Missing Money

The case of missing money refers to the fact that more than half of U.S. currency in circulation is held abroad by foreigners. The money is missing in the sense that the currency leaves the United States for foreign destinations through underground and illegal activities.

A study of $100 bills illustrates the magnitude of the missing money. About two-thirds of the outstanding currency in circulation is in $100 bills, yet these bills play a small part in daily transactions. Cash registers do not have a slot for $100 bills, and automatic teller machines (ATM) do not issue them. Instead, $100 bills rank among the important exports of the United States.

In May 2006, the stock of U.S. currency stood at $742 billion, averaging about $2500 per person. By these numbers, each family with two adults and two children should be holding about $10,000 in currency. Surveys have shown that individual holdings of currency average much closer to $100 per person. The amount of missing currency therefore approximates $2,400 per person, no small amount of money. Retailers and other businesses hold currency to conduct daily transactions but only a small fraction of the $2,400 per person that is missing. It is estimated that businesses account for less than $100 per person of the missing money. The underground economy, including the informal transactions aimed at dodging taxes, probably accounts for slightly more than the legitimate business sector. Combining the currency holdings of legitimate businesses and the underground economy still puts the average currency holding at less than $225 per person.

Studies have uncovered that a large share of the missing money is held in foreign countries. Anywhere between 55 and 70 percent of U.S. outstanding currency is held in foreign countries. During the first half of the 1990s, roughly 75 percent of the increase in U.S. currency emigrated abroad.

Residents of foreign countries often see holding U.S. currency as protection against domestic inflation. In the early 1990s, hyperinflation plagued several countries that had been either part of the Soviet Union or a member of the Eastern Bloc. Between 1988 and 1995, about half of U.S. currency that went overseas found its way to Europe, particularly to Russia and the other nations of Eastern Europe (Porter and Judson, 1996). In addition, residents of a foreign country may hold U.S. currency in case they must flee oppression and want to take some of their wealth with them. Before U.S. currency became popular in Russia, Latin America held a large share of U.S. overseas currency. In foreign countries, U.S. currency does not circulate as a medium of exchange or serve as a unit of account, but it does serve as a store of value.

The U.S. government does not regard the large foreign holdings of U.S. currency as a problem. Outstanding currency is a liability on the Federal Reserve System’s balance sheet. It is an interest free loan to the Federal Reserve and, indirectly, to the U.S. government. The popularity of the U.S. dollar as a store of value in foreign countries allows the U.S. government to borrow funds interest free. The European Central Bank began issuing 500-euro notes, probably hoping to enjoy some of the advantages the United States receives from the popularity of $100 bills in foreign countries.