Who is Holding All Those U.S. Dollars?

If recent trends continue, in a few months there will be $1.2 trillion in Federal Reserve notes (otherwise known as dollar bills) in circulation. Who is holding all these?

One clue comes from looking at the denominations: 3/4 of the currency held by the public is in the form of hundred-dollar bills.

Share of U.S. currency outstanding by denomination. Source: Judson (2012).

Personally I never use $100 bills. So the first thing I know is, whoever is holding most of that currency, it’s not people like me.

And $100 bills account for most of the growth in currency over the last two decades.

U.S. currency levels, 1988-2011. Source: Judson (2012).

A recent paper by Federal Reserve economist Ruth Judson uses a variety of methods to infer that many of those $100 bills are being held outside the United States, where U.S. currency is sometimes regarded as a safer store of value than other local options. This is a long-standing trend that seems to have accelerated during the financial crisis. Judson estimates that about half of the growth since 1988 in currency held by the public has ended up outside the United States.

Estimated Cumulative Contributions of Domestic and Foreign Factors to U.S. Currency Increases, 1988-2011. Source: Judson (2012).

That growth represents one important benefit that the U.S. has received from having a currency that is regarded as a safe and stable store of value. In effect, the growth in foreign-held dollars has meant that the U.S. government has been able to buy hundreds of billions of dollars worth of goods and services without ever needing to tax its own citizens or borrow in the form of interest-bearing Treasury securities.

Which is a great deal, as long as those foreign holders don’t change their minds and try to dump that currency back on us.

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