[Congressional Record Volume 140, Number 50 (Monday, May 2, 1994)]
[House]
[Page H]
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[Congressional Record: May 2, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
  PROGRESS REPORT ON FIVE-POINT STRATEGY REGARDING INTERNATIONAL AND 
               DOMESTIC REGULATORY ISSUES FACING AMERICA

  The SPEAKER pro tempore (Mr. Coleman). Under the Speaker's announced 
policy of February 11, 1994, the gentleman from Texas [Mr. Gonzalez] is 
recognized for 60 minutes.
  Mr. GONZALEZ. Mr. Speaker, today I address my colleagues once again 
in the nature of a progress report on the five-point strategy that I 
developed and announced here on the House floor several weeks ago for 
addressing several of the most pressing international and domestic 
regulatory issues facing our financial system.
  There is, and in fact for some time there has been, very much at 
stake, with very little perception either in the public opinion 
formulations or, more importantly, information disseminating system of 
our country, insofar as our constituents are concerned. We cannot 
expect them to have opinions if they have simply not been informed.
  This goes back many years. I have very much taken the issue and, for 
the first time, made it a part of the frontal priority agenda of the 
Committee on Banking, Finance, and Urban Affairs of the U.S. House of 
Representatives. Long before I became chairman, in fact, as long ago as 
the 32 years ago that I first came to this body, I have spoken out.
  At that time it was certainly very, very difficult, because there was 
not anybody, either in or out of the United States, but what had the 
feeling that the United States was riding the highest tide of economic 
and financial prosperity of any country at any time in the history. 
Some of it I felt was illusory, and I tried to point it out with some 
statistics that were beginning to be formulated.
  Unfortunately, there was not too much attention being given on the 
levels that could have, if they had so been inclined, anticipated so 
many of the crises we have had, including the last, which we still are 
not completely through with, the so-called depository institutions 
crisis of the S&L's and the banks. It is not over with, but the 
perception is that it is.
  There is an old saying that I got from my father, who quoted a very 
famous Mexican historian and philosopher. My father would say, ``When 
the people say at noon that it is midnight, the only thing you can do 
is go home and turn the lights on.'' This is what has happened.
  Today, in my opinion, and for the last 6 years particularly, even 
though I first addressed my colleagues specifically on this issue, and 
the--what seemed to me at the time the unavoidable consequences, which 
unfortunately came about, I wish I had been wrong, was in 1979, in 
August. That was some time ago. Again, it is on the record. It is not 
what I'm saying now. The reason I spoke was because I felt that as a 
member of this committee, and charged with knowledge, I had the duty, 
as I do today, to bring Members up to date.

                              {time}  1230

  I have spoken with a great deal of personal concern and alarm about 
the biggest danger facing this country since its founding, and, that 
is, the loss of value of its currency.
  What is our currency, the dollar note, 5 dollar note, the fractional, 
the metal currency? When I came aboard, we had silver and gold content 
in our currency.
  One of the first issues that came up, in fact it was only one of two 
meetings that year of that committee, and I was a freshman, the then 
expert, outstanding national figure, Secretary of the Treasury, Douglas 
Dillon, came before the committee to ask that the Congress repeal the 
silver transactions tax. Nobody seemed much then to be worried about 
anything. I raised the issue as to why, though as a freshman I could 
not ask too much, but the Secretary said that the reason was that this 
was a wartime imposed tax and that given the heavy industrial demand 
for silver, it was necessary to repeal that transactions tax in order 
to continue the Treasury's store of mintable silver for the purpose of 
minting our coinage. For instance, the quarter, the nickel even had 90 
percent silver. One could always tell if it were dropped on the 
sidewalk, it would ring. Today it clugs.
  Mr. Speaker, I raised the issue that it did not make sense because we 
were still very much in the same position as we were during the war, in 
the immediate postwar period. I pointed out that we were on what we 
called a defense posture that had really gotten ratcheted up in 1950, 
but that as far as a speculative nature once that tax was removed of 
the silver market, it would do the very opposite, and, of course, I was 
looked upon as if I had lost my mind.
  It was exactly 2 years to the month later that the Secretary came and 
asked that the Congress demonetize, that is, remove silver and gold 
from our coinage.
  Mr. Speaker, these are the reasons that I have always looked with a 
great deal of analysis and sober consideration at the utterances and 
the statements of the so-called experts.
  Mr. Speaker, today the big danger as I have said, and, in fact, it is 
far more we have suffered already from it is the consistent loss of the 
dollar in value, particularly since 1985.
  In 1985, you will recall this was the midpoint of the Reagan 
administration's years, we became a debtor nation for the first time 
since 1914. We had fought two world wars and we were the only country 
that was not a debtor nation. We were the only creditor nation in those 
two wars. As a matter of fact, it was our credit that enabled the 
Allies to win in both wars.
  But today and since 1985, we are the heaviest indebted nation in the 
world, or combination of nations. In the meantime, the dollar has lost 
about two-thirds of its value in this same period of time in comparison 
to the Japanese currency, then yen, and the German currency, the 
Deutsche mark.
  Mr. Speaker, what does that mean? When I have discussed this as long 
ago as 6 years ago, I became convinced that the danger was clear and it 
was present, but none of the experts, including the chairman of the 
Federal Reserve Board, with whom I discussed it, international bankers 
that deal heavily in international finance, not a one even to this day 
will say anything different other than that it cannot happen in the 
immediate future. Perhaps if the United States entered a very difficult 
period of instability, and I would always ask this question:
  Well, why can't it happen just as soon as the leading industrial 
nations or a combination thereof pool their currency reserves, indicate 
and nationalize a currency, what is to keep it from replacing the 
dollar in effect, in reality, totally as the international reserve 
unit, which it still is to a certain extent.
  Mr. Speaker, that is why all during the 1960's, even as late as 1968, 
and certainly the administrations were not of the other party that I do 
not belong to, it was President Johnson, and I was very concerned, 
because I would read the European journals, and a crisis developed but 
it was pawned over with the help of the French, who have never really 
demonetized, or for that matter the European Community.
  The European Community's or Union now, their currency is ECU, the 
European Currency Unit, and that has gold reserve backing and it is 
worth about $1.30. Most of the transactions are quoted in Europe in 
ECU's, not dollars. But that has not been perceptible yet. What has 
been perceptible is what was referred to a while ago by a previous 
speaker when he talked about this sort of squirrel cage race of the 
average American family and its economy.
  Mr. Speaker, the reason is simple, and it is tied in with this even 
though it is difficult to explain this coherently and have it accepted 
as a real impressive threat and menace. To what? To the financial and 
economic independence of our country and people.
  Mr. Speaker, we are the only country, as I have said repeatedly, that 
has had the privilege of paying its debts in its own currency, the only 
country. That is in danger.
  What does that mean, and this is where I have difficulty in conveying 
the present delicacy of this problem.
  Mr. Speaker, what that means is that all of this heavy debt structure 
we have piled, governmental, corporate debt and just citizens' debt, 
us, the people is so great that were we to have to pay those debts in 
somebody else's currency, that in effect is the end of so-called 
American financial independence. We in effect are relegated to about 
the position our country had when we were emerging from colonial status 
and obtaining our independence, the mercantile system.
  However, today I wanted to enlarge on one of the phenomenon or danger 
aspects that has been discussed very little.
  Mr. Speaker, as I said, I have introduced this 5-plan approach, and 
also let me add, my colleagues, in this area we, the Congress, cannot 
do much given the precedents and the constitutional inhibitions as far 
as the executive branch is concerned.
  The Congress could, but it will not, it is not going to change the 
present method of even managing the debt which, of course, since after 
1953 has been changed in such a way that we would never be able to 
resolve that as long as we pay compound interest.

