Money Supply: A Cash Mystery

by Elaine Schwartz    •    Jul 10, 2013

While the demand for cash is up…

Since the recession began during December 2007, we wanted more cash.

We are using it less to pay for things…

Even though the demand for cash is up, other forms of payments have risen more.

So, what are people doing with their cash? (Hint: Compare the total currency in circulation to denominations up to $50.)

Money Supply and Hundred Dollar Bills

Our clue is the soaring demand for $100 bills.

Because a one hundred dollar bill is a pretty dependable piece of paper, you can place it under your mattress today and have almost the same spending power next year. Especially now with inflation at a rock bottom 1.4% annual rate, the dollar is a good store of value. In addition, low interest rates mean the opportunity cost (what you sacrifice by not lending it) of keeping cash is low.

Combine a stable US currency and low interest rates with political and economic turmoil and you get more people around the world who are hoarding $100 bills. In 2011, 64% of all US currency was held abroad.

Sources and resources: Fascinating, this San Francisco Fed report provides such insight on why cash is still an important part of the money supply. Meanwhile, econlife has looked at the curious path of hundred dollar bills here and here and you can see CPI info here and interest rate data here. Hat Tip to the Conversable Economist for directing me to the Fed report.

« »