Currency in Circulation

Currency in circulation is the total value of banknotes and coins that a central bank has issued and that are held outside the central bank itself, in people's wallets, in businesses' tills and safes, and, under some definitions, in the vaults of commercial banks. It is the physical part of the money supply and appears as a liability on the central bank's balance sheet, because each note is a claim on the issuer.

Central banks report currency in circulation weekly or monthly. It is the largest part of Reserve Money (M0) in most cash-heavy economies and a key building block of Broad Money (M2). Definitions differ on one point: whether notes sitting in banks' own tills are counted. The US Federal Reserve's balance-sheet figure includes them; the currency component of its money stock measures, like the State Bank of Pakistan's figure, leaves them out.

Think of a country's central bank as the printer of a large stock of special vouchers. Vouchers still in the printer's storeroom are just paper. Once they leave the storeroom and pass into shops, homes and pockets, they become money people can spend.

Currency in circulation is the count of all the vouchers that are out in the world. When people want more cash, for a festival or because they distrust banks, they take more notes out and the count rises. When they deposit cash or switch to cards and phone payments, notes flow back to the central bank and the count falls.

A central bank keeps a register of every note and coin it issues and every one returned to it. The basic calculation is:

• $\text{Currency issued}$ is the total value of notes and coins the central bank has put out.
• $\text{Currency held by the central bank}$ is the stock sitting in its own vaults.
• $\text{Cash in bank tills}$ is the cash held by commercial banks; it is deducted only under the narrower definition.

Worked example: if a central bank has issued 12,000 billion in notes and coins, holds 50 billion in its own vaults and banks hold 400 billion in their tills, currency in the hands of the public is $12{,}000 - 50 - 400 = 11{,}550$ billion. Under the wider definition that keeps bank tills in, it would be 11,950 billion.

Notes that are lost, destroyed or hoarded abroad are still counted until they come back, which is one reason the figure can overstate the cash that is really in use at home.

The State Bank of Pakistan (SBP) issues Pakistani banknotes and coins and reports currency in circulation weekly as part of its monetary statistics. Its statistical tables start from total notes and coins issued, then deduct the currency held by the SBP's Banking Department and Issue Department and the cash in the tills of scheduled banks. What is left is the cash held by the public, which is the first component of both reserve money and M2.

The SBP's annual report shows currency in circulation of about Rs 4.39 trillion at end-June 2018, about 27% of M2. The figure has since more than doubled, and cash still makes up roughly a quarter of Pakistan's broad money, a high share by international standards. It rises sharply before the two Eids and other peak spending periods, then falls back as cash returns to banks.

• Spending seasons and events. Festivals, holidays, harvests and elections bring large but temporary increases.
• Interest rates. Higher interest rates make it more costly to hold cash instead of deposits.
• Trust and taxes. Distrust of banks, fear of crises and the wish to avoid taxes or scrutiny push people towards notes, including mattress cash. Taxes on bank transactions can have the same effect.
• Size of the informal economy. Large informal and shadow economy activity runs mostly on cash.
• Payment alternatives. Cards, mobile money, instant payment systems and digital wallets reduce the need for notes, though in many countries cash in circulation has kept growing even as cash payments fall.

Currency in circulation earns the central bank seigniorage, because it is an interest-free liability backed by interest-earning assets. It also drains liquidity from the banking system: when the public withdraws cash, banks' reserves at the central bank fall, and the central bank may have to inject funds through open market operations (OMOs) to keep short-term rates on target.

A high cash share in the money supply weakens the reach of monetary policy, limits commercial bank money creation and makes tax collection harder. It also raises the costs of printing, transporting and protecting notes from counterfeiting. These are among the reasons central banks promote digital payments and study a Central Bank Digital Currency (CBDC), while keeping cash as legal tender.

• State Bank of Pakistan
• Federal Reserve: Money Stock Measures (H.6)