For as long as there has been money or commerce, there has been some form of credit. Whether it was borrowing a few coins until the next payday or today’s credit cards, credit has been a fuel of economic development for quite some time. The financial industry is built on credit and charging customers to borrow money and spread the payments out over time. By some estimates the average household owes over $16,000 in credit card debt.
The United States was founded on credit. During the founding of the country currency had been limited to coins with an intrinsic value based on their gold, silver or copper content. As the King of England tried to tax the colonies to pay for the wars in Europe, the colonies looked for ways of financing their own governments to provide services. they issued paper notes. These notes functioned as currency but actually were bills of credit, short-term public loans to the government. For the first time, the money had no intrinsic value but was valued at the rate issued by the government of the colony in payment of debt. Every time the colonial government would need money, they would authorize the printing of a specified quantity and denomination of notes that it would use to pay creditors. The emission laws also included a tax that would used to repay the bill of credit and the promised interest.
Later, the era we now refer to as Obsolete Banknotes (or Broken Banknotes), were currency issued by banks under permission of the Department of the Treasury that were supposed to be backed by the assets of the issuing bank. Banks were supposed to be able to back at least 90-percent of the value of the notes with hard currency. But the banks were not honest with the Treasury Department, issued more currency than assets, and many went out of business because they could not cover the value of the notes issued.
Credit run amok has been the cause of nearly every major market downturn in history including the most recent dire recession that began in 2008.
The concept of institutionalizing consumer debt was first written about in Looking Backward, 2000 to 1887 by Edward Bellamy. Bellamy, a writer from Massachusetts, wrote about Julian West, a young American who falls into a deep, hypnotic sleep and wakes up in the year 2000. As part of West’s experience, Bellamy describes purchases being made using a credit card. Bellamy’s credit card was limited to the amount on deposit. The description is more like a debit or secured credit card of today. After the book became popular, the concept of consumer credit began to be institutionalized.
Hotels and other higher-end retailers were first. They would create medals or tokens that could be carried in the pocket or have a hole to include them on a keychain. Much like the Colgate tokens previously written about, the use of metal tags and tokens began at the beginning of the 20th century and was stopped by the War War II efforts.
Credit tokens were nondescript items with the name of the establishment and the user’s account number which lead to a number of problems. Since the account number was engraved into the tag, it was up to the cashier to write down the account number. Mistakes would lead to unpaid bills. A later improvement was to include raised letters that could be rubbed onto the paper using a pencil or carbon paper in order to record the number correctly, a feature that would be added to the plastic charge plate before the invention of the magnetic strip.
These tokens did not include the customer’s name. Although many can be mailed to the company so that the keys could be returned to the original owner, thieves would keep the tokens and use them. Stores would later have to produce lists of invalid or stolen charge numbers to verify the sale at the register. In the day before computers, this was a time consuming task.
Stores continue to think the risks are worth dealing with since credit purchases appear to be more popular than cash-based purchases.
One of the early adopters of credit purchases was Abraham & Straus, Inc. Founded in 1865 by Abraham Abraham in Brooklyn, the store was operated on Fulton Street as a small clothing outlet until its later flagship store was built closer to downtown Brooklyn in 1883. As part of expanding the store and funding the move, Abraham received funding from Nathan and Isidore Straus. When the company reopened at 422 Fulton Street the was renamed Abraham & Straus, the name that was used until its closing in 1995.
A&S Charge Token with account number
If found return it to A&S in Brooklyn!
Known as A&S throughout the New York metropolitan area, it was a little more upscale from other discount stores of the time. Although the stores expanded as far as the Philadelphia region, it would not see the same success as the New York-area stores. A&S was a favorite amongst the burgeoning middle class of the post-World War II Baby Boomer generation especially for women’s clothes. I have a lot of memories waiting outside of the A&S with my father at the Green Acres Mall in Valley Stream, NY as my (late) mother would go shopping in A&S. And the family car, a black 1963 Chevy Impala with red interior, did not include air conditioning!
