Bitcoin And An Underground Economy

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.

Ron Paul Proposes the Collapse of the World 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.

Copper Prices Rising

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.

[Most Recent Quotes from]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.

Will Virginia Coin Its Own Money

I am not one who looks at our current monetary system and believes that changes must revert back to a standard based on precious metals. I understand that such a standard requires government intervention by controlling the prices of the metals in order to create a monetary standard that does not allow for growth and expansion. History shows that the attempt to control the prices of precious metals while trying to maintain economic growth has not worked. We can look at the Coin Act of 1873, also known as the Crime of 1873, for manipulating silver out of the monetary system and creating a series of recessions and depressions because of the lack of real growth.

On the other end, taking the U.S. off the gold standard in 1933 was the first step in expansion of the U.S. economy. The final step in economic growth was fully breaking the dollar’s tie to gold while allowing the price of gold and the U.S. dollar to trade freely on open markets. Even though the United States experienced a concept call stagflation in the 1970s, the strength of the U.S. dollar was growing around the world. It was during this time that many economies were basing their own currencies on dollars to where some countries use dollars instead of their local currency.

After many years of seeing the dollar take over economies all over the world, the European Union joined to form a common currency in order to offer an alternative to the U.S. dollar. When the Euro was launched in 1999, the two European economic powers went in different directions. Germany, which has a significant manufacturing and technology base, joined the Euro while Great Britain, worrying about its sovereignty because it could not control its currency, kept its currency based on the Pound. Today, the Euro is having problems with the economic programs throughout Europe (Greece, Ireland, and Portugal with Spain not far behind) and Great Britain able to weather their own storm, albeit not without protest. Talk about replacing the Dollar with the Euro as the benchmark currency have subsided.

The issue of sovereignty becomes an interesting question with a joint resolution introduced to the Virginia House of Delegates. House Joint Resolution No. 557, introduced by Del. Bob Marshall (R-Manassas 13th district), to “[Establish] a joint subcommittee to study whether the Commonwealth should adopt a currency to serve as an alternative to the currency distributed by the Federal Reserve System in the event of a major breakdown of the Federal Reserve System.”

As with many bills on both the federal and state level, the bill begins with paragraphs what begin “Whereas….” For this joint resolution, it claims authority by cherry picking rulings from 19th century rulings made during the height of the Robber Barron era before the introduction of the various Anti-Trust Acts to justify the assumptions. They also cherry pick statements from the United States Code (U.S.C.) that take the statements out of context in order to pervert their meanings.

The “Whereas…” section also claims that “many widely recognized experts predict the inevitable destruction of the Federal Reserve System&rsuqo;s currency through hyperinflation in the foreseeable future.” Who are these experts?

If the resolution passes, it directs that a joint committee will be created to study whether the Treasurer of the Commonwealth of Virginia and the Bureau of Financial Institutions can and should coin its own money for use within the Commonwealth should the Federal Reserve or other sources collapse. The committee is supposed to report its findings by the first day of the 2012 Regular Session of the General Assembly.

After living in the Washington, DC area for almost 20 years and having jobs that worked with the federal government, I have seen my share of wingnuts from both sides of the aisle. But I have come to learn that the extremes on either side is aptly described as extreme. The extreme nature of this resolution ignores Article I, Section 10 of the U.S. Constitution that says “No State shall… coin Money.”

While the Federal Reserve and the U.S. Mint has its issues regarding the policies of the manufacture and distribution of money (remember the Bureau of Engraving and Printing prints the currency), proposing to violate the constitution is unconscionable. Besides, if it ever gets to the point that the Federal Reserve fails, Virginia coining their own money may be the least of our problems.

Looking Back at 2010 to Look Forward for 2011

Many things can be said about 2010, but for numismatics and precious metals it was quite a ride. What could this ride tell us about 2011?

Looking at the economy, the real gross domestic product—the output of goods and services produced by labor and property located in the United States—increased at an annual rate of 2.6 percent in the third quarter of 2010. A rate greater than in 2009. Although real disposable personal income increased 0.2 percent through November, the consumer price index rose at a faster rate of 1.1-percent while unemployment reached a one-year high of 9.8 percent in November.

