The E-Sylum:  Volume 5, Number 15, April 7, 2002, Article 13

THE BIG PROBLEM WITH SMALL CHANGE

  On Tuesday, April 2, Paul Podolsky reviewed a new book
  of numismatic interest in the Wall Street Journal.  The review
  is not available on their public web site, but I'll provide some
  excerpts here:

  "It may be a surprise to discover that fiat money is not a
  modern concept;  it goes back many centuries.  The idea
  resulted from a battle with a now forgotten foe -- the once
  chronic instability of small change.

  Before the 19th century, the relationship between, say, five
  pennies and a nickel (to speak in modern American terms),
  was anything but predictable.  Often the penny would lose
  value while the nickel gained. In "The Big Problem of Small
  Change"  (Princeton, 405 pages, $39.50), Thomas J. Sargent
  and Francois R. Velde reveal how disruptive such instability
  could be to economic activity and recount the often clumsy
  efforts of politicians and bankers to solve the problem.

  We have some difficulty, in our "fiat money" world, imagining
  why this problem arose in the first place, but it was real enough
  and truly vexing. Coins were once worth something in
  themselves, apart from their relation to other money: In particular,
  they were made from precious metals. Thus it happened that
  coins were clipped or shaved for the commodity value they
  would yield.

  Unfortunately, they would lose value whenever this happened.
  Thus it took more of such coins to come up to the value of the
  next coin in sequence -- more pennies to equal a nickel. Such
  "devaluing" decreased the penny coin supply, especially when
  its commodity value rose above its liquidity value (its exchange
  rate). As the metal was worth more, the coin was worth less.
  Forgery, a common problem for centuries, only added to the
  problem by insinuating worthless coins into an already
  compromised supply.

  The solution to this monetary conundrum is known as the
  "standard formula," mixing fiat rules and free markets. The
  government promises to exchange denominations indefinitely
  (five pennies for a nickel), to monopolize supply (no private
  mints) and to outlaw the physical manipulation of coin. The
  public's role is simply to act on its needs and impulses,
  determining for itself the quantity of pennies, nickels and
  quarters it chooses to hold.   All these elements must be
  present for the value of small change to be fixed -- though
  this took centuries to recognize.

  It can take a long time before a good idea is accepted.  The
  authors credit Sir Henry Slingsby -- master of the London
  Mint -- with arriving at the solution in 1661, but it wasn't
  put in place until 1816 in Britain and 1853 in the U.S"

  [Written by an economics professor and an officer with the
  Chicago Federal Reserve, it is primarily an economic book
  (as evidenced by the jarring use of the word "penny" in
  reference to the U.S. cent).   But it may offer some interesting
  insights on the evolution of coinage.   If anyone has a chance
  to read it, please let us know what you think.  -Editor]

  Wayne Homren, Editor

	coinbooks.org Web

The Numismatic Bibliomania Society is a non-profit organization 
promoting numismatic literature. See our web site at coinbooks.org.

To submit items for publication in The E-Sylum, write to the Editor 
at this address: whomren@coinlibrary.com

To subscribe go to: https://my.binhost.com/lists/listinfo/esylum