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The Rise of the Shotgun Banknote Switch

The Rise of the Shotgun Banknote Switch

Every decade or two, central banks replace their existing issue of banknotes with a new issue. The main reason they do this is to thwart counterfeiters, who by then will have started to get pretty good at duplicating the existing version. Central bankers have usually tried to make the process as convenient as possible for citizens by offering long, drawn-out — sometimes even indefinite — switching periods. Anyone who finds an old note stored away in a cupboard needn’t worry. It can still be spent at the neighborhood grocery store.

But this is changing. It is getting increasingly fashionable among central bankers to institute rapid and inconvenient shotgun note switches. India’s 2016 demonetization is the most famous example, but now Kenya has taken up the baton. Nor is the phenomenon confined to developing countries. Swedes lived through a series of shotgun switches between 2015 and 2017. I won’t get into the Swedish episode in this article, but those who are interested can read more here.

India and Kenya have marketed these shotgun switches as a form of “cleansing” or “medicine.” But central bankers have not proven to citizens that the inconveniences they must endure during a rapid switch are compensated by the purported benefits. Until we have real evidence, I remain skeptical of the usefulness of these switches.

First, let’s outline the typical stages of a banknote switch.

Introduction: The central bank stops printing the old notes and introduces new ones into circulation.

Co-circulation window: A co-circulation period begins in which both the old and new notes are legal tender and can be used to purchase goods and services in shops and other establishments.

Private-bank swap window: Banks swap old notes for new ones or deposits.

Central bank swap window: The central bank promises to swap old notes for new ones.

 …click on the above link to read the rest of the article…

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