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New estimates of U.S. currency abroad, the domestic money supply and the unreported economy

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Abstract

Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15% of the currency stock, leaving the whereabouts of 85% unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30 and 37% rather than the widely cited figure of 65%. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much U.S. currency is abroad and on the particular location of overseas U.S. dollars. The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964–2010, which have provided a $287 billion windfall for U.S. taxpayers. Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices. Domestic cash holdings are finally used to estimate the size of the U.S. unreported economy as measured by the amount of income that is not properly reported to the IRS. By 2010, we estimate that legal and illegal source unreported income” is $1.9–$2.4 trillion, implying a “tax gap” in the range of $400–$540 billion. Currently, we estimate that 18–23% of total reportable income is not properly reported to the IRS.

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Notes

  1. The currency data used throughout the paper refers to the currency component of the M1 money supply defined as currency outside U.S. Treasury, Federal Reserve Banks and the vaults of depository institutions. (Not seasonally adjusted). (http://www.federalreserve.gov/releases/h6/hist/h6hist4.pdf). The “currency outside banks” series from the Flow Of Funds Accounts of the United States Z.1 (Table L 204, line 6) (not seasonally adjusted) is typically somewhat larger than the currency component series.

  2. These included both Currency and Monetary Instrument Reports (CMIR) and the Federal Reserve Bank of New York’s (NYB) confidential wholesale currency bulk transport data.

  3. Page 899.

  4. Page iv. These conclusions appear to based on the earlier work of Porter and Judson.

  5. Page 2. The source for these assertions appear to be the U.S. Treasury Department [35]

  6. Federal Reserve Statistical Release Z.1 Flow of Funds Accounts of the United States March 10, 2011. Table L.204, (p.86). Line 23 records the stock of U.S. currency held abroad and line 6 records U.S. currency outside of banks. The ratio of line 23 to line 6 yields the faction of U.S. currency held abroad.

  7. BEA News release. June 17, 2008.

  8. The new figures appear in the 2008 Flow of Funds Z1 Tables F-204 and L-204, however no mention is made of the change in method employed to estimate the revised series of currency flows abroad.

  9. Currently known as the Report of International Transportation of Currency or Monetary Instruments (FinCEN Form 105).

  10. Both of these data systems are described, compared and evaluated in Feige [15, 16].

  11. In 2003, the Federal Reserve terminated its Extended Custodial Inventory (ECI) agreement with UBS and in 2004 followed with a $100 million civil penalty after discovering that UBS had falsified its reports of overseas shipments to the Federal Reserve over an 8 year period [29].

  12. The historical background and evolution of the FR-160 reporting system is contained in the Board of Governors technical memorandum #91 entitled “Processing Procedures for the Cash Series”, November, 1988.

  13. [14].

  14. [15], pp. 43–45.

  15. [6].

  16. BEA [7] News Release

  17. P.28.

  18. In 1980 the reporting threshold was raised to $10,000.

  19. Instructions concerning exceptions as to who must file are found on FinCEN form 105.

  20. The correlation coefficients between CMIR outflows and NYLAM and NYLAMSAELJ outflows for the period 1977–1995 are respectively .897 and .892. However the mean annual outflow for CMIR is almost $5 billion below the means of the two alternative outflow measures.

  21. The correlation coefficients between CMIR inflows and NYLAM and NYLAMSAELJ inflows for the period 1977–1995 are respectively .988 and .989 with comparable means.

  22. P. 15. This increased demand for currency is explained by the fact that this group encounters “obstacles to obtaining and using deposit accounts at financial institutions.”(p.17.)

  23. P. 25.

  24. Real output is measured by real GDP; inflation by the GDP deflator and the monetary aggregates are respectively, C = Currency component of M1, M1 = the M1 money supply; M2 = M2 money supply; MbSL = the St. Louis Federal Reserve monetary base; MbBoG = Board of Governors Monetary base; Cdom = domestic currency; M1dom = domestic M1 money supply; M2dom = domestic M2 money supply; Mbdom = domestic monetary base.

  25. As described in Feige [12] and Cebula and Feige [9] these restrictions imply that the ratio of unreported income (Yu) to reported income(Yo) can be estimated as follows:

    Yu/Yo = (C-koD)/(ko + 1)D: where C = Currency, D = Checkable deposits and ko = (Co/Do), the currency deposit ratio in the official economy which is observed in the year (1940) when the underground economy is assumed to be zero.

  26. Given αt,,the equation in footnote 25 can be solved for kot to derive a new benchmark estimate for generating the temporal development of Yu/Yo.

  27. IRS [26] Table D-17

  28. Slemrod [32]

  29. IRS [25] Table VI-2

  30. Internal Revenue Service [26], Table A-50.

  31. The 1972–92 estimates are derived from IRS [26] Appendix D adjusted for illegal income IRS [25] assumed to be a constant proportion of legal source income. The data point for 2001 is based on the IRS estimated tax gap due to underreporting (adjusted for illegal underreporting), divided by the 2001 NBER estimated marginal tax rate.

  32. The data in question are displayed in Figure 1 of Hellerstein and Ryan [24] but to date; researchers have been denied access to the underlying data, despite the fact that these highly aggregated data eliminate any concerns of confidentiality.

  33. Cebula and Feige [9] show that estimates of unreported income will increase if allowance is made for the likelihood that the income velocity of unreported income exceeds that of reported income, and if the secular rise of plastic payment mechanisms which substitute for cash usage are taken into account.

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Acknowledgements

Thanks to Dan Feenberg, Ruth Judson, Richard Anderson and Mark Ledbetter for generously providing data employed in the study.

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  1. Department of Economics, University of Wisconsin-Madison, Madison, WI, USA

    Edgar L. Feige

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Feige, E.L. New estimates of U.S. currency abroad, the domestic money supply and the unreported economy. Crime Law Soc Change 57, 239–263 (2012). https://doi.org/10.1007/s10611-011-9348-8

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