HOW TO MAKE THE MOB MISERABLE

Henry, James S.

HOW TO MAKE THE MOB MISERABLE The Cash Connection by James S. Henry Whose picture is on a $100 bill? I asked that question four years ago in this magazine. * I was trying to dramatize the...

...This level of demand continued for about three weeks, nearly using up the supplies of new $100s in New York...
...This is indeed odd, since the ordinary American probably has less need for cash now than ever, what with the increasing use of credit cards, payroll deductions, sophisticatedcash management techniques and the beginning of electronic funds transfers, all of which- might be expected to reduce the demand for currency...
...How might this be done...
...Another well-placed source recently described to me a $30 million payment made fast summer by the Muslim brotherhood (with Saudi support) to the Afghan rebels...
...In 1979, for example, about $5 billion more in currency was turned in to the Federal Reserve banks in Miami and Jacksonville than was paid out, of which over $2 billion was in $50s and $IOOs...
...In 1974, the Central Bank of Colombia asked the U.S...
...currency is really a variation on the explanation for the growth of currency demand inside the United States...
...Cash eliminates troublesome bank records, and, for organized crime, the need for mutual tr11St...
...Another makeweight objection to the scheme refers to cost and administrative difficulties...
...Milking the Mob Overall, then, our new evidence on the uses of the U.S...
...Well, time's up-do you know the answer yet...
...But this would be a very costly route for many American cash hoarders to use in such a short period of time, especially if the recall were accompanied by stiff customs inspections to catch cash caches leaving the country...
...currency abrolj.d, since many foreigners seem to prefer to carry currency rather than traveler's checks...
...Currently, bank and business demand accounts for less than 20 percent of the cash outstanding in the U.S...
...Then it moved on to the Boston and Chicago Fed branches...
...This would make drug traffic one of the largest sectors of the Florida economy, and certainly the most rapidly growing...
...Have you even seen a $100 bill in the past four years...
...This cash conversion problem can be a serious one for the drug dealer: two detectives on the Manhattan drug homicide squad recently described to me the case of a local pusher who had stashed small bills waist-high around the four walls of a room in his apartment because...
...There might be the cost of providing a few extra security guards around banks during the brief period allowed for exchanging the bills, and perhaps some added clerical expenses...
...If we assume, conservatively, that the "velocity" of cash in the Florida underworld is three we come up with illegal income figures ranging from $5 billion to $10 billion in 1979...
...My claim was that while the number of "big bills" in circulation was growing, the average law-abiding citizen had increasingly little use for them...
...Now, inflation does make it more practical for individuals to carry bigger bills...
...Political instability in the Middle East has probably been an even more important source of demand for U.S...
...In July 1977, the New York branch of the Fed began receiving orders for up to $20 million per day of new $100 bills from one of its member banks...
...I do not deny the significance of the advance warning problem, but there are several precedents for the Federal government's ability to keep secret a major change in economic policy: Nixon's 1971 surprise suspension of gold convertibility for the dollar is one example...
...But when all criminals tried to' convert their cash at once, they would bump into each other at every turn, competing for the scarce alternatives to cash, trying to unload their bills through innocent-looking outlets, and generally calling attention to themselves...
...It might even have a beneficial effect if the government had to decide which sub rosa undertakings were worth the effort...
...This surplus seems very odd, since the Federal Reserve system as a whole paid out much more currency than it took in in 1979 (nearly $10 billion more), and Florida was the only state whose Federal Reserve banks recorded net currency inflows that year...
...The Congress could grant standby authority to call in the cash, and even if an initial (and beneficial) scare resulted in some hoards being liquidated, the government could bide its time and keep the crooks guessing, springing a recall only when they had slipped back into their normal mode of behavior...
...In addition, foreign bank holdings could be swapped for in advance of a general currency recall, so that only non-bank foreign entities would be left with greenbacks...
...They seem, in fact, to be precisely the sort of problems we pay the GS-16s in the Treasury and State departments to solve...
...For example, I am told by a source with direct connections to the Christian Phalangist party of Lebanon that when the Lebanese civil war became very hot inI976":1977 the Saudis channeled large sums of U.S...
...Although for obvious reasons there are no detailed measurements of the use of cash in criminal activity, the role of big bills is supported by both common sense and a great deal of anecdotal evidence...
...An alternative to a recall, for the faint of heart, would be to gradually remove big bills from circulation over a period of several years...
...Large,U nmarked Bills First, let's review the evidence that originally led to the conclusion that currency demand in the U.S...
