Why not demonetize old bills?

Factual Questions
1

Since our beloved dollar is currently unpopular, wouldn’t this be a great opportunity to demonetize all the old (non-watermarked, old design) paper money.

Give a six month heads-up and then say they’re useless. This’ll make all those crooked operations and mattress stuffers have to bring their cash to the banks to exchange. A few money launderers and drug dealers and tax-evaders would get caught in the process, since the banks could (and should) demand accountability on any huge amounts being brought in (like they do when you transport large amounts of cash in/out of the country).

Lots of other countries demonetize their old paper after a while, England comes to mind. No one thinks less of the British Pound.

Would this be a bad idea?

2

Just for the record - even after they’re discontinued, old bills can still be redeemed by going direct to the Bank Of England - they do after all have a promise on them that makes no mention of expiry.

3

What problem are you trying to solve? Counterfeiting?

4

Mattress stuffing is not a crime. How do you distinguish legal savings from illegal lucre?

Is the benefit worth the cost?

5

If the US did that, it would likely trigger more financial instability in the markets.

One of the strengths of the US financial system is that the US federal government does not default on its debt. It keeps its financial promises, in good times and bad. That’s one of the reasons that the US dollar has traditionally been a currency of refuge for people from other countries that are going through financial turmoil.

If the US government were suddenly to change that policy, it would send tremors through the financial system. If the US is prepared to default on the greenback, what other federal financial paper will the government default on next?

In times of financial uncertainty, the last thing a government wants to do is create more instability. The message the US needs to stick to is that the federal promise to pay is good - whether a promise of one dollar, or a promise to pay a trillion, whether made 50 years ago or last week.

If the US abandoned that policy, you’d see two types of bank runs - consumers standing in line to exchange their old dollars for new ones, and also likely asking for some euros while they’re at it, and foreign creditors of the US government cashing in their Teasury bonds.

And why? what’s the pressing need? old bills regularly get taken out of the sysytem as they get torn and worn ,so what problem is the OP trying to solve?:confused:

6

Just to echo the above posters, the US has NEVER demonetized any paper money since they began issuing in 1862. I don’t think there are more than 2-3 countries in the world that can say that. Even the Swiss won’t redeem their banknotes from before 1976. It’s all about confidence. It’s a confidence game. :smiley:

7

I’ve said it here and in real life before and I’ll say it again.
Everytime they put out new bills and tout all the great anti-counterfeiting measures the new bill has, I just shrugg my shoulders and say “I’ll just keep counterfeiting the old ones”*
*I don’t counterfeit money.

8

I don’t know what the OP is trying to solve, but I’ve always figured the government is trying to eradicate counterfeiting by making the new bills increasingly harder to copy. But if they don’t get rid of the old ones who cares. What difference does it make if the new bill has a watermark, a strip, color shifting ink, microprinting etc etc etc, if I can just make a copy of a 60 year old bill that doesn’t have any of those security features?

9

I’m not sure what BwanaBob is trying to do with his scheme, but it reminds me of the script changeovers in the military.

For those of you who don’t know how it work(s)(ed), at least in the Vietnam era, when a US military person arrived in Vietnam, he exchanged all greenbacks for military script of the same denominations. They were cheaply printed, smaller-than-dollar paper slips, and intended to be used only for on-base transactions. For off-base, we were supposed to convert any amount(s) we wished into the local currency, piasters.

However, contact between locals and GIs, as you might expect, was common, and the soda sellers would take US military script as well as piasters. Convenient for all.

Then one day, without warning to any but the highest officers, all US bases were shut down and we were forced to exchange our script for a different series, with a different color scheme. We could exhange as much as we wanted on that day, but knew that the following day, the old script would be worthless and could not be exchanged.

The ostensible purpose was to screw all the black market dealers, but it also screwed any legitimate merchants who had accepted script on faith, as they were not allowed to convert to the new series. And for a long time after that, no local would accept US script of any kind. Personally, I think it was just the government’s way of making money by defaulting on their debts and thumbing their nose at anyone who complained.

This procedure was the subject of a MASH episode, so it wasn’t a one-time thing.

If the US did the same thing with greenbacks, I suspect the world would lose faith in us just like the Vietnamese did in the military script which they innocently traded.