Apparently, I survived those shopping trips along with my recent find an on old A&S credit token. While searching through a cigar box of old tokens, I found this pre-World War II item. Aside from bringing back the memories, and reminder of the hot days waiting for my mother to try on nearly every dress in the store, I though this would be a perfect addition to my collection of New York numismatic memorabilia.
Remember, you do not have to collect coins to have fun with numismatics!
While there is enough going on with U.S. politics to make one’s head spin, on Thursday, June 23 the United Kingdom will hold a nationwide vote on whether the U.K. should leave the European Union. The last time the U.K. held a referendum on joining the E.U. was in 1975, which predates the modern European Union. It is called “Brexit,” a portmanteau of the term “Britain Exit,” as in should Britain exit the E.U.?
NOTE: Electronic versions of Looking Backward, 2000 to 1887
by Edward Bellamy can be downloaded from Project Gutenberg
The European Union was formed after World War II in various forms in an attempt to collectively rebuild Europe by integrating their resources. The first formal attempt was the Treaty of Rome in 1957 signed by Belgium, France, Italy, Luxembourg, the Netherlands and West Germany to create the European Economic Community (EEC) and established a customs union. What we know today as the European Union was established when the Maastricht Treaty became effective in 1993.
As part of the integration under the E.U. is the common currency known as the Euro. First distributed in 1999 with 14 participating nations, now includes 19 of the 28 nations plus the Vatican, Monaco, and San Marino who are not formally members of the E.U. The United Kingdom (England, Northern Ireland, Scotland, and Whales) continues to use the pound sterling, sometimes referred to the Great Britain Pound. Ireland, sovereign from the United Kingdom, uses the euro.
The U.K. is holding this vote because Prime Minister David Cameron promised to hold this vote as part of his 2015 campaign. When the Conservative Party won the majority of seats in Parliament, Cameron, as party leader, was elected by Parliament to serve as Prime Minister.
British Prime Minister David Cameron
Interestingly, many of the arguments for leaving the E.U. are similar to those being applied by the apparent nominee for the Republican Party in the United States while those campaigning to remain in the E.U. are similar to the apparent Democratic Party nominee. It just goes to prove that regardless of which side of the pond you live, politics is polarizing.
For those of us Yanks who want to learn more, BBC News has published a good overview with links to more in-depth that you can click here to read it, if interested.
So why is this significant for a coin collector’s blog? We do look at economic matters affecting collecting including those whose collection are being put together for speculation including the purchase of bullion-based numismatics. Also, the outcome could not only affect the world economic system but could also have an impact for those who collect foreign coins.
If the U.K. votes to remain in the E.U. then the status quo remains. The British will go back to their partisan politics and scratch their heads over the U.S.’s partisan politics known as the 2016 presidential election. Markets that have tightened in anticipation of what Brexit may mean could see this as a temporary reprieve.
If the U.K. votes to leave the E.U. the markets may not like it and the economy can go into a freefall. Markets do not like uncertainty and a vote for the U.K. to leave the E.U. would bring about the uncertainty of “what happens next?” and “now what?” Business leaders, who are largely in favor of remaining the in E.U., has noted that it makes it easier for them to move money, people and products around the world. What happens when those doors are closed?
As we have seen when economies are uncertain, markets react by selling off speculative assets, like stocks, and running to safer investments like trustworthy bonds and precious metals. In the last three weeks in the run up to Brexit, gold is up $56 (4.6-percent) in the last three weeks and silver is up $1.41 (8.8-percent). Both are off their annual highs set on June 16 when published polls are suggesting that Stay has a lead greater than the margin of error over Leave.
June gold prices through June 22
June silver prices through June 22
NOTE: Charts do not update
It is likely that world markets will decline and precious metals will go up on Thursday as investors try to figure out how the Brits will vote. Polls close in the U.K. at 2200 GMT, which is 11:00 PM in London and 6:00 PM on the east coast of the United States. There are 382 polling districts throughout the country. Each district is counted and forwarded to one of 12 regional centers. Once the regional center verifies the counts it will be forwarded to a chief counting officer that will announce the results at Manchester Town Hall. BBC suggests that results should be reported starting at 4:00 AM or 11:00 PM on the U.S. east coast.
