Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

APPENDIX Currency Handling and Management

1. Currency handling operations

a. Operations and organization

In most new countries, the central bank will have experience in issuing currency as a former branch in the old currency area. This experience will include putting notes and coins into circulation, receiving them back, and sorting and counting them to be reissued. By the time the new currency is introduced, it will also have received new bank notes from the printer, counted them, packed them in bundles of usable quantity, and distributed some of the stock of its branches. With the issuance of the new currency, however, its currency handling operations will also have to expand to cover certain tasks it may not have undertaken in the past. These include using detection techniques to discover counterfeit bank notes, checking the quality of the used bank notes it receives to see that they are fit to return to circulation, and participating in the destruction of unfit bank notes.

In many cases, this will require a reorganization of the central bank’s currency operations. Responsibility for these operations could be divided in the following manner:

(1) Putting bank notes and coins into circulation and withdrawing them could be done by the Cashier’s Department. The department should also be charged with detecting counterfeit currency, removing unfit currency from circulation, and the safekeeping of the gold and other valuables of the central bank (such as bearer securities) entrusted to it.

(2) For reasons of internal control and security, the receipt of new currency bank notes, counting them, and packing them for distribution should be done by a department other than the Cashier’s Department, possibly an Issue Department. This department should also be the central bank’s contact with the printer of bank notes and minter of coins, arranging to purchase paper for the bank notes and for their printing.

(3) The Issue Department and the Auditor should cooperate in the destruction of unfit bank notes.

(4) The currency transportation system for all users need not be operated by the central bank and could be converted into a separate company. Until then, it would be appropriate for the central bank to charge other users for this service, with the service being carried out by the Cashier’s Department.

A central bank does not need many branches to carry out currency handling. For example, Denmark manages currency without any branches even though the country includes the Jutland Peninsula and many islands. 1/

The Cashier’s Department will need modern, currency handling equipment for counting, detecting, and sorting. Before entering into a contract, proposals and references from several companies should be obtained by the central bank. On the basis of these references, it could contact major Western central banks to learn about their experiences with the equipment.

b. Bookkeeping, rules, and controls

Accurate and extensive bookkeeping and controls are needed on the stock of bank notes and procedures used in the currency handling. Bookkeeping should be done by pieces of currency, not by denomination. This is because the handling capacity of the Cashier’s Department, as well as the number of bank notes handled by each staff member, the capacity of the vault and the speed of the counting machines all depend on the number of bank notes and not their value.

Rules and procedures for receiving, counting, sorting, packaging, storing, and destroying currency should be drawn up by the Chief Cashier in consultation with the Auditor and approved by the Board of Directors of the central bank. Such rules and procedures are important not only for security reasons but also so that groundless suspicion is not directed at the central bank’s staff.

Staff members handling bank notes, including cashiers and administrators, should be held personally responsible for the quality of their work. Each transfer of bank notes and each administrative action should be fully documented to leave a clear audit trail. The Audit Department will employ audit trails to regularly check the functioning of the departments handling cash. These audit trails will also be useful in tracking errors in handling bank notes when they occur. The rules should also ensure that bank notes are never handled by one individual alone and that the combinations of people handling the currency are rotated frequently, at irregular intervals.

Rules should also be developed to standardize counting procedures. This might include limits on the minimum number of bank notes the central bank will handle in a single transaction, as well as formal descriptions of the number of bank notes in the various packages the central bank will handle. For example, a bundle may always contains 100 bank notes, a packet may always contain 10 bundles and a sack may always contain 20 packets.

2. Management of the currency in circulation after the conversion

The central bank will have to manage the currency in circulation after the conversion. Unlike in a command economy, the central bank should not try to control the amount of currency in circulation. Money holders should determine for themselves what part of their balances to hold as currency and what part to hold as deposits. Allowing money holders to make this choice is part of the central bank’s function to provide an efficient payments mechanism. In addition, the central bank should assure that the new currency bank notes in circulation are of acceptable or higher quality.

It should be pointed out that, while the central bank should not seek to control the amount of currency in circulation, it should control the amount of reserve money in order to influence the amount of money and credit.

BIBLIOGRAPHY

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  • Bennett, Adam, The Operation of the Estonian Currency Board, PPAA/92/3, January 5, 1993.

  • Browne, F.X. (1981), “Forecasting the Demand for Currency and its Denominational Mix,Technical Paper 5/RT/81, Central Bank of Ireland, Research Dept.

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  • Cramer, J.S. (1983), “Currency by Denomination,” Economics Letters, 12, 299303.

  • Coats, Warren,In Search of a Monetary Anchor: A “New” Monetary Standard”, IMF, CBD, mimeo, January 2, 1992.

