Circulation (currency)

Circulation (currency)

The social system in which we live has usually developed to the stage for money to be used as the medium for the exchange of goods and services. Hence the money is an important aspect of the general social or macroeconomics system. To better understand how this system works it is important to appreciate the way that the money circulates and this idea implies a number of general features of the system itself.

Firstly the existence of the system itself, being a set of relationships between various agencies or entities when viewed at from a macroeconomics perspective.

Secondly that the money can make a number of circuits within the system, see diagram.

Circulation of Currency in Macroeconomics System

Money does not only consist of the currency (which is the bank-notes and coins only), but should strictly include all of the various kinds of promises to pay such as cheques, debit card accounts and particular loans, like mortgages which are negociable due to their having back-up value in the properties they represent. Thus it is possible for a debt owing economy to function without the value of the actual currency playing more than a small part. This is also a part of the circulation.

With regards to a particular currency, circulation refers to the total value of that currency (whether banknotes, coins, or demand deposits) that is engaged in that currency's economy at a given time.[1] Circulation can also refer to the metaphorical or literal movement of wealth due to transactions between the holders of a currency. The euro, the official currency of the European Union, is currently the currency with the highest combined value of cash circulation in the world.[2]

The money supply is defined to be the currency in circulation PLUS the money held in demand deposits, of which the latter makes up the greater part of the money supply. Therefore it seems clear that the currency in circulaton should NOT include demand deposits. Also common sense tells us that circulation refers to money that is readily available to spend for consumers/businesses. Demand deposits are not only extremely high in currency value, but a minimum amount (which is very large) must be kept with the central bank at all times, in which case it's not in circulation, and therefore does not have the same liquidity as cash reserves (not in a realistic sense anyway).

The demand deposit can be used by a bank, but its use is generally a last-resort, either in times of financial crisis, or when the central bank decides to increase interest rates by selling the bank bonds, for which purchases the bank uses their cash reserves at the central bank. The central bank then takes that purchase price amount from the banks' demand deposit accounts, which reduces the money available to them. This depletion in demand deposits increases the need for inter-bank lending, and therefore interbank interest rates are increased. This in turn depletes the money in circulation since borrowers will borrow less (due to the higher interest rates). Since the 'money in circulation' as we generally understand it, is kept separate from demand deposits in practice, by the above reasoning, so should it be in theory. I understand that in some places it may be defined as the opposite of what I have said (i.e. to include demand deposits, but I argue that this is not a good definition as it makes it impossible to distinguish demand deposits from banknotes and coins).

Total currency in circulation

In 1990, total currency in circulation passed 1 trillion USD. After 12 years, in 2002 this total money supply in the world was 2 trillion USD. And just after 6 years, in 2008, this money supply increased to 4 trillion USD.

  • European Union - 1035.2 billion USD, 24.30%
  • USA - 850.7 billion USD, 19.97%
  • Japan - 762.4 billion USD, 17.90%
  • China - 492.3 billion USD, 11.56%
  • India - 140.3 billion USD, 3.29%
  • Russia - 110.8 billion USD, 2.60%
  • UK - 87.5 billion USD, 2.05%
  • Canada - 43.8 billion USD, 1.03%
  • Switzerland - 40.3 billion USD, 0.95%
  • Poland - 37.7 billion USD, 0.89%
  • Brazil - 37.3 billion USD, 0.88%
  • Mexico - 34.3 billion USD, 0.81%
  • Australia - 32.4 billion USD, 0.76%
  • Other countries - 554.9 billion USD, 13.03%[3]

See also

References

  1. ^ http://financial-dictionary.thefreedictionary.com/Currency+in+circulation "Currency in circulation" at the Free Online Dictionary
  2. ^ Atkins, Ralph (2006-12-27). "Euro notes cash in to overtake dollar". Financial Times. http://www.ft.com/cms/s/18338034-95ec-11db-9976-0000779e2340.html. Retrieved 2007-05-04. 
  3. ^ http://www.marketoracle.co.uk/Article11576.html



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