7 important factors that influence currency money



Factors Influencing Currency Money

The monetary authority while determining the supply of currency and coins must be guided by the general requirements of the economy. The currency component of the money supply, i.e., coins and notes, is influenced by a number of factors as discussed below:

1. Volume of Transactions:

The supply of currency must vary in accordance with the changes in the physical volume of trade and transactions of the economy. If the issue of the currency is more than what is required, it creates inflationary pressures. On the other hand, if the money supply is less than the requirements, it leads to deflationary trends.

2. Nature of Trade:

The nature of trade, whether wholesale or retail, determines the proportion of currency of different denominations. For the wholesale trade, the notes of higher denominations are required, where the retail trade requires larger proportion of notes and coins of lower denominations.

3. Method of Payment:

The method of payment being used in the economy also determines the currency component of the money supply. If most of the payments are made in cash, greater proportion of currency to money supply is needed. If the payments are generally made through cheques, the proportion of currency to money supply will be lowered.

4. The Price level:

Price level also affects the requirements of currency considerably. Higher the price level larger the amount of currency required, and lower the price level, smaller the amount of currency required to carry out the given volume of transactions.

5. Banking Habits:

If the public has confidence in the bank money and has banking habits, the currency requirements will be less. But, if the people have less banking habits, the transactions will be conducted with currency and more currency is required.

6. Distribution of Income:

Distribution of income also influences the currency requirements. If tie i distribution of income is in favour of the rich, greater proportion of currency of higher denominations is required. On the other hand, if the distribution is in favour of the poor, a larger proportion of currency should] be of low denominations.

7. Other Factors:

Other factors, like the volume of demand deposits with the banks, the taxation policy of the government, the extent of public loans, the volume of deficit financing, etc., also influence the amount of currency required in the economy significantly.