Natural Resources Threaten Money Supply

By David L. Brown

The rising cost of natural resources, due primarily to increasing demand and faltering supply, is creating some serious problems in the world today. Here is a brief news item from the Associated Press that reveals one aspect of the problem:

WASHINGTON — The House has passed legislation designed to stop pennies and nickels from costing more than they are worth, a move that supporters say would save taxpayers $100 million a year.

The unanimous vote Thursday sends the resolution to the Senate, where its future is troubled. The Bush administration and its supporters oppose it because it does not transfer to the U.S. Mint Congress’ constitutional authority to decide what coins are made of. The measure also does not give the metals industry enough time to weigh in on the decision, opponents say.

The government is paying 1.26 cents to make each penny, and 7.7 cents to make each nickel, the Mint says.

Well, besides illustrating the problems caused by the rising cost of metals and other natural resources, this little news report provides an x-ray glimpse into the minds of our representatives in Washington, who seem to think that every problem can be solved simply by passing a new law.

When will they learn that you can’t legislate something that violates the fixed laws of nature and economics? Well, never of course, because nearly all of those esteemed members of Congress are educated as lawyers, not scientists or economists. Something about our law schools seems to filter out any residue of common sense that might linger in the minds of their students.

Note that the vote on this was unanimous, meaning that not a single member of the august body felt there was anything to question about the bill. And note also that it does not, at least as far as the AP reports, offer any specific solution to the problem, or even give the Mint authority to change the way coins are made. No, it merely demands that this problem be fixed, full stop.

There was a time, long ago, when most coins were made of precious metals including silver and gold. Pennies have been made of copper for as long as I am aware, and as the world’s supply of that useful metal gets used up it is natural that prices have continued to rise. Here is a graph showing the trend of cash copper prices over the last ten years, from May 8, 1998 to today, which I created from the database of the London Commodities Exchange:

coper-price-graph.jpg

Do you start to see the problem here? Um, yes, I thought you would. No wonder it now costs more than a penny to make a penny. The problem is pretty plain to see.

Now what about the five cent coin, the nickel? It contains 75% copper (Cu) and 25% nickel (Ni). Of course the price of nickel has also been rising, and so have all the other costs relating to the production of pennies and nickels, including energy, labor, transportation, and everything else. The value of a penny has been deflating for decades. There was a time when a penny would actually buy something, and candy bars, Cokes and Fudgsickles were a nickel when I was a kid. What can you buy today with a penny, or even a nickel? Not much, that’s for sure. The only use for these coins seems to be to make change in order to collect odd amounts of sales tax. Without that complication, everything could be priced within a dime and there would be no need for pennies and nickels.

Of course, that would put a spanner into the clever marketing ploy of pricing everything just one cent below what might seem a higher price — $9.99 vs. $10, for example. And that most ridiculous practice of pricing gasoline in one-tenth cent units. That made at least some small sense way back when gas was around a dime and the seller could offer it at $0.099. But now that gas is over four dollars in many places, how ridiculous is it to see prices such as $4.299 per gallon? Come on, would it really hurt to call it $4.30? Would sales be lost? Would outraged customers take their business elsewhere? I don’t think so.

So the all-wise Congress wants unanimously to pass a law to dictate that the cost of making these coins shall not exceed their declining value? Well, it could be done I am sure. We did it long ago when the silver dollar and gold five, ten and twenty dollar coins were replaced with pretty pieces of printed paper. So perhaps the answer is to issue little bits of cardboard printed with the values of one and five cents. No, you don’t think so? Umm.

So here are some other ideas for alternative materials from which to make these coins cheaply enough to be worth more than they cost to make:

• Make coins out of plastic (except that plastic is made from oil, which is a natural resource, which is … well, you get it).

• Compress grass clippings and other waste products to create coin-like objects (watch for chlorophyll stains on your pockets!).

• Mold coins from clay and bake it to produce ceramic coins (careful; when dropped they break!)

• Collect colorful sea shells and use them as money (this has a long tradition in certain circles).

• Follow members of Congress around and collect the hot air and other effusions they emit, then process them into shiny coins with a wave of Harry Potter’s wand.

Well, I don’t see much hope of any of these ideas working very well, but here is a brain storm for our esteemed lawmakers: Why not eliminate these coins on the grounds that they have been devalued to the point that they no longer have any reasonable use in our monetary system? Hmm, I bet the members of Congress never thought of that. If they had, they might have realized that was an idea that could actually benefit from the power of legislation. They cannot vote away the natural forces of economics and supply, but they could simply vote to eliminate the small change.

Millions of sagging pockets, overloaded purses and groaning piggy banks would thank them.

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