26 April 1998
Source: Hardcopy The New York Times, April 26, 1998, p. WK3.
By Sylvia Nasa
The potential challenge that Europe's new single currency poses to the dollar's dominance of global trade arid bond portfolios has been widely anticipated. Largely overlooked, however, is another threat: The Euro may edge out the dollar as the currency of choice in the world's huge underground economy -- and in the process end a highly profitable American monopoly.
The threat comes from a seemingly innocuous, little-noted decision by the European Monetary Institute to issue the Euro in some very large denominations, including 100, 200 and 500 Euro notes -- equivalent to $110, $220 and $550 bills at the expected rate of exchange.
These denominations are intended to mirror those of the German mark and thus make the new currency seem reassuringly familiar to those with doubts about monetary union.
But the big bills, says Kenneth Rogoff, an economist at Princeton University, will also have the presumably unintended consequence of offering Colombian drug lords, New York mafia bosses and Russian gangsters -- as well as garden-variety tax dodgers -- a superior vehicle for doing business and hoarding their ill-gotten gains.
"Giant bills will help the Europeans compete with the United States for these 'customers,' " says Mr. Rogoff. "We have these crummy $100 bills and they're going to have a $500 bill. You'll be able to smuggle a million in or out of the country in a purse instead of a suitcase."
Economists once believed that just 10 percent of all currency in circulation was tied up in the underground economy. Now it turns out that 80 percent is closer to the mark. Most of it is in $100 bills, which are the largest available and now account for well over half the value of the nation's paper money.
American banks and businesses hold very little cash. American households are also loath to keep much of it lying around. Yet according to the Federal Reserve there is enough currency floating around to make it appear that every American family of four has $6,000 or so in cash stashed under the mattress, including three dozen $100 bills. And despite the ubiquitousness of credit cards, A.T.M.'s and electronic transfers, the sea of cash has been growing much faster than the nation's gross national product.
As the issuer of dollars, America has been making out like a proverbial bandit. Having customers who want to hold your currency is like being able to get an interest-free loan. Economists call this seigniorage, a medieval French term related to droit du seigneur, or lord's rights, in this case it refers to the right to coin money. With $400 billion of its currency in circulation, the United States Government is earning $28 billion a year, or the amount the Government would have to pay if all that currency had to be replaced with Treasury bonds paying 7 percent interest.
Criminals prefer cash for the obvious reasons: it is anonymous, portable and easy to hide. For the same reasons, they prefer bigger bills to smaller ones. Until now, they have had an overwhelming penchant for dollars because there are so many of them, they are convertible anywhere and they are, relatively speaking, inflation-proof. But faced with the choice of an even better product, the Euro, criminals may well switch. And without the seigniorage from the underground economy, the United States would see a dramatic decline in revenue.
But perhaps the underground economy is one market the United States would do well to cede to a foreign rival.