Analysis of the US Currency Holdings

Currency refers to the printed bank note and produced coins used to stand for the value of money to a specific state or part. In the United States ( US ) , the currency is known as the dollar ( USD ) and is controlled by the Federal Reserve Bank. To day of the month, the U.S currency remains the most popular medium of exchange in the U.S. economic system as the laterality of the U.S. dollar AIDSs in protecting the domestic economic system from foreign dazes, and helps cut down international trade dealing cost. With respects to international trade, the dollar besides benefits holders of this currency abroad as occupants of foreign states that face uninterrupted political and economic uncertainness. In the international markets, the U.S currency serves as a hedge against when assets in the foreign state lose value due to a depreciative currency. The aforesaid usage of U.S currency provides one major ground U.S currency is held overseas. The early survey undertaken by Sprenkle ( 1993 ) found that in 1992, the per-capita of U.S. currency was $ 1096 in his research to find where the bulk of the U.S currency is located. Realistically, people do non keep such big sums of currency in their ownership, which leads to other grounds as to where the currency is held.

Harmonizing to Sprenkle ( 1993 ) , the three major holders of currency are the belowground economic system, bush leagues under the age of 18 who are excluded from studies and aliens. The research undertaken by Sprenkle ( 1993 ) provides the model for carry oning extra analysis with the reappraisal of the most recent published literature related to the usage and location of US currency. Improvements in engineering and increasing volumes of globalized trades have led to farther probes in mention to altering forms of the chief holders of currency.

The research undertaken by Anderson and Williams ( 2007 ) , explains briefly overtime how the outgrowth of improved engineering has changed the landscape of U.S. currency retentions at place and abroad. With improved engineering, there will be a lessening in the speed of money as consumers seek options for hard currency with the usage of debit cards. Amromin and Chakravorti ( 2007 ) analyzed the alterations in transactional demand for hard currency ensuing from increased use of debit cards. The improved engineering can besides take to the increased circulation of forgery U.S currency, as consumers in the belowground economic system would go on to seek ways to outwit U.S Treasury ‘s development of hard currency security characteristics. With this struggle between the belowground economic system and U.S Treasury, Judson and Porter ( 2010 ) examines the volume of forgery U.S currency that is in planetary circulation. Increasing circulation of forgery U.S currency would besides connote an increasing demand for U.S. currency on the planetary markets. Hellerstein and Ryan ( 2010 ) analyze the planetary usage of U.S currency to find whether this increasing demand serves as portion of other states foreign currency militias, or to be portion of the belowground economic system circulation. In add-on to the research of Hellerstein and Ryan ( 2010 ) , Goldberg ( 2010 ) looks at the planetary landscape to find whether the positive correlativity between increased circulation of imitative U.S. currency and the demand for U.S. currency holds due to the alterations in planetary landscape such as the outgrowth of the Euro currency.


Technological dazes to the planetary economic system have enhanced productiveness and end product. However, with the high degrees of demand for U.S. currency, it besides opens other avenues for members of the belowground economic system to falsely bring forth U.S currency. The addition in belowground economic activity is positively correlated with technological dazes which in bends lead to farther disbursement by the authorities to counter such negative tactics. Harmonizing to Anderson and Williams ( 2007 ) , technological inventions such as colour copying, scanning, and publishing have intensified the clash between progressively complicated bill forgers and authorities bill interior decorators. Bank note interior decorators have used to engineering to implement security characteristics to be embedded into the paper measures to diminish the opportunities of forging. Judson and Porter ( 2010 ) noted that the U.S dollar measures in 1996 had less security characteristics in comparing to other developed states. In most recent security characteristics, Anderson and Williams ( 2007 ) references that alterations include alone yellow-green paper, redesigned images, magnetic ink, water lines and texture.

