Wednesday, January 20, 2010

Why dimes are so small

Ever wonder why dimes are so small and half-dollars are so big? The United States used to be on a silver standard (and some of the time a gold and silver dual metal standard). Most coins were made out of 90% silver (pure silver is too soft and wears down quickly) and dollars were backed by silver. You could turn them in and get silver back. Since a quarter has 2.5 times the value of a dime, it had to contain 2.5 times as much silver. A 50 cent piece had 5 times the silver of a dime and a dollar coin (the old, big ones) had 10 times as much. Pennies and nickels didn't have any silver in them so weren't constrained the same way (well, the nickel did for a few years in WWII) I'll cover them in a later post.

Since money was based on silver and gold, the government couldn't print money whenever it wanted, it first had to get silver or gold to back it. This was both good and bad. It was good in that you didn't have much inflation, the money supply couldn't increase faster than gold and silver were mined. During times of war, the government did go off the gold/silver standard and print extra money and there was inflation then, and a couple of times the government re-valued the dollar to be worth less gold or silver which caused inflation. It was bad in some ways too. As the country grew, more money was needed for day to day transactions. When the need for money was growing faster than gold and silver were being mined, there was a shortage of money which resulted in deflation (the cost of things going down). Also, in times of recession or depression, the government couldn't prop up the economy by printing money like it is doing today (some people see this as a good thing, others think it is a bad thing, time will tell who is right).

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