FROM THE OFFICE OF PUBLIC AFFAIRS October 8, 1998RR-2748 Good morning Mr. Chairman, Congresswoman Waters and Members of the
Subcommittee. I am pleased to be here today to discuss the implications of European Monetary Union
on U.S. currency policy, specifically on higher denomination notes. This is a timely topic,
and I thank the Chairman for holding this hearing to discuss these important issues. I am glad
to be joined by Theodore Allison, Assistant to the Board of Governors of the Federal Reserve
System. Mr. Allison and I serve as members of the Advanced Counterfeit Deterrence Steering
Committee, which is an interagency committee composed of officials from the Treasury
Department, Secret Service, Bureau of Engraving and Printing, and the Federal Reserve. The
Steering Committee was established in 1982 to coordinate the counterfeit deterrent activities of
the various government agencies. The European Union has decided to issue 500 Euro notes, which, at today's exchange
rates, would be worth close to $600. As way of background, I'd like to review the history of
higher denomination notes in this country and make some observations about the use of the
$100 note. Then I will turn to some important law enforcement considerations that would be
raised by any proposal to reissue higher denomination U.S. currency. Currently, the $100 note is the highest denomination note we issue. Under legislation
passed in 1918, however, we are authorized to issue currency in denominations of $500,
$1,000, $5,000 and $10,000. These larger denomination notes were issued primarily for
interbank transactions. We stopped printing these denominations in 1946, and ceased issuing
them in 1969. At the time, Treasury and the Federal Reserve said, "Use of these larger
denominations has declined sharply over the last two decades and the need for them appears
insufficient to warrant the added cost of production and custody of new supplies." Since 1969, the amount of U.S. currency in circulation has grown from approximately
$50 billion to more than $450 billion. Over the same time, the proportion of U.S. currency
held overseas has grown from one half to two thirds. Close to $300 billion of our currency
circulates outside our borders. We study the reasons why people outside this country hold our
currency. In accordance with the Antiterrorism Act of 1996, Treasury is to conduct a survey
every three years as to the reasons for U.S. currency use globally. Our first report is due next
fall. Our work to date shows that there are a variety of reasons for use of our currency. These
include use of dollars for trade purposes and as a store of value. This is particularly true in
countries subject to hyperinflation or where the local banking system is underdeveloped. There are a number of benefits we derive from foreigners holding our currency. First,
it is a convenience to Americans traveling and doing business abroad. Second, the Federal
Reserve earns interest on the assets it holds to support U.S. currency. This interest is then
paid over to the Treasury for the benefit of U.S. taxpayers. The dollar currently has competition from high denomination currency. Within the
G-7, Germany, Italy and Canada all have notes now in circulation with values higher than
$100. Germany issues a DM1,000 note, with a current value slightly more than $600; Italy
issues a 500,000 lire note, with a current value of about $300, and Canada issues a C$1,000
note worth more than $650. Despite the existence of these higher denomination notes, demand for $100 notes has
continued to grow at about 5 percent per year for the past ten years. Most of the U.S.
currency that is held abroad is $100 bills, and we estimate that approximately 75 percent of
$100 bills are held abroad. In comparison, we estimate that there is only somewhat more than
$50 billion of German currency circulating outside Germany and not a significant amount of
Italian or Canadian currency outside those countries. The extent of the potential competition
from higher denomination Euro notes is therefore uncertain. If, however, higher denomination Euro notes were to be used instead of dollars as a
store of value, it would reduce the amount of the Fed's earnings, and therefore increase
Treasury's need to raise money publicly. There is not enough information, however, to
estimate what the effect might be on our borrowing costs. The Treasury Department also has concerns that the issuance of $500 bills could
facilitate money laundering. Money laundering involves the placement, layering, and
reintegration of illicit proceeds derived from criminal activity into the financial system. With
Congress's support, Treasury has used investigative and regulatory tools to fight the placement
of the proceeds of crime into the financial system. For example, Currency Transaction
Reports provide information to law enforcement on large cash transactions at financial
institutions in the U.S. When criminals are deterred from placing illicit proceeds directly into the U.S.
financial system, they often seek to hide it and transport it for placement in the financial
system outside the United States. One practical deterrent has been that large physical
quantities of cash are difficult to transport and to place within the financial system. At today's
prices, $1 million worth of cocaine weighs about 44 pounds, but the cash paid, usually in $5s,
$10s and $20s, for that cocaine can weigh up to 250 pounds, and is quite bulky. In $100 bills,
the weight of $1 million is about 22 pounds. If criminals had access to $500 bills, $1 million could weigh as little as 4.4 pounds, less
than the average bag of sugar or flour available at the grocery store. Higher denomination
notes would make it easier for criminals to transport and hide cash, making the money
laundering process cheaper and more likely to evade detection. As a result, the net cost of
committing many crimes could decline, as would the government's ability to punish and deter
such crime. Let me conclude by saying that we have no plans to reissue $500 notes. If there were a proposal to do so, we would have to carefully balance the concerns I
have outlined. We have time, however, to evaluate carefully any proposal to reissue $500
notes. Euro notes will not come into existence until January 2002. The Bureau of Engraving
and Printing estimates it would take 12 to 18 months to design and issue a new $500 bill if we
were to decide to do so. That concludes my statement, Mr. Chairman. I would be happy to answer your
questions.
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