Sample of the ballot that will be used for the EU Referendum “Brexit” vote
Market watchers can watch what happens to the Tokyo Nikkei 225 market index and Hong Kong’s Hang Seng Index. Both are the major indexes in the Asia/Pacific region and will be around their midday trading sessions on Friday.
Collectors looking for something numismatic to add to their collection might want to consider the In/Out UK EU Referendum Medallion produced by Chard(1964), a British metals dealer. These copper medals were produced for the Britons who were undecided. Flip the medal before you vote to decide whether to remain or leave. The Remain side has the E.U. flag surrounded by “Remain,” “Better Together,” “United,” and “Stronger in Europe.” The Leave side has the British Union Jack with “Brexit,” “Independence,” “Leave,” and “Sovereignty.”
Medals are 31mm in diameter and weighs 14 grams. They come in pure copper or Abyssinian Gold, a type of brass made of 90-percent copper and 10-percent zinc that has a gold-like color. They can be purchased for £2.95 each ($4.33 at the current exchange rate) plus shipping (estimated at £6.00 or $8.80) directly from Chard’s website.
Chard Brexit Medal “In” side
Chard Brexit Medal “Out” side
- Brexit combined flags image: Credit Philippe Wojazer/Reuters via the New York Times.
- Image of PM Cameron is an official photo downloaded from Wikipedia.
- Static metals graphs courtesy of Kitco.
- Referendum Ballot image courtesy of Wikipedia.
- Brexit Medal images courtesy of Chard.
What began as an English proverb as “March comes in like a lion and goes out like a lamb” may become a relic of history. Aside from the weather implications the markets are experiencing a lion-like robustness that even has the governors and branch presidents of the Federal Reserve issuing conflicting statements about the future of interest rates.
While the professionals are attempting to figure out what the economic numbers are saying, one thing is clear that the U.S. Mint is on pace to break its 2015 sales for American Silver Eagle bullion coins. March opens with the U.S. Mint announcing that it has another 1 million silver coins ready for sale. This is the fifth time in 2016 that the U.S. Mint has made this type of announcement.
Year to date, gold prices are up about 17-percent and silver prices are up 11-percent. This has not stopped the buying of bullion coins. One Canadian dealer recently informed me that they sold out of a specific silver issue from the Royal Canadian Mint because of high demand, especially from the United States.
This is reaching beyond collectors. While the numismatic world was focused on Dallas for the National Money Show, my business kept me in the D.C. area as a vendor at one of the largest antiques shows in the mid-Atlantic region. Although coins are a very minor part of the show, some dealers that were selling silver coins had high volumes of sales. One dealer reported that he sold out of the 30 American Silver Eagle bullion coins graded MS-70 by the middle of the show’s second day.
An informal poll of attendees to the National Money Show suggests similar sales performances.
Even though there may be areas of the economy that has not caught up to the current economic trends, it is difficult to find an analyst or pundit that does not believe that the current trends will end in the short term.
It is likely that March will go out like a raging bull, even if I could not find a one-armed economist to disagree!
Over the summer, a Harris Poll was conducted to understand how Americans feel about abolishing the one-cent coin and the paper dollar note. Even though there are pundits calling for these changes and even the end of physical currency, Harris found that those wanting to keep the lowly one-cent coin continue to hold the majority opinion.
According to Harris, 51-percent of those polled oppose abolishing the minting and use of one-cent coins versus 29-percent in favor. In 2008, 56-percent were opposed and 24-percent were in favor. While some will see a small movement to being in favor of eliminating the one-cent coin, the change is not significant when considering that the last poll was seven years ago shortly before the height of the recession and the beginning of the bank failures.
Series 1935 $1 FRN Reverse Early Design
Every so often an article is written, usually by the political elite, about ending lower denomination coins for many reasons including the high cost of mintage or the inconvenience of their existence. Others point to rise of non-cash transactions and the rise of digitally created currencies as the future.
Those of us who work in areas outside the larger commercial world has experience with a cash economy that is not tied to economic status. One of those is the numismatics industry. While many dealers will take credit cards, and will pass along the fees along to the customer, many dealers have said that most of their off-line business is a cash-based business. While larger purchases are done using checks, most will leave shows with more hard currency than other types of payments.