...For example, while the ratio of all cash in circulation to retail sales has fallen througn the 1970s, the equivalent ratio for large bills has risen...
...The most dramatic growth in cash demand has been for large denominations...
...Indeed, the dollar's weakness has prompted OPEC to explore denominating oil payments in other currencies...
...The total size of the purchase is uncertain, but apparently at least $150 million was acquired during this one period...
...the middlemen's "retail" sales on the streets of New York, Baltimore, and Boston are typically paid for in small bills-$lOs arid $20s-which must then be converted into the more convenient $100s for the trip south...
...The faster the bills are passed around, the fewer are necessary to conduct a given volume of business...
...welfare, as well as great fun, if we could just make life a little more difficult for them...
...If you support the rebels, the prospect of a cash recall is troubling, conjuring up the image of heroic Mujhadeen crawling on their bellies through Soviet helicopter fire as they attempt to make their way to the Pakistani border in order to exchange their American money before the recall deadline...
...Colombia, for example, is a key wholesaling center for cocaine and marijuana...
...Others, of course, face similar problems in financing their favorite causes...
...This offer good only for Assistant Secretaries and above...
...Russian rubles, . South African rands, and Iraqi dinars are certainly not generally accepted currencies, while gold is very hard to transpo.rt and cert~fy...
...While both are ancient traditions in the Arab world, there is evidence that they have grown substantially in recent years...
...Federal Reserve to open a branch office in Bogota, just to handle ail the American dollars that were turning up there...
...They include tax evaders, drug traffickers, illegal gamblers, loan sharks, fencers of stolen goods, and corrupt politicians, among others...
...currency to the party to finance arms purchases from the United States...
...But the expense of printing the bills needed to make the required exchanges would be relatively small-less than $100 million...
...More important, without the convenience offered by cash, the conduct of business would be greatly complicated...
...If you don't use this cash, who does...
...But while there may be something to the notion that people in developing countries-or Arabs, in particular-prefer holding tangible assets to bank deposits, such a preference did not suddenly appear in the late 1970s...
...But, frankly, I'm not going to tell you all the government's options, since that would only make them less effective if the government ever decided to use them...
...More fundamentally, the "one-shot" objection really applies to all of the social policies we now use to attack criminal activity, since none of them pretend to eliminate it once and for all...
...That's an average of almost five $100 bills per household-two for every man, woman, and child in this country...
...The use of big bills is now being studied by an interagency task force, but since the first recommendation to come out of this task force was greater reliance on the Susan B. Anthony dollar, I;m not banking heavily on its analysis...
...As criminals scrambled to purchase cash "substitutes, .. they would bid up the price against each other...
...One of these patterns, first documented in an August 1979 staff analysis by the U.S...
...Keep Them Guessing Another fear is that the criminal community might receive advance warning of a recall, and quickly convert all its cash into less vulnerable forms of wealth-paintings and gems and what have you...
...Even in constant dollars, the value of big bills in circulation ~as increased nearly 7 percent each year through the 1970s, while the GNP has risen only 3.2 percent per year...
...From 1976 to 1979, while Florida tourism growth averaged just 3.7 percent per year, its currency surpluses more than tripled...
...A comprehensive Electronic Funds Transfer System (EFT) would offer even greater potential for reducing the volume of paper currency in circulation and making covert 'transactions more difficult...
...at random, every few years or so, raising the "transaction 'costs" of doing illegal business- or else most big bills could be taken out of circulation completely...
...Imagine the panic that would strike our criminal community if, an at once, it· had to liquidate its enormous hoards of big bills, or else explain where they came from...
...currency...
...If I am right about the magnitude of these foreign block c~rrency purchases, they help explain the strange distribution of $100 bill payouts observed in recent years at several Federal Reserve branches...
...currency in circulation, up from a fourth four years ago...
...currency is such a "tangible" asset-the dollar depreciated by five percent against the riyal from 1977 to 1979...
...In the past nine y~ars the number of $100 bills in circulation has increased by an average of nearly 15 percent per year...
...Given the substantial leverage the Fed enjoys with many foreign banks, there are several other regulatory devices that could shrink this loophole to what we economists like to call a "second order" problem...
...There are more logical suspects-people who need a highly liquid, anonymous form of wealth, something one could slip into an unmarked envelope, or stuff easily inside an ordinary suitcase...
...Florida has become the entrepot of choice for most of the marijuana and cocaine flowing to the eastern United States...
...How much more difficult life would be for the heroin dealer if, instead of being paid with a small valise of $100 bills, he had to take a check, or a steamer trunk of $5s and $10s, or gems or rare stamps . .. Alas, some government policy planners are more troubled than titillated by this prospect...