                              {time}  1240

  Mr. GONZALEZ. In any event, that is another subject matter, but it 
ties in, and we reached the point now where I felt that we have got to 
discharge our responsibility by doing two things, what we could 
legislatively, and what we could by trying to spur the response 
entities like the Federal Reserve Board, which is our central bank, the 
one in charge of the monetary system that should be prevailing, and the 
executive branch through the Secretary of the Treasury.
  So that the one persistent issue is how to handle what is now an 
entirely and radically new world, which again has not been perceived, 
and that is that through this tremendous technological explosion of 
knowledge and instantaneous communication of information the world now 
has developed a system, even as I am speaking, you have hundreds of 
billions, a trillion dollars moving back and forth on electronic 
megabytes as fast as the speed of sound, and not subject to control by 
any one sovereign nation.
  In fact, we have developed what even economists are loath to discuss, 
a new financial world, very dangerous though, because it is highly 
speculative, in other words, gambling.
  My concern has been the involvement of our banking, financial insured 
depository institutions, even if indirectly, but mostly directly, in 
this highly feverish speculative or gambling activity. But what we have 
developed has been a system of values, megabyte money, which now 
exceeds by some $10 trillion or more the total amount of money value in 
the world, real money, the money you and I use, that has been exceeded 
through this highly leveraged or actually pyramided system, and so 
precarious that in my opinion being that the actions that we prescribe 
would be time-consuming and by the time, as I have suggested in one of 
my measures, that our executive branch and Federal Reserve take the 
lead in bringing about a global consortium of governments to see how 
they can control the most dangerous aspect of these movements.
  Now, this is what I call megabyte money, and I am telling you, my 
colleagues, if you total that today it would exceed all of the money, 
existing cash, in every country in the world by over $10 trillion. So 
what have you got? What is the residual value there? And what happens 
when you have the late losses that we have reported in the committee 
and have had hearings on by the corporations and the securities bankers 
and, in fact, commercial bankers who have gotten into this gambling?
  What happens to that money? Where did it go?
  Well, it went with a blip. That is where it went. And that is where 
it will go.
  In the meanwhile, the value of the dollar, that dollar note you have 
in your pocket, is your share of stock in your country, and if it has 
lost two-thirds of its value, this is the reason that costs of living 
have not abated even though they say inflation is controlled; you are 
not paying less for groceries than you were 10 years ago. You are not 
paying less for rent. you are paying more. You are not paying less for 
utilities, lights, gas, water, which you have to have. You are paying 
more. But why?
  At the root of it is a value of that share of stock. That is where it 
is. But who has said so? And that is the reason I have felt impelled to 
speak.
  In other words, if nothing else, and knowing that the impotency of 
one voice, though I have always said, in the words of the poet Auden, 
that all I have is one voice to undo the folded line, because a lot of 
marlarkey has been spread out to confuse people, not to explain, not to 
clarify, not to render accountability, but to confuse. And that is why 
I am impelled to speak.

  The two factors right now though that are of immediate pressing 
concern are the lack of information available on currency movements. 
This is a failing which hampers efforts to make sound economic policy 
and hinders even so-called anti-money-laundering efforts. Learning more 
about currency movements will also enhance our understanding of the 
reasons that the foreigners are still holding the dollars, an endeavor 
that has been neglected. To this end, I have directed the GAO, the 
General Accounting Office, a study on currency movement. We do know 
this, and this is a fact that startles some of my colleagues on the 
committee, better than 60 percent of our currency is not in our 
country. It is somewhere else, somewhere offshore. The Fed does not 
know, and it has led to quite a bit of concern on the part of such 
world institutions as the IMF and others and other governments 
including the European Parliament, because not knowing to what extent 
the Federal Reserve can set accurate monetary policy, and besides that 
it prevents the other countries from doing so themselves, so they have 
expressed grave concern though it has not been reported in our country.
  The persistent problem which I have discussed before, because it 
threatens what they call in high-faulting language systemic risks, and 
that is a fancy word for saying a collapse or a depression, and that 
involves a so-called derivative. This is this megabyte money I am 
speaking of.
  On April 12, I executed the first part of my strategy, the five-part 
strategy, by introducing H.R. 4170, the Derivative Safety and Soundness 
Act of 1994. If enacted, H.R. 4170 would require greater disclosure of 
bank derivatives activities and would also give the bank regulatory 
agencies greater power to gather information on derivatives.
  Let me say, to the credit of the existing regulators, they, too, have 
agreed and have expressed their concern, but then it is necessary that 
the Congress also help. It would also help the members of the board of 
directors and officers of banks to understand the risks that are 
inherent in this derivative speculative mania.
  Another important provision of H.R. 4170 recognizes the United States 
cannot address the safety and soundness aspects of derivatives as if we 
operated in a vacuum. Therefore, H.R. 4170 requires the Secretary of 
the Treasury to initiate a group of 10 countries to study on the 
adequacy of derivative regulation and international supervisory 
cooperation.
  Last week I directed the small but highly motivated and most 
effective and hard-working staff to work with the minority staff to 
craft a bipartisan derivatives bill based on the contents of H.R. 4170 
and H.R. 3748, which is the minority, the Banking Committee's minority 
leader's bill, the gentleman from Iowa [Mr. Leach]. The gentleman from 
Iowa [Mr. Leach] and I have similar concerns about the systemic risks 
of derivatives, and I anticipate that we will, by working together, 
provide a bipartisan effort in this direction.
  We are currently involved in the Subcommittee on Housing with having 
to extend all of the affordable-housing legislation, so as soon as we 
do that, we will hope to have our bipartisan bill up.

