Why Issuing New Banknotes Won't Put More Money in Circulation Than There Should Be

It’s not something you might think about every day, but with the Central Bank of Barbados announcing that new-look banknotes – this time made of polymer, a plastic material – will go into circulation by the end of the year, you might be wondering how the new money will get into circulation, and whether it means that there will suddenly be a lot more money floating around than before.

Well, here’s the answer to that question, and as you will see, introducing new banknotes doesn’t mean that there will be more money in circulation.

Commercial Banks Buy Money from the Central Bank

The Central Bank doesn’t put money directly into circulation, rather it sells money to commercial banks, who then put it into circulation. Sell? Yes, the Central Bank sells cash to commercial banks, and it does so at face value. Sometimes that money is brand new, and other times, it is older notes (and coins) that are still in good condition.

From There, the Money Moves Around the Country

Commercial banks use the money they buy from the Central Bank to issue to their clients – that’s what people and businesses get when they make a withdrawal either at the counter or from an ATM.

From there, the money starts to circulate – you use it to pay for the things you buy or you get it back as change, businesses that pay their employees in cash use it for wages and salaries, parents give it to their children for their allowance, and so on.

How Money Gets Removed from Circulation

Eventually, the banknotes get old, damaged, or worn, so rather than give it to a customer, businesses put it in the money they deposit at their commercial banks. They might also include extra cash that is still in good condition, but that is more than they need for their floats.

When commercial banks get these deposits, they keep some to issue to their other clients, but if they have more of a particular denomination than they need, they sell the extra cash, including damaged notes, back to the Central Bank, which pays face value for them.

As other commercial banks order money, the Central Bank sells them a combination of used notes that are still in good condition and brand-new notes – again at face value. As for the old and damaged notes, they get destroyed.

When Barbados’ new polymer banknotes are introduced in December, that is how they will go into circulation. Commercial banks will order cash from the Central Bank to replace the old and damaged notes and to top up on denominations they need, and the Central Bank will sell the notes to them at face value. So, the notes will all be paid for, and there won’t suddenly be a lot of extra money in circulation.