...But this ignores the possibility that the recalls could be repeated, raising the costs and the uncertainty of criminal enterprise...
...Large denominations simply make it easier for these people to hide and transport a great deal 'of money...
...In light of these facts, I also proposed a plan: a surprise currency recall, similar to those that had been conducted by governments in post-World War II Europe, and Latin America, and by our own military in Vietnam...
...There's the argument that professional criminals might be able to avoid the impact of a recall by making sophisticated cash transfers to foreign banks after the recall was announced...
...If,' for the system as a whole, the demand for new $100s had simply continued to grow at its 1970 to 1976 average from 1976 to 1979, total demand for bills would have been cut by a billion, which gives us a rough idea of how large the foreign demand just for new $100s may have been...
...On the whole, the activities pursued by this motley group could not be less virtuous, and it would be a valuable contribution to humap...
...Bakshish and Bombs The second recent clue to current uses of big bills involves recent foreign purchases of new $100 bills...
...The most recent known purchase involved the Houston Fed bank, which began receiving unusual orders for large quantities of new $100s from the First City National Bank of Houston during the last half of 1978...
...The payment was made in U.S...
...I would.now iike t6 add to this evidence two significant clues that have turned up recently...
...This apparently came close to happening on several occasions, however...
...If I am right, the Florida cash surpluses are simply one of our first good statistical footprints of the "underground economy...
...Currency reform, by crippling organized and disorganized crime in the short run, and raising the marginal costs of crime in the long run, would have a permanent effect...
...is abnormally high, and that various forms of illegal activity are responsible: • The U.S...
...It ignores the value of merely identifying the size and location of underground activity, as well as the present and future impact on the criminal sector of the "wealth shock" created when some of the illicit cash hoarders have to swallow their stockpiles...
...The ratio of cash surpluses to reported income in Florida tripled from 1970 to 1974...
...Unless you are an important Treasury official, in which case give me a call...
...Huge development programs financed by oil money have placed government ministers in a position to hand out lucrative contracts and "inside informa~ tion...
...There are also the anecdotes I have accumulated from salespersons at TiffanY's about "rich Arabs" who pay cash for their $5,000 gold watches...
...currency have in the stability of the dollar...
...This cast includes drug dealers, tax evaders, ·arms merchants, corrupt politicians, gangsters, "kickback" contractors, Arab sheiks, and Soviet commissars, to mention just a few...
...Why is all this cash pouring into the Florida economy...
...How much more difficult life would be for the average heroin dealer if, instead of being paid with a small valise of crisp $ 100 bills, he had to take a check, or carry a steamer trunk of $5s and $IOs, or sign up for an extension course on how to assess the value of gems, rare stamps, and other forms of compact wealth...
...When the tax cheats, Mafiosi, and other pillars of the criminal community rushed to their banks to exchange their precious notes, the IRS would be there to ask those with the most peculiar bundles some embarassing questions...
...While Florida did record significant currency surpluses as early as 1970, the recent growth of these surpluses had simply been too large to be the product of such "normal" economic activity...
...As a result, a rash of spurious objections has been directed against the recall plan...
...Large drug caches are landed secretly on one of the state's thousands of beaches or many private airstrips, or are just strapped to the legs or back of a "mule" and walked through Miami customs...
...Meanwhile, the vast majority of Americans, of course, who hardly ever touch a big bill and certainly don't keep any of them lying around, would not be inconvenienced in the slightest...
...he couldn't exchange them as fast as they were coming in...
...Any single criminal, acting alone, might be able to dispose of his cash without much trouble...
...For example, there is the case of the wealthy Egyptian going through customs before me in Cairo last spring, carrying an attache case stuffed with pound notes and $100 bills...
...Both involve patterns in the currency flow between banks in the Federal Reserve System...
...Of course, not all the cash going south necessarily goes directly to Florida...
...currency makes the subject even more...
...Naturally, I believe that this cool reception is not the fault of my plan but the symptom of an unimaginative bureaucratic mentality...
...They know what has happened to the value of paper money, and they hold as little of the stuff as they can get away with...
...The caches are then processed, divided into smaller lots, and resold to middlemen-in exchange for large-denomination bills...
...interesting than it appeared to be four years ago...
...Nor is it clear that U.S...
...cash...
...Overall, a recall seems no more difficult to arrange than, say, a typical program of automobile inspection- actually far less, since the holdings of big bills are highly concentrated and the burden of making the substitutions would fall on very few people...