Collectibles businesses are very reliant on cash. In my business, I do accept credit cards but when I do shows the overwhelming majority of my business is in cash. A few weeks ago I did a two day show and had one of my best weekends ever but only had one sale using a credit card.
1909-VDB Lincoln Cent
There are people who are leery of using credit and debit cards for every transaction. We use cash to limit our exposure. In this connected world, the credit and debit card leaves a digital breadcrumb that is available to be hacked. I cannot tell you how many times I watched people in local convenience stores punch in their codes in a matter I could see them and then leave their receipts behind. This could be used to steal your money and your debit cards are not covered the same as credit cards. But the public does not see this.
A week does not go by without a report of the hacking of personal information that should not be made public. Unfortunately, it is getting to be like rain on the hot-tin roof, after a while the sound blends into the background.
According to the Federal Reserve, there was approximately $1.39 trillion in circulation as of September 30, 2015, of which $1.34 trillion was in Federal Reserve notes. That represents a lot of money that would have to be accounted for if we were to go into a cashless society. It would take a significant effort that would not make for good public policy.
The calls to make changes to change are beginning to drone on as background noise like rain on a hot-tin roof.
The debt crisis in Greece and their threat to drop the Euro as the unit of currency reminded me that this would present an interesting collectible opportunity.
Greece 1€ coin depicts an owl, copied from an ancient Athenian 4 drachma coin (ca. 5th century BCE)
Collecting numismatic items from distressed times can present an interesting challenge. While we have heard about Hard Times Tokens being a popular collectible, sales tax tokens produced during the Great Depression so that people could pay the exact fractions of a tax on low-value purchases.
Two of the more recent examples of numismatics based on distressed economic conditions are the Zimbabwe hyperinflation currency and the State of California’s Registered Warrants (IOUs). Although both have different origins from the Greek crisis, both show different ways of handling the situation.
When a country controls its own currency, it can manage that currency to maintain its value. In the United States, that is done by the Federal Reserve. It uses many programs from buying debt from its member banks to setting what it calls the Discount Rate, the rate that its member banks can borrow overnight to meet its liquidity requirements. In Zimbabwe, the central bank did not have the business and circulation in order to make this type of policy work because of the strife caused by wars and other ugliness. Their only choice was the print more money. The more money printed, the less it is worth. The less the money is worth the more it takes to buy daily goods and services. This result is that the more money that is added to the economy the higher inflation goes.
Zimbabwe gave us the hyper-inflated currency ranging from Z$10 to Z$100 trillion. It has become fun to own a note that makes you a billionaire or a trillionaire even though the actual value of the currency is worth less than the paper which it is printer. Since Zimbabwe has converted their system to the U.S. dollar, Zimbabweans will be converting the old inflation currency at the rate of Z$175 quadrillion (175,000,000,000,000,000) for US$5. An enterprising Zimbabwean could buy them for double and make more money selling the notes as souvenirs than converting them to U.S. dollars.
Zimbabwe’s 2009 $100 trillion hyperinflation note
California was a different story. It was a self-made crisis of politics in 2009 between the Republican Governor Arnold Schwarzenegger and the Democratic-controlled legislature. Since neither side could agree on a budget, Schwarzenegger declared a fiscal emergency and ordered the printing of IOUs to pay for state debts.
Officially called Registered Warrants, the first of these IOUs were issued to pay personal tax refunds. They carried a 3.75-percent interest rate and were redeemable when the budget was passed or in early October, which ever came first. The crisis was averted when Schwarzenegger signed the budget on September 3 and redemption began on September 4. California State Comptroller’s Office stopped redeeming warrants as of November 10, 2010.
California Registered Warrant
A friend who was living in California at the time was issued an IOU for a small personal tax refund. Rather than be burdened with the rigors of cashing the warrant, the paper is now part of his collection. However, since the warrants were addressed to specific people, it is not likely that these items will be immediately collectible. Many years from now it is probable that these warrants will be a curious collectible like the old Series E or War Bonds.
