In Some Places, U.S. Money Isn't As Sound as a Dollar

Madagascar Likes Bills Signed
By Snow; Rubin Series
Trades at a Discount

By MICHAEL M. PHILLIPS
November 2, 2006

ANTANANARIVO, Madagascar -- Once a month, Jean Yves, a cabin attendant on an Italian cruise ship, gets in line at the purser's office to collect his pay -- seven $100 bills.

If he's lucky, the bills will indeed be worth $700 when he arrives in port and tries to spend them. If he isn't, they'll be worth closer to $600. The difference? The good bills are new ones that bear Treasury Secretary John W. Snow's signature. The bad ones are signed by Treasury Secretary Robert E. Rubin.

"Whoever goes first gets the new money," Jean Yves complained recently after returning home to Madagascar at the end of his cruise. Those at the back of the line get an instant pay cut, because in many of the countries the ship visits, old U.S. bills just aren't worth as much as new ones.

Americans are accustomed to the idea that the dollar -- the world's No. 1 reserve currency -- is good anywhere. After all, it's a point of principle that the U.S. never invalidates its notes. The government may add watermarks, insert security threads or enlarge Ben Franklin's face on the $100 dollar bill, but old bills are still legal tender.

Overseas, however, that guarantee carries less weight. In many countries, from Russia to Singapore, the dollar's value depends not just on global economic forces that move international currency markets, but also on the age, condition and denomination of the bills themselves. Some money changers and banks worry that big U.S. notes are counterfeit. Some can't be bothered to deal with small bills. Some don't want to take the risk that they won't be able to pass old or damaged bills onto the next person. And some just don't like the looks of them.

The imam who runs an unmarked money exchange out of his religious-supplies store in Foumban, Cameroon, won't accept anything but $100 bills. Tens and twenties "are too small -- they're not worth my time," he says. The Moscow souvenir store called "Souvenir" won't accept 1996 series Rubin $20 bills as payment for vodka or nesting dolls. The Rubins are too old, the clerk says. The Stella Matutina Lodge in Goma, Democratic Republic of Congo, accepts 2001 series C-notes -- the ones with Treasury Secretary Paul H. O'Neill's signature -- but says they're only worth $90. The hotel accepts the 2003 Snow bills at face value.

"Money is valuable only if people accept it," says Stanford University economist John Taylor, who helped Iraq figure out how to replace the dinar notes that bore Saddam Hussein's portrait with more politically neutral currency. Federal Reserve notes are, in effect, little more than scraps of paper if businesses refuse to take them.

THE NEW CURRENCY

See an animated tutorial of the security and design features of the series 2004 $10, $20 and $50 notes.

The $100 bills, which have a reputation for being vulnerable to counterfeiting, also appear to be the notes most often rejected or discounted in the marketplace. Roughly 75% of the 5.5 billion $100 bills in print are circulating abroad, where local bankers and currency dealers sometimes refuse to accept them. The $100 bill is the largest note in print. The Fed stopped issuing $500, $1,000, $5,000 and $10,000 notes in 1969.

The U.S. Secret Service estimates that less than 1/100th of 1% of the $760 billion in American cash in circulation is counterfeit. Each time the U.S. issues a new currency design, the Secret Service, the Federal Reserve Board, the Treasury Department, and the Bureau of Engraving and Printing sponsor a global public-awareness campaign to ensure that the notes are widely accepted. When the peach-and-pink-tinted $10 bills were issued in March, the agencies distributed posters and pamphlets in Uzbek, Vietnamese, Polish and 21 other languages, highlighting the new look and anticounterfeiting features of the bills.

The posters also noted that "both new and old designs of U.S. currency will circulate together and will maintain their full face value."

The 2003 $100 bills, the most recent series, have no additional safety features and are no more or less susceptible to counterfeiting than the 1996 Rubin bills are, according to Michael Lambert, assistant director for cash at the Fed.

