Social media was rife last week with a debate about the US$1 bill and whether it should be widely accepted in Barbados. Two widely shared videos sparked the conversation, both suggesting that the note was not as readily accepted as the public believed it should be. In one instance, a tourist, while travelling through Barbados, found it inappropriate that despite being told US dollars are generally accepted, a ZR driver refused to accept a single dollar note as part of the fare. The tourist suspected the refusal might have been racially motivated. Conversely, a young Barbadian woman posted a video on Instagram questioning why some service providers were refusing to accept US$1 bills.
For me, these videos highlighted the importance of money and the way society tends to accept the mechanisms surrounding it without question. Knowledge about money is lacking in many cases, and it is easy to see how people around the world are often misled about its true nature. At its core, money is simply an idea. It represents an easily divisible and transferable source of wealth. We accept the value of every denomination of our currency largely because we are told to. In reality, most governments declare certain currencies as legal tender, making it the sole currency legally accepted for transactions within a jurisdiction. Furthermore, governments typically mandate that a designated institution—the monetary authority—controls the production of physical cash. In Barbados, this role is fulfilled by the Central Bank of Barbados.
Monetary authorities play several roles in stimulating an economy. However, the creation of physical cash and the broader concept of money printing are primary in my view. While the latter is a topic for another day, the production of physical cash is worth exploring here. Monetary authorities usually contract specialised printers to produce physical money, incurring costs for this service. Considering paper money, it stands to reason that the cost of producing a Barbadian two-dollar bill would be the same as producing a Barbadian one-hundred-dollar bill.
This brings the concept of seigniorage into focus. Seigniorage refers to the profit a monetary authority earns from issuing currency, particularly the difference between the face value of money and the cost of producing it. This concept also explains why monetary authorities may prefer printing higher denominations over lower ones—they are more profitable. Coins, however, are a different matter. Because they often involve the use of precious metals, their production costs tend to increase over time. This is why low-value coins, like the one-cent coin in Barbados, are phased out. The cost of producing such coins often exceeds their face value, leading to negative seigniorage, where the monetary authority incurs a loss.
Negative seigniorage impacts the monetary authority's ability to lend money to the government, a process often referred to as money printing. When this occurs, it can indirectly lead to higher taxes, a lower standard of living, and increased costs of imports, all of which arise from the government's restricted access to financing. Conversely, excessive positive seigniorage—where a government produces more physical cash because it is affordable or profitable to do so—can lead to currency devaluation and inflation, with their associated negative effects.
While none of this directly answers the questions raised in those two videos, understanding seigniorage is essential to contextualising the apparent reluctance to accept US$1 bills in Barbados. My point is that all money carries costs—from the moment it is produced to every transaction it facilitates. Fundamentally, the willingness to accept a currency is tied to how much it costs an economy to do so financially, economically, and socially. This assertion essentially assumes, however, that the money in question is legal tender.
It is a well-established fact in Barbados that the US dollar is roughly equivalent to the Barbadian dollar. Children can recite this fact long before finishing primary school. The entire economy is built on this premise. Consequently, the average Barbadian has implicit faith in the value of the US dollar. It maintains a fixed exchange rate with the Barbadian dollar and is readily accepted by trading partners for imports, among other benefits. However, the general use of the US dollar in Barbados operates in a grey area. The capital controls in place do not explicitly permit its use for everyday street transactions. While banks generally exchange US dollars for local currency (except in specific circumstances, such as travel), they remain the only legal entities authorised to buy and sell foreign exchange, with few exceptions.
This legal ambiguity complicates the use of the US dollar in Barbados. Its use for transactions is not entirely legal, and it is certainly not legal tender, meaning no one in Barbados is obligated to accept it for payment. Merchants are, however, legally required to accept Barbadian dollars. This legal framework underpins transactions within the country and leaves the acceptance of foreign currency up to the discretion of the parties involved.
The Central Bank of Barbados recently addressed public concerns about the acceptance of US$1 bills, suggesting that commercial banks are always willing to exchange US dollars for Barbadian dollars, regardless of the amount. However, my personal experience contradicts this claim, particularly regarding the acceptance of small-denomination bills. It is worth considering the broader context here: all money has a cost, and this includes what is known as "carrying costs," which are incurred when money is stored or transported.
US$1 bills have higher carrying costs for banks than larger denominations. Consider this analogy: if you were tasked with transporting money between banks in a van filled to capacity, would you prefer it be filled with US$1 bills or higher denominations? The cost of fuel, personnel, and vehicle maintenance would remain the same regardless of the denomination being transported, but the value of the cargo would differ significantly. Naturally, higher denominations are more efficient to transport.
This reasoning extends to individuals and businesses that handle US dollars, especially when it comes to depositing them at banks. For countries like Barbados, where banks sometimes physically ship money out of the country, these costs can become even more significant. Moreover, the widespread use of US$1 bills in illegal activities has made financial institutions wary of frequent exchanges involving large amounts of such denominations.
The debate surrounding the acceptance of US$1 bills in Barbados is tied to a complex interplay of economic principles, legal frameworks, and practical considerations. While the rejection of US$1 bills may seem puzzling to some, it is rooted in the realities of carrying costs and the grey area of foreign currency use in the country. Greater public education on these issues could help demystify the factors influencing these decisions and foster a better understanding of the true nature of money in our economy.