Eye Crosser #10: The Velocity of Money

You’ve heard of wind velocity? The weather man may refer to it when reporting on hurricanes or violent storms.  If not, here’s a definition:

The horizontal direction and speed of air motion.

Dictionary of Military and Associated Terms. S.v. “wind velocity.” Retrieved August 29 2015 from http://www.thefreedictionary.com/wind+velocity

Well, how about the velocity of money? Have you heard of that? No! Got you there, right! Well, here’s the “skinny” on the velocity of money.

The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country’s total supply of money.

Read more: Velocity Of Money Definition

The velocity of money was one of the many, many concerns of financial and economic professionals during the Great Recession. During that multi-year world-wide disaster, it was the lack of velocity or the slowness of rate of money exchanged, that concerned everyone. Notice from the above definition that the velocity of money is used to compute the Gross National Product (GDP). Here’s my “By the Numbers” posting about GDP.

The Federal Reserve Bank of St. Louis (Missouri) is a district (or branch) bank of the Federal Reserve Bank. They have created a short 12-minute video  Money and Inflation. The video discusses the velocity of money, inflation, plus gives examples of the “value” of money. Wow, it’s complicated! That’s why I’m calling this another Eye Crosser topic! Enjoy.

Author’s Addendum on 9/13/15: I found a very detailed explanation (dated year 2010) and example of the “velocity of money by Paul Kedrosky quoting John Mauldin: Mauldin the Velocity of Money. It’s rather lenghty with charts. Enjoy!

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Slowly
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4 thoughts on “Eye Crosser #10: The Velocity of Money

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