Last week, the Organization for Economic Cooperation and Development in Paris issued a new report on the underground economy. This is only the latest study showing that a large fraction of employment and production in major countries as well as developing nations is taking place off the books, unrecorded in national accounts and untaxed by governments.

 According to the report, the underground economy varies from 1.5 percent of gross domestic product in the United Kingdom to almost half in the Kyrgyz Republic. The OECD does not present data for the United States, but there is much data showing that it is a growing problem here, as well.

 A recent book, "The Shadow Economy: An International Survey" (Cambridge University Press) by economists Friedrich Schneider and Dominik Enste, estimated the U.S. underground economy at between 6.7 percent of GDP and 13.9 percent in 1990, depending on the method used for calculation.

 One common method is to look at currency in circulation as an indication of underground economic activity. By its nature, such activity is done almost entirely in cash so as to avoid detection by the authorities through checks or credit cards. On this basis, underground economic activity in the United States has probably risen sharply since 1990.

 According to the Treasury Department, in 1990 there was $1,105 of currency in circulation for every American. By March of this year, that figure had risen to $2,455, an increase of 122 percent. It is highly unlikely that all of this increase is due to the needs of consumers to buy more goods and services, because per capita personal consumption expenditures only rose by 79 percent over the same period. This suggests that at least 35 percent of the increased demand for cash was for underground economic activity.

 A further indication that this is the case is shown by looking at the composition of currency in circulation. Since 1990, 84 percent of the increase in currency is accounted for by $100 bills. Such bills now represent 71 percent of the monetary value of all U.S. currency, up from 52 percent in 1990. Average people do not ordinarily use $100 bills, but they are used heavily in the underground economy, which includes drug dealing and other illegal activity. Hence, it is reasonable to assume that the increased demand for $100s is due almost entirely to an increase in the underground economy.

 Of course, even if this is true, it doesn't necessarily mean that the underground economy is growing here. U.S. currency is the medium of exchange of choice for underground activity worldwide. Indeed, 45 percent of U.S. currency circulates outside the United States for this reason. According to the Commerce Department, the United States "exported" $16.6 billion in currency last year, almost all of it in the form of $100 bills.

 The former chief economist for the International Monetary Fund notes that the European currency, the euro, is now competing for the underground economy's business by having 500 euro notes, worth more than five times the U.S. $100, the largest bill printed by the Treasury in more than 50 years. He notes that $1 million in $100s would fit in a briefcase, but $1 million worth of 500 euro notes would fit in a purse -- a big advantage in the underground world. Continued...