Good Money, Bad Money

Bad Money Driving Good Money Out of Circulation

Reaz Ahmad


Our central bank must be preoccupied with the uphill task of bringing back home the tons of money transferred illegally out of the country by political thugs over the last few years and that also, if not fully but definitely partly due to its own oversight. It must be also very busy overseeing burgeoning banking sector and important monetary policies at a time when an overstretched caretaker regime finds it handy to fight corrupts ahead of the overdue national polls. People on the street, in their daily life financial transactions, in the meantime, wonder when Bangladesh Bank will find sometime to look into the relatively ‘low-profile’ issue of torn and counterfeit bills. These-days notes, particularly the one of Taka two denomination, are so worn out and counterfeiting of notes, particularly of Taka 100 and 500 denominations, are so rampant that people are at great misery, facing lots of troubles in daily transactions.

Bad money is driving good money out of circulation in today’s Bangladesh, after five long centuries Sir Thomas Gresham had sermoned his law of ‘bad money/good money’ in Tudor times. The law of Gresham, an English financier, says that any circulating currency consisting of both ‘good’ and ‘bad’ money quickly becomes dominated by the ‘bad’ money. This is because people spending money will hand over the ‘bad’ coins rather than the ‘good’ ones, keeping the ‘good’ ones for them. Consider a customer purchasing an item that costs Taka three, who has in his/her possession several Taka five notes. Some of these notes are more tattered, while others are less so – but legally, they are all mandated to be of equal value. The buyer would prefer retaining the better notes thus offering the seller the Taka five note that is worn to shreds. In turn, as the shopkeeper returns the change to the customer – s/he would obviousely give the most worn out Taka two note s/he has. Thus, the notes that circulate in the transaction will tend to be of the shabbiest sort available to the parties. And this is what exactly happening in Bangladesh currently.

In a letter written to Queen Elizabeth on the occasion of her accession in 1558, Sir Thomas Gresham observed, “that good and bad coin cannot circulate together.” The statement was part of Gresham’s explanation for the “unexampled state of badness” England’s coinage had been left in following the “Great Debasements” of King Henry VIII and King Edward VI, which reduced the metallic value of English silver coins to a small fraction of what that value had been at the time of King Henry VII.

Time has come that we write to our central bank governor – “sir, good and bad bills cannot circulate together.” There should be a bailout otherwise; people (no matter, rich or poor, consumer or vendor, service receiver or provider) will continue to suffer everyday. How long we carry on the troubles of possessing and transacting the worn out Taka two denominations and suffer and continue to be humiliated by having counterfeit notes of Taka 100 and 500 denominations? Unless the Bangladesh Bank takes some steps to bring the “good money” back into circulation replacing the “bad money” will the modern day economics permit private parties to circulate their own brand of currency as it once happened in England three centuries back?

It may sound little bizarre today, but back in the 1780s something like it threatened to bring Great Britain’s Industrial Revolution to a grinding halt. Unprecedented quantities of small change were needed to meet factory and mine payrolls and to fill retailers’ cash boxes. But the Royal Mint, finding its attempts to issue low value coins foiled by aggressive counterfeiting and by Gresham’s Law, quit making anything save high-value gold guineas after 1775.

Employers tried everything to get around Great Britain’s “small change” problem. They roamed the country buying up small coins at a premium. They resorted to “long” pay (monthly instead of weekly). They paid workers in groups, making them share guineas or banknotes. They offered “Tommy” (company store) tickets instead of cash. Many even paid their workers’ wages at pubs after settling their bar tabs in gold. But such makeshifts couldn’t possibly make up for the shortage of decent coins. Unless that shortage was addressed somehow, Great Britain had no chance of becoming the world’s first truly industrial nation.

Finally, in 1787, the owner of Great Britain’s biggest copper mine decided that, if the government wouldn’t supply coins suitable for paying his workers, he’d do it himself. Other entrepreneurs followed the suit, and before long more than 20 commercial mints started supplying British industry with hundreds of tons of custom-made copper coins. Drawing on their experience in producing fancy metal buttons, these entrepreneurs managed to overcome administrative and technical problems that had all but shut down the Royal Mint. Thanks to them, Great Britain’s Industrial Revolution was saved.

Centuries later here in Bangladesh we the general currency users are now in a real fix – about how to cope with the situation. Be it a neighbourhood grocery shop or big retailers’ den, whether you’re paying bills to a restaurant or fare to a rickshawalla – it’s become a common scene people getting enraged and brawling over either torn or counterfeit bank notes.

Increasingly it’s becoming a health hazard too. Notes so worn out and spoiled that by touching and transacting those one need to wash their hands well prior indulging into other activities. For our school-going young kids dealing with such notes is a real hygiene issue.

Occasionally its dangerous too when by ignorance you’re carrying notes so worn out or possessing only a Taka 100 note in your purse that you later discover to be counterfeit. Because by the time you might have already bought goods or service and then you fall in an embarrassing position with the vendors or service providers disqualifying the money notes you’re offering. It’s so happening all the time. In one recent instance a housewife went to a renowned chain shop of clothes, artifacts, and fashion wares, bought some goods and paid the bill in the billing counter. Of the notes paid, the salesgirl separated a Taka 100 note from other notes, checked that, passed that note over to a male colleague who without telling anything to the customer just ripped a substantial portion of the note and asked the customer for another Taka 100 note.

To her awe, the customer then came to learn that it was a counterfeit 100 Taka note that she got as change after purchasing something just the previous day from her neighbourhood grocery shop. Now who’ll pay for the ‘lost value’ of that ripped counterfeit Taka 100 denomination – that remains a big question? It’s time the central bank gives an answer. Like big commercial bank branches should we all at individual level carry a money counterfeit-identifier machine with us?

Its high time Bangladesh Bank launches a nationwide drive against currency counterfeiting and replaces all the worn out notes with sufficient numbers of ‘good money.’ Because, Sir Thomas Gresham wrote in 1558 to Queen Elizabeth, “that good and bad coin cannot circulate together.” Isn’t it true for 2008 also?