Billions Elude Dollar Tally; Is Currency in Use Abroad?
By ROBERT D. HERSHEY Jr., Special to The New York Times
Published: February 20, 1990
WASHINGTON, Feb. 19— Call it the mystery of the missing money.
Why is it, some want to know, that about $1,000 worth of currency is now in circulation for each of the 240 million Americans when the Government estimates that people and businesses hold the equivalent of $250 for each person? What happened to the $180 billion or so of paper money that has been printed over the years and seems to have disappeared?
No one really has the answer. But specialists think most has moved abroad, some in drug transactions but some from other sources like repatriations from immigrants and payment for imported goods.
The flow has been so great, the Federal Reserve chairman, Alan Greenspan, told Congress last year, that ''perhaps more than half of U.S. currency is outside the United States.''
For most of the last 30 years, the growth of currency in circulation was quite predictable, closely correlated to the amount of personal spending and interest rates - as spending grew, the amount of currency in circulation expanded in kind. But in late 1988, the Federal Reserve found currency growth in recent years to have substantially outpaced increases in personal spending. It called this an unprecedented development, occurring for ''no readily apparent reason.'' Experts are still baffled.
''It's quite a mystery where all the cash is,'' said Gregory E. Elliehausen, a Federal Reserve Board analyst who has studied the phenomenon. ''I think we'd love to know.''
Effects Are Not Clear
Another thing that is not clear is whether - if huge amounts of currency are moving abroad - the effects are good or bad.
Although the parallels are rough, the current upheaval in Eastern Europe has directed some attention to the American experience. For example, Chancellor Helmut Kohl of West Germany is proposing monetary union with East Germany by making Bonn's mark, which already circulates outside the country to a limited extent, their common currency.
Some economists say such blurring of the currency borders tends to make the world economy less efficient and therefore all of us slightly poorer. One reason could be that in the case of the United States currency, dollars are often not invested in new enterprises that would create wealth.
But others contend that the availability of dollars in financially distressed countries like Argentina -where billions of dollars circulate as a second currency - probably allows transactions that would otherwise not occur and actually increases total wealth.
One thing, though, is sure: The United States makes a profit out of this through seigniorage, the difference between what it costs a Government to print or mint money and the money's face value. Because it costs only about 2 1/2 cents to print a $1 bill, there is a Treasury profit of 97 1/2 cents if this bill winds up, say, under a foreign mattress. For larger denomination bills the production costs are the same and the profit even greater.
Think of it as similar to American Express selling traveler's checks that are never cashed. Is $250 Per Capita Too Low? The explanation that the missing currency is moving overseas arises to some degree through the process of elimination. The other reasons sometimes raised for the discrepancy between the $250 in currency held per capita and the $1,000 printed per capita do not seem to explain much.
The possibility that people fib about how much currency they have seems unpersuasive because there is no obvious motive for them to do so. Those who suggest the huge rise in currency is the result of the proliferation of automatic teller machines come up against the fact that the machines probably reduce the number of people carrying large sums of ''walking around'' money because the machines make cash replenishment easier. Moreover, larger purchases are increasingly made with credit cards and checks.
Do merchants and other businesses have the missing currency? It seems unlikely because most are sophisticated enough to put cash to work earning interest, and they are also generally eager for security reasons to keep cash in stores to the change-making minimum. At most, business holdings match those of individuals, the Federal Reserve has estimated, accounting for about $125 per capita.
Collectors of paper money are assumed to have only negligible amounts.
Effect of Illegal Activities
But this leaves no accounting for about 75 percent of the United States currency that has been printed.
Many people attribute the currency explosion to drug traffic and other illegal or underground activities. Among other things, they cite a rapid increase in demand for high-denomination bills, which officials say do not exhibit the seasonal variations in demand of lesser-denomination notes.
Yet a recent Treasury study on whether to withdraw $100 notes as legal tender because of their purported use in illegal activity found that ''the usage of these notes in financial transactions is limited.'' The study also reported that only 12 percent of currency seizures by the Customs Service in 1988 consisted of $50 and $100 bills and that random seizures by the Drug Enforcement Administration from 1986 to 1988 showed a similar pattern.