Saturday, February 03, 2007

Not getting much currency

A penny is 1/100th of a dollar. A dollar isn't what it used to be. It costs more now to make the penny than it's worth. Many economists have suggested it's time to ban the penny, but there is great affection for the penny (for one thing, it's got Lincoln's face on it). But there's no real need to make transaction so finely priced. What to do?

Austan Goolsbee writing in the New York Times picks up the suggest of François R. Velde:
As Mr. Velde explained in an interview, “We face a very medieval problem so I took inspiration from the medieval practice of rebasing.”

He would rebase the penny by having the government declare it to be worth 5 cents.
At first that sounds impossible. But our coins are just tokens the government gives a value to. We can say they are worth whatever we like. Indeed, Mr. Velde observes that the United States did something similar in 1834, when it changed the gold-silver ratio and suddenly the half-eagle $5 coin was actually worth $5.625.

Pennies would then cost a little over 1 cent to make and would be worth a nickel, so the government would again be making a profit on money. We would have plenty of new Lincoln nickels so we could stop minting our current nickels at a heavy loss. The Jefferson nickels would stay in circulation, just as the old wheat pennies do now. Because metal in nickels is valuable, though, they would probably be melted down.
In the UAE the problem we face is that there are not enough small bills in circulation. Crisp 100 dirham bills spat from ATM machines are common (a dirham = US$3.68) but it's sometimes difficult to make smaller transactions for lack of small bills. Usually one party eventually blinks and comes up with the small bills to make it happen.

Banks charge businesses 1 percent for small bills, and ration small bills to other customers.

The EclectEcon has long advocated banning the penny.

UPDATE: Marginal Revolution discusses the Italian shortage of small notes.


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