Sunday, August 23, 2015

Who Is Underwriting the Drug Lords?

Buying and selling illicit drugs is a cash business.  The medium of payment consists largely of US$100 currency notes.  The Federal Reserve Bank estimates that 50-70% of US currency is held abroad, either as a store of value against local depreciating local currencies, or as a medium of exchange.

Over the past twenty years, the value of $100 currency notes in circulation has more than quadrupled.

Value of Currency in Circulation in Billions of Dollars, 1984 and 2014
Denomination 1994 2014 Increased Value Percent
1994-2014 of Increase
$1 6.10 11.00 4.90 0.5%
$2 1.00 2.20 1.20 0.1%
$5 7.30 13.10 5.80 0.6%
$10 13.80 18.90 5.10 0.6%
$20 80.50 162.20 81.70 8.9%
$50 43.90 76.90 33.00 3.6%
$100 229.10 1014.50 785.40 85.7%
Total 381.70 1298.10 916.40 100.1%

The Bureau of Printing and Engraving is working overtime to print $100 Federal Reserve Notes. Why would an agency of the federal government respond to this enormous increase in demand when it knows that a substantial portion underwrites the drug business?

U.S. currency notes are liabilities of the Federal Reserve Bank, which are matched by interest-earning assets.  After paying the costs of running the Fed, the surplus is turned over to the U.S. Treasury. During 2010-14, the surplus amounted to $431.4 billion, thus relieving the government of raising that amount in new taxes or borrowing.

One way to reduce the drug trade is to stop printing $100 notes and perhaps cap the supply of $50 notes in circulation.  It will be a lot harder for the drug lords to conduct business if they have to deal in giant stocks of $20 notes.

Freezing the supply of $100 and $50 currency notes will not pose any hardship to American producers and consumers since ATMs supply $20 notes and an ever-increasing share of payments are made electronically.

Of course, an easier way to curtail the drug trade is to legalize drugs, as is the case with marijuana in several of the states.  However, it is much easier to stop supplying more $100 and $50 notes than get Congress to legalize drugs.

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