The Case of the Missing Currency

Abstract

In late 1992, currency in the hands of the public was close to $300 billion, representing nearly 30 percent of M1. One would think that an economic variable of this magnitude would be well-analyzed and well-understood. Quite the contrary. The last serious surveys of currency holdings commissioned by the Federal Reserve were in 1984 and 1986. These surveys indicate that currency demand is not at all understood. Probably the most intriguing and newsworthy result of these surveys was that about 80 percent of currency holdings simply could not be explained. Despite the stir of general interest that followed those studies, economists have shown little lasting interest in considering the implications of these findings. This paper is written in hopes of stimulating more interest in currency behavior.