BLACK MARKET COINS
Shortage of coins in Argentina causes problems for consumers and merchants
by Anil Mundra / June 17, 2009
Think you’ve got cash problems? Just be glad you’re not in Argentina. No one knows the inconveniences of the peso better than Buenos Aires’s convenience store owners. Walter Teich and his wife opened one right in the center of town three years ago. He’s seen a lot of coins come and go, but never so few as right now. “There’s no coins, they don’t exist,” said Teich, standing next to a hand-written sign taped to the cash register telling his customers as much. “And it’s getting worse all the time.” The coin scarcity has created a strange predicament: Merchants regularly refuse to sell their goods or services if it means they’ll have to give coins back as change. For small transactions, they’d rather lose the revenue than spare the change. Teich, for example, won’t make a photocopy — and earn his 20 cents — for anyone who doesn’t offer exact change. He simply doesn’t have the coins, even after he and his wife make separate trips to the bank to buy the daily 20-peso coin ration that the government guarantees. And even the guarantees don’t always work. Many of the banks are as loath to let go of their coins as the small businesses are. A spokesman for the Central Bank of Argentina says that 14 of the largest banks in the country have already been fined 10,000 pesos — about $2,700 each — for failing to change bills into coins. Advertisements can be seen all over the city promoting hotlines for complaints against banks.
The scarcity has prompted everyone to overvalue coins. Black markets have reportedly cropped up for the resale of coins at more than 7 percent above their face value. And starting in June in Buenos Aires, more than half of the 3,200 members of the Chamber of Chinese Supermarkets (ubiquitous small groceries run by immigrants from China, not markets of Chinese food) will start issuing their own special bonds as change for purchases, worth 10 percent more than the coins they would otherwise give customers. The move is expected to cost the groceries less than the 450 to 600 pesos ($120 to $160) they spend weekly buying coins on the black market, according to chamber estimates. The cause of the coin scarcity isn’t clear. The Central Bank says it’s supplying enough: a record 524 million new coins in 2008, up 13 percent from 2007. This year will likely bring a new record, and there are supposedly 5 billion Argentine coins currently in circulation — about 125 per person. Many blame coin hoarders and black-marketeers, several of whom have been caught. But they seem to be effects, rather than causes, of the shortage. Another scapegoat is the city buses, which until now have only accepted coins. The role of buses may soon be seen, once a promised electronic card system takes effect. But history makes it hard to blame the buses too much: The city bus was introduced in Argentina almost a century ago, while the coin problem is new.
The shortage might have been precipitated by the rise in commodity prices in the last few years, said Dardo Ferrer, chief economist at the Market Foundation. There have been reports of people inside Argentina and across its borders melting coins for their metal, which became worth more than coins’s face value when the price of raw materials rose. But even high-rollers who manage to avoid small change face another perennial problem: counterfeit bills. Argentina’s economy is, in Ferrer’s words, a “propitious climate” for banknote forgery. Compared to most of its neighbors, Argentina has enough money going around to support this moderately high-tech crime, but not enough to combat it with all the security measures that richer countries have.
The omnipresence of counterfeit bills here is almost as apparent as the absence of coins. The same small business owners that refuse to give change scrutinize all bills over 20 pesos, rubbing them and tilting them and holding them up to the light, sometimes even under an ultra-violet lamp. New arrivals at the international airport receive leaflets about how to spot fake banknotes. “Everyone I’d spoken to about Buenos Aires added an aside about keeping an eye out for bogus notes,” said U.S. citizen Season Butler on a visit to Buenos Aires from her home in London. But she never thought to check what she got from an ATM at a large bank in a posh section of town. She only discovered later that she had gotten not one but two false bills from the machine, leaving her stuck with 150 non-pesos — about 40 non-dollars — and no recourse. “Generally, counterfeit money circulates through institutional routes,” Ferrer said . “There are very weak controls in the banks. Counterfeit notes are practically permitted.” Which leaves peso users between a rock and a hard place — or, more concretely, between fake paper and no metal at all.
Argentina Is Short of Cash – Literally
by George Selgin / January 5, 2009
Want change for a five-peso (about $1.70) note? Don’t try getting it at a store, unless you plan to buy something — and be ready in that case to have the merchant refuse your business rather than part with precious centavos, or to have him hand you bon-bons instead of coins. Banks aren’t much help either. The law says they’re supposed to give you up to 20 pesos worth of change; but most openly flout that rule, supplying just a few pesos worth, or even hanging out “No Change” signs, like the ones at retailers’ kiosks.
Why the shortage? Argentina’s central bank blames it on “speculators,” meaning everyone from ordinary citizens, who stockpile coins, to Maco, the private cash-transport company (think of Brinks) that repackages change gathered from bus companies to resell at an 8% premium. But those explanations ring false. “Black marketeering” would not exist if coins were easy to get in the first place. After all, Argentines could just as easily hoard razor blades or matchbooks. Yet there’s no shortage of those. What’s so special about coins? The answer is that coins are supplied by the government alone. “Put the federal government in charge of the Sahara desert,” Milton Friedman said, “and in five years there’d be a sand shortage.” If Argentina wants to end the coin shortage, it ought to give up its monopoly.
Crazy? Not if history is the guide. Over two centuries ago, Great Britain faced a coin shortage more severe than Argentina’s — so severe that it threatened to stop British industrialization in its tracks. People struggled to get coins for everyday use. The average worker was lucky to make 10 shillings a week, while the smallest banknotes were for 10 times as much. So the coin shortage even prevented factories from paying wages. Like Argentina’s government today, the British government wasn’t able to end the shortage. Yet the shortage did end — thanks to private-sector action. Fed up with the government’s inaction, British firms started minting their own coins. Within a decade a score of private mints struck more coins than the Royal Mint had issued in half a century — and better ones: heavier, more beautiful, and a lot harder to fake. Yet they were also less expensive, since private coiners sold their products at cost plus a modest markup, like other competitive firms, instead of charging the coins’ face value, as governments like to do. Finally, when those who had accepted the private coins for payment went back to the issuer to redeem them, issuers offered to exchange their coins for central bank notes at no cost.
Armed with this history, it takes no great flight of fancy to imagine Argentine firms today, including supermarket and retail chains like Carrefour and Wal-Mart, reputable banks like HSBC Bank Argentina, and transport companies like Metrovias, issuing their own centavos and one peso coins. By doing so they’d no longer be at the mercy of the government, or of private coin distributors with their hefty commissions. Ordinary citizens would benefit too. So why hasn’t private coinage already taken hold? Most likely because private firms don’t expect the government to put up with it. In Great Britain, despite all the good they had done, private coins were banned in 1817, and issuers were confronted by a mass rush to redeem their coins. This happened, by the way, when official British coins were still in very short supply.
If Argentina wants to end the shortage, it ought, not only to tolerate private coinage, but to sanction it. It can do so, while eliminating any risk that such coinage would be abused, through very simple legislation. It should allow any private firm to issue distinctly marked coins, perhaps subject to some minimal capital requirements, while making it clear that no one need ever accept any privately issued coins, even as change for purchases. Such a law may be all that’s needed to solve the coin shortage, while also preventing anyone from forcing people to accept money they didn’t trust. Anyone, that is, except the Central Bank of Argentina.
