A few days ago, I saw a post talking about the cost of coins in the USA and the fact that a small coin could go out of circulation.
This led me to want to check the costs of producing money in Europe (notes and coins) and compare them with their assigned value, taking into account their production costs.
I also ended up analyzing the advantages and disadvantages of there no longer being physical money.
Enough introduction, let's get to the point.
Production Costs of Euro (coins and banknotes)
The European Central Bank (ECB) and the national central banks of the Eurosystem are responsible for issuing European currency (as coins and banknotes). With regard to euro coins, the Member States mint them, albeit under the technical control of the ECB, which must give its approval to the annual quantity to be produced. With regard to euro banknotes, all issuing authorities collaborate to produce them. Each NCB produces and bears the costs of a portion of the total annual banknotes, with each NCB generally specializing in specific denominations. Regardless, the production of physical money incurs a cost, though it is much smaller than the face value indeed of the notes and coins issued. Below are estimates of the average production cost of the different denominations of euro in circulation, both coins (from 1 cent to 2 euros) and notes (from 5 to 500 euros), even though some denominations are going through the motions of no longer being actively produced.
Cost of coins
There are a lot of things that affect the cost of making coins (the next section will explain it further), though we can get some rough cost estimates per piece by the evidence. Someone has found that 1 cent and 2 cent coins were much more expensive than they were worth, in particular, those costs were about €0.0165 and €0.0194 for each coin, respectively. Larger denomination coins are less per unit than the value of the coin due to the benefits from large-scale production. Here are the most commonly found figures in a table:
| Coin | Production Cost |
|---|---|
| 0,01€ | 0,0165€ |
| 0,02€ | 0,0194€ |
| 0,05€ | 0,0301€ |
| 0,10€ | 0,0516€ |
| 0,20€ | 0,0676€ |
| 0,50€ | 0,0827€ |
| 1€ | 0,0975€ |
| 2€ | 0,1425€ |
Source: Approximate figures based on data released by the Central Bank of Ireland and the Irish Department of Finance
In this table, you can see that the production cost of 0,01€ coins exceeds their value. The 0,02€ coins already have a unit production cost very close to their value.
This has already led to countries discontinuing the issuance of these two currencies.
We were also able to determine that from 5 cents onwards the production cost is lower than the value of the coins, allowing revenue from the issuance for the issuing authority.
Notes cost
When producing banknotes, not only does the cost per unit change with the denomination, but it is also important to note, although the costs are quite low in quantitative terms when compared to the value exhibited by each note. The estimated cost for producing one euro banknote of the current series (also known as “Europa”) is about 0€.10 per piece. The cost has increased from approximately 0.08€ per piece in 2013 due to the usage of new security features. While it is understandable that higher denominations of the notes cost more due to the expenses of the more significant amount of raw materials (bigger in size) and inclusion of one or two additional security features, the difference between the costs is minor. Take for instance, 100€ and 200€ notes, the new ones contain a satellite hologram that is not present on smaller denominations and therefore, the cost of manufacturing such notes is somewhat higher. The table illustrates the estimated approximate unit costs by denomination (mean values obtained from a rough estimate):
| Note | Production Cost |
|---|---|
| 5€ | 0,06€ |
| 10€ | 0,07€ |
| 20€ | 0,08€ |
| 50€ | 0,10€ |
| 100€ | 0,12€ |
| 200€ | 0,15€ |
| 500€ | 0,16 € |
Source: Estimates based on Eurosystem information and analysis by the Deutsche Bundesbank.
The new 5, 10, 20, and 50 euro “Europa” series banknotes are usually available at a price in the range of 0,06€ to 0,10€ per note. The 100€ and 200€ notes that were launched in 2019, provided with new security features, cost a little bit more (i.e., that is around 0,12€–0,15€). The 500€ note, which was abolished in 2019 by the ECB, cost approximately €0.16 per note in 2013. In each of the options, the production cost considerably added up to the note’s face value, which resulted in a big margin for the bank of issue.
Factors that Influence Production Cost
Transparent information on the breakdown of the costs behind each, coins and notes, are the driving force behind this.
Materials and Specifications: The kind of raw material used is definitely the primary factor. Regarding coins, the material (e.g., steel-core plated with copper for one cent, bimetallic alloy for 1€ and 2€) decides the cost directly, thereby the coin's size and weight are important factors. For banknotes, raw materials (cotton or polymer), inks, and films are security-specific as well as high-quality, thus, they are expensive. Furthermore, a greater size of a note implies the use of much raw material, so it is evident that large banknotes cost a little extra due to the printing factor.
