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Saturday, January 12, 2013

Fox News Doesn't Understand How Coins Work

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Here's Fox News confusing the idea of a coin-shaped pile of platinum worth $1 trillion and a $1 trillion coin that happens to be made out of platinum and can be of any size. We saw earlier this week that the National Republican Campaign Committee also doesn't understand how coins work, so perhaps I can try again to explain.

In my wallet right now I have a bunch of $20 bills, a few $1 bills, and a $5 bill. These bills are worth different amounts of money due to the fact that they have different numerals written on them. In terms of their actual contents, there's very little difference but a $20 bill is much more valuable than a $1 bill just because. By the same token, if you write a check for $20,000 it doesn't need to be physically different from a $200 check except for having different numerals written on it. Coins are the same. Dimes are more valuable than nickels even though they're smaller. It is true that several hundred years ago the value of a coin was driven by its metallic content, but this hasn't been the case for a long time. The issue doesn't even have anything to do with fiat money. The point of a gold standard is that you can exchange your currency for a certain amount of gold. But the currency itself is not made out of gold or anything else in particular. Mostly it's paper. Some of it is coins. But the content of the coins is irrelevant.

If you think about it for a second you'll see that it basically has to be this way. Quarters and pennies and dimes and nickels all have different metallic content. Since the relative prices of different commodities fluctuates on a daily basis, if the value of coins were based on the value of the metal they contain then the relative value of different coins would be constantly shifting. You'd have to fire up your Bloomberg machine every morning to see how much money the coins in your pocket are worth. That'd be nuts, which is why they write numbers on the coins. A $1 trillion coin would be a coin of any size with the number "1 Trillion" written on it somewhere near "In God We Trust."

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