Printing money is a process that most of us are pretty aware of. We know that governments have to print money regularly to replace any money that has become damaged over time. This adds up, with the U.S. alone printing over US$500 million a day to keep up its demand. Yet we know there is not actually a government minister printing the notes, so who is?
In the U.S. it is a legal requirement that the money is printed within the border of the country but for many other countries, it is not. This brings the question of whether it is better to print your money in or out of the country? The answer all comes down to scale. While the US is large enough that any financial requirements are best served in house there are many countries that require so little cash, to print the money themselves would be very expensive.
The cost of setting up the machines, the technical skills required, the process itself all cost money and expertise that most countries do not have. For these countries, it is better to outsource to a currency producer. One such producer is De La Rue, an international banknote producer that creates the notes for 140 central banks. Their competitor, Giesecke & Devrient create for 100 central banks. Clearly producing externally is a popular choice.
However, the choice comes with some risks. Although the U.S produces so much money each year, creating economies of scale that are so significant, that producing money internally makes a lot of sense, they originally chose to do it for security reasons. Producing your money externally is a security vulnerability that could not be allowed by the American government. If war happened tomorrow your currency could be used against you. If an enemy power got the control over such a banknote producer they could produce incredible amounts of the currency and create such high inflation it would make the dollar worthless. This was actually a strategy used by Nazi Germany in World War 2 under Operation Bernhard. The Nazis flooded the UK with false currencies to try and make the currency weaker. Today it is more difficult to create fake notes and so the main producers are now incredibly important.
Libya is another concerning example. The country was controlled by Gaddafi at the time and in his last days of power the British were able to withhold nearly 2 billion dinars or almost one billion pounds. Part of this money was produced by De La Rue.
It is clear then that if you can print your money internally it is worth doing it. However, for those in smaller economies, there is simply no choice to make. It does leave a defensive vulnerability open but one that for most countries is unlikely to ever be used.
