Friday, February 02, 2007

Fiat coins 

Posts by John Palmer and Tyler Cowen bring up the possibility of removing the penny from circulation. In the latter we read of a Federal Reserve Bank of Chicago piece that suggests simply rebasing the penny coin to be worth five cents and withdrawing the current nickel from circulation. (I noted earlier that at December 2006 prices, the US Mint was losing 3.34 cents per nickel produced.)

The value of tokens (which is what the coin is in a fiat money world) can be real and not just subject to whim. One example: When the hyperinflations in eastern Europe occurred, most of the monies were paper, but public telephones still required coins. Babushkas would sell the coins at many times their face value, capturing the value of the token as something which operates the phone rather than the state phone system. (Alas, the phones were made free and took away this side business.) Similar effects would occur to the vending industry here in the States if the nickel were removed and the penny rebased; while I doubt the effect is large in the aggregate, the effect on certain groups might be substantial.