However, with conventional economic construct, there is an optimum point to which one can bring forth, revenue enhancement or generate gross prior to accomplishing decreasing returns. This construct can be applicable to adding security characteristics to the printed U.S. measures. Further redesigns of the currency will increase authorities passing apart from bring forthing the measures would include efficaciously educating the populace for continued credence. However, a more sophisticated design has the possible to make a point of being hard to acknowledge oversees. The inability to acknowledge the U.S currency may besides convey about a decrease the in the credence of the U.S currency abroad. Anderson and Williams ( 2007 ) agreed with the a aforesaid confirmations of increased security design but this leaves farther room to look into the strength of relationship between the added security characteristics and the demand for U.S. currency abroad. It is of import to farther survey this relationship as there lies a possible addition in demand for U.S. currency due to security characteristics as bulk of families users feel safer with secure measures to prosecute in more hard currency related minutess.

Technological progresss non merely take to more secured U.S. currency, but besides led to the development for other agencies for consumers to carry on minutess without the usage of currency. Such developments are related to debit card based minutess and electronic transportation of money from one bank history to another. Anderson and Williams ( 2007 ) argue that despite in the increasing usage of electronic payments and debit cards ; currency remains the most popular agencies of carry oning face to confront minutess among consumers in the U.S economic system and users of currency abroad. The following subdivision of this paper analyses the tendency between the usage of currency and debit card use.


Amromin and Chakravorti ( 2007 ) believed that there lies importance of analyzing the tradeoff between the demand for hard currency and the demand for debit card use. Form their survey, the relationship between currency and other hard currency replacements determines how of hard currency should be produced by cardinal bank. A decrease in the supply of hard currency as a consequence of lower demand due to technological progresss could take to an addition in involvement rates and lower rising prices. However, the grade to which technological progresss can make such important impact has non been measured. Hellerstein and Ryan ( 2010 ) highlighted that big sum of currency go arounding in developing economic systems may weaken the effects of the U.S economic systems pecuniary policy intercessions and exchange-rate stabilisation plans. The addition in currency and money end product by the Feds would increase rising prices thereby cut downing the motivation for the authorities to finance shortages as rising prices would take to lower seigniorage.

From a domestic position, occupants of the U.S. would take advantage of utilizing debit card payments and other methods over currency based minutess due to security grounds. For case, a consumer who carries $ 100 in measures and misplaces them can non put a exclusive claim if found by person else. Whereas, a consumer who carries a debit card with a balance of $ 100 and misplaces it can procure the value of $ 100 by puting stop orders or call offing the debit so it would hold no value to person else who retrieves this card. Amromin and Chakravorti ( 2007 ) shared the similar position in that trouble in following currency based minutess lies within the nothingness of a 3rd party intercession which is besides reflected in their analysis that found an addition in non-cash minutess from 2001 to 2004. A 3rd party intercession for other signifiers of minutess would be a bank with respects to a debit card dealing.

With the turning use of debit cards, Amromin and Chakravorti ( 2007 ) employed a arrested development theoretical account to further explicate the relationship between electronic hard currency replacements such as debit cards and the demand for currency within the United States. In their econometric theoretical account, the writers measured the currency permutation as Currency to GDP ratio. The independent variables adopted to mensurate this impact were debit card terminuss, Automated Teller Machines ( ATMs ) , the figure of bank subdivisions per capita, portion of ego employed and short term involvement rates. The empirical research conducted found a negative relationship between the figure of debit card terminuss and the currency/GDP ratio. This suggests that a permutation relationship between those two variables as consumers prefer to utilize the debit card terminus over usage of currency which in turns lowers the currency/ GDP ratio. There is besides a negative relationship between the figure of ATMs and currency retentions. Amromin and Chakravorti ( 2007 ) justifies this negative relationship by associating to the usage of ATMs as a agency of increasing the speed of hard currency as it creates an available entree point for consumers to recover hard currency at that place creates a lower currency stock.

The figure of bank subdivisions per capita serves a similar relationship to ATMs with the exclusion of the expense of coins and other notes which can non be disbursed by ATMs. The overall relationship implies that the more subdivisions that are available, the more likely for the day-to-day currency retentions to cut down to make the increased speed. The portion of ego employed classifies comparatively little concern that would take long to follow a debit card point of sale ( POS ) terminus. From the arrested development analysis, a positive relationship exist as the larger the portion, the higher demand for currency would be.

