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The money changer

Blog Post3 min read

Shopping today in the market of Sitapur’s district capital city, I saw a man squatting next to a little table with sorted piles of money: stacks of change, stacks of paper bills. You might think he would be nervous about theft, but he didn’t seem to be too worried about security, and whatever he was doing had a steady stream of customers.

I stood and watched. My first thought was that he was making change for the other small-businesses. Perhaps he breaks 100 rupees for a vegetable seller for a fee?

One of the first developmenty organizations I got to know was a Catholic-affiliated nonprofit working out of a building attached to a church in downtown San Salvador where people will killed during the war, and across the street from where Archbishop Romero is buried. I was there in 2006, and El Salvador had recently switched to using U.S. currency.

People complained that it was hard to get change in the small denominations that made sense for rural El Salvador. In response, this organization introduced a microlending program. Microcredit was all the rage in those days, but what made this program special was that the loans were partially in a new local currency of its own creation.

It didn’t take. Part of the problem is that my friends really weren’t bankers in their hearts. They seemed to be hesitant to collect loan payments. Also, I recall an instance where I struggled with vocabulary dimly remembered from Eva’s “business Spanish” class at OU, trying to explain why a 10% yearly interest rate is very different from a 10% monthly interest rate. In the end, I think they decided to stick with what they are good at: a well-regarded program that tries to counteract some of the masculine denomination of Salvadoran culture.

But merely making change didn’t seem to be what was occupying the squatting man in the Sitapur bazaar. I eventually noticed that he kept the newer, cleaner bills separate from the older, dirtier bills. He was changing old currency to new currency, and charging people for the service.

People in India – especially in places like Sitapur – believe that the value of a piece of currency has multiple dimensions: the number written on it, and its condition. Sometimes people refuse to take slightly torn money, and sometimes a rumply old 20 rupee note isn’t quite “worth” 20 rupees.

The proof was in revealed preferences. I saw a cycle rickshaw driver pull up and trade a profoundly mangled 100 rupee note for a merely old set of one 50 and two 10s – 70% of the face value.

Now, the official position of the Indian government is that money is money, even if torn or old. I’ve heard (but have no particular reason to believe) that one can change old money for new money at gas stations. I’m sure banks are required to accept money at face value, although it would be interesting to know more about when they do or don’t. Fancy modern stores and restaurants take what I give them.

One economic implication is that this clearly increases transaction costs. Not only do you have to waste time and effort finding this guy, but you perpetually have to negotiate the “real” value of your 50 rupee note. In practice, that probably means the search costs of trying it on different people. I’m not quite sure how this works in interactions where the price is agreed upon before the quality of the currency is revealed.

Somebody who knows more than I do might be able to weigh in on the macro implications of this. What does it mean for the money supply? This seems to involve economically motivating make-work, reminiscent of burying money in bottles to invoke the Keynesian multiplier, but I confess to not having a guess at the consequences.

Surely there is also a social dimension, if money has an objective value and a subjective value. India is dense with social hierarchy. Rank is pervasive. I bet a higher-ranking person can compel a lower-ranking person to accept an older, less-valuable bill. This is a subtle way that social inequality translates into material inequality that might be hard to capture with an economic household survey.

One implication is clear: I’m missing out! Every time I go to Delhi, I bring back all these crisp, new 20s and 100s. I just spend them like a sucker. I could be trading these for more (dirty) money here in Sitapur, and then bringing them back to spend in Delhi! Today I’m blogging about currency arbitrage. Tomorrow I’ll be announcing the for-profit branch of RICE.


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