                              {time}  1250

  In executing the second part of my strategy the committee held a 
hearing on April 13 on banking systems' exposure to the speculative 
investments, and the peculiar the myriad, I mean tens of thousands, of 
different forms of futures and currency, international currency, and 
betting on futures, and options, and the like. But it is what I have 
called inverted pyramid because it all has to have what is known as a 
nominal base value, and if it is based on a bond or a stock, by the 
time that thing pyramids up, what is the value?
  To my mind it is no more, no less, than a dangerous electronic Ponzi 
type of activity.
  So, in executing the second part of the strategy in this hearing, we 
heard testimony from the regulators, the head of the SEC and the 
Commodity Futures Trading Corporation, from the famous hedge fund 
operator, so called, George Soros. The committee learned that banking 
system, the system loans to hedge funds, was limited to about a billion 
dollars. These loans are held by a few large banks and, in total loans 
to hedge funds, represents a small portion of their total loans so that 
the word ``hedge'' should also be used with caution, as they use it. In 
other words, that does not really reflect the extent of the feverish 
activity.
  The committee also learned that the regulators are keeping an eye on 
the hedge fund, but we hope more than that. But at least I want to 
compliment them.
  There is another jargon used. That is why I said that hedges that do 
not really cover the ground--so-called bank proprietary trading 
accounts which have nearly doubled in size over the past 3 years to 
over--Lord only knows--the official estimates are 150 billion. But it 
is more than that.
  Now what are the bank proprietary trading accounts? Well, they are 
similar to hedge funds, but they are not hedge funds as these people in 
this kind of activity would say. So that raises more concerns.
  First, the Congress did not create deposit insurance in order for 
banks to speculate with insured funds. That we said, and my colleagues 
know what happened with the S&L, and should the exposure now of the 
commercial banks involved collapse--if my colleagues think the S&L was 
a crisis--I hope I am dead wrong--but if there is any possibility 
or probability that something will happen, the old saying is: ``It's 
going to happen.'' But we know that all the factors are in place here 
in this equation, and naturally I am, and have been, and will be very 
concerned.

  The sheer size of these proprietary trading accounts raises safety 
and soundness questions of our banking system, and that is why we are 
continuing our hearings. A large swing in interest rates or currency 
rates, and just the small ones recently did enough to shake up the bond 
markets across the seas, but what was not reported much here was the 
effect it had immediately on treasuries and how that then impacts in a 
multiple myriad of other ways, too, in ways that we cannot sit here and 
enumerate in 5 minutes.
  The quarterly earnings of several money center banks recently 
plummeted because of trading account losses. In other words, the 
handwriting is already on the wall. Not only banks, but big 
corporations, Procter & Gamble, others, the ones in Spain, the credit 
union, central credit union, this huge corporate credit union. As it is 
said, ``Everybody thinks credit unions are little church sponsored 
activities you and I belong to, or maybe work place, but you have 
corporate credit unions, and particularly since the law in 1982 known 
as the Boren-St Germain.''
  Well, the big central credit union lost its pants in the recent 
investment it did with the Spanish bank, Banesto, which went under In 
Spain, and it lost its pants trading in this speculative market, and 
that does not even account for the big collapse in Italy of the Feruzi 
empire, which also involved--because all of these activities are what 
they call syndicated; they bring in a bunch of banks. Most of them 
happen to be American. But as long as they are insured depository 
institutions, it means that taxpayers behind that guarantee on that 
insurance, and it was never intended by Congress any more than the S&L 
was, but, nevertheless, it happened. Remember?
  So, on April 21 I executed the third part of my strategy by 
introducing H.R. 4261, the Commission on International Coordination of 
Financial Regulation. The introduction of the Commission bill reflects 
the fact that the financial markets around the globe have grown so 
interrelated that there is an urgent need to establish a regulatory 
regime. As I said earlier, this activity transcends the sovereign 
nations and their power, and it has always been true ever since the 
kings in the middle centuries wanted to make war, and had to borrow 
money, and they went into what is known as sovereign loans, and looked 
what happened to them. And look what happened to the bankers of that 
day that loaned them the money. They want under.
  But as was said then is true today, and certainly since after the war 
when we went into this great multinational, transnational corporate 
activity in which the banks were the underpinning, not hesitating one 
minute to sell out American labor--America has been sold down the 
river, all up and down, even as late as last year's activities, and 
someday we will have the reckoning. I say to my colleagues, ``You can't 
cheat the labor forever.'' But American labor has been--that has been 
one of the segments of our society that has lost out, including every 
one of us.
  But they used to have this saying in Latin: Ubi pecunia, ubi patria, 
meaning simply ``Where my money is where my country is, or my 
allegiance is,'' and that is true today as it ever was then. Why not? 
Who is going to think that--and that does not mean that it is just 
American international. Everybody that has money as his main driving 
force, or mammon, if my colleagues want to, as God, is never going to 
act any differently. Where the money is, that is where the allegiance 
is, and particularly in this day and time in which the world has 
shrunk, and national boundaries have been erased through the great 
marvel of telecommunications or electronic instantaneous information.
  Our domestic and foreign financial systems are now so integrated that 
the United States cannot alone--act alone to prevent catastrophe or 
ensure the safety and sound financial activities such as derivatives. 
But the United States should take the lead. It should not wait, as it 
has in other areas of global endeavor, and exert its still residual, if 
it still has moral, suasive power, for I am afraid our country has 
indulged in some activities that ostensibly to some in the outside 
world seem to have, because the Government did it, the approval, but 
which morally sacrificed every basic principle of American historical 
commitment to freedom and uninterference with the destinies of other 
people.
  The legislation will require the Federal Reserve and the Treasury 
Department to appear before Congress semiannually to divulge 
information on the course of both domestic and international economic 
and monetary policy. The Treasury Department surprise announced Monday 
that the Federal Reserve, and the central banks of Mexico and Canada, 
were establishing a prominent $9 billion currency swap facility among 
themselves as a prime example of the need for greater congressional 
oversight on international financial issues.

                              {time}  1300

  I was the only one who raised a question, as I had years before. In 
fact, we had a hearing in 1990. Nobody paid attention to it. Nobody 
showed up, and there was not any reporting by the press. But we brought 
out how the Federal Reserve acted without any congressional approval 
that is required under the Constitution. The Constitution says there 
shall be no appropriation unless there has been an authorization 
therefor.
  But the Treasury, about 1 month ago, announced a $6 billion line of 
credit to Mexico to shore up the faltering regime there. I raised a 
question, as I have before, when they entered into these arrangements. 
By what right do they do that? What is the power of the Federal Reserve 
to use the taxpayers' money without an appropriation process?
  But that is where we are. And recently the Treasury and the Federal 
Reserve and Mexico and Canada got together to extend that to a $9 
billion line of credit.
  So we hope this legislation will call for greater accountability. 
However, there is one other aspect of this, and that is the physical 
movement. I said a while ago that better than 60 percent of our 
currency is somewhere, but the Federal Reserve does not know where. 
Nobody else seems to know, but it is there somewhere.
  Recently, in order to avoid the laws that we passed in the last few 
years to control drug money laundering, the effort now is to ship out 
the money. In fact, there was an arrest down in Miami where an 
individual was charged with trying to get $900,000 worth of cash out of 
the country. So they are trying the reserve. Instead of laundering the 
money here, which would make them subject to penalty, they will ship it 
out. And, of course, we ask, is that connected with drugs? Let me say 
that indubitably it is.
  Now, how long will this dollar as the currency of choice hold? Over 
the next several decades, China, Singapore, Taiwan, and South Korea 
will experience some of the highest economic growth rates in the world, 
as they have been before.
  Will their continued economic transformation, coupled with Japan's 
already tightened role in the world trade and finance, mean the decline 
of the dollar? As I said, it already has. Only time will tell, 
though, how it is going to translate, and in what form.

