money-supply, central-bankDuring its usage, money in paper cash and coins gets worn out and destroyed.
Since cash is a part of Central bank balance, how does it track its exact count to know its liabilities?
I’m writing about the UK, but other Central banks will operate similarly:
It doesn’t track its exact count. It tracks an estimated count, by tracking total issue, keeping track of returned currency (1), and estimating losses outside its boundaries (2).
Banks take particularly tatty currency tokens out of circulation, as they arrive at the bank, and return them to the Central Bank for destruction - which means that the Central Bank can keep track of that amount too.
And by looking at how often particular notes (by serial number) or quantities of coin (by year of issue) circulate, it can make estimates of currency destruction beyond its boundaries.
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