Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Sunday, December 11, 2005

Pennies, Coins, Dirhams, and Fils

I have long argued that Canada (and the U.S.) should stop minting pennies and stop using them (for example, see here and here). My argument has been
  • Pennies don't buy anything any more.
  • The transaction costs of using pennies are seriously non-negligible.
  • When transportation and other costs are included, minting pennies generates negative seigniorage.

Imagine if the smallest-valued coin had the purchasing power of only one-quarter of a U.S. penny. In such an economy, one can readily imagine that people would just stop using the coin. And that is pretty much what has happened in the United Arab Republic [h/t to the Emirates Economist]

Despite Central Bank of UAE figures saying that 1, 5, 10 fils coins are in mass circulation, residents and shopkeepers say they rarely see them.

“The Central Bank has not withdrawn from circulation any of these denominations and continues to issue them according to the needs of banks in the amounts they require on a weekly basis,” Rashed Al Fandi, UAE Central Bank’s executive director for banking operations, told Emirates Today.

“The large quantities of these denominations in circulation shows their availability in the market.” The Central Bank maintains that there is a demand for small fils coins and that the denominations are in circulation in significant quantities.

But if you buy vegetables and fruits in Dubai, you are likely to end up with a bill that totals 95, 48 or even 60 fils. Stores round off the bill, often in favour of the customers.

“We round it off to the nearest 50 fils or one dirham,” says Zorayda Esquerra of Carrefour, Bur Dubai. [1 Dh = 100 fils]

Plus de change .... The Canadian Mint says the same thing:
Banks want the pennies, so we mint them.
They take the orders from the chartered banks as a sign of demand, a sign that people actually want these small, useless coins. But that is just plain silly.

Look at the markets: people do not want these small coins. In Canada, people take and leave pennies in the penny cups at cash registers. In New Zealand and Australia, virtually everyone is happy to be rid of their one-cent and two-cent coins.

In the United Arab Emirates, people round to the nearest 50 Fils. And they do this not because the smaller coins are unavailable; they do it because they are a nuisance.

The solution is to declare legally that pennies (in North America) and small-denomination coins in the UAE are no longer legal tender but must be accepted for deposit by financial institutions.
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