Greece does not control its own currency nor does it have any potential backing to issue warrants. Since Greece has not been seen as creditworthy, it cannot issue bonds at any interest rate because the markets are not interesting in buying Greek debt. Unless a deal can be struck with the rest of the European Union, Greece may not have a choice but exit the pact that uses the Euro as the common currency.
Exiting the Euro will bring back the Greek drachma.
The return of the drachma would create three numismatic collectibles. One would be the Euro coins with the Greece-specific reverse, whatever the Greek government issues in the interim, and then the new drachma. This would not apply to euro currency since each denomination uses the same design throughout of the Eurozone.
2000 Greece 20 Drachma coin features Dionysios Solomos, a poet and author of the Greek national anthem.
Before you search your ten pound bag of foreign coins looking for pre-Euro drachma, it is likely that Greece will keep those coins demonetized and not recognize them as official currency. If Greece wants to be able to control the amount of currency in circulation, then they will have to issue new coins and notes.
If Greece goes this route, experts are saying that the Greek government will allow the Euro to circulate alongside whatever is added to the market. Some people think it may take over a year to strike enough coins and print enough notes to be able to remove the Euro from circulation.
What will Greece do in the interim? Does the Greece Central Bank issue warrants like California did? If so, will the warrants become something that would become a collectible?
10,000 drachma note issued by the Bank of Greece in 1995 features the image of Dr. George Papanicolaou, inventor of the Pap smear
- Greek 1€ coin courtesy of EuroCoins.co.uk.
- California Warrant courtesy of MyMoneyBlog.com
- Zimbabwe $100 trillion note courtesy of Wikimedia Commons.
- 20 drachma coin courtesy of Numista.
- 10,000 drachma note courtesy of the Bank of Greece.
The U.S. Mint has sent out a press alert saying that CBS Sunday Morning will air two segments this Sunday, April 12th, that may be of interest to collectors. The first segment will focus on the artists and engravers in Philadelphia and the role they play in the coin-making process. The segment will also look at some of the Philadelphia Mint’s history.
A second segment will look at the penny and the debate about whether or not it should be eliminated.
CBS is branding this show “The Money Issue” with CBS News Senior Business Correspondent Anthony Mason as the guest host. The four scheduled segments include “What’s in a name” examining the art of branding; “The Look of Money” with Anna Werner showing the design process as the U.S. Mint’s press alert said; Correspondent Nancy Giles reports on “Making sense of pennies” and the great elimination debate; Mo Rocca who reports on “Pirate Joe’s” and the grey market of food; and more.
CBS Sunday Morning is usually hosted by Charles Osgood and airs at 9 am Eastern Time. Check your local listings to see when it airs in your region.
Those of us here in the Washington, DC area who work with or for the Federal Government knows that this week is the home stretch to the end of the fiscal year. Many of us who work for the government are not directly involved with the political infighting that makes the national news. Federal employees are prohibited to be involved with politics by law and contractors usually have employer policies that limit their political activities.
One thing we worry about is the funding issues that have not been resolved. Although the news reported that congress has passed a continuing resolution to fund the government for six months, what the reports did not say is that the continuing funding are only at the levels negotiated last year which rolled back funding to Fiscal Year 2007 (FY07) levels. FY07 dollars do not have the same buying power as today’s dollars and the amount of work required by the laws passed by congress have increased.
You might have heard about the budget “sequestration.” Sequestration is the mechanism that was instituted as part of the Budget Control Act of 2011 to force congress to negotiate a budget or automatic, across the board cuts totaling $1.2 trillion will go into effect on January 1, 2013. Sequestration has made a lot of people in the DC area nervous because it will cause contractors to cut jobs. In fact, with the uncertainty of sequestration, large contractors, like Lockheed-Martin, are providing 90 day layoff notices they are required to give employees when defense and other security-related contracts are ended early.
For the money manufacturing operations under the Department of the Treasury, there should not be any problems from sequestration because the U.S. Mint and the Bureau of Engraving and Printing are profitable agencies that uses their profits for operations. If there are shortfalls in providing funding for operations, the Secretary of the Treasury is allowed to withdraw funds from the Public Enterprise Funds (the accounts where the profits are deposited).