Realistically talking, with the being of little merchandisers that are either late or obstinate to follow the debit card POS terminuss can lend significantly to the increasing demand for currency. Other signifiers of technological progresss that have yet to follow to debit card use such as peddling machines and Laundromats to call a few would hold the similar consequence to little scale merchandisers as it creates a demand for measures in little denominations and coins. Since there will ever be a demand for currency, Anderson and Williams ( 2007 ) implies that there will besides be an being of the belowground economic system to thrive by forging. The undermentioned subdivision would analyse the volume of imitative U.S. currency in an effort to solidify its relationship with increasing demand for currency.


Harmonizing to Judson and Porter ( 2010 ) , it was reported that about $ 759 billion in U.S dollars held in currency signifier was in circulation outside of the Treasury and Federal Reserve. They went on farther to describe that about $ 56.2 million of imitative currency circulated through the United States and approximately another $ 4.8 million of forgery circulated overseas. Though the sum seems comparatively little in comparing to the overall sum of currency that was in circulation, it is of import to find methods for accounting for such deceitful activity as overtime it bears cost to the U.S. Government. With respects to be, Judson and Porter ( 2010 ) estimated the full cost of production and distribution of imitative $ 100 measures with a high chance of success to be at least $ 50 per forgery.

In an effort to gauge how the currency every bit good as imitative currency is circulated abroad, Judson and Porter ( 2010 ) grouped the methods into three classs: currency hoarded, circulated currency outside of the U.S that does non return, and circulated currency that is circulated abroad and returns back to the U.S. Based on old mentioned grounds that people overseas hold onto U.S dollars is to supply a hedge against their ain state ‘s economic uncertainness. This ground leads to whether those persons would go on to keep or stash onto the U.S. currency for longer periods of clip. With the present planetary economic crisis, farther inquiries would originate as to would people abroad continue to stash the U.S currency in the belief that their economic system would still be worse than the U.S or disengage from stashing due to the deficiency of assurance in the strength of the U.S dollar. However, the theoretical model provided by the writers found that the turnover rate for currency hoarded abroad to be 47 % . Though the model applied to legitimate currency, there are other grounds why hoarded currency would non be strongly applicable to forge measures because from a existent position, the users of the forgeries would seek their best to acquire value out of a measure that carries no value every bit rapidly as possible.

The other classs dealt with the sum of forgery currency that either remains circulated abroad and those forgeries that are circulated abroad and returns to the U.S. depositary Bankss. The uninterrupted circulation of forgery U.S currency raises inquiries as to why this rhythm is ongoing. Judson and Porter ( 2010 ) raised several scenarios to warrant such uninterrupted rhythms. First, forgeries may be circulated within clients or little sellers overseas that may miss the engineering or cognition of observing those sorts of measures. Once received by the little seller, they in bend may pass it straight to another little seller in order to obtain some value instead than puting it in the bank. With this rhythm of little seller to vendor overseas, there is the likely goon of at least some measures coming to the terminal when 1 may eventually lodge it to a depositary establishment merely to happen out that the measure has no value. However, the writers did non take into history of preventive steps such little sellers take in order to interrupt this rhythm. Even though little sellers may miss the cognition and engineering of observing forgeries, they do maintain up to day of the month with intelligence of circulation of forgeries. Knowingly that High denomination U.S currency measures are to a great extent counterfeited, they implement regulations of non accepting these measures under any fortunes from a buyer.

Another factor mentioned by Judson and Porter ( 2010 ) that contributed towards uninterrupted circulation of U.S forgeries was that Bankss may miss the engineering to observe those types of measures or take to go around the currency to avoid losingss. Those Bankss that fall under this class are more likely to establish in developing states where inferior engineering exist in comparing to the engineering of developed states every bit good as developing states are besides noted to hold high degrees of corruptness. Corruption ridden Bankss in foreign states would go on to accept and go around forgeries in order to distort records of strong banking public presentation in order to keep credibleness with other matching Bankss.

Through the theoretical model provided by Judson and Porter ( 2010 ) , the writers found that despite the possible grounds for uninterrupted circulation, it is improbable that forgeries can stay in circulation for no more than a twelvemonth. With technological progresss and the enticement from Bankss to entice consumers or retail merchants to obtain value for the hard currency they receive, the spread is more likely to be shortened to account for forgery U.S currency.

