Let's Reminisce: Where's the money

In my childhood days we lived just down the road from a moneylender. I never borrowed money from him, but he sometimes hired me to do small chores and I noticed that he always seemed to have enough cash on hand to make the loans. Where he kept it was a mystery.

That memory came to mind when I read in the Wall Street Journal that central banks are issuing more currency than ever and yet the money seem to be disappearing off the face of the earth. Banks don’t know where it has gone, or why, and are playing detective, trying to crack the same mystery.

The puzzle is especially perplexing since societies and companies are going cashless, given the boom in payments by cards and cellphone apps. The value of US dollars in circulation hit about $1.7 trillion last year ($12.4 billion of it in $1 bills; $1.3 trillion of it in $100 bills) according to the U.S. Federal Reserve. That is up from $1.2 trillion in 2013.

A Federal Reserve economist wrote recently that about 60% of all U.S. currency, and about 75% of $100 bills, had left the country by the end of 2016—for a total of about $900 billion in U.S. dollars kept overseas. Socking those bills away is seen as providing some protection against economic turmoil, especially in countries with a record of instability in their own financial systems.

In Australia, the stock of bank notes on issue relative to the size of the economy is near the highest it has been in 50 years, said Philip Lowe, governor of Australia’s central bank. He showed off newly printed bank notes to diners at a recent event in Melbourne and estimated that about $2,000 in printed bills exists for every Australian.

Following the money trail can often mean encountering a motley cast of characters that wouldn’t look out of place in a detective novel. Dollar bills are often grease for criminal gangs and tax cheats. They are also popular with collectors who worry about a future collapse of the financial system.

Bankers aren’t just hunting down cash to satisfy their own curiosity. If central banks don’t know how much cash is out there, they could print too much currency and bring on inflation.

In September, a court in Germany ruled on a case brought by a man who stuffed more than 500,000 euros in a faulty boiler only to see it incinerated when a friend made a repair on a cold day while he was on vacation. The man sued his friend for the value of the lost bank notes plus interest. He lost. The German central bank thinks more than 150 billion euros are being hoarded in Germany.

Australia’s central bank says its best guess is that only around a quarter of the bank notes in circulation are used for everyday transactions. Up to 8% of cash is used in the shadow economy—tax avoidance or illegal payments—while as much as 10% could have been lost. That is $7.6 billion Australian dollars ($5.2 billion) missing.

Demand for high-denomination bank notes tends to rise when interest rates are low, households feel distrustful of the banking system or people want to make transactions anonymously. For example, hoarding of cash jumped around the year 2000, likely motivated by fear of the Y2K bug infecting computer systems, the bursting of the dot-com bubble, the September 11 terrorist attacks and introduction of the euro. Then the financial crisis that began in 2007 encouraged people to stash even more.

In the final analysis, most central bankers admit: “We can’t fully explain why holdings of cash are rising and where they are going.”

Jerry Lincecum is a retired Austin College professor who now teaches classes for older adults who want to write their life stories. He welcomes your reminiscences on any subject: jlincecum@me.com