Circulation (currency)
Encyclopedia
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.
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. 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.
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).
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.
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.
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
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
, circulation refers to the total value of that currency (whether banknotes, coins
COinS
ContextObjects in Spans, commonly abbreviated COinS, is a method to embed bibliographic metadata in the HTML code of web pages. This allows bibliographic software to publish machine-readable bibliographic items and client reference management software to retrieve bibliographic metadata. The...
, or demand deposits) that is engaged in that currency's economy
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
at a given time. Circulation can also refer to the metaphorical or literal movement of wealth due to transactions between the holders of a currency. The euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
, the official currency of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
, is currently the currency with the highest combined value of cash circulation in the world.
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 circulationMoney supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
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 UnionEuropean UnionThe European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
- 1035.2 billion1000000000 (number)1,000,000,000 is the natural number following 999,999,999 and preceding 1,000,000,001.In scientific notation, it is written as 109....
USD, 24.30% - USA - 850.7 billion USD, 19.97%
- JapanJapanJapan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
- 762.4 billion USD, 17.90% - ChinaChinaChinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
- 492.3 billion USD, 11.56% - IndiaIndiaIndia , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
- 140.3 billion USD, 3.29% - RussiaRussiaRussia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
- 110.8 billion USD, 2.60% - UK - 87.5 billion USD, 2.05%
- CanadaCanadaCanada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
- 43.8 billion USD, 1.03% - SwitzerlandSwitzerlandSwitzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
- 40.3 billion USD, 0.95% - PolandPolandPoland , officially the Republic of Poland , is a country in Central Europe bordered by Germany to the west; the Czech Republic and Slovakia to the south; Ukraine, Belarus and Lithuania to the east; and the Baltic Sea and Kaliningrad Oblast, a Russian exclave, to the north...
- 37.7 billion USD, 0.89% - BrazilBrazilBrazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
- 37.3 billion USD, 0.88% - MexicoMexicoThe United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
- 34.3 billion USD, 0.81% - AustraliaAustraliaAustralia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
- 32.4 billion USD, 0.76% - Other countries - 554.9 billion USD, 13.03%