NCPA - National Center for Policy Analysis

Poor Countries Give Aid TO U.S.

December 4, 1995

United States currency in the hands of foreigners amounts to about $50 for every man, woman and child on earth living outside the U.S. -- an estimated $185 billion to $260 billion or 50 percent to 70 percent of Federal Reserve Notes in circulation.

Much of this cash is held by people in developing nations who use it as a hedge against the inflation of their own countries' money. They have good reason to worry about the rapid depreciation of money issued by their central banks:

  • Since 1971, the median annual rate of inflation of the 126 developing countries with central banks has been double that of the 19 developed countries.
  • The most inflationary 37 developing countries have experienced annual inflation from 100 percent to 999 percent, and 19 have endured hyperinflation of over 1,000 percent per year.
  • Also since 1971, 13 developing nations have confiscated their currencies.
  • The currencies of the developing countries have lost most of their value relative to the U.S. dollar, with the median depreciation having been 70 percent since 1970.

The rapidly depreciating paper money issued by developing countries has been a drag on their economies, which have grown little more than half as rapidly as the developed ones.

In effect, the holders of U.S. currency in even poor nations are making interest-free loans to the U.S. government. The Federal Reserve issues little pieces of noninterest-bearing green paper at almost no cost, which foreigners accept in exchange for goods and services. Then the Fed invests the proceeds in U.S. government securities and turns profits over to the U.S. Treasury amounting to $11 billion to $15 billion per year.

For example, in 1994, well over half the total foreign shipments of dollars went to Russia, a total of about $20 billion. The rate of shipments to Russia increased in 1995 to a remarkable $100 million per business day.

If developing countries backed their currencies with U.S. dollars or German marks and invested these reserve currencies, they could reap the profit now going to Uncle Sam -- thus helping themselves without asking for foreign aid.

Source: Steve H. Hanke, "Our Most Profitable Export," Forbes, December 4, 1995.


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