Wednesday, September 21, 2011

Choice between currency and coin

When I was in high school, it dawned on me that money with higher denominations are all currencies (made of paper) and the one with lower denominations are all coins (made of metal). I had time and again wondered the reasoning behind the counter intuitive choice of transitioning from the higher valued metal to the lower valued paper as the denomination goes up.
Recently my uncle gave me an explanation for that. The choice of using metal or paper to represent a particular denomination is made based on the frequency of transaction as cash. One rupee denomination pass hands more often than say a hundred rupee denomination. So, if we make the one rupee denomination as a currency, it would soil faster and would significantly increase the recycling effort. So, it is made as a coin thus increasing its life. Since a hundred rupee denomination is likely to be transacted with lesser frequency, it would soil slower. So, a currency would suffice. After listening to the explanation, I suppose it isn't so counter-intuitive after all. But with the inflation shooting up, I think it is about time to consider a hundred rupee coin :)