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July 9, 2007
When Coins are Worth More As Metal than Coins
Interesting security problems from India.
Posted on July 9, 2007 at 1:48 PM
• 44 Comments
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We are ahead of the game, we already ban razor blades at the airports. So we are doing our part....How soon before we start melting our currency for the same thing?
Fun things start happening when coins lose their face value. During the late 1980s, inflation in Bolivia was so severe that the smallest coins became essentially worthless. A phone call cost tens of thousands of pesos - but the coin slots on payphones only took 50-peso coins. As a result, if you wanted to make a phone call, you had to buy a 50-peso coin for something like 50,000 pesos.
The price was actually driven up above the actual price of the call by the scarcity value of 50-peso coins. Apparently the Bolivian government, seeing that the 50-peso coins were worthless, had sold most of them to Brazil for use as subway tokens.
Don't forget, it's true here in the US too. :
Check out www.coinflation.com.
And yet, the penny survives.
Not really a security threat, but the US Mint has export limitations on pennies and nickels because of the value of the metals (over that of the currency).
Oh damn. Is it too late for the movie plot threat contest? I see someone at the back of the plane making razor blades from 5 rupee coins to take over the plane.
US pennies now have only a thin coating of copper with a zinc core, because copper's too expensive to make pennies with anymore.
From the article:
"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."
We have the same thing here in the United states except we use a special type of colored paper. The good thing is that it is very unlikely that the paper can ever be worth the value printed on it. Our paper must be exchanged for other assets because it's worth next to nothing as an asset itself.
Uhhh...wait a minute...
Takes me back a bit!
In Italy, in the mid-70s, for a while coins and small denomination bills where hard to obtain, for reasons I (as a teenager) was unable to comprehend. Suddenly, one day, banks started issuing their own currency (called "Mini Assegni", literally "Mini Checks"). There were hundreds of different types, with different designs, comprising denominations from 50 to about 1000 lira. The paper was hardly currency-grade (in fact, it could have doubled as toilet paper for people with really small rear ends), and each piece probably had a life-expectancy of a month at most. It was weird -- like life had turned into a vast game of Monopoly. Then, one day, a few months later, they all disappeared, and we were back to the "security" of government-issue currency.
Except for phone tokens, that is. Another funny currency quirk was that the one coin in abundant supply wasn't a coin at all -- it was a small, lined token, used for making calls on pay phones. As I recall, they started out with a 50 lira value, which was the cost of a call. People would routinely use these as small change.
Periodically, the phone company would increase the cost of a call. With characteristically comic ineptitude, they would do this by increasing the value of the phone tokens. Naturally, upon the announcement of an upcoming rate increase (say 50 to 100 lira) all tokens would disappear from circulation, since everyone knew the tokens would double in value in a few weeks.
Ah, Gresham's Law strikes again!
"Razor blade" implies a very sharp blade suitable for, well, shaving. Is it really possible to melt and form *coins* into a blade that can hold enough of an edge good enough for shaving?
Is it possible in a "run down shack" as referenced in the story?
In Germany, there were 5 DEM coins in the past that were actually made of silver - my parents told me that (some) people used to melt these because the silver was worth more than the face value of the coin. (Later 5 DEM coins contained less silver.)
Hey, I don't know about you guys, but I errr, HEARD, that children in Devizes, Wiltshire, England, used/use coins to attempt to decapitate people going along on the 'floats', during the annual carnival.
Sometimes the coin would pass through both sides (of the float, only rarely the occupants) and hit a innocent [or not-so-innocent] bystander on the other side of the street. Kudos!
So I can tell you, a coin is a damn fine weapon = if you've been trained properly.
But, hey, it was all for charity! :-)
If this makes no sense, check out:
(which also makes no sense, but may help you feel better about it)
Devizes, UK, is also the home of the "Confetti Battle", which, according to Google, is globally unique event to Devizes.
It's also my home town - which explains a lot about me.
"US pennies now have only a thin coating of copper with a zinc core, because copper's too expensive to make pennies with anymore."
... which makes for some fun science experiements:
According to this reference: http://www.usmint.gov/pressroom/index.cfm?...
there was an interim rule passed by the US Mint making it illegal to melt down *or* export the penny or the nickel. They were soliciting comments from the public until January 27 about the rule and then were going to make the decision about whether to make the rule permanent. Melting or exporting coins would result in fines of up to $10,000 and confiscation of the coins/metal under the new rule. And based on this story in USA Today: http://www.usatoday.com/money/... it might be worth it....there's more than a 30% premium on the nickel based on each one being worth 6.99 cents.
"US pennies now have only a thin coating of copper with a zinc core, because copper's too expensive to make pennies with anymore."
Actually, the zinc in a penny is now worth almost a cent too. It already costs more than $0.01 to make a zinc penny.
Personally, I can't see anything at all morally wrong with melting down coins. Making *new* coins, sure, that's counterfeiting and has obvious dilutory effects on the money supply: but melting them down, well, if that's illegal then anyone who loses money or throws it away is presumably also breaking the law. (My father lost 500 quid in 50p pieces once. Is that a crime? An act of negligence? Why?)