10

Bills wear out regularly. Sure, it might not stop counterfeiting operations right this second, but in 10 years or so a counterfeiting ring will have a much harder time laundering their fake cash if it looks out of date.

11

I would defy anyone to print up brand new $100 bills in the old style and successfully pass them around. After all, old style $100s are going to be somewhat worn. :wink:

12

But the key feature you had here, is that the change was enacted suddenly and with barely any warning. This is not how countries who demonetise their bills tend to operate. In the UK we tend to get a good year or so’s warning. (and as stated, the central bank will take old notes from as far back as you like)

So whatever argument you were trying to make about such a system being undesirable, it loses as soon as you understand that the ‘gotcha’ part of it is entirely optional.

13

I don’t see why demonetizing old bills would add to instability. Here in Sweden it is standard practise to invalidate old bills when new ones are introduced. Never have I heard of anybody calling this destabilizing. They seem to give at least a year warning, during which the old bills are decirculated. If you still have old currency left, banks usually accept old bills for a longer period while stores stop accepting old currency. The central bank usually allows for redemption of bills even after regular banks stop, but then you have to fill in a form and describe the reason for being late.

14

There are probably a lot more old U.S. dollars out there in out-of-the-way places than there are kronor. Some of those old dollar bills are no doubt being held by drug dealers and other shady characters whom we would wish to inconvenience, but many are being held by honest people who just want a safe place to keep their wealth. (Imagine living in some place like Zimbabwe; you sure as heck wouldn’t want to stuff your mattress with Zimbabwean dollars.)

As I understand it, every U.S. dollar bill that someone in some more unstable part of the world has stashed away in his or her mattress (or buried in a fruit jar in the back yard or stuffed in a safe deposit box at the local bank, as the case may be) is basically a loan or promise of re-payment from the U.S. government that Uncle Sam doesn’t have to bother with paying back until said fruit jar gets dug up to pay for some rainy day. That being the case, it’s really not in our interests to discourage people from using the U.S. dollar as the de facto “world currency” and switching to euros instead. (Although that may well happen whether we in the U.S. want it to or not.)

15

A sudden demonetization would be wrong, unfair and would destabilize the financial markets. A demonetization with fair warning only makes sense. Why bother with anti-counterfeiting efforts if you are not going to force the old currency out of circulation?

When a government changes currency it is not only to fight counterfeiting, it is to force illegal, hoarded currency to get laundered so the government collects at least some taxes on it. I don’t think that’s bad.

So what if the U.S. hasn’t done it in the past? Let the scumbags do their trades in some obscure currency. If granny finds a stash and it’s worth it to go to a Fed Reserve Bank she can still get her money (as what happens with damaged currency). At least they know who she is and can find out if she is working as a money launderer for crooks.

16

Yes, MEBuckner and the concept is Seniorage.

It’s not trivial. Two thirds of US currency is held abroad, mostly in $100 bills. Bottom: http://www.frbsf.org/publications/federalreserve/fedinbrief/keyfacts.html

These represent interest-free loans to the US. You could also think of it as importing various goods and services in exchange for little green pieces of paper (which admittedly also represent a claim on US goods). It’s a nice racket, and it would be better not to disrupt it.

17

Then they should buy gold.

18

That is true. At the same time it might be more economical for Zimbabweans to stuff their mattresses with Zimbabwean dollars since it’s probably the cheapest material around ;). In other situations I think that stuffing mattresses with money is mostly discouraged, which a demonetizing policy would support.

19

But in both the Swedish and UK examples, the old bills don’t lose their value - the holder just has to go to a bit of extra trouble to get them exchanged via the central bank. That’s not what the OP is proposing:

That’s what I was responding to, and is what I think would cause financial instability, as Musicat’s personal experience indicates.

That’s always an option, of course, but the OP was asking what the harm would be if the old US dollars were demonetized. I assume he was asking from the perspective of an American citizen, not from the perspective of a foreigner holding US $.

The foreigners who switch to gold may find themselves in a better postion, but that’s not likely to be good for US fiscal policy.

If a large number of foreign holders of US started spending them in exchange for gold all over the world, then the over-supply of US means its value goes down, just like any other commodity that suddenly floods the markets. That’s not good for US fiscal policy, nor ultimately for US citizens.

20

I believe Canada is one of the other countries that has never demonetised. In fact, coins issued by the pre-Confederation governments are still current in Canada, as set out in the Currency Act: