Author Topic: Modelling the coin/note border  (Read 4603 times)

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Offline Figleaf

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Modelling the coin/note border
« on: September 22, 2013, 12:48:58 PM »
From what started as 7 coins set ( 1, 2, 5, 10, 25, 50 paise & 1 Rupee) on the decimalization of Rupee, now the range has become only 5 coins.

Interestingly, in case of Pakistan, which almost paralleled India up to a decimalization, it has come to a three coin set. It has abolished paisa and has only 1, 2 and 5 Rupees coins. Incidentally, the have also stubbornly refused to shift up note- coin boundary ( or upper coin boundary, as many prefer to call it) even though they have issued 10 rupees Commemorative Circulation as well as 20 rupees Commemorative Circulation recently.

Other countries in the region such as Bangladesh and Srilanka have been more conservative.

You should take inflation into account. In a country with high inflation, it is not economically sensible to replace notes by coins, because low denominations disappear. Why make a new coin to replace a note that is bound to become irrelevant anyway? Moreover, while in a moderate inflation economy a 1-2-5 series of denominations makes more sense, a high inflation country will prefer a 1-5 series for the same reasons. For a practical illustration, see this thread.

Peter
« Last Edit: September 25, 2013, 11:34:59 AM by Figleaf »
An unidentified coin is a piece of metal. An identified coin is a piece of history.

Offline dheer

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Re: Modelling the coin/note border
« Reply #1 on: September 23, 2013, 10:07:56 AM »
note- coin boundary ( or upper coin boundary, as many prefer to call it) .

Yes study of note-coin boundary is interesting. In case of India, it is very surprising that the Rs 1 existed from 1947 till 1994 both as Note and coins ... although initially the coins were minted less and eventually more [if we just go by the gaps in years] ... the One Rupee note although last printed in 1994 was withdrawn around 1998 [??] ... a good 50 years when both co-existed.
In case of Rs 2, the coin made an arrival in 1990 and the note was withdrawn around 2000 [??] around 10 years ...
However Rs 5 coin is co-existing with the Rs 5 note from 1992 till now almost 20 years !!!
http://coinsofrepublicindia.blogspot.in
A guide on Republic India Coins & Currencies

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #2 on: September 25, 2013, 09:30:13 AM »
You should take inflation into account. In a country with high inflation, it is not economically sensible to replace notes by coins, because low denominations disappear.

When a coin is being designed, no one plans for high inflation. Moderate inflation, caused by Government borrowing from central Bank ( and not from bonds and other instruments), which is desirable to ensure GDP growth ( as per Adam Smith) is/ can be assumed for functional life of coins. It is either man made or natural disasters which cause high inflation, in most of the cases. In some cases, poor governance ( military dictators, corrupt politicians or economically unsound policies to appease a group or vote bank ) are the reasons.

As a matter of fact, depending solely on currency notes, tends to exaggerate the tendency to get notes of ever higher denomination printed, causing snowballing of inflation. Issue of coins, which have underlying cost of material, results in a constraint as to what can be issued.

If a country has no coins, then ever higher usage of notes of lower denomination causes reduction in life of notes. Unfortunately, in many countries, the organisational set up or machinery involved in removing torn/ dirty/ disfigured currency notes is so poor that one can see "stinking " notes being used in public.

The economic reason for issue of currency is to ensure smooth trade, increase GDP and hence enhance well being. The need for currency arose to eliminate barter trade. It is sovereign responsibility to ensure abundant availability of "trustworthy" currency. Coins and currency notes are modes and the right mode must be chosen, based on financial analysis.

Coins cost more initially but last longer. Unfortunately, most non-coin issuing countries only look at cost of issue. One must not forget that , if due to inflation, lowest denomination suffers demise, then percentage of notes being returned is much higher and cost of their destruction does not have associated recovery from alloy of the coins.

This is off topic from the thread but similar logic prevails in case of construction of roads.
May be this point can be shifted by the moderator to "modelling of coin boundaries", a topic of my current research.
« Last Edit: October 01, 2013, 12:00:06 PM by Pabitra »

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #3 on: October 01, 2013, 08:19:35 AM »
On the coin boundary, there are two  edges. One is where a note is replaced by a coin and other ( lower end) where mintage of coin is stopped.
USA is proposing to enact a law which will prohibit  issue of coins which cost more than their face value.
This is also an interesting study.
« Last Edit: October 01, 2013, 11:51:54 AM by Pabitra »

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #4 on: October 01, 2013, 11:56:43 AM »
I would like to seek help from members of this group.

On the upper end of coin boundary, I think of Japan 500 yen and Tunisia 5 dinar circulation coins as most expensive coins with reference to face value per capita income ( in terms of days of work).

On the lower end, I think of 10 won of South Korea and 1 tenge of Kazakhstan.

Can any member think of other answer?

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #5 on: November 09, 2013, 07:37:35 PM »
I'd like to see a technical, automatic mechanism, rather than a decision based on emotions. It is not difficult to calculate whether a coin or a note gives the largest seigniorage. Just develop the formula and, once a year, fill in the numbers. When the outcome says "switch to coin", do it automatically, without political interference and adjust the formula to reflect the next higher value.

Peter

Such mathematical model exists but is still subject to many subjective data.
Shall we open a new thread on identifying what factors influence this decision?

Offline Figleaf

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Re: Modelling the coin/note border
« Reply #6 on: November 09, 2013, 08:16:08 PM »
Sure. I think input factors are:

a) average production cost per unit
b) average time to replacement.

Example with completely hypothetical figures.

Suppose it costs €10 to produce, distribute and withdraw 100 notes of €5 that stay in circulation for 3 months
Suppose it costs €300 to produce, distribute and withdraw 100 coins of €5 that stay in circulation for 30 years.

Then, the cost of providing €500 in notes for a period of one year would be 4*€10 = €40 and,
the cost of providing €500 in coins for a period of one year would be €300/30 = €10.

Now increase the time of circulation of the note to 12 months and you find equilibrium. Or else decrease the cost of the note to €2.50 and you will find equilibrium. You can also play with cost and velocity of the coin.

Of course, you can drill down the cost factor. This will prolong discussion time, but I doubt that it would make much difference in the outcome. The important thing is to restrict the calculation to only one year. You can always do it again a year later.

Peter
An unidentified coin is a piece of metal. An identified coin is a piece of history.

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #7 on: November 10, 2013, 09:46:24 AM »
The cost which many tend to forget is the replacement cost of notes.
This is a big exercise since countries which keep track of notes replaced by putting serial numbers with star, have substantial set up to do this work.
Old notes are disposed off by burning and that too has big cost.

In case of coins, the other side of coin ( pun fully intended) is recovery of alloy in case of death of a coin. Royal mint appears to have derived considerable alloy as a part of their Alloy Recovery Programme in the current 5 and 10 Pence replacement of Copper Nickel coins by Nickel plated steel coin in United Kingdom.


Offline chrisild

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Re: Modelling the coin/note border
« Reply #8 on: November 10, 2013, 12:16:13 PM »
Old notes are disposed off by burning and that too has big cost.

Depends on the volume for example. Just as you can used "defunct" coins as a scrap metal, "ex-notes" can be shredded and processed further, and be used as thermal insulation material. Even when you burn them, the energy from that process does not have to be lost. Side note: Are replacement notes that are marked as such very common? In the euro area for example, those that are issued to replace defective notes simply have a new serial number, I think.

Christian

Offline malj1

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Re: Modelling the coin/note border
« Reply #9 on: November 10, 2013, 12:22:15 PM »
Australia has had polymer banknotes for many years, these last much longer than the paper notes.

However these notes can be recycled when they can no longer be used.

More here Reserve Bank of Australia.
Malcolm
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Offline Figleaf

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Re: Modelling the coin/note border
« Reply #10 on: November 10, 2013, 12:32:40 PM »
I think that text is misleading, Malcolm. Polymers can be recycled, but the cost is much higher than recycling paper. It cannot be burnt or taken apart. It's nice to make plastic pellets of them, but who will buy them and at what price?

Banknote paper is high quality, i.e. long fibers. It can easily be recycled, but the fibers will be shorter, giving a second quality paper. This paper can also be recycled, until the fibers are so short that they can only be used in carton, which can be burnt for energy or other purposes.

Peter
An unidentified coin is a piece of metal. An identified coin is a piece of history.

Offline malj1

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Re: Modelling the coin/note border
« Reply #11 on: November 10, 2013, 12:55:21 PM »
There is a huge industry today here in Australia in recycled plastic for Boardwalks, sleepers, garden edging, garden furniture, signs, bollards, etc.