‘NO HAY MONEDAS’
Inside the world’s most annoying economic crisis
by Joe Keohane / Dec. 3, 2008
It was no surprise that the cab driver tried to rip us off. We’re in Buenos Aires, Argentina, after all, and we’d made the rookie error of requesting a vague destination instead of giving a precise address—naturally he interpreted this as a license to take us from La Boca to the Plaza de Mayo by way of southern Nicaragua. What we hadn’t expected was the predicament the driver found himself in when it came time to pay. The fare had come to 14 pesos and 6 centavos. I proffered a 20-peso note (worth about $6.70), and he handed back 50 centavos, suggesting that I was going to be shorted 44 centavos. Then he realized that continuing on this course would require him to give me two 2-peso notes and a 1-peso coin. He sighed dramatically and gave me three 2-peso notes instead. Factoring in the 50 centavos he had already handed over, this effectively reduced the fare to 13.50 pesos, which, for reasons I’ll get to in a moment, is actually more than 14.50 pesos.
Welcome to the world’s strangest economic crisis. Argentina in general—and Buenos Aires in particular—is presently in the grip of a moneda, or coin, shortage. Everywhere you look, there are signs reading, “NO HAY MONEDAS.” As a result, vendors here are more likely to decline to sell you something than to cough up any of their increasingly precious coins in change. I’ve tried to buy a 2-peso candy bar with a 5-peso note only to be refused, suggesting that the 2-peso sale is worth less to the vendor than the 1-peso coin he would be forced to give me in change. When my wife went to buy a 10-trip subway pass, which retails for 9 pesos, she offered a 20-peso note and received 12 pesos in bills as change. This is commonplace—a daily, if not hourly, occurrence. It’s taken for granted that the peso coin is more valuable than the 2-peso note.
No one can say what’s causing this absurd situation. The government accuses Argentines of hoarding coins, which is true, at least to some extent. When even the most insignificant purchase requires the same order of planning and precision as a long-range missile strike, you can hardly blame people for keeping a jar of monedas safe at home. The people, in turn, fault the government for not minting enough coins. In fact, the nation’s central bank has produced a record number of monedas this year, and the problem has gotten even worse. Everyone blames the bus companies, whose buses accept only monedas. (Buenos Aires’ 140-plus bus routes are run by a number of separate, private companies.) These companies, exploiting a loophole in the law, run side businesses that will exchange clients’ bills for monedas for a 3 percent service fee. This is legal, but the business community also routinely complains of being forced into the clutches of a thriving moneda black market—run by the local mob, or the bus companies, or both—in which coins sell for a premium of between 5 percent and 10 percent. The bus companies steadfastly deny any involvement in this racket, but their claims were undercut by the discovery of a hoard of 13 million coins, amounting to 5 million pesos, in one company’s warehouse this October.
Those coins were confiscated, but the 5 million pesos were returned to the company—in bills—which could be seen as a fine of sorts. The government has also passed laws requiring banks to provide customers with 100 pesos’ worth of change on demand. (The banks ignored this because, they said, their precious monedas would then wind up on the black market.) The government recently lowered that figure to 20 pesos (which the banks still ignore) and demanded that the bus lines adopt a pass system, like the subway’s, to keep more change in circulation. (All this did was create a stalemate over who would pay for the new equipment.)
The history of Argentina in the last 100 years is a story of great potential overwhelmed by a genius for acts of pointless economic self-destruction, but even for the Argentines, this is an exasperating state of affairs. The economy is still growing at a robust clip of around 8 percent year over year, but out-of-control inflation, estimated by independent analysts to be around 25 percent, has effectively devalued the currency, making it ironic that coins have become such an obsession. But an obsession they are, worthy of Argentine writer Jorge Luis Borges’ story “The Zahir,” about a man driven mad by contemplating a single coin.
Nowadays, without exact change, porteños also spend their days haunted by the specter of metal money. They are casually shortchanged by waiters or pushed to buy more produce in order to bring the total closer to a figure that won’t require the vendor to provide change. People with a keen strategic sense maintain a well-diversified hoard of coins and painstakingly build alliances with local shopkeepers or bank tellers, conspicuously proffering coins for one purchase or deposit in the hopes of being indulged when they’re short of change at some point in the future. Street musicians, like one we talked to in the San Telmo neighborhood, have to preface their performances by announcing that they have change, or they risk starving to death. Subway employees are occasionally forced to wave commuters through because they are out of coins.
Stranger still, change mania doesn’t end at coins. The moneda shortage has produced a rising disinclination to provide change at all, even in bill form, at least not without histrionic sighs and eye-rolling. Last night, for instance, in a very crowded bar, I handed the waitress a 100-peso note to pay a 20-peso bill, and I was made to wait 30 minutes for change. The 2-peso note is thrown around with a contemptuous disregard usually reserved for metal money, at least in countries where less money isn’t occasionally worth more than more money. But 5s and 10s are harder to come by, because they’re actually worth something. In many cases, they’re more worth more than 20s, because you can buy things with them, which isn’t always true with a 20. In some cases, 5s and 10s are effectively worth more than 100s—which, unless you want to take out the equivalent of $20 at a time, are pretty much the only bills ATMs here dispense. Save for large purchases, 100-peso notes are functionally useless—imagine trying to trade a bar of platinum bullion for a sandwich and a coffee. In several instances, I’ve found myself buying an expensive lunch, costing, say, 60 pesos, just to break a 100 into more useful constituent parts so I can buy something I need, like beer.
Until someone figures out how to solve the crisis, money, at least money of a certain form, will remain like the painted lanes on the grand chaotic avenues of Buenos Aires: merely a set of loose guidelines to be interpreted by the individual, depending on the circumstances. It’s exasperating, but there are signs of hope. Every once in a while, something happens that suggests the cosmos has decided to intervene and even things out. Last week, at the ferry terminal, I handed a cashier a 10-peso note for a 10.50 tab. He just shrugged and took it without a word of complaint. Not without a twinge of guilt, I wordlessly returned a precious 50-centavo coin to my hoard. A hoard I plan to release, in one spectacular all-moneda purchase, the day I leave the country.
Argentine inflation means daily scramble for coins / October 17th 2008
A kiosk owner bribes a bank worker with cookies to break bills. Subway workers let commuters ride free because they can’t change their cash. Bus companies resell the coins they collect at a steep black market markup.
Argentines are increasingly scrambling to get their hands on pocket change for everyday transactions, as soaring inflation makes the copper and aluminum that coins are made of worth more than their face value. Many suspect profit-seeking hoarders are scooping them up to stow away.
Argentine annual inflation officially hit 8.7 percent in September, but independent economists say the government is lowballing that rate, which they claim is closer to 25 percent. One peso — worth about US$0.31 — now buys so little, it makes more sense to melt down its metal than to save the 20 pesos it would take to buy an average box of chocolates, said economist Diego Giacomini, a consultant at Economia & Regiones in Buenos Aires. “If there were a 100 peso coin, it wouldn’t disappear like we see happening now with smaller coins, because the currency’s value would be greater than the value of the metal,” Giacomini said.
Argentines love a good conspiracy theory, and there is little evidence that people are dealing in coin scrap just yet. But the scarcity of coins has triggered a black market, with dealers collecting and illegally reselling them at a hefty markup of up to 10 percent. That only takes more coins out of circulation, and the government is struggling to keep up with demand. The Central Bank says it injects new currency into the market every few months, making sure there are about 125 coins per person in circulation.
The Justice Ministry is meanwhile investigating Buenos Aires currency distributor Maco S.A., for allegedly withholding nearly 5 million pesos in change to resell on the black market. The company denies the allegations.
