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However, if the numismatic market were to weaken substantially,
proposals to demonetise even the earlier issues might well provoke sizeable exchanges followed, when that right persists, by conversions/redemptions which otherwise might not have
occurred. The redemptions would result in an outflow of
foreign exchange from the territory concerned (balanced by a reduction in a liability towards non-residents).
Where there was no right of redemption the effect would be
somewhat different. Under normal circumstances, when a
currency series is declared to be no longer legal tender and is
then exchanged at face value, there is no effect on the overall
money supply of the territory, as a new series is issued to
replace the cancelled one. However, if the "de-legal tendering" is of numismatic coins held abroad (which may outnumber local notes and coins by several times), the influx of coins for exchange could result in a massive expansion of the local money stock (it would be unlikely that foreign recipients of new circulatory coins would simply take them out of the country). If the exchange is effected against currency notes, which, it is suggested, would not lose their current
redeemability, the holder would subsequently have the right to obtain value in foreign exchange (and would be able to, provided that their backing included enough foreign exchange assets). The same would apply, broadly, if the exchange was against bank deposits.
If, however, no redemption, direct or indirect, is possible
against foreign exchange, the holder would be forced to use the
coins one way or another in the local economy. This would
have an inflationary impact, to the extent that it resulted in
an over-supply of coins which could not be absorbed or balanced
by increased economic activity or an equivalent reduction in alternative means of payment such as notes or bank money. is, furthermore, likely that there would eventually be an actual depreciation of the purchasing power of the inflated stock of coins in the hands of the public. They would cease to be acceptable, despite their official legal tender status, except at a discount; and this depreciation would be likely to end with the coins in practice worthless.
It
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