May 19, 2008

The Under Estimated Peso: Face Value versus Intrinsic Value

Whenever I shop at the department store and pay for the items I purchased, I always have 1 centavo, 5 centavos, and 10 centavos change. I already have a jar full of these coins but I have not spent a single coin since nobody accepts them. I even tried using those for paying fares but not a single driver accepted and everybody thinks it is worthless.

With the inflation rising to an average of halfway 7% every month it seems that we are losing a lot of purchasing power. The people not accepting these denominations only show that money is not always an invincible medium. Imagine having a million in 1000 peso denomination then suddenly fragmented to 1centavo denomination. Would the same amount of money have the same equivalent purchasing power?

A year ago, containers full of sack of 1peso coins were caught while being smuggled to China. Since our coins are made of copper, it became apparent that China has a shortage of raw materials and that it could resort to illegal means just to meet its rising internal demand.

Traders had already exported large quantities of this coin when government agents uncovered the illegal scheme. This only means that the actual value of the peso coin is above its monetary value, and even the Central Bank explained that the cost of manufacturing the denominations, 1 centavo to 1 peso are above its face value. It was a drastic measure for a Central Bank admitting that the value they put on their issued coins is less than the cost of its production just to show the public that those people profited from such kind of deals.

Despite the fact the even our own Central Bank unintentionally gave us a hint that our coins are more valuable than our paper money, people still prefer banknote over coins.

It is also a mystery why a group of Chinese saboteurs started counterfeiting 5 pesos a couple of years ago. It is very odd to know why would a counterfeiter take such tremendous effort of duplicating a coin with less face value than the equivalent expenditure combined just to have it duplicated. The intrinsic content of our coins might have the answers to all of these questions.

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