Coins and inflation

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by Richard Giedroyc

April 9, 2013 – publishes articles almost continuously announcing either new coins being issued, or coins being withdrawn. Coins meant for circulation come and go due to the economic climate of the times.
Coins of Angola issued since 1976 serve as a good example of what can happen. At that time, recently having become an independent nation, this African country issued coins in denominations of 10, 20, and 50 lwei and 1, 2, 5, and 10 kwanza. Inflation was becoming a problem. Only two years later a higher value 20-kwanza coin was added to the mix for this reason. (Every increasing bank note denominations reflected the inflationary problems of the period as well, but will not be examined in this article.)
As inflation became a greater problem coin production ceased after 1979. Bank notes were the only currency issued throughout the novo (“new”) kwanza currency reform of 1990 to 1995 and the kwanza reajustado (“adjusted”) currency reform of 1995 to 1999.
Coins re-entered Angola’s currency system with the introduction of the “second” kwanza in 1999. In theory inflation was under control. The coins issued were in denominations of 10 and 50 centimos, and 1, 2, and 5 kwanza. The new coins recently announced to be issued during 2013 are in denominations of 50 centimos and 1, 5, and 10 kwanza. A bank note of a new, higher denomination has been drawing some attention to the potential for uncontrolled inflation once more appearing in the local economy. The demise of the 10-centimos and introduction of the higher denomination 10-kwanza coin have been largely ignored but are additional potential red flags.

When do you issue coins, and when don’t you? When is it practical to use coins in commerce, and when do coin substitutes such as bank notes become more practical?
Today the headlines are typically focused on a low value coin being discontinued due to the cost of its production or raw materials becoming greater than its face value. The introduction of a new, higher denomination coin is typically due to it being more practical to do away with a low denomination bank note in favor of a coin, again due to the costs of production and projected longevity of the coin versus the note in circulation.
Inflation has always been with human societies. You can observe inflation simply through the lack of precious metal content in our modern coins. But, what can a country such as Angola do to control the cost of manufacturing its currency while battling inflation?

A coin is of greater value to the issuing authority than is a bank note of equal face value due to the production costs and anticipated time the coin will circulate as compared to that of the note. When an inflationary environment is projected to interrupt the use of the denomination entirely the roles may be reversed, with it becoming less expensive to produce the notes due to the shortened circulation period being anticipated.
Turkey, however, has found it to be expedient to issue unusually high denomination coins that keep a reasonable pace with the needs in an inflationary environment. These denominations eventually become obsolete as well, but are in use long enough to justify the cost of their production.
Russia had a different experience with rampant inflation when subway and telephone tokens were bartered as substitutes for government issued coins and bank notes during the late 1990s. The purchasing power of coins and bank notes was quickly eroding. It was the service that was represented, able to vend a ride or make a telephone call with the same token no matter what happened with inflation, that made these tokens inflation resistant as long as the servicing entity didn’t change the vending mechanisms to accepting coins.
The United States now uses what it calls “forever” stamps – stamps that carry no denomination, but can be used to post a letter regardless of if the postal system has raised its rates or not since the stamp was purchased.
Can coins continue to have utility in the face of inflationary challenges? Thinking outside the box, as these illustrations show, can make the answer be “yes.”