Opinion Editorial | |
| Monday, May 4, 1998 | |
Euro May Compete with U.S. Dollar in Black Market |
In a few months, Europe will replace most of its individual currencies,
including the French franc and the German d-mark, with a common currency
known as the euro. In an effort to create demand for this new money, the
European monetary authorities have decided to print notes as large as 500
euros, expected to be worth more than $500 each. London's Financial Times
newspaper says that these new notes, much larger than U.S. $100 bills, "could
make the euro an ideal tool for payments in the black and underground markets."
Princeton economist Kenneth Rogoff says the large bills will help the euro
compete for the "business" of Colombian drug lords, Mafia bosses
and other criminals who operate exclusively in cash. The fact is that almost all $100 bills in existence today function primarily
to lubricate the wheels of the underground economy--untaxed, unregulated
and illegal transactions that are not recorded in the gross domestic product.
Although economists commonly estimate the U.S. underground economy at 10
percent of GDP, the explosion of $100 bills in use suggests that the actual
figure may be much larger. According to the Treasury Department, $100 bills have risen from less
than 20 percent of the value of all currency outstanding in 1967 to more
than 63 percent today (see figure). Last year alone, almost 100 percent
of the increase in U.S. currency consisted of just $100 bills. Total currency
increased by $31 billion in 1997 and $30.2 billion of it was in $100s. Few ordinary people have any reason to use $100 bills in everyday commerce.
Stores are reluctant to accept them for fear of counterfeiting, and most
people find it much easier to make large purchases with credit cards or
checks. But $1 million in $100s can fit in a briefcase, making $100s the
bill of choice in illegal trade throughout the world. Indeed, the Federal
Reserve estimates that more than half of all U.S. currency circulates abroad
and that three-fourths of the annual increase goes straight to foreign countries. However, as the size of the world's underground economies has grown in
recent years, U.S. $100 bills have become a drag on commerce, because it
take too many of them for large transactions. ($100 million in $100s would
weigh more than a ton.) That is what makes the prospect of a $500 euro
so attractive. It reduces the volume of cash by 80 percent. A purse might
be large enough to carry $1 million, making it easier to avoid detection. Whether the world's drug dealers will in fact embrace the euro is still
an open question. But for now, the $100 bill at least has competition for
their business. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
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