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Jan 23, 2007

Gresham's Law -- in Action in 2007

1d62r The theory holding that if two kinds of money in circulation have the same denominational value but different intrinsic values, the money with higher intrinsic value will be hoarded and eventually driven out of circulation by the money with lesser intrinsic value.

-- Gresham's Law, as defined at Answers.com

Some years ago I learned Gresham's Law in a shorter version that said (more or less) "if the metal in money is worth more than the money's face value, people will hoard the coins."  "Yeah, right," I said.  Who would ever work that hard for the nth of a cent it would be worth?"

Apparently, speculators do.  From Reuters:

Sharply rising prices of metals such as copper and nickel have meant the face value of pennies and nickels are worth less than the material that they are made of, increasing the risk that speculators could melt the coins and sell them for a profit.

Such a risk spurred the U.S. Mint last month to issue regulations limiting melting and exporting of the coins. But Francois Velde, senior economist at the Chicago Fed, argued in a recent research note that prohibitions by the Mint would unlikely deter serious speculators who already have piled up the coinage.

"History shows that when coins are worth melting, they disappear," Velde wrote.

Raw material prices in general have skyrocketed in the last five years, sending copper prices to record highs of $4.16 a pound in May. Since 1982, the Mint began making copper-coated zinc pennies to prevent metals speculators from taking advantage of lofty base metal prices. [click --> full article at Reuters.]

From what I can glean in various articles like this one (from Nobel-winning economist Robert Mundell) or this one (by the non-Nobel-winning but better-writing economist George Selgin), Gresham's Law is often misquoted or misinterpreted.  Sounds like it could use an entry in the Dictionary of Allusions.

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1962 British penny from here.

01:19 PM in Misc.Blog 2007, Quotables, Words | Permalink

Comments

That....seems....too much hassle for me. Can you imagine the weight involved? And the extraneous expenses? Like transportation. You'd have to rent something to carry all that around. You'd have to pay people to load and unload them. Then there's the percentage to the person melting and separating the amalgam (pennies aren't 100% copper are they?). Or else you'd have to purchase the material and train yourself to do it. AND the time involved!! No way.

See how things tend to overwhelm me? :-)

All that said, I can see how people who are dreamers like me might *hoard* the coins, thinking about The Possibilities!! and then never do anything about it.

Posted by: Stew | Jan 23, 2007 2:23:17 PM

I think they should just do away with the penny - it's a pain in the ass. If stores set their prices to include sales tax (a la Locopops new price), then we would never need them anyway.

However, my quarter collecting has ground to a halt because I can't find the latest state quarters. I was hoping to present my son with the complete set because that will probably be the most valuable heirloom he's going to get. De-hoard, hoarders!

Posted by: Marianne | Jan 24, 2007 8:32:53 AM

Marianne:

Penny-elimination is mentioned in the full Reuters article. I've added a link, above. In your time growing up in Scotland, did you see the removal of any small currencies, or did that happen before your time?

I think about the couple of changes that have happened in the US: addition of the Susan B. Anthony dollar (pfft.) and the use of the 2-dollar bill (WTF?)


The state quarters won't all be released until 2008, so you might want to reschedule your gift giving! Here's the schedule:

http://www.littletoncoin.com/html/Quarter_Release.html

Last year I gave my mom a fun display-map-of-the-US with a slot for each quarter. She keeps it displayed in the living room where it really is kind of fun to look at -- with info on each state's date of accession and an easy way to check out all the quarters at once. I found the book at Hungates for ~$13.

Posted by: Phil | Jan 24, 2007 3:14:35 PM

Also, do folks remember the news from last November stating that the US might have to re-do all its paper money? A federal judge said that the uniform size and color of our existing bills violates the Rehabilitation Act which has various requirements for preventing discrimination against the visually impaired (or "requirements for assisting the visually impaired", depending on how you look at these things).

While others may be debate the appropriateness of this law and its implementation, I am thrilled at the prospect of getting completely redesigned and better looking money.

See here for a picture of how the Canadians do it:

www.craigmarlatt.com/canada/images&downloads/downloads_misc_currency.html

Full article on the Rehabilitation Act decision here:

www.finextra.com/fullstory.asp?id=16213

Posted by: Phil | Jan 24, 2007 3:30:38 PM

Well, I vaguely remember the switch to decimal. We were taught math as young 'uns with 12 pennies to the shilling and 20 shillings to the pound. So if you tendered a pound for something that cost 10/6 (ten and six), how much change would you get?

I also remember the demise of the ha'penny (haipenny). The local sweet shop had a ha'penny tray with candy you could get for that amount. Now there's a pointlessly small amount of money.

And no, I'm don't remember Queen Victoria's coronation.

Posted by: Marianne | Jan 25, 2007 7:46:18 AM