Handling money each day is commonplace for the majority of people, whether it is through your job or when paying for goods and services. It requires only a rudimentary mental capacity to register how much something costs and to measure this by how much money you possess or are presented with by a customer.
Until recently my own perspective of money followed this logic – essentially, if the price tag outweighed the ability to pay, then the purchase was not affordable. The reasoning for this way of interpreting money appeared quite sound. For example, a denomination of £10 is insufficient for an item labeled at £15. Mathematically at least, that is indisputable.
Not until I began my current job of working inside a cash office did I make the effort to question beyond this limited perception. It was a colleague of mine with over a decade of experience who said that bundles of notes soon become akin to ‘monopoly money‘. Instead of thinking of it in terms of what it could buy, they saw it as little more than bits of paper – a ‘means to pay‘ as it were. It is accurate to say that handling thousands of pounds on a routine basis ensures that the allure of money quickly starts to dissipate. Once you pare back the wonderment, it allows for a clearer perspective to emerge, one that is not distracted by the idea of wealth and visions of refined living.
For this article we are going to investigate two aspects to physical money, they being what exactly goes into its composition in terms of materials and who has jurisdiction over its supply.
To understand the make up of money today, it is necessary to go back in time so we can accurately compare and contrast.
Up to 1920 in the UK, the threepence, sixpence, shilling, florin and crown coins were made up of 92.5% silver. From 1920 onwards The Royal Mint, who continue to have an exclusive monopoly for producing British ‘slummy‘, reduced the amount of silver content down to 50%. That was until 1947 when silver was eliminated altogether from British coins. The coins retained the same face value, and to the untrained eye nothing had visibly changed. The reasoning given for diluting the silver to eventually taking it out completely was that the price of silver had begun to rise in the wake of World War Two. A clearly defined rule of The Royal Mint is that the contents of a coin must be less than its face value. Given that silver is a precious metal, one that is finite compared to other materials, they subsequently changed the make up of coins to a Cupro-Nickel composition (Cupro being copper).
Work had already begun to remove precious metals from every day coins in 1914 when the gold sovereign and half sovereign were withdrawn from circulation, the same year that the First World War began. Replacing the sovereigns were the ten shilling note as well as pound notes, which at this time were still backed by the UK Gold Standard (this was later removed in 1931 with the official reason being given as to the Great Depression and speculative attacks on the pound).
A quick look on eBay shows that British coins containing either gold or silver remain highly sought after by collectors and investors alike. The earliest examples of some of these coins, such as the shilling, date back over 500 years to 1503.
The UK was not the only country to embark on a programme of removing silver from their currency. The United Status were not far behind. The Coinage Act of 1792 had originally made silver legal tender. The composition of silver came to 90%, slightly less than the UK’s level. The remaining 10% of coins were made out of copper. But in 1965, the 89th U.S. Congress enacted the Coinage Act of 1965 which authorised the elimination of silver from circulating dimes and quarters. The motivation for the act was given as the government’s stock of silver having been rapidly reduced, along with the threat that they might run out altogether in just a few short years. Silver content in the half dollar was later taken out in 1970. Replacing the silver was what the U.S. term as ‘clad coinage‘ – otherwise known as coins containing a copper-nickel face and a pure copper core. Coins are now made up of 91.67% copper and 8.33% nickel.
As with coins from the UK, pre 1965 dimes, quarters and half dollars are worth more than their face value. To work out how much can be judged by the price of silver today per gram, which in the U.S. is $0.54. For example, a pre 1965 quarter, weighing 6.25 grams and with the face value of $0.25, has a true value of around $3.
Returning our focus to the UK, let’s examine some of the current mix of coins in circulation. Four main components make up British coins today. The first is Cupro Nickel, which is an alloy of copper containing nickel. The second is Nickel-Brass, an alloy of copper, zinc and a small amount of nickel. The third is Copper-Plated, which amounts to a layer of copper deposited onto steel. And finally there is Nickel-Plated where a thin layer of nickel is applied to steel.
In January 2013, the Royal Mint began a ‘Cupro Nickel Replacement Programme‘ to gradually ‘recover‘ five pence and ten pence pieces made from Cupro Nickel. Preparation for their withdrawal began in 2012 when they started issuing new versions made out of Nickel-Plated steel. The official reason for this was due to the increasing price of copper in the market place. Pre 2012 five and ten pence pieces are made from Cupro Nickel and are both 75% copper.
