Laundering money, literally

by on July 7, 2010 at 1:59 am in Economics | Permalink

Low-denomination U.S bank notes change hands until they fall apart here in Africa, and the bills are routinely carried in underwear and shoes through crime-ridden slums.

Some have become almost too smelly to handle, so Zimbabweans have taken to putting their $1 bills through the spin cycle and hanging them up to dry with clothes pins alongside sheets and items of clothing.

It's the best solution – apart from rubber gloves or disinfectant wipes – in a continent where the U.S. dollar has long been the currency of choice and where the lifespan of a dollar far exceeds what the U.S. Federal Reserve intends.

Zimbabwe's coalition government officially declared the U.S. dollar legal tender last year to eradicate world record inflation of billions of percent in the local Zimbabwe dollar as the economy collapsed.

The U.S. Federal Reserve destroys about 7,000 tons of worn-out money every year. It says the average $1 bill circulates in the United States for about 20 months – nowhere near its African life span of many years.

That's one way to conduct a countercyclical monetary policy, namely put old bills in the wash.  Yet it is tricky because velocity should decline as well.  (Do they get the proper degree of monetary endogeneity?  Is this actually a free banking model?)  Rather than unloading your money quickly, you have other options:

Zimbabweans say the U.S. notes do best with gentle hand-washing in warm water. But at a laundry and dry cleaner in eastern Harare, a machine cycle does little harm either to the cotton-weave type of paper. Locals say chemical "dry cleaning" is not recommended – it fades the color of the famed greenback.

The full article is here.  For the pointer I thank Jeremy Davis.

1 TracyW July 7, 2010 at 3:41 am

I wonder what the theoretical impact is on the US economy of African desires for American dollars.

2 Bob Knaus July 7, 2010 at 7:29 am

TracyW – total USD circulation is about $1 trillion, about 2/3 of which is held outside the US. Most of the value is in $100 bills.

Think of this as a $1 trillion perpetual loan at zero interest, minus the cost of printing replacement bills as they wear out. Currently the imputed interest on such a loan would be about 4%, so it benefits the US Treasury to the tune of $40 billion per year.

3 Don the libertarian Democrat July 7, 2010 at 12:57 pm

“Some have become almost too smelly to handle, so Zimbabweans have taken to putting their $1 bills through the spin cycle and hanging them up to dry with clothes pins alongside sheets and items of clothing.”

I love the idea that money is ‘almost’ too smelly to handle. Filthy Lucre Indeed!

4 Neil August 6, 2010 at 2:11 am

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