If the slow improving economy and expanding unemployment has you confused, the simple explanation is that if the economy was a bus, it just pulled away from the curb and the driver started to shift into second gear while employment has yet to be allowed aboard. Although economists agree that employment and Consumer Confidence Index are lagging indicators, neither have seen improvement in 2010. Although the politicians are hoping their lame duck legislative efforts will help the unemployed to board the employment bus, it is possible that the bus will be too far down the road to make a difference in 2011. Let’s hope it is not too late!

In an attempt to provide its version of stimulus in 2010, the Federal Reserve’s lowered its discount rates and its ability to manipulate the money supply to try to provide relief. Although the Fed has increased the money supply, the United States dollar has not been significantly weakened against most of the world currencies—although some would say that it was seriously weakened in 2009. While the dollar has fluctuated against other major currencies throughout the year, the dollar has shown marginal only weakness against the British Pound, Euro, and Yen year-over-year while there were no weaknesses against the Reniminbi (or Yuan) because of institutionalized currency manipulation in China. Many economists believe that the avoidance of a dollar free-fall was because of the failure and pending failure of some Eurozone economies and China’s desire to reduce its own inflation concerns. The rumblings to remove the dollar as the standard and benchmark currency that we heard in 2009 subsided in 2010.

To measure the effect of the economy on the numismatic markets, I use the PCGS3000® Index as an indicator. The PCGS3000 Index is a market basket of 3,000 coins that PCGS their analysts believe represents the broad market. The variety of coins makes for a good indicator but as a broad market basket, movement indicates trends rather than a real-time indicator (similar to the Russell 2000).

The PCGS3000 Index opened 2010 with at 68,476.87. After dropping to a 12-month low of 66,886.27 (2.3-percent) in August, the index closed at 67,323.11, down 1.68-percent for the year. For a market basket that consists of 3,000 non-volatile items made from a variety of metals an in different grades, a downward trend of one-to-two percentage points indicates a weakness in the numismatic market. While some think the markets are strong—and there has been no slow down in the high-end coin market—collectors and some investors are either pushing prices downward or waiting for prices to drop before buying. Like in retail sales, many purchasers are standing on the sidelines waiting for the bargains or the market to settle.

But if the economic indicators do not show weaknesses except in employment, then why should the numismatic market show a weakness? The answer can be summed up in two words: gold and silver.

Some dealers and auction houses have found that the buyers for the high-end coins have continued their strong buying but the rest of the market has not joined them. One of the factors can be that the price of gold has scared many people away. When the markets opened on January 4, 2010, the price was $1,087.50 for one troy ounce of gold. During the year, the price never dipped below $1,050 climbing to $1,420 on December 7 before closing at $1,405.50 on December 30. As a result, investors who bought gold prior to 2010 saw their investment to rise 29.2 during the year. One would think it makes sense that the generic gold coin market would rise with the gold market. But a look at the PCGS Generic Gold Coin Index found that even with gold’s rise through the year, the generic gold coin market also saw a 17.76-percent drop in prices. However, Proof Gold rose only four-tenths of one-percent (0.41%) showing that there continued to be a little activity in the high-end market.

If there was a bull market in 2010 they were running for silver. After opening the year at $16.99 per troy ounce, silver closed at $30.63—a whopping 80.4-percent increase! Although less than the $54 ($143 adjusted for inflation in 2010 dollars) that it reached when the Hunt Brothers tried to corner the silver market in 1980, the 2010 rise is significant because few believe that the markets are being manipulated. In fact, one analyst believes that the silver market is undervalued as compared to the gold market. He said, “The gold rush of the 2000s is going to be nothing [compared] to the silver rush of the 2010s.”

When looking at the numismatics market, silver is the key metal. Up until 1964, every dime, quarter, half-dollar, and non-gold dollars were made of silver. Silver has been a key coining metal since the creation of the United States Mint in 1792. Many of the most collectible coin ever created by the U.S. Mint were struck in silver. Nothing represents silver coins like Morgan and Peace Dollars. Arguably one of the most popular numismatic collectibles, Morgan and Peace dollars are 26.73 grams made of 90-percent silver and 10-percent copper making its melt value $23.03 at the end of 2010.