An anonymous Central Bank hot line has meanwhile received 5,000 complaints about black market coin sales since it opened in February, according to the bank. Each 50 cent coin contains about 5.3 grams of copper and 0.5 grams of aluminum, together worth about a sixth of the coin’s monetary value.
But inflation is rising so fast that in a few years, the coins will be worth less than the metal they are made of. Unless, that is, the global financial crisis lasts so long, and pushes Argentine growth rates and copper prices so low, that the coin regains its monetary value and hoarders return it to circulation. In other words, global financial calamity just might make it easier for Argentines to find pocket change. Meanwhile, Maxi Rosa has his own plan. To keep his busy kiosk running in downtown Buenos Aires, he gives weekly cookies and chocolates to a banker friend who changes his bills into coins.
It’s a more reliable source than he had before, when he said he paid a bus company 310 pesos in paper to get back 300 pesos-worth of coins. “We’re really lucky to have the contact, and because we always have change, we have a lot of regular customers,” said 20-year-old Rosa. The capitals’ subway system had no such backup plan: last weekend attendants ran out of change, forcing them to let passengers ride free for two days. On Oct. 7, Buenos Aires’ state government passed a law to levy bus companies that resell coins with a 2,000-peso (US$624) fine and indefinitely suspend their service. The Central Bank has also opened stands at three major train stations to dispense up to 20 pesos of coins per person. But passengers complain they don’t have time to wait in long lines two or three times a week to get change. What the government really needs to do, economist Giacomini said, is confront the root cause that’s driving people to hoard the metal coins and worsen the shortage. “First, they need to deal with inflation,” he said.
THE EX KOPECK
“In the years immediately following the dissolution of the Soviet Union, many pay phones were still operating on kopeck coins, even though the calls themselves were priced much higher. Would-be callers would have to go buy “tokens”—in actuality, old kopeck coins—to be able to operate the phones. A poster on Marginal Revolution muses that while he was at a conference in Moscow in 1992, his “wife wanted to call somebody, and had to give three roubles to obtain two kopeks to make the call. That would be like paying three dollars to get two pennies in the US.”
RUPEES into RAZORBLADES
Sharp practice of melting coins
by Subir Bhaumik / 26 June 2007
Millions of Indian coins are being smuggled into neighbouring Bangladesh and turned into razor blades. And that’s creating an acute shortage of coins in many parts of India, officials say. Police in Calcutta say that the recent arrest of a grocer highlights the extent of the problem. They seized what they said was a huge coin-melting unit which he was operating in a run-down shack. The grocer confessed to melting down tens of thousands of Indian coins into razor blades which were then smuggled into Bangladesh, police said. “Our one rupee coin is in fact worth 35 rupees, because we make five to seven blades out of them,” the grocer allegedly told the police. “Bangladeshi smugglers take delivery of the blades at regular intervals.”
Out of circulation
Police say that initially the smugglers took coins into Bangladesh and then melted them down, but as the scale of the operation has increased, more and more criminals in India are melting them down first, and then selling them as razor blades. To deal with the coin shortage, some tea gardens in the north-eastern state of Assam have resorted to issuing cardboard coin-slips to their workers. The denomination is marked on these slips and they are used for buying and selling within the gardens. The cardboard coins are the same size as the real ones and their value is marked on them. “We will commit an offence if these cardboard slips go out, but we have to use them in our gardens because there are hardly any Indian coins in circulation here,” said a manager of a tea garden in northern Assam. He is not willing to be named because the disclosure could cause legal complications for the estate.
‘Do our best’
Indian revenue intelligence officials say millions of coins are finding their way into Bangladesh. They say they have alerted the paramilitary Border Security Force (BSF) – which is deployed on the India-Bangladesh border – to check the smuggling. “We are aware of our coins going across the border in some quantities and we will do our best to stop it,” senior BSF official SK Datta told the BBC. Revenue intelligence officials, who do not wish to be named, say criminals can make five to six blades from a five-rupee coin. “We are investigating this closely,” said one official posted in north-eastern India. Earlier, Indian coins were being melted in huge quantities in places like Calcutta. The mints took corrective action – scaling down the metal content of the coins – but that has not stopped the shortages.
The authorities have taken various steps to deal with the problem. In Calcutta alone, India’s central bank – the Reserve Bank of India – has distributed coins worth nearly six million rupees ($150,000) to overcome the shortage in the last two weeks, bank treasurer Nilanjan Saha said. Long queues form outside the bank’s regional office in the city centre every time this happens. Unscrupulous touts set up makeshift shops and collect as many of the coins as they can, only to sell them later at a premium. “We stand in long queues but the coins are finished within no time. Those in front pick them up and we can see some of them later selling the coins at a big margin,” complained small trader Nitai Banik, who needs a lot of coins for his retail trade in small garments.
Shopkeepers ask customers to buy more to make it a round figure so that small change does not have to be given out. “The shopkeepers give us toffees or cigarettes to make it a round figure,” said student Debolina Sen. In desperation, some shopkeepers have even turned to beggars to maintain their coin supplies. The beggars get given coins by passers-by and then sell them on at a profit. “They charge a smaller premium, much less compared to the touts outside the Reserve Bank,” says businessman Tarun Jain. The coin shortage is most acute in the north-eastern frontier town of Agartala, right on the border with Bangladesh and believed to be a major centre for contraband trade with Bangladesh. Here, rickshaw pullers tell you that they cannot provide any coins in change because they have none left. “So we have to accept very soiled notes of one or five rupees, so soiled that the banks will not change it,” says Agartala resident Sushil Choudhury. In Guwahati, Assam’s capital and the business hub of India’s northeast, small coins like 50 paisa have completely dropped out of circulation.
the DISPOSABLE PENNY
They’re horrid and useless. Why do pennies persist?
by David Owen / March 31, 2008
One problem with pennies is that their metal value exceeds their face value. Several years ago, Walter Luhrman, a metallurgist in southern Ohio, discovered a copper deposit of tantalizing richness. North America’s largest copper mine—a vast open-pit complex in Arizona—usually has to process a ton of ore in order to produce ten pounds of pure copper; Luhrman’s mine, by contrast, yielded the same ten pounds from just thirty or forty pounds of ore. Luhrman operated profitably until mid-December, 2006, when the federal government shut him down.
The copper deposit that Luhrman worked wasn’t in the ground; it was in the storage vaults of Federal Reserve banks, and, indirectly, in the piggy banks, coffee cans, automobile ashtrays, and living-room upholstery of ordinary Americans. A penny minted before 1982 is ninety-five per cent copper—which, at recent prices, is approximately two and a half cents’ worth. Luhrman, who had previously owned a company that refined gold and silver, devised a method of rapidly separating pre-1982 pennies from more recent ones, which are ninety-seven and a half per cent zinc, a less valuable commodity. His new company, Jackson Metals, bought truckloads of pennies from the Federal Reserve, turned the copper ones into ingots, and returned the zinc ones to circulation in cities where pennies were scarce. “Doing that prevented the U.S. Mint from having to make more pennies,” Luhrman told me recently. “Isn’t that neat?” The Mint didn’t think so; it issued a rule prohibiting the melting or exportation of one-cent and five-cent coins. (Nickels, despite their silvery appearance, are seventy-five per cent copper.) Luhrman laid off most of his employees and implemented his corporate Plan B: buying half-dollars from banks and melting the silver ones (denominations greater than five cents aren’t covered by the Mint’s rule); mining Canadian five-cent coins (which were a hundred per cent nickel most years from 1946 to 1981); and lobbying Congress.
