Tuesday, November 16, 2010

The Canadian Mint: Coining Extra Business

Recently the Canadian Mint has been producing what seems like an extraordinary number of “collectible” circulation coins. This summer it was the Saskatchewan Roughrider looney and more recently a Remembrance Day quarter and many, many others. It’s getting rarer and rarer to get a quarter with a caribou on it as change.

Of course this gets me thinking, why go through all the cost and effort of designing, producing, and advertising these coins? I suspect, but haven’t been able to track down, that the Mint is receiving money from Canadian Heritage or some other government department for such coins. But I think there might be something else a little more subtle going on here as well.

Let’s start by a little review of some basic monetary theory. The idea is the relationship between the monetary base and the money supply. According to basic theory the relationship is

Money Supply = ((1+Currency Drain)/(Reserve Ratio + Currency Drain)) times Money Base.

Currency drain is technically money that doesn’t get deposited in banks for whatever reason. For our purposes here, this means people are hanging on to it because it looks pretty. The reserve ratio is the ratio of deposits that commercial banks keep on hand in case you want to take some money out your account.

As people choose to hold onto more cash, the money supply shrinks. When the money supply shrinks, we tend to see really low inflation or even deflation. Given that the Bank of Canada has an inflation target of 2%. It has two ways to react to an increase in the amount of cash people want to hang on to. One way to respond is to reduce the overnight rate in an effort to get banks to reduce their reserve ratio. Another solution would be to increase the monetary base by printing or minting more money. Both of these will lead to an offsetting increase in money supply.

Let’s focus on the second option, as it actually relates to the Mint. By minting “collectible” coins, the Mint encourages (if not forces) the Bank of Canada to increase the monetary base. Of course when the monetary base is increased what is needed? More currency produced by the Mint. In short by producing successful “collectibles” the Mint creates more business for itself. Not a bad deal for them, eh?

Now give me back my lucky Riders looney.

1 comment:

John Palmer said...

Why such convoluted explanations? Isn't the Canadian Mint merely acting just like, say, The Franklin Mint, and manufacturing collectible coins, profiting on the seigniorage? It seems like a legitimate enterprise for a gubmnt mint.

Beside, I really love the "Rider" loonies!