But the value of Morgan and Peace dollars extend beyond their melt value. Morgan and Peace dollars are tied to the late 19th and early 20th century history of silver manipulation in the United States with designs popular with collectors. Morgan dollars struct at the Carson City mint are amongst the most desired. Since the GSA sales in the 1970s, the prices of these coins have gone up—in some cases beyond the reach of the average collector. Of the Peace dollar series, the high-relief 1921-D dollar is very desirable as is the low mintage 1928 dollar, and the 1935 last year of issue dollars. And the rumor that not all of the 1964-D Peace dollars were melted makes finding out the absolute truth a great interest to the numismatic world. However, with the rest of the market trending downward and silver skyrocketing, the PCGS3000 Morgan and Peace Dollar Index found the market rise-then-fall-then-rise again to end the year up eight-tenths of one-percent (0.825-percent) for 2010. Not a great showing, but demonstrating that Morgan and Peace dollars are still popular amongst collectors.

What is clear is that the coin market was down in 2010 while investors and even some collectors might have been concentrating on gold and silver bullion.

In speaking with some dealers, many have said that they have survived the last two years buying and selling bullion including American Eagle coins. One said that the numismatic market has been very slow that the bullion market has allowed him to stay in business during this era being dubbed “The Great Recession.”

Just because the calendar turns does not mean the market will turn along with it. Even though the lame duck congress passed significant stimulus legislation, it will take some time for those measures to settle into the markets. Some experts think that the eventual hiring may not occur for at least six monist and that there will not be a significant drop in unemployment until the fall. Others point to the infrastructure project the new laws are supposed to support forgetting that even shovel-ready projects have legal requirements, such as contract and environmental restrictions, that have to be address before a shovel can be used. In short, we may be in for more of the same through the first and even second quarters of 2011.

The new congress will help keep the economic uncertainty alive. Although the Republicans will control the House of Representatives, the Senate will be controlled by the Democrats with an active Republican minority who has shown that they will use the body’s rules to try to force their will. In other words, prepare for gridlock. None of this takes into consideration that Rep. Ron Paul (R-TX) will be the chairman of the House Finance Committee, thus allowing him to have control over economic policy in the House!

Neither the lame duck stimulus or the new congress will do anything to settle the markets in the short term. With the uncertainty, investors will continue hedge their bets using precious metals. Gold will continue to rise but at a rate less than in 2010. It is fair to say that with the current valuation being so high, it is likely that 2011 will end with gold only rising by 20-percent. However, the argument that the gold-to-silver ratio is out of balance being very compelling, we may see silver continue to climb. Silver may not climb at the 80-percent rate we saw in 2010, but a 40-percent rate may be reasonable. If this holds true, this time next year we could be talking about gold being $1,680 per troy ounce and silver closing at $42.

During the Fall of 2010, the PCGS3000 Index rose a bit from its low for the year and the low since the index’s all-time high in 2008. But with other factors not changing in the short term, could this be the coin market’s version of a “dead cat bounce?” A dead cat bounce is a small yet brief market recovery derived from the idea that “even a dead cat will bounce if it falls from a great height.” It is more likely that the numismatic market will flatten a bit while the rest of the markets figure out which direction they will go.

The first indication of how the numismatic market starts the year will be at the F.U.N. Show held January 4-9 in Tampa, Florida. With F.U.N. being one of the largest non-ANA shows of the year, sales and dealer impressions will set the tone for at least the next few months. Under the premise that markets do not turnaround quickly and that the last major show, Whitman Baltimore Expo in November, saw only nominal sales, one can assume a similar atmosphere for F.U.N. It will be more reasonable to wait until the National Money Show March 17-19 in Sacramento and the Whitman Baltimore Expo held March 31-April 3 to determine if the numismatic market will be better in 2011. At the end of the year, it is reasonable to expect that the PCGS3000 Index will be up 2.5-percent by the end of 2011 given the other market forces.

Of course predicting any market is a total crap shoot. While my roll of the dice may be no better than others, I would caution against thinking that my crystal ball is clearer than anyone else’s. All I have done is read the proverbial tea leaves and drank the tea while throwing darts at the wall trying to guess what the future will bring. Or as one comedian used to say, “That’s my opinion, I could be wrong.”

Metals charts courtesy of Kitco.
The PCGS300® Index courtesy of the Professional Coin Grading Service.

