Coins with nominal value

Money with nominal value must be considered separately as an example of natural money evolving into credit money (fig. 16).

It is believed that the first of the best-known attempts to introduce credit money was made by Emperor Nero, who decreased the content of gold in coins (common folk at the time believed he was «spoiling» coins). Thus, for the first time in history the value of metal in a coin became lower than its nominal value, but still was high enough to define consumer properties of metal.

Gold, circulating as jewelry, at present is always mixed with copper, silver, nickel and zinc to increase its shine and durability. Consumer properties of such gold improve, but its exchange value as the goldcontaining metal decreases. Thus, if gold was «diluted» by other metals to an insignificant measure, there was no social controversy. However, as soon as this proportion exceeded the limits of what was accepted by the public conscience, unrest grew and riots sprung up — thus the society tried to make the State executives change their viewpoint.

«At first coin minting was a private trade (in Russia, for example, coin minters were known as “livtsy” — “casters” and “serebryaniki” — “silversmiths”). Then minting was monopolized by the State and coin production began at State premises known as Mints.

In the world of ancient civilizations, as has already been stated above, coins were made from pure silver and gold (Greece) or their alloy (Lydia). Then they started adding hardeners (for instance, copper in gold alloys). Too high an amount of hardener resulted in coin spoiling.

Coin spoiling by the State is a deliberate act of decreasing the weight or the standard of coins while preserving their face value, in order to get profit¹⁴²  This means that, together with the monopoly on coin minting, the State got the opportunity to spoil coins.

The decrease of the amount of metal in coins is usually more or less palpable and is achieved by various means. For example, it is done by simply decreasing the weight of freshly minted coins without any damage to the quality of metal or by spoiling the metal, mixing it with a cheap additive, whilst the weight of coins either stays the same or increases. Also, sometimes a precious metal is simply replaced by a nonprecious one.

Coin spoiling was broadly practiced in slave-trading and feudal societies, especially during wars which put all involved parties in a tense financial situation. Thus, in Rome the weight of coins was a kind of barometer, which indicated periods, when tyrannical power of the Emperor, or social unrest, significantly increased. Historians provide us with the following evidence: a silver denarius during the reign of Augustus (63 BC — AD 14) weighed 3.89g; in Nero’s time (37–68), its weight went down to 3.41g and 15 percent of additive was mixed in. In Commodus’ time (161–192), it weighed 2.85g and the amount of additive had grown up to 50 percent; at Septimius Severus’ time (146– 211), it’s already up to 60 percent, and an old denarius is now twice as expensive as a new one. Quite often coins had a copper core, covered with thin silver plating. This was nothing else but official counterfeiting of coins»¹⁴³

It was coin spoiling that demonstrated the State’s power. Common folk and traders accepted these coins because, on the one hand, it was acceptable for paying taxes, and, on the other, apparently, the State could force traders to accept this and no other money as the means of payment for their goods.

Coins began to differentiate into full-value coins and change. Fullvalue coins are a type of monetary unit in the form of an ingot (usually round-shaped), made from an alloy containing a precious metal. Face value of a full-value coin was equal to the value of the amount of precious metal contained in it. Billon coins are another sort of monetary units, looking the same as full-value coins, but, in contrast to the latter, their face value was higher than the value of the alloy they were made from, as well as higher than their production cost.

Copper coins (fig.17) nominated in silver, minted in the time of Russian Tsar Nicholas I (1840), can serve as an example¹⁴⁴

 

Иллюстрации из книги А. Ю. Грибова "Деньги и ценные бумаги: сущность и правовой режим"

Иллюстрации из книги А. Ю. Грибова "Деньги и ценные бумаги: сущность и правовой режим"

 

In Russia, coin spoiling by Princes and Tsars, spoiling of silver «grivnas» by cutting off pieces and the emergence of «thief» money led to complete disappearance of full-weight coins, social unrest and riots («copper riot» in the time of Tsar Alexei Mikhailovich in the mid.-17th century) Trying to avoid difficulties, the government began to mint copper money with an enforced exchange rate. As a result, the market value of the silver rouble began to grow compared to its face value, silver almost entirely disappeared from circulation and was hoarded by money-lenders and money-changers, and commodity prices in general went up.

Difficulties experienced by «bimetallic» countries are explained by Copernicus-Gresham’s Law, discovered in 1526 by the Polish scholar Nicolaus Copernicus and in 1560 by the English financier Sir Thomas Gresham: «Bad money drives good money out of circulation"¹⁴⁵. This means, that if two kinds of coins, interconnected by a legal correlation of exchange, are in circulation in the same country at the same time, there arises the trend for disappearance of the better (in terms of their commercial value) coins. What happens is precisely this: good money is either hoarded or used in foreign trade, or remelted and then exchanged for bad money.

Eventually, copper money was withdrawn from circulation. In the late 17th century, the amount of silver in rouble coins was decreased by 30%. In Russia, up until the 17th century, mining of precious metals was extremely underdeveloped, and because of that Mints, which in the 17th century were monopolized by the State, remelted foreign coins. According to the «monetary regalia» of Peter the Great, export of precious metal bars was strictly banned, whilst export of spoilt coins was allowed.

As the price of the precious metal component in coins with low face value continues to grow, there arises a problem of the object component of coin value being higher than its liability component.

«The Swiss Government decided, from the 1st of January 2007, to withdraw from circulation one-centime coins (0.0076 US dollars). It costs 11 centimes to produce a one-centime coin, as Hans-Rudolf Merz, Head of the Federal Department of Finance, has calculated. His plan included saving another 230 500 dollars by eliminating five-centime coins as well, but consumer organizations, fearing that round numbers on price tags would in fact mean growth of prices, won the fight to save five-centime coins.

СThe cost of metal content in United States one-cent coins (97.5% zinc core, 2.5% copper plating) rose up to 77% of their face value. Also, if one adds the minting and distribution costs (0.0061 dollars per one cent), it turns out that the United States Mint’s costs involved in producing a one-cent coin exceed its face value by 38%. The US cent has been through this before: in 1982 the cost of its copper content exceeded its face value, and as a result the coin’s weight was lessened from 3.1 to 2.5 grams, and the copper content was reduced from 95 to 2.5%.

The five-cent coin weighting 5g (75% copper, 25% nickel) costs Americans 4.5 cents, or 5.75 cents including production costs, which exceeds the face value by 15%.

The value of metal content in Russian coins may also be higher than their face value… But the information on metal content in Russian coins is restricted… In Russia, too, the cost of metal content is close to the face value. In a one-kopeck coin metal content exceeds its face value by over 100% percent… In the early 1990-ies the Central Bank of Russia even had to cease minting small change, as the then First Deputy to the Central Bank President Arnold Voilukov confessed in 2003: «Our coins contain copper and nickel, and thus reminting them even with the help of rather primitive technologies would be profitable"

Even paper money may turn out to be cheaper than the material it is made of. The catastrophic inflation that hit Germany in 1922 (prices were multiplied by 5570) and 1923 (by 1300 billion) made banknotes more expensive than paper. And in 2003, a Web portal for travelers Inyourpocket.com, calculated that in Byelorussian restrooms it is cheaper to use one-rouble bills than toilet paper. However, in 2004 President Lukashenko withdrew one-rouble banknotes from circulation"¹⁴⁶.»