Problems remain for both agencies. The most significant of the issues are the problems with printing the new $100 Federal Reserve Notes. BEP continues to report that the new notes have folding issues that have delayed their release for two years. Inquiries by numismatic industry news outlets have reported that the problems are still under investigation and that no new release date has been set.
The U.S. Mint recently reported striking problems with the First Spouse Gold Coins. Apparently, the design caused metal flow problems in trial strikes that caused delays in releasing the coins. While the U.S. Mint has said they rectified the problems, the coins have not been issued.
In addition to the coining problems, the U.S. Mint also suspended its attempt to update its technology infrastructure. After receiving the responses from a formal Request For Information (RFI), the U.S. Mint pulled back on its attempt to update its infrastructure and online ordering services to re-examine the requirements and the business processes that would be part of that contract. The U.S. Mint press office said that they had no further information other than what has been published. They did confirm that the RFI responses will not be released because they contain proprietary information that is protected from public release.
It is difficult to know whether the federal budget situation will effect the U.S. Mint and BEP or whether the attempt to reduce costs in order to ensure they do not access more money from their respective Public Enterprise Funds. This is because money in excess of budgeted operations plus a reserve must be withdrawn from these Public Enterprise Funds and deposited in to the general treasury accounts at the discretion of the Secretary of the Treasury (31 U.S.C. § 5136 for the U.S. Mint and 31 U.S.C. § 5142 for the BEP). It is reasonable to question the management of these funds in the light of the federal budget situation.
Right now, the way the BEP and the Federal Reserve has handled the situation with the new $100 note suggests there is more to that issue than meets the eye. Nether the BEP or the Fed are answering question and the BEP did not issue an annual report for 2011 which would have to report on the production of the $100 notes. Inquiries to the BEP were returned with a reply that the report “is not ready.”
The annual reports for both these bureaus will make for interesting reading, if the BEP produces one for 2012.
Deep in the background of an economy run amok has been the development of a new currency that has found a home supporting both legal and illegal commerce in a way that makes it difficult for regulators to regulate. To facilitate these transaction, this new underground economy has turned to Bitcoins.
Bitcoins can be best described as digital currency whose wallet system is based on a digital address. They have no intrinsic value except that of the open market that has formed around the Bitcoin System. Bitcoins do not use a bank or any central authority to govern them and Bitcoins are valued by an open market. It is a peer-to-peer system that is self-regulated by its users and limited by the number of coins in existence.
To obtain Bitcoins, someone can use their machine and the Bitcoin client (available for Windows, Mac, and Linux) to try to create Bitcoins. A Bitcoin is created when the client solves a difficult mathematical equation. You can also buy Bitcoins on an exchange, trade cash for Bitcoins, or accept Bitcoins for goods and services. Because of the volatility of this market, exchange rates can fluctuate unpredictably.
Although there are legitimate uses for Bitcoins, last week it was reported that Bitcoin is being used to support illegal activities including being used to support the hacking group LulzSec and an underground website that deals illegal drugs called “Silk Road.” Following the publication of these stories, Senators Chuck Schumer (D-NY) and Joe Manchin (D-WV), has asked U.S. Attorney General Eric Holder to shutdown the Silk Road website.
Shutting down Silk Road may be difficult since it requires a technology that anonymizes Internet connections to make it difficult to find. Rather, it might be easier for for the government to cut off its money supply—Bitcoin.
Bitcoin is an interesting concept. Bitcoins are created electronically and have no intrinsic value. Bitcoins get its value through a market that is created around these bits of information and is used to create its own economy. They do not have the protection of being legal tender or backed by a government that would make Bitcoin users whole should the market crash or is closed by legal action. There is also a question whether Bitcoin is legal. Following the conviction of Bernard von NotHaus for creation, distribution, and handling of the “Liberty Dollars,” could Bitcoin be next?
It may not be that simple. It has been reported that the part of the indictment that said “it is a violation of law for private coin systems to compete with the official coinage of the United States” was struck from the document the jury used for its deliberations. In an exchange with prosecutors before the case went to the jury, the judge said that the paragraph did not “appear to the court to be a factual predicate that is supported by the evidence in the case.”
