In case you haven't noticed, something strange is happening to the most tangible component of the money supply--the good old American greenback. After posting healthy gains in the early 1990s and indeed, during most of the postwar period, growth of currency in circulation slowed sharply last year. It is now expanding at its slowest year-to-year pace in more than 30 years.
"It's a mystery," says economist David H. Resler of Nomura Securities International Inc. "It's uncertain whether the slowdown in demand for paper currency is telling us something about foreign economies, the U.S. economy, or perhaps both."
Resler notes that more and more greenbacks are exported--legally or covertly. Dollars are used for transactions not only in Panama and Liberia, say, which have adopted the dollar as their official currency, but also in Latin America, Eastern Europe, and the Middle and Far East.
Indeed, economists Richard D. Porter and Ruth A. Judson of the Federal Reserve Board estimate that as much as 70% of U.S. cash in private hands (currently about $375 billion) may be held outside the U.S. More important, they say, some 80% of all currency growth since 1980 seems to be tied to rising foreign demand.
The big impetus behind such demand, of course, has been political and economic turmoil overseas, such as the breakup of the Soviet empire and the economic crises enveloping Latin America a few years ago. In fact, many experts attributed the slump in currency growth last year to unfounded Russian fears that American plans to issue a new counterfeit-resistant $100 bill would somehow affect the value of old banknotes. Thus, when the new U.S. C-note was finally issued this March, the betting was that demand for banknotes would start to accelerate again.
The fact that demand for U.S. currency has continued to languish--at least thus far--suggests an intriguing thesis to economist John B. Carlson of the Federal Reserve Bank of Cleveland. More and more, he observes, growth in U.S. currency seems to have become an index of international political and economic instability.
If that's true, he says, "the current slowdown in demand for U.S. banknotes may be signaling the recent success of economic and political reforms in Eastern Europe and Latin America."