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Ban on export, melting extended

A ban on the export or melting of large quantities of U.S. cents and nickels will continue, the federal government announced April 16.

A temporary ban was issued in late 2006 after the world price of copper caused the cent?s nominal value to exceed its face value.

The U.S. Mint says it now costs 1.73 cents to produce each new cent because of other costs such as labor and overhead. Nickel production on the same basis is 8.74 cents on a metal cost of approximately 7 cents.

Melting, treating or exporting selected U.S. one-cent coins, and all nickels, went into effect Dec. 15, 2006, for a five-month trial expiring in April 2007. Mint Director Edmund C. Moy issued a regulation prohibiting the melting with criminal penalties imposed on those who ignore it.

The last time that a melting ban was imposed was in April 1974, as the price of copper in the then 95 percent copper cent rose to near melt levels. It stayed in effect until June 1978.

Earlier, a melting ban was imposed to prevent melting of silver coins during the coin crisis of the 1960s.

All of these are based on use of an obscure proviso in the Coinage Act of 1965. Some 73 years ago, the Roosevelt Administration used a provision in the 1917 Trading with the Enemies Act to ban gold coin melting. A gold coin recall followed; no such recall seems likely for cents or nickels.

The final regulations are not intended to be permanent and are likely to change when the pressure of commodity prices change. Found in volume 72 of the Federal Register at pages 18880-02 (2007 WL 1107391 (F.R.)), the final regs differ from the original proposed and temporary regulations because of comments and response received from the public, and one very specific comment from the Industry Council for Tangible Assets.

?To protect the coinage of the United States, the United States Mint is adopting a final rule that prohibits the exportation, melting, and treatment of 5-cent and one-cent coins. This rule is issued pursuant to 31 U.S.C. 5111(d), which authorizes the secretary of the Treasury to prohibit or limit the exportation, melting, or treatment of United States coins when the Secretary decides the prohibition or limitation is necessary to protect the coinage of the United States. This rule?s purpose is to ensure that sufficient quantities of 5-cent and one-cent coins remain in circulation to meet the needs of the United States.? The rule is effective April 16.
Congress gave the secretary of the Treasury broad discretion to ensure that he can effectively protect the nation?s coinage and to ensure that sufficient quantities of coins are in circulation to meet the needs of the United States.

Secretary Henry Paulson Jr. (acting through Mint Director Moy) has made this determination because the values of the metal contents of five-cent and one-cent coins ?are in excess of their respective face values, raising the likelihood that these coins will be the subject of recycling and speculation.?

The prohibitions contained in this final rule apply only to five-cent and one-cent coins.

The regulation says that ?It is anticipated that this regulation will be a temporary measure that will be rescinded once actions are taken, or conditions change, to abate concerns that sufficient quantities of 5-cent and one-cent coins will remain in circulation to meet the needs of the United States.?

The Mint sought comments on the original regulations proposed and ?received 31 comments from members of the public, businesses and trade associations.? Two commenters fully supported the regulation. One trade association supported the regulation as long as its proposed exception was included in the final regulation. Three commenters stated that the regulation should only be a temporary measure until a solution could be attained on the underlying issue. Eighteen commenters generally opposed the regulation.

The Federal Register notice says that ?One bank and three individuals suggested that the United States government should eliminate the 5-cent coin and the one-cent coin as circulating coinage. The bank stated, ?The cost associated with the creating and handling of these low denomination coins far exceeds their value.? Five commenters suggested that the United States Mint change the content of the 5-cent and one-cent coins to less expensive alloys. Two commenters suggested that the United States Mint eliminate the one-cent coin and alter the composition of the 5-cent coin.?

The Mint sent a heads up to Congress, noting that ?The changes suggested by these comments are outside the scope of the interim rule, which is limited to implementation of the secretary of the Treasury?s authority under 31 U.S.C. 5111(d) to prohibit the exportation, melting, or treatment of coins when necessary to protect the coinage of the United States.?

Specifically, they went on, ?We note, however, that under Article I, section 8, clause 5, of the United States Constitution, only Congress has the power to coin money and regulate its value. Congress determines the denominations, specifications, and design of United States coins.?

Put differently, they are saying that if Congress eliminates the denominations, it?s okay with them.

They acknowledge, however, that the Mint ?has ongoing research into alternative metals for the nation?s coinage. Changing the metal content or the denomination of United States coins requires legislation passed by Congress and approved by the President.?

The Mint says that the proposed regs have been altered such that it would allow ?exportation of 5-cent and one-cent coins having an aggregate face value of up to $25 when it is clear that the purpose for exporting such coins is for legitimate personal numismatic, amusement, or recreational use.? The prior limit proposed was $5.

ICTA, a trade association for rare coin and precious metals dealers, submitted a comment suggesting that an exception be added for the exportation, melting, or treatment of ?war nickels.?

War nickels were five-cent coins produced during World War II, from 1942 through 1945, from a special alloy of copper, silver and manganese in order to conserve nickel for the war effort.

ICTA pointed out that ?war nickels are traded for their numismatic value, they are melted for the value of their metal composition, and that few, if any, remain as circulating coins.?

