A Benjamin Cole post
Back in the 1970s, when I took introductory macro at Berkeley (and fell in love with economics), I asked the professor about food stamps.
Back then, food stamps were literally booklets of stamps, intended solely for use in grocery stores. But people traded the stamps about as cash.
So I asked the prof, “Well, do food stamps add to the money supply?”
He glared at me. Hadn’t I been listening? He huffily went back to the chalkboard and pointed at M1, M2 and M3, and contemptuously dismissed my question—“Food stamps are not part of the money supply,” the words ring yet. To rub it in, he briefly essayed the declining role of paper cash.
I didn’t dare ask about casino chips, let alone subway tokens.
Forty years later, economists still hate to talk about paper cash.
$1.34 Trillion In Circulation
The numbers get crazier every year. You read about the cashless economy, but the greenbacks tell us something else, as in $4,213 in paper money in circulation for every resident of the U.S., whether in old age homes, toddlers, or the incarcerated. Cash in circulation has doubled in the last 10 years.
Some try to dismiss the paper cash-topic by asserting the Benjamin Franklins are in suitcases, doing drug deals overseas.
But Edgar L. Feige, University of Wisconsin-Madison prof, has studied the U.S. cash situation for decades, and concluded just one-quarter is offshore, possibly less. In 2012 he published a persuasive paper entitled, The myth of the “cashless society”: How much of America’s currency is overseas?
Feige also came across the surprising fact that more U.S cash enters the stateside than leaves it in some years, by official count of the Fed.
If Feige is right, of the $500 billion in new cash printed up since 2008, perhaps $330 billion to $370 billion is circulating in the United States.
Feige is probably onto something: The amount of Canadian $100 bills in circulation has also soared in recent decades. And the Japanese keep the yen equivalent of more than $7500 cash per capita in circulation (in 2010). But no one ever knowingly says, “The paper yen is used in drug deals.”
One paper cash commonality across the broad: Nations with a large amount of paper lucre in circulation per capita are advanced, rich—and high-tax.
Gee, what does that tell you?
So the natural question is, “Well, how many times a year does paper money circulate?”
If the U.S. has another $350 billion in circulation since 2008, and $1 trillion total in the U.S now—what does it mean?
No one knows, as there seems to be no way to count paper money “velocity.”
That may be one reason economists detest the big paper cash story so much.
Also, perhaps for liberal economists the big cash story suggests people in the U.S. are better off than the official stats say, diminishing the need for state services. For conservatives, the cash story heretically suggests putting several hundred billion of paper money into circulation since 2008 has been stimulative, but not inflationary.
And for all economists, a large cash, off-the-books economy tends to undercut the elaborate yet fragile econometric models so deftly constructed to give precisely the results desired—but which rely on reported data. As Feige puts it, “the growth of unreported income has the insidious effect of corrupting the reliability of primary data used for most macroeconomic analysis.”
BTW, Feige in his 1989 paper Currency Velocity and cash payments in the U.S. Economy: The Currency Enigma, cited earlier Fed studies to the effect paper money turns over 20 times a year. Obviously, that figure appears far too high today—the cash economy would be larger than the reported economy.
Certainly, the public owning large reservoirs of cash has not been inflationary, and probably provides stimulus in times of recession—people, with business slow, open up their safes and deposit boxes and start spending, for example.
Well, I always say the Fed needs to print more money. Literally, too.