The Location of U.S. Currency: How Much Is Abroad? Richard D. Porter and Ruth A. Judson, of the Divi- Currency movements are difficult to measure for sion of Monetary Affairs, prepared this article. Lyle some of the same reasons that currency is popular: It Kumasaka, Adam Reed, and James Walsh provided can be easily concealed and readily carried across research assistance. borders, even in large quantities (a briefcase can hold $1 million in $100s). The total amount of U.S. cur- Federal Reserve bank notes are widely used outside rency in circulation is known; in principle, one could the United States. Knowing how much U.S. currency conduct a census to determine the domestic stock and is abroad is important for a variety of reasons, but assume that the rest of the currency is abroad. How- currency movements are notoriously difficult to mea- ever, such a census would be invasive, prohibitively sure, and estimates of the foreign component of cur- costly, and unlikely to yield reliable results. Thus, the rency stocks and flows have been subject to a great amount of currency held abroad can only be esti- deal of speculation and uncertainty. Here we bring mated, and then only from incomplete or indirect together several new methods and data sources to evidence about dollars flowing across U.S. borders. narrow the range of that uncertainty. According to Policymakers would find it useful to have a clear our estimates, about $200 billion to $250 billion of idea of how much U.S. currency is circulating outside U.S. currency was abroad at the end of 1995, or more the country. First, foreign demand for U.S. currency, than half the roughly $375 billion then in circulation if large and unrelated to domestic U.S. spending, will outside of banks. Moreover, that proportion has been complicate the interpretation of movements in the rising. Our calculations indicate that growth in for- amount of currency outstanding and in various other eign demand for U.S. currency—especially for monetary aggregates. hundred-dollar bills ($100s)—is far stronger than Second, estimates of changes in foreign holdings growth in U.S. demand. On average over the 1990s, of U.S. currency may also reduce the average size of the overseas stock has been growing at about three the errors-and-omissions category in the U.S. interna- times the rate of growth of the domestic stock. tional transaction accounts, which do not currently Today, foreigners hold U.S. currency for the same incorporate any estimates of changes in foreign hold- reasons that people once held gold coins: as a unit of ings of currency. account, a medium of exchange, and a store of value Third, a significant foreign demand for U.S. cur- when the purchasing power of the domestic currency rency will have important effects on the amount of is uncertain or when other assets lack sufficient ano- seigniorage that the United States can expect.1 All nymity, portability, divisibility, liquidity, or security. U.S. currency, including that held externally, can be A safe asset in an unpredictable world, dollars often thought of as a form of interest-free Treasury borrow- flow into a country during periods of economic and ing and therefore as a saving to the taxpayer. If the political upheaval and sometimes remain there well amount of currency abroad is around $200 billion, after the crisis has subsided. and the three-month Treasury bill rate is 5.2 percent (which it is as of this writing), the amount of seignior- age (and taxpayer saving) from externally circulating currency, calculated as the product of these two Note. We are grateful to Michael Bordo, David B. Humphrey, Russell Krueger, J.L. Laake, Robert M. Lucas, Jr., Howard Murad, figures, would be more than $10 billion per year. Gerald Pollack, and our colleagues in the Federal Reserve for helpful Knowing more accurately the amount of seigniorage assistance, comments, and discussions on various points. We thank FinCEN, the Financial Crimes Enforcement Network of the Depart- ment of the Treasury, for permission to use aggregate information derived from the U.S. Customs Service’s Currency and Monetary Instrument Reports. Finally, we are grateful for the stimulating dia- 1. Seigniorage is defined as the government’s gain from converting logue we have had with Edgar L. Feige on all aspects of this study. valuable metal into more valuable coins. We use the term here in the Questions and comments can be e-mailed to the authors at looser sense that includes the central bank’s income from issuing [email protected] or [email protected]. paper currency. 