Sinking Currency: U.S. Treasury Phasing Out Pennies And Nickels For Base Metal Value In 2013 Video

CNN Money reported last Febuary that President Barack Obama has asked Congress for approval to change the formula behind nickels and pennies.

The Obama administration is seeking a way to make cheaper money, which in political circles means something different than it does at the U.S. Mint. Of course, abolishing the penny would not just make a lot of sense, it would save a ton of cash as well.

A report from CNN indicates it costs taxpayers 2.4 cents to make every penny and more than 11 cents to make every nickel, which means as raw material prices increase those costs are only going to escalate.

UPDATE: by Brittany Stepniak, Wealth Wire: 11 26 2012

The penny has run out of luck, both in Canada and in the United States. Back in March, the Royal Canadian Mint announced that they were phasing out the penny due to “low purchasing power and rising production costs”, according to CBC News.

Canada was pigeon-holed into this decision after the penny decreased to 1/20th of its original purchasing power, becoming an unnecessary “burden on the economy.”

The U.S. is following Canada’s footsteps regarding the production of pennies and nickels. According to U.S. Treasury Secretary Tim Giethner, our U.S. Mint intends to remove the penny and nickel coins from circulation beginning early in January 2013.

The Mint currently spends about 4.8 cents per penny due to the rising costs of zinc and copper. A nickel valued at five cents now costs approximately 16.2 cents to make due to inflated nickel prices.

Read More @ WealthWire.com

Despite popular belief, since 1982 pennies have only been copper plated, not copper through and through. Much less expensive zinc makes up 97.5% of the mass of a penny, the rest is a copper coating.

Nickels actually have much more copper in them — 75% copper and 25% nickel. It’s the same mix they have always had except for the World War II years, when silver and manganese replaced the nickel and some of the copper.

Gresham’s law states that any circulating currency consisting of both “good” and “bad” money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the “bad” money.

This is because people spending money will hand over the “bad” coins rather than the “good” ones, keeping the “good” ones for themselves. Legal tender laws act as a form of price control. In such a case, the artificially overvalued money is preferred in exchange, because people prefer to save rather than exchange the artificially demoted one (which they actually value higher).

Consider a customer purchasing an item which costs five pence, who possesses several silver sixpence coins. Some of these coins are more debased, while others are less so—but legally, they are all mandated to be of equal value.

The customer would prefer to retain the better coins, and so offers the shopkeeper the most debased one. In turn, the shopkeeper must give one penny in change, and has every reason to give the most debased penny. Thus, the coins that circulate in the transaction will tend to be of the most debased sort available to the parties.

If “good” coins have a face value below that of their metallic content, individuals may be motivated to melt them down and sell the metal for its higher intrinsic value, even if such destruction is illegal. As an example, consider the 1965 United States half dollar coins, which contained 40% silver.

In previous years, these coins were 90% silver. With the release of the 1965 half dollar, which was legally required to be accepted at the same value as the earlier 90% halves, the older 90% silver coinage quickly disappeared from circulation, while the newer debased coins remained in use.

As the price of bullion silver continued to rise above the face value of the coins, many of the older half dollars were melted down. Beginning in 1971, the U.S. government gave up on including any silver in the half dollars, as even the metal value of the 40% silver coins began to exceed their face value.

A similar situation occurred in 2007 in the United States with the rising price of copper and zinc, which led the U.S. government to ban the melting or mass exportation of one-cent and five-cent coins.

In addition to being melted down for its bullion value, money that is considered to be “good” tends to leave an economy through international trade. International traders are not bound by legal tender laws as citizens of the issuing country are, so they will offer higher value for good coins than bad ones.

The good coins may leave their country of origin to become part of international trade, escaping that country’s legal tender laws and leaving the “bad” money behind. This occurred in Britain during the period of the gold standard.

Reverse of Gresham’s Law (Thiers’ Law)

In an influential theoretical article, Rolnick and Weber (1986) argued that bad money would drive good money to a premium rather than driving it out of circulation. However, their research did not take into account the context in which Gresham made his observation. Rolnick and Weber ignored the influence of legal tender legislation which requires people to accept both good and bad money as if they were of equal value.

They also focused mainly on the interaction between different metallic monies, comparing the relative “goodness” of silver to that of gold, which is not what Gresham was speaking of.

The experiences of dollarization in countries with weak economies and currencies (for example Israel in the 1980s, Eastern Europe and countries in the period immediately after the collapse of the Soviet bloc, or South American countries throughout the late 20th and early 21st century) may be seen as Gresham’s Law operating in its reverse form (Guidotti & Rodriguez, 1992), since in general the dollar has not been legal tender in such situations, and in some cases its use has been illegal.

Adam Fergusson pointed out that in 1923 during the great Inflation in the Weimar Republic Gresham’s Law began to work in reverse, since the official money became so worthless that virtually nobody would take it. This was particularly serious since farmers began to hoard food. Accordingly, any currencies backed by any sorts of value became the circulating mediums of exchange. In 2009 Hyperinflation in Zimbabwe began to show similar characteristics.

These examples show that in the absence of effective legal tender laws, Gresham’s Law works in reverse. If given the choice of what money to accept, people will transact with money they believe to be of highest long-term value.

However, if not given the choice, and required to accept all money, good and bad, they will tend to keep the money of greater perceived value in their possession, and pass on the bad money to someone else. In short, in the absence of legal tender laws, the seller will not accept anything but money of certain value (good money), while the existence of legal tender laws will cause the buyer to offer only money with the lowest commodity value (bad money) as the creditor must accept such money at face value.

The Nobel prize-winner Robert Mundell believes that Gresham’s Law could be more accurately rendered, taking care of the reverse, if it were expressed as, “Bad money drives out good if they exchange for the same price.”

The reverse of Gresham’s Law, that good money drives out bad money whenever the bad money becomes nearly worthless, has been named “Thiers’ Law” by economist Peter Bernholz, in honor of French politician and historian Adolphe Thiers.

  “Thiers’ Law will only operate later [in the inflation] when the increase of the new flexible exchange rate and of the rate of inflation lower the real demand for the inflating money.”

Precursors

Ibn Taimiyyah (1263–1328) described the phenomenon as follows:

If the ruler cancels the use of a certain coin and mints another kind of money for the people, he will spoil the riches (amwal) which they possess, by decreasing their value as the old coins will now become merely a commodity. He will do injustice to them by depriving them of the higher values originally owned by them. Moreover, if the intrinsic value of coins are different it will become a source of profit for the wicked to collect the small (bad) coins and exchange them (for good money) and then they will take them to another country and shift the small (bad) money of that country (to this country). So (the value of) people’s goods will be damaged.

 

 Sources:

http://en.wikipedia.org/wiki/Gresham%27s_law

http://www.goldismoney2.com/showthread.php?39973-Penny-and-Nickel-Coins-to-be-Phased-Out-in-2013