Cato Journal

Cato Journal

Spring/Summer 2002


Review of "The Big Problem of Small Change"
By Leland B. Yeager



The Big Problem of Small Change
Thomas J. Sargent and François R. Velde
Princeton: Princeton University Press, 2002, 405 pp.

Thomas Sargent of Stanford University and the Hoover Institution and Franc¸ois Velde of the Federal Reserve Bank of Chicago have expanded their article of the same title from the Journal of Money, Credit, and Banking of May 1999. They tell the fascinating story of how monetary authorities groped slowly over many centuries toward the ultimate solution to recurrent shortages of small change. The solution is to issue minor coins as mere tokens with no pretense at metallic contents worth anywhere near their face values and, further, to keep those tokens interconvertible at fixed rates with the definitive money (e.g., full-bodied gold coins under a gold standard). This "standard formula", as the authors call it, following Carlo Cipolla, may seem trivially obvious nowadays, but it was not always so. Furthermore, it became a stage in an intellectual process that eventuated in the rationale for modern fiat money.

Sargent and Velde attribute perhaps the first clear statement of the formula to Sir Henry Slingsby, master of the London Mint, in a 1661 memorandum to King Charles II; but Slingsby's proposal was not implemented for over a century. The long delay was not due merely or especially to intellectual failure. Implementing the solution had to await advances in the technology of coinage. Mere token coinage would have offered great profit opportunities to counterfeiters, and identifying counterfeits would have been difficult when primitive minting techniques produced crude and irregular coins. Counterfeiters could reap no special profit, however, by using gold or silver to imitate official coins.

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