The Swiss 10-centime coin has a lot to teach us about monetary economics.

On its face, the Swiss 10-centime (rappen in German) looks like a pretty unremarkable coin. It's the second-lowest value Swiss coin, the Swiss version of America's lowly nickel, the sort of coin that many people might prefer to throw in a jar and forget about. But I recently learnt via @alea on Twitter that the 10-centime has the distinction of being the oldest original coin in circulation, its size, design and composition remaining unchanged since 1879.

Below are the 1879 and 2023 versions. They're exactly the same.

It's the stability of the coin's composition in particular that strikes me. Since its debut almost 150 years ago, the 10-centime has contained three grams of cupronickel—75% copper and 25% nickel. The only exception was from 1932 to 1939, when it was made of pure nickel. 

The U.S. five-cent coin, or the "nickel," has also had a remarkably long period of stability. Debuting in 1866 as a five gram cupronickel coin comprised of 75% copper and 25% nickel, the nickel has maintained the same metal content throughout its entire existence (except for the wartime five-cent coin), although unlike the 10-centime it has undergone a few decorative changes.

What makes the enduring stability of the Swiss 10-centime and the American nickel so unique is that it runs contra to the dominant coinage timeline, which typically involves a series of changes to a coin's metallic content over time. The main reason that coin compositions have been prone to change is that the global economy has generally been characterized by inflation, or a rising price level. With coins, this has had the unfortunate effect of steadily pushing the market value of their metal content higher, to the point that it eventually exceeds the coin's face value.

When this happens Gresham's law takes hold. It becomes profitable for speculators to melt the coin down in order to sell it as raw metal, the coin disappearing from circulation. Gresham's law, you may recall, is the dictum that when the official value of a monetary instrument is set too low, then it will be hoarded or exported, the "good" money being driven out leaving only what remains – the "bad" money – to circulate in its place. As a result, coin shortages occur and it becomes harder for the consumers and retailers to conduct basic commerce. 

In the early 1960s, for instance, a big rise in the price of silver led to hoarding of U.S. dimes and quarters, which at the time were 90% silver and 10% copper.

Source: New York Times (1964)

To prevent coins from being tossed into the melting pot and causing shortages, governments have typically reminted them out of cheaper material once their metal value approaches their face value. That's indeed what the U.S. monetary authorities did in 1965 with the Coinage Act, when they decided to henceforth mint new dimes and quarters out of cupronickel rather than silver.

Another reason for the regular alterations in coin metal content is to protect the mint's profits, which typically flow through to the government. Buying raw metal is one of a mint's largest costs, so when metal price rise, mint officials search around for cheaper types of metal. Either that or they reduce the size of the coin itself.

After commodity prices boomed in the 1970s, the 10-centime coin's smaller cousin, the Swiss 5-centime – produced from two grams of cupronickel since 1879 – was replaced by an aluminum-bronze version made of 92% copper, 6% aluminum, and 2% nickel. Nickel is a relatively pricey metal, so subbing it out with cheaper materials not only prevented the 5-centime coin from ever reaching its melting point, but also protected the Swissmint's profits.

Canada's 5-cent coin has gone through even more compositional changes than Switzerland's 5-centime. Beginning life in 1858 as a sterling silver coin, the five cent coin was diluted to 80% silver in 1919, got converted to pure nickel in 1922, then cupronickel in 1982, and finally became 94.5% steel in 1999—steel being by far the cheapest of these materials.

Monetary headroom

The 10-centime coin has avoided these transformations. You can see why in the chart below, which illustrates the market value of the nickel and copper making up the 10-centime going back to its original minting in 1879.

When it was created in 1879, the 10-centime had just 1.2 centimes worth of cupronickel in it. That effectively gave the coin a massive amount of metallic "headroom," or space between its metal content and its face value—8.8 centime's worth.

Zoom forward 150 years or so to 2024 and the market value of this three grams of cupronickel has more than doubled from 1.2 centimes to 2.8 centimes. That's a big jump, but still far below – 7.2 centime's worth – the coin's ten-centime face value. Given that plenty of headroom remains, Gresham's law won't be kicking in any time soon. I'd hazard that the cupronickel 10-centime has a few more decades of life, unless the Swiss give up on using cash before then and simply cancel their coinage altogether.

The 10-centime's fat amount of historic headroom isn't the only factor driving its endurance. Another factor has been the relative strength of the franc, Switzerland's monetary unit, composed of 100 centimes. To illustrate this, let's take a look at its competitor, the American five-cent piece.

Not worth a nickel

Below, I've charted out the market value of the five-cent coin's cupronickel content going back to its introduction in 1866.

