MINT OR MELT

[spectre]

from : http://spectregroup.wordpress.com/2009/07/03/mint-or-melt/

MELT VALUE
http://www.coinflation.com/coins/silver_coin_calculator.html
http://www.silverrecyclers.com/Calculators/coin_calculator.aspx

BLACK MARKET COINS
http://www.globalpost.com/dispatch/argentina/090428/argentina-cash-problems
Shortage of coins in Argentina causes problems for consumers and
merchants
BY Anil Mundra / June 17, 2009

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.

COIN SHORTAGE
http://online.wsj.com/article/SB123111629554952657.html
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'
http://www.slate.com/id/2205635/
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.

MASSIVE HOARDING
http://www.nydailynews.com/latino/2008/10/17/2008-10-17_argentine_inflation_means_daily_scramble-2.html
Argentine inflation means daily scramble for coins / 10.17.2008

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.

ELSEWHERE:
THE EX KOPECK
http://www.findingdulcinea.com/news/Americas/2008/November/Argentinas-Coin-Scarcity-Leads-to-Illicit-Numismatic-Trade.html
"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
http://news.bbc.co.uk/2/hi/south_asia/6766563.stm
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.

Distributing coins
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.

Begging coins
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
http://www.newyorker.com/reporting/2008/03/31/080331fa_fact_owen
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.

In 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.

In 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.

Whether 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.

NICKEL
http://financeandinvestments.blogspot.com/2006/10/im-still-saving-us-nickel-coins.html
http://www.coinfacts.com/nickels/jefferson_nickels/2000d_jefferson_nickel.htm

COPPER
http://financeandinvestments.blogspot.com/2006/02/save-your-pre-1982-pennies.html
http://www.coinfacts.com/small_cents/lincoln_cents/memorial_cents/1981_cent.htm
http://www.coinfacts.com/nickels/jefferson_nickels/1943d_jefferson_nickel.htm

WORTH MORE THAN ITS 'WORTH'
http://financeandinvestments.blogspot.com/2007/05/melt-value-of-us-nickel-coins-is-still.html
The 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."

NOW ILLEGAL
http://financeandinvestments.blogspot.com/2006/12/us-mint-is-implementing-new-rule.html
U.S. Mint Implementing New Rule Abolishing Melting of Pennies and
Nickels / 12.14.2006

"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. 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 i nclude less
expensive metals, a move that would likely increase the collectible
value of current pennies and nickels."

MELT VALUE
http://www.usatoday.com/money/2006-12-14-melting-ban-usat_x.htm
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.

SENSELESSNESS
http://www.foxnews.com/story/0,2933,354590,00.html
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
http://www.chicagofed.org/publications/fedletter/cflfebruary2007_235a.pdf
http://www.reuters.com/article/domesticNews/idUSN2247882520070122
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.

CONTACT
Francois Velde
http://www.velde.org/econ/
http://www.chicagofed.org/economic_research_and_data/economists_preview.cfm?autID=46
http://ideas.repec.org/a/mcb/jmoncb/v31y1999i2p137-61.html
email : fvelde [at] frbchi [dot] org

MINT OR MELT
http://eh.net/bookreviews/library/0510
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."

'CLAD' COINS
http://narademo.umiacs.umd.edu/cgi-bin/isadg/viewitem.pl?item=100687
http://www.economicprincipals.com/issues/02.06.09.html
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."

NEARLY WORTHLESS
http://www.nytimes.com/2007/02/01/business/01scenes.html
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 SCAVENGERS
http://www.findingdulcinea.com/news/business/March-April-08/As-House-Prices-Tumble--Homes-Are-Sold-for-Scrap.html
http://www.guardian.co.uk/uk/2007/may/28/transport.topstories3
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.