Security Elements: Security features are a burden to the cost per unit. All the pin-tucks, watermarks, color changing inks, secure threads, fine prints and other things that appear on banknotes due to the complicated design and the great number of them run up the expense of production. As a rule, the higher the personal value of the note, the more complex is the security devices (for instance, on 100€ and 200€ notes, the satellite hologram) and, therefore, the cost of the notes should be higher. When it comes to coins, the presence of anti-theft components is also a big deal (for instance, on the edges of the coins, there are web-shaped slots, and the 1€ and 2€ coins are bimetallic) as they can change the cost of the coin's production.
Durability and Quality: Notes and coins have a lifetime and are not only durable ones but also easily circulated in the intended period. At the same time, the choice of materials and/or the application of a coating that makes a banknote's lifetime longer will automatically improve the cost of production, but in the long term, these increased costs could be justified. Therefore, the banknote series of Europa were upgraded by changing the materials to stronger and thicker ones still they are more expensive than notes of the previous series (an increase of €0.06-€0.10 per unit was possible) at the same time being more durable. Hardly is it the case of coins, which due to corrosion-resistant treatments or thanks to a change in the minting process that would result in further wear and tear, are the objects of extra costs.
Production Volume and Economies of Scale: mass manufacture efficiencies not only cut the unit cost of every coin or banknote dramatically but also eliminate the preparation expenses that are fixed and associated with engraving, plates, machine setup, and so on. Besides, the reduced per-unit costs are typical for the time when a large amount of a certain product is manufactured, while higher volume usually leads to higher unit costs. For instance, if a country mints a few million coins of the same value each year, the cost of a coin will be higher than if it mints tens of millions because of machine optimization and bulk raw materials.
Energy, Labor and Logistics Costs: The energy needed in the minting and printing processes of industrial notes and coins and human labor utilization are the two components which directly cause expenses; the two of them make salaries, training, etc., as part of the final price. It is also possible that the variations in the cost of energy and metals can change the cost of production quite significantly. Moreover, productivity cost like packaging, transportation, and security is another layer to the cost. Once the money is produced, it has to be packed and shipped to the central banks and treasuries; transportation as a security measure (armored cars, insurance) also requires additional spending. According to the German Ministry of Finance, with regard to the coins, the cost of packaging and transportation are included in the total cost, especially the smaller denominations can be a considerable fraction. This very process that consists of the logistic part – from the place of production, through the commercial bank to the end user – introduces the costs that are complementary to those of the manufacturing charge and then are added to it.
To put it briefly, the materials, security, durability, economies of scale, and logistics lead the coins or notes to be expensive or cheap. That is why certain cash values are naturally more costly to be produced than others, but on the whole it is a rather controlled cost (typically a few cents per unit) due to the huge amount of mass production and the superb performance of Eurosystem facilities.
Disappearance of Physical Money
With the revolution of technology and the proliferation of mobile money, the talk of the demise of cash (paper money and coins) in a possibly wholly cashless society is being debated. It guarantees a lot of things and removes a few things at the same time and it is all these that will be uncovered in the next few.
Advantages of a cashless economy
Cost Savings and Improved Efficiency: Operational and Main Cash Costs: A cashless environment can save the costs associated with cash management. Security costs for merchants and banks go away (e.g. theft or counterfeiting of money), the transportation of valuables, and cash management (counting, storing) costs stop. Electronic payments will generally be faster and more convenient (therefore meaning transactions are faster with less waiting in queues). In some cases, especially for higher-value payments, using digital media may have lower social costs than cash.
Fighting Against the Shadow Economy and Crime: Illicit activities involving cash, would face a tougher challenge if, there was no money or coins supplied into circulation. Anonymous payments associated with corruption, cash payments for illegal services and drug dealing, or hiding income from revenue authorities would be harder to do without physical liquidity. Evidence suggests the elimination of cash would reduce the size of the shadow economy by roughly 20% and criminal revenues by approximately 10%. In addition, if cash did not exist, violent opportunistic crime such as robberies or theft of cash, valuables that had monetary value would be limited. The push towards a cashless society is justified for complying to improved economic transparency, hence minute possibilities for tax evasion and money laundering.
