It’s hard to imagine a world without penny candy and nickel newsreels, but for most of human history, petty transactions were a pain in the ass.

Prior to the Industrial Revolution, coinage was a labor-intensive process. Metal had to be melted, refined, hammered, and cut. Because it took just as much effort to hammer out a small coin as it did a big one, mintmasters were inclined to create only the largest denomination coins.

If it weren’t for taxation and church collections, the state would have had no reason to issue small denominations at all. To encourage the creation of small change, medieval states authorized seigniorage — mints reduced the relative quantity of silver in small denominations to offset production costs.

Debasement! Where legal tender laws are enforced, bad money drives out good. Creditors complained that debts were being repaid in shittier coins than what was lent out. In states without legal tender, the large-denomination coins became the unit of account, and smaller coins had a floating exchange rate depending on their level of debasement.

The more the small denominations were debased, the worse the exchange rate got. Seeing small denominations as a poor store of value, people melted them for the commodity silver, exacerbating the small-change shortage. Small coins provided liquidity, but the liquidity service was not valuable enough to counteract debasement.

The biggest transaction cost is trust.

The title question is backwards. Value does not come from the ability to spend; the ability to spend comes from value. The full-bodied large coins were more valuable than liquidity-providing small coins because the gold and silver content securely constrained their supply.

There are plenty of cheap solutions for illiquidity. When small coins were scarce, retailers and craftsmen issued lead and copper tokens as a substitute for change. The tokens had no commodity value, but customers accepted them because they trusted their local businesses.

Foreign trade doesn’t have the benefit of localized trust, so merchants must rely on a scarce and unforgeable intermediate commodity. The Group 11 elements (Copper, Silver, Gold) have been universally employed as coinage metals thanks to the eons-old neutron star collisions that created a limited supply. Their shared electron configurations make them pliable and corrosion resistant. Atomic weight corresponds to the required energy input and hence, unforgeable value.

There’s no cheap substitute for securely constrained scarcity, especially since humans are so good at making scarce things abundant. Domesticated livestock, designer knockoffs, genetically engineered plants. Even labgrown diamonds are nearly indistinguishable from the real thing. We try to mimic scarcity with patents and licensing and zoning regulations, but these are all expensive solutions. Fiat money pretends to be scarce, and that costs us $600 billion a year.

People are trying to make Bitcoin knockoffs. After all, it’s human nature to want to make a scarce thing abundant. If they succeed, then Bitcoin has no value. But if Bitcoin has no value, how can anyone spend it?

See Also:
1. Nick Szabo, Unforgeable Costliness, 2004.
2. Thomas J. Sargent & François R. Velde. The Big Problem of Small Change, 2002.