by Emma Dahl
There’s a huge quantity of money moving through the US economy each year, the majority of which isn’t accounted for in traditional measures of the economy. Most of this money flows through the finance industry, and just a small portion of it is either paper money or kept in checking accounts.
On a physical level, the US has about $1.2 trillion of paper money and coins in circulation. There’s also a lot of money stored in bank accounts and travelers checks, money market funds, and savings accounts, which adds up to around $10.5 trillion.
Another way to measure the amount of money in the US is via gross domestic product (GDP), which is a measure of all the final goods and services produced in the economy in one year. In short, it shows the size of the economy. In 2018, US GDP was $20.658 trillion. GDP is bigger than the amount of dollars in the economy because money circulates. Chances are, if you buy a coffee with cash, those $3 won’t just sit in a bank account for the rest of the year- they might be used to pay a salary or buy supplies, both of which create money movement.
While GDP does measure money movement around the economy, it only accounts for the money that is tied to the production of goods and services. A lot of financial transactions are excluded from this figure because financial transactions aren’t always productive. Most of the time, transferring money from one bank account to another doesn’t create jobs or move through the rest of the economy. Because we normally use indicators like GDP that only measure economic growth, there aren’t many estimates of the total value of transactions that happen each year. But, by using data available from the Bank for International Settlements and the Chicago Mercantile Exchange Group, we can estimate what this number might look like. I’m using the most recently available data as of February 2018, but some publications are not released til several years afterwards.
The first set of data we’ll look at is the Red Book published by the Bank for International Settlements. This publication offers data on payments in selected countries. Measurements for the U.S. start on page 406, but the first few pages of tables for the U.S. are general measures (amount of currency in circulation, value of money in accounts, gdp, etc).
Payments processed by selected interbank funds transfer systems:
Table 11 on page 408 shows payments processed by selected interbank funds transfer systems. I’m including all of the values in this table, and I’ll break down what each one means below:
CHIPS ($364.331 trillion): CHIPS is the major fund-transferring system for the private sector. CHIPS is used as an alternative to paper checks because the payments are cleared in real time. The system processes payments like commercial transactions, bank loans and securities transactions. According to the always-reliable Wikipedia, by 2015, CHIPS was settling over $1.5 trillion per day.
FedWire ($766.961 trillion): FedWire is the public sector counterpart to CHIPS, and also allows members to send and receive central bank money. It deals with only large-value payments, and processes money more quickly than CHIPS, but serves the same basic function.
Private cheque clearing and direct exchanges ($10.423 trillion) and Federal Reserve cheque clearing ($8.261 trillion): Check clearing is straightforward- it’s the process of moving funds from a withdrawn account to a deposited account. The number of paper checks used in the last 10 years has decreased substantially, while direct transfers and transfers through systems like Paypal and Venmo have increased. Federal Reserve check clearing is simply the public side of check clearing.
Private automated clearing houses ($21.719 trillion) and Federal reserve automated clearing ($22.058 trillion): Automated clearing houses (ACH’s) enable electronic credit and debit transfers. This covers transfers like direct deposit of payroll, government and Social Security benefits, mortgage and bill payments, and online banking payments.
On-us wire transfers ($178.704 trillion), On-us cheques ($8.486 trillion), and On-us ACH ($107.504 trillion): On-us transfers refer to transfers of money where the sending and receiving ends are at the same bank or financial institution.
Total 1: $1488.447 trillion, or $1.488 quadrillion
Value of Contracts and Transactions Cleared
Table 21 on page 415 covers the value of contracts and transactions cleared under the National Securities Clearing Corporation (NSCC) and the Fixed Income Clearing Corporation (FICC).
- NSCC ($243.304 trillion) and FICC ($991.379 trillion): The NSCC and FICC both work in clearing various financial products. The NSCC clears contracts and transactions such as equities, corporate and municipal debt, and exchange-traded funds. The FICC clears both mortgage-backed securities and government-backed securities that include treasury bills, bonds, and notes.
Total 2: $1,234.683 trillion, or $1.234 quadrillion
OTC Interest Rate Derivatives
The second set of data we’ll look at is over-the-counter interest rate derivatives, also measured by BIS.
OTC interest rate derivatives cover a variety of financial products like Forward Rate Agreements (FRAs), interest rate swaps and credit default swaps. While many of these products can be exchanged directly between buyer and seller, the 2008 market crash caused the Dodd-Frank act (Title VII) which put regulations on select OTC interest rate derivatives. The sum of OTC interest rate derivatives is reported in semiannual outstanding amounts- in H1 of 2018 there were $192.510 trillion of outstanding OTC interest rate derivatives, summing to $385.02 trillion for the 2018 year.
Total 3: $385.02 trillion
Chicago Mercantile Exchange Group
The last set of data we’ll pull numbers from is the Chicago Mercantile Exchange Group (CME Group). CME group runs a futures and options exchange, primarily in agriculture, energy, stock indices, foreign exchange, interest rates, metals, real estate, and weather. CME group uses its own clearing house which makes it difficult to get an exact count on the value of transactions they clear, but they self-report having cleared over $1 quadrillion in transactions yearly.
Total 4: $1 quadrillion
Summing it up
When we add up the totals, we see that over $4.1 quadrillion moves through the US economy each year. Again, it’s important to emphasize here that this value doesn’t reflect the size of the economy, but rather the immense number of unproductive financial transactions that happen in the US each year. Additionally, if you’ve glanced through the rest of the tables in the BIS red book, you’ll notice a slew of other values that I’ve chosen to exclude out of concern for double counting. As alarming as it sounds, this is a conservative estimate. Additionally, we didn’t even account for transactions in cash, which generally make up around 7-10% of GDP.