"Although we have heard reports that some discounting of older designs for U.S. currency has occurred in localized markets, the dollar remains a stable currency backed by a highly productive economy with low inflation and by the assurance that it will not be demonetized, recalled, or devalued," said Mr. Lambert, who went to Russia two years ago to promote the new $50 note.

Jean Yves, the Malagasy cruise-ship employee, finds that in many ports, the 1996 series bills are discounted by as much as 15%, if they're accepted at all. He and his fellow crewmen complain to their bosses, he says, but to no avail. "They say to me, 'This is your pay -- take it or don't,'" said Jean Yves, who, for fear of losing his job, spoke on the condition that neither his family name nor his employer's name be published.

Robert Rubin, now chairman of the executive committee at Citigroup Inc., doesn't take it personally that his bills sell at a discount. "If people are paying 85 cents on the dollar, I'll pay them a lot more than that -- and I'll make the difference," the former Wall Street trader said.

Jean Yves and his shipmates don't see the arbitrage opportunity. So, to keep the peace, the purser pays the crew of 700 by nationality, according to Jean Yves. One month the Filipinos get paid first and get the newest bills. Another month it's the Indians or the Indonesians or the Malagasy.

The day after he returned from nine months at sea, Jean Yves took one of the 1996 $100 bills from his pay and went downtown to Antananarivo's Liberation Avenue, where the illegal money-changers troll for customers. One dealer offered 2,080 ariary per dollar for new bills and 2,040 for old bills -- not a bad spread. But he got even luckier and found a changer willing to pay the top rate for his 1996 note if he promised to change his new bills with the same dealer.

Jean Yves would likely have fared far worse at the city's legal money-changers. The currency-exchange window at the Banque Malgache de l'Océan Indien, part of Groupe BNP Paribas, doesn't take $100 bills at all. "If we take it here, the goal is to resell it," says Hanitra Rasoanaivo, a customer-service manager. "But the Malagasy and foreign tourists don't want $100 bills."

BFV-SG, a Malagasy bank majority-owned by Société Générale, will change $100 bills only for clients who have accounts there. Even then, bank officers write down the serial number of each bill exchanged.

Down the street, the State Bank of Mauritius branch won't accept any U.S. bill smaller than a fifty. A manager there says small bills are too hard to resell. And the bank won't take any U.S. bills from the 1996 Rubin series or older, whatever the denomination. The manager says the bank is simply following the rules set by the Malagasy central bank.

But Vonimanitra Razafimbelo, director of foreign services at the Central Bank of Madagascar, denies that the authorities have any such rule. "That's crazy," she says. "The rules of American currency aren't made by the Malagasy Central Bank. That's up to the Federal Reserve." Each commercial bank in the country decides what foreign exchange it is willing to buy and sell, she says.

She should know. Prior to a work trip to Southeast Asia two years ago, Ms. Razafimbelo went to her own bank and withdrew $800 in $100 bills. Four of the bills were from the 1996 series, and she was surprised to find that many hotels, restaurants and shops wouldn't accept them, especially in Indonesia. "The Indonesians are very serious about their bills," she says.

She says she had to borrow money from friends to get through the trip. "I've learned my lesson," Ms. Razafimbelo says. "If I'm going to Europe or the U.S., I don't worry. But in Africa or Asia I take precautions and make sure my $100 bills are new and in perfect condition."

According to U.S. law, any bill that is more than 50% intact is legal tender. But in Singapore, currency dealers often pay less for imperfect bills.

Ziyaudeen, manager of Bismi Money Changer, accepts $100 bills of any age. But if the serial number is missing on either the right or the left, he'll only pay $50 for it. Then he sells the note for $80 or $90 to a dealer who redeems it for $100 on a trip to the U.S.

Ahmed Maricar, who trades foreign exchange from a green metal cage in a fabric store in Singapore's Little India section, knocks a percentage point or two off the price if a U.S. bill is slightly ripped. But "if the serial number is gone, I won't take it," he says.

It's not that he thinks such damaged bills are fakes; it's just that they aren't money to him.

Write to Michael M. Phillips at michael.phillips@wsj.com

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