Your tax dollars at work

The US Mint, an agency within the Department of the Treasury, has announced a ban on the "recycling" or melting down of pennies and nickels, according to this article in today's NY Times. Rising prices of copper, nickel, and zinc have resulted in a situation in which, melted down, a penny is worth 1.73 cents (2.13 cents if it was minted before 1982) and a nickel is worth 7 cents. Why won't the Mint let me melt down my pennies?

A better question to ask might be, what kind of government takes 1.73 cents worth of copper and calls it a penny? Traditionally governments have done the opposite: take say 0.73 cents of copper, put a stamp of Abraham Lincoln on it, call it a penny, and pocket the difference; this is called "seigniorage", and it's a time-honored method of revenue collection. Our government, for some reason, is in the business of losing money with every coin it produces. Go figure.

That issue aside, there's a good theoretical reason for allowing citizens to melt their coins. The price of copper and nickel is rising because of a general inflation (commodity prices are like canaries in a coal mine as far as inflationary pressures are concerned). If we were allowed to melt down our pennies, the resulting destruction of coinage would reduce the amount of money in circulation and put downward pressure on inflation. Coin melting, in other words, would act as an automatic stabilizer as far as the price level is concerned.

Of course, the preceding statement needs to be qualified. The total stock of money (M2) in the US is about $7 trillion, of which about $750 billion is currency, of which about $1.5 billion is pennies and about $1 billion in nickels. So if we destroyed all of the pennies and nickels in circulation it would reduce the money supply by only about 0.00036 percent. This would, according to the quantity theory of money, result in a one-time reduction in the price level of 0.00036 percent, which is kind of a paltry effect.

But the very insignificance of pennies and nickels as a component of our money supply raises the question, why does the government care if people melt these things down? What is the compelling state interest? The Mint says that the measure is intended to prevent a shortage of these coins.

"We are taking this action because the Nation needs its coinage for commerce," said Director Ed Moy. "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."

This rationalization strikes me as bizarre. I, like most Americans, have jars full of pennies and nickels in my house just gathering dust. Letting me melt them down would be a bonanza to me and my fellow citizen-taxpayers. There would be no need for the Mint to replace them because there is such a surplus of these coins in circulation. And if a shortage did develop, surely American business is inventive enough to stumble upon the obvious antidote: round prices off to the nearest dime. The current system sounds to me very much like a scheme to subsidize copper, zinc, and nickel mining companies. The government buys $1.73 worth of copper from Amalgamated Copper, Inc. (fictitious name) with taxpayer dollars and mints $1 worth of coins. If the Mint were really interested in saving the taxpayers money it would change the composition of the coins or, better yet, stop minting the damn things.