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April 15, 1996

eCONOMIC
COMMeNTORY
Federal Reserve Bank of Cleveland

Where Is All the
U.S. Currency Hiding?
by John B. Carlson and Benjamin D. Keen
The total amount of U.S. currency
held by the nonbank public equals about
$375 billion, or nearly $1,400 for every
man, woman, and child in the country.
Clearly, few individuals ever hold this
much cash at any point in time. On the
surface, the sheer volume of currency
outstanding seems inconsistent with
common sense. Even if one coosiders
currency balances held by businesses
involved largely in cash transactionslike retailers-and by participants in
the underground economy- like drug
dealers-it is hard to reconcile the difference between households' holdings
and total currency outstanding. So where
is this currency hiding?
Recent evidence suggests that a growing
proportion of U.S. currency is held outside the country by individuals who are
uncertain about their own currency's
future value. To these people, the dollar
is a refuge during times of political and
economic uncertainty. Knowing precisely how much currency is held outside the United States, however, is no
simple matter. Unlike checking accounts, currency flows do not leave a
paper trail. However, informal reports to
the Federal Reserve and the U.S. Customs Department regarding currency
flows abroad do provide a rough indicator of foreign demand.
Having some idea about the magnitude
of overseas holdings is important for
several reasons. First, if the demand for
currency is becoming driven largely by
foreign portfolio decisions, then fluctuaISSN 0428- 1276

tions in the level of currency outstanding
·may have little to do with domestic economic activity. Second, movements in
the narrow monetary aggregates-of
which currency is a sizable component
-will not provide the same information
as they have historically. Third, to the
extent that foreigners demand currency,
which is non-interest-bearing debt, the
U.S. Treasury's need to issue an mterestbearing alternative is reduced.
To address these issues, we will examine
why individuals hold currency and why
the U.S. dollar is so popular abroad. We
will also discuss some recent research on
the share of currency held abroad and
look at the implications for policy.

• Why Do People
Hold Currency?
For most Americans, the answer to this
question is simple: to make payments
when neither checks nor credit cards are
convenient or accepted. The U.S. dollar
has the textbook qualities often used to
define money. That is, it is both a unit of
account and a medium of exchange.
Although stories about currency stashed
under the mattress occasionally come to
light, most Americans choose to hold
cash oniy for transaction purposes. Since
it bears no interest, there is little incentive to hold currency when no transactions are anticipated.
Textbooks also identify "store of value"
as a quality of money. This characteristic, however, applies to many nonmonetary assets as well. During inflationary

-

A recent Federal Reserve Board study
revealed that between SO and 70 percent of all U.S. currency is held
abroad, and that.about 80 percent of
all currency growth since 1980 is
attributable to increased foreign
demand. In this Economic Commentary, the authors take a look at why
the dollar is so popular outside our
borders and discuss the implications
of rising currency demand for U.S.
economic policy.

periods, houses are often considered
good stores of value. Gold, rare art,
coins, and stamps can also serve this
purpose.

-

FIGURE 1 ESTIMATED SHARE OF U.S. CURRENCY
HELD ABROAD

Percent

75,......~~~~~~~~~~~~~~~~~~~~~~~~~~~~-.

70

The dollar, on the other hand, has some
characteristics that make it preferable to
-other-stores of-value,..F'.irst, it-is-eeili
compact and portable. One can barely
move a house across town, let alone
abroad. Even carrying gold can be cumbersome. Second, currency affords
anonymity not offered by, say, ownership of a Van Gogh. Third, the U.S. dollar is liquid in many parts of the world.
That is, it is easily converted to spendable forms with no (or minimal) transaction costs and little risk of capital loss.
And finally, unlike most real property,
currency is divisible. If the denomination of a bill is larger than the price of an
exchange, then change can be made.

• Why Do Foreigners
Hold U.S. Currency?
In contrast to domestic demand, foreign
demand for the U.S. dollar owes more to
the store-of-value quality of money. The
dollar is preferred to many other currencies because it is a relatively stable
source of purchasing power, widely accepted, and reasonably secure from
counterfeiting. Another appealing feature is that unlike some other currencies,
which may be recalled with little notice
or limited opportunities for exchange,
Federal Reserve Notes are ultimately
exchangeable at full face value, regardless of when they were issued. Moreover, because shipments of less than
$10,000 do not have to be reported, U.S.
currency maintains a degree of anonymity for its holder.
These favorable features of the U.S. dollar ultimately reflect the political and
· economic stability we enjoy. For countries whose political situation is uncertain, the dollar offers a form of wealth
that may be put in a suitcase and carried
should a resident need to flee. Political
instability is often associated with economic turmoil and a debasing of a country's currency. Despite the episodes of
double-digit inflation in the 1970s and
early 1980s, the United States has never
experienced a hyperinflation.

