I found [this data recently that shows the amount of US currency in circulation has more than doubled in the last ten years.](https://fred.stlouisfed.org/series/MBCURRCIR)
Intuitively, I would conclude that this means the relative value of money should have fallen by 50%. But it didn’t – the value only fell by about 15% according to www.usinflationcalculator.com
How does this happen?
In: Economics
Think about the money that an average person possesses. How much of that is in coins and bills, vs. how much is in a bank account or some form of investment? Unless you are obsessive about using cash for everything- it is likely that most of your transactions don’t even involve any banknotes or coins.
The vast majority of US money that exists in not in physical currency, and even much of the physical currency is held in reserve by banks.
As you’ve seen in your data, there is about 2 trillion dollars in physical US currency. However, there are currently about 18 trillion dollars in US ‘money supply’- all of the money that exists in any form. Thus, to add a few hundred billion in physical currency wouldn’t change the total money supply by that much.
So technically *money* is not the same thing as *currency*. In fact, most of the *money* circulating in the US has no corresponding physical dollars laying around somewhere. When you’re talking about giant companies that make gigantic transfers of millions of dollars between themselves all the time, they’re really just moving digits on a computer, (or entries on a piece of paper, in the old days).
And it’s not just that the bank has all the currency in a vault somewhere so it need not physically change hands. That’s not what’s happening. For about 90% of the money, there’s no currency in any vault anywhere. This money exists *only* on account sheets.
The government writes a check for $1 billion to Bank of America, so the accounts at the Treasury will type in “minus 1,000,000,000” and the accounts at BoA will type in “plus 1,000,000,000”, and there never needed to be a gigantic stack of dollar bills to correspond to this money. As long as everyone’s accounts agree, the money “exists” and can circulate. Most of the actual trade going on in the economy is taking place virtually like this, and no physical dollar bills are needed.
But when a bank or a business does need real physical dollar bills, they basically *purchase* these bills from the government. The bank subtracts $10,000 from its accounts, and then the Treasury sends them one-hundred fresh $100 bills in the mail or whatever.
There is more stuff.
mv=pq is a basic equation used in economics.
m= amount of money
v = velocity basically how fast a given dollar changes hands in one year, dont worry about this one.
p= price of stuff
q= quantity of stuff.
This means that when you up the money supply that means either prices will go up, or the amount of stuff will go up. A lot of very smart people try really hard to make sure that “amount of stuff” is what goes up, and that’s exactly what happened.
Edit: Consider this small example of there being more stuff: in 2010 20% of the US population had a smartphone, in 2020 that’s around 70% that is a lot of new smartphones.
Edit 2: The actual amount of physical money is also only about 50% of the actual money supply, the rest of it isn’t cold hard cash but other things.
Latest Answers