Friday, October 5, 2012: 9:00 AM
Beginning in 1980s the United States began to export a growing share of its banknotes abroad, where they serve as a store of value and, in notable cases, as a medium of exchange. The United States garners seigniorage revenue from the international use of the dollar and these currency outflows have balance of payments effects.
Even though the dollar displaced the British pound as the primary international currency after the First World War, our research suggests only a limited role for U.S. banknotes during the period between the two world wars. Data published by the Federal Reserve suggest that during this period, nearly one half billion dollars in currency was returned from Europe to the United States and, if we include the decade after the end of Second World War, the sum returned suggests that at the end of 1923, nearly $2 billion, or one half of all U.S. currency in circulation, was held in Europe. This large return flow suggests a diminished international role for the dollar during this period. Our analysis, however, shows that this is unlikely to have been the case. The Fed data substantially undercounted the outflow of currency since much of it did not pass through the banking system. When reasonable estimates are made for this outflow, a much smaller proportion of dollars were held in Europe and in most years, the outflow and inflow of currency were reasonably balanced. Moreover, the nature of the currency regime was such that it yielded little in the way of seigniorage.
Even though the dollar displaced the British pound as the primary international currency after the First World War, our research suggests only a limited role for U.S. banknotes during the period between the two world wars. Data published by the Federal Reserve suggest that during this period, nearly one half billion dollars in currency was returned from Europe to the United States and, if we include the decade after the end of Second World War, the sum returned suggests that at the end of 1923, nearly $2 billion, or one half of all U.S. currency in circulation, was held in Europe. This large return flow suggests a diminished international role for the dollar during this period. Our analysis, however, shows that this is unlikely to have been the case. The Fed data substantially undercounted the outflow of currency since much of it did not pass through the banking system. When reasonable estimates are made for this outflow, a much smaller proportion of dollars were held in Europe and in most years, the outflow and inflow of currency were reasonably balanced. Moreover, the nature of the currency regime was such that it yielded little in the way of seigniorage.