The Velocity of Money
We see pictures of money flying out of an ATM, but where does it go from there and where does it come from? Let’s take a look at the velocity of money in our current economy to understand the dollar’s journey.
According to Investopedia, the velocity of money “refers to a metric calculated by economists. It shows the rate at which money is being transacted for goods and services in an economy. While it is not necessarily a key economic indicator, it can be followed alongside other key indicators that help determine economic health like GDP, unemployment, and inflation.”
The rate at which currency exchanges hands can provide some insight into whether businesses and consumers are spending their money or saving it. The Federal Reserve has different categories for America’s money supply: M1, M2, and MZM. Cash currency falls under the M1 category, including both bank notes and coins.
The velocity of M1 money has fluctuated greatly over the past 60 years. According to the Federal Reserve Bank of St. Louis, in 1960, the M1 velocity was 3.836, meaning that cash currency at that time changed hands over 3.8 times to purchase goods and services. The velocity of money reached an all-time high in 2007, when the rate climbed to 10.681. After the economic crash of 2008, the velocity of M1 money fell to a low of 5.496 in the third quarter of 2017. It has since rebounded somewhat, coming in at 5.569 at the end of the third quarter of 2019.
What’s in a Dollar?
U.S. paper currency, also known as Federal Reserve notes, is made up of 75 percent cotton and 25 percent linen. Each time a paper bank note is redesigned, it goes through an expansive process of design, engraving, siderography (individually engraved elements such as the portrait, border, counters and text which are first combined like pieces of a jigsaw puzzle to form one complete face or back of a note using a transfer press.), plate making, and printing.
So, how much money is printed each year? According to the U.S. Department of Treasury, “During Fiscal Year 2014, the Bureau of Engraving and Printing delivered approximately 6.6 billion notes to the Federal Reserve, producing approximately 24.8 million notes a day with a face value of approximately $560 million.”
Additionally, the Bureau of Engraving and Printing, the U.S. Treasury department in charge of designing and printing paper money, states that as of November 2019 there were $1.74 trillion worth of Federal Reserve notes in circulation.
The Lifespan of the Almighty Dollar
With the velocity of money in the U.S. currently sitting at just over 5 ½ percent, how long does a paper bank note last? That largely depends on the denomination of the note. For example, a $100 bank note is used much less frequently than a $1 bank note. Therefore, a $1 bank note will need to be replaced with much greater frequency than a $100 bank note. The estimated lifespan for a $1 bill is 5.8 years, whereas the estimated lifespan for a $100 bill is 15 years.
On an annual basis, the Federal Reserve Board estimates the amount of new currency needed and orders the printing of new cash from the Bureau of Engraving and Printing. In turn, the Bureau of Engraving and Printing charges the Federal Reserve Board for the printing. The cost of printing each denomination varies slightly. As an example, the cost to print $1 and $2 bills is 5.5 cents per note whereas the cost to print a $100 bill is 14.2 cents per note.
With hustle and bustle of everyday life rarely do we take time to consider where the cash that is dispensed out of our local ATM comes from. However, from its design and creation to its lifespan in the American economy, the journey of our currency is a fascinating one. The next time you buy your cup of morning coffee or pay your kid’s weekly allowance, you might just wonder where that bill has been, what adventures it has seen.