How does lost/stored/destroyed currency affect the economy?


I recently revisited my old house and while cleaning I found a bunch of old and dusty dimes and pennies under some of the furniture, and even though it’s money, I would not have picked it up and started using it. I wondered how all of the coins and bills that have been forgotten, lost, or accidentally destroyed affect the economy.

In: Economics

If the money supply falls, it is likely to cause deflation (falling prices) or at least reduce the inflation rate.

It is the opposite of printing more money. If you print more money, it doesn’t change the output of an economy, it just creates more money and so puts upward pressure on prices.

If the money supply falls, that doesn’t directly affect output. The amount of goods and services in the economy is not directly affected by people destroying or creating money But, with less money circulating, there is a downward pressure on the price of the same number of goods.

People hoarding money, not placing it with financial institutions, keeping it at home, deposit boxes, whatever.
So a whole lot less currency in circulation will force Mints to print more, resulting in an inflationary trend, thus spurring increased interest rates.

Any “lost” currency is not in circulation anymore. So the overall amount of money that is available to the economy is getting smaller when money gets lost.

If there is less of something, it becomes worth more, if there is more of something, it becomes worth less. This is also true for money which is why your government can’t just print more money if they need it: that would make money overall worth less and lead to what’s called inflation.

So in principle, if money is lost, the overall worth of money is increased. However, the government is able to monitor the amount of money in circulation so if there were ever a substantial decrease due to physical money being irrevocably lost / destroyed, they could replace it with newly printed money and keep the amount of money in circulation steady.

If it’s “lost”, then it’s out of circulation, and not part of the active economy. It’s still part of the money supply, like all those collections of coins. When it’s “destroyed” in the formal sense of being returned to the treasury as damaged or worn out, it’s replaced.

In a modern economy, the parts of the money supply that could be lost or destroyed are just a blip. Most “money” is actually things like bank obligations and treasury bonds, and those things don’t get misplaced in the same way a jar of coins might.

It’s important to have a certain amount of cash and coin for everyday transactions, but it’s not hard to turn other forms of money into cash. If lots of people suddenly misplace cash, they go to the ATMs more, banks realize they need more cash, and they “buy” it from the central bank in exchange for some other asset. Ultimately, worrying about destroyed cash is like worrying about draining the oceans because you left the tap on for too long.