The Small-Change Problem: The Three Options--Strike All Coins from the Standard Metal, Use Bimetallism, or Issue Fiduciary (Token) Coins--All Had Drawbacks

How might the eighteenth-century British government have tried to supply its citizens with small change? Having defined its basic monetary unit in terms of one precious metal, the government faced three options. It could

1. strike both large- and small-denomination coins from the standard metal, with the coins' weights corresponding to their face values;
2. resort to bimetallism, with low-denomination coins made from the less valuable metal, and large-denomination coins made from the more valuable one; or 
3. issue avowedly fiduciary or token small-denomination coins, on government account. 

Each option had its drawbacks. [What follows is a much-simplified analysis of the small-change problem.]

Under the first option, if the standard metal was sufficiently valuable, coins of lower denominations would be too small to be practical, as happened with Great Britain's quarter guineas. A still more egregious case was that of the silver farthings the Royal Mint issued in 1464. Weighing only three troy grains each, these were "lost almost as fast as they were coined." The standard metal could, of course, be one from which convenient small-denomination coins might be made; but then large-denomination coins of the same metal would end up being too bulky. 

A bimetallic system might have avoided the problem of undersized or oversized coins. But it suffered from its tendency to give effect to Gresham's law, with one metal alone being taken to the mint for coining and with coins of the other metal being clipped, filed, sweated, or melted. The nation would then be exposed to shortages of decent small or large change, depending on which metal was overvalued. The situation might not be much better, in other words, than if the mint stuck to a single metal. 

The token coinage alternative, finally, had its own peculiar drawback: the large difference between token coins' nominal, or face, value and their "intrinsic worth" would tempt counterfeiters. Unless legitimate coins could be distinguished from fake ones (by mint authorities, if not by the general public), false coiners would foil the mint's attempts to keep the supply of token coins in line with the demand for them, causing both real and fake token coins to be discounted. If the mint tried to limit the supply and prop up the value of its token coins by offering to redeem them in full-bodied (silver or gold) coin, counterfeiters might take the mint to the cleaners. If, on the other hand, it avoided losses by refusing to take back unwanted coins, counterfeiting might give rise to a glut, eventually driving the tokens' value down to a level no greater than their "intrinsic worth," and making them no more fit to serve as money than matches, nails, or . . . buttons. 

--George Selgin, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821; Private Enterprise and Popular Coinage (Oakland, CA: The Independent Institute, 2011), 13-15.