Back in 1879, when the Swiss 10-centime was introduced, the U.S. nickel had just 0.4¢ worth of copper and nickel in it, giving it a massive 4.6¢ worth of monetary headroom. But over the decades that headroom has been entirely eaten up by inflation. In 2006 the nickel's metallic content exploded above its face value for the first time, and again in 2011. Since 2020 this state of affairs seems to have become permanent, with the value of the metal currently clocking in at 5.5 cents, around fourteen-times higher than 1879.

The high price of the nickel's metal content has been eating into the U.S. Mint's profits. The chart below shows the amount of seigniorage, or profit, that each coin provides to the mint. Seigniorage is the difference between the face value and cost of producing coinage.

Source: US Mint 2023 annual report

As you can see, in 2023 the U.S. Mint lost an incredible $93 million producing nickels! It hasn't made a profit on the five-cent coin in almost twenty years. That the nickel's metal mix hasn't been updated despite almost two decades of consecutive losses indicates bureaucratic failure. Something at the U.S. Mint is broken.

At the same time, we are seeing signs of the nickel falling prey to Gresham's law as hoarders remove them from circulation. A few years ago, investment manager Kyle Bass, who made his fame shorting various mortgage-related instruments during the 2008 credit crisis, bought 20 million nickels in anticipation of eventually melting them down and selling them for more than their face value. In a conversation with me on Twitter, Bass confirms he still keeps the nickels at a storage facility.

I do other business with the storage facility. My agreement is in basis points of value (less than 25bps) and not sq ft.

— 🇺🇸 Kyle Bass 🇹🇼 (@Jkylebass) February 27, 2024

No doubt other speculators have adopted the same strategy. As metal prices inevitably continue to rise, expect serous shortages of nickels going forward, unless the U.S. Mint finally decides to do something about the problem.

Let's bring the 10-centime back into the conversation. By all rights, the 10-centime should have had a much shorter life than the U.S. nickel. In 1879, the nickel was the more valuable of the two coins by a long shot. At the time, the going exchange rate was one U.S. cent to five Swiss centimes, which means a nickel was worth around 25-centimes. Given that it was worth so much more, the nickel had a much wider region of monetary headroom, and so it seemed destined to enjoy a much longer period of time before its metal value caught up to it and Gresham's law kicked in.

But not so. The less valuable centime has proven more enduring.

As I hinted earlier, the reason for this is the Swiss franc's extraordinary strength over the last century. Below I've plotted out the long-term franc-to-dollar exchange rate.

In 1880, one dollar was worth 5.18 francs. Today, a dollar is worth less than a franc. Put differently, the purchasing power of the Swiss franc and its centime subdivisions has improved by a factor of five relative to the dollar's purchasing power. And so the value of the cupronickel embedded in the 10-centime coin hasn't inflated nearly as fast as the value of cupronickel in the U.S. 5-cent piece. That's why Kyle Bass isn't hoarding lowly 10-centime coins.

The U.S. Mint is belatedly scrambling to make changes to the metal content of the nickel. In its 2022 report to Congress, it asked legislators for the authority to mint an updated five-cent coin made of 80% copper and 20% nickel, the idea being to reduce costs by using more of the red metal, which is the cheaper of the two. Either that or use an alloy known as C99750T-M, which is composed of 51% copper, 14% nickel, the remaining being cheaper-cost metals zinc (33%) and manganese (2%).

In the end, the nickel and 10-centime tell two very different stories. One, a coin that’s run out of headroom, becoming a financial liability for a mint that seems mired in bureaucratic inefficiency. The other, a relic of stability, quietly enduring in a world of change.

Having just emerged from the fiasco of last year's coin shortage (which I wrote about here and here), the U.S. Mint has a new problem on its hands. The melt value of the nickel, or five cent coin, has suddenly moved higher than the coin's face value.

Thanks to the big rally in copper prices, a nickel coin is once again worth more than 5¢ https://t.co/2ZEkkxqEVR pic.twitter.com/2O2ce0eccN

— John Paul Koning (@jp_koning) May 5, 2021

The melt value of a nickel refers to the market value of the 3.25 grams of copper and 1.75 grams of nickel inherent in each five cent coin. In the chart below I've mapped out the melt value of a U.S. nickel going back to 2000, decomposed into its copper and nickel components.

As you can see, the last time that the intrinsic value of a coin exceeded its face value was ten years ago, back in 2011. Thanks to the huge rally in copper prices over the last twelve months, the metallic content of a nickel is currently worth 5.9 cents. In theory, anyone can buy nickels for five cents, melt them down, sell the copper and nickel for 5.9 cents, and earn 0.9 cent profit less costs.