If the coin's face value is below the value of its metal, well, the mint had better change it. This happens sometimes, and society rarely if ever collapses. (In the UK for some time this year the 2p piece was worth over 2p in scrap metal value alone. Society has not collapsed. There's more trouble with criminals stealing everything that isn't nailed down and sometimes stealing the nails as well: manhole covers, railway lines, lead roofs, even *live gas pipes* are getting stolen.)
"There's more trouble with criminals stealing everything that isn't nailed down and sometimes stealing the nails as well [...]"
That's been a problem here and there in the US as well, as commodity prices have spiked over the last few years. Popular items have included aluminum guardrails, copper telephone wires (well, the phone companies say the copper network is expensive to run and they want to get rid of it eventually anyway), and manholes (no stories on them recently, though, so either they're not a hot item anymore or it's so common it's not worth reporting). I've also heard of enterprising thieves hitting high-tension power lines, monumental sculptures, whatever's handy...
Reserve Bank of India on coin composition:
Most of the coins being melted down are made from stainless steel. Razor blades are made from stainless steel. The alloy used in the coins is a specific grade (ferritic) of stainless steel meant to resist wear and corrosion. No wonder it's great for making razor blades! Melting the alloy and die stamping it into razor blades does not require much equipment. All you really need is a small charcoal furnace. Any blacksmith could produce perfectly serviceable razor blades in no time.
That seems like a lot of razor blades for Bangladesh. Is their a market that Gillette and Schick have overlooked?
"Is their a market . . ." !!! of course, "Is there a market . . ."
Serves me right for not "previewing".
Australia had a similar problem here with their 50c piece not long after decimalization (the quaint name for when we changed from pounds and shillings and pence to the simpler dollars and cents). The 50c piece was a piece made mostly of silver and as the world silver price rose it was suddenly worth more than its face value. They tried reducing the silver content but people were still melting them down on the off chance they would come out ahead. So the coin was withdrawn. A lot later (a decade or more?) the current 12 sided piece was introduced which has little enough silver content that it will never suffer this fate.
Noting the discussion about whether its illegal or not, in Australia these sorts of activities have always been prosecuted under the statute that bans 'defacing' the currency. (There was briefly a fad when the current plastic notes were introduced here of making 'shrinkies' out of them -- putting them in an oven and letting the plastic contract till you had a perfect 1 inch long piece of (former) currency. Also discouraged when the practice came to light! Of course the toxic fumes that coated your oven walls should have been enough to discourage most sane people.) Although technically, any time the gov can convince you to take a note or a coin out of circulation its a new one they can mint without driving inflation. Thats the reason they love collectors of course. The problem with coins is that the cost of production is high and only makes sense given that ordinarily coins remain in circulation for decades if not longer.
The inflation is a hidden tax. Money were backed up by real value these problems wouldn't exist, but most money in the world is only backed up by the laws of the issuing government (the US dollar is only worth anything because the US government says so). We left the "gold standard" long ago and it is nearly impossible to go back.
Nix said: "If the coin's face value is below the value of its metal, well, the mint had better change it."
That might require some significant expenditure, like when the US Mint went from silver coins to cupro-nickel in the 1960s and had to retrofit their presses because the cupro-nickel alloy is much harder than silver. But making something illegal is free!
This has happened in most countries whose coins were made out of precious metals. The silver in an old US dollar silver coin, for example, has long been worth more than a dollar. Precious metal dealers sell bags of old US silver coins as investment silver. This page is an example.
"The inflation is a hidden tax. Money were backed up by real value these problems wouldn't exist, but most money in the world is only backed up by the laws of the issuing government (the US dollar is only worth anything because the US government says so). We left the "gold standard" long ago and it is nearly impossible to go back."
The problem here is that "value" is not a physical quantity, so there exists no class of object or material that can intrinsically serve as a store of value. The scarcity and fungibility of precious metals doesn't automatically make them into stores of value; all that those qualities do is prevent the metals from being automatically disqualified to serve that function. Value is a social fact about what exchanges of goods and services people will agree to, whether we're talking about barter, currency backed by precious metals, or fiat currency.
@David Robarts: "but most money in the world is only backed up by the laws of the issuing government (the US dollar is only worth anything because the US government says so)."
Money is only worth something because people believe it is. Currency is the ultimate trust-system, a coin is only worth what others are willing to trade you for it, in order for them to trade the coin for something else again.
In fact, one of the main reasons the Dollar is so valuable internationally, is because oil is sold for it. Just watch what happened when Iran tried to get OPEC to have it changed to Euros instead.
Also, we've just been hit by something similar here in Norway. Enterprising thieves stole a large length of controlcables for the subway in Oslo.
In Israel, at one time, so I was told, there was an aluminium coin so worthless that US$200 worth of them would contain enough aluminium to build a jumbo jet.
