A world where some currency loses value when handled would have a deflationary economy. What would the consequences to society be?

Question

Imagine a world which looks roughly like what we might call the “standard D&D setting”; not quite medieval, not quite Renaissance, something like 17th century London, where a penny buys a day’s food, a shilling (12 pennies) is a week’s pay, and a normal person might have never seen a crown coin (5 shillings). Between a penny and a shilling is a three pence coin. So people use that for (slightly) larger purchases.

Now, for Reasons to do with the government’s policy (which aren’t particularly relevant here) this thruppence coin devalues after too much skin contact: it changes colour, and this makes that coin worth only 2p instead of 3p (and then it does not degrade further). The question is: what are the economic and societal consequences of this?

I believe this is “deflationary” but I don’t really understand what that means in this context. Would people desperately avoid using these coins? Does the economy of the city crash somehow because this happens? Does everything cost much more than it would otherwise? Is everyone very poor?

(Assume here that coins are representative: a 3p coin does not cost 3p to make. This avoids the issue of people melting down the coins for the values of the metal in them.)

I don’t know enough economics to predict forward what would actually result from this deliberate policy. Obviously for a normal government this would be a bad idea: if I were a person with a coin in my pocket and that coin decreased in value. I wouldn’t like it. But if the government wanted this coin degradation to happen anyway (for story reasons), what would the larger scale consequences of that decision be?

Answer 1

It's not going to have any real effect really.

It will just mean that the "thrupeny" coin will be treated as tuppence in all transactions regardless of its current colour.

If you offer a trader (or anyone else for that matter) a coin that they definitely know is guaranteed to lose a third of its value (and may potentially lose it with the very act of being exchanged between the two of you) then they will as a matter of course only be willing to give you that reduced value in goods or services in exchange for it.

If it will only be worth 2p (in the near and expected future) then it is only worth 2p (now) .. simple as that really.

..

Alternatively.

If the only cause of devaluation is "skin contact" everyone might just wear gloves and use tongs to handle it.

But no one will waste time with that when they can just treat it as tuppence.

Answer 2

The Great Recoinage

Since you're imagining a place like 17th century London, let's take a look at what actually happened in 17th century London for our answer!

The year is 1696. Most of the coins in circulation in England at this time are either old hammered silver coins, some, perhaps centuries old by this time or else a few of the newer machine made coins --- a large number of which were couterfeits. Here's a shilling of Elizabeth I so you can see what we're dealing with:

(CPM Coins)

Hammered coins are very thin to begin with, thin enough that you can actually bend them with ease! They wear out easily. People clip them (a way of creating a bit of a nest egg by stealing some of the silver); people sweat them (putting them in a bag and shaking until some silver dust is formed); to make change, people cut them into pieces (this was very common practice in the US up until the mid to late 1800s!) and those pieces get clipped and sweated until a shilling has probably 9 or 10 pence left to it!

(Hansons Auctions)

Enter Sir Isaac Newton.

Far more well known for sitting under apple trees, Sir Isaac was appointed Warden of the Royal Mint, supported by the Exchequer at the time. His job was largely to oversee the effort of making Britain's coinage great again. Various branch mints got established to handle the minting of new coins. Incidentally, 1696 was also the year that the Bank of England was established in Threadneedle Street, not too far from the Bank of the Thames.

The result of this pantagruelian effort was a little more than 5 million quid in newly minted coins. Here's a shilling of William III:

(RP Coins)

Coins such as these would remain in circulation until the next great recoinage (1813); and those would remain in circulation until the next great recoinage, Decimalisation Day in 1971! The history lesson here is that whole economies don't crash because of some issue with the coinage. Especially such a trivial issue as you describe! The reality is that people are resilient and resourceful. They'll keep using those 3d coins until the very last moment --- and the unlucky sod who ends up getting a 2d coin that was worth 3d a minute ago will do whatever he can to make up for it!

First, he'll probably accuse the person he got it from of short changing him. They might have a scuffle. One or the other of them will go home 1d poorer and the world shall continue to revolve on its axis unperturbed. Whoever ends up with the rotten coin will probably try to pass it at full value in a dark and skanky pub. Perhaps even set himself up as a "money changer" down at the docks --- hey pal, I can see you're new here! I've got a really good deal on two shilling coins! For you, since ye're new here, one shilling each! The con actually works. In the US in the early 1880s, the government decided to mint a nickel (five cents) without the word "cents" on it. Naturally, Americans being clever and crafty people, some decided to gold wash the new coins and perhaps carve some reeding along the edge. Hey presto! A nickel becomes a half eagle! An amazing return on an investment of perhaps 50 cents!

(Etsy)

As for this being a "bad idea" for a government, I would strongly disagree with you on that! Governments do, in fact, produce automatically devaluing currency all the time! The UK doesn't, nor does the US. All of our coins ever minted and all of our currency every printed is still current, spendable and exchangeable for new at any bank.

