Active Money


Glossary Editor
Active money refers to the total amount of physical currency in public circulation at any given time. In other words, not taking into account digital currency such as bank account balances which can be drawn upon using a debit card (which funds are theoretically backed by physical coins and bills as well), the active money in an economy is the actual spending power of the people in the economy. Active money is balanced by reserve money that is held by the Federal Reserve and other banks. It is important that a country have enough assets in the treasury to balance the money in circulation, as well as that the circulated money is released at rates that allow the currency to maintain an equitable rate with international currencies as well.

The Federal Reserve prints and releases money for two purposes: to replace old, worn coins and bills; and to adjust the active money supply in order to compensate for inflation or recessions. While the effects of a recession can be somewhat alleviated by increasing the supply of active money, the danger of releasing too much money into circulation is that the increased supply of money, without being backed by assets, will simply lead to inflation.

The amount of active money in circulation varies over time, even from day to day. For example, in the United States, the majority of the workforce is paid on the first and third Friday of the month; therefore, the amount of active money tends to increase on these Fridays as people cash their paychecks or take money out of ATMs. On the other hand, the amount of active money tends to shrink following major spending times such as Christmas. In the beginning of January, many people have just spent much of their extra money and do not usually withdraw large amounts of cash from their bank account.