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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.