According to the Royal Mint, ‘the value of the metal in both the cupro nickel and nickel-plated steel coins is still less than their face value.’ As mentioned, this is a prerequisite for all coins in circulation. Coins that could potentially exceed their face value in future have either been replaced, are in the process of being eliminated, or will likely be selected for such treatment in the years ahead. Only three denominations now comprise of Cupro Nickel – the twenty pence piece (84% copper), the fifty pence piece (75% copper) and the two pound coin (75% inner copper). At some stage they too will likely be watered down to contain a composition of Nickel-Plated steel, in line with the replacement programme.
Incidentally, the price of steel today per kilogram (1000 grams) is measured anywhere between fifty pence and a pound. The value of a gram of steel, therefore, is barely negligible at less than a penny.
This presents us with an intriguing question. Exactly how much are today’s issuance of coins worth beyond their ‘face value‘?
As of writing, copper is worth £0.004 per gram, nickel £0.007 and zinc £0.002. Let’s first use the pre 2017 pound coin as an example for working out actual value. This version of the pound coin, which will lose its ‘legal tender status‘ on the 15th of October 2017, weighs 9.5 grams and is 70% copper, 5.5% nickel and 24.5% zinc. The copper makes up 6.65 grams of the coin, meaning its value comes to around 3.8 pence. The combined value of nickel and zinc inside the coins comes to about one pence. So whereas the face value of the coin is £1, the materials it is comprised of comes to a little under five pence.
By comparison, the new £1 coin weighs less at 8.75 grams and has an outer composition of Nickel Brass (an alloy containing copper) and an inner make up of Nickel Plated steel. Its true value will be less than the five pence of the old version, simply because the copper element has been watered down into an alloy and is not as pure.
On the opposite end of the coin spectrum, the one and two pence coins produced since 1992 are also worth less than their face value. The version of each today is made out of copper plated steel, whereas the pre 1992 coins were made out of near solid bronze at 97% copper. Using the two pence coin as an example, the pre 1992 addition weighs 7.12 grams, with 6.9 grams of this as copper. The price of copper today gives this coin a true value of three pence, The problem here is that this version of the two pence is still circulating throughout a largely unsuspecting public. Little do they realise that the coin is actually worth 50% more than its face value. But because coins are interpreted solely by their face value, the coin will still only be good for two pence worth of goods. The pre 1992 one pence coin is also worth slightly more than its face value at around £0.15.
The Royal Mint state on their website that there is more to the value of a coin than just the composition of its materials. Factor in the minting and manufacturing process, as well as the manpower involved, and the cost notches up slightly. However, it is still significantly below the face value. They have ensured that by altering the make up of coins over time that the face value will always exceed the value of materials.
The one occasion where coins of a watered down purity are presented of greater worth than their face value is when special editions are released to the public. Take The Beatrix Potter series as an example. The Mr Jeremy Fisher 50 pence piece is currently selling on the Royal Mint website for £10. Whilst it may be to a ‘finer finish‘, the coin itself is not valuable. It is sold as such because of the limited number that have been produced. The Westminster Collection also sell 50 pence coins from the Beatrix Potter series. The 2017 Peter Rabbit coin is selling for £3.99, again on the understanding that it is limited in number. The website also promotes the coin by urging people to, ‘avoid the long wait to find this coin in your change by securing the brilliant uncirculated issue today‘. But should one of these coins find their way into your pocket, the £3.99 it sells for will cut no ice with shopkeepers up and down the country. It is worth the face value of fifty pence and no more.
As for the Royal Mint, the company has a policy of not revealing how much it costs to produce specific coins as ‘such information could be used to its competitors’ advantage.’ By competitors, one assumes they are referring to counterfeiters given that they enjoy exclusive rights for producing all of Britain’s coinage, by way of its Royal charter.
Those rights also extend to the manufacturing of Britannia silver bullion. The company sells, amongst other examples, a one troy ounce 2017 coin of .999 fine silver for £19.30. Compared to other silver traders (all of whom charge a premium on top of the spot price), this is competitively valued. Where it gets interesting is the revelation that the coins on sale are all exempt from capital gains tax for UK residents, the reason being that they are all legal tender. The one ounce coin, despite being pure silver and worth the current spot price (£13.15 as of writing) has a face value of just two pounds. Which means it has equal purchasing power to the two pound coin that contains no silver content and costs pennies to produce.
To better understand how a coin like the two pound piece has the full purchasing power of its face value, despite in reality only being worth pennies, part two of this article will look at the Bank of England’s role in money creation in terms of both coinage and banknotes.