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Greener Money

Jan 22, 2011 • Economic History, Environment, Innovation, Money and Monetary Policy • 210 Views    No Comments

Hearing that Canada was switching to plastic money this year, I imagined…plastic. It turns out that plastic money looks and feels pretty much like the cotton-based paper currency we now use. 

Why make the change? Money was one reason. Although it is costs close to half as much to make cotton-based currency, plastic lasts 4 times as long. Also, it is tougher to counterfeit, it carries fewer germs, and it is more ATM friendly because it clogs less easily. Some call plastic currency “greener” because, as money that lasts longer, there is less to discard or recycle.

Still though, Thailand tried it out and then, dissatisfied with how it “handled” and discolored, went back to its original currency. Mexico still has plastic currency but its banks have had to get used to not being able to staple bills together. One journalist said that plastic money is “springier.”

Australia, the country that developed the polymer technology for creating plastic bank notes started using them in 1988.

The Economic Lesson

What money is made of matters. It is most crucial that the coin or currency that circulates is composed of material that has less value than the face value of the money.

Seignorage refers to the money a central bank can make when it issues money because it costs so little to print it. The central bank gets the currency for the amount it costs to print it and then receives a market value return when it circulates it. We could say that it costs 16 cents to print a $1 bill. Then the Fed gets paid interest on the $1 if it buys a treasury bill from a bank with millions of dollars of that newly minted money. The seignorage is the different between the printing cost and the interest it gets.

In 2006, when metal prices soared, there was concern that people would melt their coins. At the time, the metal in a nickel was worth 6.99 cents and in a penny, 1.12 cents. So, the US government said, “No,” it is against the law to melt money. Violators could face jail and large fines.

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