But this trade isn't without its risks. Since 2006, the U.S. Mint has made it illegal to melt down U.S. one-cent and five-cent coins. Rule-breakers can get up to five years in jail. A would-be entrepreneur might try exporting U.S. nickels to Canada to melt them down. But the U.S. Mint anticipated this loophole and also made it illegal to export coins in amounts exceeding $5.

These sorts of punishments might reduce melting. But they are unlikely to stop melting altogether.

The price of copper has risen over the last year, but the price of nickel hasn't matched it. If nickel prices were to rise too and the melt value of a five-cent coin were to hit, say, 8 or 9 cents, then the financial incentive to break anti-melting laws would become quite strong. Cue the problem of coin shortages. If a coin is more valuable for its metal content than as money, it'll quickly disappear from circulation.

Shortages arising from illegal melting would be exacerbated by legal nickel hoarding by speculators. Kyle Bass, for instance, once made a $1 million nickel bet that I wrote about here. Expect many Kyle Basses to emerge out of the woodwork as commodity prices rise.

Careful readers will recognize this as an instance of Gresham's law. When a monetary instrument's value is fixed by the authority, but its intrinsic value is above the amount, then all of this "good" money will be withdrawn from circulation.

What's the solution? 

We've been fighting this problem for hundreds of years and have devised a pretty standard fix. The Mint needs to quickly reduce the metallic value of the nickel. For instance, the U.S. was plagued by shortages of silver quarters in the 1950 and '60s as people hoarded them for their silver content. The solution was to replace silver quarters with cheaper copper ones. (I wrote about these wise debasements here.)

Take another example. In 1982, the high price of copper forced the U.S. Mint to swap its 95% copper penny for a 97.5% zinc penny. Zinc is cheaper than copper. To this day, the melt value of a U.S. penny remains quite a bit below its face value, as the chart below illustrates. (The only exception is a few months in 2007 when high zinc prices pushed a penny up to 1.1¢.) If the U.S. Mint hadn't made the switch from copper to zinc in 1982, then the melt-value of pennies would currently be around 2.5¢, and everyone would be melting them down.

So moving back to 2021, one the U.S. Mint's option to combat hoarding and melting of nickels is a zinc nickel. A steel nickel is another possibility – back in 2000 we Canadians switched our five-cent coins from a nickel/copper mix over to 94.5% steel.

Sure, there would be some hassles. Vending machines often read a coin’s electromagnetic signature to determine its denomination. A move to steel coinage would require the vending machine industry to make significant changes to its coin-reading apparatuses.  

But compared to enduring constant shortages, a switch is a far better idea.

Or here's another option. Why not use the occasion of high commodity prices to get rid of both the one-cent and five-cent coins altogether? These coins are little more than monetary pollution. We don't need them anymore.

 

Last month I wrote an article about banning gold mining. It received plenty of feedback from different parts of the internet. Some loved it, some didn't. [ GATA | Boing Boing | Hackernews ]

In this follow-up post, I want to outline a less draconian and more market-friendly alternative to banning gold mining.

But first, let me quickly reprise the original blog post. Unlike coal or oil or wheat, gold never gets consumed. We mostly "use" gold by holding it in vaults where it is kept safe from wear and tear. If people collectively want to hold more of the yellow metal, then a simple rise in price will suffice. After all, if the price of gold jumps to $4000/oz from $2000/oz then the world's gold hoards will have doubled. Voila, demand satisfied.

With price doing all the work of responding to higher societal demand, no new metal from mines is required. That's a good thing. The problem with gold mining is that it causes all sorts of environmental damage. That's why El Salvador, for instance, chose to ban gold mining back in 2017. Extending this ban to the entire globe would reduce all of the damage caused by mining without hurting gold's main consumers: investors, speculators, and hoarders.  

So that was the gist of last month's post.

In today's post I want to outline an alternative way to move in the same direction as a mining ban. The idea would be for a standards board, perhaps the London Bullion Market Association or the International Standards Organization, to create a new industry standard for gold called "clean gold." Unlike "dirty gold," clean gold would not be implicated in the environmentally damaging effects of mining. Environmentally-conscious gold investors would be able to migrate from their dirty gold to clean gold, which would likely trade at a premium to the dirty stuff.

Clean gold would be defined as all gold in existence before a fixed cutoff date, say December 31, 2023. Any gold produced after that would not be granted clean status. It would be dirty.

