Albert Mitchell

Robert W. Gilmer

English

Research Papers in Economics

Houston Business
A Perspective on the Houston Economy
Growth in cash use 
is particularly
striking where 
economic growth 
is strong, as in
cities like Houston 
and Dallas, 
and recent years 
have seen a
definite shift in 
cash usage toward 
the Southwestern 
United States. 
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1
Cash Use Grows in Houston
The exact role of cash in the economy is difficult
to pinpoint. Although we know notes and coin
held by the public grew from $270.3 billion in 1991
to $464.1 billion in 1998—an 8 percent annual
growth rate—it is unclear how much of that cash
flowed overseas; a large fraction of U.S. currency
is held abroad as a hedge against inflation or
social instability in other countries. Further, no one
counts the number or value of U.S. cash transac-
tions. They are inherently private, and no bank or
public intermediary records and moves the funds
from one pocket to another. 
It may seem surprising that the oldest form of
making payments is still growing so rapidly. Per-
haps even more surprising is that in this age of
electronic commerce, paper transactions still dom-
inate the U.S. payments system. Electronic transfer
is still growing rapidly, but cash and the paper
check remain the workhorses for Americans to
make their daily purchases and pay their bills. 
For noncash transactions, the role of the paper
check differs depending on whether you examine
the number or the value of transactions. Either way,
however, the check is dominant, accounting for 70
percent of the 94.5 billion noncash payment trans-
actions in 1998 and 82 percent of their $94.5 tril-
lion value. The biggest and fastest growing rival
for checks, in terms of dollars spent, is the direct
deposit of payroll and direct payment of bills through
automated clearinghouses belonging to the Fed-
eral Reserve or private associations. In terms of the
number of transactions, the competition to checks
arises from the growing use of credit and debit
cards for small transactions (averaging $60 per
purchase in recent years). The transaction share
held by the credit card has flattened in recent years,
while the debit card has come from nowhere in
1991 to grab 6 percent of transactions in 1998.DIs that find themselves short of cash sub-
mit an order to withdraw currency from the
Fed inventory. The Fed debits the DI’s reserve
account for the amount withdrawn, and the DI
must cover the debit by the end of the business
day to keep the reserve account in balance.
The Fed first pays out previously circulated,
but fit, currency from its inventory. If fit cur-
rency is not available, the Fed will place in cir-
culation new notes printed by the Bureau of
Engraving and Printing. 
WHY DOES CASH USE KEEP GROWING? 
The Federal Reserve processes cash in 36
offices across the United States. Table 1 lists
those offices with the fastest growing cash-
processing operations over the 20-year period
from 1979 to 1999 and also shows growth rates
and rank over the 10 years from 1989 to 1999.
The figure shown is the annual growth rate of
all currency paid and received, taken from the
basic productivity statistics used to compare Fed
cash operations. The 36 offices combined aver-
aged 6 percent and 5.3 percent growth, respec-
tively, during the two periods. Note that Houston
had an 8.7 percent annual growth rate during
1979–99 and a 10.7 percent rate in 1989–99,
more than double the System average. The
four Eleventh District offices—Dallas, El Paso,
San Antonio and Houston—have all been among
the top six offices since 1979, joined by Char-
lotte and Seattle. 
Comparing cash use with other payment
media, most estimates put cash first in terms of
the number of transactions and probably sec-
ond only to checks in the value of transactions.
The growth in the value of cash transactions is
probably well above checks (2.6 percent per
year from 1991 to 1998) but short of the increase
in debit and credit cards (16.3 percent). Growth
in cash use is particularly striking where eco-
nomic growth is strong, as in cities like Hous-
ton and Dallas, and recent years have seen a
definite shift in cash usage toward the South-
western United States. 
CASH AT FEDERAL RESERVE BANKS
For a different perspective on the growing
use of cash, we can look at the payment and
receipt of cash at Federal Reserve Banks. The
Federal Reserve plays a key role in the distribu-
tion of cash: it maintains a cash inventory for the
banking system, puts currency into circulation,
maintains the quality of currency in circulation
and protects U.S. currency from counterfeiters.
Imagine that on Friday afternoon, every
depository institution (DI) in Houston—bank,
credit union, thrift or savings bank—has exactly
the right inventory of cash. DIs are prepared to
stock their automated teller machines (ATMs)
for weekend withdrawals and to cash cus-
tomers’ payroll and other checks. They will pay
out a substantial share of cash on hand over
