The myth of the “cashless society”: How much of America’s currency is overseas?

Feige, Edgar L. (2012): The myth of the “cashless society”: How much of America’s currency is overseas? Forthcoming in: Bundesbank Conference Volume

Abstract

The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S., per capita currency holdings now amount to $3000. This paper revisits the long-standing controversy concerning the whereabouts of U.S. cash. Specifically, we employ a previously confidential data source on net shipments of U.S. currency abroad to re-estimate the fraction of U.S. currency held overseas. Contrary to the widely cited figure that 65 percent of U.S. currency is abroad, we now find that direct evidence supports the notion that overseas holdings amount to less than 25 percent. Currently, the official figure for the percent of U.S. currency held abroad as published by the Federal Reserve in their Flow of Funds Accounts and by the Bureau of Economic Analysis in the U.S. Balance of Payments Accounts is 37 percent. This official figure is a proxy variable that is supposed to mimic the previously confidential data series maintained by the New York Federal Reserve. Judson (2012) made this series public enabling us to discover that the official estimates of currency abroad require downward revision to reflect accurately the newly released data on actual cash shipments abroad. We also review the “indirect” approaches to estimating the fraction of currency overseas employed by Porter and Judson (1996) and Judson (2012). We find that these indirect methods to be innovative but deeply flawed due to violations of their restrictive assumptions. Moreover, sensitivity analysis reveals the estimates highly sensitive to alternative specifying assumptions. We conclude that the large estimates of currency abroad obtained by these methods are spurious. The paper also examines the temporal pattern of overseas holdings of U.S. currency and finds that the observed decline in the demand for U.S cash abroad coincides with the growing popularity of the Euro and its growth as a second currency held outside the Euro area between 2003 and 2008. These new findings have significant implications for estimating the domestic money supply and other domestic monetary aggregates; for estimating the net benefits of seigniorage earnings of the Federal Reserve; for forecasting changes in output and prices and for estimating the amount of unreported income and tax evasion in the U.S.

• Item Type: MPRA Paper
• Language: English
• Keywords: Overseas Currency; cashless society; currency abroad; underground economy; seigniorage
• Subjects: C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology ; Computer Programs > C82 - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data ; Data Access; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth ; Environmental Accounts; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E26 - Informal Economy ; Underground Economy; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; F - International Economics > F2 - International Factor Movements and International Business > F24 - Remittances; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money

References

References:

Anderson, 1977, P. Anderson, Currency in use and in hoards, New England Economic Review, Federal Reserve Bank of Boston, (1977), pp. 21-30.

Anderson and Rasche, 1997, R.G. Anderson and R.H. Rasche, Construction of an estimated domestic monetary base using new estimates of foreign holdings of U.S. currency, Federal Reserve Bank of St. Louis Working paper 019A, (1997), pp. 1-50.

Augustin, 2011, S. Augustin, The circulation of euro banknotes outside of the euro area, Billertaria, Issue 10, December, (2011), pp. 16-17.

Avery, et.al. , 1986, R.B. Avery, G.E. Elliehausen, A.B. Kinneckell and P. A. Spindt, The use of cash and transaction accounts by American families, Federal Reserve Bulletin, 72 (1986) pp. 87-108.

Avery, et.al. , 1987, R.B. Avery, G.E. Elliehausen, A.B. Kinneckell and P. A Spindt, Changes in the use of transaction accounts and cash from 1984 to 1986, Federal Reserve Bulletin, 73 (1987) pp. 179-196.

Bach, 1997, C.L. Bach, U.S. International transactions, revised estimates for 1974-96, Survey of Current Business 77(7) (1997), pp. 43-55

Board of Governors of the Federal Reserve System, 2012, Currency and Coin Services, May, 22, 2012. http://www.federalreserve.gov/paymentsystems/coin_about.htm

Bureau of Economic Analysis, 2008, News release, June, 17, 2008, pp. 1-7.

Cebula and Feige, 1997, R. Cebula and E.L. Feige America’s Unreported Economy: Measuring the Size, Growth and determinants of Income Tax Evasion in the U.S, Crime, Law and Social Change, Vol.57 Issue 3, April, 2012

Doyle, 2000, B. M. Doyle, Here,dollars,dollars..Estimating currency demand and worldwide currency substitution, International Finance Working Paper No. 657, January 2000.

European Central Bank, 2011, The International Role of the Euro, July.

Federal Reserve Bank of San Francisco, 2012, President John C. Williams’ speech to the Western Economic Association International, July, 2, 2012. http://www.frbsf.org/news/speeches/2012/john-williams-0702.html

Federal Reserve Statistical Release Z.1, 2011, Flow of Funds Accounts of the United States, December 8, 2011. Feige, 1989, E.L. Feige, Currency velocity and cash payments in the U.S. Economy: The Currency Enigma, http://ideas.repec.org/p/pra/mprapa/13807.html.