Cash Is Still King

“Cash is expensive, we need to be using it less.”

This self-serving quote was made by Steve Perry, executive vice president of Visa Europe, in an article that appeared in the Telegraph in the United Kingdom. To justify this statement Perry says that supermarkets in the UK are introducing cashback, a program to promote the use of credit and debit cards over cash because cash is more expensive to handle.

It may be the case in the UK that cash is more expensive to handle, but in the United States, we are seeing consumers and some small businesses moving in the opposite direction. This past week, credit reporting agencies and the credit card companies reported that the average credit card debt has fallen to its lowest point since 2002. Delinquency rates fell by 17-percent to the lowest point since the start of the current recession. Americans are buying fewer items on credit and using what income they have to pay off credit card debt.

With the economy in a stall, the U.S. Mint exceeded its 2009 output in July 2010. And even before the August Federal Open Market Committee meeting, it was speculated that the Federal Reserve would order more paper notes from the Bureau of Engraving and Printing. Since the FMOC meeting, Federal Reserve Chairman Ben Bernanke said that the Fed will do whatever it takes to stimulate the economy.

Aside from the economy another factor turning people away from credit cards is the environment created by the banks prior to the implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Public Law No. 111-24 [TXT] [PDF]), also know and the Card Act. Between the bill’s passage and recent enactment, the banks have been raising fees on consumers and businesses in order to make up for what they saw as a potential loss of income. Rather than make it better for the consumers in the spirit of the Card Act, the banks showed their bald-faced greed making the using of credit cards more expensive than cash.

Even though Canada is debating on eliminating its 1-cent coin and others are pushing credit card technology onto the smart phone, small businesses are looking to save the cost of credit card handling by offering a discount for paying with cash. Credit card processing costs from three to five percent per transaction plus account fees. Some small businesses are offering their customers a discount of their credit card processing fee if they pay in cash.

Receiving a discount for paying using cash is not a new idea. There was a time, before the Card Act, when gas stations used to offer one price for cash purchases and another for credit card purchases. However, the convenience of using credit cards at the gas pump made this option unattractive. Even though the costs for using credit cards have been added to the price of gas, the elimination of this dual pricing was welcome. Recently, some independently owned stations have been offering a discount for using cash or for using the company’s credit card. The psychology of receiving a discount may make dual pricing more palatable in this environment.

As people are pulling away from credit cards, small businesses are looking to cut costs by offering discounts for paying with cash, and even with the rise in savings rates, it appears that the report of cash’s eventual demise appears to be greatly exaggerated. For numismatists, this means that our hobby will continue to grow with new, fresh material for years to come. And considering the bad economic news, this is good news. Happy collecting!

Could EU Countries Reissue Their Original Currency

You might have noticed that a European debt crisis has caused the markets to panic where some have been saying there is no relief in sight. It started wit the economy of Greece needing its own bailout while it is questioned as to whether they can pay the money back. The the news that Portugal, Spain, and possibly Ireland may follow. As a result, the Euro is at a 4-year low against the dollar and dropping.

Aside from the economic impact, there has been questions about the viability of the European Union as an economic entity and its ability to act as a central bank in the best interests of the sovereign members of the Euro zone. Countries can no longer manipulated their currencies or manufactured more money to maintain solvency. They now have to follow the rules of the European Central Bank in order to maintain “fairness” within the Euro zone.

What would happen if these countries did not want to be beholden to the European Central Bank? Countries would have to break from the bank and issue its own currency. There has even been speculation as to the current value of the former EU currencies if they were still in circulation.

For numismatists it would add new collectibles to the market. Countries that would re-issue its own currencies would likely demonetize the Euro and force locals to trade in their Euro coins and notes for the re-issued currency. This would make the reverse designs that are country specific instantly collectible as well as the new Drachma, Escudo, Pesta, Franc, Lira, or Deutsche Mark that would be issued in its place.

Maybe Great Britain was right for not converting to the Euro. But for now, their newly issued circulating coinage is arguably the most interesting in the Euro zone. Maybe another country will join them an open new areas of collectibles.

