Thursday 21 October 2010

Still debasing our coins even now!

First I am going to provide a little potted history of British coinage, since most people have no idea of this track record and it is instructive and I think you will agree worth your five minutes to suck it up. If you wish to skip this back story and head straight to the meat of what is new for you, skip down BELOW.

Back in the day, that is up until 1919, our "small change" coins in the UK were made from Sterling silver -- 92.5% silver with 7.5% copper to make then tougher, so they last longer in circulation than pure silver. This was when money was still a real, tangible store of value, rather than just medium of exchange tokens; worth whatever the politicians wanted to make them worth, as is the case today.

A quick background for the uninitiated to pre-decimal money in the UK, a shilling was the equivalent of today's 5p, and in fact during the 1970's these two different coins from the decimal and pre-decimal systems were interchangable with each other at this official rate of exchange. A florin (two shillings) was interchangable with a 10p coin, and so on through the various denominations which were all proportionate multiples/fractions of the standard weight of a shilling. An old-school Pound (a gold sovereign coin) was equivalent to 20 shillings.

If you were to take a quick look on eBay you will readily find plenty of people buying and selling "pre 1920" silver coins, trading with each other for the silver bullion content by weight. Roughly speaking, at the moment, pre-1920 shillings will change hands for something upwards of £2 per shilling, based around the silver spot market price. As you will immediately see, this is somewhat more than the 5p face value they used to change hands for, which reflects the massive amount of inflation that has taken place over the time period.

Between 1920 and 1946, the coins were instead minted from an alloy containing only 50% silver. This was how a nearly 50% devaluation of the Pound was effected by politicians back in the day. In fact, debasing currency in this way by reducing the silver content goes way back, to well before the Romans; it's really nothing new for politicians to use the expedient of devaluing a nations currency in order to cover up their past economic mismanagement. The reason it was necessary to devalue the Pound in 1920? World War I had cleaned us out and this was the only way we could ever repay our debts. Everyone in the country took an almost 50% real-terms pay cut overnight, because the currency they were being paid in was worth just over half what it had been until that time. This was the beginning of the end of the mighty British Empire, the first empire that the sun never set on. The first truly global dominant power.

From 1947, UK coins were changed to 0% silver content - they were entirely made from an alloy of copper and nickel, called cupronickel. This was necessary as a result of the massive public spending during World War II, which essentially left our once-powerful nation completely bankrupt. The only way we could pay our bills to foreign creditors, was to do it with money that was virtually worthless like this. It was a default on our debts, through the political expedient of making the money intrinsicly worth almost nothing. The creditors still got piles of lovely shiney shillings and crowns, but they no longer contained any silver. All of which goes to prove the sage advice in the old adage never a borrower, or lender, be!

Similar to the "pre 1920" coins, you will find many people on eBay trading the "pre 1947" coins with each other, again based on the weight at 50% silver (no value is attributed to the remainder of metal making up the alloy). As you might expect, they change hands for about half the price of the "pre 1920" coins, because they have about half the silver content. You will not be too surprised, I'm sure, to know there is no such market for "post 1947" cupronickel coins.

Anyway, the reason (finally! :-) ) for this post is that today I read with interest the Royal Mint will soon be even removing the copper from our wonderful British coins, making our coins instead from steel covered in nickel.

How wonderful -- our currency is no longer as good as copper, let alone as good as gold. I wonder how many more years before they have to replace the steel with something a little cheaper...

You can read for yourself the BBC article on this subject, if you like. Here

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