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What is the value of an individual piece of currency itself based on the efficiencies it allows in trade, in contrast to the value it represents?

For example, people often talk (complain) about the cost of manufacture of a single US cent coin being greater than one cent — but to me, this seems an irrelevant comparison. A single coin will be used in many, many transactions over its lifetime, facilitating the efficient transfer of (possibly) thousands — or tens of thousands — of dollars. Surely that is worth far more than one cent.

Without use of that coin, the parties involved may have had to round prices up/down, purchase multiple items at once, or forego certain transactions altogether. Smaller denominations are useful by the same logic that drives public companies to split their shares, making it possible for people to purchase just a single piece of "penny candy" if they would like, as opposed to being forced to buy "five for a nickel" (or none at all.)

Beyond that, physical currency has a value simply in facilitating efficient trade. If there weren't enough coins to go around, merchants may have to wait for somebody else to spend them (or the government may have to mint more, which raises its own issues since that also involves introduction of additional inflationary value) before customers have enough to conduct trades.

I realize these are somewhat unrealistic scenarios, since in practice there are typically enough pieces of currency around that trade isn't significantly impacted. But this shouldn't change the fact that the currency is still increasing the efficiency of trade, in however minor a way, and that in virtue of the large number of trades in which those pieces of currency will (likely) be involved, the aggregated value becomes quite significant.

I want to strongly emphasize here that I am not looking for answers that address things like forex value, etc. I've found it extremely difficult to even research this topic because of the multiple meanings of all the terms involved (just try searching for "use value of currency" and you'll see what I mean) and a satisfactory answer need only point me in the direction of appropriate articles/books, so long as they directly address the aspect of currency in which I'm interested here.

EDIT: I should also clarify that I'm not primary interested in coins. That's just an example. I'm interested in how to estimate the value that a currency provides through facilitating financial transactions, regardless of the physical nature of the currency (e.g. paper, metal, whatever.)

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The value of something, in this case money, is based on it's demand; and since you want the value based on it's efficiency, not what it can purchase, you are looking for the value of money based on how efficient money is. I believe I have just the answer for you.

Your missing variable is the Velocity of Money. The demand for money and the Velocity of Money are inversely related. (your question emphasizes this point, "in contrast to the value it represents?".

The velocity of money (or the velocity of circulation of money") is a measure of how fast money passes from one holder to the next. It is most commonly measured as the income velocity of money, which is the frequency at which the average unit of currency is used to purchase newly domestically-produced goods and services within a given time period. In other words, it is the number of times one unit of money is spent to buy goods and services per unit of time.

Vt = PT/M
where

  • Vt is the velocity of money for all transactions in a given time frame;
  • P is the price level;
  • T is the aggregate real value of transactions in a given time frame; and
  • M is the total nominal amount of money in circulation on average in the economy. Thus PT is the total nominal amount of transactions per period.

Hope this helps.

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  • $\begingroup$ Except one would have to calculate different velocities for ever coin/banknote type to answer what the OP asked $\endgroup$ – Fizz May 20 at 18:37
  • $\begingroup$ Yep. Also see thismatter.com/money/banking/money-demand-money-velocity.htm $\endgroup$ – Clinical_Coder May 20 at 18:41
  • $\begingroup$ Velocity would indeed be part of the calculation (to determine how many times a coin changes hands) but I'd think that without a measure of how much a physical currency contributes to the efficient transfer of value, it still won't get me there. I'm thinking more along the lines of comparing use of currency in transactions to other methods of payment (such as credit card, ACH, PayPal, etc.) which are often associated with fees of their own. Coins basically do for "free" what credit card companies charge for. Therefore they must be adding value.. just value we aren't tracking properly. $\endgroup$ – Bill Clark May 20 at 20:39
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Before the availability of electronic money, the intrinsic value of currency might be estimated as the value of all gains from trade under a currency regime minus the value of all gains from trade under a barter regime plus the value of human time saved via the use of currency minus the cost to produce the physical currency. Since the nature of trade is incomparable between the two regimes the value of time saved is hard to estimate. Since the nature of trade is incomparably improved, the volume of trade is incomparable between the two regimes.

The gains from trade is the total improvement in the welfare of each trader as a result of the trade having taken place. Measure welfare in smiles or sense of well being or dollars or whatever.

After the availability of electronic money, the intrinsic value of currency might be estimated to have been reduced by the amount of revenue necessary to support the provision of electronic payment services. Since banks want customer loyalty so they can sell various other services it might be hard to know how much you would have to pay to receive electronic payment services alone. The value of these services is more explicit at businesses such as Paypal and Western Union and Remitly but these do not constitute the bulk of services in use.

Lastly, people are concerned about the cost to mint coins not because they fail to recognize the value of the existence of currency. They are concerned about the illegal arbitrage of melting coins to be sold for the value of the metal. This is temporarily remedied by the mint when it collects old coins and re-manufactures using less expensive alloys. They are also concerned that small denominations are not worth the time to count them.

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  • $\begingroup$ This is more along the lines of what I'm wondering... but do you know of any published papers / books that address this aspect of currency, specifically? I should note (and have edited my question) that coins are merely an example; I'm not actually trying to defend the penny here.. I just figured it was useful to have a concrete example. $\endgroup$ – Bill Clark May 21 at 4:13
  • $\begingroup$ I think most first year university economics textbooks might address this briefly. $\endgroup$ – H2ONaCl May 21 at 4:19
  • $\begingroup$ I've never seen that, but perhaps I'm looking at outdated textbooks. To be clear, I don't mean simply that currencies are an improvement over (say) barter -- I am interested in determining an actual numeric value, even if just an estimated one. I've never even seen an attempt at such a thing, though as I mentioned this has been less than straightforward to research, since the obvious keywords bring up results relating to the more traditional notion of a currency's value. $\endgroup$ – Bill Clark May 21 at 4:28
  • $\begingroup$ Incomparable regimes. Good luck getting a numeric answer. $\endgroup$ – H2ONaCl May 21 at 7:55

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