US Mint Math: Costs More to Produce Less

After reading a few stories on how the president’s 2011 federal budget was proposing changes to coin composition. Many of these articles point out how the budget projects that changes could save the US Mint about $150 million per year after making over $777 million in circulating coins (business strikes) in fiscal year 2009. The US Mint’s Fiscal Year 2009 Annual Report says that the US Mint earned over $904 million in seigniorage from all sources.

While everyone is concentrating on the costs of changing coinage metals, there is a missing point: even if the US Mint was able obtain the copper covered zinc planchets for the cent at no cost, the US Mint will lose 0.62-cents per cent struck just for the labor and administrative costs.

In 2009, the US Mint shipped $777 million in circulating coins after shipping over $1.2 billion in 2008. The 40-percent reduction in production also was matched by a 40-percent reduction in the amount the US Mint spent on the metals. In other words, the increase in the costs of metals between 2008 and 2009 was minimal. However, the cost to produce the 40-percent fewer coins cost the US Mint 1.1-percent more in 2009! With presses sitting idle for long periods of time for the first time in many years, the US Mint paid $98.1 million in 2009 for striking few coins and costing $97 million in 2008.

The US Mint documents the costs in the Annual Report as Sales, General & Administrative (SGA). In the Annual Report the reported SGA from 2006 through 2009 has remained stable. Increases have roughly followed the rate of inflation. When looking at the SGA for individual coins, the US Mint spent $65.3 million to sell $459 million one-dollar coins to the Federal Reserve in 2009. In 2008, it cost $52.2 million to sell $475 million one-dollar coins.

The US Mint’s core responsibility is to manufacture the coins required by the Federal Reserve for commerce. In 2009, the seigniorage for business strikes was $427.8 million while making $32.7 million for bullion sales.

The problem is not the cost of the metals. The problem is the inefficiency of operations at the US Mint. “In FY 2009,” the US Mint’s FY2009 Annual Report reads, “the worsening economic environment challenged our ability to maintain efficient manufacturing operations but also presented opportunities for long-term efficiency gains.” Then where are the efficiencies? If the US Mint has an efficient manufacturing process, then why did it cost the US Mint 1.1-percent more in 2009 to producing 40-percent fewer coins than they did in 2008?

If the Obama Administration wants the US Mint to produce more in seigniorage, then the place to start is to immediately replace the political hack that is the current director. A replacement should be someone that has had a manufacturing background working in a regulated environment to lead the US Mint forward.

California Currency

While the study of coins can be a lesson in history, the study of paper currency can present a lesson in economics that may be relevant today. With the state of California printing and distributing IOUs to meet its financial obligations, I am reminded of how the colonies used similar arrangements to finance the fighting of the Revolutionary War.

During the colonization of the New World, charters were granted to companies to set up businesses and trade the natural resources they found back to England and the rest of the known world. We may be more familiar with the East India Company from popular movies, the first settlement at Jamestown was colonized by the Virginia Company of London. These and other companies were originally chartered by King James I to set up trading centers on the shores of the new world to make it easy to goods back to Europe.

As the companies became successful, the English government became more interested in expanding its empire. The Royal Navy was sent to the new world to protect shipping lanes. As threats from other countries and Native Americans endangered the colonists, the King began to revoke charters to make the companies Crown colonies. Governors were install with Army garrisons at their ready to expand holdings against other nation’s settlers and to fend off Indian attacks.

Following the French and Indian War, the British government was in considerable debt. When they added the cost of keeping a regular army in the colonies, the extra expense was more than King George III wanted to endure. Beginning with the Stamp Act of 1765, Parliament tried many ways to have the colonies pay the debt and for their protection. With no representation in Parliament, the colonies began the road to independence proclaiming “No Taxation Without Representation!”

In order to maintain their control over the colonies, the King and Parliament only allowed minor, non-precious metal coins to be used for commerce in the New World. Colonist adopted by accepting silver coins from other countries as legal tender. The most common coins was the Spanish 8 Reales or Pillar Dollar. But the Pillar Dollar was not enough to fight against the powerful British Army, who was attempting to keep order.

The first currency issued in the New World was issued by the Massachusetts Bay Colony in the 1690s. Later in the eighteenth century, other colonies began to issue currency, many times surreptitiously without the knowledge of the colonial governor, to raise money. When colonial assemblies issued currency, they were issued as indented bills of credit with a plan to repay the loans.

