Ok let’s see if I can get my question right. Let us assume for a while that all transactions all over the world are being done in cash. I know that is not realistic, but even if they are done on credit or on paper, ultimately cash or its equivalent has to be invloved at some atage of the transaction. Ok…so assume you go to the ATM and withdraw some money. Then you go out and buy a crate of beer. The money goes to the beer store. The beer store uses that money to buy beer from the beer manufacturer. So the money goes to the beer manufacturer. who in turn perhaps gives money to buy molasses or whatever stuff beer is made of. The mollasses man spends that money on slots, the casino gives it away to a winner, who spends it on a whore or on ice cream…and so on it goes. Now it gives me the same feeling that I get when I look up at the night sky and cannot imagine where the end of the universe is. Where and what is the last last final end of that money that I took from the ATM.
Money doesn’t stop moving. It keeps going around and around, and this is what makes our glorious economy work. Sure, some of it may end up in bank accounts, but remember that banks just use the money to buy investments and make loans.
In your example, note also that the beer store and brewery are also using the money to pay their employees, rent or buy their buildings, insure their businesses, pay taxes, et cetera ad nauseum.
Related to your statement, an anecdote : The Euro coins all have a side with a national emblem (say, the Queen for the Netherlands, an owl or a boat, depending on the coin’s value for Greece, etc…).
The Euro was introduced on a January 1st. 4 days later, I already had been handed 4 or 5 foreign coins. It’s not representative since France is the most centrally located country using the Euro and besides I live in Paris where more foreigners are likely to come than in any other place, but still…When the owner of the little grocery in my little street away from any touristic or business venues gave me a german coin as change a couple day after the Euro had been introduced, I was amazed, and wondered how it could have found its way there so quickly.
I thought so, but then if it just keeps moving around then does it imply that whatever new bills and coins are printed are just to cover for the damaged and surrendred bills? And well… coins do not get damaged…so how come we continue to make so many coins day in and night out? And we have been making new coins and bills for eons. I know economics is a pretty confounding subject, but I would is there a simpler explanation out there? Say like to grade 6 student.
Hard currency (bills and coins) represents only a tiny fraction of the money out there. The bills we print are indeed mostly used to replace old ones, though we print more as time goes on because the demand for paper money continues to grow. Coins do get damaged and worn out also, but they last a long time.
Coins may not get damaged, but they do leave the economic system one way or another.
I’m inclined to wonder what percentage of the world’s coinage is in
a) A big, rarely-opened jar
b) The ground
c) Hi, Opal!
Hey OP, why not track some of your cash at www.wheresgeorge.com ?
Well, your example is kind of flawed since the money you gave the convenience store is actually going out as change or to the bank as a deposit. Assuming the cash is in good condition, the bank will sort it and send it out to another merchant via armored car or to a bank customer via teller\ATM transaction. Or course, the $20 you gave the c-store could have been given out as change to someone who just stopped in to pick up some toothpaste on his way to New York, or London, or…
Monetary policy is implemented by the Federal Reserve System. The Fed decides how much money should be in circulation and takes action to carry out this policy. If interest rates are low, people will generally hold larger money balances and this makes the velocity of money decline. The Fed has a web site here. This site has information for kids.
citrus x paradisi, I don’t know how much is where, but in 1998 Unca Cece reported:
Yes…what next and…next…and next…so finally…eventually where does that 20$ bill end up. Someone said it just keeps floating around. Forever? Until it is destroyed? I can understand that…but then are the new bills being printed and coins that are being minted meant only to replace the damaged ones that are taken out of circulation? I don’t think so! There are far many more bills being printed and coins being minted then are getting destroyed. So where is all the money going finally? Does inflation account for the extra bills brought into circulation since we only have positive inflation? My question is after all what is happening to all the money that is in circulation? Everybody, and that includes corporations, but eventually that too boils down to individuals - the share holders, earns and spends money to fulfill his needs. Money keeps changing hands, but where does it finally end up?
THE LIFESPAN OF MONEY
The average life of a dollar bill is eighteen months. Five dollar bills last about fifteen months, with twenties remaining in circulation for two years. Ten dollar bills have about the same lifespan as singles do, and the larger denomination bills can last up to eight years.
In 1960, the Federal Reserve had $177.41 in cash circulating for every person living in the United States. In 1990, the amount had grown to $1,062.86 per capita.
[Here](THE LIFESPAN OF MONEY )
Eventually, it gets taken to the bank. When it is too worn to recirculate, the bank replaces it. Banks send their worn/uncirculatable currency to the Federal Reserve, who supply banks with currency.
As for the question of where new money comes from, your mistake is in assuming that all transactions require cash. That is impossible even in theory. If it were the case, then yes, we would be stuck with a very limited money supply, and the economy would grind to a halt. (Actually, I suspect people would start using something else as scrip, like postage stamps or cigarettes, because there wouldn’t be enough cas to go around.) Instead, people put money in banks, where it doesn’t sit still. The money that in theory is sitting in your ATM available for withdrawl at any moment is also being loaned out on a mortgage, being invested in stocks, traded for foreign currency, etc. They also keep money on deposit with the Fed. Banks keep only as much cash on hand as they need, and the Fed orders as much money printed as it needs to fill banks’ debits on their accounts.
Someone with more knowledge of finance can give more details, and maybe even an easy to understand example of how this works.
The word “they” in the next to last sentence of the second paragraph refers to banks, not people.
Actually, yes, the government really does only print enough money to keep up with what is destroyed. Usually banks wad up their worn bills and ship them to the mint and the mint replaces them with new money. But the government also prints a bit more, because some money gets taken out of circulation in other ways, like being thrown in the washing machine, or burned in a house fire, or tossed into a piggy bank and left there forever.
Of course, the government also sometimes prints even more money than that. The government can just print itself money and use it to pay for whatever it is that governments need money for. The only trouble with this is that there isn’t any new stuff being created, just new money. The result is inflation. Keep it up long enough and no one will take the paper rectangles the government prints in exchange for goods and services anymore.
(tries to resist urge to post rant on the difference between money and currency and the worthlessness of fraudulent fiat currency)
(succeeds, albeit barely)
In the U.S., paper currency is printed by the U.S. Bureau of Engraving and Printing. The U.S. Mint does not print bills, it only coins metal currency.
The U.S. government does not and never has brought about inflation by printing excess paper currency (although, admittedly, some crackpot countries have). Your conception of inflation is incorrect. Remedy that, in part, by reading this column.