June 24, 2019 Reading Time: 5 minutes

Every decade or two, central banks replace their existing issue of banknotes with a new issue. The main reason they do this is to thwart counterfeiters, who by then will have started to get pretty good at duplicating the existing version. Central bankers have usually tried to make the process as convenient as possible for citizens by offering long, drawn-out — sometimes even indefinite — switching periods. Anyone who finds an old note stored away in a cupboard needn’t worry. It can still be spent at the neighborhood grocery store.

But this is changing. It is getting increasingly fashionable among central bankers to institute rapid and inconvenient shotgun note switches. India’s 2016 demonetization is the most famous example, but now Kenya has taken up the baton. Nor is the phenomenon confined to developing countries. Swedes lived through a series of shotgun switches between 2015 and 2017. I won’t get into the Swedish episode in this article, but those who are interested can read more here.

India and Kenya have marketed these shotgun switches as a form of “cleansing” or “medicine.” But central bankers have not proven to citizens that the inconveniences they must endure during a rapid switch are compensated by the purported benefits. Until we have real evidence, I remain skeptical of the usefulness of these switches.

First, let’s outline the typical stages of a banknote switch.

Introduction: The central bank stops printing the old notes and introduces new ones into circulation.

Co-circulation window: A co-circulation period begins in which both the old and new notes are legal tender and can be used to purchase goods and services in shops and other establishments.

Private-bank swap window: Banks swap old notes for new ones or deposits.

Central bank swap window: The central bank promises to swap old notes for new ones.

In the past, central banks’ swaps have generally been designed to be as hassle-free as possible. For instance, when Canada began to swap its old paper banknotes for polymer notes in 2011, it set no time limits on the co-circulation and swapping periods. To this day, old paper dollars can still be spent at any shop or establishment.

Ditto for Australia’s switch in 1996. All pre-1996 Australian notes remain legal tender. And the same goes for the U.S.’s most recent revamping of the $100 bill in 2013. Old versions of the $100 bill are allowed to co-circulate indefinitely with the newest version.

During wartime, slow note switches have often been replaced by shotgun ones. When the U.S. was fighting the Vietnam War, for instance, U.S. Military Payment Certificates were often cancelled overnight to hurt black marketeers and to prevent U.S. currency from dollarizing the local economy. Rampant counterfeiting of British pounds by the Germans during World War II worried the British authorities so much that on April 16, 1945, they announced that all existing 10-, 20-, 50-, 100-, and 1,000-pound notes would cease to be legal tender. Brits had till the end of the month to spend them. To this day, the UK has no £100 bills.

On November 8, 2016, Indian Prime Minister Narendra Modi shocked Indians with a rare peacetime shotgun note switch. A new set of 500- and 2,000-rupee banknotes was to be put into circulation, said Modi. But there would be no co-circulation window. Rather, all existing 500- and 1,000-rupee notes would immediately cease to be legal tender. As for the private-bank swap window, it would only be open for two short weeks. The window for central bank swaps, typically the longest-lasting window during a switch, was to close at the end of December.

These stringent conditions proved to be incredibly difficult for Indians to meet. Massive lines grew at banks as people flocked to get their 500- and 1,000-rupee notes switched before they expired. Trade ground to a halt, especially in India’s large informal sector, where cash is dominant.

It is no wonder that Kenya, the most recent nation to experiment with a shotgun switch, has chosen to modify India’s approach. On June 1, 2019, the Central Bank of Kenya (CBK) announced that it would be introducing a new set of 50-, 100-, 200-, 500-, and 1,000-shilling banknotes. The legacy versions of the smallest bills — the 50-, 100-, 200-, and 500-shilling notes — will continue to co-circulate with new notes for an indeterminate amount of time.

But the CBK has different intentions for the 1,000-shilling note. Old 1,000-shilling notes will cease to be valid on October 1, 2019, just four months from the announcement day. After that date they can no longer co-circulate, nor can they be swapped at banks for deposits or new 1,000-shilling notes, nor will the central bank redeem them. As Patrick Njoroge, the governor of the CBK, recently put it, old 1,000-shilling notes will become mere scraps of worthless paper after October 1.

Unlike India’s demonetization announcement, the Kenyan announcement hasn’t caused panic or nightmarish bank lines. This is because the CBK’s four-month co-circulation and redemption periods are lenient compared to Modi’s next-day announcement. Furthermore, the embargo has been limited to the largest shilling denomination. Modi’s dragnet was cast over the largest two Indian denominations. Nevertheless, the window for Kenya’s 1,000-shilling switch is still a very narrow one.

The pain of these shotgun note switches is part of the design. Short co-circulation and redemption periods are intended to make it difficult for those with large quantities of illicitly obtained funds to make the switch. A crook with a suitcase full of 1,000-shilling notes can’t easily spend them before October 1, and depositing this stash would catch the attention of a bank officer. So the crook may very well be forced to “maroon” their money.

India’s shotgun note swap was also touted as a way to promote financial inclusion. By making the note conversion uncomfortable, India’s large population of unbanked would be forced into opening bank accounts or adopting mobile money.

Although we don’t have all the data from India’s demonetization, what we do have indicates that the effort failed to meet either of these goals. Thanks to tricks like money muling, some 99.3 percent of banned 500- and 1,000-rupee notes were returned on time, indicating that very little “black money” was trapped. Because Kenyans will have four months rather than two weeks to make the switch, it is likely that those with illicit notes will have an even-easier time laundering their stashes.

As for financial inclusion, two years after the affair Indians are pretty much back to holding the same quantity of cash as before. It would appear that demonetization hasn’t been an effective means for pushing people into digital alternatives.

In addition to their technical shortcomings, shotgun note switches don’t seem very fair. They force all citizens — innocent or guilty — to run through the same gauntlet. But in a free and democratic society, shouldn’t punishment be confined to the guilty? Law enforcement agencies have many tools for catching crooks. It’s not apparent to me why such a blunt instrument as shotgun note switches is also required.

The recent note switches by India, Kenya (and Sweden) have all inconvenienced their citizens. It is not apparent that the benefits are sufficient to justify this pain. In times past the monetary authorities confined these sorts of stringent measures to war-time. Perhaps they should stay that way.

J.P. Koning


J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a Canadian brokerage firm and a financial writer and publisher at a large Canadian bank. More recently, he has written several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments. He founded the popular blog Moneyness in 2012. He designs economics and financial wallcharts at Financial Graph & Art.

Koning earned his B.A. in Economics from McGill University.

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