Yesterday National Public Radio ran a segment on penny hoarders. These are people whose hobby is to hoard pre-1982 pennies. Some even go to their local banks and ask to convert dollar bills into pennies and then spend their evenings triaging boxes of pennies. Why would they do that would you ask? Well, pre-1982 pennies are made mostly of copper and, given the price of a pound of copper tripled over the past ten years, the face value of a penny is half the value of the content of copper: face value is 1 cent, intrinsic value is 2 cents. 100% profit from selling pennies for their copper content!
Now, there is one small problem with this portfolio strategy: It is illegal to destroy government currency. However, the government is considering to demonetize the penny coin because it costs more to make than its face value, and because US residents mostly find it cumbersome to use. If the government ever demonetizes the penny coin, penny hoarders are ready to rush to their local scrap metal dealers.
If people get so existed for a 1-cent difference between the face value and intrinsic value, imagine in the past when differentials were much higher. For those of you who read monetary history, the above should remind you of the “Gresham Law” and the times when the coinage was devastated by current and expected movements in the price of precious metals: clipping, exporting, melting, and sweating of the coinage were common (illegal) methods to gain from current and expected differential between face value and intrinsic value. And in the old times money changers, mint masters and others were not as law-abiding citizens as our contemporary penny hoarders (even though the penalties were severe: death, cutting of hands, etc.). The country was left with clumsy coins—that encouraged counterfeiting and promoted mistrust—and, the quantity of coins became too small to satisfy economic needs.
King fought this through financial means by either debasing (lowering the metal content) or crying up (raising the face value) of their coinage. While debasement or crying up are commonly seen as a bad thing, they were actually central to maintain the quality and quantity of coinage. In the process, however, if done too often, expectations about future debasement and crying up would interact with expectations about future intrinsic value. This created a mess to determine the fair value of coins and the general population ended up having no clue what a coin was worth.
Now all this (among other things) should give some pause to those who want to return to the “good old days” of the gold or silver standards.