By committing to only buy and hold clean gold (i.e. the legacy already-mined stuff) a woke gold investor is choosing to avoid contributing to any additional mining-linked environmental degradation. These investors' collective choice to only buy pre-2023 gold would be a substitute for a gold mining ban. Together, they would be acting as-if gold mining had been banned by governments.

------

One institution that could champion clean gold would be the London Bullion Market Association, or LBMA. The LBMA already maintains a set of standards that define London "good delivery" gold bars, including rules concerning permitted bar dimensions and purity. There are currently 8,790 tonnes of London good delivery gold, worth around $555 billion and accounting for about 5% of all gold ever mined. So the LBMA’s standards have a major influence on what sort of gold is considered legitimate for investment purposes.

The LBMA has already instituted some woke standards for good delivery bars. LBMA responsible gold guidance prohibits bars from qualifying as good delivery if they have been involved in financing conflict and the abuse of human rights. It also sets some environmental standards. For instance, the LBMA requires refiners who buy gold from artisanal miners to assist them in establishing processes to better use mercury.

How would the LBMA introduce a clean gold standard?

The LBMA could redefine its good delivery standard to be a clean standard by only allowing bars produced prior to the December 31, 2023 cutoff date to qualify. Alternatively, it could set up a second delivery standard, a "good & clean delivery standard," and anyone participating in the London gold market could choose their preferred standard.

Exchange-traded funds, say like the State Street's SPDR Gold Shares ETF, the world's largest gold ETF, would also be a natural set of institutions that could champion clean gold. Either in conjunction with an LBMA clean standard, or on it own, the SPDR Gold Shares ETF could commit to only holding gold bars produced prior to December 31, 2023.

Finally, major gold coin-producing mints like the Royal Canadian Mint and the US Mint could also apply a clean gold standard to the coins they produce.

-----  

As I mentioned earlier on, clean gold would trade at a premium to dirty gold. Likewise, a clean gold ETF would trade at a premium to a dirty gold ETF and clean gold bullion coins would trade at a premium to regular bullion coin.

The reason for a premium is that the supply of clean gold would be fixed at the amount of gold in existence prior to December 31, 2023. But the amount of dirty gold is not fixed. Dirty gold includes not only all gold mined after 2023 but all pre-2023 gold. After all, an owner of a 1995 gold bar needn't seek clean status if they don't care for that designation.

If dirty gold were to ever rise to a premium to clean gold, then arbitrageurs would convert clean gold into dirty until the premium disappeared. There are no rules prohibiting movement from the clean to dirty designation. But careful, once dirty always dirty! There is no way to do the opposite, to convert dirty gold into clean in order to reduce the clean premium. The clean gold rules and standards prevent dirty gold conversions.

How large might the premium get? If the gold investment world were to completely migrate over to clean gold, quite high. Most existing gold is currently being held for hoarding purposes. By taking the totality of this demand and refocusing it on pre-2023 gold, the price of clean gold might trade at, say, $3,000 while the price of dirty gold trades at just $300.

On the other hand, the premium would remain low if the clean gold standards are poorly managed and lack credibility.

------

Who would want to buy dirty gold?

Investors who are less concerned about the environment might be content to keep holding dirty gold kilo bars and 400-ounce bars. People who buy gold jewellery might not mind holding dirty gold either, since dirty gold necklaces will be cheaper than certified clean necklaces.

I suspect the main buyers of dirty gold would be manufacturers that use it for industrial purposes, like circuitry. Gold has excellent conductivity. It is also the most non-reactive of all metals, which means that unlike copper and silver it is resistant to corrosion & oxidization.

Given these advantages, manufacturers would love to use more of the yellow metal in their products. However, gold's high price prevents broader industrial usage of gold. The dominant group of buyers—hoarders & investors—keep gold's price perpetually high, thus pushing manufacturers out of the market. And so copper has become the most important metal in electronics. By diverting a large chunk of hoarding demand to a certain type of gold, clean gold, chip makers could finally get access to low-priced gold. Gold would displace copper and the overall quality of electronics products would improve.

Certain manufacturers that want to demonstrate a commitment to having sustainable supply chains (i.e. Apple?) would probably purchase clean gold, and so their products would be more expensive than those without clean gold.

-------

What about coins?

As I suggested earlier, mints such as the US Mint and Royal Canadian Mint would produce two streams of gold coins: clean coins and regular ones. They would buy clean gold feedstock from the LBMA's certified clean gold inventories. The mints would include branding on clean coins to certify their clean status. As for their regular coins, mints would continue to buy newly mined gold from miners.

