How Much U.S. Currency Is Held Abroad and Why

The views expressed do not necessarily reflect those of the St Louis Fed or the Federal Reserve System.

Shera Dalin: Have you ever gotten a dollar bill that had an ink stamp on it that said, “Where’s George?” and a website? That’s a page that allows you to track where that dollar bill has been based on other people inputting its location on the website. It’s a fun way to see where your money has traveled to. But have you ever thought about what happens when U.S. banknotes travel overseas and stay there?

Economist Christopher Neely has, and he wrote about it for the St. Louis Fed’s On the Economy blog at StLouisFed.org (shameless plug). His post is titled, “The Innocent Greenbacks Abroad: U.S. Currency Held Internationally.”

I’m Shera Dalin, and I am your host today for the Timely Topics podcast, and we’re talking to Chris Neely. Welcome, Chris, to the podcast.

Christopher Neely: Oh, thanks very much, Shera. Appreciate you having me here.

Dalin: Absolutely. So some questions for you about your blog post. First, what got you thinking about U.S. currency that’s held overseas?

Neely: Well, the topic of U.S. currency held overseas is a pretty old topic. I remember reading about it a long time ago, when I was in college. So it’s been talked about for many, many years. But I think what rekindled my interest in it was the increase in currency circulation during the COVID pandemic of 2020. And you know, if you take a look at a graph of currency in circulation, you notice that there’s a jump up during 2020 as people presumably held more currency, maybe because they were concerned about, you know, the banking system, or being able to get to their deposits, having enough cash on hand to make purchases. So in any case, there was an increase in currency in circulation. I think that that sort of got me thinking more about currency and thinking about the older topic of U.S. currency held abroad.

Dalin: Yeah, I was really surprised when I read your blog post about the dollar value and the percentage of U.S. currency that’s held in nonresident hands. Can you walk us through those numbers?

Neely: Well, that’s a good question. Currently, non-U.S. residents hold a little bit over $1 trillion in U.S. currency, and that’s about 45% or almost 45% of the total amount of U.S. currency that’s held. So this this proportion hasn’t been rising but foreigners have been holding more and more U.S. currency over the past five years, non-U.S. residents have held about 6% more a year on average than they did the year before.

Dalin: Any idea why they’re they’re holding more at least in the last handful of years?

Neely: Sure. Well, there’s two real reasons they’ve been holding more U.S. currency for the same reason that U.S. residents have been holding more currency: more economic activity, and higher prices. So there are more people, prices have been rising, and so people need more currency.

Dalin: So in a sense, it’s a function of inflation in some measure?

Neely: It is a function of inflation. So one way to think about it is that one might expect the amount of inflation adjusted currency per person to remain relatively, relatively stable over time, or to grow with the size of the real economy.

Dalin: So you wrote in your blog post that foreigners holding our currency abroad are essentially making an interest-free loan to the United States. Can you explain how that works?

Neely: Well, sure. To explain how that works, we have to think a little bit about how international trade works. So residents of different countries can exchange goods and services and assets between countries. So for example, residents of Japan might exchange cars in exchange for wheat or computer parts or bonds or stocks from the United States. But one of the ways in which countries can exchange goods and services and assets is, you know, a country might exchange goods or services or assets in exchange for a special type of asset, which is currency.

So currency is like a government bond, but it’s a government bond that pays no interest. So if, for example, an American tourist were to go someplace in the world where U.S. dollars were accepted in exchange for payment for hotel services or restaurant services or some sort of trinkets or souvenirs, then you know if the U.S. tourist shows up in Jamaica and pays some place for souvenirs with U.S. dollars, then the U.S. tourist is getting something of value that is in exchange for little green pieces of paper that cost the United States more or less nothing to make.

Now, if the owner of the souvenir shop in Jamaica just circulates that currency within Jamaica and it stays there forever, then Americans have gotten goods and services of value — souvenirs or tourism services — in exchange for something that costs us more or less nothing. But if, say, in 10 years, somebody in Jamaica decides to take those U.S. dollars and exchange them for U.S. goods and services, then what the United States has done is gotten goods and services for 10 years in exchange for almost nothing, and then 10 years later, we have to pay for them, say, in terms of goods or services or other assets. And so we’ve gotten a 10-year interest-free loan for the amount of the currency that was paid for the original souvenirs.

Dalin: So they’re they’re hanging on to our currency. That’s a benefit to us, which makes complete sense. But as Milton Friedman said, there’s no free lunch. There’s got to be a downside to this. What are the downsides?