the weekend as the public withdraws cash and
spends it at the mall, the rodeo or a Rockets
game. On Monday, retailers deposit this cash in
their own DIs. By Monday afternoon, roughly
half the DIs in Houston hold too much cash to
satisfy business needs, while the other half
hold too little. 
The Fed accepts excess cash from DIs that
hold a surplus and credits each depositing DI’s
reserve account, allowing it to invest or loan
the money rather than hold cash on its books
as a nonearning asset. The DIs deliver the
deposited funds to the Fed in straps of 100
notes, bundled into groups of 10 straps of the
same denomination. After an initial count of
straps and bundles, the DI is credited for the
deposit. High-speed currency processors will
later verify the deposit, counting the notes at a
rate of about 100,000 per hour. The machine
will also verify the denomination of each note,
remove suspected counterfeits and destroy cur-
rency that is worn, soiled or otherwise unfit to
be recirculated. 
Table 1
Fastest Growing Cash Operations in the 
Federal Reserve System, 1979–99
(Ranked by average growth of cash paid and received)
1979–99 1989–99
Growth rate Rank Growth rate Rank
(percent) (percent)
Charlotte 9.8 1 10.6 4
El Paso 9.4 2 10.9 2
San Antonio 9.2 3 8.9 8
Dallas 9.0 4 10.4 5
Seattle 8.9 5 11.1 1
Houston 8.7 6 10.7 3
Salt Lake City 8.7 7 6.5 13
Little Rock 8.6 8 9.9 6
Helena 7.9 9 9.0 7
Portland 7.7 10 7.8 11
Nashville 7.7 11 8.1 9
Omaha 7.7 12 7.9 10
Atlanta 7.5 13 6.9 12
System average 6.0 5.3Several factors keep cash growing. One is
easy access to cash through ATMs, now seem-
ingly on every corner. The number of ATMs in
the United States grew from 83,545 in 1991 to
187,000 in 1998. The number of ATM transac-
tions increased at an 8.3 percent annual rate,
from 6.4 billion in 1991 to 11.2 billion in 1998,
and the annual value of withdrawals grew at a
similar rate, from $429 billion to $762 billion. 
Cash plays an important role because it
offers the user anonymity. Cash is king of the
underground economy. We’re all aware of the
plumber or painter with two price scales—one
for cash and one for payment by check. In the
Southwestern United States, the high rate of
immigration compounds the cash factor. Many
legal immigrants come to the United States
with little experience or trust in banking insti-
tutions, and illegal immigrants are forced into
the anonymous cash economy. 
An important event boosting growth in
1999, an end-year in the growth rate calcula-
tions in Table 1, was Y2K. Although Y2K itself
proved a non-event, it had two important effects on
the cash picture. One was simply the prepara-
tion for the event itself; it boosted the volume
of cash paid out in late 1999 and, thus, the
overall rate of growth. However, Y2K should
have affected all Fed offices more or less equally,
changing the ranking less than the growth rate.
And the growth rate was affected less than one
might have expected; for example, the Houston
operation paid out 2.8 percent more cash in the sec-
ond half of 2000 than in the same period of
1999, the Y2K “emergency.”
A more permanent effect of Y2K may be
simple awareness. For the first time in many
institutions, Y2K involved all levels of DIs’ man-
agement in cash planning. DIs are now more
aware of the cost of holding cash and of the
need to systematically plan to minimize cash 
balances as part of sound banking practices.
Cash-rich DIs may now be depositing more fre-
quently and in a more timely fashion with their
local Fed.
Perhaps the most obvious and important
factor related to our list of fast-growing cities
for cash processing, however, is rapid eco-
nomic growth. Except for Omaha, which is
near the bottom of the list, every city can be
described as a Sunbelt or Western city. These
cities have all been leaders in population and
regional economic growth over the last 20
years.
There seems to be a short-run relationship
between the local economy and cash processing.
With Houston as an example, we used a regression
analysis to relate growth in the volume of cash
processed to growth in real per capita income, to
the local inflation rate and to a series of dummy
variables that reflect policy and other exogenous
changes that have affected cash growth since 1975.
The result is a strong relationship between per
capita income growth and cash processed, with a 1
percent change in income per person implying a 1
percent increase in cash processed per person. The
estimated relationship is limited to about one year.
Over longer periods, a cash-processing–eco-
nomic-growth relationship emerges as well. We
compared the rank order of the 36 Fed offices in
cash-processing growth (partly listed in Table 1)
with the rank order of the same 36 cities based on
employment and personal income growth and
computed Spearman rank-order correlation coeffi-
cients. Table 2 describes the estimated correlation
coefficients (r) and their associated t-statistics, with
t-statistics greater than 2 indicating a strong statis-