Colonial assemblies issued two types of currency. One type of issue were indented bills of credit which were not considered legal tender but could be used to pay fees or taxes. These notes contained one or more receipts or payment slips that were redeemed at specific intervals for hard currency. Legal tender currency were allowed to circulate for commerce. Both types of notes usually were printed with a denomination, value basis for the denomination, the interest rate of return, and when the note can be redeemed for hard currency. The value basis for the denomination was usually expressed as “Bill of Exchange in London for Gold and Silver” and a rate of exchange. However, that exchange rate was different from colony to colony which made inter-colony transaction difficult. Value was also based on the trustworthiness of the colony to repay these notes.

As the Revolutionary War continued, colonial assemblies found themselves without the ability to raise enough money to pay off their currency. One way around the problem was to issue enough currency to cover the last issue plus a little more to cover current expenses. Not only did this create a big debt for the colonies, but that debt made the paper worth less than is printed value which made it difficult for the colonies to purchase supplies.

After the war, both the Continental Congress and the new states were competing with each other generate revenues and to pay off their debts. This continued until the US Constitution was ratified in 1789 and the federal government took over the minting and issuing of money. Because this demonetized the currency from each state, a compromise was made to trade the currency at the rate of 100 state dollars for one dollar of the new United States currency—which at that time was being paid in Spanish Milled Dollars.

Even though the states lost the rights to print and distribute money, they continued to have the right to issue non-legal tender bills of credit in order to raise money. These bills of credit were issued in the form of bonds that were either redeemable on the date of maturity or had a periodic payment option. Bonds are usually issued to pay for capital improvement projects. They are associated with a source of revenue that would be used to reimburse the bond holders, such as a tax. This practice continues today with every states’ debt being backed by many bond issues. And with technology, most bond issues are not printed. Rather, they electronic records noting ownership of the bonds.

The paper issued by the colonies, the Continental Congress, and the United States under the Articles of Confederation are very collectible. Aside from being a lesson in history, it is a lesson in the state of the art of printing in the colonial times and a lesson in colonial economics. Finding colonial currency is not easy, a nice collection can be awe inspiring. One such collection is in the Colonial Currency Collection at the University of Notre Dame’s Department of Special Collections.

The State of California is in serious economic trouble. Their fiscal year began on July 1 without a budget and a significant deficit between the government’s income and their legal obligations to provide services to the citizens of California. Governor Arnold Schwarzenegger declared a fiscal emergency and order the printing of IOUs to pay state debt obligations. Initially, 28,750 IOUs worth $53.3 million will be issued mainly for personal income tax refunds. The IOUs will carry a 3.75-percent interest rate redeemable by October 2 or earlier if a budget agreement is reached.

The financial term for the IOUs are “registered warrants.” For the citizens receiving these IOUs, most of California’s in-state and nationally-owned banks said that they will accept the IOUs as deposits for a limited time.

California last issued IOUs in 1992 during a similar budget crisis.

Records of the how many of the IOUs were redeemed do not seem to be publicly available and I did not find an auction record for the paper issued in 1992. However, it stands to reason that the paper IOUs will be highly collectible. Opportunists have been using online classified websites to offer to purchase these warrants as souvenirs (see an ad).

Although registered warrants are not legal tender, people may elect to trade and barter these IOUs for goods, services, and even legal tender money. We can only wonder if the paper will become more valuable as a collectibles as the Zimbabwe notes after their government devalued Zimbabwean Dollar because of hyperinflation. That ball is in the court of the California legislature. But they will make interesting collectibles.

Gold and the Coin Market

The big news of the week is that the gold spot price spiked over $1,000 this week before profit takers caused the price to back off to a close of $993.20. Gold has been on a steady rise since the week of January 12, when the markets were worried during the last week of the Bush administration with nothing concrete being offered by the incoming Obama administration. Markets continue to be skittish about the economy.

Recently, we have learned that the new openness of the Obama administration has a price. The administration and congress have pulled back the covers of the Emergency Economic Stabilization Act (TARP) revealing that the banks and brokerages were not using the money to open capital markets and were practicing “business as usual.” Recently, we learned that the nation’s two largest banks are not as healthy as initially reported. This is making everyone uneasy about the economy.

