Cash & Liquidity Management

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The Journey of Currency This article reveals what the author calls ‘the secret life story’ of the common banknote, describing production processes, materials including polymers and plastics, how the notes are stored, put into circulation and withdrawn at the end of their useful life, and the demand for ever more sophisticated levels of security. As compliance with anti-money laundering and counter-terrorism financing regulation is increasingly being demanded in most countries around the world, it is becoming more important to step up the levels of automation of procedures surrounding the management of currency.

The Journey of Currency

by Tim Shaw, Product Manager, IMX Software

While the US is reported as fast becoming a cashless society, countries such as Great Britain, amongst others hit by today’s economic downturn, is seeing a significant increase in the use of cash. For example, a recent survey by the British Retail Consortium showed that Britons made 60% of transactions in 2007 using cash, and the Bank of England produced 500m new notes in 2007 alone. The research also showed that some members of society are turning their backs on plastic in a bid to reduce the risk of falling into debt or being hit by fraud. Consumers try to keep control of their finances using different methods, but one thing is certain: cash still has its place in today’s increasingly global society, and if anything, its use is set to rise further in many regions.

The average paper banknote costs around £0.03 to produce in the UK and $0.04 to produce in the US.

The world of physical currency trading is not an easy one to understand. There are billions of notes making their way around each country at any one time and every note has been through a rigorous system designed to make sure it is tagged and recorded at every possible opportunity. With banknotes produced, recycled, restocked, distributed overseas, washed and torn, and eventually withdrawn, the story of a banknote’s journey through its lifetime is one which warrants attention both inside and outside of the treasury management profession.

The initial production of banknotes is fully controlled by central or reserve banks (for example, the Bank of England, the European Central Bank or the US Federal Reserve), which retain responsibility for the monetary policy of individual countries or groups of member states around the world. While some central banks produce their own banknotes, others outsource the production of banknotes to specialists such as DeLaRue and G&D, and/or to government-owned subsidiaries such as the Bureau of Engraving and Printing in the US.

Banknote production

Banknotes are produced using printing presses which are not commercially available, in order to limit the risk of fraud. The materials used in production vary from country to country, with individual choices impacting on factors such as the cost of production, life expectancy and the risk of counterfeit. The average paper banknote costs around £0.03 to produce in the UK and $0.04 to produce in the US, with an average lifespan of around two years depending on its denomination. Plastic banknotes cost twice as much to produce but they last four times longer.

The majority of the world’s banknotes are made of toughened starch paper, which is sometimes mixed with linen, abaca, or other textile fibres. The paper used is therefore different from ordinary paper; it is much more resilient, resists wear and tear, and does not contain the usual agents that make ordinary paper glow slightly under ultraviolet light. Unlike most printing and writing paper, banknote paper is also impregnated with polyvinyl alcohol or gelatin to give it extra strength and a mould-made watermark and security thread are incorporated during the paper forming process in order to reduce the risk of counterfeit and fraud.

Polymer or plastic notes, first issued as a currency in 1988 in Australia, are much more durable than paper banknotes. They make counterfeiting much more difficult, but are a lot more expensive to produce. Particularly in warm and humid climates, polymer substrates are less prone to degradation and stay in circulation for much longer; countries that have converted fully to polymer banknotes include Australia, New Zealand and Vietnam. Brazil and Israel, amongst others, also print some notes on polymer, and Hong Kong is currently undertaking a two-year trial.

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