How L.A. Became Cash Capital of U.S.
It’s official: Last year, for the first time, the Los Angeles branch of the Federal Reserve system led all others in cash surpluses. Los Angeles attained its currency preeminence thanks to a 72% increase in surplus cash over 1991, enabling a leap ahead of Miami, the perennial winner until 1992.
What does this mean? That banks in this part of the country took in--and thus deposited with the local Fed--far more cash than they gave out.
Who cares? Not nearly enough people. But the numbers are watched by a savvy few who want to track trends in investment, trade and, especially, illegal activity.
Such people tend to attribute the sudden huge increase in surplus cash at the Los Angeles branch to two factors: money pouring in from Asia, and money pouring in from illegal activity. They are struck by the magnitude of the increase in a year when the Southern California economy performed poorly.
“It’s an unprecedented jump,” says Charles Intriago, a former assistant U.S. attorney in Miami who publishes a newsletter called Money Laundering Alert.
There are several explanations for the enormous leap in the Los Angeles currency surplus, none of them entirely satisfactory. In general, though, the good part of this news is that cash is not fleeing. In fact, it appears to be flooding in.
Cash outflows in the region only fell $2.3 billion. The surplus widened so much because inflows grew by $5.7 billion. The bad part is that this was indeed cash, and it wasn’t a byproduct of sightseeing.
There is general agreement that large cash surpluses imply illegal activity. The latest figures are thus held to confirm the position of Los Angeles as a center of money laundering, the process whereby ill-gotten gains are introduced into the banking system, where they become indistinguishable from all other gains. The idea is to turn greenbacks into electronic blips that, perversely, are easier than cash to spend and invest.
Undocumented cash gets into banks in many ways. People spend it in stores, for example, where merchants at the end of the day deposit it down at the bank. The arrival in Southern California of an excess of cash no doubt helps stimulate the region’s economy, although obviously not enough to offset other factors in the non-cash economy--such as layoffs in the aerospace industry--that are now acting as a drag.
But why the sudden cash increase? No one has a good answer. One is that stepped-up drug enforcement elsewhere has made Southern California a relatively easier point of entry. And, although the jump this year was remarkable, the local currency surplus rose 40% from the year before.
Of course, cash surpluses aren’t just the result of drug dealing and the like. Tourists, for example, bring cash to certain Fed districts from all over the world. Jacksonville always shows a surplus because its zone encompasses Orlando, the location of Disney World.
It’s only natural that the Los Angeles zone would run surpluses. Tourism is a big deal in Southern California, and the Los Angeles Federal Reserve zone also includes Las Vegas, that black hole for cash, as well as Arizona. In California, it reaches from the Tehachapis to the Mexican border.
Yet tourism can’t possibly explain the enormous widening of the zone’s currency surplus in 1992. For example, the Nevada Gaming Control Commission says that last year Nevada casinos only took in 4% more than in 1991. And the Los Angeles riots were an effective tourist repellent for much of Southern California.
In an effort to figure out why these cash surpluses occur at all, the federal government has established the Financial Crimes Enforcement Network, known as FinCEN, a little-known interagency task force that includes employees of the Federal Reserve and the Treasury Department.
FinCEN is still working on the problem, Meanwhile, there are several plausible reasons for the large surpluses in Los Angeles. Perhaps the most important one is cash brought in from foreign countries.
Weak or strong, the dollar is a worldwide currency. Of about $330 billion in U.S. cash circulating today, half or more is overseas. Things happen sometimes that makes people bring some of that money here.
Falling California real estate prices might be an example. Asian investors have been drawn to this market for years; they may perceive a buying opportunity. Because of political uncertainty, taxes and the underdeveloped banking systems of some countries, many Chinese entrepreneurs are accustomed to dealing in cash.
Intriago also contends that capital from Hong Kong--some of it the result of organized crime--is arriving in search of refuge from the colony’s eventual takeover by the Communists. An international banker I know disputes this; he says Singapore and Vancouver are likelier destinations for Hong Kong flight capital.
That brings us to money laundering. Dozens of clandestine desert airstrips, a leading port, a major international airport, the long coastline and border with Mexico and established ties with Latin America are said by law enforcement authorities to contribute to a gigantic problem. A huge proportion of America’s cocaine supply--authorities have said as much as half--passes through Southern California.
Drugs are enormously profitable. Sooner or later, freezers and basements fill up with money. The amounts get too large to be spent in greenbacks. The cash has to get into the banking system.
The effect of large cash surpluses on a region’s economy isn’t well understood. And the Federal Reserve won’t release more precise figures on where in each large zone the cash comes from, so it’s impossible to separate Los Angeles from, say, Las Vegas.
But as pleasant as it might be to think of all this cash flowing into the region, its sources--and uses--often aren’t very pretty, as the experience of the former leader in this category amply demonstrates. What next, “L.A. Vice”?
Dubious Distinction Last year the Federal Reserve’s Los Angeles branch, which includes Las Vegas, Arizona and all of Southern California, surpassed Miami as the district with the largest year-end cash surplus. Authorities say large cash surpluses often point to illegal activities, such as drug dealing and money laundering. Los Angeles 1992: $8.15 billion Miami 1992: $5.36 billion Source: Money Laundering Alert, from the Federal Reserve System
Where Cash Is King These Federal Reserve zones had currency surpluses last year; banks in these sub-districts took in more cash than they could use. The numbers below, in millions, represent the difference between cash delivered to the local Federal Reserve office and cash disbursed.
City 1989 1990 1991 1992 Los Angeles $3,465 $3,381 $4,748 $8,145 Miami 5,097 5,396 5,731 5,363 Jacksonville 2,379 2,829 2,596 2,638 San Antonio 2,437 2,134 2,134 2,284 Philadelphia -165 44 329 610 Buffalo -750 -701 -417 521 El Paso 816 664 544 469 Nashville 423 475 431 370 Denver 489 464 460 279 Helena 81 100 91 86 Little Rock 73 109 112 84
Source: Money Laundering Alert, from the Federal Reserve System
