The Underground Economic Recovery, a Cashless Society?

In a recent New Yorker article entitled, “The Underground Economy,” writer James Surowiecki explores the import of a study by University of Wisconsin economist and professor emeritus Edgar Feige, who for many years has done research on the amount of actual cash in the US. Feige has recently updated his work.

What prompted me to follow up and then finally to discuss his work personally with a remarkably accessible Feige was his rather well-documented refutation of a common assertion I have long believed: that at least 2/3 of physical, printed US cash circulates outside the borders of the country. Indeed, you can find research on this topic at the San Francisco Fed and in serious economic journals, so this was not just some anecdotal belief I held from observing the impressively large number of dollars in use wherever I travel in the world. But no, this factoid was something “everyone” simply “knew.” Well, everyone but a few people like Feige and evidently some people at the New York Fed.

And we are not talking about a small difference between perception and reality here. Feige asserts convincingly that only 23% of physical US dollars are outside our borders. The difference is $400-500 billion, not a small sum. He vigorously (and I think conclusively) dissects the assumptions in the research that has generated and promoted the larger number. (You can read his 28-page paper here. Let’s look at some of the more interesting parts of his research. (Emphasis mine, of course. This is an academic paper, after all, and polite academics do not use boldface for emphasis.)

The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S., per capita currency holdings now amount to $3000. This paper revisits the long-standing controversy concerning the whereabouts of U.S. cash. Specifically, we employ a previously confidential data source on net shipments of U.S. currency abroad to re-estimate the fraction of U.S. currency held overseas. Contrary to the widely cited figure that 65 percent of U.S. currency is abroad, we now find that direct evidence supports the notion that overseas holdings amount to less than 25 percent. With domestic cash holdings amounting to roughly $2250 per capita, we are far from a “cashless society”.

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