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Testimony of Theodore E. Allison
Assistant to the Board for Federal Reserve System Affairs
Overall impact of euro banknotes on the demand for U.S. currency
Before the Subcommittee on Domestic and International Monetary Policy,
Committee on Banking and Financial Services, U.S. House of Representatives
October 8, 1998

Thank you for the opportunity to comment on the implications for the demand for Federal Reserve notes that are likely to follow from the issuance of euro banknotes, which will--early in the next decade--replace the national currency notes of eleven participating nations in Europe.1 You have asked the Federal Reserve to address both the overall impact of euro banknotes on the demand for U.S. currency and, in particular, what impact the issuance of higher denomination euro notes might have.

Plans for the euro
Eleven member countries of the European Union are planning to adopt the euro as a single currency, which will be issued in eight coin denominations--2, 5, 10, 20, and 50 euro cents, 1 euro, and 2 euros--and seven note denominations--5, 10, 20, 50, 100, 200, and 500 euros. The value of the euro in relation to other currencies, including the dollar, will not be known until January 1, 1999, but it is likely to be near the value of the ECU, which is presently about $1.20. (The ECU is a currency basket whose value is based on the currencies of the eleven euro participants, as well as the Danish krone, the Greek drachma, and the British pound sterling, whose issuers will not initially be among the euro group.) Thus the value of the two highest euro notes--200 and 500--will be about $240 and $600 respectively.

Euro notes and coins will be introduced on January 1, 2002, and will be exchanged for the banknotes of the individual countries during the following six months. Banknotes denominated in German marks, French francs, and the like will cease to be legal tender on July 1, 2002.2

The use of U.S. currency outside the United States and associated benefits
For most of this century, U.S. currency has been used outside this country as a store of value by people facing economic and political uncertainty. Board staff estimate, for example, that as far back as 1960, a bit less than half of all U.S. currency in circulation was held abroad. That proportion has grown steadily over the last four decades and has accelerated during the 1990s. We believe that as much as two-thirds of all Federal Reserve notes in circulation--perhaps $250 to $300 billion--are now held abroad.3

The main force behind the recent increase in the holding and use of U.S. currency abroad has been the opening up and privatizing of previously state-dominated economic systems--chiefly in the former Soviet bloc but also in Latin America and numerous Asian countries. In many of these transition economies, citizens and small businesses still face unstable local currencies and underdeveloped banking and payment systems. Under these conditions, it becomes difficult to save, to make business-to-business transactions, and to buy and sell a range of consumer goods. As a result, many residents of transition economies have chosen to carry out critical and large saving and transaction functions in a "hard" currency, very often U.S. dollars.

The availability of U.S. currency in these economies is of value to the people there, as demonstrated by the large quantity used. The functions of saving and making business transactions efficiently are essential to the improvement of economic conditions and living standards.

The United States also benefits from the use of its currency outside the country. The ease with which dollars can be spent in many places around the globe, for example, is a convenience for American travelers. Moreover, the U.S. Treasury earns income on all of the currency in circulation--including that which is held outside the country--in the form of interest on assets that are held by the Federal Reserve as a consequence of the currency having been issued. The $250 to $300 billion of Federal Reserve notes that appear to be in use outside the United States earn the Treasury and U.S. taxpayers about $12 to $15 billion per year.

The history of large-denomination notes in the United States
Notes of $500, $1,000, $5,000, and $10,000 were first authorized in 1918, primarily for interbank transactions. In 1946, with demand for the notes declining, printing of new notes of these denominations was discontinued, and in 1969, the Treasury Department and Federal Reserve decided to discontinue their issuance as well.

Since 1969, all high denomination notes that have been deposited at the Federal Reserve have been destroyed. The Secretary of the Treasury, however, retains the authority to have printed, and the Federal Reserve the authority to issue, notes in all four high denominations.

Implications of the euro for the demand for Federal Reserve notes
The availability of euro notes will reduce the use of dollars outside the United States, to some extent, for a variety of good reasons. Some U.S. currency is used within the euro area to facilitate travel to other countries. For example, a Finnish family headed for a vacation on the Costa del Sol might convert some Finnish markkas into dollars before leaving home, both because the dollars are more likely to be accepted in Spain, without having to be converted, than would be markkas and because, when the dollars are converted to pesetas, the exchange transactions involved--markkas to dollars and then dollars to pesetas--may involve a lower cost overall than a single markkas-to-pesetas transaction conducted in either Finland or Spain. Beginning in 2002, the Finnish family will of course find its local currency--the euro--used in Spain as well. That development will improve efficiency, and we should be glad to see it, even though the United States will experience some reduction in income as a result. Outside the euro area, some substitution of euros for dollars may take place, especially in eastern Europe, if the cost to banks and currency exchanges of acquiring euros is lower than the cost of acquiring dollars, and if the cost advantage is reflected in better exchange rates to citizens and business firms.

