Since 1961, the ratio of currency in circulation to demand deposits has been rising. In the November/December 1977 Financial Analysts Journal Peter Gutmann attributed this rise to growth in the subterranean economy. But, while the per capita value of currency in circulation — $381 at the end of 1976 — may seem surprisingly high compared with what most of us carry in our pockets, economic models have been predicting it successfully since the 1950s.

Professor Garcia asserts that a shortfall in demand deposits, rather than an increase in holdings of cash, has caused the currency ratio to rise. She cites among the reasons for the shortfall corporations’ growing use of repurchase agreements and consumers’ growing use of negotiable order of withdrawal (NOW) accounts, telephone transfers between savings and checking accounts, savings deposits, checking accounts at mutual savings banks, money market mutual funds and bank credit cards.

An adjustment for these reductions in the use of demand deposits produces a currency ratio comparable to that of the early 1950s and late 1960s. Changes in the ratio thus provide no information from which to estimate the magnitude of the subterranean economy.