See here for for just one example.

We are all educated to divide our garbage into our waste and recycle bins which is done.
Malcolm
Have a look at  my tokens and my banknotes.

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #12 on: November 12, 2013, 01:10:39 PM »
Suppose it costs €300 to produce, distribute and withdraw 100 coins of €5 that stay in circulation for 30 years.

I think it is too much to expect 30 years of functional life. Physical life too may not be that much.
Some time back, there was news of some chinese caught in using scrapped German 2 Euro coins ( please link up with news on this forum)

German authorities were scrapping 2 Euro non - usable coins by separating the core from the ring and selling them as scrap to China.
Some persons in China collected both and made them in to coin and sold them back to German tourist or airlines staff, who were caught.

My queries

1. When life is 30 years and Euro coins were issued in 2002, why were they deemed fit for scrapping in say 10 years?
2. The selling of scrap without melting does not genuinely result in actual trashing. What are the other options and their associated costs?


Banknote paper is high quality, i.e. long fibers.

The paper used for notes is Cotton based paper which has longer and stronger fiber than cellulose paper.

Australia has had polymer banknotes for many years, these last much longer than the paper notes.

Australia was the pioneer in polymer currency and sold this technology on

1. Longer life of notes
2. Better security features

Longer life would have caused shift of note- coin boundary towards continuation of lowest valued note since their life tends to be the shortest.


However, the technology has not been unanimously successful.
The major incidents have been
1. Australian company was claimed to have used unfair means for getting the contract ( Think it was Malaysia)
2. Notes were fading after some use ( I think it was Bangladesh)
3. The cost was 15 percent higher whereas the life was only 10 percent longer ( thus shifting the note coin boundary lower rather than upwards) ( think it was Nigeria) which decided to revert back to paper notes.
4. Not many countries felt that polymer notes were good for their climate and abandoned the trial ( think it was India, which introduced higher denomination of 10 Rupees coin as well as set up additional currency paper plant)
5 No country accepted that security features were better than paper notes (except perhaps Canada which has started using higher denomination notes of polymer) that however does not related to note coin boundary.

Not being a currency note student, I stand to be corrected wherever there is lack of knowledge on my part.

Offline chrisild

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Re: Modelling the coin/note border
« Reply #13 on: November 12, 2013, 04:31:05 PM »
When life is 30 years and Euro coins were issued in 2002, why were they deemed fit for scrapping in say 10 years?

Thirty years is an average of course. :)  Some coins don't "live" that long, others sure get much older. If and when cash gets damaged (notes or coins), it will be replaced. This is the old story that you mentioned: http://www.worldofcoins.eu/forum/index.php/topic,9281.0.html Note that the "operation" was between 2007 and 2010, and apparently involved 29 tons of coins.

Quote
The paper used for notes is Cotton based paper which has longer and stronger fiber than cellulose paper.

And there are more options. The first generation euro notes were basically made from cotton. That also applies to the newer ones, but that second generation - still cotton based - has a thin lacquer layer on either side. Sure feels different, and is also supposed to extend the average lifetime of a note.

Christian

Offline Pabitra

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Re: Modelling the coin/note border
« Reply #14 on: November 17, 2013, 06:51:13 PM »
Peter

I did prepare a mathematical model.

Here is first result of hypothetical data.

We can discuss the role each of the factors play.

Interestingly, since notes are created as a liability against assets or borrowing of the government ( either from market, foreign lenders or the central bank itself ), there is a cost of capital involved for the duration of the notes issued.

On the other hand, coin making is virtually creation of money itself and seignorage is the additional GDP generation.

Cost has been broken into major components so that transportation cost is highlighted to show the reason why countries in Africa and Asia who do not have nearby mints, prefer to issue notes.

Also, in case where the coins are made of plated steel, the return of coins is higher since the metal does not fetch any value. On the other hand, stainless steel coins are used to make blades or razors in countries like Bangladesh and other parts of Asia and Africa.

The purpose of currency was to develop increase in market transactions by eliminating barter by creating a trust worthy intermediary. This increases the velocity of money and thereby increases the GDP. Coins and notes are two generally accepted physical modes and cheaper one must be provided so that net GDP increase is maximized.

« Last Edit: November 17, 2013, 06:55:47 PM by <k> »