<p>Recently India demonetized their 500 and 1000 rupee notes. As a replacement a new 2000 rupee note was introduced. This has resulted in some chaos in the commercial markets due to decreased availability of banknotes. I was wondering about the root-causes of this. </p>

<p>I'm not a trained economist. One reason, that I think, adding to the chaos is the unscientific design of the denominations. Currently the banknotes in India have the following denominations:
5, 10, 20, 50, 100, 2000.</p>

<p>In the current price structure in India, there are lot of goods currently sold in the range 100-2000 and this means that for a given sale of a good in this range the money exchange process becomes very complicated due to the absence of some intermediate denominations in this large range. </p>

<p>For e.g: If somebody buys an item of 800 rupees, now she has to carry at least 8 different notes. On the other hand, if she decides to carry only a single note of 2000 rupee, then the shop owner has to give her 12 different notes back. So, either way now there is a large burden on the central bank to increase the number of notes in the supply.</p>

<p>So, I was wondering on what is the most efficient design of banknote denominations. 
efficient => The most optimizing in terms of the number of notes to carry/keep for the payer and the receiver and most optimizing for the central bank to issue in terms of cost and distribution logistics.  </p>

<p>My intuition says that a denomination structure based on the powers of 2 would be the most 'efficient' mechanism. Another option would be the Fibonacci series. I would assume that most of the central banks across the world design their banknotes in a series close to the Fibonacci series. I tried to google around about how this is designed in general and surprisingly my searches didn't reveal anything in this direction.</p>

<p>My question is : Is my intuition right? 
Also it would be helpful if somebody points me to some literature discussing this topic. </p>

CC BY-SA 3.0
2016-11-13T17:15:53.373Z
Why was this question downvoted...?
Giskard
CC BY-SA 3.0
2016-11-14T08:20:27.513Z
The most common pattern of notes and coins seems to be like   1-2-5-10-20-50 (and similarly up or down depending on the value of the currency) and this works reasonably efficiently in a decimal world.
Henry
CC BY-SA 3.0
2016-11-14T08:25:59.667Z
In China the largest denomination is ¥100 (worth in the order of US$15).  It is common to see these in bundles of ten to deal with higher value transactions
Henry
<currency><central-banking>
How is the banknote denomination designed?
PermanentGuest
# How is the banknote denomination designed?

(Asked by: username_0 on 2016-11-13)

Recently India demonetized their 500 and 1000 rupee notes. As a replacement a new 2000 rupee note was introduced. This has resulted in some chaos in the commercial markets due to decreased availability of banknotes. I was wondering about the root-causes of this.

I'm not a trained economist. One reason, that I think, adding to the chaos is the unscientific design of the denominations. Currently the banknotes in India have the following denominations:
5, 10, 20, 50, 100, 2000.

In the current price structure in India, there are lot of goods currently sold in the range 100-2000 and this means that for a given sale of a good in this range the money exchange process becomes very complicated due to the absence of some intermediate denominations in this large range.

For e.g: If somebody buys an item of 800 rupees, now she has to carry at least 8 different notes. On the other hand, if she decides to carry only a single note of 2000 rupee, then the shop owner has to give her 12 different notes back. So, either way now there is a large burden on the central bank to increase the number of notes in the supply.

So, I was wondering on what is the most efficient design of banknote denominations.
efficient => The most optimizing in terms of the number of notes to carry/keep for the payer and the receiver and most optimizing for the central bank to issue in terms of cost and distribution logistics.

My intuition says that a denomination structure based on the powers of 2 would be the most 'efficient' mechanism. Another option would be the Fibonacci series. I would assume that most of the central banks across the world design their banknotes in a series close to the Fibonacci series. I tried to google around about how this is designed in general and surprisingly my searches didn't reveal anything in this direction.

My question is : Is my intuition right?
Also it would be helpful if somebody points me to some literature discussing this topic.

**Tags:** currency, central-banking
> **Comments:**
> **username_1**: Why was this question downvoted...?  
> **username_2**: The most common pattern of notes and coins seems to be like   1-2-5-10-20-50 (and similarly up or down depending on the value of the currency) and this works reasonably efficiently in a decimal world.  
> **username_2**: In China the largest denomination is ¥100 (worth in the order of US$15).  It is common to see these in bundles of ten to deal with higher value transactions  

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## 0 answers