884 Federal Reserve Bulletin October 1996 derived from externally circulating currency would THE INTERNATIONAL MARKET assist policymakers in deciding how many resources FOR U. S. C URRENCY to devote to protecting it by, for example, combating the counterfeiting of U.S. currency abroad or improv- Before the advent of paper currency, gold coin—in ing the physical quality of externally circulating the form of Dutch guilders, Spanish pieces of eight, notes. Add to these reasons the fact that currency and other coins of the realm—circulated far outside outstanding has surged over recent years, and a reli- the countries in which they were minted; similarly, able answer to the question of how much is abroad bank notes (that is, notes issued by private commer- becomes a matter of considerable interest. cial banks) in the United States and England in the In all, we have examined ten methods for estimat- 19th century circulated far beyond the market areas ing the amount of currency held abroad. We first of those banks. U.S. currency today provides many of outline the major sources of foreign demand for U.S. the monetary services that gold coins once did. As currency. We also review the available information, the leading international currency, Federal Reserve from statistical reports to institutional structure, none notes enter other national economies for reasons both of which, alone, covers the full extent of currency public and private. Some countries, including Panama stocks or flows but which nonetheless point to for- and Liberia, have elected at times to use the U.S. eign use as the major source of recent growth in U.S. dollar as their currency. Other countries that issue currency. We then describe two of the ten methods currency maintain stable exchange rates between we use to estimate the stock of currency abroad, the their own currency and the U.S. dollar; in the Carib- seasonal method and the biometric method, which bean, for example, that stability allows tourists and provide convenient illustrations of the assumptions residents to use both dollars and local currency with- and empirical relationships required to estimate over- out fear of a sudden change in exchange value. Work- seas currency flows and stocks. ers employed outside their home countries are often After briefly summarizing the remaining eight paid in U.S. dollars, which make their way into local methods, we present a summary measure, the economies directly or via remittances: U.S. soldiers ‘‘median flow estimate,’’ based on several methods have been paid in dollars since World War II, and for which we have sufficient time-series data. We many expatriate workers in the oil-producing coun- show that although year-to-year changes in domestic tries of the Middle East are paid in dollars. The dollar holdings have been relatively stable, changes in total is also the preferred currency for exchange: Travelers currency have grown and have become increasingly heading for points outside of Western Europe often dominated by foreign movements. In light of the economize on exchange costs by carrying dollars. evidence, we examine and find unpersuasive several arguments supporting the claim that very little cur- rency is held outside the United States. Finally, when Jeffrey A. Frankel, ‘‘Still the Lingua Franca,’’ Foreign Affairs, vol. 74 (July/August 1995), pp. 9–16. our estimate of U.S. currency held abroad is sub- Lawrence B. Lindsey, ‘‘America’s Most Ignored Export,’’ Durell tracted from the total outstanding, the amount of Journal of Money and Banking, vol. 6 (Winter 1994–95), pp. 2–5. domestically circulating currency per U.S. resident John Mueller, ‘‘Most of Our Money Is Missing—Again,’’ Durell Journal of Money and Banking, vol. 6 (Winter 1994–95), pp. 6–13. that remains is considerably smaller than the corre- Richard D. Porter, ‘‘Estimates of Foreign Holdings of U.S. sponding measure for most other developed coun- Currency—An Approach Based on Relative Cross-Country Seasonal tries, and we examine some of the economic forces Variations,’’ in Nominal Income Targeting with the Monetary Base as 2 Instrument: An Evaluation of McCallums’ Rule, Finance and Econom- underlying these cross-country differences. ics Discussion Series Working Study 1 (Board of Governors of the Federal Reserve System, March 1993). , ‘‘Foreign Holdings of U.S. Currency,’’ International Economic Insights (November/December 1993), p. 5. 2. For earlier estimates of the foreign component of currency and Ruth A. Judson, ‘‘The Location of U.S. Currency: stocks and flows and related issues, see, for example, How Much Is Abroad?’’ (Board of Governors of the Federal Reserve Robert B. Avery, Gregory E. Elliehausen, Arthur B. Kennickell, System, April 15, 1996). and Paul A. Spindt, ‘‘Changes in the Use of Transaction Accounts Franz Seitz, ‘‘The Circulation of Deutsche Mark Abroad,’’ Discus- and Cash from 1984 to 1986,’’ Federal Reserve Bulletin, vol. 73 sion Paper 1/95, Economic Research Group of the Deutsche (March 1987), pp. 179–96. Bundesbank (May 1995). Alan S. Blinder, ‘‘The Role of the Dollar as an International Case M.