On December 10 2019, the Facebook page “The Other 98%” shared a Tumblr screenshot of a discussion of a concept described as the “velocity of money”:
In it, the first of two comments claimed that a unit of $10 as handled by working and middle-class people created a far larger amount of value than $10 in a bank or otherwise hoarded because it was repeatedly re-spent in a series of small transactions:
This is actually a real economic concept called the velocity of money. Let’s say you get paid $10, you use that $10 to buy lunch from a street vendor, then the street vendor uses that $10 to take a taxi home, then the taxi driver used that $10 to pay his babysitter, next the babysitter uses that $10 to buy groceries, etc. That one $10 bill produced $50 of economic value. This is really good for the economy and why it’s bad to give rich people more and more money because all rich people do is horde it. They don’t stimulate the economy multiple times over with it.
Another person replied:
The buck stops with the 1%
As the first Tumblr post began with “This is actually a real economic concept,” the screenshot appeared to be missing some context. On September 7 2019, Tumblr user aperfectillusion shared the commentary seen in the image, but underneath a Twitter screenshot of a meme:
The meme on which aperfectillusion commented showed a man in a hoodie whose expression was contemplative; in a second part, the camera zoomed in on his face. Text on that meme read:
*hits blunt* the money in your wallet isn’t yours, it’s just your turn to spend it
The screenshot on Facebook appeared to have been captured from a September 14 2019 reblog of the post by user vibewitme/jheselbraum, the reply about the “1%”:
“Velocity of money” or “money velocity” popped up quite a bit on finance-related sites, but usually in the context of reporting, not as a defined term. In keeping with the first of the posts, Dictionary.com described the concept as “the frequency with which a single unit of currency or the total money supply turns over within the economy in a given year.”
An August 2018 item from the American Institute of Economic Research (AIER) began with a brief mention of the concept:
The weak link in monetary policy is the connection between money as a stock and money in circulation, the so-called velocity of money. The velocity of the circulation of money refers to the frequency of the monetary transactions in an economy. One unit of money serves for several transactions over time.
Whatever the aggregate used, the velocity of money can strengthen or weaken the effects of a change of the amount of money. The countermovement of the velocity can change an increase of the stock of money into a contraction or turn a monetary contraction of the stock into an expansion. Inflationary expectations lead to a higher ratio of the velocity of money while deflationary and dis-inflationary expectations lead to a lower ratio of the velocity.
In that context, AIER described the velocity of money in part as a single unit of currency playing repeated roles in successive transactions — that is, when person A pays person B, who spends that cash in a transaction with person C, who goes on to purchase something from person D, and so on. AIER included a graph, explaining that periods of economic depression or recession demonstrably “collapsed” the velocity of money:
As the graph shows, shows, the velocity of money collapsed during the Great Depression of the 1930s. The long period of the increase of the velocity lasted from the late 1940s until 1980 before the trend turned downwards again. An even steeper decline of the velocity took place since the outbreak of the financial crisis in 2008.
Economics blog Marginal Revolution hosted a series of educational videos, among them one titled “Velocity of Money” or “Quantity Theory of Money.” A description box for the video on YouTube indicated that the “equation for the quantity theory of money is: M x V = P x Y,” adding:
M is fairly straightforward – it’s the money supply in an economy.
A typical dollar bill can go on a long journey during the course of a single year. It can be spent in exchange for goods and services numerous times. In the quantity theory of money, how many times an average dollar is exchanged is its velocity, or V.
The price level of goods and services in an economy is represented by P.
Finally, Y is all of the finished goods and services sold in an economy – aka real GDP. When you multiply P x Y, the result is nominal GDP.
Actually, when you multiply M x V (the money supply times the velocity of money), you also get nominal GDP. M x V is equal to P x Y by definition – it’s an identity equation.
You can think about the two sides of the equation like this: the left (M x V) covers the actions of consumers while the right (P x Y) covers the actions of producers. Since everything that is sold is bought by someone, these two sides will remain equal.
The Balance described it more succinctly as “the rate at which people spend cash, and finance site Investopedia defined the term as follows:
The velocity of money is a measurement of the rate at which money is exchanged in an economy. It is the number of times that money moves from one entity to another. It also refers to how much a unit of currency is used in a given period of time. Simply put, it’s the rate at which consumers and businesses in an economy collectively spend money … velocity of money is important for measuring the rate at which money in circulation is being used for purchasing goods and services. It is used to help economists and investors gauge the health and vitality of an economy. High money velocity is usually associated with a healthy, expanding economy. Low money velocity is usually associated with recessions and contractions.