Feige, 1994, E.L. Feige, The underground economy and the currency enigma, Public Finance, 49, 1994 pp.119-139. Reprinted in G. Fiorentini and S Zamagni (ed.) The economics of corruption and illegal markets, International Library of Critical Writings in Economics, Elgar (1999), pp. 23-40)

Feige, 1996, E.L. Feige, Overseas holdings of U.S. currency and the underground economy, in Pozo (ed.) Exploring the underground economy: studies of illegal and unreported activity, Kalamazoo, Mich. W.E Upjohn Institute for Employment and Research, (1966), pp. 5-62.

Feige, 1997, E.L. Feige, Revised estimates of the underground economy: Implications of U.S. currency held abroad, in O. Lippert and M. Walker (ed.) The Underground economy: Global evidence of its size and impact. (1997), pp.151-208.

Feige et. al. 2003, E.L. Feige, M. Faulend, V. Sonje and V. Sosic, Unofficial dollarization in Latin America: Currency substitution, network externalities and irreversibility, in D. Salvatore, J.W. Dean and T.D. Willett (ed.) The Dollarization debate, Oxford university press, (2003), pp.46-71.

Feige, 2012, E. L. Feige, New Estimates of U.S. Currency Abroad, the Domestic Money Supply and the Unreported Economy, Crime, Law and Social Change, Vol.53 Issue 3, April, 2012

Fujiki and Tanaka, 2009, H. Fujiki and M. Tanaka, Currency demand, new technology and the adoption of electric money: Evidence using individual household data. IMES Discussion Paper Series 09-E-27, Institute for Monetary and Economic Studies, Bank of Japan.

Goldberg, 2010a, L. S. Goldberg, Is the International Role of the Dollar Changing? Federal Reserve Bank Of New York, Current Issues in Economics and Finance, 16(1) (2010) pp.1-7.

Goldberg, 2010b, L. Goldberg, “What is the status of the international roles of the dollar? VOX, March, 31, 2010. http://www.voxeu.org/article/dollar-s-international-roles

Hellerstein and Ryan, 2011, R. Hellerstein and W. Ryan, Cash Dollars Abroad, Federal Reserve Bank of New York Staff Report no. 400. February, 2011.

Judson, 2012, R. Judson, Crisis and calm: Demand for U.S. currency at home and abroad from the fall of the Berlin Wall to 2011, Presented at the International conference on “The usage, costs and benefits of cash: Theory and evidence from macro and micro data”, Deutsche Bundesbank, Eltville, Germany, February, 2012, pp. 1-33

Leung et al. 2010, F. Leung, P. Ng, S. Chan, Analyzing External Demand for the Hong Kong-Dollar Currency, Hong Kong Monetary Authority Working Paper 07/2010, September.

Murray and Powell, 2002, J. Murray and J. Powell, Dollarization in Canada: The buck stops there, Bank of Canada, Technical report No. 90, August, 2002.

Pasley, 2005, R. Pasley, Recent Developments in Bank Secrecy Act Enforcement, North Carolina Banking Institute, 9 pp.61-102.

Porter and Judson, 1996, R.D. Porter and R.A. Judson, The location of U.S. currency: How much is abroad? Federal Reserve Bulletin, vol. 82 (October), pp.883-903

Roseman, 2010, L.L. Roseman, Statement of Louise L. Roseman, Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors of the Federal Reserve System before the Subcommittee on Domestic Monetary Policy and Technology of the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. July 20, 2010. http://www.federalreserve.gov/newsevents/testimony/roseman20100720a.htm

Sumner, 1990, S.B. Sumner, The transactions and hoarding demand for currency, Quarterly Review of Economics and Business, 30 (1990), pp. 75-89.

U.S. Department of Commerce, 2012, Office of Travel and Tourism Industries from the Bureau of Economic Analysis. June, (2012)

U.S Department of Commerce, 2012, International trade Administration, Office of Travel and Tourism Industries. Profile of U.S. Resident Travelers Visiting Overseas Destinations: Various Years, Outbound

U.S Department of Commerce, 2012, International trade Administration, Office of Travel and Tourism Industries. Profile of Overseas Travelers to the United States: Various Years, Inbound

United States Treasury Department, 2000, United States Treasury Department, 2000, The use and counterfeiting of United States Currency Abroad, January (2000).

United States Treasury Department, 2006, United States Treasury Department, 2006, The use and counterfeiting of United States Currency Abroad, Part 3, January (2006).