65

___2Q._1-~~~~~~~~~·~~~~~-->--~~~~"-~-Y"'--~~~~~-+-~~~~~~
55
50

45

35

30 ................~~.............~~....................~....................~~........................_..............~~....................~~........

1959

1964

1969

1974

1979

1984

1989

1994

SOURCE: Richard D. Porter and Ruth A. Judson, ''The Location of U.S. Currency" (footnote I).

•
Trends in Foreign
Holdings of U.S. Currency
Foreign demand for the U.S. dollar is
particularly strong in certain parts of the
world. In Liberia and Panama, the dollar
is the official currency. Large amoun'ts of
currency are known to be circulating in
Central and South America, especially in
Argentina, where it is often used to settle
real estate and auto transactions. The
dollar is also very popular in Eastern
Europe, especially in the former Soviet
Union, where inflation, declining
exchange rates, and currency recalls
have made·the ruble a poor store of
value. U.S. military personnel stationed
overs~as and many international travelers likewise rely on the dollar.·
Measuring the.flow of U.S. currency
abroad is extremely difficult. Cash is
often sent in the mail, and, as mentioned
above, individual shipments of up to
$10,000 do not have to be reported to the
Customs Department. Customs does
keep records of shipments above
$10,000, however, and these provide
some information on currency flows
abroad. Another major source of data is
found in the informal reports that commercial banks submit to the Federal
Reserve regarding their overseas currency shipments. These reports suggest
that since 1988, about half of all U.S.
currency sent overseas has gone to
Europe (Russia is the most likely destination), 30 percent has gone to the

Middle East and Far East, and around 20
percent has gone to Central and South
America, with a fair amount of that ending up in Argentina. 1
Determining the total stock of currency
held abroad is even more difficult. In
fact, the only available data are shipment
numbers from informal reports to the
Customs Department and the Federal
Reserve. Currently, many analysts
believe that a substantial portion of all
U.S. currency is held overseas.
Researchers at the Federal Reserve
Board have examined this issue in depth.
_ A preliminary study conducted in 12?3
estimated that more than 70 percent of
all U.S. currency is held outside our borders, with most of the outflows occurring since 1970.2 Recently, a broader
examination set that figure at between
50 and 70 percent, with about 80 percent
of all currency growth since 1980 tied to'
increased foreign demand.3
Figure l illustrates two estimates of the
level of currency held abroad. Both are
based on statistical approaches that exploit the similarity between seasonal
fluctuations in the domestic demands for
U.S. and Canadian currency. 4 Because
the seasonal factor in currency for both
countries is largely driven by similar
seasonal fluctuations in retail sales, one
approach adjusts for differences in the
seasonality of retail sales between the
two countries.

FIGURE 2

U.S. CURRENCY GROWTH

Percent change, seasonally adjusted annual rate

14r-~-'-~~~'"-"'"-~~~~~~~~~~~~~~~~~~~--.

12
10

8
6
4

2

-2 ......................_......_.__._.._......_.__._.._......_.__._..L..JL....L....L....L...L..JL....L....L....L...L..JL....L....L....L...L..J~
1960

1965

1970

1975

1980

1985

1990

1995

SOURCE: Board of Governors of the Federal Reserve System.

FIGURE 3

more consistent with its previous trend.

U.S. CURRENCY LEVELS

•

Billions of dollars, seasonally adjusted

420.--~~~~~~--'-~~~~~~~~~~~~~~~~~~~~

Currency growth, 1991-96"

12~~...;....;'-----'~~

400
10%
5%

380

360

340

320
300 .__._....._.__.,_._...._..__._....._.__.,_._...._.............._.__.,....L.J....l'--L....L..L..L....L..l.....L-1....L.....1'--L....L..l.....J.....L.J....I
1996
1994
1995
a. Growth rates are percentage rates calculated on a fowth-quarter over fourth-quarter basis. Annualized growth
rate for 1996 is calculated on an April over I995:IVQ basis.
NOTE: Dotted lines represent growth ranges and are for reference only.
SOURCE: Board of Governors of the Federal Reserve System:

•

Some Recent Issues

The strong international demand for the
dollar inevitably makes it a target for
would-be counterfeiters. Although the
current design of U.S. currency is sufficient to prevent mass counterfeiting, photocopying technology may soon reach
the point where nearly perfect copies can
be easily produced. The Treasury anticipated this potential problem in 1983 and
began working on a plan to redesign the
currency. Even though Treasury officials
believe that the amount of counterfeit
currency in circulation is minimal, recent
rumors of an almost-perfect counterfeit
produced in the Middle East-the socalled supemote-gave added incentive
to the redesign effort. 5