Luhrman’s experience highlights a growing conundrum for the Mint and for U.S. taxpayers. Primarily because zinc, too, has soared in value, producing a penny now costs about 1.7 cents. Since the Mint currently manufactures more than seven billion pennies a year and “sells” them to the Federal Reserve at their face value, the Treasury incurs an annual penny deficit of about fifty million dollars—a condition known in the coin world as “negative seigniorage.” The fact that the Mint loses money on penny production annoys some people, because one-cent coins no longer have much economic utility. More than a few people, upon finding pennies in their pockets at the end of the day, simply throw them away, and many don’t bother to pick them up anymore when they see them lying on the ground. (Breaking stride to pick up a penny, if it takes more than 6.15 seconds, pays less than the federal minimum wage.)
Various people have proposed various remedies, one of which is to get rid of pennies altogether. This is a step that many countries have taken with their least valuable coins—among them the United States, which stopped making half-cents in 1857, when a half-cent, by almost any measure, had significantly more purchasing power than a dime does today. There are problems, though. One is that many people are quite attached to one-cent coins. Another is that some people fear that merchants in a penny-free economy, when making change on cash purchases, might be more inclined to round up than to round down, thus penalizing consumers. A third is that eliminating pennies would increase our reliance on nickels, which now cost almost ten cents to manufacture and so generate even more negative seigniorage, per coin, than pennies do. What is to be done?
America’s assortment of circulating pocket change is anything but immutable. Colonial-era settlers initially had no coins (or bills) of their own. They therefore depended heavily on barter, and conducted cash transactions with British coppers and other foreign coins, especially Spanish reals. (The “dollars” mentioned in Article I of the Constitution were actually eight-real coins, also known as pieces of eight.) British silver coins were scarce in America because Britain, which had little domestic access to precious metals and hoped its colonists would soon get busy shipping treasure in the opposite direction, forbade their export. In 1702, the alchemy-obsessed master of the British Royal Mint, Isaac Newton, melted down and minutely analyzed the coins of a number of countries to determine their exact content. The results of Newton’s assay were used, among other things, to set the bewildering, constantly shifting exchange rates that were a part of daily commercial life in England and America in the early eighteenth century.
Congress created the Mint in 1792, and its original headquarters, in Philadelphia, was the first government building to be erected under the authority of the Constitution. The first U.S. coins, produced that year, were silver “half dismes,” or half-dimes. They were worth a twentieth of a dollar and may have been manufactured, at least in part, from silverware donated by President and Mrs. Washington. The first U.S. coins to circulate widely were probably one-cent pieces struck in 1792 or 1793. They were made of pure copper, and were slightly larger in diameter than a Sacagawea dollar and about half again as heavy. The first Lincoln cent was minted in 1909, on the hundredth anniversary of Lincoln’s birth. It replaced the Indian-head cent, and was the first circulating American coin to be stamped with the likeness of a real, identifiable person. It was made of bronze and weighed about twenty-five per cent more than the cent we use today.
The scarcity of one metal or another has prompted sporadic crises in American coin production. In 1943, the Mint, hoping to preserve copper for military uses, experimented with a number of materials, including Bakelite, before settling on galvanized steel. These coins were prone to rust, especially near the edges, and were so unpopular that in 1944 the Mint went back to using copper, much of it from spent shell casings. Enough steel cents were made, however, that they were still turning up twenty years later, when I made a brief go at coin collecting. (I had all three versions—from the Mints in Denver, Philadelphia, and San Francisco.) In the early seventies, when the value of the copper in a penny had risen to almost a penny, the Mint produced about a million and a half Lincoln cents made of aluminum. Congress rejected that idea, and the Mint destroyed all the aluminum coins, except for a dozen samples that were kept by congressmen and others. Possessing these coins, which are dated 1974, is against the law, since they are considered by the Mint to be purloined government property; one of them—which numismatists refer to, ominously, as the Toven Specimen—is thought to be held by heirs of a Capitol police officer.
The most significant shift in the metal content of American coins occurred in 1965. The price of silver had risen so high that some bank employees were asking to be paid in change, and Congress passed a law that required the Mint to stop using silver in almost all coins. The new, silver-free coins were of the “sandwich” variety still used today; they have a pure-copper core and thin top and bottom layers made of a copper-nickel alloy. Sacagawea dollars and the new Presidential dollars also have copper cores, with a coating of manganese brass.
Coin denominations higher than five cents don’t present the same seigniorage challenge that pennies and nickels do, at least for the time being; a dollar coin, for example, costs only about twenty cents to make. In 2006, the Mint cleared $750 million on revenues of $2.3 billion, so it’s in no immediate danger of violating its obligation not to spend more on manufacturing coins than it receives, from the Federal Reserve and other coin consumers, for manufacturing them. (Last year, the Mint sold some eight hundred and seventy-two million dollars’ worth of non-circulating coins and medals to collectors and to people who like to keep savings in precious metals.) Nevertheless, Edmund Moy, the Mint’s director since 2006, worries about long-term trends in metals prices, and he and his staff have asked Congress to allow the Mint to periodically adjust the content of coins on its own, without going through the time-consuming process of seeking specific legislation. Congress probably won’t give Moy everything he wants, but the problem is unlikely to go away, since demand for base metals is strong all over the world.
n January, I fulfilled a long abandoned schoolboy ambition by taking a field trip to watch coins being manufactured, at the Mint in Philadelphia. On arrival, I was required to empty my pockets of change, to make it easier for the Mint’s police force to determine later whether I had tried to smuggle anything out. Then I met John M. Mercanti, a substantial, bearded middle-aged man, who is the Mint’s supervisory design and master tooling development specialist, and is identified by a sign on his office door as the Big Cheese. “My wife laughs at me, but I pick up pennies,” he said. “To me, a penny is a work of art that a lot of time and effort have gone into, and I’m not just going to let it lie on the sidewalk. It becomes a personal thing.”
New coins begin in Congress, which sets the themes, the metal content, and other details in consultation with the Mint and various interested parties, including coin collectors and historians. Next, the designs are created by Mercanti’s staff of six in-house artists and a larger group of freelancers. For about a century, the Mint’s sculptors have made eight-inch prototypes from clay and other materials, after which a machine called a Janvier transfer engraver has rendered those images onto coin-size metal dies. Now the Mint is moving toward an entirely digital system. I met Joseph Menna, a young staff artist who earned a master’s degree at the New York Academy Graduate School of Figurative Art, and he let me try his virtual-engraving tool, which looked like a dentist’s drill and gave realistic tactile feedback as I slashed away, on a computer tablet, at the face of James Madison. One of the biggest challenges of coin design is portraying realistic-looking three-dimensional facial features on a metal surface that is nearly flat. This difficulty explains why the faces on coins are almost always shown in profile: doing so keeps noses recognizable. The 2006 nickel, which features a likeness of Jefferson and was sculpted by Menna’s former colleague Donna Weaver, is the first circulating U.S. coin to have a forward-facing portrait; it is considered by coin aficionados to be an engraving tour de force.