  The question I have always asked is: Why should we wait until the 
crisis develops? The S&L crisis was entirely unnecessary. It was not an 
act of God. Some of us foresaw that and tried to warn others.
  So I am not trying to tell the Members that these events are 
something that is going to happen because they are God-ordained. 
Therefore, it has always been my belief that we should act in a way 
that we can recognize the contingency, that we can anticipate and, if 
possible, sidestep a crisis. But that is not and has not been the 
history of our activities since the days of Franklin Roosevelt.
  So we do not even have the understanding of the physical movement of 
our currency. The Federal Reserve's own shot-in-the-dark estimate 
places the amount of currency overseas at 60 percent. But little 
analytical work has been done to determine through what channels 
currency flows across our borders. We do not know the destination of 
that money, and we do not know why it flows where it does. Lack of 
knowledge about physical currency movements is problematic in that it 
affects antimoney laundering efforts and the accuracy of international 
financial statistics. And that is what the European nations are 
complaining about.
  The knowledge gap on currency movement also has some uncertain effect 
on monetary policy. Well, of course. How can any central banking or 
official national entity that is mainly in charge of setting monetary 
policy do so accurately if it does not know the facts?
  Right now people around the globe have too much confidence in the 
dollar. But the dollar is under siege. I say to my colleagues that we 
should not mistake that. One important step we can take to better 
understand the factors that cause the dollar to be so revered is a 
study of the financial movement of our currency. This has been 
neglected by the Federal Reserve and other agencies, and it is 
important that we fill that information gap so we can protect the 
dollar's standing as far as we can, up to now, if at all possible.
  We must have currency flows and accurate capital flow statistics.
  In September 1992, the International Monetary Fund released a little 
noticed yet very important report entitled ``Measurement of 
International Capital Flows.''
  I will place that report at the end of my presentation today. And, of 
course, we have their conclusions. In terms you and I can understand, 
this report is warning that decisionmakers, all of them, including we 
in the United States, are basing our monetary and fiscal policies on 
faulty data. The result is that inaccurate data undermines the conduct 
of international economic policy and international cooperation.
  There is a background paper prepared for this IMF report entitled 
``Physical Currency and Capital Flows,'' and I will also place that in 
the Record today so my colleagues, if they are interested, will have 
access to these facts. That has always been the main purpose of my 
reporting on these activities since I became chairman of this 
committee, starting out no more than 2 days after I was elected 
chairman in January 1989.
  The fact remains that until we know more--and we do not--there is 
very little that can be done. As has been said, if we do not know where 
we are coming from, how can we know where we want to go? Of course, if 
nobody wants to know or cares to know where we want to go, any road 
will take us somewhere, wherever we want to go.
  On the subject of smuggling, I referred to this huge transaction that 
was stopped in Miami, and there was another one amounting to $300,000 
in San Diego, CA; smuggling is going up exponentially. So more than 
ever, I see an urgency to the adoption of this legislation.
  The main problem, as I see it, is the fact that there is no real 
dissemination of information. When I came aboard 31\1/2\ years ago to 
this body and to the Banking Committee, I did so with a tremendous 
interest in financial matters, one that I had developed when I was in 
the State Senate of Texas, where I had been named the chairman of the 
Banking Committee. Of course, there is such a vast difference in the 
parameters or jurisdictions that I see now. What a vast enterprise that 
is on the congressional level.

                              {time}  1310

  Even before that, when I started on the city council of my city, San 
Antonio, that is why I think one reason I am here now is that I 
struggled hard as a very lonely figure on that city council, but soon 
was recognized for saving money to the taxpayer, and also addressing 
what, again, like on the national level, everybody seemed to consider 
beyond the ken of the citizen.
  In fact, I remember a fellow councilman saying, we don't know why you 
are wasting time on all of this. Why, the people don't know what you 
are talking about.
  My answer to that was, well, wait a while. What were you and I before 
we were sworn in as councilmen? Weren't we people? Were we dumber or 
smarter then than we are now, or are we smarter or dumber now?
  So that psychology still persists all over, not only on the local, 
but on the national level.
  Of course, the people are way ahead of us. I find amazing grasp by 
citizens that no local newspaper editor even thought of these matters. 
So it is just a question of us doing our duty as the agents of the 
people.
  Remember, my colleagues, every one of us will have our day of 
judgment, sooner or later, but ultimately we will inexorably face the 
day of judgment, and the only question will be were you for the people, 
or were you against the people.
  Mr. Speaker, I submit the documents I referred to earlier for the 
Record.

Report on the Measurement of International Capital Flows--International 
                     Monetary Fund, September 1992

