Key Takeaways
- Currency in circulation is cash actively used for transactions within an economy, minus money withdrawn from use.
- Physical currency is less critical to monetary policy than other forms, like bank reserves, due to its limited flexibility.
- U.S. currency demand is strong internationally due to its stability compared to more volatile foreign currencies.
- Physical currency is vital during emergencies when electronic transactions are not feasible.
- Larger denominations like $500 and $1,000 are phased out as electronic transfers reduce their necessity.
What Is Currency in Circulation?
Currency in circulation is the total amount of cash (notes and coins) actively used for transactions within an economy. Managed by central banks, it forms part of the money supply and supports day-to-day commerce. Though digital payments are widespread, cash remains important for accessibility, privacy, and reliability, especially in regions with limited electronic infrastructure.
The Role and Importance of Currency in Circulation
Currency in circulation can also be thought of as currency in hand because it is the money used throughout a country’s economy to buy goods and services. Monetary authorities of central banks pay attention to the amount of physical currency in circulation because it represents one of the most liquid asset classes. Currency in circulation is less important to central banks’ monetary policy relative to other types of money (for example bank reserves) because the quantity of currency is relatively less flexible.
In the U.S., a new currency is printed by the Treasury Department and distributed by the Federal Reserve Banks to banks that order more currency. The amount of U.S. currency in circulation has increased over the years as a result of demand from the international market. According to the Treasury Department, more than half of U.S. currency in circulation is found overseas rather than domestically. Overseas demand for U.S. currency stems in part from the relative stability of U.S. currency compared with nations that have more volatile currency valuations.
Even though electronic funds are accessible for many types of transactions, physical currency in circulation may be preferable in some circumstances. After natural disasters, for instance, physical currency can become more prevalent as the means to pay for services that are needed immediately. In addition, the nature of the disaster could make it difficult or impossible to access electronic funds. Power may be unavailable in widespread areas, for example, making physical currency or paper checks the only method of conducting transactions. The delivery of physical currency puts funds immediately in the hands of those in need, rather than waiting for assets to transfer between institutions.
Real-World Examples of Currency in Circulation
In the United States, the majority of denominations of currency that are printed and remain in circulation include $1, $2, $5, $10, $20, $50, and $100 bills (in addition to coins in circulation). At different periods, the Treasury Department has discontinued production and the Federal Reserve Banks have removed from circulation certain denominations of currency.
For example, after World War II, currency in denominations of $500, $1,000, $5,000, and $10,000 stopped being printed. In 1969, Federal Reserve Banks were ordered to remove that paper currency from circulation. Those denominations had been used for such purposes as making large transfers of funds. Furthermore, as secure electronic means of transferring funds became increasingly used, the need for such large forms of currency was eliminated. Though such currency may still exist, Federal Reserve Banks actively work to remove them from circulation and then destroy the physical currency.
The Bottom Line
Currency in circulation includes all active paper notes and coins issued by a nation’s monetary authority. Though less adaptable than electronic funds, it remains vital for liquidity, especially when digital systems fail.
With high-denomination bills discontinued and electronic transfers growing, central banks must balance cash needs with digital reliance to maintain economic stability.
