Explain subdivided currencies to me.
June 9, 2017 12:21 PM   Subscribe

I can't seem to gin up a good Google query about this, partly because "Fractional currency" apparently refers to something else. Most currencies in use in the world have a 1/100 subdivision -- e.g., in the US, our currency is the dollar, but each dollar is made up of 100 cents. But this isn't universal -- for example, the Japanese yen and the Italian lira.

I assume these configurations just sort of emerge over time, and currencies develop and are re-adjusted over time, but do economists think there's an advantage to one method or the other? What are the schools of thought here? One might've assumed it was all just a product of evolution over time, except we have an example of a "synthetic" currency in the Euro that was created to have cents, too, which suggests at least some folks think that approach is preferable for some reason despite being more complex.

(Bonus: And how is all this related to the more complex system in use pre-decimalisation?)
posted by uberchet to Society & Culture (20 answers total) 2 users marked this as a favorite
Useful terminology for further googling: denomination, super unit, subunit.
posted by zamboni at 12:32 PM on June 9, 2017

Regarding Japan, the yen did use to be a divisible currency, with denominations of one sen (1/100 of one yen) and one rin (1/1000 of one yen). But inflation and devaluation of the yen against other currencies eventually made these smaller denominations meaningless, and they were eliminated sometime after World War II.
posted by Faint of Butt at 12:43 PM on June 9, 2017 [2 favorites]

Britain used to use a non-decimal currency.
posted by theora55 at 1:06 PM on June 9, 2017

You might be interested in this wikipedia entry on Non-decimal currencies.
posted by mskyle at 1:13 PM on June 9, 2017 [1 favorite]

In the case of the Euro, you can follow the history in Wikipedia: the euro had the same value as the European currency unit (which was just a unit of account used by a predecessor of the EU, not a real currency), which in turn had the same value as the European unit of account, which upon creation had the same value as the IMF's special drawing rights. Special drawing rights are a basket of international currencies, with the amounts originally chosen to add up to one US dollar. So it's not a coincidence that the euro is, to a first approximation, one US dollar.
posted by madcaptenor at 1:14 PM on June 9, 2017

"Decimal" currencies, i.e. those with 100 subunits have many advantages, perhaps most important of which is that people are used to base 10 for mental calculation.

One of their disadvantages is that 100 cents cannot be divided evenly into six parts, which is occasionally a useful thing to do. 60 is the smallest number that can be divided evenly by 2, 3, 4, 5, and 6, which is perhaps the reason there are 60 minutes in an hour. The British pound had 240 pence, which is a multiple of 60.
posted by caek at 1:19 PM on June 9, 2017 [1 favorite]

Also the Italian lira, like the yen, did once have decimal subdivisions (centesimi), but inflation made them useless. It sounds like that has happened to a lot of formerly-subdividable currencies.
posted by mskyle at 1:19 PM on June 9, 2017 [2 favorites]

Also the Italian lira, like the yen, did once have decimal subdivisions (centesimi), but inflation made them useless. It sounds like that has happened to a lot of formerly-subdividable currencies.

Sometimes it even goes further than that, at least when spending in cash. The Hungarian forint is about 275 to the US dollar now; cash transactions are rounded to the nearest 5. So in some sense "one forint" isn't a real thing anymore. (Credit card transactions, if I recall correctly, can be any whole number of forints.)
posted by madcaptenor at 2:12 PM on June 9, 2017

Even post-decimalisation, Britain had a half-penny, needed originally to represent more accurately the pre-decimal prices of cheap things, (e.g. a pre-decimal sixpence was worth 2 1/2 new pence). In 1984 it was abolished though.
posted by w0mbat at 2:13 PM on June 9, 2017

It's probably no coincidence that decimalisation coincided roughly with the rise of the use of digital computers in finance. As the tools of science became tools for recording and calculating monetary transactions, the ability to represent money using decimal notation became very useful. Computers don't really give a fig about fractions.
posted by pipeski at 2:19 PM on June 9, 2017

I feel like I need to redirect here, because my question either was phrased poorly or isn't landing right.

I'm aware of nondecimal subdivision (it's even linked in the question). I'm aware that the Yen used to have a sub-currency.

What I'm interested in is the economic implications of a divided currency, like the dollar, vs a currency that is denominated such that you don't need one, like the lira was pre-Euro, and like the yen is today.
posted by uberchet at 2:46 PM on June 9, 2017

The process of changing currency units (including sub or super) is called redenominalisation. Maybe look at articles on that?
posted by zamboni at 3:58 PM on June 9, 2017

And how is all this related to the more complex system in use pre-decimalisation?

This is entirely a guess on my part but that article observes that of the Roman solidi were made of gold and denarii were made of silver.

So, since the relative values of the two metals in relation to each other would have varied over time based on things like new mines being found and myriad other causes, I'm inclined to wonder if the ratios some non-decimal currencies ended up with were the product of transitioning to coinage of a single metal or to fiat currencies while leaving the values of different denominations based on the relative metal values of the earlier coinage.
posted by XMLicious at 4:00 PM on June 9, 2017 [1 favorite]

What I'm interested in is the economic implications of a divided currency, like the dollar, vs a currency that is denominated such that you don't need one, like the lira was pre-Euro, and like the yen is today.

A couple of random things that might be closer to what you're thinking about:

When stock trading switched from eighths of a dollar to sixteenths of a dollar, and later to cents, it changed the profits and losses caused by spread. In that case, the economic impact was due to the smallest available trading unit, rather than the levels of currency division.