I suspect that many gold coin buyers would default to the woke alternative. Say that Jack has $10,000 to invest in gold. He can either buy 4 clean Maples for $2500 each or 40 dirty Maples for $250 per ounce. At least with the clean option Jack can feel good he's doing the right thing. Either way, he ends up with the same nominal $10,000 in metal, and it's the nominal amount of metal that most gold investors care about, not the actual quantity of ounces. 

Of course, there are gold coin buyers who like to consume their gold (say like Scrooge McDuck) and prefer to get more bulk for their dollar. They will be happy to buy the dirty stuff.

-----

Gold laundering would be a big issue.

With clean gold trading at a premium to dirty gold, fraudsters would try to profit by converting gold mined in 2025 or 2026 into counterfeit gold bars with a 2016 or 2017 date, and then try to sneak the counterfeit bars through the LBMA's (or State Street's) verification process. These institutions would have to set up effective mechanisms for stopping counterfeit gold bars.

At the same time, the LBMA and State Street would have to find ways to ensure that they are not preventing legitimate pre-2023 bars from entering their systems. Central banks would probably account for a large proportion of pre-2023 bars. Going forward, their holdings would be a key source of clean gold.

Rogue gold coin manufacturers would buy mined gold at $250 an ounce and manufacture fake Maples or Eagles for $2500. Mints such as the Royal Canadian Mint and US Mint would have to introduce additional anti-counterfeiting measures into their manufacturing processes to guard against fake clean coins.

-----

There are plenty of other things that can be said about clean gold, but for now that's probably enough.

In sum, if a clean gold standard was carefully implemented and became popular with investors, it would synthesize many of the same effects of an outright ban on mining. By herding the gold investment community away from the newly-mined gold market, the amount of gold mining would fall, and so would associated environmental damage.

It would also correct a major defect of the gold market. Manufacturers who actually buy gold by the gram for use in their products have always had to compete with investors/speculators who aren't beholden to the same profit and loss calculation as a business. This is just silly. Disaggregating gold into two types corrects this. Investors & speculators can continue with their bets as before by focusing on the first type of gold, and it's clean to boot. And manufacturers finally get access to cheap type 2 gold. It's win-win.

We can all think of examples of state failure. The most obvious include the inability to protect citizens from criminals, failure to provide drinkable water, and incapacity to cope with a public health crisis like COVID-19. I would argue that the ongoing existence of the penny within a nation's borders is another example of state failure.

The poster child for this particular example of state failure is the U.S. and its Lincoln penny. Many (though not all) developed nations have already rid themselves of their lowest denomination coin. (Well-run New Zealand has managed to cancel two of them, the penny in 1989 and the nickel in 2006!) My own country, Canada, was a disappointing failure on this front. But in 2012 we worked up our resolve and put an end to our orange one-cent discs.

In this post I'm going to explore why this particular example of state failure continues to plague the U.S. 

But first, let me make the argument for why pennies constitute a failure of the state.

Any government that still provides pennies is hurting its citizens

Most examples of state failure occur when the government doesn't provide a service or poorly provides one. In the case of the penny, the U.S. Mint, is ably providing us with a service, pennies. But this particular service is a frivolous one, sort of like offering free high fives or back slaps.

Actually, it's worse than silly. Pennies impose a tiny burden on each given individual. But when summed up across the entire population, each of those tiny burdens becomes a huge societal inconvenience. 

Let's take a moment to explore the penny supply chain. The U.S. Mint allocates a large chunk of its manpower and resources to producing pennies, as if these precious little discs were some sort of vital national service. Of the 4.9 billion coins the Mint has produced in 2020, 55% have been pennies.

Fresh pennies then get transported to banks. Stores dutifully buy the tiny discs from banks so that they can give them out as change to customers. But pennies are of too little value to be of any use to us shoppers. We mostly throw them in the garbage or forget them in jars. The conscientious among us redeposit them into the system using Coinstar machines or at the bank. This penny charade goes on and on and on, every hour of the day.

It's a costly charade. The U.S. Mint expends 1.6 cents for each penny it produces. But that's only a small part of the waste. Large quantities of time and resources are expended by all of us—banks, shops, transport companies, consumers—in moving pennies, storing them, counting them, sorting them, and moving them again.

Get rid of the penny and this whole charade ends. Everyone can stop pretending they are providing and/or enjoying an important public service.

So why hasn't the U.S. managed to exorcise itself of the penny? There are two theories. The most popular one is corporate capture. I'll explore that one first. My own personal theory, which I'll get into after, is American monetary populism. This populism gets in the way of the most basic of monetary reforms. (The two theories aren't mutually exclusive.)