Though the old writers focused on uninterrupted circulation of forgery U.S currency and the trouble in accounting for the economic losingss, the statements presented earlier were on the premise that the U.S dollar remains the most demanded currency. The undermentioned subdivision of this literature reappraisal would analyze the determiners of the international usage of U.S. hard currency dollars to farther justify grounds for storage of U.S. currency abroad.


This literature reappraisal discussed briefly as to grounds why people overseas would keep onto U.S currency, there were non elaborate treatments as to what other factors may play a function in what may do a lower demand for U.S. currency. Hellerstien and Ryan ( 2010 ) examine the determiners of the abroad usage of the physical U.S. hard currency dollars. The factors that influence the international retentions of U.S. currency hard currency retentions are economic instability of the foreign state, graduated table of the belowground economic system, and strength of viing currencies. In the empirical theoretical account Hellerstien and Ryan ( 2010 ) used the information from lone developing states. Developed states in contrast, are characterized with stable rising prices rates and stable economic conditions so that the demand for hard currency retentions of U.S. currency would non increase the demand for dollar bills.

Taking into history the glooming economic state of affairs from the bulk of developing state, at first glimpse there is a logical positive correlativity among the factors that determine the demand for U.S. currency. Similar to Judson and Porter ( 2010 ) that discussed the banking construction of developing states ; these features are reflected in the presence of the states ‘ authoritiess that entail high degrees of corruptness which in bend leads to instability in their macro economic system, and are extremely influenced by activities or forces taking the belowground economic system. These unattractive features of states further lead to other states implementing trade limitations every bit good as economic partnerships.

Residents of states with a history of economic instability tend to demo a high demand for U.S hard currency currency to function the intent as a shop of value. Economic stableness is frequently characterized by high rising prices or sometimes hyperinflation. Developing states which are besides characterized by holding big budget shortages tend to finance these shortages by increasing their money supply. Higher rising prices from monetising immense shortages leads to the depreciation of the exchange rate and weakens the credibleness of the pecuniary governments for the underdeveloped state. Hellerstien and Ryan ( 2010 ) noted that the shop of value map of money is most open to rising prices of the several state. In order the explain this behaviour, in their empirical theoretical account that included 104 states during the period from 1990 to 2007, they found states with higher monetary value degrees were associated with increased use of U.S dollars. Likewise with Judson and Porter ( 2010 ) , the wont of stashing U.S. currency bills would be the most likely action undertaken by occupants of foreign states as a shop of value. Hellerstien and Ryan ( 2010 ) added that with uninterrupted billboard of U.S. currency to battle against high rising prices, the procedure of currency permutation occurs where monetary values of existent estate, vehicles and capital stock points would be quoted in U.S dollars.

The belowground economic systems of developing states besides have high demand for U.S. hard currency dollars for a agency of carry oning minutess and a shop of value. The belowground economic systems of developing states are more prevailing to win with the usage of U.S. currency in comparing to those that reside in a developed state. Due to the technological progresss developing states possess, operations in the belowground economic system are more likely to acquire seized. On the other manus, the belowground operations of developing states are less likely to be seized due to miss of engineering to observe or acceptance from the authorities of the several state. Hellerstien and Ryan ( 2010 ) noted that operations in the belowground economic system may entirely utilize their domestic currency ; nevertheless the demand for U.S. hard currency dollars would be more established for cross-border minutess. Though the writers excluded belowground minutess between one developing state and the United States ( abroad state ) , it is less likely for minutess to be successful as the United States has the engineering to counter such illegal activities. So in kernel, there would be a higher chance of success if Latin states conducted illegal minutess with each other. To set up the impact of the abroad ‘ belowground economic system impact on the demand for U.S. hard currency dollars, the empirical consequences showed no statistical significance that larger belowground sectors increased the demand for U.S. currency. Despite the statistical insignificance on the impact of belowground economic system on the demand for U.S hard currency dollars, the issue of forging currency was non taken into consideration.

