Money And The Concept Of Its Velocity Explained

velocity of money

Money isn’t the root of evil. Everyone uses it! We all want it, work for it and think about it. While the creation and growth of money seem somewhat intangible, money is the way we get the things we need and desire.

What is money actually?

Unfortunately, money is a lot like the Blind Men and an Elephant fable we all know. Each one perceives it differently. Money is such a multi-faceted and all-pervasive element of our system that our capability to obsess about one aspect of it prevents us developing a proper appreciation of what it actually is.

Money is more than just a commodity used for a trade. It’s an energy. Energy is the ability to do work.

Everything that happens in the economy is due to the flow of high-grade energy. And given that energy is measurable and consistent in terms of both quantity and quality, it should be recognized as the only real currency.

Money is an expression of energy and we use it to support our life. When money is earned, spent, saved and given consciously, it reflects what we value most.

What is the velocity of money?

It can refer to the income velocity of money, which is the frequency at which the average same unit of currency is used to purchase newly domestically-produced goods and services within a given time period. In other words, it is the number of times one unit of money is spent to buy goods and services per unit of time.

In simple words, the velocity of money refers to how fast money passes from one holder to the next.

What happens when the velocity of money increases?

Low inflation increases demand for money because higher prices require more money for a given amount of goods and services. But higher inflation also increases the holding costs of money. Hence, higher inflation rates increase the velocity of money, which increases inflation even more.

In simple words, the economic condition of an ecosystem will be disturbed if the money is not changing hands. If people hold money, it’s going to create a lot of inequality in the world.

Strictly speaking, all the velocity of money tells us is how long people actually hold onto their money. The ancient Indian scripture Panchatantra described the velocity of money. Although it’s more of a philosophical explanation, it does a good job.

Ancient wisdom and money

दातव्यं भोक्तव्यं धनविषये सञ्चयो न कर्तव्यः |
पश्येह मधुकरिणां सञ्चितमर्थं हरन्त्यन्ये |

The above verse from one of the chapter says that money should be either used or given out as charity. It discourages one to hold money for greed and encourages to give a part of it as charity. The verse also tells us that money accumulated without purpose or only for selfish motives will always change hand.

The verse uses a honeycomb as an example. The bees accumulate honey for future use of the eggs but humans other creatures take it all away.

दानं भोगं नाशस्तिस्रो गतयो भवन्ति वित्तस्य |
यो न ददाति न भुङ्क्ते तस्य तृतिया गतिर्भवति |

The above verse talks about the velocity of money in three phases—pleasure, donation, and annihilation. It says that if money is not used at right time or is given out as charity, it’s going to be destroyed.

Conclusion

Money is a powerful tool. It’s an energy and energy always keeps flowing. It’s not the only answer but it makes a difference. Hence, we should be careful how we use this tool for ourselves and others.

Accumulation isn’t an effective wealth-building strategy. Money is a lot like water. It stagnates when it sits. It becomes unproductive, useless and goes to waste. You want to keep water moving and flowing!

Do you have money sitting in your savings account or even under your mattress? If so, you can put it to good use and accelerate your wealth and prosperity!

Thank you very much!

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