February 8, 2017 Reading Time: 3 minutes

This is the second of several posts on Ken Rogoff’s The Curse of Cash. In this post, I consider Rogoff’s estimate for the extent to which cash is used by criminals and tax cheats. If you have not yet read the book, I offer a brief summary in a previous post and I will consider some shortcomings of the work in my next two (here). Now: on to the estimate!

Rogoff starts by observing the vast sums of cash in circulation. In 2015, he notes, there was “$4,200 floating around for every man, woman, and child in the United States.” Perhaps more surprisingly, nearly 80% of that is in the form of $100 bills. That’s thirty-four $100 bills per person—or, $13,600 worth of $100 bills for a family of four. Almost certainly more than any of us have on hand. So where is all that money? Some of it is held abroad. Some of it sits in cash registers and vaults. And some of it has been lost, destroyed, or buried with loved ones. But, at least according to Rogoff, a big chunk of it is employed in the domestic underground economy to buy and sell illegal goods and services and/or evade taxes.

How much of the currency is used for criminal activity? Unfortunately, criminals are not very forthcoming in surveys. But Rogoff offers some estimates by whittling away at the whole. About half of all US currency is held abroad. To get a rough estimate, Rogoff compares the ratio of currency to GDP in Canada, 3.7 percent, to the US, 7.4 percent. He reasons that, since Canada and the US have similar financial systems and the Canadian dollar does not circulate much beyond its borders, the difference in the ratio of currency to GDP should largely reflect the extent to which the US dollar circulates abroad. It is a crude measure, to be sure. But it puts us in the ballpark. It is also consistent with more sophisticated estimates. Exploiting changes in the design of notes and the frequency of deposits, Federal Reserve economists Richard Porter and Ruth Judson initially estimated that 55 to 70 percent of all US currency is held abroad. More recently, Judson has revised that number down to 50 percent. A US Treasury, Federal Reserve, and Secret Service joint task force conducting on-the-ground interviews in some forty-countries put the estimate closer to 60 percent. Still, accepting that half of all US currency circulates abroad leaves about $2,100 per person—or $8,400 for a family of four—in the domestic economy.

Another 6 percent of all US currency is held by businesses and banks. Less than 2 percent sits in cash registers, with perhaps another 3 percent in transit at any one time. Some $75 billion is held by banks—at the counter, in the vault, or in an ATM. But, after subtracting the $61 billion treated as required reserves (which doesn’t count as currency in circulation), it only amounts to 1 percent of currency in circulation. Taking the currency held by businesses and banks reduces domestic pocket money to $1,848 per person; $7,392 for a family of four.

So, by all accounts, domestic consumers are holding about 44 percent of currency in circulation. And, yet, they only admit to holding 5 to 10 percent. That leaves more than one third of all US currency in circulation unaccounted for. Rogoff implies that the difference between what is being held by consumers (44 percent) and what is admitted to being held by consumers in surveys (5 to 10 percent) is a reasonable estimate of the share of cash employed to buy and sell illegal goods and services and/or evade taxes. In other words, more than a third of all US currency in circulation is used by criminals and tax cheats.

William J. Luther

William J. Luther

William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News. Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.

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