Money in the United States changes hands constantly. Each day, millions of U.S. dollars and coins are circulated throughout the economy.
A more recent number provided by the Federal Reserve Statistical Release at the end of April 2010, shows that total USD currency in circulation was $878.8 billion. Many people believe that it is the Federal Reserve that prints our money, however, in actuality the Bureau of Engraving and Printing (BEP) produces the paper currency, while the U.S. Mint produces the coinage. Further, up to two thirds of U.S. currency in circulation worldwide is held outside of the United States.
After the currency is minted, the coins and paper are sent to the Federal Reserve Banks (collectively, the “Fed”), twelve in total throughout the United States, and to some large banks within each Federal Reserve Bank district. It is the responsibility of the Fed to decide the amount of money in circulation. The Fed regulates the supply of money using:
- The Discount Rate – The interest rate the Fed charges to financial institutions for short-term loans of reserves.
- Reserve Requirements – The percentage of deposits in demand deposit accounts financial institutions must hold in reserve.
- Open Market Operations – The Fed buys or sell U.S. Government securities on the open market to influence short-term interest rates and the growth of the money and credit aggregates.
The Fed establishes monetary policy with the aim of sustaining economic growth. However, changes in the money supply impact interest rates as well as exchange rates. When the economy needs to be stimulated, or an increase in the growth rate of the money supply and credit is needed, the Fed steps in and buys U.S. government securities. This increases the amount of bank reserves. As a result, the federal funds rate, the rate on overnight loans between banks, decreases as banks are more willing to lend each other reserves. Other short term rates also decrease as the increase in supply of loanable funds decreases the equilibrium rate for loans. Longer-term interest rates also decrease.
The decrease in rates causes the dollar to depreciate in the foreign exchange market. The reduction in interest rates at home leads to capital outflow, as money flows out to take advantage of higher interest rates abroad. The opposite occurs when the Fed is attempting to “cool” down the economy and stem inflation (too much money chasing too few goods causes an increase in prices). In this situation, the Fed sells U.S. government securities. As a result, the amount of bank reserves decreases, in turn, raising the Federal funds rate and other long-term rates. The increase in rates causes the dollar to appreciate, as investors demand the dollar because of its attractive yield.
Keeping the economy in check has always been a tough job for the US Treasury and with the more money put into circulation the more difficult the job becomes. While $878 billion in circulation is a ton of money, it may not be as much as you thought. Projects have over $1 trillion in circulation before 2020 and if you’ve ever tried to visualize that amount of money, you know just how large that sum is.