As a consequence of the soaring price of metals in recent years the metal in US nickel and cent coins is now worth more than the face value of the coins. One cent (which is almost entirely zinc) has scrap value of around 1.12 cents, while a nickel (which despite the name is 75% copper and 25% nickel) is worth 6.99 cents.
The mint realized that this discrepancy could turn into a major problem when it began getting a number of queries about the legality of melting down coins. Fearing that some smart arbitrageurs might be about to denude the country of nickels, the US government did what governments always do in these circumstances.
It changed the rules…
Until this month, melting down coins hasn't been illegal in the US. But from now on, dumping your change in the furnace and turning it into an ingot could get you up to five years in prison and a $10,000 fine. If you’re considering shipping coins out of the country for melting, that dodge has been kaboshed as well; henceforth, travelers can only carry $5 in nickels and cents out of the country. In the past people would send there copper pennies down to Mexico and they would return to the US with copper bars.
This story appeals to us on two levels. The first is that it’s an elegant illustration of the ‘do as I say, not as I do’ approach that governments are wont to take whenever they can get away with it. As a handful of commentators more versed in numismatic history than us have pointed out, melting down coins to make a quick buck is something that the US government has a history of doing.
Back in 1834, the gold content of coins was reduced, leaving older coins worth more than their face value. Consequentially, almost all 1795-1834 gold coins were melted down and the gold reused to make more coins with that same notional value.
More infamous was what gold bugs term ‘The Great Confiscation’ of 1933, when the Roosevelt government declared that it was no longer legal for private citizens to “hoard” gold coins and bullion. Any large holdings of gold were confiscated at a price of $20.67 an ounce and melted down into bars for the Treasury. Of course, shortly afterwards the price of gold for international transactions was raised to $35 an ounce, netting the state a decent profit.
But the second aspect is that you simply couldn't ask for a pithier encapsulation of how the dollar’s value is being eroded. When the world’s reserve currency is worth more in the vat than the till, there’s a problem somewhere.
Despite the somewhat draconian nature of the new laws, you can see why the US Mint has done it. The margins involved on the nickel look as if they may be large enough to make melting worthwhile and a shortage of small change makes life very inconvenient. But regulations such as these don’t the solution to the real problem – the debasement of the dollar.
For now, there’s no guarantee that metal prices will get stay at these levels, particularly if the global economy weakens. But should the US continue to pursue its loose money policies, the dollar will continue to lose value against commodities (and probably against other currencies as well). If melting down your change is not to be a temptation for many years to come, the Fed needs to adopt tougher, tighter monetary policies for the long run and put the dollar back on a sound base. We’re not holding our breath for that.