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Low denomination money tend to be coins because low denominations are exchanged more often therefore a low denomination paper money would wear out quickly.

But doesn't this argument transfer to higher denominations as well? Why don't we make all cash as coins then?

It's well known if the intrinsic value of a coin goes above the face value there is a danger of melting the coin down for the metal. But what about for the other extreme where the face value is much higher than the metal value. What deters issuers from minting high face value coins?

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    $\begingroup$ Coins are a lot easier to counterfeit. $\endgroup$
    – AKdemy
    Oct 13 at 11:18
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Historically "real" money was minted as coins in precious metal. "Bank notes" (literally, bearer bonds payable by a specific private bank) were invented as a lightweight way of dealing with large amounts of money. Later on governments took control of the bank note system because of the systemic risk of bank default, so that is how we wound up with the current system.

As a practical matter today, the split remains for the following reasons:

  • Coins are useful for low denominations because they can be accepted by machines. Today we have bank note acceptors, but they need cheap fast computers to work, something only possible in the past few decades.

  • To go from 1 cent to 100 dollars you need 4 orders of magnitude, with 2 or 3 denominations at each OOM (the UK currency system has denominations of 1, 2 and 5 at each OOM). That means around 10 denominations. Splitting that up into 5 coins and 5 notes makes it a lot easier to distinguish the different denominations, and avoids the risk of accidentally handing over a $50 note for a 50c item.

  • Coins are easier to counterfeit than notes, so high denomination coins are a bad idea. It would also be more worthwhile to create "slugs" that can pass mechanical coin acceptors without necessarily looking like counterfeit money. It is estimated that 1% of UK pound coins are counterfeit. As the value increases so it becomes more worth-while for the counterfeiters to invest more effort. Bank notes are easier to secure because there is more area and the material can be engineered with more complicated physical properties (e.g. metal strips and watermarks) than a metal disk.

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  • $\begingroup$ Coin machines (too many variants) and counterfeiting (worth it) seems to be convincing. I'll accept this. $\endgroup$
    – Calmarius
    Oct 13 at 15:46

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