The corporate capture theory of the penny

If you explore the oral history of the penny, you quickly learn about the penny lobby. Tennessee-based Jarden Zinc Products (recently rebranded as ARTAZN) is one of the largest producers of coin blanks in the world. Jarden is owned by One Rock Capital Partners, a private equity firm. Its main customer is the U.S. Mint, which buys and converts Jarden's zinc blanks into pennies.

We can dig into the U.S. Mint's financial statements get a good idea how much Jarden earns from the penny. In 2019 the U.S. Mint's costs of goods sold for pennies came out to around $124.9 million (2018: $145.7 million). I get that from the Mint's 2019 Annual Report (see screenshot below with yellow highlights). As the sole supplier of one-cent blanks to the Mint, Jarden Zinc Products gets most (if not all) of this $124 million stream of income. That's a big contract!

Source: US Mint 2019 Annual Report

Jarden has spent decades lobbying Congress to keep the penny in circulation. Below are its annual lobbying expenses going back to 2006, which I get from OpenSecrets. As you can see, Jarden paid its lobbyist, one Mark Weller, $120,000 in 2019. So far it has paid him $50,000 in 2002 2020. That doesn't seem like a bad investment if you want to protect a $124 million revenue stream.

Data from OpenSecrets

Below I've screenshotted a list of all the issues that Mark Weller has addressed in the first quarter of 2020 on behalf of Jarden. Most glaringly, he lobbied the Senate, Treasury, and House of Representatives on "issues related to the one cent coin." This issue consistently appears in each quarterly lobbying report going back to as early as 2009.

Another interesting item on Jarden's list of issues is the Payment Choice Act of 2019, which if passed would oblige retailers to always accept cash. No doubt Jarden is a big supporter of this particular bit of legislation; millions of retailers and banks would be forced to continue stocking one-cent coins, and that would mean more profit for Jarden shareholders.

Lobbying activity for Jarden Zinc in the first quarter of 2020. Data from OpenSecrets.

Nor is Jarden the only corporate culprit.

Coinstar, the company which provides Americans with ubiquitous coin-cashing machines, also benefits from the penny. Earlier this year Coinstar lobbied the government on both the Payment Choice Act of 2019 and the Cash Always Should be Honored Act, or CASH Act, which would make it unlawful for any physical retail establishment to refuse to accept cash as payment. Coinstar also regularly lobbies law makers on "issues related to minting and coinage." I'm going to assume this has something to do with keeping the penny and nickel in circulation, and perhaps converting the paper dollar into a coin. (Note that Coinstar's corporate name was changed to Outerwall in 2013).

Below is a chart showing how much Outerwall (i.e. Coinstar) has paid to its lobbyist going back to 2014.

Coinstar is owned by Outerwall Inc. Data is from Opensecrets

So according to the corporate capture theory, companies like Jarden Zinc Products and Coinstar have managed to twist the legislative process to serve their own agenda.

I should point out that a counter-lobby exists. Citizens to Retire the Penny is an anti-penny group run by MIT physics professor Jeff Gore. Here is its website. But according to the corporate capture theory of the penny, heroes like Gore lack the resources and expertise to out-muscle a slick Washington lobbyist like Mark Weller. The set of groups who are harmed by the penny—banks, citizens, shops—are too diffuse to provide much of a push-back.  And thus the final result is state failure. The U.S. citizenry is being mis-served by its penny-issuing government.

Just because I've shown numbers proving the existence of the penny lobby doesn't mean that the U.S.'s failure to remove the penny is necessarily a result of lobbying. We need more to complete the picture.

After all, we also have lobbyists up here in Canada. And we Canadians still managed to get rid of the penny. Australia, New Zealand, and Singapore also have lobbyists, but none of those fine countries have pennies anymore. To complete the story we need to be able to show that U.S. policy makers are more beholden to special interests than policy makers in other countries. And if so, that would explain why the U.S. is stuck with its orange burden, but the rest of us aren't. But I'm not an expert on differences in national lobbying, so I'll defer on this topic. Anyone have any good insights into this?

Now let's get to our second theory: monetary populism.

The monetary populist theory of the penny

I've spent about ten years writing about both the Canadian and U.S. monetary systems. And one of the consistent differences between the two countries is that Americans of all backgrounds have strong opinions about monetary issues. We Canadians generally don't express much interest on the topic of money and central banking.

I think it's great that Americans get so involved in these issues. Americans are critical and curious and want to know what their central bank, the Federal Reserve, is up to. Canadians' lack of engagement sometimes worries me. To ensure that institutions like the Bank of Canada are serving Canadians, we need to be constantly auditing and debating everything that they do.

