Having just followed the probable travels of a dollar bill at “wheresgeorge,” I’ve been thinking about money. Money is more than coin or paper currency. Because we can easily spend our demand deposits (checking accounts) and savings accounts, they too are money. Anything that people accept as payment, know the value of, and stores value can function as money.
At wheresgeorge.com, you can register a dollar bill and then trace its life if its holders record their transactions. Between Marc 5, 2002 and March 5, 2005, a certain dollar bill traveled from Dayton, Ohio to Rudyard, Michigan with stops in Kentucky, Tennessee, Florida, Texas, Louisiana, and Utah. Along the way, the dollar saw a food mart, a race track, and a McDonald’s. Its last recorded user said the bill “was getting pretty old looking.” At that point, we can guess that the bill was retired at a Federal Reserve Bank by someone’s local banker.
According to the Federal Reserve, in 2007, located primarily abroad, there was approximately $829 billion of coin and paper currency in circulation. In the United States, if banks need more cash (maybe Mondays when ATMs are most popular), they withdraw it from the Federal Reserve bank in their area. On the other hand, when they have too much cash, banks take it to the Fed. At that time, the Fed destroys close to one third of the bills they receive.
With the life span of a typical dollar 1.8 years, the bill traced by “wheresgeorge” lived to a ripe old age but not as long as most hundred dollar bills which live 7.4 years. It cost the Bureau of Engraving and Printing four cents to make each bill.
The Economic Lesson
All of this matters because the money supply has an impact on business activity. If there is too much money circulating, then its value can plummet. It fell so much in Zimbabwe recently that people needed wheelbarrows or U.S. money to buy milk. On the other hand, when there is too little money, producers have less incentive to create goods and services because people do not have enough money to spend. During the recent recession when credit froze, less money passed from hand to hand and businesses produced less.
The Equation of Exchange, MV=PQ, illustrates the connection between the money supply and production (the G.D.P.). Here “M” equals the money supply; “V” is velocity, the number of times the same dollar is used; “P” is the average price of goods and services and “Q” is their quantity.