How much U.S. currency (cold cash) is in circulation around the world? Who decides how much to print? With the government continually borrowing money, shouldn’t lenders be broke by now? Where do they get the money to keep lending out, especially when they know that none of it will ever be paid back? –F. Lucre, Dallas
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Coins and paper currency are economic petty cash. At the end of 1990 the total amount of currency in circulation was $246 billion. The total amount of money, by the strictest definition (what economists call M1), was $825 billion. M1 money is whatever you can spend right now–currency plus checking deposits. A more inclusive estimate of the money supply (M2, which includes savings accounts) was $3.3 trillion. Currency is used in under 10 percent of transactions, dollar-value-wise. People sometimes say inflation occurs when the government “prints too much money.” Nonsense. The amount of money actually printed is inconsequential.
The government doesn’t create money, private banks do. Banks create money by making loans. Suppose I put $100 in my checking account. The bank bets I won’t draw it out for a while and lends $85 of my $100 to legendary cartoonist Slug Signorino. Slug blows the $85 on Captain Morgan and lottery tickets at McGinty’s. Now McGinty’s has $85 in folding green and I’ve got $100 in checking that theoretically I can draw out at any time. Behold, the local money supply has bloomed from $100 to $185.
Strange business, eh? Strange as nuclear physics in its way, about as widely understood, and offering to its adherents the same attraction: the power to create worlds and destroy them.