                           Executive Summary


                              Introduction

       The 1980s saw an unprecedented growth in the volume and the 
     complexity of international financial transactions (Chart 1). 
     (Charts are not reproducible in the Record.) This has been 
     accompanied by a significant deterioration in the coverage 
     and quality of the data. As a result, it has become very 
     difficult, and at times impossible, for policymakers to base 
     judgments on reported balance of payments statistics, 
     particularly statistics on international capital flows. 
     Unless appropriate action is taken, there will almost 
     certainly be a further deterioration, with inevitable 
     consequences for policymaking.
       The problem is particularly serious for two reasons:
       (1) Net errors and omissions in the balance of payments of 
     several of the major industrial countries have, in some 
     years, been so large that it has been difficult to ascertain 
     each country's true capital (and current) account position 
     and, therefore, how much saving the country has been 
     providing to, or absorbing from, the rest of the world (Chart 
     2). (Charts are not reproducible in the Record.)
       (2) The sharp rise in these errors and omissions after 1988 
     indicates that statistical problems have worsened 
     dramatically and may well continue to worsen in the absence 
     of a major effort to improve the data.
       The weakness in capital flow statistics is also reflected 
     in the ``discrepancy'' in the global capital account. In the 
     absence of errors and omissions, this discrepancy should be 
     zero because the sum of inflows in the world should equal the 
     sum of outflows. However, the discrepancy has fluctuated over 
     the last decade, and it amounted to $66 billion in 1989. 
     Imbalances in the global capital account and its principal 
     components, for the period 1986 to 1989, are shown in Table 
     1. (Tables are not reproducible in the Record.) Although 
     these imbalances reflect inaccuracies in the capital account 
     statistics, they do not necessarily measure them exactly 
     because, for example, some positive errors cancel out 
     negative ones, and some transactions are not recorded at all. 
     Factors causing the rapid expansion of international capital 
     flows during the 1980s have also been a primary cause of 
     deterioration in the statistics. For example, the removal of 
     exchange controls by a number of countries has resulted in a 
     loss of valuable data sources. The internationalization of 
     markets has meant that compilers can no longer rely solely on 
     domestic data sources; investors have increasingly used 
     overseas intermediaries beyond the reach of the domestic 
     compiler. The trend toward the much greater use of 
     transactions in securities has required compilers to widen 
     the scope of their enquiries to institutions less able or 
     willing to provide data than banks have been. As new 
     instruments have been introduced onto the markets, new ways 
     of tracking and recording them have had to be found. Many 
     countries have tried, although sometimes rather slowly, to 
     adapt their balance of payments statistical systems or 
     introduce new ones. However, in some countries, the changes 
     in the international financial environment have been too 
     large and have produced too great a burden on reporters to be 
     met without increases in resources. Furthermore, these 
     changes have occurred at a time when many governemnts have 
     been attempting to curb growth in public spending. As a 
     result, too little has been done too late.
       Against this background, the Executive Board of the Fund 
     established the Working Party on the Measurement of 
     International Capital Flows in late 1989. This study follows 
     the work for the Working Party on the Statistical Discrepancy 
     in World Current Account Balances, the report of which was 
     approved by the board in 1987.


                        economic policy concerns

       Progressive deterioration of the quality of information on 
     international capital flows can undermine the conduct of 
     national economic policy and international policy 
     coordination in a number of ways:
       a. Inconsistencies in current and capital account recording 
     at both the national and global level may indicate errors in 
     national information on saving and investment. Such errors 
     may mislead policymakers in basic choices about fiscal and 
     monetary strategies.
       b. With greater freedom for capital to react to shifts in 
     policy, it is important to anticipate how monetary policy 
     actions may be affected by crossborder capital flows. For 
     example, an intended tightening of credit markets may be 
     frustrated by capital inflows, or an intended increase in 
     taxes may be aborted by a capital outflow. Similarly, better 
     information about capital flows may help to guide exchange 
     rate policy, especially when capital flows have a significant 
     immediate impact on the exchange markets.
       c. The enhanced speed and volume of international financial 
     transactions also create greater exposure to possible crises 
     in the clearing systems for international banking accounts, 
     should a major participant be unable to meet scheduled 
     obligations. The availability of accurate and timely data on 
     capital flows can help national authorities assess such 
     risks.
       d. There are now many occasions when groups of countries 
     seek to coordinate their responses to problems in the 
     international economic system, or when the IMF exercises its 
     surveillance function. At such times, timely and credible 
     data on relevant developments in capital flows are vital.
       e. It is important for the authorities and the public to 
     have accurate information on the structure of the capital 
     flows affecting a country, that is, on the distribution 
     between relatively stable private flows (such as direct 
     investment), flows of liquid private capital (such as short-
     term deposits in banks), or interofficial financing. Changes 
     in this structure and in the terms of financing may have 
     policy implications.
       f. For direct investment, capital flows data giving 
     information on the types of enterprises being financed are 
     useful for analysis of the functioning of the host and 
     creditor economies.
       g. Countries with large foreign debts and their creditors 
     need to have accurate statistics about such debts and the 
     ways in which capital flows, both inward and outward, are 
     affecting debt management.
       Additional instances can be listed, but the Working Party's 
     main concern about the connection between capital flow 
     statistics and the policy process can be stated succinctly: 
     there are strong indications that this body of information on 
     which good economic management depends is undergoing a 
     serious and progressive deterioration. The size of recorded 
     discrepancies in the global capital account is not the only 
     sign of deterioration. Many errors in the compilation of such 
     data many be offsetting, or transactions may be missed 
     entirely. Thus, problems with the figures may be worse than 
     is immediately apparent. Concerns such as these contributed 
     to the decision to set up the present Working Party.
       It is crucial to bear in mind that research on 
     international capital flows is far more complicated than work 
     on current account transactions. For the latter, 
     classifications are clearer and transaction balances for a 
     larger number of component accounts (such as trade, travel, 
     investment income, and transfers) should by definition by 
     zero for the world as a whole. Thus, there is an indication 
     of how much correction is needed for each principal category. 
     With capital flows, however, there is much greater likelihood 
     that the two sides of the same transaction may be recorded 
     under different rubrics in national balance of payments 
     accounts. For example, while the balances for direct and 
     portfolio investment should approach zero at the global 
     level, a capital outflow recorded as a direct investment by 
     the creditor country may be recorded under some other 
     category by the host country if different classification 
     criteria are used. Similarly, an increase in a country's 
     reserves in the form of securities will be recorded as 
     portfolio investment in the country issuing the securities. 
     Consequently, when the researcher finds a discrepancy in any 
     of the capital account categories (see Table 3) (Table not 
     reproducible in the Record), there is uncertainty as to 
     whether the problem is one of classification differences or 
     whether one or the other country simply has erroneous or 
     missing data. The categories combined in ``other'' sectors 
     are subdivided by type of transactor, so in this rubric the 
     problems of matching inflows and outflows are even more 
     severe.
                                  ____


 Background Papers--Report on the Measurement of International Capital 
           Flows--International Monetary Fund, December 1992

             Physical Currency Movements and Capital Flows

                          (By John F. Wilson)

       In the literature on international capital flows there is 
     almost no mention of currency movements. ``Capital'' is 
     usually understood to move through the channels of 
     institutional finance or company accounts, where book entries 
     record the changes in international assets and liabilities. 
     Yet some capital moves in simpler and more tangible ways. 
     Whenever domestic currency notes are acquired by 
     nonresidents, foreign claims increase, constituting a capital 
     inflow. The flow of currency back into residents' hands 
     represents a decrease in external liabilities--an outflow.\1\ 
     The balance of payments counterpart entry to the currency 
     flow may belong in a country's current account, as with 
     tourist expenditures, or the entry may belong in the capital 
     account. An example of the latter case is a domestic banks's 
     shipment of currency to a foreign correspondent, whose demand 
     account is debited in payment. Only a few major currencies--
     those widely accepted in global transactions or regarded as 
     stores of value--are likely candidates for substantial 
     international movement. The U.S. dollar is the most obvious 
     candidate, but there are others, too.
---------------------------------------------------------------------------
     Footnotes at end of article.
---------------------------------------------------------------------------


