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

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  • Feige, Edgar L.

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.

Suggested Citation

  • Feige, Edgar L., 2012. "The myth of the “cashless society”: How much of America’s currency is overseas?," MPRA Paper 42169, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:42169
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    References listed on IDEAS

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    1. Richard G. Anderson & Robert H. Rasche, 1997. "Construction of an estimated domestic monetary base using new estimates of foreign holdings of U.S. currency," Working Papers 1997-019, Federal Reserve Bank of St. Louis.
    2. Feige, Edgar L. & Cebula, Richard, 2011. "America’s unreported economy: measuring the size, growth and determinants of income tax evasion in the U.S," MPRA Paper 34781, University Library of Munich, Germany.
    3. Feige, Edgar L., 1989. "Currency Velocity and cash payments in the U.S. Economy: The Currency Enigma," MPRA Paper 13807, University Library of Munich, Germany.
    4. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, University Library of Munich, Germany.
    5. Feige, Edgar L., 1997. "Revised estimates of the Underground Economy: Implications of US Currency held abroad," MPRA Paper 13805, University Library of Munich, Germany.
    6. John Murray & James Powell, 2002. "Dollarization in Canada: The Buck Stops There," Technical Reports 90, Bank of Canada.
    7. Gianluca Fiorentini & Stefano Zamagni (ed.), 1999. "The Economics of Corruption and Illegal Markets," Books, Edward Elgar Publishing, volume 0, number 1589.
    8. Feige, Edgar L., 2011. "New estimates of U.S. currency abroad, the domestic money supply and the unreported Economy," MPRA Paper 34778, University Library of Munich, Germany.
    9. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-136.
    10. Hiroshi Fujiki & Migiwa Tanaka, 2009. "Demand for Currency, New Technology and the Adoption of Electronic Money: Evidence Using Individual Household Data," IMES Discussion Paper Series 09-E-27, Institute for Monetary and Economic Studies, Bank of Japan.
    11. Frank Leung & Philip Ng & Simon Chan, 2010. "Analysing External Demand for the Hong Kong-Dollar Currency," Working Papers 1007, Hong Kong Monetary Authority.
    12. Ruth A. Judson & Richard D. Porter, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 82(Oct), pages 883-903, October.
    13. Susan Pozo (ed.), 1996. "Exploring the Underground Economy," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number eue, November.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How many dollars are abroad?
      by Economic Logician in Economic Logic on 2012-11-22 21:36:00
    2. Cash is king, but $100 bills are for crooks
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-11-13 19:38:07

    Citations

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    Cited by:

    1. Kenneth Rogoff, 2015. "Costs and Benefits to Phasing out Paper Currency," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 445-456.
    2. Jobst, Clemens & Stix, Helmut, 2017. "Doomed to Disappear? The Surprising Return of Cash Across Time and Across Countries," CEPR Discussion Papers 12327, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Overseas Currency; cashless society; currency abroad; underground economy; seigniorage;
    All these keywords.

    JEL classification:

    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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