After I had finished defiling Madison’s face, Tim Grant, the Mint’s public-affairs manager, led me down a staircase to the production floor, which was vast, clean, and noisy. Once specialists have turned coin designs into working dies, coin manufacturing proceeds much as it did in President Washington’s day, adjusted for technology. A machine punches coin-size blanks, called planchets, from long coils of sheet metal, and another machine, in a process called upsetting, gives each planchet a raised rim. (All coins have this rim; without it their surface features would make them unstackable.) Another machine then stamps designs onto both sides simultaneously, one planchet at a time. “To make a penny takes thirty-five tons per strike,” Grant said, as I ran my hand through a bin of warm, new coins. “We can make about a million pennies from one set of dies.” All this happens very quickly. The U.S. Mint took more than two years to manufacture its first million coins; the Philadelphia Mint now makes that many every forty-five minutes or so.
Conveyor belts feed finished coins into large, box-shaped bags made of white-and-blue plastic webbing. Grant and I watched as workers loaded a number of these bags, each of which weighed more than a ton, onto trucks, for shipment to Federal Reserve banks. The trucks had nondescript markings—a superfluous precaution, probably, since robbing one would be a chore: a typical Mint bag full of pennies contains only about four thousand dollars’ worth, yet you’d need a forklift to move it to the back of your getaway vehicle.
As I watched new pennies spewing from the Mint’s stamping machines, I couldn’t help wondering about the fate of all the pennies that had gone before them. The average life span of American pocket change is thirty years. During the past thirty years, the U.S. Mint has produced something like a half trillion coins, most of them cents, yet the Mint estimates that only about three hundred billion coins are currently in circulation. This estimate is probably high, since it includes coins that haven’t budged from their coffee cans in years. Even so, the missing change is worth billions. Where is it? Except in rare cases, old coins, unlike old banknotes, aren’t withdrawn from circulation by the Federal Reserve. People simply mislay them, eventually, in one way or another, and in most cases they disappear as permanently as if they had been dropped into the sea. Pocket change leaks from the economy the way air leaks from a balloon, and most of what leaks is pennies.
On November, 1989, Representatives James A. Hayes, of Louisiana, and Jim Kolbe, of Arizona, having had just about enough of all this, introduced the Price Rounding Act. Its purpose was to phase out the penny by requiring that all cash transactions be rounded to the nearest five cents. The bill was actively opposed by Americans for Common Cents, a lobbying organization that had been founded specifically to defeat the legislation. A.C.C.’s main funding came from Jarden Zinc Products, which is one of the nation’s largest producers of zinc, and which has supplied the U.S. Mint with penny planchets since 1982.
In 1990, A.C.C. enlisted Raymond E. Lombra, an economics professor at Pennsylvania State University, to make an academic case for preserving one-cent coins at a Senate Banking Committee hearing on the Price Rounding Act. Lombra, after studying prices at a retail store, had concluded that rounding cash transactions would be more likely to raise consumer expenditures than to lower them. He testified that eliminating pennies would “impose a significant and regressive rounding ‘tax’ on the American public”—about six hundred million dollars annually, or, at the time, a little more than two dollars per American. He also said that any putative productivity gains from eliminating cent coins were “an illusion,” since “cash-register clerks would not suddenly be free to stock shelves or clean stores if the penny were no longer in circulation.”
Lombra and A.C.C. prevailed, and the Price Rounding Act was tabled out of existence. In July, 2001, Kolbe—this time alone, Hayes having retired—tried again. His new bill, the Legal Tender Modernization Act, played a supporting role in an episode of “The West Wing”: Sam Seaborn, the White House deputy communications director (played by Rob Lowe) is given the task of coming up with a plausible-sounding excuse that President Bartlet (played by Martin Sheen) can use in declining to support the Legal Tender Modernization Act (played by the actual bill), and he settles on the fact that the Speaker of the House is from Abraham Lincoln’s native state. The bill’s opponents in real life also included Lincoln-loving people from Illinois, along with people who hold “penny drives” for charity, people who would prefer that everything remain the way it is now, and, of course, Americans for Common Cents. The bill went nowhere. Kolbe tried one more time, in 2006, when the price of zinc was at a record high and inflation had further eroded the penny’s minimal purchasing power—again without success. He retired the following year, leaving Congress without an active penny-hater.
In 2001, Lombra published a paper in the Eastern Economic Journal, in which he elaborated on a number of the ideas that he had introduced in his congressional testimony a decade before. The direct and indirect effects of the “rounding tax,” he wrote, would be “no less than $1.5 billion over five years and $2.5 billion over a decade,” estimates that he described as “conservative.” Yet Lombra’s analysis was highly selective. Consider, after all, the opportunity cost of storing billions of dollars’ worth of small coins in dresser drawers, often for decades, and then losing track of them entirely. This taxlike penalty is self-imposed, since no law prevents anyone from filling his pockets with pennies before leaving the house, but even people who do use small change bear the burden of lugging it around and sifting through it—the old-lady-with-a-coin-purse problem, which has doubtless been slowing checkout lines since the Lydians invented coinage, in 500 B.C. or so. Nor is it clear that merchants, who have to cover the considerable cost of handling, sorting, transporting, and redeeming excess change, would invariably abuse a rounding system. When I was in Washington visiting the executive director of A.C.C., I made three small purchases in the gift shop of my hotel and noticed that the cashier avoided handling pennies on all three occasions, and twice rounded in my favor. We were both happy to keep bothersome metal disks out of the transaction.
Even if retailers consistently fudged in their own favor, rounding’s impact on individual consumers today would be imperceptible. For one thing, rounding would apply only to the final five cents, no matter how high the price: a $1.98 purchase would be rounded up two cents; so would a $1001.98 purchase. Americans have taken this sort of thing in stride for years. Sales taxes are rounded when assessing them results in fractional cents, and most consumers don’t even try very hard to avoid A.T.M. fees, which are far more costly than any form of rounding. Besides, the growing percentage of transactions that are handled by credit card, PayPal, and other non-cash media wouldn’t be subject to rounding at all.
A modern penny simply isn’t worth enough to worry about. In 1940, an average one-pound loaf of bread sold for eight cents, according to the U.S. Census Bureau. That means that a penny in those days bought enough bread to make a good-sized sandwich. These days, a penny doesn’t buy much more than a bit of crust. Accurately comparing monetary values (and bread loaves) across decades is impossible, but by almost any economic measure a 1940 penny had more purchasing power than a modern quarter does; in 1940, then, consumers got by, quite contentedly, without the equivalent of our penny, nickel, or dime. And many people continue to get by without these coins today, since in the actual marketplace consumers tend to treat the quarter as the smallest meaningful denomination.
In that 2001 episode of “The West Wing,” the Sam Seaborn character states that the only coin-operated machines that accept pennies anymore (apart from automated tollbooths on highways in Illinois) are “those coin-wrapping machines people buy to get rid of pennies.” Since 1992, there has actually been one more: change-redeeming machines owned by the company Coinstar—which people also use to get rid of pennies. Coinstar’s founder, Jens Molbak, got the idea for his company while considering his own mounting collection of unredeemable change, in his dormitory room at the Stanford Graduate School of Business. A senior vice-president at Coinstar—Molbak himself retired in 2001—told me, “Jens interviewed some people outside supermarkets, and realized that a ton of them had hordes of coins sitting at home in jars or shoeboxes, too, and nobody really wanted to deal with them. He needed a project for a class, so he did some research and discovered a business. Now, everybody always says, Why didn’t I think of that?” Today, Coinstar’s kiosks can be found in more than fifteen thousand supermarkets and other locations, including the lobbies of some banks.
