- The Washington Times - Wednesday, July 18, 2007

Much has been written about the net transfer of resources from Americans to unskilled and poorly educated immigrants who receive a wide variety of benefits paid for by taxpayers, ranging from public education and health care to housing and community services.

Now another cost to society can be added to the list: Latin American immigrants’ dependence on large-denomination U.S. currency.

Why is this use of U.S. currency costly? A new study, “Against the tide — Currency use among Latin American immigrants in Chicago,” by Carrie Jankowski, Richard D. Porter and Tara Rice, economists at the Federal Reserve Bank of Chicago, is revealing. The study appears in the Chicago Fed’s 2007 second-quarter issue of Economic Perspectives.

The U.S. is on its way to becoming a cashless society. For a long time Americans have been shifting from paper currency to greater use of electronic transfers and other noncash payment methods. The use of cash substitutes is far less costly than paying in cash. Quoting author James Gleick, the Chicago Fed economists point out in their study that “Cash is expensive — tens of billions of dollars drain from the economy each year merely to pay for the printing, trucking, safekeeping, vending, collecting, counting, armored-guarding and general care and feeding of our currency.”

In using cash, Latin American immigrants appear to buck the national trend. According to the Fed economists, “In our study of Latin American immigrants in Chicago, we find evidence that the dramatic increase in the number of immigrants is supporting a growing demand for currency, notably in the $100 denomination. … We find that the demand for $100 bills is greater in Chicago neighborhoods with higher concentrations of foreign-born Latin Americans than in other immigrant neighborhoods or other Chicago neighborhoods in general.”

Since the mid-1960s, the international demand for U.S. currency has been rising sharply. However, for more than 30 years, up to the mid-1990s, currency in circulation domestically relative to gross domestic product (GDP) was on a declining trend. A decade ago, the study shows, the trend reversed and the ratio of currency to GDP has continued to rise coincident with a surge in Latin American immigration, much of it illegal.

The above-average preference for $100 bills among Hispanic immigrants is not altogether surprising. Unskilled immigrants and those working in the underground economy are often paid in cash, and currency is commonly used in off-the-books transactions. Many Hispanic immigrants distrust banks, due to experience in their home countries. Those here illegally are probably reluctant to open banking accounts, fearful that filling out paperwork might expose their status. For some, inability to speak English is an impediment. And with U.S. currency commonly used in transactions south of the border, Latin Americans have come to trust and feel comfortable with American dollars.

Using Census data, the Fed study showed that among the foreign-born population in the U.S., a higher percentage of Latin Americans than other foreign-born groups do not use banks. More than half of Mexican immigrants were nonbankers, and the percent of Mexicans who did not have a bank account was more than threefold the percent of native-born Americans.

Cash has apparently become a means of storing wealth for Hispanic immigrants in America, and they put it to many uses. Large-denomination bills are convenient for paying rent and for costly purchases, such as home furnishings. When immigrants wire money to relatives in their home country, cash is typically presented to money transmitters and recipients are paid in cash. Immigrants returning home to visit their families bring them cash and often use cash for travel expenses. If illegal, immigrants who temporarily visit south of the border may need a good amount of cash to help get back into the U.S.

Interestingly, the Fed researchers did not find statistically significant evidence that crime was important in explaining the demand for $100 bills, which is not to say the bills aren’t used for that purpose.

Latin American immigrants’ differential demand for cash is yet another example of inequitable cross-subsidization. That is, the cost of heavily using cash is not borne proportionately by the immigrant users but ultimately falls upon others in the economy.

Most Americans are not big users of $100 bills, yet as individuals we don’t complain about the cost imposed upon us by others’ preference for large-denomination currency, in part because the cost is hidden. While there are no hard numbers on the national cost of Hispanic immigrants’ preference for $100 bills, it is not trivial.

There are also opportunity costs to the immigrants themselves — they are forgoing the income they would otherwise earn if they took advantage of interest-bearing accounts. Ignorance, fear and illegality have their price.

Alfred Tella is former Georgetown University research professor of economics.

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