Let me offer an anecdote. During the 2007-08 credit crisis I was indirectly involved in the Bank of Canada Act being updated. To help cope with the credit crisis, it was deemed that the Bank of Canada needed to be able to buy a wider range of securities than the law permitted it to. Even though Canada had a minority government at the time, the requisite legislation was quickly shepherded through various committees and then onto the floor of Parliament. Voila, with almost no fuss the Bank of Canada Act was updated and the Bank could buy more assets. I recall press coverage being minimal.

The same process in the U.S. would have attracted massive amounts of press coverage. Think tanks from all parts of the spectrum would have chimed in. The political sniping between Republicans and Democrats would have been loud and vigorous.

If Americans hold a wide range of views on monetary issues, many of these views are anti-establishment. I'm thinking the End the Fed movement in particular. (There is no equivalent End the Bank of Canada movement.) We Canadians tend to be more trusting of our monetary institutions and the elites that run them.

But American skepticism about monetary institutions often slides into knee-jerk conspiracy theories. And that's where I prefer wishy-washy Canadians and their lack of engagement. Whereas there are umpteen U.S. monetary conspiracy theories, there are almost no Canadian ones.

For instance, American monetary conspiracy theorists are currently wildly excited about the national coin shortage. Due to a number of reasons (which I go into here, and Will Luther explores here) there are not enough coins to meet public demand. This shortage is temporary and unplanned. But American monetary conspiracy theorists have reworked this incident into some sort of coordinated effort by the powers-that-be to force Americans onto a cashless digital dollar and ultimately, into subservience to a one world government.

Here is Twitter:  

I’m sorry. In my opinion.. I’m not buying this garbage about a coin shortage. This is steps toward a cashless society and eventually wanting us to have a chip in our hand NWO. Wake up America!!!

— Jeanette be me (@JeanetteMT1) July 15, 2020

And here is Facebook:

Source

Or here. I could provide many more examples. The coin shortage conspiracy theory has gone viral.

And so now I can finish off my theory. A society with a broad range of opinions about the monetary system (many of which are erroneous conspiracies and lies) is going to be much harder to change than a society that is neutral or uninterested about the monetary system. In the U.S., a fix as simple and smart as removing the penny will inevitably be misinterpreted (often willfully so) by crowds of monetary populists. And so any wise bureaucrat or legislator who wants to remove the penny will have to expend huge amounts of extra time combating misinformation. So maybe they won't bother.

And thus the state has failed Americans, and they are stuck with the penny. But we trusting (and perhaps naive) Canadians have been saved.

---

PS: In writing this I forgot to mention my last theory for the U.S. penny. American monetary experts tend to be inward-looking. Foreign monetary experts tend to be much more outward-looking. That is, an American analyst will generally know a lot about the Federal Reserve, but not much about the rest of the world's monetary institutions. But a foreign expert will generally be much more bilingual with respect to monetary systems. As a Canadian, for instance, I'm forced to know a lot about both my own monetary institutions and a list of American ones. A Swede monetary analyst is likely to be trilingual: comfortable with the Riksbank (Sweden's central bank), the European Central Bank, and the U.S. Federal Reserve. 

I worry that this inwardness leads to an incapacity on the part of the U.S. to learn from the successes of other monetary systems. The following nations have rid themselves of their lowest monetary unit: Canada, Australia, New Zealand, Switzerland, Singapore, Finland, Netherlands, Italy, Belgium, Ireland, Sweden, Norway, and more. That's a lot of playbooks to draw from. But many Americans won't know about this--they're too focused on themselves.

The idea behind the trillion dollar platinum coin goes something like this. According to law, President Obama is permitted to take an ounce of platinum, which is worth around $1,500 in the market, and mint it into a collector's coin that says $1 trillion on its face. Obama then heads off to the Federal Reserve and deposits the coin at face value, his $1,500 worth of platinum having been exchanged for $1 trillion worth of fresh Fed deposits.

What is being exploited here is the difference between a collector coin's intrinsic value and its legal tender face value. Anyone who has collected American Eagle's will be aware of this difference. On its face, an Eagle is worth $50. But the coin's intrinsic value due to its gold content is well over $1600.

Do Eagle's pass at their face value or at intrinsic value? Head on over to the US Mint and you'll see that the Mint is selling $50 Eagles at their intrinsic price of $1,900 or so. Coin dealer American Gold Exchange is hocking 1 oz Eagles for $1750.  Aren't the Mint and and American Gold Exchange breaking the law in selling coins so far from face value? Not really. Legal tender laws stipulate the sorts of payment media required in the discharge of debt obligations. In selling collectors coins in retail spot transactions, the Mint isn't engaged in the activity of discharging debts. Nor is American Gold Exchange.

