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"Money"
is really what is technically known as "base money." "Base
money," in turn, is mostly -- typically about 90% -- banknotes and
coins. So let's take a
look.
 
Here
we see that there was a total of $1,176 billion of banknotes and coin in
existence. Most of this -- $1,133 billion -- was "Federal Reserve Notes,"
your usual dollar bills and so forth. There was another $43 billion of coins.
The Treasury hed $261 million, probably in a warehouse. Federal Reserve Banks
had another $222 billion, also in a warehouse. Banks can go to the Fed and
trade their bank reserves for paper banknotes on demand. If you go to a bank
and say "I want $2000 in twenties please," and there are a lot of
other people like you, and the bank needs more twenty dollar bills, this is
how they obtain them. These banknotes held by the Treasury and Fed are not
considered "in circulation." They are held in storage in case there
is a sudden demand for more paper money.
Here we see that there were $9.4 billion of $1 bills, $16 billion of $10
bills, $126 billion of $20 bills, and $685 billion of $100 bills. Indeed, of
the $914 billion of Federal Reserve Notes in circulation, 75% is in the form
of $100 bills. The total circulation of all of the banknotes of $10 and less
amounts to $37.8 billion, or only 4.1% of the total.
This should make you think a bit. When was the last time you even saw a $100
bill? I don't think I saw one last year. Most people use $20s, and a credit
card or check for larger amounts. Where are all these $100 bills? What are
they used for? They must be useful for something, or all the people who have
those $100 bills would trade them in for some sort of interest-bearing note
(maybe not so much today since interest rates are low). For example, they
could deposit them at a bank. The bank, if they had more $100 notes than they
needed, would then give them to the Fed in exchange for electronic bank
reserves (in effect a deposit at the Fed).
Next, we see that there are $3,074 of notes and coins in circulation for each
person in the United States. Look in your wallet. Do you see $3,074 there? If
you have a family, multiply each person by $3,074. Does your family of four
have $12,296 of banknotes in their wallet, sock drawer, safety deposit box
etc.? Probably not, I'd say. This also includes banknotes held by businesses,
in the cash register and so forth. But, that is not really all that much
either. Businesses don't like to hold a lot of cash, because it can be
stolen. I remember not too long ago that I couldn't get change for a $20 bill
at an Au Bon Pain in Boston.
One thing to ask here is: how were these proportions determined? I talked
about this extensively in my book, and I don't think I will review that here.
Go buy and read the book. I can tell you what didn't happen: there wasn't
some sort of committee meeting in which they said "well, I think we
should have banknotes in circulation of $914 billion this year, of which
$684,807,084,300 consists of $100 notes. Shall we vote on it?" These
proportions arise due to the automatic performance of the banknote
convertibility system. If people want to hold more $20 bills and fewer $50
bills, then they take their $50 bills to the bank, and ask for $20 bills. On
the aggregate basis, banks end up with lots and lots of $50 bills and they
have a shortage of $20 bills. So the banks go to the Fed and say "here,
take these $50 bills and give us some $20 bills." The Fed does so. In
this way, the amount of $20 bills in circulation increases and the amount of
$50 bills declines. A currency board works almost the same way, but instead
of $50 bills and $20 bills, banks will exchange Hong Kong dollars and U.S.
dollars. A gold standard also works in a similar way, as it amounts to a
"currency board linked with gold" instead of a currency board
linked with some foreign currency.
Here we see that at the end of November 2010, the Bank of Canada had
banknotes in circulation of $54.972 billion. It works out to $1,617 per
person. About half that of the U.S. Still a pretty big number, though.
Nobody really knows where all this money is. But we can guess. Most of those
$685 billion of $100 bills are probably used either in illegal/under the
table transactions in the U.S. (notably in the drug trade), or outside the
country. I would guess that only about $100 billion of U.S. banknotes is
actually used by normal law-abiding people. This works out to about $320 per
person, and would include perhaps $25 billion of banknotes of $10 and under,
plus another $75 billion of $20 bills. Judging by the statistics from Canada,
I would say that at least half (could be higher) of all U.S. currency is
circulating outside the U.S. Although we hardly ever see transactions today
in the form of bundles of $100 bills, it is not too uncommon elsewhere in the
world. Every large business in Argentina, for example, had a safe with
bundles of U.S. dollar banknotes to engage in large transactions,
particularly during the hyperinflationary 1980s. Even later, it was common to
engage in large transactions, such as buying a house, with a briefcase of
U.S. dollar banknotes.
From this, you can see how inane it is to make economic assumptions based on
U.S. statistics alone. Most of the people using the U.S. dollar are not even
in the U.S.! We can also see how the demand for dollars can change for all
number of reasons. Mabye Argentines stop buying houses with cardboard boxes
of dollar bills, and start using euros or Swiss francs (or internal bank
transfers) instead. This would lead to a decline in the demand for U.S.
banknotes ("dollar base money"). This would then have to be met
with a decline in the supply of base money (banknotes taken out of
circulation), or the value of the dollar would fall. The Keynesian economists
would panic at the drop in the "money supply," ascribing all sorts
of consequences to it, when it was just the normal adjustment of supply to a
decline in demand. Likewise, maybe currency collapse in India leads people to
do all their business with wads of U.S. dollars, like Argentines did. To
accomodate this new demand for banknotes, the Fed and Treasury would have to
print some up. The Austrians would then be in a tizzy over the
"expansion in the money supply." Go complain to the Indians. Of
course the Monetarists and their "velocity of money" indicators
would be all over the map, which would make the Monetarists start to spout
all sorts of idiocy as well. And you wonder why today's economists always get
it wrong, and blow things up whenever they are allowed to actually
participate in policy decisions. It is all just one never-ending parade of
stupidity, which has at its base the fact that none of these economists
actually know how a monetary and financial system works. But it's not
really that hard. If you can get over the idea that "all these experts
couldn't be wrong," and just start studying it, you can figure it out
pretty quickly. Then you wouldn't have to take my word for it, you would also
understand that all these experts are, in fact, just babbling inanities of
one sort or another, which they can get away with because nobody calls them
on it.
Nathan
Lewis
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