An example of a government that does issue magically disappearing currency is North Korea where they occasionally surprise people with a revaluation and a whole new currency, making the old money useless and worthless. There are practical uses for this as well. During World War II, the US printed specially marked banknotes for use in Hawaii. Having learned a lesson from losing US territory, the Philippines, to Japan, these Hawaii notes were prepared and issued for use in the Islands out of an abundance of caution. If Hawaii fell to Japan as well, all the US would have to do is say -- sorry, those notes are now useless. Obviously, Hawaii never fell and those specially printed notes never had to be demonetised. You can still spend them, though they're worth much more to collectors. The American economy wouldn't have crashed and the world would have continued to revolve on its axis unperturbed.

---

Here's an example of a wedge cut from a Spanish milled dollar (8r):

(cointalk.com)

Answer 3

This is not deflationary.

What the setup in the question describes is just that there is a penny coin, a tuppence coin, and a notionally threepence coin. Since the threepence coin is of uncertain value, it would be avoided and therefore discounted, so that it would be accepted for maybe tuppence ha'penny, or maybe only for tuppence.

Because, you see, the government can make the coins all right, but they cannot set their value. The value of the coins is that which is accepted in trade, and the government can do nothing about it. The government cannot force anybody to accept the coin with a 3 on it as being worth threepence; the value of that coin will be whatever the market decides it will be.

Bonus:

In any functional economic system, the amount of money circulating as farthings and pence or other such small value coins is a (very) small fraction of the amount of money circulating as shillings, crowns, sovereigns, or any other such coins with reasonable value. The government's attempt to stimulate circulation is completely misplaced and would be utterly ineffective.

Answer 4

Barter

If the value of your money is variable, then you will find that Black Market trading and Bartering will increase in usage, with people reserving money for the type of transactions where it has to be used.

Which brings me to my next point:

People will set prices in such a way that the 3p coin is not used

If I have a coin that degrades over time, but other coins don't - then guess what the majority of people are going to do? Not use that coin. I suspect you will find that most prices will be in things like 5. I mean hell as the reason we have silly prices was initially so that the cash register company could force people to use the register and not skim off the top.

Answer 5

First and foremost: BAD COIN PUSHES GOOD COIN OUT.

SO if your 3p coin is something that devalues fast, it would be uses extensively and dominate trade, while "good" coins that do not devalue would be saved, invested, and even hoarded for the future.

People would do everything in their power to spend 3p coins as fast as possible, preferably on perishables (food, especially fresh fish, meat or milk etc) and then if the 3p coin is in danger of going bad it will be used to pay taxes, so that the "loss" is passed to the government.

But since the government is the one to mint the 3p coins, and pay in 3p coins to its employees, it balances out.

This is actually a pretty clever idea to force dynamic free trade between middle class urbanites (only people who would be able to use the 3pence fast enough) and ensure they pay their tax in time, out of their own volition and without having to remind them.

It will lead to a frenzied "hustle culture" among city-dwelling merchants, craftsmen and service-providers, who would benefit most from selling a lot of goods/services quickly for a low price, and then sprint to the Tax Collector's office to pay their dues. There would be a sort of Game of Chicken/ Coin Exchange service where crafty brockers would buy loads of "almost expired" 3pence coins for 2,5pence each then immediately buy wholesale or pay tax with it as long as it is still technically worth 3p.

Answer 6

In Germany there are private "regional currencies" issued as a substitute for the euro.

Most of these are depreciative in nature and known as schwundgeld (I think this can be literally translated as "depreciative currency").

The value of this money is reduced at a predetermined rate of time and is meant to encourage the holders to spend it quickly in order to boost local demand.

Here is a link to a document with specific details on this: Regional currencies in Germany

Answer 7

Inflation originally meant increase in money supply. If nothing else happens, money valuation changing from 3p to 2p would be deflationary in this sense, since there is effectively less money to go around.

There are two important questions that should be addressed: How is the money supply controlled (when does the government mint new coins)? What determines the real value of the currency (i.e. is there a gold standard or similar, and what exactly causes the coins to lose value over time, is it by government decree)?

On thing that could be said about those coins is that they tend to retain their value if not used. This favours hoarding, i.e. people would prefer to save their money instead of spending it. This creates a deflationary pressure since effectively it reduces the amount of money in circulation.

Generally some amount of inflation is preferential, since it keeps money circulating and promotes economic activity.

Answer 8

This is kind of like imagining using Trading cards such as MTG or Pokemon as a currency. Already there are people who collect rare coins (Numismatics ) and if you have coins that devalue themselves through use, having mint condition ones could well make them worth MORE. Imagine if you have a 3p coin from the first printing that was never handled and is still pristine. As more people see the value in collecting the amount of 3p in circulation will decrease which will only serve to increase the value of "mint condition" coins. Your "handling devaluation" will only make the coins worth more in the long run.

Answer 9

I feel like a system of credit will be developed to avoid using your currency.

If I setup a bank account, and have all my money in there except for a small amount of pocket change. I could then setup a line of credit with the bank and the vendor(s).

The vendor would tell me how much I owed, and the bank would move the money from my account to the vendor without using any coins.