                        measuring currency flows

       A seamless statistical system would account for changes in 
     cross-border currency ownership as part of international 
     capital flows. However, currency movements post two serious 
     problems for compilers: measurement of the flows and 
     appropriate use of available data. For perhaps obvious 
     reasons, measuring currency flows is difficult. Although 
     movements through financial institutions are accessible to 
     statistical systems, large amounts of currency surely flow 
     through individuals' hands and other channels. Only a few 
     major countries (see annex) make any attempt to record or 
     estimate international currency movements. Compilers who do 
     gather some statistics rely almost entirely on reports from 
     domestic banks about cross-border shipments of bank notes, 
     and they concede that coverage is fragmentary. Proper use of 
     the resulting data is also problematic, as it is hard to 
     determine what portion of net currency movements should be 
     associated with particular current or capital account 
     transactions.\2\
       Whether or not currency flows can be properly measured, 
     cumulative flows of any national currency in one direction 
     can constitute a large capital flow that is presently 
     unmeasured in either debtor or creditor countries. In that 
     sense, currency flows may contribute to the problems of 
     measuring capital flows. Owing to the lack of systematic data 
     on this subject, it was not possible for the Working Party to 
     address currency movements in its Report on the Measurement 
     of International Capital Flows.
       If the net international currency flows were small, 
     omitting them from balance of payments calculations would 
     make little difference. Evidence suggests, however, that net 
     movements of several key currencies are relatively large, and 
     the emission may play a role in both national and global 
     statistical discrepancies.\3\ In this context, key-currency 
     countries should be understood to be those whose physical 
     currencies are candidates for transactions, for hoarding (as 
     a store of value), or for investment holding (such as 
     exchange rate speculation) by nonresidents.\4\
       Discussions of currency stocks are seldom found in a 
     balance of payments context. The most frequent mention of 
     them is usually made in research attempts to estimate the 
     size of a country's underground economy. A number of such 
     studies have been carried out in the past 15 years, mostly 
     for the United States. Until recently, such work has not 
     focused on--and sometimes has not mentioned at all--the role 
     of cross-border movements in the growth of the currency 
     stock.\5\
       It is widely accepted that the U.S. dollar circulates in 
     many parts of the world, especially those afflicted with 
     political and economic instability. Translating this 
     knowledge into specific estimates of either the stock of 
     dollars held abroad or flow estimates of dollars moving 
     across borders is a much more difficult task. Some estimates 
     suggest that more than 50 percent of the U.S. current stock 
     is in foreign hands, but they are largely unsupported by 
     systematic statistics (see annex). Little else has been 
     written about the nonresident holdings and cross-border flows 
     of currencies beside the dollar.
       In the past few years, questions relating to currency 
     growth have sometimes been connected to drug trafficking and 
     other illegal activities. The framework resembles attempts to 
     estimate domestic underground activities, except that it is 
     more international in nature. Yet, as noted in Chapter 11 of 
     the Report on Capital Flows, the largest portion of cross-
     border currency movements probably is not connected to drug 
     trafficking at all. There are numerous channels--
     institutional and individual--through which domestic currency 
     can move abroad, and the reasons for such movements are 
     usually more prosaic than the drug or arms trade. For 
     instance, in a general sense, the acquisition and retention 
     of a foreign currency may be a form of capital flight 
     resulting from political or economic uncertainty, inflation 
     or exchange rate considerations, a desire to hide assets or 
     avoid taxes, or many other possible factors.


                quantifying international currency flows

       Whatever the motivation, physical currency movements are a 
     type of poorly measured capital flow, and the size of actual 
     movements is an important gap in capital account 
     statistics. Although the scope for improving the formal 
     statistics may be limited, it may be possible to identify 
     which currencies are most affected and roughly to quantify 
     the amount of cross-border movements over time. The 
     following experiment in quantification is similar to 
     previous studies of domestic underground economies in that 
     it uses an inferential approach to the subject of 
     unmeasured capital flows.\6\ Crude estimates of such flows 
     can be obtained by comparing data on changes in currency 
     stocks to some assumptions about how these stocks should 
     behave over time.
       Specifically, the following paragraphs examine the real per 
     capita currency stock in eight countries over the 1970-90 
     period.\7\ All of the currencies are candidates for 
     significant cross-border movements because of inflation, 
     exchange rate influences, and geography. In none of these 
     cases can the quantity of currency circulating domestically 
     be isolated from the amount held by nonresidents, so 
     conclusions reached in this paper are suggestive at best.
       Chart 1 (Charts are not reproducible in Record.) displays 
     the 1970-90 movements of the nominal currency stocks and real 
     per capita currency stocks for four of the eight countries: 
     France, Germany, Japan, and the United States.``Real currency 
     per capita'' is the total currency stock divided by 
     population and deflated by the consumer price index. These 
     adjustments are intended to eliminate the upward push on 
     currency stocks associated with growing populations and 
     generally rising prices. The chart shows that real per capita 
     currency stock declined sharply in France over the past two 
     decades and rose noticeably in Germany, Japan, and the United 
     States.
       How should real currency balances behave over time? 
     Expected behavior has cyclical as well as systemic features. 
     Physical currency is a component of narrow money in all 
     countries, and narrow money is substituted for broadly 
     defined money when interest rates change. When interest rates 
     rise, the opportunity cost to a domestic resident of holding 
     domestic bank notes increases, causing per capita holdings of 
     currency and narrow money to fall. The converse holds true 
     for declines in interest rates.\8\ Real balances will 
     therefore fluctuate with interest rates.
       For the most part, however, interest rate changes are a 
     cyclical force, not a secular one. A more important long-run 
     influence on currency balances is technology--that is, 
     changes in domestic payments mechanisms. Technological 
     changes have tended to work against the demand to hold 
     currency. Widespread use of credit and debit cards, 
     electronic payments, and similar mechanisms available to the 
     individual consumers should have reduced the currency 
     intensiveness of transactions over the past two decades. 
     Thus, while one might expect to see cyclical ups and downs in 
     currency balances, a distinct downward drift should occur 
     reflecting the technological advances.
       The exact rate at which real currency balances should 
     decrease is a matter of extreme conjecture and will likely 
     vary across countries. However, each country might be thought 
     to follow an expected ``baseline'' evolution of real per 
     capita currency stocks. For present purposes, it was assumed 
     that between 1970 and 1990 advances in payments technology in 
     each country lowered the intensiveness of domestic currency 
     usage by 10 percent. The difference between actual and 
     baseline balances is an unexplained residual, representing 
     a cumulative change in the currency stock induced by 
     factors other than prices, population, and technology. For 
     key currencies, this residual could largely be cross-
     border movements of bank notes.
       Among the countries shown in Chart 1, a persistent downward 
     drift in real per capita currency stocks has taken place only 
     in France. There, currently balances not only decline in a 
     way that seems consistent with changes in payments technology 
     and consumer behavior but they drop even faster than 
     hypothesized over an extended period. There have been 
     striking upward movements in per capita currency balances for 
     Germany and Japan, and to a lesser extent the United 
     States.\9\
       Table 1 gives further details of the calculation for all 
     eight countries. It shows ``unexplained'' currency growth--
     the residual--in real per capita terms. This residual is then 
     translated back into nominal currency amounts: the total 
     quantity of currency at current prices that is 
     ``unexplained'' by population, prices, and technology. 
     Finally, the result is shown in dollar terms.
       Apart from the possible contribution of domestic 
     underground economies to these residuals, the signs and 
     magnitudes of most of the results are intuitively plausible. 
     The local currency figures in the second column might be 
     interpreted as upper-bound estimates of cumulative capital 
     flows associated with physical currency movements over this 
     interval. The dollar figures, however, are equivalent to the 
     cumulation at 1990 average exchange rates. They should not be 
     interpreted as the dollar value of the capital flows for 
     themselves. This distinction is especially important for the 
     strikingly large Japanese figure, where yen appreciation 
     during the 1980s inflated the dollar equivalent of the 
     putative currency outflow.\10\
       Another aspect of national currency balances is relevant to 
     speculations about their role in capital flows: the size of 
     the bills in circulation. It has been noted that an unusually 
     high (and rising) proportion of U.S. currency outstanding is 
     in denominations of $100 and greater. Although this is 
     consistent with the presumed nature of some illegal domestic 
     activities, it is also consistent with increased hoarding and 
     transactions (including illegal ones) outside the United 
     States.
       As noted above, there is no simple ``benchmark'' for 
     currency outstanding for domestic use. Some national 
     economies tend to be more currency intensive than others, in 
     the sense that more transactions are traditionally done in 
     cash, implying higher average amounts of real per capita 
     balances. As Table 2 shows, however, the amounts of currency 
     outstanding vary greatly across the eight countries, even 
     apart from the movements shown in the Chart 1.
       Switzerland is the most prominent ``outlier'' in the table, 
     with impressive real per capita currency stocks, even after 
     allowance for exchange rate movements. There has not been 
     much change in the real demand for Swiss currency in recent 
     years, and the figures are consistent with the notion that a 
     certain quantity of Swiss francs are in nonresident hands.


