What is currency in circulation?

What is currency in circulation?

Currency in circulation tends to be defined as the currency held by commercial banks, and currency with the public, without including long-term deposits or investments.

As much as 2/3rd of Currency in Circulation is held outside of the borders of the US, and is estimated to be around $1.5 trillion as of 2016. Currency in Circulation is one part of what’s known as the money supply.

Money supply is divided into four levels: M0, M1, M2, and M3. Some might define currency in circulation as the larger part of M0, which is the money base, constituted by the currency held in commercial banking institutions and excluding central bank reserves / Federal funds. This definition disregards the Currency with Public, which is included in other definitions and is part of M1.

Currency with the public is, of course, the amount of currency held by the public and used to transact business. If the currency with the public is included, the long-term deposits of individuals, such as CDs and mutual funds, are disregarded. As much as 2/3rd of the US dollars in circulation is held in foreign countries.

The Money Supply also has three other levels: M1, M2, and M3, which each add another level of currency held by the public in the form of increasingly illiquid and long-term forms, from savings accounts to CDs and mutual funds, etc. The amount of currency in circulation is important to keep track of because an over-supply can lead to unnecessary inflation and even hyperinflation, which can cause an economy to crash.