What's a penny worth?

Thursday, February 01, 2007 | 10:30 AM

Amusing analysis of the value of coins in circulation, via the Chicago Fed:

"In the old days, a commodity was chosen to serve as both the standard to measure value and the medium of exchange. Thus, if silver was the chosen commodity, prices were measured in, say, pounds of silver, and lumps of silver of a standard size (called “coins”) were exchanged for goods and services. This is called a commodity money system. In the early Middle Ages, there was only one size of coin; it was called the penny and made of silver with a little copper alloyed for hardness.

The quantity of money in circulation was determined by two actions: minting and melting. The stock of money increased through minting new coins, which could be done by monetary authorities on their own account or by private individuals taking metal to the mint for conversion into coins. The stock of money decreased through the melting of coins. If the price of metal in terms of money fell enough, it became profitable to convert metal into money by minting it. Conversely, if that same price rose high enough, it became profitable to convert coins into metal by melting them down. Minting and melting maintained within bounds the value of money relative to metal and to all other goods. Import and export of coins served the same purpose in keeping domestic prices in line with world prices.

Over time, the needs of trade required large silver coins and gold coins. The difficulty of maintaining fixed exchange values between coins of different sizes and different metals had two consequences. One was a process of repeated “debasements” that increased the proportion of copper in small denominations to make its content cheaper, so that by the eighteenth century the penny was made of copper. The other was, after much experimentation, the adoption in the nineteenth century of the gold standard."

Note that, thanks to the increases in commodity prices, a nickel is now worth more than 5 cents:


The Quarter remains the government's most profitible coin: Less than a nickel's  worth of metal, selling for 5X that amount!


What's a penny (or a nickel) really worth?
François R. Velde
Chicago Fed Letter, February 2007

Thursday, February 01, 2007 | 10:30 AM | Permalink | Comments (13) | TrackBack (0)
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Re: Commodities and inflation...

From Ticker Sense:

ISM Inflation
In this month's ISM commodities survey, respondents said they saw price increases in five commodities and price decreases in six, for a net of minus one. Below we have updated our chart which shows the relationship between the ISM commodities survey and the CPI. Historically, trends in the CPI have been preceded by the ISM survey. If this month's survey is any indication, then the up tick we saw in December's CPI report will prove to be short-lived.

Posted by: Fred | Feb 1, 2007 10:56:01 AM

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