Ease and Innovation in Payments: Making the transition to fully electronic payment methods can spur financial innovation. Consumers have a convenience factor - they do not have to carry cash and can pay with a card, mobile phone, or other devices. Digital payments facilitate automatic record keeping and improved personal financial management (ex. apps that can track spending). Digital payments can give governments real-time data on the economy, enabling the monitoring of activity which can be used to define policies. For example, during the COVID-19 pandemic many citizens preferred contactless payments for health reasons, which accelerated the acceptance of alternatives to cash.
Disadvantages and risks of eliminating cash
Exclusion of Vulnerable Groups: Not all populations are included in the digital financial system. Elderly people, people with low levels of digital literacy, isolated rural communities, as well as the homeless, undocumented immigrants or unbanked citizens are often limited to physical cash for basic transactions. In a cashless society, these vulnerable groups will face additional barriers to participating in the economy, therefore worsening financial and social exclusion. Even in developed countries, millions of people still rely primarily on cash - in the UK, for example, it was recently estimated that around 5% of the adult population (2.7 million people) rely almost exclusively on cash in their daily life. Without alternatives, forcing the complete migration to digital media could school further marginalization of these vulnerable populations.
Loss of Privacy: Electronic transactions produce an electronic record of every transaction. In a fully digitized economy, every transaction can potentially be monitored by companies (such as card providers) and authorities, leading to concerns about privacy and surveillance. Conversely, cash transactions can be conducted anonymously, while digital transactions show details of the buyer, the seller, amounts paid, places, and times. This possibility opens the door for consumer profiling and the subsequent extraction of personal data by commercial interests and the government. Furthermore, financial data is like something everyone has agreed to be hacked: if you create a hack or leak of said information, the transactions made by individual citizens could be made public, impacting citizens’ privacy and security heavily.
Infrastructure Dependence and Systemic Risks: A cashless economy's reliability will be completely dependent on technology infrastructure (IT systems, telecommunications networks, electricity) to make payments. A single technology failure, cyber attacks or power outages could completely shut down the economy since there is no physical money to use instead. Unlike cash that enables peer-to-peer transactions without the need for a network or electricity as intermediaries, digital forms cannot be utilized during a blackout or breakdown in the network of transactions. This highlights a resilience issue where cash provides an alternative when cards or apps fail. There is no doubt that a natural disaster or a breakdown in the banking system would be much more overwhelming if no physical cash was available for emergency transactions.
Commercial Competition and Costs: Without cash the payments ecosystem would be owned and operated by a handful of operators (banks, card schemes, technology platforms). In the euro area (and indeed elsewhere) if we did not have a dominant national card scheme in some countries, going to a cashless situation would mean we were reliant on two or three multinationals to process virtually all transactions. This would also reduce competition, and reduce the rates and commissions charged to merchants and to customers. Cash represents at a very low-cost option which forces electronic payment service providers to stay as competitive as possible; if the competition no longer exists, small merchants will face higher costs to accept payments, and in the end will simply pass on these costs to consumers. Further, without possible alternative in the event of a failure of digital services, we would have a Plan A and no Plan B – even temporary issues with the card networks (which have happened before) would already have immediate economic repercussions because there would be no other means of payment.
Access to Central Bank Money: Today the only way for citizens to have direct access to money issued by the central bank (state legal tender) is through physical money (notes and coins). In a cashless scenario all population deposits would exist as digital money in commercial banks or private entities. This has implications for trust in the financial system, and could even jeopardize monetary sovereignty if there is also no diffused means of accessing an equivalent central bank digital currency (such as potential digital euro by the ECB). Therefore, the elimination of cash would need to be accompanied by assurances which guarantee universal access to safe public money under pain of wholly privatizing means of payment.
The disappearance of physical cash would then serve efficiency purposes and fight against illicit acts, but would perhaps do so at a high social cost: risks of exclusion, loss of privacy, and a heightened risk of systemic weakness. Monetary policy posters are conscious of these trade-offs. For example, the ECB itself has stressed that despite growing digital payments, it is vital to ensure that "everyone can continue to have cash as a payment option", thus not harming those who depend on it. Therefore, cash use is gradually fading, yet many experts are in favor of a gradual transition that still contains the benefits of physical cash and develops alternatives (like central bank digital currencies) to offset the perceived disadvantages of a cashless society.