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Marijuana and the Money Multiplier

Half of the U.S. states have now decriminalized or legalized marijuana for medicinal or recreational uses.  However, as Serge Kovaleski reports in The New York Times, legal marijuana businesses in these states cannot open bank accounts to store their funds, or offer credit and debit card transactions.  So, for now, all transactions are in cash (currency).

Banks are reluctant to open accounts for marijuana businesses because they fear federal government laws.  That's right: it's still a federal crime to sell, possess or use marijuana. 

According to Kovaleski:

The limitations have created unique burdens for legal marijuana business owners. They pay employees with envelopes of cash. They haul Chipotle and Nordstrom bags containing thousands of dollars in $10 and $20 bills to supermarkets to buy money orders. When they are able to open bank accounts — often under false pretenses — many have taken to storing money in Tupperware containers filled with air fresheners to mask the smell of marijuana.

So what does this have to do with macroeconomics?  Currency held outside the banking system reduces the money multiplier and, all else equal, leads to a lower quantity of money in the economy. 

Oh dear, will this cause another economic contraction? No.

Kovaleski reports that the legal marijuana industry expects revenues of $3 billion this year. And, while that is a lot of cash, it is very, VERY small in comparison to the U.S. money supply, which is currently around $11 trillion (M2).  The money supply might fall (see chapter 17 in our macro text), but not by nearly enough to affect the overall economy.