Friday, December 15, 2006

Where are you going with that piggy bank? 

The U.S. Mint has issued new rules to prohibit the melting pennies and nickels. This is the result of sharp increases in the prices of copper, nickel and zinc (it's worth remembering the early 1980s, when the copper/zinc ratio was changed to reduce the metal cost of pennies.) The government currently loses 3.34 cents on each nickel produced and 0.73 cents on each penny.

Monies can be divided into two categories: fiat and commodity. Fiat is money by government decree; commodity money is something with intrinsic value that's generally accepted as a medium of exchange. Pennies and nickels have now, thanks to the rise in metals prices, traversed from one category to the other. I find it interesting that the U.S. government would rather lose seigniorage and keep these coins in circulation than withdraw the penny and nickel.

Worth noting: even in 2004, when prices for copper, zinc, and nickel were much lower, the operating profit margins on nickels and pennies were less than 10%, compared to more than 60% for other coins. (Source: US Mint annual report.)