Coinstar charges most of its customers 8.9 per cent of any amount they feed into a machine. The fact that consumers happily pay this considerable fee suggests that they wouldn’t be bothered by the vastly smaller penalty that rounding to the nearest nickel might entail. Of course, eliminating cents would also eliminate the middleman—in this case Coinstar, which annually processes about forty billion coins, more than half of which are pennies. Not surprisingly, therefore, Coinstar has been an advocate of preserving pennies. Since 1998, the company has conducted an annual currency poll, which always shows that Americans still love pennies and would prefer to continue getting rid of them by collecting them for months or years and then paying Coinstar to put them back into circulation, instead of getting rid of them once and for all by having the Mint stop making them.
hether or not the United States ever does drop the penny, Congress will presumably have to do something about the nickel, which now costs almost a dime to make. That won’t be easy. Tinkering with the metal content of the nickel is more challenging than tinkering with that of the penny, because nickels are used in vending machines and vending machines distinguish real coins from slugs by measuring size and weight. The modern five-cent piece was introduced in 1866, and was made of the same copper-nickel alloy that is used today. Its weight was set at exactly one gram per cent, and it therefore memorializes a moment in American history when the United States was thinking somewhat seriously about adopting the metric system. The nickel still weighs five grams—nearly as much as a quarter, and heavy enough that it is almost guaranteed to generate negative seigniorage, no matter what alloy it’s made from.
One solution to this problem would be to replace the nickel with an updated version of the coin that the nickel itself replaced, back in 1866. Frank Lucas, who is a Republican congressman from Oklahoma, a lifelong coin collector, and a potential inheritor of Jim Kolbe’s anti-penny mantle, told me, “I think we need to assess stepping back from the nickel, the five-cent piece, and consider readopting the traditional five-cent coin, the old half-dime.” Lucas’s version would be smaller in diameter than a dime, and weigh half as much—not light enough to blow away in a strong breeze, though almost.
An even simpler solution might be to get rid of five-cent coins altogether—along with the penny, of course. This idea may not be as radical as it sounds. In 2006, in an initiative called Change for the Better, New Zealand eliminated its five-cent coins, and dramatically reduced the size and weight of its ten-, twenty-, and fifty-cent coins. It had already stopped making one- and two-cent coins, in 1989, and had replaced one-dollar and two-dollar notes with coins, in 1991. This total transformation of the country’s currency was received with calm pragmatism by most New Zealanders—even though the lowest-denomination coin in the new system, the redesigned ten-cent piece, is worth about eight American cents at the current rate of exchange.
Canada, too, has streamlined its currency. It has stopped printing one- and two-dollar notes, and officials are considering further changes. Last year, economists at the Desjardins Group, an association of Canadian credit unions, published a study that strongly advocated the elimination of the Canadian one-cent coin, which would most likely be followed by the elimination of the five-cent coin as well. The study makes many references to the experience of New Zealanders. It also gets in several digs at foot-dragging Americans: “Canada does not have to follow their example. After all, American society is very conservative, particularly with its symbols (for example, the U.S. did not adopt the metric system and has not replaced the dollar bill with a dollar coin).” This sort of slur from an (alleged) ally probably isn’t worth going to war over, especially now that its money is sometimes worth more than ours. But we could still strike back, by doing Canada—and New Zealand—one better: we could get rid of dimes, too.
WORTH MORE than it’s ‘WORTH’
Melt Value of U.S. Nickel Coins Is Still Increasing
“I have mentioned several times that I am collecting U.S. nickel coins and copper pre-1982 pennies because the value of the physical base metals from which they are formed (i.e., the “melt value”) exceeds their respective face values. Back on December 14, 2006, I mentioned that the metal value of pre-1982 pennies was 2.0752 cents (207.52% of face value), post-1982 zinc pennies had a metal value of 1.1257 cents (112.57% of face value), and nickels had a metal value of 6.9879 cents (139.75% of face value).
The value of zinc (the primary component of post-1982 pennies) has decreased about 13% since then. However, the values of raw copper and nickel metal have risen substantially since mid-December, with copper increasing about 22% and nickel increasing almost 49%. These metals have been soaring during the U.S. commodities boom that has been going on during the past several years. The cause of this boom is most likely due to a continuing weak U.S. dollar and rising demand for raw materials from fast-growing emerging markets such as China and India.
As shown in the chart below, the metal value of pre-1982 pennies is now 2.5237 cents (252.37% of face value), post-1982 zinc pennies have a metal value of 0.9953 cents (99.53% of face value), and nickels have a metal value of 9.7226 cents (194.45% of face value). With the melt values of these metal substantially exceeding the face value for nickels and at about parity with face value for post-1982 pennies, the U.S. Mint is losing many millions of dollars each year by making these coins with their current compositions. As such, it is practically a guarantee that the U.S. Mint will change the base metals of these coins within the next couple years, at which point the current pennies and nickels in circulation will become collectors’ items hoarded just like old silver coins were hoarded when the U.S. Mint abandoned the use of silver in its coins.”
U.S. Mint Implementing New Rule Abolishing Melting of Pennies and Nickels / December 14, 2006
“I have mentioned several times over the past year that I am hording pennies and nickels. We are currently in the midst of a commodities boom and the value of precious metals and non-precious metals (such as those used in current U.S. coins) has soared for the past 2 or 3 years. There are several reasons for the soaring prices that I will not discuss in detail here in this post (although I may discuss it in a future post), but among the chief reasons for this boom is the strong global demand for metals due to strong worldwide economic growth, as well as a devaluation of the U.S. dollar by the Federal Reserve that has increase the U.S. dollar value of commodities.
The value of the metals within several U.S. coins, including pennies and nickels, now exceeds the face value of the coins, as shown in the picture below that I acquired from coinflation.com, the best website I’ve seen for determining the intrinsic metal of various coins (click on the picture for a larger view). As one can see, the metal value of pre-1982 pennies is now 2.0752 cents (207.52% of face value), post-1982 zinc pennies have a metal value of 1.1257 cents (112.57% of face value), and nickels have a metal value of 6.9879 cents (139.75% of face value).
To realize the intrinsic metal value of these coins, one would need to melt them down to separate out the respective valuable metals. Up until yesterday, my understanding was that this practice was not illegal. I’ve never done so myself or heard of anyone actually doing so, but I read somewhere that this practice would not be prohibited.
The U.S. Mint has apparently been losing money by making pennies and nickels over the past year as it pays more for the metals used to make the coins that it receives in return when it sells the coins at face value to banks, etc. As of today, the U.S. Mint has made it illegal to melt down pennies and nickels. It is also illegal to transport more than $100 worth of pennies and/or nickels out of the country unless it is for legitimate coinage purposes. The penalty for violation of this new rule is a penalty of up to five years in prison and a fine of up to $10,000 for people convicted of violating the rule.
In case anyone had any doubts about whether collecting pennies and nickels is worthwhile, the U.S. Mint’s implementation of the new rule should quell such doubts. It’s only a matter of time until the U.S. Mint changes the metal composition of pennies and nickels to include less expensive metals, a move that would likely increase the collectible value of current pennies and nickels.
New rules outlaw melting pennies, nickels for profit
by Barbara Hagenbaugh / 12/14/2006
People who melt pennies or nickels to profit from the jump in metals prices could face jail time and pay thousands of dollars in fines, according to new rules out Thursday. Soaring metals prices mean that the value of the metal in pennies and nickels exceeds the face value of the coins. Based on current metals prices, the value of the metal in a nickel is now 6.99 cents, while the penny’s metal is worth 1.12 cents, according to the U.S. Mint. That has piqued concern among government officials that people will melt the coins to sell the metal, leading to potential shortages of pennies and nickels. “The nation needs its coinage for commerce,” U.S. Mint director Ed Moy said in a statement. “We don’t want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers.”
