Wednesday, September 29, 2010

Coin hoarding, Gresham's Law, and base metals

Argentina's weird coin shortage got some press back in 2008 and 2009, and it continues into 2010. Some suspected hoarders or melters when inflation was at 25%, and led small businesses to give change in mints or candy.

Where are Argentina's coins? (Global Post, 2009-05-11):
The coin scarcity has created a strange predicament: Merchants regularly refuse to sell their goods or services if it means they’ll have to give coins back as change. For small transactions, they’d rather lose the revenue than spare the change. ...Many of the banks are as loath to let go of their coins as the small businesses are.

...The cause of the coin scarcity isn’t clear. The Central Bank says it’s supplying enough: a record 524 million new coins in 2008, up 13 percent from 2007. This year will likely bring a new record, and there are supposedly 5 billion Argentine coins currently in circulation — about 125 per person.

Many blame coin hoarders and black-marketeers, several of whom have been caught. But they seem to be effects, rather than causes, of the shortage. Another scapegoat is the city buses, which until now have only accepted coins.

...The shortage might have been precipitated by the rise in commodity prices in the last few years, said Dardo Ferrer, chief economist at the Market Foundation. There have been reports of people inside Argentina and across its borders melting coins for their metal, which became worth more than coins's face value when the price of raw materials rose.
Coin hoarding and melting were common in an earlier age, when money derived most of its value from the intrinsic value of the metal, James Surowiecki explains:
Hoarding of this sort, and the resulting coin shortages, was once a recurring economic problem, one that the Italian economic historian Carlo Cipolla dubbed “the big problem of small change.” But these shortages were thought to be a feature of premodern times, when coins were made out of precious metal, and people literally brought silver to the mint to have it turned into coins. If the value of silver rose beyond the face value of coins, hoarding silver was a natural response. Today, coins are government-issued tokens, and their value is theoretically unconnected to the metal they contain.

This isn’t to say that the material worth of a coin’s metal can’t still exceed its face value; the rising value of zinc, for instance, meant that, last year, every new penny issued cost the U.S. Mint about 1.7 cents. But hoarding no longer makes sense unless it’s done on a large scale, and most people in Buenos Aires are not melting down their coins into hunks of copper.
Gresham's law implies that coins with a lower intrinsic value will replace coins with a higher intrinsic value if the nominal value of the coins remains the same. A lot of this happened in the 1960s and 1970s, when the U.S. shifted to a true fiat currency and started minting dimes (and other coins) in a copper-nickel alloy rather than silver. Numismatists shifted through change for decades to collect all the silver dimes and remove them from circulation. According to, the intrinsic value of a silver Mercury or pre-1964 Roosevelt dime is US$1.59, although the face value remains US$0.10.

So, how likely is it that hoarders are (or were) melting down the coins of Argentina for a profit? The Central Bank of Argentina's Web site is a little strangely laid out, but has useful information about the coins. Most of Argentina's coins are minted in aluminum bronze or cupronickel, and some of them have a brass-plated steel variant. Let's look at three of them: the aluminum bronze 50-centavo coin, the aluminum bronze 25-centavo coin, and the cupronickel 25-centavo coin. Since there are no brass-plated steel variants, these would be among the easiest to collect and melt down.
  • The 50-centavo coin weighs 5.8 grams, and is composed of 92% copper and 8% aluminum. The metal in each coin is thus worth US$0.044. The nominal value of 50 centavos is US$0.12.
  • The aluminum bronze 25-centavo coin weighs 5.4 grams, and is composed of 92% copper and 8% aluminum. The metal in each coin is thus worth US$0.04. The nominal value of 25 centavos is US$0.063.
  • The cupronickel 25-centavo coin weighs 6.1 grams, and is composed of 75% copper and 25% nickel. The metal in each coin is thus worth $0.072. The nominal value of 25 centavos is US$0.063.
Only the cupronickel coin has greater intrinsic value than face value. But Argentina, like the U.S., has a penny problem. Both of the 1-centavo coins are worth more than US$0.01 for the copper, while the face value of the coin is only worth a quarter of a U.S. cent. Argentine pennies are worth nearly four times as much for their metal as for their face value. Melting may make economic sense with the 1-centavo coin, and possibly others. But if melting was the culprit, it seems like steel coins would eventually make their way into circulation. Or perhaps, having gotten swept up in a hoarding dynamic, hoarders can profitably sell even steel coins, which helps maintain the hoarding behavior.

However, there have been at least some cases where it is known that people have been melting down base metal coins to use as a raw material.

Sharp practice of melting coins (BBC, 2007-06-26):
Millions of Indian coins are being smuggled into neighbouring Bangladesh and turned into razor blades. And that's creating an acute shortage of coins in many parts of India, officials say.

Police in Calcutta say that the recent arrest of a grocer highlights the extent of the problem. They seized what they said was a huge coin-melting unit which he was operating in a run-down shack.

The grocer confessed to melting down tens of thousands of Indian coins into razor blades which were then smuggled into Bangladesh, police said.

"Our one rupee coin is in fact worth 35 rupees, because we make five to seven blades out of them," the grocer allegedly told the police. "Bangladeshi smugglers take delivery of the blades at regular intervals."
This was three years ago, and prices have changed since 2007, but a quick comparison at contemporary prices may be interesting. According to the Royal Bank of India, all currently-minted Indian coins are minted in stainless steel. The old two- and five-rupee coins were cupronickel. Assuming a 75% copper/25% nickel alloy, the metal in the old six-gram two-rupee coin would be worth approximately US$0.07, while one nominal rupee is worth US$0.02 at current exchange rates. So it's entirely plausible that hoarders were melting the coins for copper and nickel. It seems like steel prices would have to be higher for the metal for the new 5.62-gram stainless steel two-rupee coin to be worth more than the face value of the coin, but perhaps Bangladeshi melters have additional costs to obtain raw materials otherwise.

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