It is a welcome relief when the narrative in the current economics debate throws up a sufficiently serious matter that we can take a break from thinking about Brexit and the gravity model.
Nick Macpherson, former permanent secretary at the Treasury, is exorcised about Treasury plans to abolish the one and two penny coins.
He exclaimed, on Twitter: “Only banana republics don’t have a coin representing the lowest denomination of their currency.”
Nick’s tweet is an indirect remark about the fact that countries that experience hyperinflations out of necessity abandon the use of the smaller denominations of their currency, on the journey to discarding the currency altogether. When you get to the point of needing holdalls full of notes to buy your groceries, you have no need for small coins.
But hyperinflations have typically been caused by profound breakdowns in political order. Extreme pressures on public finance caused by war, or a collapse in public order and the willingness to consent to normal tax collection. Although hyperinflationary economies abandon small coins, we can be sure that the reverse causality does not operate: republics don’t slip into banana status because they abandoning small currency units.
The modern consensus on the best rate of inflation is that it is low and positive. Before we thought the zero bound was relevant, central banks were assigned two p er cent. Now some – me included – support a higher number, like four per ent, to make more room for interest rate cuts fighting a recession [in the long run, achieving a four per cent target will lead to a correspondingly higher resting point for central bank rates]. So eventually, even at ideal, low and positive inflation, all Republics, even Banana ones, will abandon their smallest denominations.
In fact over grand sweeps of time the currency unit will be continually recalibrated. In a thousand years, if the pound is not already replaced by the Euro or Canzuk dollar, it will have been supplanted by the New or Super-Pound.
Macpherson followed up with: ‘to abolish penny would be to give in to inflation and trash 1000 years of history’.
In fact, we have, as many have pointed out on Twitter, already been travelling down this journey, abolishing the farthing in 1960, the old penny in 1971’s decimalization, and the half-penny coin in 1984.
This is as it should be. Currency needs to be divisible. If the smallest physical denomination were £50, trade would be inconvenient. Anything worth less than that would have to be bought in larger bulk than needed, perhaps on credit. Or, if the good were not storable, vendors would have to set up accounts for customers, taking advance payment of £50, or offering credit, the account only run down once enough of the small item [say a 1970s penny chew] were eaten.
But it only needs to be divisible up to a certain point. Beyond that, the extra convenience of finer units is outweighed by the inconvenience of managing small coins.
Also, ultimately, cutting out some of the smaller denominations helps what economists call the ‘unit of account’ function of money. In hyperinflationary economies like Zimbabwe, 100 trillion dollar notes were in circulation. You really have to be on top of your large units to check your change when a lot of zeros are involved. But similarly, it’s much easier to do mental arithmetic in units of 5p or 10p. If my Sainsbury’s receipts had items priced down to the last 0.00001 of a penny, checking them would give me a headache.
Remember too that our economies are moving rapidly towards widespread use of electronic payments using debt and credit cards, and smartphone-app equivalents. So the actual suite of physical currency units is becoming less and less relevant. People are slowly turning away from not just 1p coins, but all our notes and coins.
Macpherson pointed out rightly that ‘symbols [of an economy with sound monetary policy] matter’. But we have plenty others. A large carbuncle of an imitation-classical building for the Bank of England, with impregnable-looking walls. Ornately decorated polymer notes with historical figures and old fashioned writing. All of it [ok, perhaps not the polymer] communicating that ‘this has been here for a long time and so will be around for a lot longer!’
The symbol of the 1p can safely be guarded in the Bank of England museum, alongside the farthing, old penny, and the half-penny piece.
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