Black Market - Traded Goods and Services - Currency

Currency

Money itself is traded on the black market. This may happen for one or more of several reasons:

• The government sets ("pegs") the local currency at some arbitrary level to another currency that does not reflect its true market value.
• A government makes it difficult or illegal for its citizens to own much or any foreign currency.
• The government taxes exchanging the local currency with other currencies, either in one direction or both (e.g. foreigners are taxed to buy local currency, or residents are taxed to buy foreign currency).
• The currency is counterfeit.
• The currency has been acquired illegally and needs to be laundered before the money can be used.

A government may officially set the rate of exchange of its currency with that of other currencies, typically the US dollar. When it does, the peg often overvalues the local currency relative to what its market value would be if it were a floating currency. Those in possession of the "harder" currency, for example expatriate workers, may be able to use the black market to buy the local currency at better exchange rates than they can get officially.

In situations of financial instability and inflation, citizens may substitute a foreign currency for the local currency. The U.S. dollar is viewed as a relatively stable and safe currency and is often used abroad as a second currency. At the present time, $340 billion dollars, roughly 37 percent of all U.S. currency is believed to be circulating abroad. The most recent study of the amount of currency held overseas suggests that only 25 percent of U.S. currency is presently held abroad. The widespread substitution of U.S. currency for local currency is known as defacto dollarization, and has been observed in transition countries such as Cambodia and in some Latin American countries. Some countries, such as Ecuador, abandoned their local currency and now use US dollars, essentially for this reason, a process known as de jure dollarization. See also the example of the Ghanaian cedi from the 1970s and 1980s.

If foreign currency is difficult or illegal for local citizens to acquire, they will pay a premium to acquire it. U.S. currency is viewed as a relatively stable store of value and since it does not leave a paper trail, it is also a convenient medium of exchange for both illegal transactions and for unreported income (tax evasion) both in the U.S and abroad.