Pennies, Nickels, and Dollars

The USA Today is reporting New rules outlaw melting pennies, nickels for profit.

12/14/2006 WASHINGTON — 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."

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.

Shortly after I posted the above on Silicon Investor, "Bucky" responded with:

Twice in our nation's history, gold coins were melted by the government.

The first melting occurred in 1834 when the gold content of U.S. coins was reduced and nearly all gold coins minted from the period 1795 to 1834 were melted because their intrinsic value exceeded their face value.

The second melting resulted from the great Gold Confiscation of 1933, when 90% to 95% of all U.S. gold coins held by individuals, banks, and the Treasury were recalled, thrown into huge melting pots, and poured into lifeless 100-ounce and 400-ounce gold bars. Franklin Roosevelt's gold confiscation order of 1933 saw the end of regular issue, legal tender U.S. gold coinage.

Part III of Honest Money Douglas V. Gnazzo discusses Coinage Acts From 1834 to 1900. Gnazzo's article is a good read on the history of various coin acts.

While on the subject of good reads I can point out The Monetary Elite Vs. Gold's Honest Discipline by Vincent R. Locascio, Demise of the Dollar by Addison Wiggin, The Dollar Crisis by Richard Duncan, and The Coming Collapse of the Dollar by James Turk and John Rubino.

Disclosure: If you order any of those books via the above supplied Amazon links I will make about 20 cents or so a copy. If that bothers anyone go straight to Amazon and do a search.

Answers.com has this to say about the Coinage Act of 1834.

By 1834, the gold in the half eagle was worth more than its face value. The Act of June 28, 1834 called for a reduction in the gold used. The weight of the coin was reduced to 8.36 grams, the diameter reduced to 22.5 mm, and the composition changed to .8992 gold and .1008 silver and copper.

In 1933, with the Executive Order 6102, President Roosevelt confiscated the nation's gold.

Executive Order 6102 was signed on April 5, 1933 by U.S. President Franklin D. Roosevelt to prohibit the "hoarding" of privately held gold coins and bullion in the United States, in an attempt to address the causes and effects of the Great Depression. This Order was given under the auspices of the Trading with the Enemy Act of 1917. The government required holders of significant quantities of gold to sell their gold at the prevailing price of $20.67 per ounce. Shortly after this forced sale, the price of gold from the treasury for international transactions was raised to $35 an ounce. The U.S. government thereby devalued the dollar to 69.3% of its former value.

The order specifically exempted "customary use in industry, profession or art"--a provision that covered artists, jewelers, dentists, and electricians among others. The order further permitted any person to own up to $100 in gold coins (equivalent to about $1,550 as of 2006).

Section 9 of the Order noted the punishment for failure to comply could include a fine of up to $10,000 or up to ten years in prison. Nevertheless, anecdotal accounts later related that many persons who possessed large amounts of gold simply ignored the order and hid their gold until the Order ceased to be in effect.

The government held the $35 per ounce price until August 15, 1971 when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus abandoning the gold standard.

The limitation on private gold ownership in the U.S. was repealed by an act of Congress codified in Public Law 93-373 which went into effect December 31, 1974. P.L. 93-373 does not repeal the Gold Clause Resolution of 1933, which makes unlawful any contracts which specify payment in a fixed amount of money or a fixed amount of gold. That is, contracts are unenforceable if they use gold monetarily rather than as a commodity of trade.

Right now, a nickel is the closest thing to "Honest Money" we have. We are in the ironic situation where the value of the dollar is falling but the value of a nickel is rising. In what time frame will the current (and probably soon to be confiscated) nickel be worth more than a dollar?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/