With the financial markets in turmoil, investors are running to the gold markets. Gold has been the traditional safe haven for the equity markets. Pundits have been reminding us how gold was used as the standard currency at the beginning of the Great Depression. With the markets failing, foreign trade partners were demanding payment in gold causing much of the United State’s wealth to be shipped overseas. This did not not leave enough gold to back circulating currency causing money to be a scarce resource. As Franklin D. Roosevelt began his presidency, he ordered a 4-day bank holiday and an embargo on the use of gold in overseas transaction. A month later, Roosevelt ordered a nationwide gold recall (Executive Order 6102).

The Gold Reserve Act of 1933 made Executive Order 6102 the law. Gold ownership and the restriction on the use of gold contracts started to ease in 1965 with full ownership granted in 1977. Under 31 U.S.C. §5118, gold contracts with the government are not permitted as well as issuing gold or silver as circulating currency. The United States was officially off the gold standard.

For us collectors, the economy may help keep the coin markets active. But which part of the coin market? Reports from the recent Long Beach Expo noted that there was strong business, especially in with gold coins. It was also pointed out that the auction at the Long Beach show held by Heritage Auction Galleries realized $13 million for a catalog that had a significant number of gold coins. I can understand why the people who manage the Long Beach Expo and Heritage Auction Galleries would want to show the bright side of the weekend, but I suspect that the reports are misleading to the overall state of numismatics.

There were no reports on silver or “common” and less expensive collectibles.

Silver, which is more abundant than gold and has significant industrial uses, is up 25-percent in 2009 while gold is only up 13-percent. It seems to be effecting the industrial market more than the coin market.

While gold may be the investment of choice for those leaving of other equity markets, other coins do not seem to be selling as well. The PCGS3000 Market Summary Index has been falling since last October. Other PCGS indices have moved lower with the exception of the Proof Gold Coin Index, which has remained flat.

Downward pressure on the coin market observed by PCGS can be traced to the news of bad economics event. With the flow of money and seizing of capital markets, buyers have less discretionary funds to purchase coins. As a result, there maybe a higher supply from people wanting to sell in order to convert their coins into spendable currency. The basics of the Law of Supply and Demand dictates that when the supply is high but the demand is low, the downward pressure caused by the lower demand will force the prices down. For those still in the market, the elasticity of demand in the overall market, which takes into consideration lowered incomes, may continue to put downward pressure on prices creating bargains for some formerly higher priced coins.

Since numismatics is an industry that relies on its customers to have discretionary income to purchase its products and since economic indicators say that people now have less discretionary income, I wonder if the positive press from Long Beach may be the result of investors entering the market looking for safe havens. The markets have seen this before in 1980 and in 1990 where the 1980 market was because of manipulation and 1990 increases was because of economic factors.

Before you run out and buy gold or gold-based investments, understand that following the two biggest gold spikes in history, gold had dipped to the lowest levels of the year within a few months months. After reaching $850.00 on January 21, 1980, ($2,178.05 adjusted for inflation), gold dropped to $481.50 on February 18, a 43-percent decline. Following the February 7, 1990 closing price of $423.75 ($684.56 adjust for inflation), gold closed 20-percent lower at $345.85 on June 14, 1980. The PCGS3000 also notes similar drops in their index during the same period.

There are quite a few analysts who are predicting that gold prices could surpass $1,500 and $2,000 per ounce. It is conceivable to think that if gold reaches $2,000 per ounce without market manipulation, we would be in a depression that could eventually make the 1930s look like a picnic in comparison.

Please remember that I am not an investment advisor or analyst. I am collector with a background in public policy trying to read the tea leaves to understand if it is time to sell my gold leaf!

In the mean time, I have cut back on my numismatic purchases. This year, I will be looking to fill the holes in the modern sections of my albums before buying higher priced coins. I will probably not purchase any coins for my registry sets and limit the number of coins I send off to be graded. I might purchase a bulk package of cents to fill up the Whitman coin board I purchased last year.

Are you limiting your collecting activities this year? Let me know by posting your comment here.

Gold chart courtesy of
Image of
The New York Times front page from March 6, 1933 courtesy of Charleston Voice.

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