  • den Butter, F.A.G., and Coehen, R.L. (1982), “The Process of Soiling and the Life of Bank Notes in the Netherlands,Applied Statistics, 31-226237.

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  • Garber, Peter M. and Michael G. Spencer, The Dissolution of the Austro-Hungarian Empire: Lessons for Currency Reform, WP/92/66, July 1992.

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  • Gillieson, A. H. (1977), “Research Into the Extension of the Life of Bank Notes: Results of 1973, 1975 and 1976 Field Trials,Technical Report No. 10, Bank of Canada.

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  • Guitián, Manuel,The Choice of Exchange Rate Regime”, prepared for a seminar on “Exchange Rate Policies in Developing and Transition Economies”, IMF Institute, December 311, 1992.

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  • Hernández-Catá, Ernesto,Introduction of a National Currency,” in Inter-State Economic Relations, in FSU CEPS Working Document No. 63, 16/18 January and 14/17 February 1992.

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  • Kimball, Ralph C. (1981), “Trends in the Use of Currency,New England Economic Review, (September/October), 4353.

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  • Manski, Charles F., and Goldin, Ephraim (1982), “The Denomination-Specific Demand for Currency: The Israeli Experience,international report, Bank of Israel, Currency Dept.

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  • Mayer, Thomas and Gunther Thumann,Radical Currency Reform: Germany, 1948,Finance and Development, March 1990, pp. 68.

  • Osband, Kent and Delano Villanueva,Independent Currency Authorities: An Analytic Primer”, IMF, Staff Papers, March 1993, pp. 202216.

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  • Quirk, Peter J.,Review of Experience with Multiple Exchange Rate Regimes,WP/84/64, March 19, 1984.

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1/

The authors are grateful for helpful comments to Hugh Bredenkamp, Adrienne Cheasty, Manuel Guitián, Carl-Johan Lindgren, Peter J. Quirk, Brock K. Short, and Peter Stella. Any remaining mistakes are, naturally, their own.

1/

Monopolies are constrained by consumers’ demand. If they set the price, demand will determine the quantity. If they set the quantity, demand will establish the price.

2/

Other relevant prices of money are in terms of goods (the reciprocal of the goods’ price level) or in the terms of financial assets (the reciprocal of the interest rate).

1/

For a more complete treatment of the issues relevant to a choice of exchange regime, see Guitián (1992).

2/

Further analysis of currency boards appears in Osband and Villanueva (1992), and Coats (1992). For discussion of the Estonian currency board, see Bennett (1993).

3/

In some cases, like Argentina, the backing is 100 percent of new issues of reserve money (but not in the initial stock).

4/

Except insofar as there are international reserves in excess of full coverage of the domestic currency. The Estonian central bank has recently used the margin provided by its excess reserves (above what is required to back the kroon) to finance some of the costs of commercial bank restructuring.

1/

Intervention is the use of international reserves with the principal objective of changing or supporting the exchange rate.

1/

For an extended analysis of the different kinds of exchange regimes, see Quirk (1989).

1/

Russia, Albania, Bulgaria, and Romania are the other countries in Central and Eastern Europe that are also independently floating, but have not introduced new currencies.

2/

For a fuller presentation of these issues see Quirk (1992).

1/

See Quirk (1984), particularly p. 25.

1/

Quirk (1984), p. 12, documents the ineffectiveness of exchange controls in a number of Fund member countries. In the 1980s, many developing countries with extensive capital controls found that they did not prevent massive capital flight. More recently, virtually all industrial countries have abandoned their sophisticated exchange control systems because they were evaded to the point that they became inoperable.

2/

See Guitián (1992), particularly Section V.

3/

The soft budget constraints on many state enterprises may allow them to hoard foreign exchange, while private enterprises would not.

1/

A currency board system does not require the establishment of a central bank. Such is the case in Hong Kong.

1/

There is, however, little if any difference between issuing a transitional currency and introducing a new currency. Once the domestic currency is no longer fully fixed against the old national currency, the country has effectively left the old currency zone and gained monetary independence--whether it wishes to or not. The only benefit to a transitional currency appears to be the hope, on the part of the authorities, that any mistakes or problems associated with the transitional currency will be forgotten when the “real” currency is introduced.

1/

While a currency conversion converts all the financial assets and liabilities in the system at a single conversion--exchange--rate, a currency reform uses multiple conversion rates.

2/

A currency reform can be a noninflationary way to absorb a monetary overhang, particularly if it is associated with a large-scale default on public sector debt, as in Western Germany after World War II. It works by cutting the value of financial assets, without a corresponding decline in the prices of goods and current expenditures. However, it does result in a redistribution of wealth from financial creditors to financial debtors, which can be massive. The undesired redistributional effects must then be offset by taxes or subsidies, making successful currency reforms quite complex. See Mayer and Thumann (1990).