In early 1995, as news of the soon-to-be
released $100 bill spread abroad, cura
rency growth plummeted, from _bout 8.5
percent over the last two decades to
about 3 percent in 1995 (see figure 2).
Many analysts believe that this slowdown largely reflected foreign holders'
concerns about the new currency. Moreover, now that the redesigned note has
been released, currency growth is expected to accelerate to near previous levels. Preliminary data since the March
introduction reveal no sharp rise in the
currency numbers, but it must be stressed
that this information is very limited (see
figure 3). Only time will tell if the currency growth rate will return to a level

Because most foreigners prefer to hold
$100 bills and most counterfeits are
found overseas, the Treasury decided to
redesign that note first and set a release
date of March 1996. To avoid disturbing
foreign economies and to protect the
special anonymity feature of the dollar,
officials announced that the old currency
would not be recalled and would always
be accepted at 100 percent of face value.
To spread the word, the department is
spending millions of dollars on advertising and on setting up toll-free hot lines
around the world. Nevertheless, promises about cash are often viewed with
deep suspicion by foreigners who have
watched their own currencies become
virtually worthless.

Policy Implications

Large swings in overseas holdings of
U.S. currency typically have little impact
on the current level of domestic economic activity. Rather, such movements
distort the historical relationship between
currency and the economy, making currency a less reliable indicator. Although
the level of currency has never received
much attention in policy analysis, it is a
substantial component of the monetary
base (about seven-eighths currency) and
of Ml (about one-third currency), which
are watched closely by some analysts.
Events such as the introduction of the
new $100 bill can thus create misleading signals in the narrow money measures, making them less reliable for
policy purposes. For example, the slow:
down in currency growth in early 1995
accentuated the decline in both the monetary base and M 1. 6 Because the currency slo',.Vdown most likely reflects
reduced foreign demand, it seems
doubtful that"deceleration in the narrow
money measures portends a weakening
econemy, as it might have in years past.
Moreover, foreign demand tends to be
induced by unpredictable events. To the
extent that U.S. currency is becoming
increasingly subject to the vagaries of
foreign demand, the use of narrow
money measures as guides for policy
will prove problematic.

Another important implication concerns
the federal budget. U.S. currency pays
no interest, yet is ultimately a debt of
the federal government. Essentially, it is
an interest-free loan. The greater the
level of currency outstanding, the Jess
the level of interest-bearing debt outstanding and hence the smaller the interest bill of the U.S . Treasury. This implicit yield of currency-known as
seigniorage-reduces the annual tax
bill by between $15 and $20 billion. To
the extent that foreign demand for the
dollar increases, the tax burden of U.S .
citizens is further lightened.

•

Footnotes

1. See Richard D. Porter and Ruth A.
Judson, "The Location of U.S. Currency:
How Much Is Abroad?" Board of Governors
of the Federal Reserve System, manuscript,
June 1995 .

3. See Porter and Judson, "The Location of
U.S. Currency" (footnote 1).

-

John B. Carlson is an economist and

4. Essentially, both approaches assume that
foreign demand for Canadian currency is negligible and that the foreign-held component of
U.S. currency has no seasonal pattern. Hence,
the difference between the seasonal factors in
total demand for U.S. currency and Canadian
currency largely reflects foreign demand for
U.S. currency.

Benjamin D. Keen is a research assistant at

the Federal Reserve Bank of Cleveland.
The views stated herein are those of the
authors and not necessarily those of the Federal Reserve Bank of Cleveland or of the
Board of Governors of the Federal Reserve
System.

5. According to the U.S. General Accounting Office, "the total level of counterfeitcurrency detections-$208.7 million in fiscal
year 1994-represented less than one onethousandth of U.S. currency in circulation."
See Counterfeit U.S. Currency Abroad:
Issues and U.S. Deterrence Efforts, WashingtOIJ, D.C.: GAO, February 1996, p. 2.

Economic Commentary is now available

electronically through the Cleveland Fed's
home page on the World Wide Web:
http://www.clev.frb.org.

6. The implementation of sweep accounts
has also tended to dampen the growth of both
of these aggregates relative to economic
activity.

2. See Richard D. Porter, "Estimates of
Foreign Holdings of Currency-An Approach Based on Relative Cross-Country
Seasonal Variations," Board of Governors
of the Federal Reserve System, manuscript,
September 1993.

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