Coining It: Our Currency Is Worth Every Penny

Listener: 29 July, 2006. 


Keywords: Macroeconomics & Money; 


The change of coinage over the next few weeks will pay for itself. Not only will the new coins be more convenient to use, but also they are cheaper to make. The savings will pay for the administrative costs of the change. Today’s currencies cost less than their face value. The old 50-cent piece costs about 20 cents to make; its replacement will about cost about 3.5 cents. 


That is also true for our notes. The polymer ones, introduced in 1999, cost about 10 cents each, despite having face values between $5 and $100. Hence the attraction of counterfeiting. Yet, despite their low manufacturing costs, the notes have numerous features that make imitation very difficult. Probably only one in three million notes are duds – typically poor forgeries of the pre-polymer kind. When you are handed a note in New Zealand you don’t check its authenticity. You have to in some countries. 


The coins also have cunning features to discourage counterfeiting. They are not a single piece of metal, but contain a steel core surrounded by layers of carefully graded copper and nickel that have an electronic magnetic signature which coin-using machines can recognise. (That is why Australian and Fijian coins are rejected.) 


Once upon a time, the metal in coins was near the face value (it was a fraction below because of the cost of manufacture). A gold coin was made of gold. Today our one- and two-dollar “gold” coins are made of an aluminium-bronze alloy, and cost around 10 cents including manufacturing. 


Why do we accept coins or the notes whose cost of production is well below their face value? Because we know the next person will also accept them. Underpinning this is that the issuing authority, the Government of New Zealand through its reserve bank, will also accept them, especially for tax payments. 


Notes used to have the “promise to pay” on them. Nobody was sure what that meant, but we felt good about it. Nowadays we are so trusting that they say nothing. There is the signature of a Governor of the Reserve Bank. Many $20 bills are still signed by Donald T Brash, the previous Governor. We trust our currency so it does not matter. (It is not every country in which the Leader of the Opposition guarantees the value of its currency.) 


That our notes and coins are not fully backed to their face value is efficient because they are so cheap (and yet robust). A fully backed currency would cost more to make, and that would be a waste of – ahem – money. 


The profit from the issuing of the undervalued currency is called “seigniorage”. In the first instance it is a gain to the Reserve Bank that issues the currency. But the bank is required to pay the seigniorage to the Treasury, so it becomes a part of the government revenue. If the currency was produced at full face value, there would be no payment and we would be paying more taxes. Unfortunately, the seigniorage is small, amounting annually to about $10 per New Zealander. 


(There is also seigniorage on tokens such as those issued by the motor trade and the booksellers associations. The funds are used to fund their organisations. You don’t have to pay it: just don’t use the tokens. Since they are convenient, we do.) 


Not all “money” generates a seigniorage. The cheques you write are not money, but instructions to transfer the money in your bank account. The deposit may be “money”, but the costs of administration mean there is no seigniorage. Instead, you may pay bank fees for the service. Were there any additional benefits to the bank, the profits would be quickly wiped out as they competed by offering higher interest for your deposits. 


The government issues only so much currency. Partly that is because it is all we want to hold. But the government does not force more on us, to increase seigniorage and lower taxes. That would be inflationary and, as Milton Friedman famously pointed out, the tax of higher inflation would affect us all. 


<>The New Zealand currency system is thought to be one of the best in the world. Our notes and coins are worth every penny.