                               conclusion

       These final comments stress that multiple influences work 
     on currency demand. The simple facts of ``rising'' or 
     ``falling'' real per capital currency balances can be the 
     result of both domestic and foreign developments, and the 
     comparisons made with baseline assumptions in this paper are 
     merely indicative. What several findings do suggest, however, 
     is that foreign demand for several physical currencies has 
     been rising over the period covered by this paper, implying 
     unmeasured capital flows into the countries of the currency 
     issuers. As this appears to have taken place over a fairly 
     long internal, the cumulative capital inflow has been perhaps 
     been substantial. If this were the case, the outstanding 
     stock of currency owned by nonresidents may not be a 
     negligible factor in the international investment positions 
     of such countries or in those where the currencies are held.


                               Footnotes

     \1\Although it is the acquisition of domestic currency notes 
     (change in ownership) by nonresidents and the acquisition of 
     foreign currency notes by residents, rather than cross-border 
     flows per se, that defines a capital flow, for convenience 
     this paper will refer to ``currency movements.'' References 
     to ``currency'' transactions mean physical currency: bank 
     notes. ``Currency stock'' as used in this paper means 
     currency outside deposit money banks.
     \2\The countries that gather data usually record net inflows 
     of currency through their banks. This may reflect the 
     tendency for currency to be exported in large numbers of 
     small transactions and eventually to be returned by foreign 
     banks to the home country for deposit credit.
     \3\If net flows of currency are entirely unmeasured by both 
     affected countries, the omission of these capital flows might 
     give rise to discrepancies in national balance of payments 
     accounts, but not contribute to the global capital account 
     discrepancy. However, the exact role played by currency 
     movements (and the exchange of currency balances for assets 
     that may be captured by compilers) is more complicated, so 
     some effect on the capital account imbalance is likely.
     \4\Potential compilation errors are not confined to the small 
     number of identifiable key-currency countries alone. Other 
     countries cannot measure changes in their residents' holdings 
     of foreign currencies. Which ``holder countries'' are most 
     affected and by what amount is more conjectural.
     \5\Officials in the United States have long been aware of the 
     large amount of currency outstanding relative to the 
     population. All such currency is included in the M1 measure 
     of the money supply. Federal Reserve officials have began to 
     make public ``guesstimates'' as to the share of the currency 
     stock that might be in foreign hands.
     \6\The intent of the research into the ``underground 
     economy'' problem usually has been to estimate biases in 
     official national accounts statistics on income and 
     expenditure.
     \7\The countries included in this experiment were: Canada, 
     France, Germany, Japan, Italy, Switzerland, the United 
     Kingdom, and the United States. All the figures used in the 
     calculations were taken from the IMF publication 
     International Financial Statistics.
     \8\Note that the reverse might apply for foreign holdings of 
     domestic currency notes. A rise in domestic interest rates 
     often is accompanied by an appreciation of the currency. 
     Actual and expected appreciation might induce foreign holders 
     of the currency to acquire more, especially if their access 
     to other vehicles (such as deposits and securities) is 
     constrained by local regulations.
     \9\Among countries for which charts are not shown, smaller 
     declines in real per capita currency balances were recorded 
     between 1970 and 1990 in the United Kingdom. Apart from 
     oscillations, balances did not change much in Canada, Italy, 
     and Switzerland. An examination of exchange rate movements 
     over the interval suggests some correlation with yen and 
     deutsche mark currency balances.
     \10\For instance, the exchange rate in the early 1980s was 
     well above 220 yen per dollar. The 1990 rate used for the 
     translation was about 145 yen per dollar.
                                  ____

         House of Representatives, Committee on Banking, Finance 
           and Urban Affairs,
                                      Washington, DC, May 2, 1994.
     Hon. Alan Greenspan,
     Chairman, Board of Governors of the Federal Reserve System, 
         Washington, DC.
       Dear Chairman Greenspan: According to most estimates, the 
     majority of our currency is held by foreigners. In this 
     regard, the Committee would like to learn more about how 
     large shifts in the amount of currency held by foreigners 
     would affect the conduct of monetary policy, and more 
     generally, the real economy.
       The Committee is also concerned about the accuracy of 
     estimates it has received of U.S. currency held overseas, and 
     the resulting accuracy of international capital flow 
     statistics. A September 1992 International Monetary Fund 
     (IMF) report, entitled ``The Measurement of International 
     Capital Flows,'' concluded that estimates of U.S. currency 
     stock in foreign hands are largely unsupported by systematic 
     statistics.
       One of the IMF report's background papers, entitled 
     ``Physical Currency Movements and Capital Flows,'' states 
     that ``currency movements are a type of poorly measured 
     capital flow, and the size of the actual movements is an 
     important gap in capital account statistics.'' The report 
     concludes that cumulative flows of currency in one direction, 
     such as the large annual export of dollars from the U.S., can 
     constitute a large capital flow that is presently unmeasured.
       To assist the Committee in learning more about how physical 
     currency movements affect monetary policy and the accuracy of 
     international capital flow statistics, please provide answers 
     to the following questions.


