Vault Cash
What is Vault Cash?
Vault cash is the physical currency a bank keeps on its premises; it counts toward the bank's reserves alongside its deposits at the Fed.
A bank's total reserves equal its vault cash plus its deposit balances held at the Federal Reserve. Vault cash lets banks meet day-to-day withdrawals and, together with Fed deposits, determines whether the bank is holding required reserves and any excess reserves. On the AP exam, remember that vault cash is an asset of the bank but is NOT counted in M1 (currency in circulation excludes cash sitting in bank vaults).
Vault Cash: a worked example
Cedar Ridge Bank holds $40,000 of currency in its own vault and $260,000 on deposit at the Fed, so total reserves are $40,000 + $260,000 = $300,000. Against $2,000,000 of checkable deposits at a 10% required reserve ratio, required reserves are $200,000, leaving $100,000 of excess reserves. A customer then deposits $5,000 in cash. Vault cash becomes $45,000, reserves $305,000 and deposits $2,005,000, so required reserves are $200,500 and excess reserves $104,500. That $5,000 left currency in circulation and entered a vault, so M1 is unchanged: currency down $5,000, checkable deposits up $5,000.
The mistake students make with vault cash
The frequent error is adding vault cash to M1 because it is physical cash. Money supply measures count only currency held outside banks, so the moment a bill enters a teller's drawer it leaves M1 and becomes a bank asset. The bills look identical before and after, which is why the reclassification feels arbitrary, but counting them would tally the same $5,000 twice, once as cash and once as the deposit it created. The error also runs the other way, treating reserves as only the balance at the Fed; vault cash counts toward required and excess reserves too.
Vault Cash questions
Does vault cash count as bank reserves?
Vault cash counts fully as bank reserves. A bank's total reserves are its vault cash plus its deposit balance at the Federal Reserve, and both forms are eligible to satisfy a reserve requirement. A bank with $30,000 in the vault and $170,000 at the Fed holds $200,000 of reserves. Holding the reserve as paper rather than as a Fed balance changes nothing in the calculation.
Is vault cash included in M1?
Vault cash is not included in M1. M1 counts currency in circulation, meaning cash held by households and firms outside the banking system, plus checkable deposits. Cash sitting in a bank's vault has already been handed back by the public, so counting it would double count the deposits those bills help back. Vault cash appears instead on the bank's balance sheet as an asset.
What is the difference between vault cash and currency in circulation?
Vault cash and currency in circulation are the same physical bills in different locations. Currency in circulation is cash held by the public outside banks and counts in the money supply; vault cash sits inside banks and counts as reserves instead. Bills move between the two categories whenever someone makes a deposit or a withdrawal, which shifts the composition of M1 without changing its total.
Formula / Example
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