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The switch to deflationary money in the UK

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I support the Governor of the Bank of England’s decision to shift to plastic banknotes, but I think that the deflationary aspects of an environmentally-friendly polymer policy should be explored more.

As I’m sure you are aware, two years from now there is to be a one-every-400-year change to the circulating medium of exchange in our United Kingdom. The Bank of England is going to get rid of paper banknotes.

Plastic banknotes that can survive a spin in the washing machine are to be brought into circulation by the Bank of England in 2016.

[From BBC News – Plastic banknotes to start in 2016, Bank of England says]

Like many people, I’d assumed that the switch to plastic was essentially one of the government’s green policy items. As the Bank of England themselves point out…

Polymer notes are also more environmentally friendly than paper… The results were supplemented by feedback gained during a 10 week public consultation programme, which showed 87% of respondents in favour of a move to polymer.

[From The Decision to Move to Polymer Banknotes]

However, having spoken to some sources close to the Bank of England (*) I’ve discovered why the Chancellor of the Exchequer and Her Majesty’s Treasury are so keen to switch banknote technology so early in the next Parliament. They want to make the transition from paper to green plastic for economic, not environmental reasons.  As you can see from the quote above, the Bank of England make environmental issues key to the new policy. If you read up a little on environmentally-friendly plastics you will find the certain types have a rather interesting property: 

Oxo-biodegradable plastics seem to offer an advantage in this regard because they break down without releasing methane. However, as their name suggests, their requirement for oxygen to enable the degradation process to occur means it will not break down if buried.

[From Material of the month: Biodegradable plastics | IOM3: The Global Network for Materials, Minerals & Mining Professionals]

Now, you cannot fault the Chancellor for his green credentials, so plastic banknotes that biodegrade without releasing methane should be especially attractive to him if the green agenda is the main reason for the switch. But note the second part part of that sentence. The plastic needs oxygen to degrade so if you wrap the banknotes in tinfoil and bury them in the garden, they will remain intact indefinitely. If you want to experiment to see how long biodegradable plastic takes to disintegrate, you can actually make it at home!

The plastic in the video is made from combining a polymer — starch — with a plasticizer — glycerin

[From Q&A: Chemical formula for bioplastic?]

Now obviously it doesn’t include the kind of anti-counterfeiting measures that the Bank of England will use to make plastic banknotes but it does give you an idea of how inexpensive and simple the production is. Depending on the exact formulation some of the these plastics can degrade away in a fairly short time but others can last much longer. Which kind might be best for banknotes is obviously a matter of opinion and I have no idea about which formulation the Bank of England will opt for, but I suspect they may opt for a shorter lifetime that you might think.

Hence the reason for calling biodegradable plastic banknotes “deflationary”. If you keep them in your wallet or in your pocket, they will biodegrade. This will encourage people to spend their money as soon as they get it, thus boosting the economy. But if they don’t, the money will degrade and vanish, so they government can print considerably more banknotes (via quantitative easing – or “QE” as it is called) without causing a spike in inflation. To deal with this, some people will bury their money in biscuit tins down the bottom of the garden, thus taking the money out of circulation and reducing inflationary pressures.

There’s another benefit: since high-value banknotes are mainly used by criminals, switching to biodegradable plastic money means that they will be accumulating cash that will fall apart before they can use it. This rewards honest taxpayers who take their low-value notes down the shops in short order, and punishes the tax-evaders, money-launderers and drug-dealers who stash away their £50 notes.

It’s good to see a policy on printing banknotes that finally makes sense for a change. It’s a shame we had to wait until today to hear about it.

* My mate Steve, half way down Gresham Street at the time.

One thought on “The switch to deflationary money in the UK”

  1. caleb.bradley@getmail.no' Caleb Bradley says:

    We are not amused by Dave Birch’s clumsy April fool joke piece. The Bank of England would never choose a biodegradeable plastic for banknotes because they are obliged to replace banknotes when they become worn. Dave Birch also misrepresents his mate Steve (singular) as “sources” (plural) and seems unable to proof read the error in “a shorter lifetime that[sic] you might think”.

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