Neely: Well, that’s a good question. As far as I can see, the only real downside might be that by exporting currency, the U.S. might be somehow facilitating criminal activity in the rest of the world. So one reason that non-U.S. residents might hold, might hold U.S. currency, is that they might be engaged in illegal activity of some sort — smuggling, drugs, weapons, something like that — and they might not wish to hold their money in banks or might not be able to hold their money in banks. I also hasten to add that there are lots of good and legitimate reasons to hold currency and to use currency. But it is true that criminals probably disproportionately use currency compared to other methods of payment and storage of value. So one potential downside to the export of U.S. currency is that it might facilitate criminal activity abroad.

Now, you know, personally, I don’t find this too troubling a reason, and I tell you why. Because the U.S. doesn’t really have much of a way to stop criminals from using U.S. currency, short of stopping the production of U.S. currency, including for U.S. citizens, so the U.S. can’t really stop the export of its of its currency, because currency is too easy to hide, too easy to smuggle. U.S. tourists take currency large, large amounts of currency abroad all the time. So it would be very difficult, if not impossible, to stop the flow of currency across borders.

Furthermore, even if the U.S. did stop the flow of its currency across borders, say for instance, by eliminating currency as a means of payment —  by the way, I that would be a measure that I personally would strongly oppose —  but if it did eliminate U.S. currency as a means of payment, then, you know, I don’t think it would really handicap criminals abroad very much because they they would have an already existing stock of U.S. currency. They could use other foreign currencies. They could use the euro, the yen, other major currencies. They could use bitcoin. So there are a lot of a lot of ways that foreign criminals could get around attempts to restrict their use of of U.S. currency. So personally, I think that probably the best thing to do is to just enjoy the fact that we’re getting interest-free loans on our currency, and not really worry too much about criminal activity with it, because there really isn’t much we can do about that.

Dalin: And if we phased out the use of currency, actual hard currency, it would put the Tooth Fairy out of business.

Neely: That would be one downside to it, yeah.

Dalin: Yeah, it would be sad.

Neely: Yeah.

Dalin: So in your blog post, you posed several intriguing questions about the potential costs of foreigners holding U.S. banknotes, such as, “Wouldn’t this cash stimulate our economy if it remained onshore?” and “Would shifts in foreign cash holdings destabilize the economy?” So I’m going to put you on the spot and ask you how would you answer those questions?

Neely: So let’s take the question about what would happen if, for example, all the cash that’s held abroad, or a good portion of the cash that’s held abroad, were to be returned to the U.S. to buy goods and services. So first, it’s probably pretty unlikely that any large amount of cash is going to come back to the United States within a relatively short period of time. But the U.S. monetary base, which it consists of currency plus bank reserves, the domestic, domestically held monetary base would tend to grow, and that would tend to reduce short-term interest rates. Now, because the Federal Reserve targets the short-term interest rates, the sort of normal operating procedures of the New York Fed would counteract the influx of currency on short-term interest rates, and the Fed would essentially absorb the currency and replace it with, you know, a combination of other types of the monetary base or bonds or repos. So basically, the Fed would kind of offset the effect of the influx of currency just automatically, without really having to take any particular actions. So…

Dalin: You’re going talk about destabilizing the economy?

Neely: Yeah, so it wouldn’t really destabilize the economy, because, you know, the Fed would counteract it. And in fact, you know, practically no Americans would even notice it. So, you know, there’d probably be a brief shift in amount of currency held domestically, and the Fed would would counteract that, and nothing would happen. So, you know, other people might ask, “Well, you know, wouldn’t an influx of currency have a stimulative effect, and might this not be a good thing for the U.S. economy?” And the answer to that is that, you know, while it’s conceivable that an influx of currency would have a stimulative effect if the Fed didn’t counteract it, that isn’t necessarily a good thing because the Fed can always take monetary policy actions to stimulate the economy, and it doesn’t need an influx of currency from abroad.

Dalin: Great discussion. Chris, I appreciate it. Thanks so much for sharing your research with us and look forward to more of your upcoming work. Can you, can you give us a little preview of something you are working on now?

Neely: Well, I just, I just put a paper out last week that talks about the economic effects of a potential armed conflict over Taiwan. So I think that that will be of interest to a lot of people.

Dalin: I feel a lot of people want to read about that, right? Well, thank you for your time today, and for our listeners, if you’re interested in more of our Timely Topics podcast episodes and to read Chris’s post, visit the St Louis Fed’s website at StLouisFed.org. You can also stream and subscribe to all our episodes on Apple podcasts, Spotify, or your favorite podcast app. Thanks for listening.