January 24: Could Dirty Money Help Revive the Economy?

Article featured in The Voice of Russia.

Open your wallet and look inside. Are the banknotes crisp and pristine or crumpled and covered in grime? Do you keep the dirty ones or spend spend them as soon as possible? One study has revealed exactly how consumers behave with their mucky money. The findings are offering evidence that the physical condition of cash in the consumer's pocket has an impact on how quickly they spend it. An economy limping out of recession may actually benefit from the circulation of a little more of the filthy lucre; literally! Professor Theodore J. Noseworthy from the University of Guelph, who co-authored the study, spoke to VoR about what really happens to all that tainted cash.

Throughout their research, Noseworthy and his counterpart Fabrizio Di Muro, from the University of Winnipeg, discovered an irrational side to how people tend to perceive their banknotes in both unspoilt and crumpled states. In a controlled setting at the University of Winnipeg, a fictitious retail outlet was put in place where participants were to spend their money. Different situations were simulated to see how reactions changed as the scenario altered slightly from one to the next.

“We tried to be as careful as we could with it, even to the extent that we ran not only with Canadian currency and Canadian students but also with American currency and American students,” commented Noseworthy to the Voice of Russia, who added that no coins were used in study.

If alone, people were more likely to get rid of their unclean bills. What’s more, in a scenario where people had a dirty bank note which also happened to be the biggest in their wallet, they actually opted to break it, favouring the smaller denomination but crisp and unadulterated bills. The study was repeated in various ways, using only unspoiled bills and then, only dirty ones. On other occasions the unblemished and grubby notes were mixed to help understand how people react in different situations.

“It’s rather fascinating if you think about it from an economic theory perspective, it actually shouldn’t matter what a bill looks like, it’s a store of value. It holds that value regardless of what it looks like. As long as it’s not absolutely ripped to shreds and so, that’s actually the fascinating side of it, that people will attribute different inferences, different biases to money depending on how it looks,” said Noseworthy.

However, this was not the case with all of those who took part in the experiment. One group acted quite differently because they were spending in front of their peers. In a mixed gender group, mostly in their 20s, people were more likely to spend their crisp and clean money when watched by their friends, keeping the dirty bills hidden away in their wallets.

“ We get this whole effect with socialization where when you ‘ re around people, you don ’ t want to dump an old bill however when you ’ re around your friends you want to spend a crisp bill, ” said Noseworthy.

All in all, they found that the physical appearance of money can change people’s buying patterns, and that consumers spend more of their worn bills than newer ones. Although people do want to dispose of money that looks used up and tattered, they will sacrifice the brand new bills if they are in the company of peers.

So, could dirty money actually stimulate the economy simply because it's unclean? “If you are coming out of a recession and want to decrease government spending and you want to increase domestic spending, especially if you’re a consumption based economy, what are you going to do? Well hey, why don’t you drop currency production costs, don’t replace money for wear and tear. Replace it if it has high bacteria content sure, and that would decrease government spending on money production, which is actually incredibly expensive by the way, leave worn bills in circulation and you could increase domestic spending,” explained Noseworthy, adding that, “There are a million things that influence spending.”

This study is far from over, as several follow ups are now underway to see how consumers behave in more diverse situations. Noseworthy is very excited to start the next phase of this research as it gives some sound insight into how people spend and why. Perhaps a cleaner banknote is a better one, but depending on a consumer’s circumstances, many other factors could influence them to buy a product or not. For now, it’s safe to say that when you’re spending, take note of the bills on hand and which you use, you may just surprise with the notes you choose to lose and those you prefer to keep.