There have been no specific reports of people melting coins for the metal, Mint spokeswoman Becky Bailey says. But the agency has received a number of questions in recent months from the public about the legality of melting the coins, and officials have heard some anecdotal reports of companies considering selling the metal from pennies and nickels, she says. Under the new rules, it is illegal to melt pennies and nickels. It is also illegal to export the coins for melting. Travelers may legally carry up to $5 in 1- and 5-cent coins out of the USA or ship $100 of the coins abroad “for legitimate coinage and numismatic purposes.”
Violators could spend up to five years in prison and pay as much as $10,000 in fines. Plus, the government will confiscate any coins or metal used in melting schemes. The rules are similar to those enacted in the 1960s and 1970s, when metals prices also rose, the Mint said. Ongoing regulations make it illegal to alter coins with an intent to commit fraud. Before today’s new regulations, it was not illegal to melt coins.
Metals prices have skyrocketed worldwide in recent years in response to rising demand, particularly in rapidly growing China and India. Prices for zinc, which accounts for nearly all of the metal in the penny, have risen 134% this year, according to the London Metal Exchange. Even accounting for a recent decline, the price of copper is up 50% since the start of 2006. Nickels are produced from 75% copper and 25% nickel.
Although the Mint’s new rules are immediately going into effect, the Mint will take comments from the public for a month. The government has changed the composition of coins in response to rising metal prices. The penny, which was pure copper when it was introduced in 1793, was last changed in 1982.
House OKs Bill to Keep Pennies From Costing More Than One Cent / May 08, 2008
The House voted for cheaper change Thursday, the kind that would make pennies and nickels worth more than they cost to make and save the country $100 million a year. The unanimous vote advances the legislation to the Senate, but it’s prospects are muddled by objections from the Bush administration and some lawmakers. The bill would require the U.S. Mint to switch from a zinc and copper penny, which costs 1.26 cents each to make, to a copper-plated steel penny, which would cost .7 cents to make, according to statistics from the Mint and Rep. Zack Space, D-Ohio, one of the measure’s sponsors. It also would require nickels, now made of copper and nickel and costing 7.7 cents to make, to be made primarily of steel, which would drop the cost to make the five-cent coin below its face value. Advocates say that such actions would push back against surging metal prices and save taxpayers about $1 billion over a decade. But even the Mint opposes the House-passed measure. The legislation directs the Treasury secretary to “prescribe” — suggest — a new, more economical composition of the nickel and the penny. Unsaid is the Constitution’s requirement that Congress have the final say. The administration, like others before, chafes at the thought that Congress still clings to that authority.
Mint Director Edmund Moy said this week that the bill as “too prescriptive,” in part because it does not explicitly delegate to the Treasury secretary the power to decide the new coin composition. The bill also gives the public and the metal industry too little time to weigh in on the new coin composition, he said. Sen. Wayne Allard, R-Colo., is expected to introduce another version of the legislation in the Senate. In 2007, the Mint produced 7.4 billion pennies and 1.2 billion nickels, according to the House Financial Services Committee. Other coins still cost less than their face value, according to the Mint. The dime costs a little over 4 cents to make, while the quarter costs almost 10 cents. The dollar coin, meanwhile, costs about 16 cents to make, according to the Mint.
EXCHANGE RATE for your THOUGHTS
Coin shortage could turn pennies to nickels
by Kevin Plumberg / Jan 22, 2007
A potential shortage of coins in the United States could mean all those pennies in your piggy bank could be worth five times their current value soon, says an economist at the Federal Reserve Bank of Chicago. Sharply rising prices of metals such as copper and nickel have meant the face value of pennies and nickels are worth less than the material that they are made of, increasing the risk that speculators could melt the coins and sell them for a profit. Such a risk spurred the U.S. Mint last month to issue regulations limiting melting and exporting of the coins. But Francois Velde, senior economist at the Chicago Fed, argued in a recent research note that prohibitions by the Mint would unlikely deter serious speculators who already have piled up the coinage. The best solution, Velde said, would be to “rebase” the penny by making it worth five cents rather than one cent. Doing so would increase the amount of five-cent coins in circulation and do away with the almost worthless one cent coin. “History shows that when coins are worth melting, they disappear,” Velde wrote. “Rebasing the penny would … debase the five-cent piece and put it safely away from its melting point,” he added.
Raw material prices in general have skyrocketed in the last five years, sending copper prices to record highs of $4.16 a pound in May. Copper pennies number 154 to a pound. Prices have since come down from that peak but could still trek higher, Velde said. Since 1982, the Mint began making copper-coated zinc pennies to prevent metals speculators from taking advantage of lofty base metal prices. Though the penny is losing its importance — it is worth only four seconds of the average American’s work time, assuming a 40-hour workweek — the Mint is making more and more pennies. Velde said that since 1982 the Mint has produced 910 pennies for every American. Last year there were 8.23 billion pennies in circulation, according to the Mint. “These factors suggest that, sooner or later, the penny will join the farthing (one-quarter of a penny) and the hapenny (one-half of a penny) in coin museums,” he said.
email : fvelde [at] frbchi [dot] org
MINT or MELT
BY Anna J. Schwartz / July 2002
“What was the big problem? After 1200, when throughout Europe coins of larger denominations than the silver penny — the sole constituent of Charlemagne’s monetary system from 800 on — became common, a puzzling phenomenon was the recurrence of shortages of small denomination coins, depreciations of small coins relative to large ones, and small coin debasements. Why would a shortage coincide with a fall in value of small coins?
In a commodity monetary system, the value of a coin was based on its metal content, with an upper limit determined by the production cost and seigniorage charge for minting a coin from the raw metal, and a lower limit determined by the price level at which it paid to melt the coin and use the metal for payments. At a price level below the lower bound, the coin would be minted. At a price level above the upper bound, the coin would be melted. The government set the limits by choosing the metal content of each denomination and the price the mint would pay as measured by the number of coins it offered for the metal brought to it.”
by David Warsh / June 9, 2002
“It was only in 1964 that the US stopped minting coins containing 90 percent silver. Nearly 15 billion circulating dimes, quarters, half- and silver dollars (face value $2.6 billion) then quickly disappeared from circulation in the late 1960s, melted down for ingots by (felonious) entrepreneurs or squirreled away by collectors as the price of silver rose during the inflation associated with the Vietnam War. By 1970 they were gone.
Just as quickly — and virtually unnoticed by almost everybody who wasn’t minting or melting money at the time — they had been replaced by today’s “clad” coins, composed mostly of copper and zinc, whose intrinsic value as commodity metal is far less than their value in trade. As coins overnight became mere tokens, their hoarding finally ceased altogether in the US. Periodic buying and selling of household silver and gold has continued to be an important fact of life in India and Saudi Arabia to the present day. It is easy to forget that experience with coins, not banks, drove monetary policy for many centuries. Combining different metals of varying relative values in one unified system was government’s central monetary problem for hundreds of years.”
