Currency in Circulation
What is Currency in Circulation?
Currency in circulation is the physical cash held by the public outside banks; it counts in M1, while cash sitting in bank vaults does not.
Only currency in the hands of households and firms is part of the money supply, vault cash and Fed-held cash are excluded. Currency in circulation plus bank reserves makes up the monetary base. A common exam point: most of M1 is checkable deposits, so currency is only a small slice of the total money supply.
Currency in Circulation: a worked example
Take a small economy where households and firms hold $80 billion of cash, banks keep $10 billion in their vaults, and banks hold $120 billion at the central bank. Currency in circulation is $80 billion, since vault cash is excluded. Reserves are $10 billion + $120 billion = $130 billion, so the monetary base is $80 billion + $130 billion = $210 billion. Households now deposit $5 billion of that cash. Currency in circulation falls to $75 billion, vault cash rises to $15 billion, reserves become $135 billion, and the base is still $210 billion.
The mistake students make with currency in circulation
The recurring error is treating currency in circulation as the money supply, so a jump in cash holdings reads as monetary expansion. Currency is one component of M1 alongside checkable deposits, so a public that withdraws cash shifts the composition of M1 without changing its total. A related slip counts vault cash inside currency in circulation, double counting the same notes, once as public spending power and once as the reserves behind someone's deposit. Location, not the note itself, decides the category.
Currency in Circulation questions
Is currency in circulation the same as the money supply?
Currency in circulation is one part of the money supply, not the whole of it. M1 adds checkable deposits, which are balances rather than paper, and broader measures add more still. Because deposits are counted separately, the amount of cash the public chooses to carry can rise or fall while the total money supply holds steady, since the offsetting change lands in deposits.
Does cash in bank vaults count as currency in circulation?
Vault cash does not count as currency in circulation. Currency in circulation measures cash outside the banking system, so the moment bills are deposited they leave that total and become part of the bank's reserves. Counting them in both places would credit the same physical notes twice, once to the depositor's spending power and once to the bank's reserve position.
What is the difference between the monetary base and M1?
The monetary base is currency in circulation plus bank reserves, while M1 is currency in circulation plus checkable deposits. The base measures what the central bank supplies directly; M1 measures what the public can actually spend. Reserves appear in the base but never in M1, and deposits appear in M1 but never in the base, so the two overlap only in the currency term.
Formula / Example
Related terms
Common comparisons
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