In the last of three excerpts from Kenneth Rogoff’s new book, The Curse of Cash, the Harvard economist continues to delve into the question of who exactly is holding the world’s cash and finds that the vast majority of the money is simply unaccounted for. This suggests that cash is flooding into the underground economy and is part of why Rogoff argues for the near-total abolition of paper money.
Anyone who thinks that debit cards, cell phone payments, and virtual currencies are already burying cash could not be more wrong. Demand for most advanced-country paper currency notes has been rising steadily for more than two decades. Believe it or not, as of the end of 2015, $1.34 trillion worth of US currency was being held outside banks, or $4,200 floating around for every man, woman, and child in the United States. The orders of magnitude for most advanced-country currencies is broadly similar. Incredibly, the vast bulk of this mass stash of cash is in high-denomination notes, the kind most of us don’t carry in our purses and wallets, including the $100 bill, the €500 note (about $570 at present), and the 1,000-Swiss franc note (a little over $1,000). Almost 80 per cent of the US currency supply is in $100 bills. How many people have 34 of them in their purses, cookie jars or cars, as each individual would need to account for his or her share? And this is for every man, woman and child, so a four-person family would need to be holding $13,600 just in $100 bills, and that is not counting smaller bills. Treasuries and central banks routinely make billions from printing large-denomination notes, yet no one quite knows where exactly most of it lives or what it is used for. Only a minor fraction is in cash registers or bank vaults, and surveys of consumers in the United States and Europe don’t begin to explain the rest. And it is not just the United States that has a gigantic currency supply dominated by big bills. The problem is nearly universal in advanced economies.
When one looks closely at the evidence on the use of cash in legal transactions, it is extremely hard to see who is holding all the (say) $50 and $100 bills; it is certainly not the poor. People might use cash regularly, but how much of the world’s massive cash supply is really circulating in the domestic legal economy?
How much currency do businesses and banks hold?
The Curse of Cash
■ Read first excerpt: Part 2: Big bills in dark corners
Businesses are, by and large, very efficient in their cash management and thus can account for only a small share of total currency in circulation. A couple of studies back in the 1990s estimated that seed cash in retail establishments (eg in cash registers) is less than 2 per cent of all outstanding cash, with perhaps another few per cent in transit to banks at any one time. Given the huge trend of decline in cash used for medium and large retail transactions over the past 20 years, this share can only have declined.
Bank vault cash, even including cash in ATMs, does not explain much of the surprisingly large currency holdings either. First of all, the amount of vault cash just isn’t that big compared to the overall money supply. As of mid-February 2016, US currency in bank vaults and ATMs combined was $75 billion, which equals about 5 per cent of reported currency in circulation. However, out of this $75bn, $61bn is treated as required reserves, and doesn’t even count in currency-in-circulation figures.
So if a significant share of reported currency in circulation is being used in the legal economy, it is not in cash registers or bank vaults. One has to look to consumers’ pockets and cookie jars.
Most of what is known about consumer cash holdings in the legal economy comes from surveys that have been conducted by central banks in recent years, using sophisticated techniques but fairly small samples. The basic takeaway from these studies is that the cash consumers admit to holding can account for perhaps 5 to 10 per cent of the total currency supply. We begin with the United States and then look at Europe.
The two important sources of data on US consumer cash holdings are the Survey of Consumer Payment Choice and the Diary of Consumer Payment Choice. The first is an annual survey conducted by the Federal Reserve that makes use of the Rand Corporation’s American Life Panel survey respondents. The second is a consumer diary project (where consumers are asked to keep diaries, something akin to the Nielsen diaries for rating TV shows). It gives a more detailed snapshot of consumer holdings of cash, but so far only for the month of October 2012. Nevertheless, the diary snapshot is especially valuable, because, in addition to answering questions on total currency held on person (eg, wallet, pocket and purse) and on property (eg home and car), respondents were also asked the denominations of the notes they held. Of course there are well-known problems with both survey and diary methods, but in any event, these are the best sources available.
Both approaches – the annual survey and the more detailed one-time diary snapshot – find that consumers admit to holding only a modest fraction of total cash outstanding, certainly neither the $4,200 per individual counting all denominations nor the $3,400 per individual counting only $100 bills. In the 2012 annual survey, for example respondents reported holding an average of $46 on person (outliers omitted) with a median of $25. The one-time October 2012 diary respondents reported a slightly higher average amount on person ($56, median $22). Total cash holdings reported, including on property, were $250.
The annual surveys, which attempt to follow a relatively constant and uniform group, have the advantage of allowing one to look at trends. The results show that in parallel to total currency in circulation, there is an upward trend to reported cash holdings and a strong increase since the financial crisis of 2008. Average reported total holdings (on person and around the house) rose by $100 from 2008 to 2012, but then fell by $20 in 2013, the most recent year available.
Thus the order of magnitude for consumer cash holdings is roughly 6 to 7 per cent of total currency in circulation, or 12 to 14 per cent of currency estimated to be held domestically, presumably mostly for legal, tax-compliant, regulation-compliant activities. These numbers become somewhat higher if one includes outliers from the survey, albeit there is no way to tell how the high rollers actually use their cash. Are the high rollers using cash to pay household help to get a lower rate, to avoid regulation and social security taxes, or to hire migrants without work permits? In any event, counting the high rollers, the share then rises to perhaps 10 per cent of total currency in circulation. Either way, the bulk of US cash in circulation cannot be accounted for by consumer surveys.
Obviously, if consumers are holding only a small fraction of all cash outstanding, they cannot possibly be holding more than a small fraction of the $100 bills in circulation, since $100 bills account for nearly 80 per cent of the value of US currency. Nevertheless, it is interesting to ask to what extent ordinary consumers use them at all. The answer seems to be a “little bit,” just enough so that a retailer cannot be 100 per cent sure that the $100 bill a customer wants to pay with was obtained through illegal activity or tax evasion.
According to the October 2012 diary survey, 5.2 per cent of US consumers reported at least one $100 bill in their possession. Among the consumers carrying between $400 and $699, two-thirds had at least one $100 bill. Federal Reserve economists have interpreted this data as underscoring that Americans still value the $100 bill, perhaps to avoid carrying many $20s. Maybe, but showing that 1 in 20 adults carries around a $100 bill is not quite the same as explaining why everyone isn’t carrying around at least 34 of them, in addition to smaller notes.
What about other countries? The basic logic for businesses and banks is the same: they account for only a relatively modest share of total currency in circulation. If a large share of currency is to be explained by holdings for legal transaction purposes, it can only be by consumers. In an interesting project, seven central banks aimed to harmonise the results of one-time consumer surveys so as to achieve broadly comparable cross-country data. The main message is similar to what we learnt from the United States: consumer demand for cash does not begin to account for the extant currency supply. The graphic at left gives estimates of “cash on person”, with figures adjusted to US dollars by purchasing power parity exchange rates.
The graphic confirms that Austria and Germany are cash-intensive countries, whereas France is more similar to the United States. The figure includes only cash on person and not cash on property. Assuming similar ratios of the two for Austria and Germany as for the United States, then total cash balances would be, say, $500 to $600 worth of euros in Germany, and $285 to $340 in France, hardly enough to explain per-capita currency holdings (and remember the survey is only counting adults).
Overall, the research results suggest that (1) the legal economy accounts for only a modest fraction of all cash holdings and (2) there is still a high demand for small bills for use in retail transactions, even if this demand appears to be diminishing gently over time, especially with increased debit card usage.
* Edited extract taken from The Curse of Cash by Ken Rogoff, published by Princeton University Press
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