tical relationship. Cash and economic growth, as
measured by income or employment, are linked.
CONCLUSION
Cash is still a linchpin in the U.S. payments
system. Cash use is growing rapidly, particu-
larly in the South and Southwest. One addi-
tional sign: major new Federal Reserve vaults
and cash-processing facilities have recently
been completed in Birmingham, Ala.; are
under construction in Atlanta and Phoenix; and
are being planned for Houston. The cashless,
all-electronic society remains a distant vision.
—Robert W. Gilmer 
Albert Mitchell*
*Mitchell is a research associate with the 
Houston Branch of the Federal Reserve Bank 
of Dallas. 
Table 2
Spearman Rank-Order Correlation Coefficient: 
Cash Growth and Income or Employment
1979–89 1989–99 1979–99
Job growth
r 0.33 0.56 0.63
t 2.02 3.92 4.68
Real income
r 0.25 0.47 0.47
t 1.57 3.06 3.09H
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For more information, contact Bill Gilmer at (713) 652-1546 or bill.gilmer@dal.frb.org.
For a copy of this publication, write to Bill Gilmer, Houston Branch, 
Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252.
This publication is available on the Internet at www.dallasfed.org.
The views expressed are those of the authors and do not necessarily reflect the positions
of the Federal Reserve Bank of Dallas or the Federal Reserve System.
News on the Houston economy continues
to be good. Revised data point to more than
60,000 new jobs in 2000, and local labor mar-
kets continue to tighten with the unemploy-
ment rate well under 4 percent. The Houston
Purchasing Managers Index continues to push
past 60, while the U.S. index sinks to 41.9—
a near-recessionary level. Oil and natural gas
prices seem to be carrying the local economy
forward, even as the U.S. economy down-
shifts. 
RETAIL AND AUTO SALES
After a slow fourth quarter, Houston area
retailers report a pickup in the sales pace.
Consumer traffic and interest have improved,
although some promotions and discounts are
still necessary to keep the merchandise mov-
ing. Auto sales in December and January ran
4 percent below the figures for 12 months ear-
lier. Sales were still robust, but auto and truck
sales in Harris County fell short of all-time
records set a year earlier. 
ENERGY PRICES
Over the past six weeks, the price of
crude oil strengthened to $29–$30 per barrel
as OPEC cut production in response to slower
world growth. The dominant factor in heating
oil and natural gas markets has been the
weather. After one of the coldest starts to 
winter in U.S. history, January brought normal
weather and February warmer than normal
weather. Heating oil inventories looked criti-
cal in December but have now returned to
levels above those of a year ago. Natural gas
inventories are 30 percent below year-earlier
levels, but natural gas has slowly drifted down
from $10 to a still-high $5 per thousand cubic
feet. 
Fears of shortages of MTBE and reformu-
lated gasoline have kept gasoline prices high.
With heating oil in ample supply, refiners began
an early turnaround in preparing to produce
gasoline for the coming driving season. This
also reduced capacity utilization and produc-
tion and helped keep profit margins strong. 
PETROCHEMICALS 
Petrochemical markets are slowly adjust-
ing to declining natural gas prices, restarting
methanol, ammonia and ethylene production
that had closed down in response to $10 nat-
ural gas. Inventories and spot markets have
dried up for ethylene and polyethylene, and
healthy price increases have been required to
get these plants to resume production. Man-
ufacturers of other petrochemicals, such as
polypropylene and polyvinyl chloride, are
still struggling with high inventories. 
EXPLORATION
Labor and equipment shortages are keep-
ing domestic oil drilling in the range of 1,100
to 1,200 working rigs. Drilling in the United
States remains heavily oriented toward natural
gas. Over 80 percent of working rigs are
drilling for gas, and some new projects are
counting on natural gas prices having found
a new plateau in excess of $3 for several
years into the future. International activity
remains about 20 percent below the last peak
in the drilling cycle, leaving a gap in oil ser-
vice company revenues. Respondents blame
mergers among the largest oil companies,
which have left decision-making on large cap-
ital expenditures in limbo as they focus on
the consolidation process. 
HOME SALES 
Houston-area new home sales dropped
6.8 percent in January from the year-earlier
period, but local builders indicate that the
market quickly snapped back in February as
interest rates fell. The used home market set
an all-time record for January sales, which
were up 3.6 percent over the year earlier.
Respondents cite relocation of oil company
employees into the Houston metro area as an
important factor in the local housing market. 

Cash use grows in Houston

http://www.dallasfed.org/assets/documents/research/houston/2001/hb0102.pdf

Cash use grows in Houston

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