Most people are familiar with U.S. currency, as they use it on a daily basis for a variety of transactions. But where exactly does it come from? And how does it get into circulation? Below is an overview of American currency, but the system used in other nations is largely the same.

The Origin of Currency

Currency describes the paper money that is in circulation, but may also include funds which are electronically held in bank accounts. Citizens require a substantial amount of cash to shop and go on vacations during holidays. Research also shows that ATM withdrawals usually increase during the weekend, which means that in the U.S. there is usually greater cash in circulation by Monday compared to Friday.

To meet customer demand, banks acquire their cash via Fed Banks (Federal Reserve). The majority of medium to large banking houses contain reserve accounts within one of twelve regional Fed banks, and they compensate the Fed for the cash they receive through account debits. Smaller banks will usually keep their needed reserves in bigger correspondent banks. These correspondent banks will charge a fee to the smaller banks, in exchange for receiving currency from Fed banks which they then transmit to their smaller counterparts.

As with anything, consumer demand for cash will ebb and flow. For instance, in the aftermath of holidays demand for cash will typically fall and banks will have more cash on hand than needed. As a consequence, they will deposit their excess funds back into the Fed. Since these financial institutions already pay Fed banks a fee for debiting their reserve accounts, the amounts of reserves within the American banking system will drop whenever consumer cash demand increases, and the level will rise when consumer cash demand subsides. The Fed banks will offset these demand variations in an effort to prevent volatility.

How Much Cash is In Circulation?

It is impossible to determine exactly how much currency is in circulation in the United States at any given time, because the amount constantly changes. At best we are able to make estimates based on past data, but this information is largely dated by the time it is received. However, research shows that during the 2010s there was usually around $1.2 trillion circulating in the United States at any given time.

Fed banks are responsible for distributing new currency to the United States Treasury Department, who then prints it out. Depository institutions will also purchase Fed currency when its needed for consumer demand, which is then redeposit back into the Fed when these institutions have more cash than they needed.

The advent of automated teller machines (ATM) has enhanced currency demand among the general public, which has prompted financial institutions to order more cash from Fed banks. In many cases banks prefer used and fit bills instead of newer ones since used bills tend to work better inside ATM machines.