When gold, silver and copper were used as coins for the different levels of division, it had an impact closer to what I think you're looking for. Each monarch would set the relative value of the metals, and the weight of metal per coin. Devaluing the coinage was an easy and tempting way for a monarch to make money - you bring 100 coins to the mint, the monarch makes them 10% lighter, gives you 105 coins back, pockets the difference, and forces everyone to accept the new, lighter coins - so the relative value of the metals in relation to each other and in relation to the nominal value of the coinage was constantly changing. Add to that the exogenous changes - people using copper in industry, or turning their gold into dishes and jewelry, or the discovery of massive deposits of silver at Potosi - and the relationship between a penny and a pound was a volatile one.

This created lots of opportunities for arbitrage, both within and between countries. Each monarch had their own currency policy. Monarchs would try to control the inflow and outflow of precious metals, but given the money to be made and the weakness of the state, it was a losing proposition. Lots of illegal smuggling and melting down and counterfeiting went on. Precious metals flowed back and forth as the interaction between supply, demand and national currency policies changed.

One of the most interesting attempts to avoid these problems was the Chinese decision, after they stopped using paper money, to use precisely measured amounts of silver which they weighed on scales. According to some descriptions, pretty much everybody carried around a small scale and silver-snipping scissors. Since you can slice off an exact amount, you don't have to worry about having a smallest available trading unit that is too large, nor do you have to worry about the complications of bimetallism, trimetallism, or currency devaluation.
posted by clawsoon at 8:24 PM on June 9, 2017

posted by aqsakal at 1:14 AM on June 10, 2017

economic implications of a divided currency

Canada got rid of the penny ($0.01, I cent) coin a little whiles back.

Cash transactions are rounded in a transparent manner to end with 0 or 5.

Electronic transactions still account down to $0.01 / to-the-penny.

Institutional electronic transactions still account down to sub-fractions of cents, a la Salami Slicing by Richord Prior's character in Superman III.

So no real implications; it's baked into the background.
posted by porpoise at 1:26 AM on June 10, 2017

To be honest, the boring answer to the question as you describe it is there aren't many important economic implications.

The classic definition of money is an asset that is both a unit of account, a medium of exchange, and a store of value. Divided vs. non-divided doesn't really make a difference to those categories: The latter two are entirely a result of the status governments accord to money and public trust in government as a creditor. The first could in theory be just about affected by the way money is divided, in the sense that it's probably marginally harder for many people to do calculations in dollars and cents than whole numbers; but we know from decimalisation of pounds-shillings-pence currencies, which are much more complex, that there's no big deal about this stuff.

For economists the really interesting questions about money are largely about issues like liquidity preference (ie, money pays no interest but it's more useful than a 10 year government bond because you can take it to the shop and buy a loaf of bread with it).

There's also a slightly separate question about seigniorage -- essentially, the difference between the cost of producing money and its face value. You can regard that as profits for the mint. Seigniorage on banknotes tends to be higher than on coins because they're normally higher-denomination and made of cheaper materials. But there's no rule about where you transition from metal to paper, so I don't see many implications there.

In general, I think this question is a bit like "what are the economic implications of non-circular coins?" or "what are the economic implications of the physical size of banknotes?" There is probably some very minor indirect effect but it's going to be something too small to measure.
posted by 8k at 4:27 AM on June 10, 2017 [1 favorite]

What 8k said. It's all conceptual. Okay, so the American unit of currency is called the "dollar" and it is subdivided down to 1/100th of a dollar in physical currency. If the United States tomorrow decided that the "penny" were the unit of currency instead of the "dollar," there would be no meaningful economic implications. This is especially true in the era of electronic financial transactions, where units of currency can be subdivided far more than the smallest physically produced amount. In ye olden times before paper and electronic transactions were common to most levels of society, there could possibly have been economic implications if the smallest physically produced amount had a large enough value that there was a meaningful need for smaller values. This resulted in things such as coin cutting and/or valuing (pieces of) coins by weight rather than "face value." Whether this was a meaningful economic factor rather than simply an everyday practice is harder to say.
posted by slkinsey at 7:13 AM on June 10, 2017

I understand your question and think it's clear, but am not aware of any answer for it. This question would make a great topic for the Planet Money podcast; they'd be the ones to dig up some obscure economics paper on the question. They take suggestions from the public for stories, might be worth asking.

My guess is there's certainly an interesting answer in the psychology of consumers. Just like in the United States we sell things for $9.99 because it feels cheaper than $10. (They don't do this trick as much in countries without sales tax, because you pay the price on the tag and no one wants to deal with small change.)
posted by Nelson at 7:37 AM on June 10, 2017 [2 favorites]

I can think of at least two reasons: the history of coins as a precious metal and ease of comprehending prices.
You mention the yen, which is a perfect example because 1 yen is the lowest denomination and equals about one USD cent (i.e. no subdivision). I'm an American living in Japan, and 1 USD is approximately 100 JPY. So if a beer is $5.00 or 500 yen, what difference does it make, after I get used to mentally calculating the exchange rate. But when I see that a big company grosses, say 1.2 trillion yen (12 billion USD) per year, it just gets unwieldy. Would anyone want to value google's market cap in cents (100 trillion cents), god forbid government debt etc?
On a historical level, it's just that most coins were made of precious metals and if they were of a reasonable size, would be fairly valuable. You could make a Penny of gold, it would be tiny. But most people needed these small denominations in their day to day transactions.
One more thought: the average person doesn't really understand how exchange rates work. If the Euro had started at 100 EUR to 1 USD, it would have seemed like a "weak" current to a lot of people. Which is totally irrational but what can you do?
posted by banishedimmortal at 6:34 PM on June 11, 2017

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