In both posts, the Tumblr users made a side point: the velocity of money was hindered when the units of currency flowed to wealthy people, asserting that they did not participate in the economy in the same way.
Finance and investing blogger Joshua Kennon addressed partisan aspects to broader discussions of the concept in a blog post titled “The Velocity of Money for Beginners.” In it, he provides a real-life circumstance he posits has an adverse impact on money velocity, and underlying motivators which might increase it, essentially echoing the point made in the Tumblr posts:
Since 1950, the tax rates levied on the poor and middle class have skyrocketed in a lot of ways. Consider the payroll tax for a self-employed person. When Warren Buffett was in his 20’s, a self-employed person would have had to send $2 for every $100 he earned into the Federal government before paying a penny in income taxes, state taxes, property taxes, or sales taxes. Today, that same self-employed person would have to send $15.30 into the government before paying any of those other taxes; it comes right off the top. Any party that was actually interested in increasing the velocity of money would address the 700% increase the poor and middle class have seen on the very first tax burden they face.
Ultimately, economic growth is the result of consumer demand. Thus, you want money in the hands of people who will spend it, in turn, increasing the velocity of money. Tax cuts that only benefit the rich, rather than the average school teacher going into Target to buy a box of cereal or a video game for her child, are a failure.
A July 2019 Business Insider editorial by tax advocate Nick Hanauer was titled “Want to grow the economy? Tax rich people like me.” Hanauer cited a 2014 blog post by the Federal Reserve of St. Louis about a sharp drop in money velocity rates after the economic downturn of 2007 through 2009, and the causes behind it:
During the first and second quarters of 2014, the velocity of the monetary base was at 4.4, its slowest pace on record. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession.
So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP? The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money[.]
In his July 2019 editorial, Hanauer wrote:
You see, the problem with today’s economy isn’t that rich people like me don’t have enough capital to invest; it’s that we’re not productively investing the glut of capital we already have. And it’s a problem greatly amplified by the dramatic rise of income and wealth inequality over recent decades. Since 1989, the top 1% of Americans have grown $21 trillion richer, while the bottom 50% have grown $900 billion poorer. We in the top 0.1% now own more wealth than the bottom 90% of Americans combined. And this gets to the real cause of our nation’s chronically slow growth in wages, productivity, investment, and output: our accelerating crisis of economic inequality. We are concentrating cash in the hands of people and corporations who already have more money than we know what to do with, while starving consumers of the spending power that accounts for 70% of GDP.
In many ways, the secondary claim about concentrated wealth having low velocity is the counterargument to trickle-down or supply-side economics. On its “Trickle-Down Theory Definition” page, Investopedia notes that critics of trickle-down policies make some of the same arguments:
Many economists believe that cutting taxes for poor, and working families does more for an economy because they’ll spend the money since they need the extra income. A tax cut for a corporation might go to stock buybacks while wealthy earners might save the extra income instead of spending it. Neither does much for economic growth, critics argue.
Policies of that sort, famously linked with United States President Ronald Reagan, were described by his then-opponent (later vice president) George W. Bush as “voodoo economics,” alluding to Bush Sr.’s opinion that the concepts were risky and unproven. During that period, the notion that decreasing taxes on the very wealthy and corporations would stimulate growth did not bear out, and indeed, led to a recession:
In the years that followed, some of Bush Sr.’s earlier criticisms of Reaganomics were validated. President Reagan’s policies contributed to a near doubling of national debt, in part due to his commitment to increase military spending to fight communism.
The expectation that decreased taxes on the wealthy and businesses would result in increased spending on their part for goods, services, and payment of salaries also failed to materialize. Moreover, President Reagan’s relaxed regulation contributed to the Savings and Loan Crisis and, by the early 1990s, the U.S. economy fell back into recession.
In short, the complete Tumblr post described a meme’s claim that “the money in your wallet isn’t yours, it’s just your turn to spend it” exemplified a economics concept known as “money velocity” or “velocity of money,” which is broadly true. The original poster and a commenter whose remarks were seen in the screenshot also maintained that money which flowed to people or entities with significant capital lost velocity, a concept that is hotly debated in economics overall. However, a significant amount of data shows that middle and working class people do tend to circulate currency in their communities in a fashion that the very wealthy and corporations do not — a factor in the controversial concept of “trickle down” economics.