CASH MIGHT BE DETHRONED, BUT IT HASN´T GONE AWAY / BARRON´S MAGAZINE

Economic Beat

Cash Might Be Dethroned, but It Hasn’t Gone Away

Immense amounts of U.S. currency are sloshing around the globe, but no one can say precisely where.

By Gene Epstein

May 15, 2015 10:38 p.m. ET

 

Is cash still king? Based on data from the Federal Reserve Board, you might think so. The Fed routinely tracks M1, which covers cash plus checking deposits. In March, the cash component of M1 had a face value of $1.3 trillion, a record high (see chart).

                 

About $1 trillion of that $1.3 trillion is in $100 bills. Another $300 million is in denominations of $500, $1,000, $5,000 and even a gasp-provoking $10,000. (These bills haven’t been produced in decades, but remain in circulation.) The rest, nearly $300 billion—also a record high—is in denominations of less than $100, with workhorse $20 bills accounting for most of that value.

Where is all this currency? The Fed can only tell you with certainty where it is not. It’s “outside” the U.S. Treasury or any of the Federal Reserve Banks, and outside the vaults of commercial banks and all other depository institutions. It must therefore be currency in circulation.

At $1.3 trillion, currency in circulation has grown faster than nominal gross domestic product, and noticeably faster than the U.S. population. Divide that $1.3 trillion by all U.S. households, and you get a record high of $11,000 per household, up from $7,000 per household as recently as 2008.

But, of course, such a ludicrously large stash of cash can only be held by a fringe group, especially since debit cards, credit cards, and electronic transfers have almost obliterated our need for currency.

As a Barron’s cover story has pointed out (“The End of Cash?” Dec. 31, 2012), the dethronement of the greenback has been nearly total, at least in the above-ground economy tracked by the tax collector.

SO WHERE’S ALL THE CASH? That mystery will not be unraveled here, for the simple reason that no one seems to know for sure. But the main patterns seem fairly clear.

To begin with, while illegal transactions with virtual currencies like Bitcoin have prompted concern, the gangster’s true friend surely remains Uncle Sam, ever willing to print C-notes by the bale to facilitate untraceable payoffs. A million dollars’ worth of $100 bills can fit into a mere briefcase. Ironically, the Treasury’s ongoing efforts to print C-notes whose design characteristics stay one step ahead of the counterfeiters is one way the drug lords can be confident that their money will be purer than the heroin they buy and sell with it. We don’t know what share of U.S. currency is used by criminals, both foreign and domestic, but it cannot be insignificant.

Then there is the immense amount held abroad. “Dollarized” economies, in which the dominant medium of exchange is the greenback, include Panama, El Salvador, East Timor, and the British Virgin Islands, along with others that actively use the dollar, including Iraq, Lebanon, Bermuda, and Zimbabwe.

According to a November 2012 Fed study on currency at home and abroad, foreign demand for U.S. money generally tends to rise with an increase in financial turmoil. Immediately following the fall of the Berlin Wall in 1989, the resulting financial turmoil prompted a foreign flight into U.S. currency, which abated by the early-2000s. But demand for greenbacks has heated up again in the wake of the 2008-09 financial crisis.

As the Fed study makes clear, however, the amount of cash that actually leaves the country, by plane or by boat, is impossible to track.

FINALLY, A LOT PROBABLY NEVER LEAVES the country, but is used in the “informal” sector of the domestic economy—non-criminal, except for evading the tax collector. An August 2011 Urban Institute study estimated this sector at 5% to 10% of gross domestic product. There are at least two reasons to believe the informal sector has grown disproportionately over the past decade: the surge in recipients under 60 of Social Security disability benefits, for whom benefits would be threatened if they reported earnings from work; and the surge in recipients of conventional Social Security checks, whose income would be taxed if they reported earnings.

As noted, however, most of the above consists of semi-educated guesses. The best guess is that, far from going away, cash will probably be with us for quite a while longer.