Cash in circulation surges provide a positive signal for the economy.

cash , economy

The amount of U.S. currency in circulation surged last year at a rate unseen since World War II, and has been a positive sign for the financial system.

According to Federal Reserve data, total currency in circulation accelerated to $2.07 trillion by the end of the year as the results of both monetary and fiscal policy actions.

That marked an 11.6% gain from a year earlier and was the largest one-year percentage increase since 1945, as the nation was coming out of the war and the military-industrial complex took hold.

The surge is due to the $2.2 trillion stimulus bill the government passed in May, and the Federal Reserve printed a little over $3 trillion in order to counter the economic impact of covid-19.

Besides, huge demand from foreign central banks and a need for cash on hand during times of uncertainty has been a significant component in the current run.

Traditionally, economic peril usually coincided with rises of currency in circulation. Conversely, when all that cash builds up, it tends to look for a spot to go, leading to economic boom times.

This was the case in 1983, when the U.S. was heading out of its inflation-induced recession; 1991, as the country was coming out of a downturn; 2002 following the hangover from the dot-com bust; and 2009 as the financial crisis was coming to an end.

Utilizing M1 (a country’s basic money supply) as the yardstick, those years saw respective circulation growth of 9.6%, 10.2%, and 9.8% in both 2002 and 2009.

Damon Harrison
Market Analyst, IPG Group