Mint or melt?

Metal coins represent a battle between official fiat and profit motive. Price not punishment is key

That coins are being used for any other purpose than settling transactions always worries authorities. So reports about coins being melted in Bengal and Jharkhand will inevitably attract attention in Delhi the finance ministry and Mumbai RBI. Coins, as economists say, are a medium of exchange and a store of value. The fact that they have an underlying value that derives from the material they are made from 8212; therefore their value is not solely determined by fiat 8212; adds to their attractiveness as a store of value. This is why coins are an important medium of exchange during periods of political uncertainty when faith in government treasuries run low.

Some smart operators in Kolkata are melting coins, yet others are taking Indian coins to Bangladesh 8212; all for good economic reasons. The value of the Indian coin is far higher than what the government has decreed its value to be. In May last year the UK faced a similar problem. The BBC reported that copper had become so valuable that melting coins was a profitable activity. In December last year the US faced a similar problem, and it reacted by decreeing that melting US coins was illegal. In both cases India was assigned some part of the blame: high economic growth in India and China was pushing up commodity and metal prices, that of copper in particular.

In India anti-reformists will soon start complaining that not only have reforms taken away livelihood, but are also now taking away coins. But the problem is quite simple. Rational Indian operators are melting coins and getting greater value than would otherwise be available from them. Others are doing the same in Bangladesh. The fact that they are breaking the law has not really deterred such profit maximisers in the past, neither are they deterred now.

Many a fortune may have been made by melting coins. Melting, of course, is not the only option. Some coins are dipped in acids; the metal reacts and is then re-extracted from the acid. Some operators were in the habit of shaving off metal from the sides, which forced mints to produce coins with serrated edges.

But why are coins made of metal? There are historical reasons and there are practical reasons. The coin was a store of value and metals were valuable. Wear and tear is lower when metals are used, they are not likely to break up or turn into powder the way porcelain can, nor are they likely to catch fire like wood. Of course, potassium is a metal that catches fire easily and so there are no potassium rupee coins. Metals are also easy to stamp and design intricate shapes on apart from metals like calcium and mercury, so whether it is lions, an eagle or the queen, everyone8217;s head can be easily reproduced.

But these are all historical reasons. Practically, costs of production are quite high for some of the other alternatives. I can immediately think of carbon fibre coins, ceramic coins, silicone coins; the list can go on. None of these can be melted, are quite hard, and would have most of the characteristics required in coins. However, the costs of producing coins from these substances is quite high. Plus, unlike metals, they are quite value-less. And no one really knows how counterfeiting can be prevented with such materials. Last, coin-operated vending machines these will become more and more popular in this country are able to distinguish counterfeit coins by detecting electromagnetic properties of metal coins. Coins made of non-metal substances would not allow this.

So like it or not, we are stuck with metal coins. Therefore the finance ministry and RBI have to always worry over which metal to use. And about how to deal with frequent fluctuations in commodity prices. The answer: make coins out of cheaper metals that have little intrinsic value. Aluminum is one alternative India has had some experience in, but there are many alloys other countries have tried out. However, if coins of cheaper metals have lower intrinsic value than their face value but are easy to counterfeit, there8217;s a great incentive for counterfeiters. It is these considerations and not stiffer penalties for melting coins that will lead to a good official response.

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When all money becomes electronic, coins will only be collectors8217; items. Their value will be higher than either the value of the metal or the face value. Until that happens, our mints must be sensitive to changing commodity prices and be prepared to frequently change the metallic composition of Indian coins.

The writer heads Indicus Analytics