The Rise Of The C-Note "And" The Cashless Economy?

Even as Washington stares into a fiscal abyss of its own construction, there is one bright spot: the ongoing global popularity of the $100 bill. The U.S. Treasury/Federal Reserve launched their latest version of the venerable C-Note just this week, printing $350 billion worth over the last 12 months to meet anticipated robust worldwide demand. This came on the heels of the 2012FY, when the Treasury printed 3.0 billion such notes.

Given that $100 bills last about 15 years in circulation, ConvergEx’s Nick Colas notes that these record amounts seem to indicate very strong worldwide demand for hard currency rather just replacing old stock. In the US, by contrast, the ‘Cashless economy’ is coming hard and fast.  Dollar bill production in 2013FY was just $1.8 billion, the lowest amount since 1980. The value of all currency printed, excluding $100 bills, was $27 billion – less than half the run rate of just a decade ago and the lowest since 1981.


Via ConvergEx’s Nick Colas,

The ongoing news coverage about the U.S. debt limit and budget debates has crowded out some pretty juicy stories in the past week, such as the mysterious $27 billion cash hoard sitting in a Moscow airport warehouse.  According to the Russian tabloid press (so take this all with a grain of salt), it arrived six years ago in 200 pallets of plastic-wrapped cash, with no forwarding address.  Since then Russian authorities have kept the money under armed guard, waiting for someone to claim it.  Some say it belongs to a fallen Middle East dictator.  Others suspect it is Iranian oil money. 

The strangest bit of the story, true or not, is that that the cash is all in 100 euro notes.  It is theoretically possible for such a trove to exist, for the European Central Bank printed some 129 billion euros worth of these bills from 2002 to 2008.  If 16% of them are sitting in Moscow, that would be a large chunk of the outstanding, to be sure.  How one person or institution could amass so much of the relatively new currency without drawing attention is the real question.

That anecdote neatly explains why the U.S. $100 note is still the world’s king of physical currency, rather than the euro.  Over the same seven-year period the U.S. Treasury printed $589 billion of C-notes, so anyone looking to store $27 billion in cash would need just 4.5% of the issuance to construct their nest egg.  And, of course, the U.S. government was printing $100 bills long before the euro was even a twinkle in Brussels’ eye, so the supply is actually much larger than that. 

The fact that the U.S. Treasury just redesigned the $100 bill, launching the latest iteration today, should tell you that physical notes are still an important part of what makes the U.S. dollar a global “Reserve” currency.  The new notes have upgraded anti-counterfeiting measures such as three-dimensional ribbon imbedded in the bill and a color-changing bell in an inkwell.  Everyone from Hezbollah to North Korea has famously tried to counterfeit the U.S. $100 bill over the years, with varying levels of success.  The latest enhancements are merely the latest move in a long game of cat and mouse between forgers and the U.S. government.

What is more intriguing is the explosive increase in demand for $100 bills since the Financial Crisis.  Prior to 2007, the U.S. Treasury typically printed about 630 million C-notes (the average from 2001 – 2006).  From 2007 to the recent end of the 2013 government fiscal year, that average is 1,894 million, or three times the old run rate.  A few points here:

Most $100 notes go immediately overseas and stay there for their useful lives.


The Treasury estimates that a typical $100 bill lasts about 15 years, versus just 5 years or less for a $1 bill.  This is due to reduced handling.


The cost to produce a new $100 bill is about 13 cents, up modestly from the old note’s cost of 8 cents.  


The production of $100 bills is therefore profitable enough to have a positive and noticeable impact on U.S. fiscal health.  Assuming that half of the average 1.9 billion note average issuance since 2007 was new demand rather than replacing used currency, the U.S. has netted $190 billion/year since the Financial Crisis from the $100 bill program.  


Even better, since the demand for C-Notes is non-U.S., these inflows are largely incremental to the domestic economy.  You think Apple or Google have a good business model?  The Treasury/Federal Reserve have them trumped.

Who uses the $100, and to what purpose?  That’s where things get a little difficult.  It’s not like this is an efficient way to move money around. One million dollars just about fits in a standard Halliburton 5” aluminum briefcase, but it weighs about 22 pounds.  The $100 bill is widely accepted, to be sure, but if you move around with more than a few million dollars you’d better have a bodyguard or five. 

A piece of the incremental demand over the last decade is obviously conflict-related.   When I travelled in Afghanistan earlier this year it was clear that the U.S. dollar was the preferred currency, and the whole place seems to run on wads of $100 bills.  As countries in the region – Syria, Libya, Lebanon, and Egypt, for example – go through political and economic upheaval, their demand for physical currency likely grows.  The dollar still has an edge over the euro here, if only because of its longer history.
Then there are the more obvious sources of demand: criminal enterprise and tax evasion.  Google the term “Drug bust” and you won’t likely see bitcoin thumb drives or euros stacked up next to the illegal substances.  It will be stacks of $100 bills.  And our Russian airport stash notwithstanding, the dollar certainly has an edge in money laundering and “Wealth preservation” strategies.  Add to this the low rates of inflation in the U.S relative to many other countries, and you have a convenient (if bulky) store of value.

Back inside the U.S., however, paper currency is quickly sliding into the same history as electric typewriters and land line telephones.  We’ve got a lot of data on this in chart form after this note, but here are the highlights:

For the just-ended 2013 Fiscal Year, the Bureau of Engraving and Printing (part of the Treasury), produced just 1.8 billion dollar bills.  That’s the lowest production count on record since 1980 and a fraction of the 5 billion notes printed in 2000 and 2001 during the Y2K scare.  Even back during 2007 and 2008, the BEP was pumping out +4 billion bills a year.


The second most popular note – the $20 – is also way down in terms of production.  In 2013FY, the BEP produced 528 million such bills, down from +3 billion in 2005 and +4 billion in 1999.


The total value of non-$100 bill currencies printed in 2013FY was just $27.4 billion, the lowest amount since 1981.  For comparison, consider that in 2007 the BEP printed $72 billion in non-$100 currencies and even last year this number was $56 billion.

In summary, technology – debit cards, online bill paying, gift cards, etc – is quickly making physical currency a niche product rather than a mainstay of the domestic American economy.  The most profitable ‘Niche’ from an issuer’s perspective is the high-denomination $100 bill, and this fits neatly with the needs of many people who want a reliable and physically compact currency – especially offshore.  For everyday transactions, the “Cashless economy” is clearly on its way.


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