Now That a Penny Isn’t Worth Much, It’s Time to Make It Worth 5 Cents
by Austan Goolsbee / February 1, 2007
How dumb do you have to be to mint money at a loss? In the latest only-in-Washington episode, we find that the government may have lost as much as $40 million coining pennies and nickels last year. The metal in them — the zinc, copper and nickel — has soared in value in the last few years, making the coins more valuable as raw materials than they are as currency. The government reaction has been to ban the melting of the coins to get the metal. But there is a good chance that we will find ourselves in an outright coin shortage of a form we have not seen in four decades and one that harks back to the monetary problems of medieval times. In their landmark book on monetary history, “The Big Problem of Small Change,” two economists, Thomas J. Sargent of New York University and François R. Velde of the Federal Reserve Bank of Chicago, point out that before the 20th century, the value of coins came from the material they contained: silver or gold. In the words of economics, it was “commodity money.” But as the price of silver or gold increased, people pulled the coins from circulation. These shortages are a basic problem with commodity money and began almost as early as Charlemagne’s minting of the first silver penny around 800 A.D.
The United States doesn’t have commodity money anymore. Our coins are just tokens now. They are valuable only because the government says they are — because the government is willing to trade them for dollars. And making tokens that cost more to manufacture than they are worth is monetary insanity. We could make them out of any material we want, so why in the world would we lose money? To stop this senselessness, we would seem to have only two choices: debase the coins (i.e., make them out of something cheaper) or abolish pennies (and, perhaps, even nickels).
The United States has debased money in the past. In World War II, we made steel pennies to save copper. In the 1960s, the high value of silver caused a run on quarters and dimes and led to a full-blown coin shortage until we substituted copper and nickel. We also took most of the copper out of pennies in 1982 for the same reason. But debasement only puts off the inevitable for a short time. Because the penny is fixed in value at 1 cent, no matter what the penny is made of, the cost of its material will rise with inflation and eventually be worth more than a cent.
Most economists, then, argue that we should use this opportunity to abolish pennies the way Australia, Britain, Finland and the Netherlands abolished their smallest coins. Because of inflation, a penny isn’t half the coin it once was. Indeed, the United States ended the half-cent in 1857 when it was still worth about 8 cents in today’s terms, so we’re probably well overdue to retire some coins.
But polls show that a majority of Americans like their pennies, and abolition might lead people in Illinois — the land of Lincoln, where pennies still work at tollbooths — to outright currency rebellion. On top of that, Raymond Lombra, an economist at Pennsylvania State University, claims that the rounding of prices — a $6.49 bill would cost you $6.50 — might not be evenly distributed and might cost consumers as much as $600 million a year, a cost that would be paid disproportionately by the poor who use cash more often. Others counter that retail stores could not get away with such shenanigans. But, clearly, the case for abolishing pennies is not universally believed.
So what to do?
Mr. Velde, in a Chicago Fed Letter issued in February, has come up with a solution that would abolish the penny, solve the excess costs of making nickels, help the poor, keep the Lincoln buffs happy and save hundreds of millions of dollars for taxpayers.
As Mr. Velde explained in an interview, “We face a very medieval problem so I took inspiration from the medieval practice of rebasing.” He would rebase the penny by having the government declare it to be worth 5 cents. At first that sounds impossible. But our coins are just tokens the government gives a value to. We can say they are worth whatever we like. Indeed, Mr. Velde observes that the United States did something similar in 1834, when it changed the gold-silver ratio and suddenly the half-eagle $5 coin was actually worth $5.625.
Pennies would then cost a little over 1 cent to make and would be worth a nickel, so the government would again be making a profit on money. We would have plenty of new Lincoln nickels so we could stop minting our current nickels at a heavy loss. The Jefferson nickels would stay in circulation, just as the old wheat pennies do now. Because metal in nickels is valuable, though, they would probably be melted down.
Rebasing pennies is printing money. But don’t get too worried about inflation. With about 140 billion pennies in circulation ($1.4 billion) — counting the ones in your couch and your kids’ piggy banks — this rebalance would make them worth $7 billion, adding about $5.6 billion to the money supply. For comparison, at the start of 2007 there was about $1.4 trillion in currency and money available for purchases, to say nothing of credit cards.
Plus, the money would go disproportionately to the poor (and to people getting allowances from their parents), more than offsetting any “rounding tax” from eliminating the penny.
Copper thieves cause havoc for commuters
by Dan Milmo and Mark Milner / 28 May 2007
Soaring global demand for copper is a growing threat to the British railway network leading to a surge in trackside metal theft, police have warned. Copper theft caused more than 240,000 minutes of delays for train passengers last year after a near-fivefold rise in robberies at tracks and depots. Rail customers are the victims of an economic crime that is being driven by the insatiable demand for industrial material in China and India, said Andy Trotter, deputy chief constable of the British Transport police. “It is a growing problem,” he said. “You have only got to look at the rising copper price on the metal market and the theft of copper matches that rise almost absolutely. Unfortunately, the impact on the infrastructure is beginning to bite.”
Copper theft is a major problem in north-east England, accounting for nearly two-thirds of the delays related to metal thieves in the UK and wreaking havoc with the Northern Trains franchise. Mr Trotter said the regional bias of the problem may reflect the north-east’s industrial heritage. “The north-east has a tradition of heavy industry and of people who know how to deal with copper and metals,” he said. “There are also lots of people who know how to trade in it.”
Police also blamed copper thieves for the demolition of a bungalow in Bradford yesterday. The unoccupied house exploded after copper gas pipes on the outer walls were fractured, apparently by someone trying to rip them out. Police are looking for two boys, aged 10 and 11, in relation to the explosion. “The copper is going through larger scrapyards, then to smelters and then by ship to China, which has an incredible demand for copper, particularly with the Beijing Olympics coming and the demand for telecoms infrastructure,” Mr Trotter said.
The global price of copper has risen fivefold since 2001 and has risen above $8,000 (£4,000) a tonne this year, driven by demand for its use in car production, building and power grids. China accounts for about 20% of global copper consumption and the US for 13%. Such is the demand that 2p pieces are more valuable if they are melted down for their copper.
The British Transport police have launched Operation Drum to crack down on cable theft and are liaising with Network Rail to ensure that copper is not left unguarded at the side of tracks, as used to be the case, and is not stored in easily accessible parts of depots. The clampdown has also led to stakeouts at suspect scrapyards, which have emerged as key outposts in the cable crime food chain. A Network Rail spokesperson said the railways were “increasingly falling victim” to cable theft, but the organisation was working hard with the transport police to stop the trend. “In the fight against cable thieves, we use CCTV, lineside patrols and the Network Rail helicopter. All our people at work on the railway network remain vigilant for cable thieves – and many have foiled thefts and helped the British Transport police catch offenders,” the spokesperson said.
The delays caused by copper thieves contributed to a reduction in the annual bonuses for Network Rail’s 32,000 employees last year, after the infrastructure company failed to meet targets on reducing the number of minutes of delays in services. Stripping cable from railways causes delays by activating a fail-safe system that turns all signals in the area to red, bringing all trains to a halt. Network Rail had set a benchmark of 9.1m delay minutes for the year to March 31, but missed the mark by some distance and recorded 10.5m delay minutes, the same level as the previous year.
Copper theft is also spreading to other industries. Earlier this month, Northumbrian Water said it had stepped up security after a spate of thefts from some of its sewage works in the north-east which it said would cost the company £100,000. It said it was introducing round-the-clock patrols and increased CCTV coverage of rural works in County Durham to try to combat the losses. The company said thieves had targeted 15 sewage works, taking heavy equipment, plant, steel plates, safety covers and hatches, screens, troughs and metal ladders. It added that it believed much of the equipment was being stolen for its scrap value. The company warned that not only were the thefts costly and inconvenient, they were also creating a threat to health and safety and the environment.