Abstract
I investigate in depth the contemporary, nation-wide arbitrage phenomenon of copper penny hoarding. While penny hoarding represents a “pure arbitrage” opportunity, it also clearly demonstrates the knowledge problems that face those entrepreneurs who are fully informed about intra-market price differences. This paper contrasts the Neoclassical and Austrian views on the role of information and knowledge in arbitrage, emphasizing the greater depth in understanding to be gained from the knowledge-based Austrian approach, as opposed to the information-based Neoclassical approach.
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Information: knowledge communicated or received concerning a particular fact or circumstance;
Knowledge: acquaintance with facts, truths, or principles, as from study or investigation; general erudition. Definitions from Dictionary.com Unabridged (v 1.1). Retrieved January 28, 2009, from Dictionary.com website: http://dictionary.reference.com/browse/knowledge
For an excellent historical account of several important Western European currency debasements, accompanied by a rigorous model of currency provision under a metallic standard, see Sargent et al. 2002. The Big Problem of Small Change. Princeton University Press.
As the market price of silver rose above melt parity of $1.29 per troy ounce in the mid 1960s, the mint came into a situation of negative seigniorage with dimes, quarters, and half dollars, all of which were composed of 90% silver. In 1965, dimes and quarters were debased to nickel-clad copper, and the silver content of half dollars was reduced to 40% (see Rickenbacker, op. cit.). In 1971, the composition was again changed to match that of dimes and quarters. As the 1970 half dollar issue was small and restricted to collectors, 1969 was the last year the United States issued coins intended for circulation with precious metal content.
The small copper cent was introduced in 1864, as a cheap substitute for the heavier, copper–nickel cents that had been largely hoarded out of circulation due to their bullion premium which arose from civil war greenback inflation. (see Rothbard, Murray N. 2002. A History of Money and Banking in the United States Before the Twentieth Century. Auburn, AL: Mises Institute, pp. 126-127) Similarly, the nickel 5-cent coin, which contains 25% nickel and 75% copper, was introduced to replace the silver half-dime. The composition of both coins was intended to counteract potential hoarding due to bullion premia resulting from greenback inflation.
Hoarders anticipate either: (1) selling the coins directly to metal smelters or scrap dealers for their scrap price, (a significant discount from spot price); (2) holding the coins over a period of time, anticipating either further increases in the spot price, or the establishment of a premium above face value at which the coins will continue to trade, acting as a quasi-money, without ever actually being melted; (3) selling to other hoarders who anticipate 1 or 2.
The primary market for liquidation of copper pennies was scrap dealers; with the imposition of a coin-melting and export ban by the US Treasury in December 2006, the vast majority of copper penny sales has shifted to eBay and the like; buyers are speculatively anticipating either: (1) continued increases in the copper price, and/or (2) a repeal of the melt ban. There are no legal prohibitions on hoarding or selling copper pennies. Historical experience (i.e., the 1967–1969 melting ban) suggests that the Treasury will repeal the ban once they feel a sufficient supply of new, debased coinage has been produced to take the place of the hoarded-out coins (dates for previous melting ban from Velde, Francois. Chicago Fed Letter 235a, Feb. 2007).
http://minerals.usgs.gov/minerals/pubs/commodity/copper/240798.pdf Average yearly prices.
Data from Yeoman 2007. Although the small copper cent has been in circulation since 1864, 1959 is the most appropriate year to begin a reckoning of the number of copper cents currently in circulation. The present design (Lincoln Memorial cent) was adopted in 1959, which led to a gradual hoarding-out of the previous design (wheat cent) by coin collectors; this collectible or nostalgic value is quite apart from the copper melt value of these older wheat cents. This hoarding process has essentially run its course, with pre-1959 “wheat” cents now representing well less than .5% of the circulating penny stock.
Data compiled by author from individual reports posted at http://realcent.forumco.com -see Appendix C.
Gross melt value = $4.00/lb ÷ 154 pennies/lb × 0.25(418 billion[pennies minted since 1959]) = $2.71 billion gross face value = 0.25(418 billion)/100 = $1.05 billion
gross market value = $.015 × .25(418 billion) = $1.57 billion gross face value = .25(418 billion)/100 = $1.05 billion
Penny hoarders routinely come across pre-1959 wheat cents, some of which are quite rare and command large numismatic premia; additionally, hoarders rarely, but routinely, find pre-1910 Indian head cents, which can also be of high numismatic value, and mint errors, foreign coins, etc.
This estimate is based on personal experience. A good hand sorter can go through two boxes (5,000 coins) per hour with the use of a small scale. At a 25% copper rate, this yields 1,250 copper pennies per hour. At $0.015 per copper, the gross profit comes to (1,250 × $0.015) – (1,250/100[face value]) = $6.25/h.
At the peak of the boom in nickel prices, the profit potential for sorting out 1955-1981 Canadian nickels, which were made of pure nickel, was quite large and far more significant than that for US pennies. see www.coinflation.com/canada/
Though they make use of such tools, professional-level hoarders prefer to obviate the tedious job of "roll-cracking" by dealing strictly with 5,000 count bags of loose pennies.
Due to the melting ban enacted in 2006, the primary market for copper pennies is now eBay. The eBay market has become fairly well standardized in quantity, with the typical lot size being 5,000 coins, and shipping charges, which hover at or slightly above the Postal Service’s flat-rate box rate of $8.95.
v. opening quotation above, p. 1.
Many hoarders or prospective hoarders are informed of the copper penny-bullion premium via www.coinflation.com. A website oriented towards those with sensibilities about inflation and hard money, coinflation tracks the bullion values (the “melt values”) of US gold, silver, and currently circulating base- metal coinage. Whereas the realcent forums are a repository of hoarding knowledge, coinflation.com is a continuously updated repository of price information.
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Appendices
Appendix A
Appendix B
Appendix C
Average rate of copper pennies in circulation
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Watts, T. Arbitrage and knowledge. Rev Austrian Econ 23, 79–96 (2010). https://doi.org/10.1007/s11138-009-0087-3
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DOI: https://doi.org/10.1007/s11138-009-0087-3