Chapter 11: Problem 372

Why are United States coins called "token money"?

Short Answer

Expert verified

United States coins are referred to as "token money" because their face value is greater than the cost it takes to produce them. In other words, the value of the coin in trade (as printed on the coin) is higher than the cost of the materials, labor, and equipment used to create the coin. This concept of token money allows the currency to serve as a physical representation of value in an economic system, rather than being a measure of its intrinsic value.

Step by step solution

Define Token Money

Token money is any kind of money that has a face value greater than the cost it takes to produce it. This is typically in the form of coins or similar small changes. The reason that the face value of token money exceeds its cost of production is that it represents a set value in trade, regardless of its material value.

Understand the concept of face value and cost of production

Face value, in this context, is the value of a coin, banknote, or other monetary item as printed on the item itself by the issuing authority. The cost of production, on the other hand, includes the costs directly associated with the manufacturing of these coins. This comprises the costs of materials, labor, equipment, etc.

Apply the concept of Token Money to United States coins

United States coins are classified as token money. How come? The face value of a United States coin (like 1 cent for a penny, or 25 cents for a quarter) is more than the cost to produce and distribute that coin. For example, it costs less to produce a quarter (25 cent coin) than 25 cents. Because its face value exceeds its cost of production, it is considered token money.

Conclude why United States coins are called "token money"

To sum up, United States coins are referred to as token money because their face value is higher than the cost to produce them. They serve as physical tokens or representations of the value they hold in an economic system, not as a measure of their intrinsic value. This illustrates the basic principle of token money in which face value outstrips the physical worth of the currency itself.

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