                            monetary policy

       1. How is monetary policy affected by the fact that the 
     majority of our currency (estimated at almost 60%) is held by 
     foreigners?
       2. How would a significant change in the willingness of 
     foreigners to hold dollars affect the conduct of monetary 
     policy?
       3. How would a significant change in the willingness of 
     foreigners to hold dollars affect the size of bank reserves, 
     long and short-term interest rates, aggregate demand for 
     goods and services and exchange rates.


              federal reserve efforts to improve accuracy

       In your letter to me of April 1, 1993, you stated that the 
     Board of Governors estimated the percentage of U.S. currency 
     held overseas was arrived at indirectly and was ``subject to 
     considerable imprecisions.'' You also stated your belief that 
     ``research concerning currency location should continue.''
       1. Please describe the Federal Reserve's continuing efforts 
     to measure currency held by foreigners, the methodologies 
     used, the degree of accuracy of the estimates, and the 
     results obtained.
       2. Does the Federal Reserve agree with the IMF's conclusion 
     that currency movements are a poorly measured type of capital 
     flow and this lack of data adversely affects the accuracy of 
     capital flow statistics?
       3. Please describe the Federal Reserve's efforts to improve 
     the accuracy of capital flow statistics, and the potential 
     impact inaccurate statistics have on the conduct of monetary 
     policy.
       Thank you for your attention to these matters. I look 
     forward to working with you to improve our understanding of 
     the impact of physical currency movements. Please provide a 
     response to this request by the close of business, June 3, 
     1994.
       With best wishes.
           Sincerely
                                                Henry B. Gonzalez,
                                                         Chairman.
                                  ____

         House of Representatives, Committee on Banking, Finance 
           and Urban Affairs,
                                      Washington, DC, May 2, 1994.
     Hon. Charles Bowsher,
     Comptroller General of the United States, U.S. General 
         Accounting Office (GAO), Washington, DC.
       Dear Comptroller Bowsher: The Committee on Banking, Finance 
     and Urban Affairs is studying the impact that physical 
     currency movements have on the conduct of monetary policy, 
     the accuracy of capital flow statistics and anti-money 
     laundering efforts.
       A number of sources, including the GAO, raise concerns 
     about the accuracy of estimates of the quantity of U.S. 
     currency held by foreigners. Concerns have also been raised 
     about the affect unmeasured currency movements have on 
     monetary policy, the accuracy of capital flow statistics, and 
     anti-money laundering efforts.
       To assist the Committee in learning more about the patterns 
     of physical currency movements and the effects of these 
     movements on the above issues, please submit a report which 
     addresses the following questions.


                    quantity of currency outstanding

       1. Please provide historical statistics on the amount of 
     U.S. currency outstanding by denomination. What amount and 
     percentage of U.S. currency is held by foreigners?
       2. Please provide historical statistics on the amount of 
     currency exported and imported into the U.S. each year.
       3. Please describe the factors that create the demand for 
     U.S. currency both domestically and internationally (i.e. for 
     transactions, hoarding, etc.)
       4. Please list the top ten foreign countries in terms of 
     U.S. currency holdings. What amount and denomination 
     circulates in each country? Through what channels does each 
     nation obtain its U.S. currency?
       5. Which countries use the dollar as their main medium of 
     exchange? Why do these countries choose the dollar as its 
     main medium of exchange?
       6. Please describe the techniques used to make the above 
     estimates and their degree of accuracy. Please make sure to 
     analyze the adequacy of the Federal Reserve's technique for 
     estimating currency held by foreigners.


                        banks and currency flows

       The Committee is interested in learning more about the 
     institutional channels through which U.S. currency flows into 
     and out of the country. In particular, the Committee would 
     like to know more about the role played by U.S. banks in 
     international currency movements.
       1. By what methods does U.S. currency exit and enter the 
     country (e.g. banks, securities firms, mail, etc.)?
       2. What percentage of cross-border U.S. currency movements 
     are attributable to smuggling?
       3. What percentage of cross-border U.S. currency movements 
     are executed by U.S. banks?
       4. Please list the U.S. banks that handle the most U.S. 
     currency overseas.
       5. Please provide a measure of the volume of currency 
     handled overseas by U.S. banks, a measure of the annual 
     volume of currency imported and exported by these 
     institutions, and the most common places of entry or exit 
     through which they import or export the currency.


           currency and the accuracy capital flow statistics

       A September 1992 International Monetary Fund (IMF) report, 
     entitled ``Measurement of International Capital Flows,'' 
     concludes that cumulative flows of currency in one direction 
     can constitute a large capital flow that is presently 
     unmeasured in either debtor or creditor nations. The study 
     also concludes that ``physical currency movements are a type 
     of poorly measured capital flow, and that the size of the 
     actual movements is an important gap in capital account 
     statistics.'' The Committee is interested in how the Federal 
     Reserve has addressed this problem.
       1. What steps has the U.S. taken in the past few years to 
     improve the accuracy of the currency component of capital 
     flow statistics?
       2. Please describe U.S. efforts to work with the IMF or 
     other international bodies to improve currency movement and 
     capital flow statistics?


                            money laundering

       Illegal activities such as narcotics trafficking generate 
     billions of dollars annual in domestic cash sales. Over the 
     past decade, the Congress has passed increasingly tough money 
     laundering statutes aimed at curbing the amount of illicit 
     currency that enters U.S. financial institutions. According 
     to law enforcement officials and past reports by your agency, 
     drug cartels and other criminals are responding to these laws 
     by transporting massive amounts of U.S. currency out of 
     the country.
       1. Please describe the mechanisms by which U.S. banking 
     agencies work with law enforcement and intelligence agencies 
     to track the flow of illegal currency across our borders.
       2. Please describe U.S. banking agencies' efforts to work 
     with U.S. banks to ensure they are not exporting or importing 
     illicitly obtained currency.
       3. Banks are generally exempt from the Bank Secrecy Act's 
     requirements to report cross-border currency movements. Do 
     you believe that reports by banks would provide useful 
     information for anti-money laundering efforts or for other 
     purposes?
       I would appreciate any additional information or comments 
     related to the above topics. Thank you for your attention to 
     these matters. The Committee looks forward to your reply.
       With best wishes.
           Sincerely,
                                                Henry B. Gonzalez,
     Chairman.

                          ____________________