Polymer bank notes: A bailout for conventional fibrous currency
 

The News International

Business & Finance Review

By Prof. S. Sabir A. Jaffery

07.03.03
 

Fibrous (paper) currency is once again on the hit list of monetarists round the world. This time the charge is that it is the carrier of infectious bacteria that travel deep through the cross section of population as fast and as multi-directionally as paper (fibrous) currency notes change hands.

Paper as a money-material took edge over its predecessors, namely, grain, shell, leather, precious stones, metal etc. and therefore replaced them mainly owing to its comparative portability. However, this characteristic of paper currency failed to retain its utility with the passage of time. Following reasons may be ascribed to the fall in the popularity of paper currency.

Time value of money

Portability was the essence of paper currency that helped it perform the medium of exchange function of money quite meritoriously. With ever-increasing inflation, the purchasing power of money dwindled substantially, with the result that the quantity of money that a couple of decades ago was adequate to finance large commercial transactions fell short even to cater for the needs of moderate size business deals. Carrying of huge sums of money on one's person being risky and impracticable, the paper currency is deprived of its nucleus, i.e. the portability.

Advanced countries overcame this deficiency by establishing a self-contained banking system and resorting to multipurpose commercial papers. They developed a society that is averse to physical movement of cash. Third World countries, on the other hand, still hang on to cash. There seems to be no possibility of changeover in the near future. This requires movement of huge amounts in cash, which is met out by way of inducting higher denomination bank notes. Obviously, this is merely a timeserving patch, and cannot be relied upon incessantly.

Short life span

Useful life of paper currency is quite short. Paper notes soon get soaked, soiled, and smeared. These are also easily worn out and deformed. In countries with humid climate, or where cash transactions outnumber other modes of financial transactions, the process of decay is much faster.

Prohibitive and non-productive replacement cost

Quicker the paper notes decay, oftener are these required to be replaced. The recurring printing cost is prohibitive in size and non-productive in nature. It, therefore, concerns the entire world these days. Metallic coins, which were considered to be a lasting substitute till some time back, are devoid of portability, and therefore lack credibility.

Easy to counterfeit

Counterfeiting of paper currency is comparatively easy. With the advancement in technology, it has become further easier to print forged notes. Instances of counterfeiting have surfaced too often all over the world. To quote an example, substantial counterfeiting of $10 notes was detected in Australia soon after she initiated the change to decimal currency in 1963. This paved the way for innovative technologies in the craft of notes printing.

Demand for counterfeited currencies also increase tremendously in the wake of political turbulence across the world. An example near-at-hand is that of Afghanistan. After the American onslaught, truckloads of counterfeited Dollars. Afghanis, and Pak rupees were reported to be in circulation on either side of Pak-Afghan border.

Carrier of infectious bacteria

The latest uproar in the relevant circles is about the infectious bacteria carried by the dirty, decayed, soaked, soiled, and smeared currency notes as they change hands as a normal daily activity. Modes of this unhygienic activity are being explored. Research is being undertaken at the university level to unearth its causes and to find out rescue measures. Precisely speaking, this is a futile exercise. Counting of notes by applying one's spittle first on the finger and then on the pieces of currency notes, and then repeating the exercise again and again until the counting is over, is a common sight. This alone is more than sufficient to prove the hypothesis that bacteria have their way to penetrate through the veins of the society. No other mode of this virulent abuse needs to be unearthed. However, what is needed is the search for a suitable alternate of paper currency.

The polymer bank notes, a bailout for paper currency

The substantial counterfeiting of currency notes in Australia during early sixties provided an impetus for the Reserve Bank of Australia to develop new note technologies jointly with the Commonwealth Scientific and Industrial Research Organisation. The revolutionary polymer (plastic) notes have proven their success since the issue of the first, a commemorative note of $10 denomination, which marked Australia's bicentenary in January 1988. This note incorporated radical new technology developed in Australia, which set the scene for a new era of currency notes in the world.

These plastic notes even 'survive' the washing machines. In other words, these are capable to be laundered - washed and ironed - and thus expose the infallible economic dogma, commonly known Gresham's Law - bad money derives good money out of circulation - to the risk of gradual extinction.

The experiment did not augur well in the early years of the innovation. The ink rubbed off the surface; the superimposed portrait smeared; the notes jammed while passing through the counting machines, and often did not fold.

After getting over with all these ordeals, the bank made polymer notes legal tender in 1992 with a programme of gradual replacement of paper currency. Ultimately, in the year 1996, the last lot of the paper currency was withdrawn out of circulation.

The present series of Australian notes is the first in the world to be printed on polymer substrate instead of paper. It consists of $5, $10, $20, $50, and $100 denominations.

With this successful experiment, the Note Printing Australia Ltd., renamed as Note Printing Australia in 1990, and established as separately incorporated, wholly owned subsidiary of the Reserve Bank of Australia in 1998 to undertake not printing, started making on order plastic notes for other countries also. It has so far produced polymer notes for Papua New Guinea, Indonesia, Kuwait, Western Samoa, Singapore, Brunei, Sri Lanka, and Thailand. In a very recent communication dated 16 January 2003, H.E. Brett Hackett, Acting High Commissioner for Australia in Pakistan, has informed the writer that Bangladesh has also introduced polymer notes for one currency denomination.

The polymer currency notes are claimed to have manifold advantages over paper currency. Fro example, these are difficult to forge. They are also cost effective. According to a research report published in The Economist, London (April 5th. - 11th. 1977), although a plastic currency note costs almost twice as much as a paper note does, it lasts up to four times as long. The difference is much greater in countries like Pakistan with humid climate and massive cash turnover where life span of paper notes is too short. Moreover, worn out plastic notes can also be recycled and made into commercial products of high demand.

Lesson for Pakistan

The circumstances that prompted Reserve Bank of Australia to develop polymer notes technology, and the drawbacks of paper currency recently surfaced, are of great concern for Pakistan also.

Ours is a cash-ridden society. For more than one reasons, most of the commercial transactions take place in cash. Deep-rooted financial corruption is not likely to let a cashless society operate in Pakistan even in the distant future. This demands heavy cash turnover. Our climatic conditions also affect the fiber of our currency notes quite adversely. The end result of these two factors is that the life span of our currency notes is shortened and needs more frequent replacements.

With the given pace of replacement, the recurring cost of printing, which is non-productive in nature, becomes exorbitant. This has to be done away with. One step that we can take straight away to discourage enormous cash transactions is to demonetise currency notes of Rs500 and Rs1000 denominations.

Unhygienic stuffs absorbed by the fiber of paper do not tend to get stuck on the plastic surface. Again, plastic notes are washable. This is an adequate safeguard against the health hazard associated with the traditional paper currency. Finally, when worn out, polymer notes can also be recycled. Thus, their replacement cost is substantially reduced.

In view of the foregoing, we should also go for polymer notes. To start with, we can get one denomination notes manufactured for us by the Note Printing Australia. At a later stage, if the experiment proves successful, we can negotiate with them the import of technology in order to be self-sufficient in the long run in manufacturing polymer notes of all denominations of our choice.