...In particular, it seems likely that they reflect a dramatic rise in the volume of illicit drugs moving through Florida...
...New York payouts of new $100~ rose 85 percent, while in the rest of the system these payouts rose only 38 percent...
...After a short period of time,they would be forced to revert to cash use for the same reasons of practicality and anonymity that led them to trade $100s instead of Picassos in the first place...
...And the ability to insist upon casH payments from customers operis up a special incentive to tax evasion by selfemployed people in high tax brackets, such as doctors arid dentists...
...Organized criminals tend to be more professional in their methods' of concealment, but the basic principle is still the same...
...As a general proposition, this claim is utterly groundless...
...Certainly this virtue of EFT should be considered when we debate the system's desirability...
...When you look at it this way, I suggest that the cash recall scheme is a bargain...
...Similarly, when the Saudis want to send· a covert subsidy to the antigovernment party in South· Yemen, dolla.r bills are far more discreet and ·acceptable· than checks or riyals...
...In the past few years, the cast of suspected big-bill users has gained some surprising additions-more about them later-but the case for a cash recall has, if anything, gotten stronger...
...The dollar's exchange rate against other currencies depends on economic variables like the rate of inflation and the balance of payments, not such details as whether or not a particular series of $100 bills remains in circulation...
...The only remaining complications worth considering have to do with foreign banks, and foreign users of U.S...
...These costs would be a relatively small burden for the banks to pay, considering everything the government has done for them over the years-including protecting them from competition, and providing free services, such as crisp new bills on demand...
...The illegal income that this cash reflects may be even higher, since several hundred dollars of income can be serviced by one $100 bill if the biil changes hands fast enough...
...currency...
...Since the niid-1970s, when President Nixon increased police surveillance along the Mexican border...
...This is why the element of surprise could be retained, even if the government found it necessary to ask for legislation authorizing a recall...
...Fed branches in Houston, Boston, Baltimore, and Denver also showed surprising jumps in purchases of new C-notes...
...But there is strong evidence that tile dramatic growth in big bill demand is out of proportion to the growth of ordinary transactions requiremerits...
...James S. Henry is an economist with McKinsey & Co...
...For example, from 1976 to 1978, the net payout of $100s at the New York Fed rose 62 percent, to nearly $6.2 billion, while net payouts of $1 OOs by all other Fed Branches rose just 15 percent...
...Unfortunately, my original proposal apparently has attracted only fleeting attention from the nation's policy-makers, who seem to have dismissed it as either administratively imp...
...For example, there was the reported case of a dentist whose...
...Neither inflation nor economic growth explains this increasingdema!1d...
...Overseas, the bills could presumably be traded in without the IRS probing around...
...I was trying to dramatize the increasing and mysterious demand in our economy for currency in large denominations-$ 50, $100, $500 bills and up...
...Finally, we have what might be called the Afghan Rebel problem...
...It might reflect, for example, a foreign preference for holding liquid assets in tangible form...
...In 1979 alone these surpluses grew from $3.3 billion to about $5 billion, and the $IOO-bill surpluses rose from $800 million to $1.5 billion...
...A recall may sound like a messy proposition-but only until you compare it with the $20 billion or so we spend on our criminal justice system each year, and the increasingly complicated equipment demanded by the police and the courts...
...On any given Sunday, the Federal Reserve would announce that existing "big bills"-$50s and $100swould no longer be accepted as legal tender, and would have to be exchanged at banks for new bills within a short period of time...
...In the case of the Middle East, the relevant transactions are not drug traffic or tax evasion, but political and commercial payoffs...
...in New York...
...Correcting for inflation, the number of big bills per capita has more than quadrupled since 1929...
...First it has been suggested that the recall of all $ 100 bills on short notice would wreak havoc with the world's financial markets, al)d undermine the confidence that holders of U.S...
...The use of cash facilitates a great variety of transactions that, for legal, political, or economic reasons, are best done under cover...
...This growth does, however, correlate suspiciously well with the recent rise in effective personal income tax levels (and hence with the incentive to evade taxes...
...I have no particular fondness for these types, but there is the possibility that some of them are engaged in pursuits many would regard as necessary- like bankrolling the Islamic insurrectionists who are causing so much trouble for the Russians in Afghanistan...
...Not the banks or businesses...
...wife accidentally threw a coffee can containing $20,000 of' unreported income into the trash...
...An informed source familiar with currency markets in the Middle East tells me that, indeed, there has been a large and growing Soviet demand for $100 bills· on the region's black markets, probably'to supply their political needs...
...And even if word did leak out, the resulting scare would accomplish many of the goals of a recall, without the government having to lift a finger...
