Friday, December 29, 2006

U.S. COINS

U.S. Criminalizes Coin-Melting: Bad Sign for Dollar?

Your pennies and nickels are now worth more melted down for their metal content than their face value. This has the government worried about more than just the most obvious, publicly stated reason.

On December 13, United States Mint officials said they were making it illegal to melt pennies and nickels and to take large amounts of the coins outside the country. Under the new law, anyone convicted of melting the coins or leaving the country with more than $5 in pennies and nickels or shipping more than $100 worth could be punished with five years in prison and/or a fine of up to $10,000.

Why the drastic steps? “We are taking this action because the nation needs its coinage for commerce,” stated Mint Director Edmund Moy. “We don’t want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer.”

Because of current zinc, copper and nickel prices, pennies and nickels cost the Mint far more than the coins are worth.

For example, as of the December 13 announcement, pennies (which are 97.5 percent zinc and 2.5 percent copper) were worth approximately 1.12 cents. Similarly, nickels, which are 75 percent copper and 25 percent nickel, were worth 6.99 cents—a whopping 39.8 percent above the nickel’s currency value.

For obvious reasons, when the metal value of a coin exceeds its face value, it makes people wonder if they could make money by selling the coin as scrap metal.

Although melting down U.S. coinage to sell the metal seems unpatriotic and opportunistic to say the least, it is a bit ironic that the Mint is worrying about people taking advantage of the taxpayer—especially since the Mint is now costing taxpayers millions by manufacturing pennies and nickels at a cost far above the value of the coins themselves.

According to the Associated Press, when all production costs are taken into account, the U.S. Mint now spends 1.73 cents to produce each penny and 8.34 cents to produce each nickel.

Therefore, since the Mint
produced approximately 7.86 billion pennies and 1.42 billion nickels between January and November, the U.S. Mint itself, by making pennies and nickels that were worth less than their face value, actually cost taxpayers roughly $105 million just in the last 11 months.

Tellingly, there are alternatives the Mint could have employed that would have mitigated these costs and inhibited the exchange of paper money for coinage at banks for the purpose of melting. Instead, they first chose to make new laws.

One alternative would be to stop producing pennies and nickels altogether, thereby stopping any potential coin melting and saving the Mint tens of millions of dollars in production costs. Many other countries have done just that; instead of using small coinage they just round up or down any transactions.

A second option many other countries have effectively employed is changing the metal content of the coins by replacing the costly copper, nickel and zinc with steel, tin or some other less expensive alloy.

Both of these options would completely stop the coin melting trade, because there would either be no coins in circulation to melt, or it would be unprofitable to melt them.

So why would the Mint go to all the trouble of minting pennies and nickels that cost taxpayers millions of dollars (and cost businesses millions of man hours by forcing them to count, package, roll and transport the coins), and then spend the time and effort to draft laws prohibiting people from melting and transporting them, when there are other efficient solutions that would do away with the possibility of people choosing to break the law by melting coins anyway?

The foremost reason is that when nations choose to eliminate their smaller coinage or degrade the metal content in their coins, it is commonly a tell-tale sign of the currency’s devaluation. To discontinue production or shift metal content would be a blatant admission of the loss of purchasing power of the dollar, and it is beneficial to hide this so as not to damage the dollar’s reputation, even if it means losing millions in minting costs.

Currently, the dollar’s position as the world’s reserve currency is very precarious. Several central banks around the world, including Russia’s, Sweden’s and Qatar’s,
have announced they are reducing dollar holdings. Most recently, even China has indicated that it will reduce its dollar holdings.

The fact that pennies and nickels are now worth more for their metal content than their 1-cent and 5-cent face value is undisputable proof of how much value the dollar has lost since its founding. This is not good news for the U.S. dollar, whose reserve currency status is largely built upon confidence that it will remain a stable store of wealth.

If the dollar continues to fall, so will international confidence in the dollar.

The loss of the dollar’s reserve currency status would be a disaster for the U.S., and the fact that the government is hiding how much value the dollar has lost shows the seriousness of this threat.

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