While many people may think that all forms of currency are active, that is not the case. Active money refers to currency, both paper bills and coins, that is actively in circulation among the general public. This is in contrast to money that is currently held in the national treasury or Federal Reserve, which is considered to be non-active money. Here is some information about the circulation of active money, and why it is important to differentiate between inactive and active money.
The amount of money in circulation within a given country is determined by the basic guidelines in place to ensure that the face value of the currency remains equal in all parts of the country. That is, a five-dollar bill in the United States will still be valued at five dollars no matter where the bill is circulated in the country.
In order to maintain the status quo, it is necessary to keep tight control on the amount of currency that is made available to the general public. When the need arises, the Federal Reserve can authorize the release of additional amounts of currency to enter the general circulation. This does not include the process of replacing worn bills and coins, which is an ongoing process. Increasing the amount of active money in circulation involves the addition of new cash to the economy, not replacing instruments that have been worn down by time and distribution.
The maintenance of a balance between the amount of active money that is available for use by individuals and businesses and the amount held in reserve by the issuing government also plays a role in determining the value of the currency on the world market. Money issued for general circulation is intended to have a specific internal value. Issuing an inordinate amount of bills and coins, without the assets to back the value on the open market, would lead to a significant drop in the value of a country’s currency when compared to the value of currency issued by a country that did maintain that equitable balance.
The role of active money in regulating internal economic factors is very important. The judicious issuing and regulation of the amount of active money allowed into circulation can more adequately address inflation and recession. By striking and maintaining a healthy balance between active money and the reserves that back the currency, the government can maintain an economic climate that is more or less workable for the citizens of the country, as well as remain financially sound in the eyes of other countries.