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What is Money Circulation?

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  • Written By: Patrick Roland
  • Edited By: Jenn Walker
  • Last Modified Date: 12 November 2016
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Money circulation is the process of creating, distributing, collecting and destroying currency. This is done to ensure a specific money supply is available to a country's citizens and also to ensure the money in circulation is not defective or counterfeit. Each step of the process involves government officials and banks working together, focusing on both paper and coin currency.

The first step in the money circulation process is actually printing banknotes, either as coins or bills. Many countries have a specific government department that handles this function; for example, in the United States, the United States Treasury and the Federal Reserve are in charge of printing money. These offices determine how much money needs to be available, or "in circulation," to the general public. When there is too much money, these offices pull currency out of circulation and when there is not enough, they print more. One example of this process happens when a nation prints more money before a shopping holiday season, such as Christmas, to account for added transactions and then removes that added currency after the holiday.

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Distributing the currency is the next part of the money circulation process. After coins and bills are produced, they usually are sent to large government-owned banks. In the United States, these are known as federal banks, for example. Private banks get the money supply they use to operate from these large banks, mostly on the credit system. Once currency is held by a bank, it is distributed through ATM machines and by bank tellers to customers. From this point the coins and bills are used and reused for transactions by the general public.

After money has been in the hands of the public for a time, anywhere from several months to several years, it is ready for collection. In money circulation, the most common reason for collection is the mutilation of bills and coins. Banks collect currency featuring rips, tears and graffiti and return the money to the federal bank. This also happens when banks discover or suspect certain currency is counterfeit.

Destruction of unusable currency is the final step in money circulation. This older money is replaced by newer currency and is deemed worthless. Bills are shredded by machines designed to handle large quantities of bills and sent to a landfill, in most cases. As with each bill created, each destroyed bill is closely monitored in order to have an accurate understanding of a country's currency standings.

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kentuckycat
Post 4

@titans62 - It sounds like you at least know the basics. I am not an economist by any means, I just remember talking about it in my economics class for a brief time last year. Basically, the M1 money supply is the most liquid of assets. It includes things like cash and traveler's checks and things that can be spent immediately.

The M2 money supply is a little bit more locked up. It takes everything from the M1 category and adds on things like savings accounts. There is also an M3 category, but I don't remember exactly what it includes. Maybe things like housing assets that usually take a long time to become liquid.

We were talking about it

in the context of the Greek economic crisis, so it can be applied to other systems outside of the United States. I guess when economists and federal regulators are deciding what decisions to make, they look at the numbers. I know in the US, the Fed publishes the numbers every week or so. That way people can see changes in saving and spending habits by Americans.
titans62
Post 3

@JimmyT - I never did quite understand why people didn't use $2 bills. A lot of people even think that somehow they are worth, or will be worth, more than two dollars someday, which seems crazy to me.

Is anyone here familiar with the different money circulation schemes? I had never heard about it until recently, but can't really find a lot of information about it. Basically, money can be divided into a bunch of different categories that all start with M followed by a number. Somehow the different numbers signify the liquidity of the money and how it is being spent.

Since I can't really find any good explanation of it, I am wondering if it is only an American thing or if it is a general economic principle that can be applied to the amount of money in circulation in any country.

JimmyT
Post 2

@jmc88 - If you have ever heard of the Chairman of the Fed, that is the person who is in charge of the Federal Reserve Bank. Alan Greenspan was in charge of the Fed from the end of Ronald Reagan's presidency up through 2006. Ben Bernanke took over from there. The Chairman's name gets thrown around a lot, but a lot of people don't really know what he does.

Basically, like you asked, he is in charge of deciding how much money should be in circulation and where it should be going. Another very important job is deciding what the various interest rates should be for the federal government. He works closely with the Secretary of the Treasury whose responsibility

it is to advise the president about economic matters and, of course, run the Treasury.

As far as deciding what types of currency get printed, I think that is mostly just based on what is being circulated. Obviously, there need to be more 1s than 100s, but fewer $2 bills than either. In fact, $2 bills get circulated so little that there have only been two printings since the 1970s.

jmc88
Post 1

I had a chance to visit the Federal Reserve Bank when I went to Washington last summer. It was a pretty interesting place to go, but they definitely keep a tight lock on what you get to see.

As far as how much money gets printed, who decides? Is there an actual person, or is it sort of just a formula with a bunch of different inputs? Also, how do they decide how much of the different types of currency need to be printed?

I know I was reading an article not long ago about the penny being worth less than the cost to make it. It seems like that is a pretty foolish way to go about the process, but what do I know? Also, is the Reserve Bank the only place that prints money or do all of the federal banks have the ability to print their own money?

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