US velocity of money history

Wikipedia has a nice definition of velocity of money:

“The velocity of money is the average frequency with which a unit of money is spent in a specific period of time. Velocity associates the amount of economic activity associated with a given money supply.”

If the money supply is stable, the trend in money velocity is an indicator of how the economy is doing.  The chart of money supply from the Federal Reserve below shows that decreasing velocity coincides with recessions.  The big spike and plateau at a high level during the 1990’s reflects what a lot of other information tells us about the period; the tech/dot.com boom and prosperity meant that people/businesses were willing to spend the money they got.

Now, when people get their paychecks they are a lot more likely to hold on to the cash; you could be laid off or take a pay cut at any time so you are careful with your spending.

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