New York Diary

The Value of Money

Unusual Sign the American Economy is Going Down the Tubes: Last Thursday, the U.S. Mint banned people from melting down their pennies and nickels. Given the price of metals on the open market, a new penny is now worth 1.12 cents, pre-192 pennies are worth 2.04 cents, and nickels are worth 6.99 cents. (Note that it costs more than this to make a penny; this is just the market-value of the copper and zinc (and it's the same with the nickel - 6.99 cents is the fair market value of the nickel.) Making a coin also requires paying for the shaping, melting, setting, and stamping that go into the whole deal, of course.) People are also banned from exporting the coins (because, obviously, somebody in Nefarious Foreign Country X could melt them down perfectly legally), though this has some practical exceptions for tourists and pneumismatists (and banks?). Now you tell me that if this keeps up there won't be a black market in United States coinage.

Surely the whole point of money is that it is a convenient proxy for a thing of inherent worth, not a way to artificially legislate that something inherently worthy... well... isn't.

If you go to www.coinflation.com, you can get a live tracking of the inherent value of coins currently in circulation.

Thinking about this stuff is really quite an interesting exercise. That's because, for money to work efficiently, we have to pretend that it doesn't have any inherent worth. This is an illusion, of course, and it's an illusion that financiers take advantage of all the time (even without melting coins--all they have to do is a bit of exchange rate arbitrage to show that money is itself valuable.*)

But, when I go to spend a nickel (or, more practically, a greenback), I never keep it in my pocket because of the worth of its constituent parts--and that's the idea. This is not the same as a claim about inflation. It might well be that my nickel doesn't go as far these days, and so I am more careful about how I spend it--but then, I'm hanging on to it because I'd rather spend it on product X instead of product Y, and it no longer is worth enough in the market to buy both X and Y together. But that's a different scenario. What I'm talking about is the kind of scenario where I say, "Look, I could pay for this $4 item with four one-dollar bills--but I'd be willing to give you 200 pennies instead." Nobody ever thinks that the 200 pennies would be a better deal. Why? Because the penny is a proxy for 1/100 of a dollar. That's the whole purpose of the penny--to stand in some relationship to money itself, to allow us to easily exchange our work and worth for our things (and for other peoples' works).

But if you really think about it, if those were old-style pennies, at 2.04 cents-on-the-dollar, you'd really rather have those penny rolls. And that's a bit screwy.

It seems counterintuitive to want your money to be inherently worthless, but in fact, it seems to me that that worthlessness is ennabling. It keeps people from hoarding what is, essentially, an instrument of exchange (unless, of course, they want to be able to exchange it for something else in the future). If we do hoard dollars, it's not because we want the paper they're printed on; we hoard them because we're going to buy that yacht in ten years' time, or because we think inflation is going to fall and they'll be able to buy more stuff tomorrow, or for some other reason that actually has to do with the economy and not the dollar bill.

This makes me optimistic about the cyber-economy.


*Exchange rate arbitrage: a simple concept that people like to pretend is complicated. Let's say I have 10 US Dollars. Here in New York, I can buy 1,200 Japanese Yen for 10 Dollars. Well, in Tokyo, perhaps I can buy 6 British Pounds for 1,200 Yen. And back in New York (or in London, or Chicago, or wherever at all), maybe I can buy 12 Dollars for 6 Pounds. Voila! I have just made Two Dollars, a rather ridiculously high return for rather ridiculously little risk. (Oh, and yes, of course we can buy currency--it's what you do when you go to the foreign exchange window when you get off the plane in Paris, it's what companies do when they need to pay producers in a foreign country, and it's what banks do when they want to hold their reserves in stable dollars or when they need to cover massive withdrawals in a different currency.)

posted by Skay @ 4:35 AM