Does this mean that prosecutor was unable to show that von NotHaus tried to create a private coin system or that the government could not prove that a private coin system was a violation of the constitution? We may never know unless von NotHaus appeals the decision and appelate courts rule on the case. In the mean time, that does not prevent the Department of Justice from pursuing Bitcoin or similar ventures.
Bitcoin may be the ultimate private market that someone like Rep. Ron Paul may endorse. But after enduring an economy where legal tender and investments tied to them have shown great volatility, Bitcoin might have to find a more solid foundation before being able to compete in the mainstream economy.
Bernard von NotHaus, creator of the Liberty Dollar, was convicted of counterfeiting for creating “coins resembling and similar to United States coins” and distributing them with the intent to “use [them] as current money.” The verdict was handed down by a federal jury in Statesville, NC on March 18, 2011. Von NotHaus is facing a maximum sentence of 20 years in prison and fines up to $500,000. Sentencing hearing will begin on April 4.
In an email to supporters, von NotHaus indicated that he will appeal his conviction.
A few days before the end of the trial, Rep. Ron Paul (R-TX) introduced H.R. 1098: Free Competition in Currency Act of 2011. Its stated purpose is “To repeal the legal tender laws, to prohibit taxation on certain coins and bullion, and to repeal superfluous sections related to coinage.”
During his Extensions of Remarks on March 15, 2011, Rep. Paul said, “At this country’s founding, there was no government controlled national currency. While the Constitution established the congressional power of minting coins, it was not until 1792 that the U.S. Mint was formally established. In the meantime, Americans made do with foreign silver and gold coins. Even after the Mint’s operations got underway, foreign coins continued to circulate within the United States, and did so for several decades.” Unfortunately, Rep. Paul learned the wrong lesson from history.
Starting with the statement that foreign coins continued to circulate for several decades, fails to recognize the real reason for this. Upon passage of the Constitution and prior to the passage of the Coinage Act of 1792, the new government realized that the they were not ready a would not be ready to supply coins to satisfy the needs of the new nation. Even after the passage of the first Coinage Act, congress realized that the U.S. Mint needed time to produce enough coins for the nation. Rather than plunging the economic potential of the new nation into chaos, the government continue to allow foreign coinage, specifically the Spanish Reales, to be used for commerce. This continued until the passage of the Coinage Act of 1857. Aside from authorizing the issuing of the small cent, which the U.S. Mint did by striking the Flying Eagle Cent, the law gave citizens two years to redeem their foreign money for the equivalent in U.S. coinage. By 1859, no foreign coins were circulating in the United States.
In the years leading up to the Revolutionary War, the new colonies were hampered by a situation where King of England did not allow the colonies to control its own money or create its own monetary policy. In order to expand commerce, colonies issued paper notes. These notes functioned as currency but actually were bills of credit, short-term public loans to the government. For the first time, the money had no intrinsic value but was valued at the rate issued by the government of the colony in payment of debt. Every time the colonial government needed money to pay creditors, they authorized the printing of a specified quantity and denomination of notes. Laws authorizing the issuance of notes were called emissions. The emission laws also included a tax that was used to repay the bills of credit with interest.
As taxes were paid using the paper currency, the paper was retired. As the notes were removed from circulation, that meant less payments the government had to make. On the maturity date, people brought their notes to authorized agents who paid off the loan. Agents then turned the notes over to the colonial government for reimbursement plus a com- mission. Sometimes, colonies could not pay back the loan. They instead passed another emission law to cover the debt owed from the previous emission plus further operating expenses, buying back mature notes with new notes. The colonists accepted this system since it was easier than barter and there were never enough coins to meet commercial needs.
To maintain commerce, many of the notes were tied to the value of the Pound Sterling but the worth of the Pound Sterling was interpreted differently from colony to colony. Although the colonies accepted foreign coins, especially the Spanish silver reales, each colony set its own price of silver as based on its purchasing power. For example, the colonies of North Carolina and Virginia tied the reales’ value to the amount of tobacco that can be traded. This continued following the Revolutionary War so that commerce could continue and the new states could repay war debts.
