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Money and credit - Ivanov V.M.

5.3. Money velocity

A change in the money supply can be the result of both an increase in the amount of money in circulation and an acceleration of its circulation. The velocity of money refers to the speed of their turnover in servicing transactions. The indicator of the velocity of circulation of money is characterized by the number of repetitions of the same units of financial means of payment, circulation in a certain period of time. This indicator is difficult to quantify and indirect data have to be used. In capitalist countries, two indicators of the velocity of money are calculated:

• revenue cycle;

• payment turnover.

The second indicator reflects the huge volume of speculative transactions that are not included in the gross national product (GNP).

A huge role in the intensification of money circulation is played by the development of the credit system and cashless payments. Banking systems make extensive use of the achievements of science and technology, not only for the sake of labor savings associated with banking operations, but also to accelerate the circulation of funds both nationally and internationally. Thus, the time required for interbank settlements is reduced. A change in the calculation technique reduces the need for cash balances on current accounts by 1.5-2.5% per year.

According to the law of money circulation, the amount of money needed for circulation is inversely dependent on the speed of their circulation. Therefore, ceteris paribus, an increase in the velocity of money is tantamount to an increase in the money supply and is one of the factors of inflation. The state can put into circulation any amount of money, but, being captured by circulation, money falls under the power of its immanent laws and is spontaneously regulated in accordance with real national economic needs.

The change in the velocity of money depends on many factors, both general economic (cyclical development of the economy, economic growth rates, price movements), and purely monetary (development of economic operations, mutual settlements, interest rates in the money market, etc.). The acceleration of money circulation is facilitated by the replacement of metallic money with credit, the development of a system of mutual settlements, and the introduction of computers in banking.