Think about the implications of requiring coin dealers and the US Mint to sell Eagles at face value to all comers. Both would be providing the world with the a great risk-free arbitrage opportunity—and destroying their balance sheet in the process.

Here's another interesting anecdote about collector's coins circulating (or not) at face value. From 1997 to 2003 Robert Kahre, a resident of Las Vegas and owner of 6 construction companies, ran a scheme in which he paid wages with gold eagles at their legal tender face value. Rather than hiring someone for say $50,000 a year payable by check, Kahre paid with 45 ounces of  Eagles with a total face value of $2,250 or so. Their declared income of $2,250 was so low that Kahre's workers didn't have to report their income to the IRS. At the same time, Kahre saved on payroll tax. Win-win. Except for the IRS. In May 2003, Kahre's businesses were raided by the tax authorities. Kahre was at first acquitted in 2007, but in 2009 he was found guilty of tax evasion and sent to prison.

The implications of the Kahre case are that despite what's said on their face, collectors coins pass at intrinsic value in the US.

The ability, indeed requirement, to ignore a collector coin's face value when engaging in transactions with these coins is a matter of common-sense self-preservation. If private coin shops like American Gold Exchange, the US Mint, or the IRS were required to let eagles pass at face value they would all suffer tremendous losses. Likewise, if the market price of an ounce of gold fell to $2, those obliged to accept Eagles at their $50 face value would quickly go bankrupt. Face value on collectors coins is merely symbolic, not obligatory.

With the rest of the US already passing collector coins at their intrinsic value, why would Ben Bernanke be expected to accept a platinum collector coin worth $1,500 at its face value of $1 trillion? He has no obligation to do so. As I pointed out, legal tender refers to the types of media that can be used to discharge debts, and Bernanke is not indebted to Obama in any way. All he does is administer the Treasury's account at the Fed.

Nor can Bernanke choose to forgo self-preservation. Section 16.2 of the Federal Reserve Act obligates him to protect the Fed's balance sheet by stipulating the rules concerning Federal Reserve note collateralization. The Act requires that all notes must be backed by

collateral in amount equal to the sum of the Federal Reserve notes thus applied for and issued pursuant to such application... In no event shall such collateral security be less than the amount of Federal Reserve notes applied for.

This means that notes cannot be backed by an insufficient amount of collateral security. There is a long history behind section 16.2. I've discussed it before here and here. 16.2 has been liberalized over the decades. In the old days, only a small range of assets could stand as collateral, but now almost any asset can back the note issue. Nevertheless, the 16.2 requirement for sufficient quantity of security remains. If a collector coin's market value is only $1,500, then Section 16.2 presumably prevents Bernanke from depositing the coin in exchange for anything over $1,500 in Fed notes and deposits. Any larger amount of notes and deposits applied for and the coin fails the collateral test.

The case could be made that Bernanke would accept the trillion dollar coin if it were to represent a binding debt of the government to repay the $1 trillion loan. But in this form the coin is no more than a bond or promissory note. Instead of being written on paper, the promise is embossed on platinum. Bernanke can't directly accept government debt, no matter if its inscribed on platinum, paper, or a mere digital entry. He can only bring government debt onto his balance sheet after the market has already purchased it. These limits can be found in sections 13 and 14 of the act. Section 13, which governs the Fed's lending powers, does not give the Fed power to lend to the government, while section 14, which governs open market purchases, only allows the Fed to purchase government bonds on the open market.

Of course, we can speculate about the possibility of Bernanke accepting the trillion dollar coin until we turn blue. We only really know what he'd do when the time actually comes. Bernanke might accept the trillion dollar coin at face value, but he'd surely have both tradition and law on his side in questioning his obligation to do so. However, laws and conventions often bend and morph when circumstances dictate. The Bear Stearns transaction via Maiden Lane I and the AIG bailout via Maiden Lane II and III somehow went through, despite what would seem to be explicit warnings against such actions in the Federal Reserve Act. Until it gets minted, I've got to hand it to the Beowulf, the originator of the trillion dollar coin idea, in having created what seems to be the econ blogosphere's most influential idea of the New Year.

[Update: In the comments with Bill W., I mentioned another bit of legalese indicating that the Fed needn't accept coin from either the government or a member bank. See section 13.1 of the Federal Reserve Act: “Any Federal reserve bank may receive from any of its member banks, or other depository institutions, and from the United States, deposits of current funds in lawful money, national-bank notes, Federal reserve notes, or checks.”  More evidence that Bernanke can say no to a government deposit request. May≠must.]