Sentiment and science: reasons to keep the coin

1 March 2013

United Kingdom

Paul Race

Glory 

Blog

It always saddens me when coins are taken out of circulation, and I’m very much of the belief that a coinless world wouldn’t necessarily be a better one. As the oldest standardized medium of exchange on earth, coins have existed in some form or fashion for eons and it’s fair to say that they’ve served us pretty well to date.

Despite this, and what with the rise of electronic payments and the ever increasing costs associated with minting coins, governments worldwide don’t share my view. In recent years many have chosen to pursue policies that reduce the number of lower denominations in circulation.

Whilst I totally understand the reasons why governments have chosen this path, there are credible arguments against it, both sentimental and scientific.

One of the main reasons that I’m pro-coin is that first and foremost we have a certain attachment to coins that is hard to let go of. We have an attachment to them as objects: They’re interesting to look at; we like to jingle them in our pockets; and we all get a little satisfaction when we get a shiny new one in our change.

They’re also quite handy for deciding who kicks off first at soccer matches and for impromptu trips to the vending machine. I also think that the buzz archaeologists get now when they dig up a hoard of Roman coins from a farm in rural England will be somewhat lost in a thousand years’ time, when all they find is fossilized credit cards. In short, a coinless world would be quite a strange one don’t you think?

Now the sciency stuff, with a little help from my good friend Dr. Ferdinand Georg Frobenius. Briefly, Dr Frobenius, or Doc Fro as I like to call him, was a German mathematician who, amongst other things, developed a way of calculating how many chicken nuggets fit into a takeaway box.

Whilst Doc Fro certainly left his mark on the fast-food world, he also can help central banks out with their coin problems today, as the very same theory can be applied to work out how to optimize low coin denomination availability for retailers, commercial banks and the public alike.

Doc Fro’s biggest selling point is that he can help us avoid inflation. One of the key problems associated with scrapping lower denominations is that it causes inflation in food and petrol prices.

For example, if the U.K. were to remove its 1p and 2p coins from circulation, a natural rounding up of prices would occur. As the next lowest denomination, prices would be set at 5p increments, meaning that a litre of fuel no longer costs 132p but 135p and so on.

The value of lower denomination coins then is not to be underestimated. Doc Fro helps us avoid this by giving us insight into how to manage coin circulation better.

Not to bore you with the details, the essence of Doc Fro’s theory is that taking coins out of circulation is not the answer, and the best thing we can do, is to get smart when it comes to the coin cycle.

One example of smart coin-cycle management was achieved by Bank Negara in Malaysia. Unlike many other central banks, Malaysia's have been proactive and pragmatic in balancing their minting costs versus improving the circulation of their coinage.

Key to their strategy is to deploy specialized coin deposit units whereby small businesses and individuals can get notes in exchange for their hoarded coins, which make their way back to banks and retailers at prime reclamation locations.

It was through such astute introduction of technology and public education programmes that Malaysia was able to tackle the problems of low circulation and high minting costs head on.

Many similar success stories from around the world also demonstrate that getting rid of lower denominations is not necessarily the best option, and that there is another way.

Low circulation caused by high minting costs can be mitigated through technology that encourages individuals to exchange coins for notes or other value-holding media. So to all central banks looking to scrap lower denominations, the message from me is to keep calm and think, "What would Doc Fro do?"

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