Supply of Pound Sterling

Readers Question: Why are there more pounds sterling in the UK than 30 years ago? Did the Bank of England simply print more money over the years?

• Firstly, there are different measures of the money supply. The narrow definition is the volume of notes and coins in circulation. (M0)
• The broad definition (M4) is the total volume of notes and coins and bank deposits.

The money supply has increased . This is partly because the Bank of England prints money, but also the effects of inflation. The money supply can also increase because of many factors such as the money multiplier through bank lending.

See: Increasing the Money Supply.

If GDP increases by an average of 2% a year then you will need to increase money supply by 2% to reflect this. However, with an average inflation rate of 3-4%, it means the money supply has been increasing by a faster rate than growth of GDP.

However, the Money Supply doesn’t just depend on the quantity of money, but, the velocity of circulation (how often it changes hands)

Also, when Central Bank wants to increase the stock of money, it can also do it electronically. i.e. increasing its central reserves.