Tarkeel, just yesterday some burglars stole the copper wires powering a purification water plant in an eastern Spain town. Now over 25.000 are out of water!
Some years ago I worked for a telecomms company who was installing a system in South Africa. The interconnections were fibre optic rather than copper, not because of bandwidth requirements, but because the copper got stolen so often.
Apparently, South Africa appears to be an exporter of copper despite not having any copper mines:
I visited our local recycling centre a couple of weeks ago. They'd had a break-in, and thieves made off with a few bales of crushed cans, worth over £1,000 ($2,000).
They figured that the stolen cans still counted toward the council's official recycling targets, though!
Indeed there's still legislation in Germany that you are not allowed to destroy money. So lighting your cigarette with a (now) euro bill is strictly speaking illegal.
Background is indeed that the old 1 Pfennig coin, made from copper, was worth almost twice its face value in material.
A 35 fold split as reported in India here is however really gross. No wonder they run out of these coins.
Around 1987 one of my friends went to Ecuador, and I asked him to bring back a few of the local coins.
He brought back a set of coins glued inside a little transparent plastic case, because the coins of Ecuador had become so worthless that the only use for them was gluing them inside little plastic boxes and selling them to tourists.
@mas: there is no such legislation in Germany - but it is a common misconception. You may own, sell, buy, abandon, or destroy money in Germany as you like.
The US just recently outlawed melting down coinage for these reasons. But the only currency that might be worth melting down would be the old copper penny, and I believe that the copper hoarders have already removed them from circulation.
I haven't noticed a particular shortage of copper pennies (pre-1982). They're the preferred penny for using in the penny-squashing souvenir machines at tourist attractions, because when you squish a zinc penny it comes out a bit malformed and has unsightly silverish highlights around the detail. So I do go through my pennies looking for coppers, but not to melt down.
Quick penny test without squinting at the tarnished year (I love topic drift!): flip the penny, standard thumb coin-flip style. If it rings audibly, it's copper (pre-'82).
This sort of thing goes on all the time with metals - the recyclability of metals makes it possible - and profitable.
I was born in Camden, NJ (often referred to as the poorest city in America) and I grew up is a suburb just a few miles from Camden.
During much of the 1980s and early 1990s, Camden's number one economic "output" was scrap metal as people went into abandoned housing and stripped it of copper wiring and plumbing and then sold it to metal recycling plants.
Can someone explain to a humble non-economist like myself why the gold standard was such a bad thing and what would preclude us from returning to it? You'd never have to worry about dispcrencies between the coin's worth in metal and its value as currency, since the value is defined by the metal, nor worry about runaway inflation?
Jared - the gold standard is "bad" because it prevents government and bankers stealing from everybody else by printing new money. (This process of legalized counterfeiting is known as "inflation" - for, obviously, increases in productivity mean that if the quantity of money remanied the same the prices would only go down!)
Of course, all you hear from their pet economists is that some inflation is somehow neecessary - for a large range of totally obscure and bullshit reasons - none of which makes a slightest sense if examined critically for thirty seconds. Inventing these reasons is what these pet economists (and that's about all of them) are getting paid for.
For a concise and very readable explanation of what's going on see Murray N. Rothbard's "What Has The Government Done To Our Money?" So far, this is the only text on the present-day on the monetary system which I've read (and I did research this carefully) which makes any sense to my techie brain.
(It is available on Amazon).
1967 saw the last full minting of silver nickels, dimes, and quarters in Canada. Too many were being melted down since they were worth more that way.
"Can someone explain to a humble non-economist like myself why the gold standard was such a bad thing and what would preclude us from returning to it?"
Think of currency as a kind of artificial commodity for mediating exchanges. A problem with a strict gold standard is that it limits the supply of currency, as the supply of gold itself is limited. As population grows and production of goods and services increases, the amount of value need to be exchanged, via currency, increases. (For example, workers in a widget factory don't want to be paid with widgets the factory produces -- they want something they can readily exchange for something they really want -- they want to be paid with currency). When the demand for currency increases and there is no corresponding increase in its supply, the value of this artificial commodity increases relative to other goods and services. In other words, there is deflationary pressure. Prices, as measured in currency units, will not be stable but are expected to fall. People who have money but don't have an urgent need to spend it will have incentive to hoard it, as it will be worth more in the future. This makes the currency shortage problem worse and trade difficult. To cope with it, people will have to perform exchanges without using gold-backed currency. They can barter, but matching buyers and sellers, spatially, temporally, and in terms of needs, is difficult and is a problem that currency was created to solve. People can also resort to some kind of credit backed only by promises but not actually possession of currency, but then what you have is a form of supplementary currency not backed by gold.
New Zealand's sub-dollar coins had the same problem. The 5, 10 and 20 cent coins were worth about 5-10% more than face value due to their copper and nickel content. We transitioned to plated steel coins. One day they're going to be worth more as metal too...
Beer kegs are disappearing into the scrap market. Watch for new plastic kegs to replace aluminum kegs.
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