...The last argument against the scheme would question its value even if it were successful, characterizing it as just a one-shot action that would merely annoy the criminal community in the short run, and make no long-run difference...
...But many American tourists simply don't carry much of their spending money in the form of cash...
...Inquiries by the Fed to the commercial banks concerning the purchasers' identities were not answered, except that ~n indication was given that the bills were destined for the "Middle East...
...Treasury, 'centers on the unusual surplus of currency' that has been turning up in Florida's Federal Reserve banks in the 1970s...
...My natural incliillition is reinforced by new evidence that has accumulated over the past four years to support my original arguments: Coupled· with the attention recently paid by the media and Congress to the "underground economy," the prominent role of big bills in the careers of such worthies as Tongsun Park,and the recent decision by the Israeli government to conduct a currency reform of its own, this evidence prompts me to try again...
...Or until you think about how much success their policies have had in reducing the level of criminal activity over the years...
...When the tax cheats, Mafiosi, and other pillars ,of the community rushed to the banks to exchange their precious big bills, the IRS would be there to ask some embarrassing questions...
...I have analyzed the Federal Reserve's data on currency receipts in Miami and Jacksonville back to 1970, and the surpluses cannot be explained by tourism...
...The exact dimensions of this activity are unclear because the Federal Reserve tends to keep plenty of "new" and "fit" bills in supply and doesn't usually notice any unusual purchases of currency unless they threaten to exhaust existing inventories...
...Indeed, all of the alleged obstacles to a successful cash recall seem far from insurmountable...
...Federal Reserve officials believe that the Main Bank then sent the bills to the National Commercial Bank of Saudi Arabia in leddah-another bank owned by the Mahfouz family...
...So the level of demand for cash is very peculiar in and of itself, quite apart from any increase in this level...
...If we ass'ume that all of this increase was due to increased drug traffic, we derive an illegal cash surplus of about $1.9 billion in 1978 and $3.3 billion in 1979...
...This would eventually render criminal activity much more difficult, but would not offer a recall's opportunity for catching criminals or destroying the value of their assets...
...We have identified a very odd cast of characters that has high stakes in the availability of big bills, and, at anyone time, is likdy to be sitting on thousands of them...
...Similar bloc~ purchases apparently have recurred several times in the past three years, and there is nO way of telling how many others have escaped attention...
...Alternatively, the cash going overseas might reflect "ordinary" transactions demand for U.S...
...Treasury's estimate of currency in circulation outside the bankirig system has reached nearly $1,600 per American househol~, despite the fact that most people have little use for so much cash...
...Nevertheless, the data we have on Florida's cash inflows permit some rough estimates of the wholesale drug traffic that depends on the use of cash...
...This brings me back to the subject of a cash recall...
...Between October 1978 and December 1979, about $10.4 million per month in new $100 bills was purchased by First City and then resold to the Main Bank of Houston, a non-Fed member bank owned by a wealthy Yemeni, Khaled Bin Mahfouz...
...And most people seem to have responded to the tax that inflation imposes upon them by increasing the velocity of their cash holdings-the speed with which they pass on their cash to others...
...In my previous article, I estimated that in 1976 tax evasion alone might account for $14 billion of the $94-billion cash stock then outstanding...
...ractical or as a one-shot action that would have no long-run impact on criminal behavior...
...But again this is not a 'phenomenon peculiar to the 1970s, and I doubt that it accounts for the uneven bursts of currency buying that have recently been occurring...
...the recent scandal involving kickbacks by the Italian State oil company, ENI, to a Saudi Minister is a typical result...
...Remember that among the recent heavy users of American cash were various international operators who need to discreetly finance political intrigue and armed conflict around the globe...
...More than once or twice...
...The recalls could be repeated...
...There are several theories that might explain this unusual burst in the foreign demand for $100 bills...
...Nor are the logistical problems particularly serious...
...But in the few areas around the world, like Afghanistan, where the United States really may want to sponsor political or military skullduggery, there are surely ways we can do so even in the face of our own currency recall...
...Of course, there is substantial tourist traffic to Florida from other states and from Latin America, which might account for some of these inflows: the Florida State Division of Tourism estimates, for example, that about 32.8 million tourists visited the state in 1979, spending nearly $13 billion...
...If not, you should know that $100 bills now make up over a third of the $120 billion in U.S...
...Meanwhile, the trend toward a "cashless" consumer society has continued apace...
...The most plausible explanation for the large foreign block purchases of U.S...

Vol. 12 • June 1980 • No. 4


 
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