Statement by Theodore E. Allison, Assistant to the Board, Board of Governors of the Federal Reserve System, before the Subcommittee on Domestic and International Monetary Policy, Committee on Banking and Financial Services, U.S. House of Representatives, October 8, 1998

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Thank you for the opportunity to comment on the implications for the demand for Federal Reserve notes that are likely to follow from the issuance of euro bank notes, which will--early in the next decade--replace the national currency notes of eleven participating nations in Europe.(1) You have asked the Federal Reserve to address both the overall impact of euro bank notes on the demand for U.S. currency and, in particular, what impact the issuance of higher-denomination euro notes might have.


Eleven member countries of the European Union are planning to adopt the euro as a single currency, which will be issued in eight coin denominations--2, 5, 10, 20, and 50 euro cents, 1 euro, and 2 euros--and seven-note denominations--5, 10, 20, 50, 100, 200, and 500 euros. The value of the euro in relation to other currencies, including the dollar, will not be known until January 1, 1999, but it is likely to be near the value of the European currency unit (ECU), which is now about $1.20. (The ECU is a currency basket whose value is based on the currencies of the eleven euro participants, as well as the Danish krone, the Greek drachma, and the British pound sterling, whose issuers will not initially be among the euro group.) Thus, the value of the two highest euro notes--200 and 500--will be about $240 and $600 respectively.

Euro notes and coins will be introduced on January 1, 2002, and will be exchanged for the bank notes of the individual countries during the following six months. Bank notes denominated in German marks, French francs, and the like will cease to be legal tender on July 1, 2002.(2)


For most of this century, U.S. currency has been used outside this country as a store of value by people facing economic and political uncertainty. The Board's staff estimates, for example, that, as far back as 1960, a bit less than half of all U.S. currency in circulation was held abroad. That proportion has grown steadily over the past four decades and has accelerated during the 1990s. We believe that as many as two-thirds of all Federal Reserve notes in circulation--perhaps $250 billion to $300 billion--are now held abroad.(3)

The main force behind the recent increase in the holding and use of U.S. currency abroad has been the opening up and privatizing of previously state-dominated economic systems---chiefly in the former Soviet bloc but also in Latin America and numerous Asian countries. In many of these transition economies, citizens and small businesses still face unstable local currencies and underdeveloped banking and payment systems. Under these conditions, it becomes difficult to save, to make business-to-business transactions, and to buy and sell a range of consumer goods. As a result, many residents of transition economies have chosen to carry out critical and large saving and transaction functions in a "hard" currency, very often U.S. dollars.

The availability of U.S. currency in these economies is of value to the people there, as demonstrated by the large quantity used. The functions of saving and making business transactions efficiently are essential to the improvement of economic conditions and living standards.

The United States also benefits from the use of its currency outside the country. The ease with which dollars can be spent in many places around the globe, for example, is a convenience for U.S. travelers. Moreover, the U.S. Treasury earns income on all of the currency in circulation--including that which is held outside the country--in the form of interest on assets that are held by the Federal Reserve as a consequence of the currency having been issued. The $250 billion to $300 billion of Federal Reserve notes that appear to be in use outside the United States earn the Treasury and the U.S. taxpayers about $12 billion to $15 billion per year.


Notes of $500, $1,000, $5,000, and $10,000 were first authorized in 1918, primarily for interbank transactions. …