Since You Asked

Loose money in all that spare change

The disappearance of small coins will be little noticed, writes Tim Harford

‘There is a wish among the German population to keep hold of the small coins. can personally only join that opinion.’ Jens Weidmann, Bundesbank president, quoted in the German newspaper Bild

Why is a German central banker bothering to campaign for the retention of the euro cent? It’s not as if anyone is proposing scrapping them.

Actually, the European Commission has proposed exactly that.

Oh.

They have a case: one and two euro-cent coins are expensive to make, relative to their face value. And they are useless things, as are the British penny and the US cent.

But people don’t want to see these coins disappear.

There does seem to be a psychological barrier. This is most obvious in the US, which did away with the half cent back in 1857, when it was worth quite a bit – 14 modern cents, after adjusting for consumer prices. Relative to the wages of the day, the half cent was worth almost a dollar in today’s money. It was no small thing to get rid of the half cent when people were only paid a few cents an hour. Nevertheless, the coin was withdrawn and everyone survived. Modern pennies, because they feel like some kind of foundational building block of the monetary system, have clung on stubbornly.

And why not? We like them.

No, we hate them. Actions speak louder than words. People don’t use these coins as money, for the excellent reason that they’re not terribly useful as a medium of exchange – too heavy and too difficult to count when purchasing anything but the tiniest item. The reason that so many euro cents have to be minted is that people get the things in change but don’t then spend them. They end up down the back of sofas or gathering lint in people’s belly buttons.

Isn’t that Gresham’s law or something?

It’s actually a weird inverted form of Gresham’s law, which says that “bad money drives out good”. When two coins with the same face value are circulating, people will tend to spend the coins with lower metallic value and keep the rest. The commemorative John F. Kennedy half dollar, for instance, was 90 per cent silver when first minted in 1964. Later half dollars contained less, then no silver. Gresham’s law predicts that the silver half-dollars will not circulate – and indeed, they do not. According to the website Coinflation, the melt value of a 1964 half dollar is $8. But the situation with the euro cent is the reverse: people hold on to them not because they are too valuable to lose but because they are too trivial to use.

Or they are popped in a charity collection box. Charities have a lot to lose if small-denomination coins are abolished.

The cost of keeping these coins in circulation has been €1.4bn since 2002, according to the European Commission. We should be able to figure out a cheaper way to encourage donations.

But the euro cent is hardly the least valuable coin in the world.

Indeed not. The More or Less programme on the BBC looked into this in 2012 and found a number of absurdly small-value coins. A jar of 500 of Tanzania’s smallest coin, the 5 cent piece, was worth just one British penny. There were 1,300 Burmese pya to the penny. The lowest-value coin in the world was Uzbekistan’s 1 tiyin.

How much is that worth?

One hundredth of a som, which as I am sure you know means that the tiyin was worth about one-three thousandth of a penny.

Has any country withdrawn small-denomination coins?

Various economic basket cases have, yes: Sweden, Australia, New Zealand and the home of the next Bank of England governor, Canada. New Zealand’s smallest coin is the 10 cent piece, worth more than 6 euro cents or 5 pence. The most valuable smallest coin of all is the Norwegian krone, worth more than 13 euro cents or 11 pence. The Norwegian economy has coped.

Things are awfully expensive in Norway. Perhaps people are right to fear inflation if these small coins are eliminated.

There’s a question of cause and effect here. Are things expensive in Norway because the country abolished smaller denominations, or were smaller denominations abolished because things were expensive? Don’t worry about inflation: the effect of scrapping small coins is unlikely to be noticeable, and inflation in the eurozone is low anyway. I don’t think the bastions of small-denominationism – Tanzania, Myanmar and Uzbekistan – suggest there is anything especially prophylactic about keeping our smallest coins.

Also published at ft.com.

25th of May, 2013Since You Asked • Comments off