1/

For an example of the problems of using multiple rates, see Garber and Spencer (1992).

2/

Currency reforms may seem a conduit to help a disadvantaged group, such as pensioners, or to punish an unfavored group, such as criminals or profiteers. However, this is not the best way to address these problems. A subsidized conversion rate only gives the disadvantaged group a one-time transfer and does not confront their underlying problems, e.g., they cannot live on their income. On the other hand, an unfavorable rate is an inefficient way to seek out and punish criminals, which is better done on a case-by-case basis through the legal system. Rather, a temporary freeze of the accounts of those seeking to convert large amounts of funds with the police or the tax authorities examining the source of the funds can allow the prosecution of illegal activities to be handled through normal channels.

1/

Several bank note printing companies estimated minimum efficient scale for producing bank notes ranged from a population of about 20 million to a demand for bank notes of 250 million annually, while the cost of setting up a bank note printing operation was estimated at US$35-45 million.

2/

Although, in most countries issuing new currencies, vending machines probably would not warrant consideration on the short term.

1/

Studies of the life expectancy of banknotes include Gillieson (1977) for Canada and den Butter and Coenen (1982) for the Netherlands.

1/

Payne and Morgan (pp. 45 and 47) estimate the ideal value of the smallest currency unit is between one two thousandth and one five thousandth of the average day’s pay.

2/

See Payne and Morgan (1981) for a useful discussion on this topic.

3/

For example see Payne (1980).

4/

In some countries, the life of a low denomination note is as short as three to eight months, while in most cases it is under one year.

1/

For studies on the demand for currency in a particular country see, Cramer (1983) for the Netherlands, Kimball (1981) for the United States, Manski and Goldin (1982) for Israel and Payne and Morgan (1981) for the United Kingdom. In addition, the impact of inflation is discussed in Chen, and Laurent (1974) and a planning model for central banks is presented in Fase, van der Hoeven and van Nieuwkerk.

2/

Although some models estimate currency deflated by either nominal GDP or total deposits.

1/

Although Agénor and Lennblad (1992), p. 18, do warn that--extended--periods of uncertainty about the conversion date may have adverse effects on prices and distort the portfolio decisions of private agents.

1/

For example, the announcement of the conversion could be made at close of business on a Thursday. Friday could be a bank holiday and the conversion could begin on the following Monday. This would give banks three uninterrupted days to prepare. The disadvantage of declaring a Friday to be a bank holiday is that some people might be caught without sufficient currency for the long weekend. Thus, the announcement might be made on Friday, with Monday declared to be a bank holiday.

1/

To minimize arbitrage possibilities, this would however require that the exchange value of the coupon would need to be restated in terms of the new currency from the start of the conversion period (presumably at the official conversion rate for old currency bank notes into new bank notes during the conversion period).

2/

Some countries have attempted to reduce this risk by closing their borders during the conversion period. However, such extreme actions are expensive, difficult, and may not work.

1/

Giving customers a choice of currency exposes the banks to foreign exchange risk. If the new currency were expected to appreciate against the old, banks’ borrowers would wish to keep their loans denominated in the old currency and to have their deposits expressed in the new. If expectations were fulfilled, the banks would suffer foreign exchange translation losses.

2/

On the other hand, in the case of Ukraine, Russia agreed that all nonresident accounts would be converted into the new currency.

1/

Accusations of dumping arise occur during most currency conversions. This could occur in the ruble zone of the FSU, as non-ruble zone FSU importers pay in cash rubles for ruble zone imports because of the breakdown of the inter-republic payments system.

2/

It would be advisable that the disposition of the withdrawn currency be negotiated before the conversion.

3/

It should also not bear the risk of inflation cutting the value of the old currency notes, since this could impair the capital of the central bank. However, if the interest rate on old currency deposits abroad was considered “reasonable” the bank notes could also be redeposited.

1/

An initial exchange rate is not necessary with a free float; however, if any actions are taken to set a starting rate, even an indicative one that is not defended, large movements in the rate may be damaging to confidence.

2/

Dollarization makes the implementation of monetary policy less predictable, and thus more difficult.

1/

This could even be done before a country issues its own currency.

1/

To do this, the Central Bank of Denmark has established 17 “depot banks” in the outlying areas. Each is operated by a commercial bank branch on behalf of the central bank to deliver currency to and receive it from commercial banks’ branches (including the branch operating the depot bank).

Introduction of a New National Currency: Policy, Institutional, and Technical Issues
Author: Mr. Hernán Cortés Douglas and Mr. Richard K. Abrams