In general, however, dollar currency has a lot going for it as a store of value in areas with unstable political or economic environments. It is accepted and readily available in most parts of the world. The United States has never recalled any outstanding notes, so holders are confident that their dollars will always be accepted. The United States has a strong history of political stability, and the dollar has held its value reasonably well over a long period. Our financial institutions and markets are highly regarded. As a consequence, the worldwide demand for dollar notes is based on an unusually favorable combination of wide acceptability, political and financial continuity, and esteem.

The euro may in time earn a similar kind of status. It seems likely, however, that any major substitution of euros for dollars as a trusted store of value would take place fairly gradually.

Nevertheless, there are two aspects of the foreign demand for hard currency notes that could hasten somewhat a substitution of euro notes for dollars. The first would be the availability of higher denomination euro notes, which could make euros more convenient and efficient than dollars for some transactions. The second would be a public perception that dollar notes are significantly less secure against counterfeiting.

The role of high denomination notes
If the $100 note remains our highest denomination, it does seem plausible that some users would find the high denomination euro notes more efficient and would shift some currency holdings from $100 notes to 200 and 500 euro notes. The magnitude is impossible to predict, but the heavy concentration of U.S. currency in $100 notes, as shown in table 1, suggests that there may be some unmet demand for a more efficient and convenient higher denomination.

Table 1
Quantities of U.S. currency notes in circulation
December 31, 1997


Number of Notes
































less than 1



less than 1








Source: U.S. Department of the Treasury Bulletin, March 1998.

The efficiency with which U.S. currency could be shipped and stored would be increased fivefold to the extent that $500 notes were used in place of $100 notes. Likewise, the availability of a $500 note would reduce transaction times in the substantial number of large-value transactions that are conducted in $100 bills in many "dollarized" economies--most notably sales of real estate and consumer durable goods such as automobiles. And some households would find higher denomination U.S. currency more efficient for saving.

The United States does not issue currency for the purpose of generating revenue (but rather to meet the convenience and needs of the public), and it neither promotes the use of dollars internationally nor competes with other issuers in this regard. Nonetheless, the demand for dollars from abroad does provide significant benefits to the United States, and if making the use of U.S. currency more efficient and convenient for foreign users by reissuing the $500 note could help preserve those benefits, that would be an argument for doing so.

We doubt that $500 and $1,000 notes would improve convenience or efficiency to any significant degree within the United States. Research at the Federal Reserve suggests that, with the availability of a $500 note, domestic cash holdings might rise somewhat, with an attendant increase in Treasury revenue, but any such effect is likely to be small.

There are public policy arguments against reissuing the $500 note, particularly because any efficiency gains, such as lower shipment and storage costs, would accrue not only to legitimate users of dollar notes but also to money launderers, tax evaders, and a variety of other lawbreakers who use currency in their criminal activity. While it is not at all clear that the volume of illegal drugs sold or the amount of tax evasion would necessarily increase just as a consequence of the availability of a larger denomination bill, it no doubt is the case that, if wrongdoers were provided with an easier mechanism to launder their funds and hide their profits, enforcement authorities could have a harder time detecting certain illicit transactions occurring in cash. Consequently, we believe that the law enforcement community should be consulted in any final decision about reissuing $500 notes.

The perception of security against counterfeiting
A second, and potentially important, consideration for people around the globe who now keep their saving and business working capital in U.S. currency, and who might consider using an alternative, is likely to be their perception of the relative security of notes against counterfeiting. The fear of taking a possible loss on a $100 bill could be an inducement to use an alternative currency if the alternative were perceived as being less susceptible to counterfeiting.

This is not the subject of your hearing, and I won't spend more time on it, except to note that (a) the interagency committee on Advanced Counterfeit Deterrence is seriously studying further possible design improvements, especially for the $100 and $50, and (b) if the $500 note were issued again, it would have to be seen as highly secure in order to be accepted.

Thank you for this opportunity to meet with the Subcommittee.


1 The eleven participating countries are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

2 More information on the euro can be found at the Internet site maintained by the European commission.

3 The U.S. dollar is not the only currency that circulates internationally. The German mark, for example, is held fairly widely outside Germany.

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1998 Testimony