The Mint responded by saying that ?Because it appears that covering war nickels under the regulation would disrupt longstanding practices and would not further the protection of circulating coinage, we have added an exception for such coins.?

Origins of melting prohibitions of coins go back to World War I and the Trading with the Enemy Act of 1917. That provides that ?During the time of war, the President may, through any agency that he may designate, and under such rules and regulations as he may prescribe, by means of instructions, licenses, or otherwise investigate, regulate, or prohibit, any transactions in foreign exchange, transfers of credit or payments between, by, through, or to any banking institution, and the importing, exporting, hoarding, melting, or earmarking of gold or silver coin or bullion, currency or securities.?

President Woodrow Wilson used the act to regulate gold and silver imports and to hold the threat over the marketplace of banning coin melt ? in an era when bullion was traded between governments to settle accounts. FDR used it to prevent coin melting after he essentially nationalized gold coin.

In the 1960s, silver rose above $1.29 an ounce, the price at which it paid to melt the coins for their metal content, and the nation slipped into a coin shortage of major proportions. The Coinage Act of 1965, signed by President Johnson in mid-year, gave the Treasury secretary unlimited authority to ban precious metal coin melting.

It was almost immediately exercised. The regulation was withdrawn in 1969.

Cents made the hit parade in 1974, as the price of copper in the then 95 percent copper cent rose to near melt levels. On April 10, 1974, 31 C.F.R. section 94.1 saw the Treasury secretary ban melting without his consent; exports of more than $5 face value were also prohibited, except for numismatic purposes.

June 7, 1978, saw those regulations withdrawn by publication in the Federal Register. In mid-July 1978, Mint legal counsel Miklos (?Mike?) Lonkay wrote me in response to an inquiry that ?the secretary, if he deems such action necessary to protect the nation?s coinage, may reimpose the ban on any or all U.S. coin denominations at any time.?

What, then, caused the Treasury chief to reimpose the ban?

Most likely a serious threat to circulation of coinage. That was the pattern in 1933-1934 for gold (there desiring that it not circulate or be melted), in 1965 (when there were prosecutions for silver coin meltings) and in the mid-1970s when the circulation pool of cents was being hammered almost as soon as it left the Mint.

One difference now is that there are statistical studies that show that the cent does not widely circulate, anyway, and instead has an anecdotal attrition rate of nearly 100 percent. (By contrast, the quarter has a virtually zero percent attrition and is continually re-used.)

That changed in 2006 as the current zinc cent?s metal worth increased to more than face value.

What frightens the Mint is the potential melting of older copper cents, which are now worth about 2.13 cents apiece. In the Lincoln Memorial cent series, since 1959, more than 350 billion coins have been produced, of which about 100 billion (face value $1 billion) are copper coins issued prior to 1982, and about 250 billion are zinc coins.

 As articulated in the Federal Register daily, the Mint fears a coin shortage or high replacement cost for coins withdrawn from the circulation pool. ?First, the economic burden on the Treasury, and ultimately on taxpayers, occasioned by the need to replace 5-cent and one-cent coins withdrawn from circulation if these regulations are not implemented could be in excess of $1 million per day,? they claim.

They also believe that ?protecting the 5-cent and one-cent coins currently in circulation, without delay, is essential to avoiding the destruction of coins that would result in high costs to the government.?

From 1789 to 1959, the Mint produced about 28 billion one-cent pieces. From 1959 to 1974, another 62 billion cents ? all of the Lincoln Memorial design ? were added to the pool. In the intervening 32 years, more or less 300 billion more have been produced. This means that more than 360 billion Lincoln Memorial cents have been produced ? more coins than all the other coins produced by every other country in the world, combined, from the beginning of antiquity until the present.

Small wonder that Research Triangle Institute, a North Carolina think tank hired by the Mint to examine U.S. coinage more than a generation ago, recommended then that cent production be terminated because doing so would be ?both less costly and generally more acceptable to user groups than any of the alternative solutions to the penny dilemma which RTI examined.?

In 1976, RTI?s conclusion claimed elimination of the cent ?will be less costly than increasing Mint capacity to meet an artificially-high demand due to attrition caused by the cent?s declining purchasing power? and then went on to say that elimination would ?permit the Mint to reduce its operating costs as well as to avoid the expense of constructing new capacity.?

With nearly 400 billion one-cent coins in the pool, most of which are never in real circulation, it would be hard to argue that their presence was threatened or that a melting prohibition was warranted.

Economics, for now, don?t seem to be an issue, either, While the price of copper is at record levels, it still remains uneconomical to smelt the copper domestically; the cent of profit evaporates with the cost of labor and fuel. Abroad may prove to be a different issue if the price rises.

Affected by the ban are all nickels and cents that have the specifications of current coins ? that?s the copper-plated zinc cent and the 3.121 gram cent (but not older Flying Eagle cents or large cents, for example).

For nickels, it?s the five-gram coin produced since 1866, but not the half dime.

One thing not affected for now: the 2009 congressionally mandated Lincoln bicentennial commemorative coins including a traditional copper cent intended for collectors. To change that would require further act of Congress.

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