After the failure of the Articles of Confederation to form that perfect union, the authors of U.S. Constitution understood the a union must be able to be supported out of the whole and not individual parts. It was best explained by James Madison in Federalist No. 44 when he wrote:
Had every State a right to regulate the value of its coin, there might be as many different currencies as States, and thus the intercourse among them would be impeded; retrospective alterations in its value might be made, and thus the citizens of other States be injured, and animosities be kindled among the States themselves. The subjects of foreign powers might suffer from the same cause, and hence the Union be discredited and embroiled by the indiscretion of a single member. No one of these mischiefs is less incident to a power in the States to emit paper money, than to coin gold or silver.
By reigning in the chaos caused by 13 different economic policies, the more perfect union turned this young country into an economic powerhouse that has surprised empires of years past.
The economic strength of the United States is based on strength of its currency that is backed by the full faith and credit of the U.S. government. While there are disagreements as to how to use and maintain that strength, the fact of the matter is that much of the world bases its economic stability on the full faith and credit of the U.S. Dollar. There are many economies that use Dollars as its primary means of exchange like most of the countries in Central America. Most of the world’s commodities are priced in dollars like oil and precious metals. And countries buy United States bonds to help back their currency like China.
By repealing the legal tender laws (31 U.S.C. § 5103), Rep. Paul is proposing to demonetize all United States coins and currency that could lead to a global economic collapse. Countries that use the dollar as their currency will not have a currency; currencies backed by the dollar will be worthless; and the price of world commodities will become unstable as the markets search for a new standard. As we have seen during the current economic crisis, instability causes prices to rise—see the prices of gold, silver, and oil.
H.R. 1098 was referred to the Committees on Financial Services, Ways and Means, and the Judiciary. Rep. Paul is chairman of the Domestic Monetary Policy and Technology Subcommittee under the Committee on Financial Services. Should this bill be successfully reported out of all three committees it would have to passed on the floor of the House of Representatives. If it passes the House, it is doubtful that the bill would pass in the Senate. This aspect of the sausage making process ensures that this bill will never pass. Regardless of what you think about United States monetary policy, it is not in anyone’s interest to plunge the world into economic chaos.
The base metals market woke up this morning trumpeting record high futures prices for copper, nickel, and aluminum on the London Metals Exchange (LME) and COMEX Metals Exchange (New York). Analysts credit this rise in price to low supplies and higher demand, specifically in China.
Copper closed at $4.5135 per pound in New York and $9,878 per metric ton in London on Monday, January 31, 2011.
For numismatists watching production at the U.S. Mint, this means that the material costs to produce U.S. coins will increase. With the exception of the cent, the predominant metal used in the manufacture of U.S. coins being copper—the Lincoln cent is 97.5-percent zinc with a coating using a 2.5-percent copper coating. Since most coins are composed of an average 88-percent copper and the nickel containing 75-percent copper, the rise in the cost of materials will reduce the seigniorage (profit) collected by the U.S. Mint.
Second most used metal used in U.S. coinage is nickel. While nickel has been up for the last six month and approaching its one-year high, it is down from its previous high reached in 2007 when it the U.S. Mint said the cost of manufacturing the nickel was nearly double its face value. If we use the average production costs from the last three years of 21-percent of face value (as reported in the U.S. Mint Annual Reports), it costs approximately 8.16-cents per coin to manufacture (metals cost 7.06-cents and approximately 1.1 cents to manufacture).
As for the Lincoln Cent, it has fared better in its materials cost. The price of Zinc has also dropped from its five-year high and is trading around $1.09 per pound. Zinc is also in ample supply to meet market demands meaning that the price should not be that volatile. This means that the materials cost to make the Lincoln Cent is 0.644-cents. Using the average cost to manufacture the cent at 35-percent of face value (as reported in the U.S. Mint Annual Reports), the overall cost to manufacture the cent should be on par with its face value.
However, the FY2009 U.S. Mint Annual Report showed a marked rise in manufacturing costs (I have not analyzed the FY2010 Annual Report as of this post) wondering if the production costs estimates are too low. However, if copper continues to rise, then the costs to manufacture all U.S. coins will rise and reduce the profit collected by the U.S. Mint.