Thursday, November 30, 2006
Two points I'd raise. First, a friend said to me last night he cannot understand why we still have one-dollar bills. (His family is Canadian, and he thinks loonies and two-nies are great.) He said the only reason we don't have dollar coins is because the ink-and-paper industry will not let the US retire the dollar note. It's worth remembering that the Sacajawea coin was in part a sop to the copper industry. The ol' Susan B. Anthony's biggest problem was that it was hard to distinguish by feel to the quarter, particularly to the blind, so on came the 'sackie' with the smooth edge. Does the court intend to review coin design? Moreover, new dollar coins with rotating presidential heads on them -- imitators of the 50-state quarters -- are scheduled to come out next year. If people wanted to hold the coin dollars, wouldn't sackies have been more popular? "But it would save us $500 million a year!" you say. That's true only if the demand for currency -- which provides the US with seigniorage -- stays at current levels.
Which begins my second point: Much of the U.S.'s seigniorage revenue comes from demand for US currency held overseas, which is about 2/3 of the currency the US creates. Not all of that is for Colombian drug lords, either. Most currency holdings are just developing country households who use the dollar as a saving instrument because stable banking systems don't exist there. When the US changed the style of its currency in the 1990s, older US currency became less desirable. (It was common when traveling to the xUSSR right after the fall of communism to go to a bank and be sure your bills were the newest printing, or else face a 5% discount in Russia, Ukraine, etc. The discount in Ukraine when the new $100 bills came out in March 1996 were reported at even 7% some places in Kyiv.) The value of these dollar holdings by farmers living away from the central cities of African countries, for example, would fall as a result. You wonder if this judge realizes that as his ruling spreads out in news around the world, he may have just caused a substantial drop in the wealth of the world's poor. Such losses could cause the dollar to be sold in favor of euros or yen as those families shift their wealth into more stable currencies. (US coins, by the way, are highly unlikely to be found in circulation elsewhere except Canada and Mexico.)
Not that I dislike money with colors and shapes. But fiat money isn't money by government fiat, it's money because others accept it in return for real things. What causes that acceptance is quite subjective. I still use old Ukrainian 100 karbovanets notes for bookmarks at home; one worth about $2, when they stopped circulating in Sept. 1996 they were worth about $.00056.