Even a cursory examination of the growth and magnitude of the U.S. currency supply in circulation with the public reveals that predictions of the advent of the “cashless society” are unfounded. Despite financial innovations giving rise to convenient substitutes for cash, per capita cash holdings continue to increase and by the end of 2011, amounted to $3000 for every man woman and child residing in the U.S. While this figure does not comport with our common sense notion of how many dollars the average person holds in her wallet, we show that Europeans and Japanese citizens hold even larger amounts of cash. Two explanations are offered for these large cash holdings. The first posits that a large fraction of U.S. currency is held abroad, the second that large amounts of cash are employed to undertake transactions that individuals and firms prefer to hide from the government either to avoid taxes, regulations or punishment for illegal activities.
10 20 30 40 50 60 70 80
Percent abroad
Figure 12
Estimated share of U.S. currency abroad: Seasonal model sensitivity analysis
Porter/Judson (1996) [Dec-Feb] Judson(2012) [Dec-Jan] Seasonal [Dec-Sept]
Cash, being an anonomous medium of exchange leaving no paper trail, is the logical choice for undertaking such transactions.
Feige(2012) employed the official estimates29 (FOF/BEA) of the amount of U.S.
currency believed to be overseas, to derive estimates of U.S. seiniorage earnings, the domestic money supply, and estimates of the unreported economy and the “tax gap”. This official FOF/BEA estimate of the share of U.S. currency abroad is based on a proxy measure (NYLAM) that was designed to mimic a confidential data series controlled by the New York Federal Reserve (FSN) that tracks bulk shipments of wholesale currency dealers into and out of the U.S. This confidential aggregate shipment data was recently published in a paper by Judson (2012), enabling researchers to reexamine the veracity of the official FOF/BEA (NYLAM) proxy estimates of the amount of U.S. currency held abroad.
As displayed in Figure 13, the NYLAM proxy appears to track the formerly confidential FSN series reasonalby closely between 1988 and 2001, after which time the proxy begins to substantially overstate the series it is supposed to mimic. By 2011, the official FOF/BEA (NYLAM) estimate of overseas currency is roughly $150 billion larger than the amount reported to the New York Federal Reserve (FSN) by wholesale bulk
29 As published by the Federal Reserve in its Flow of Funds Accounts and by the Bureau of Economic Analysis in the U.S. Balance of Payment Accounts.
0 200 400 600 800
Dollars (Billions)
Figure 13
Alternative estimates of currency abroad
FSN (Actual Recorded) FSN+Remittances + Travel
NYLAM (Proxy) Average MDM
Porter Judson(1996) Judson (2012)
shippers of currency. Judson (2012) suggests that the the FSN series may be an understatement of the amount of U.S. currency abroad because it omits net currency shipments abroad through informal channels such as immigrant remitances and travel.
We therefore directly estimate cash flows through these informal channels and find that taking account of immigrant remitances and cash transported by inbound and outbound passengers leads to a slight increase in our estiamte of U.S. cash held abroad between 1988 and 2002. Thereafter, informal flows reduce our estimates of currency abroad. We conclude that by the end of 2011, the best direct estimates of U.S currency held abroad suggest that $230 billion is held overseas, that is 23 percent of the currency in circulation with the public. This estimate implies that per capita domestic cash holdings amount to roughly $2300. We strongly suggest that the Federal Reserve and the Bureau of Economic Analysis downward revise their official estimates of overseas currency to bring them into conformity with the New York Federal Reserves (FSN) series and the available estimates of immigrant remittances and travel flows.
We then turn to a reexamination of “indirect” means of estimating the amount of U.S. currency abroad. These indirect methods, based on varients of monetary demography models, are the basis for the oft cited claims, that as much as 55 -70 percent of the nation’s currency supply is held overseas. While these indirect methods are admittedly innovative, we demonstrate that they require highly restrictive assumptions which can be shown to be significantly violated by available empirical data. Figure 13 reveals that an average of simple monetary demography models suggests that $470 billion of U.S. currency (47 percent) is currently held abroad. We also update the
“seasonal” models proposed by Porter and Judson (1996) and Judson (2012) also displayed in Figure 13. If taken at face value, they suggest that between $620 - $790 billon (62-79 percent) of U.S. currency is held abroad. As such, the indirect approaches produce estimates exceeding the direct estimates by an astounding $390-550 billion.
They also suggest a temporal path at variance with that of direct estimates. The direct estimates reveal that the introduction of the Euro led to a substitution of Euros for U.S.
dollars until the financial crisis. The seasonal models suggest a continual upward trend in the demand for U.S. dollars abroad. We not only demonstrate that a key assumption underlying these indirect models is false but also show that the results from these models
are highly sensitive to slight variations in their specifying assumptions. We conclude that these indirect models, particularly the seasonal models, are unfit as measures of the amount of U.S. currency held abroad.
It is beyond the scope of the present paper to examine many of the interesting implications that follow from our finding that the amount of currency overseas is less than 25 percent of the nation’s cash in circulation with the public. We do however strongly urge Federal Reserve officials to come to some agreement concerning the amount of currency held abroad so that the current discrepancies between their published data, their internal data and their public pronouncements can finally be put to rest.
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