15
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I
a marked change, which could not be lightly undertaken, even though
practice in the UK itself is, as it has always been, quite different.
With numismatic coins, which are often in large denominations and can
then not be considered in any sense as "small change", the question of
redeemability is obviously more important. Their utility is less;
so more attention will be directed to their aesthetic value, their
intrinsic value, if applicable, and to their legal status - and the
value of the latter is likely to be based on the holder's awareness of
their potential redeemability.
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7.7
The practice normally adopted has been to legislate for 100%
backing for local currency in eligible (meaning, in brief, liquid
and/or marketable) assets in a specified external currency. Often the
physical currency is included as one form of liability in the wider
category of the "demand liabilities" of the issuing authority along
with deposits that may be placed with the issuing authority. Subject
usually to cautiously-worded provisions, a facility is often also given
for a proportion of the backing to be held in specified local securities:
so long as there is redeemability in an external currency this facility
must obviously be limited, though it is normally safe to assume that a
"hard core" of local currency will always remain in circulation.
7.8
It
With the more frequent issue of numismatic coins of high
bullion value in recent years, legislation has sometimes included a
provision for calculating the bullion value of such coins as an asset,
on the basis that if such coins were ever redeemed the issuing authority would regain possession of the coins and then be able to sell their
bullion content. To the extent that this facility is available and
used, it also permits less than 100% external backing to be held. does not avoid the potential problem that redemption payments would have
to be made by the issuing authority from its other (liquid) assets
before it could itself obtain liquid assets in exchange for the bullion.
There would thus perhaps be a problem of liquidity; but it is a
secondary one. Of the dependencies, only the Solomons, St. Helena, the
Gilbert Islands and Tuvalu have such a provision in their legislation;
none has yet used it, so far as we know. There are practical problems in making the necessary revaluation and accounting adjustments [see Section 10.2(b)7.
7.9
The problem is to assess the risk that holders of currency
will seek to have it redeemed, and also to estimate to what extent the willingness of holders of currency to go on holding it depends on their
power to have it redeemed.