The economics of the new pound coin

Why go to all that trouble?

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Last Tuesday 28 March, the rollout of the new, angular, vaguely euro-esque £1 coin kicked off in banks UK-wide. It’s rare enough that Money gets the chance to write about, well, money, so we take the opportunities as they come.

We tend to take the occasional revamp of coins and banknotes as a matter of course. When you start to think about it, however, the “why” of the whole song and dance becomes difficult to answer. After all, putting out a new coin is a massive undertaking, all the more so in our day and age.

The new coin represents a fundamental redesign, with adjustments not just in the design of the coin but in its very shape; the new pound is neither the same size, weight, nor even the same shape as its predecessor.

Thus, one of the greatest hurdles for the circulation of the new pound coins is getting vending and self-checkout machines to accept them. The British Parking Association (BPA), for example, estimated a cost of between £90 and £130 each to upgrade existing parking machines (of which there are around 80,000 in the United Kingdom). That’s just for machines that need a simple software upgrade: machines that need physical updates could cost their owners, often councils, up to £350 each.

Then there are are other coin-operated mechanisms to take into account. Much has been made, for example, of Tesco being forced to remove the locks from its trolleys after it failed to upgrade them to accept the new pound coin. Other coin-operated mechanisms, like lockers, will also pose a costly challenge to business owners.

Things are further complicated by the months-long period of co-circulation, where both the 2017-issue and the old pound coin will be legal tender. Until the round quid is pulled out of circulation on 15 October, machines will need to be able to accept both varieties. Machines that offer change may have to do away with smaller denomination coinage during this period to accommodate the need for two pound slots.

All in all, it makes for a light purse and heavy headache. So again, we ask: why go to all the trouble?

The answer, according to the Royal Mint, lies in counterfeiting.

It’s no secret that a healthy proportion of the old pound coins in circulation are fakes: in 2015, it was estimated that approximately one in thirty was counterfeit. The number fluctuates from year to year as fakes are spotted and counterfeiters produce new imitations, but the relative number of imitations to “real” pound coins remains significant.

Where the 1983-issue £1 coin was highly vulnerable to counterfeiting, HM Mint makes the bold claim that its modern replacement is “the most secure coin in the world.” Elements like the new 12-sided design, its bimetallic composition, and the hologram-like image on the obverse are cited as support for this assertion.

HM Mint remains secretive about what it calls an additional “hidden high security feature.” The Daily Telegraph reported that this secret feature is a code readable only under a “specific frequency of ultraviolet light,” but HM Mint declined to comment.

These security features make it more difficult and costly, but perhaps not impossible, to produce a passable forgery. This means that counterfeiters may instead choose to opt for easier targets abroad, or else turn away from the business altogether.

But how does counterfeiting actually hurt the economy?

As a consumer, the distinct public ill of currency counterfeiting is less than intuitive. Most would concede that there must be something damaging about counterfeiting, but that wrong is hard to put your finger on. After all, if you can earn it and you can spend it, where’s the real harm? It may be an blatantly and unashamedly facile question, but can you answer it?

As you’ll be unsurprised to hear, however, the consequences of counterfeiting are very real and, at least in some small way, affect us all.

On one hand, banks will not accept detected counterfeits, and will instead seize them with no compensation for the merchant. Thus, if the bank at which it deposits its earnings detects the forgery, a shop that accepts a fake quid may be no better off than if someone had simply stolen a pound’s worth of merchandise.

For businesses, this means a significant cut to their profit margins if they unknowingly accept fakes. The Royal Bank of Canada highlighted an example wherein a grocer, working on a narrow margin of one-or-two per cent, would have to sell $5000 worth of merchandise to make up for losses incurred by accepting a fake $50 bill. These losses inevitably factor as costs of business just like any other, and end up getting passed on to the consumer in the form of higher prices for goods and services.

While losses to business may be the most straightforward cost of counterfeiting to society, it’s not the only one. HM Treasury also stresses the importance of preventing a “loss of confidence” in the pound.

The idea of a “loss of confidence” may sound theoretical at best and likely dubious even then, but the phenomenon is both real and quantifiable. A 2015 research paper from the Reserve Bank of Australia found that, for every standard deviation of increase in the rate of counterfeiting, there is a 0.2 per cent decline in demand for banknotes.

This becomes a problem when you consider the befuddling concept of “seigniorage.” To greatly simplify for the purposes of illustration (consult Google for further information), it’s the profit a central bank makes for issuing hard currency, essentially the difference between the cost of producing a coin or a banknote and the money’s face-value. Thus, if the public’s loss of confidence in a currency leads it to demand less hard cash in circulation, the government loses money and has to make up the profit elsewhere, often in taxes or cuts in spending.

With a view to minimising the costs associated with the two aforementioned cases, the government expends money and resources hunting down and prosecuting counterfeiters. These law enforcement costs add healthily to the total social ills caused by counterfeits.

All that, in brief, is why we’ve got a new pound coin. Though the costs of the transition seems steep, HM Mint holds that, in the long run, it will be far outstripped by the savings offered by more counterfeit-resistant coinage.

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