The outgrowth of the Euro besides plays a factor into finding the demand for U.S hard currency dollars. Hellerstien and Ryan ( 2010 ) did non look at tendencies to find whether the euro has a possibility of ruling the planetary market as the international currency but looked at how trade between European states and other developing states impacted the demand for U.S. currency. The empirical consequences showed that a higher proportion of trade with European states does non significantly affect the demand for U.S. hard currency dollar from the developing state. The deduction holds from this empirical consequence illustrates that the U.S. currency is still dominant despite the mergence of the Euro. Though the outgrowth of the Euro is still comparatively immature, it may be still excessively early to find how much power it will derive on the international markets and whether this degree of demand for U.S currency would go on to keep or would the function of the U.S dollar alteration overtime.


The current economic clime has been highlighted by the U.S. increasing in the authorities money supply and disbursement in order to excite economic activity but in bend, the state ‘s debt which in bend leads decreased involvement rates and a depreciated value of the U.S. dollar. If this tendency persists, holders of U.S. currency abroad would go extremely bad of whether the U.S. dollar would be a strong currency to keep onto. Leaderships from other states have besides been pressing for deviating off from the U.S currency as a modesty every bit good as other international trading activities.

Goldberg ( 2010 ) nevertheless believes that despite the economic clime and outgrowth of the euro, U.S. currency would still be the highest demand currency abroad. In the writer ‘s farther analysis, other possible grounds are discussed to find whether the function of U.S. currency is easy changing overtime. The writer believes that certain factors contribute significantly towards the remained laterality of U.S. dollar. Such factors include inactiveness, comparatively strong end product and stable rising prices of the U.S. economic system, and the pricing of trade goods such as oils and metals in dollars.

Though, the factors presented are really strong statements for the continued laterality of the dollar, the U.S. nevertheless can non take other states for granted. History showed that the lb sterling was the dominant modesty currency in the early 20th century before was finally overtaken by the U.S. dollar. With earlier references of the outgrowth of the Euro, there is guess that this possibly the new currency to rule the international modesty market. Goldberg ( 2010 ) and Hellerstien and Ryan ( 2010 ) besides acknowledges the function of the Euro as international hard currency as the euro currency has been in heavy circulation in states near European Borders. Since there are the few states that are accommodating to the euro relation to the figure of states that are soon accommodating to the U.S. dollar, it is still early to find whether the euro is a menace to take over as the dominant international modesty currency. A opposition to alter in militias from other states, particularly developing states would restrict the Euro dollar to take over as the dominant international currency modesty. The fiscal crisis as besides impacted the European states such as Greece which would do other states to be bad of accommodating the Euro dollars as this currency may besides weaken along with the U.S. dollar. The grounds for non accommodating to the Euro is besides similar to the findings of Hellerstien and Ryan ( 2010 ) that found no statistical significance with the impact of the Euro in impacting the degree of demand for U.S. currency.

Exchange rate agreements have played a critical portion for maintaining the U.S. dollar at the centre point of international trade and militias. Agreements are made in the signifiers of dollarization, pegged exchanged rate government against the U.S. dollar, and keeping managed floats with the U.S. dollar as mention currency. Goldberg ( 2010 ) mentioned from Ilzetzki, Reinhart, and Rogoff ( 2008 ) that in 2007, 9 states arranged to dollarize or organize currency boards, 89 states arranged to nail down the exchange rate against the U.S. dollar, and 8 states maintained a drifting rate government. This statistics showed that out about 50 % of the states abroad have remained committed to the U.S currency. The committednesss made by other states would besides be an index for subjects in these perpetrating states to possess U.S. currency at their disposal.


In a follow up to Sprenkle ( 1993 ) that attempted to warrant where most of the U.S. currency is held, most of his grounds where justified by more recent surveies. Despite the recent surveies did non cover studies of currency retentions from bush leagues, other factors such as belowground economic activities and foreign retentions were held accountable. With uniting other factors such as betterment of engineering, bridging the spread between international trade, and outgrowth of the Euro ; the findings showed retentions in foreign and belowground markets were more complicated to account for. Despite the current glooming economic clime the U.S. currency still showed marks of staying the highest demanded currency in the international markets. Even though the surveies justified grounds for keeping U.S. currency, the cardinal restriction to this survey was the trouble to quantify the existent retentions of legitimate and imitative currencies overseas.