This picture has been in the news in the last few days:



old and new pound coinsAlthough frankly, if I was Queen Elizabeth, I’d be well annoyed with all those base-relief wrinkles that the Royal Mint is throwing around. Wow.

“We are not amused, Mr Osbourne. Not at all. And do not think, for even a moment, that we do not see through your subterfuge. We noted the timing of this announcement and how conveniently it coincided with your Budget. You have made us a distraction to our loyal subjects, you horrible little man. And you did not even have the decency to airbrush. Bastard.”

In particular, the Brits have been moved by the resemblance to the old twelve-sided thruppenny coin, which was retired when the UK decimalised in 1971. That said, I reckon they’ll be less moved when they realise that vending machines and parking meters are not going to accept a new £1 pound coin just because George Osbourne says so.

Why a coin though?

I realise that this question sounds a bit pedantic – but I’m posing it because the answer is quite interesting.

In the US, there is a fairly big debate around the $1 note. After all, it’s worth less than £1, and yet Britain has a coin instead of a note. Actually, Britain also has a £2 coin. So why would one country elect to use a coin where another elects to use a note?

Which brings me to the concept of seigniorage*, and why there are counterfeiters out there in the world.
*Pronounced sane-your-idge. With a near-silent “d”.

The Cost of Making Money

Question: Why would a counterfeiter make a fake $1 note?

Answer: Because it costs less than $1 to make.

$1 – cost of making $1 note = Counterfeiter’s Profit

When Central Banks and Federal Governments do the same thing:

$1 – cost of making $1 note = Seigniorage

That’s not the only form of seigniorage*, but it’s the one that’s the most obvious.
*The big seigniorage profits are made during hyperinflations. I wrote about how inflation turns into seigniorage in my post on The Global Currency of Reserve.

When decisions are taken about what type of money to make, the argument boils down to these two options:

  1. Notes are cheaper to make, but don’t last as long.
  2. Coins are often more expensive to make, but last a long time (and then get recycled).

Now obviously, given that notes are cheaper, and have to be issued more frequently, it seems like the US authorities are just greedy for more seigniorage revenue. And while that might make sense to the conspiracy theorists – it does make you wonder why the other countries are so altruistic with their seigniorage…

Are they really though?

Well, no. And to illustrate, I’m going to complain about paying for parking.

  • Every time I go to a shopping centre, I collect a parking ticket. And because I am rarely there for longer than an hour, but always there for longer than 15 minutes, the parking machine regularly demands R6 from me.
  • This. This is annoying. Because it means that I have to go to an ATM, and withdraw some cash, insert a R50 note into the damned parking machine, only to get R44 change returned to me as coins.
  • Those coins go into my pocket, and then get taken out and placed on my bedside table when I get home.
  • The next day, I go shopping. Without the coinage.
  • I return home with a further R44. In coins.

If we were dealing in notes, I would keep the notes in my wallet. But because we’re talking about coins, I don’t carry them on my person in general. I only ever carry them on purpose – and because my shopping trips are usually en route to something else – I rarely remember to take the coins to pay for parking.

And this is why countries like coins… Because you need so many more of them in circulation. We tend to spend notes quickly – but coins get stuck in jars and forgotten about in drawers. I’ve heard some estimates suggest that you need 3 to 4 times the value of coins in circulation as you would notes.

Which is why the other countries aren’t really that altruistic at all.

It’s just a question of choosing between volume over time and volume as a once-off.

And George Osbourne, apparently, feels like he can get away with another once-off…