Friday, July 13, 2007

The kinds of stories I love 

I am by training a monetary economist, and I love good stories about money. Via Marginal Revolution, I read that India has a problem with its coins being driven out of circulation because they are worth more as razor blades in Bangladesh.

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."

Two-rupee coins are made of copper, whose price shot up enough to cause lots of coins to be melted down last year, as well as nickel. (I recommend this article by Daniel Gross on the longer-run reasons for copper's price rise.) Now it is a bit of a bother to melt down coins to get pure copper (though if you have pre-1982 pennies, which are 95% copper, you're probably going to get more than a penny back). Given that the coin is quite substantial in size, I could see that.

But one-rupee coins are stainless steel, 4.85 grams; using them for creating razor blades seems pretty novel (this blog says it's not likely to have a great edge for shaving, but who knows what quality is available in Bangladesh?) As the blades would go for the equivalent of four rupees each in Bangladesh, I assume good ones must be very scarce. It's almost a weird version of Gresham's Law: bad Bangladeshi razor blades drive good Indian coin out of existence.

The original story says that the Indian government has been minting new coins to make up for the shortfall. As in many countries, small candies or other trinket goods are used as substitutes for small currency (rupees are divisible into 100 paise, and a rupee is worth less than $.03.) even resorting to a fiat private money with small bits of hand-printed cardboard.

Question: If the Reserve Bank of India wanted to maximize the value of its issue, why wouldn't it just sell steel directly to the razor makers?