It would, in principal, be similar to a debit card without the card.

Thus I could mostly avoid paying with a currency that loses value.

Essential, I would write a check and the bank would do the rest.

Answer 10

Very easily explained.

"this thruppence coin devalues after too much skin contact"

It is entirely and totally about how long that takes to happen.

This is the absolutely normal nature of how the world generally works.

Every derivatives trader on this list deals with it every minute.

Regarding say the USD, everyone does indeed assume that it's value is plummeting, over the decades. Every single person knows that ten bucks used to buy a lot, it now buys nothing.

It is literally what you described.

You have simply described the world as we know it.

The USD drops 1/3 every 12-13 years.

The answer to your question is simply that it drastically depends on whether that happens every 12-13 years (as with the USD) or a shorter time (perhaps a year) or a longer time (perhaps 100 years).

Answer 11

People will use the other coins

If you want people to use devaluing currency, then ALL of your coins need to devalue, and the amount they devalue has to be proportionally equal, measurable, uncontestable, and unmistakable for all coin types. If they are not, then people will just find something more reliable to use as currency.

If the 3p coin is the only one that devalues, then they will not see any use. No person in thier right mind will accept payment in 3p coins, they will simply refuse the payment and instead insist on being paid in 3 1p coins instead. Knowing this, no store owner or employer will ever accept a withdrawal in 3p coins either. Your 1p coins need to in the same amount of time become worth 2/3p, your shillings devalue to 8p, etc.

The second issue with your devaluing currency is that it is not measurable. Part of what makes money worth using that it represents a specific worth. If the coins slowly change color over time, then no two people will agree on when a coin has changed color enough to change its value. If red polished copper coin is 3p and tarnished black copper coin is 2p, then what is a brown copper coin worth?

It would take literal magic to make coins spontaneously change color from a 3p to a 2p coin in order to make it measurable. But that leads into the next issue of needing coins to be uncontestable. If I give you 3p that magically turns into 2p the second it touches your hand, then have I short changed you? Did you see that it started off as a 3p coin? If this happens, do I owe you an extra 1p coin or are you expected to eat the cost? No matter what, one of us is going to be arguing about how much money I just gave you, and if this is a common occurrence, then con-men will make a habit of giving people 2p coins and then arguing it was a 3p coin.

The contestability issue could be mitigated if you know at what point the coin will devalue, like if instead of being triggered by handling, you print on it: "This coin is worth 3p until the year 1498DR", but still not good because then a coin that devalues in 1498 is no longer proportional to one that is good until 1501. So, just like with not making all coins devalue proportionally, people will still want to argue about what coins they will accept as payments. Also, if you have printed devalue dates, the coins no longer become unmistakeable. If I have a stack of new coins, it would be easy to try to hide some old ones in it and hope that the vendor mistakes it for a whole stack of new 3p coins.

A better way to make devaluing coins is to use zinc

The best way to make coins devalue is to make all of them out of a substance that quickly loses mass over time. Historically, most coins were made out of very chemically stable metals like silver and gold but zinc is a very unstable metal that easily rubs away and corrodes. If 1 gram of zinc coin is always worth 1p, then a 3g coin will soon enough corrode down to 2g making it worth 2p. Since all coins are made of zinc, they will all devalue more or less equally; so, no one will argue about being paid in one denomination over another. Your coins will always have a weight that can be precisely measured; so, if I measure my 11 coins as worth 9p someone else can measure thier weight and come to the same evaluation. They also never change value when you hand them to someone; so, there is nothing about the transaction itself to contest. And they are unmistakable, because it is their weight and not what exactly they look like that sets thier worth.

If you want your coins to devalue by 1/3rd and then stop devaluing, it's even better because you can then use zinc to create a bimetallic coin which uses an outer rim made of copper, silver, or gold impregnated with a core that is 1/3 of the coin's total weight. The zinc slowly eats away making the coin lighter, but the government basically says that as long as the zinc fits flush into the X diameter hole in the Y diameter coin, you can weigh it the same as a pure coin of that metal.

The Economic Impact

Using devaluing currency is not much different than inflation. It will encourage people to convert thier money into things that are not money: real-estate, commodities, investments, etc. However, it does come with the advantage that it reduces actual inflation by quite a bit. This would help stabilize prices and salaries over longer periods of time which would eliminate some of the economic problems that happen when prices get fixed. So, a shilling a week today could be just as reasonable as it was 50 years ago, even if the government continues to mint new coins each year.

Another interesting side effect could be government sectioned refurbishment. Obviously, recoreing a coin is illegal, but as with many things, its only illegal when you are not the government. When you pay your taxes with an old coin, it might only be worth 2.4p. Then the government could without having to invest in any new precious metals, recore the coin with zinc restoring it to its 3p value for a very tiny fraction of the cost of a new coin. In this way, the government could reduce how much taxes they need to collect and thier operational overhead of minting new currency.

Answer 12

Money like this already exists in real life. Though it applies to all forms of money, and not a single coin. It is called Inflation.