Global Money & Markets | Insights Money Market

Here's how much money there is in the world, According to the Bank for International Settlements, the total amount is about $5 trillion. According to the CIA, the total amount is $80 trillion if you include "broad money." The US dollar is the most popular currency in use worldwide. Most of the broad money in the world economy isn't actually cash held in bank vaults, explained Karen Petrou, managing partner at Federal Financial Analytics. It's bank balances on digital ledgers, money that people deposited in banks, and banks then lent out again. "Banks always have your money out working in the economy," said Petrou. "If everybody lined up and suddenly went to the bank to get cash, you'd have a classic banking run." This question would make sense if the amount of money were static. It is not. Years ago, money was essentially fixed by the amount of gold and other valuable metals that was in circulation. At some point (perhaps 100 years ago) this notion changed from using gold coins as money to paper that represented gold stored in national treasuries. These Gold and Silver certificates were also limited by the same amount of precious metal as the coins that were previously in circulation. In effect there was still a fixed amount of money in circulation but it changed from coins to paper certificates. Then the world of money changed again. Instead of certificates representing valuable metals stored in vaults the certificates changed to "Fiat" money that represented absolutely nothing except the "Good" credit of the government that printed it. This created a lot of inflation since the government could print as much of this worthless money it wanted. And then the world changed again. Today the notion of fiat money has been replaced by a system based on credit. Money is created and destroyed in a constant flow of transactions. The actual amount of money in existence doesn't matter any more. It is the flow that matters now. We measure this with mathematical concepts like "Gross Domestic Product". Perhaps an example of how this works is in order. Suppose you go to a restaurant and eat a nice meal. When the check is presented you don't actually pay for the meal. Instead you present a "Credit Card" to pay. This satisfies the restaurant operator since he can use the credit "Slip" to get paid for the meal. (He only gets around 98% of the value of the charge but he is happy to get that right away.) So, where did the money come from? The only correct answer is it was created by the transaction. There was no money circulating to pay the bill until the charge slip was created. Eventually, the diner will get a bill from his bank and be required to actually pay for the meal. This takes an average of one month from the meal to the actual payment. How does he pay the bill? He authorizes an amount of "Money" stored in his checking account to be transferred to the credit card department's account in the same computer. No gold coins or silver certificates or fiat money ever changed hands, but there was certainly money moving "In circulation". Physical currency In modern economies, relatively little of the supply of broad money is in physical currency. For example, in December 2010 in the U.S., of the $8853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.[2] The manufacturing of new physical money is usually the responsibility of the central bank, or sometimes, the government's treasury. Contrary to popular belief, money creation in a modern economy does not directly involve the manufacturing of new physical money, such as paper currency or metal coins. Instead, when the central bank expands the money supply through open market operations (e.g. by purchasing government bonds), it credits the accounts that commercial banks hold at the central bank (termed high powered money). Commercial banks may draw on these accounts to withdraw physical money from the central bank. Commercial banks may also return soiled or spoiled currency to the central bank in exchange for new currency

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