The Coinage Crisis

December 7, 1964

The U.S. Government is faced with a coin shortage and a very awkward problem in relieving it. A few months ago the Treasury doubled its coin-volume goals for this year and 1965. Congress approved construction of a new mint, but it won’t be ready before 1967. Since spring, both U.S. mints, in Philadelphia and Denver, have been working around the clock seven days a week. All twelve Federal Reserve Banks now ration coins to their member banks. In late August, Congress passed a bill indefinitely extending the 1964 date on all coins into 1965—and possibly thereafter—to discourage hoarding or speculation by collectors.

But the problem goes much deeper than the past failure of the government to do sufficient minting. It lies in the rise in the consumption and in the price of silver. The demand for coins has increased because of the constantly rising volume of business as well as of prices—and also because of the increase in vending machines and in coin collecting. But the industrial demand for silver has been rapidly increasing, not merely for its older uses in plate and jewelry, but for photography (for which no present substitute exists), for electronics, and for space technology.

In 1963 world consumption of silver in industry and coinage was estimated at 422 million ounces, whereas new mine production was only about 238 million ounces. This imbalance between production and consumption largely explains the rise in silver prices.

BOOM IN SILVER

Why hasn’t the increased demand and price led to the production of more silver? The answer is that two-thirds of current output is merely a by-product in the mining for other nonferrous metals. Mining activity is mainly determined by the market for these metals rather than for silver. The difference between current production and the much greater current consumption is made up partly by purchases from government stocks.

The price of silver went up to $1.29 an ounce in July 1963. It has not gone higher, in spite of increased demand since, because this is the official price at which the government redeems its silver certificates. As long as it stands ready to do this, $1.29 will remain the ceiling price. But if the government stopped “selling” silver at this price, or if its monetary stock of 1,387,000,000 ounces of silver ran out, the price would be free to move to $1.38 or more. At that price silver coinage in circulation (more than $1 billion) would be more valuable as bullion than as money, and would be melted down or exported.

At the new annual minting rate of 275 million ounces, the government’s silver stock will be used up in five years. Speculative action could bring a crisis much sooner. (Fuller presentations of the existing situation can be found in an article by Elizabeth Gillett in The Commercial and Financial Chronicle of Aug. 27 and in a pamphlet study by Dr. Elgin Grose-close published by the investment firm of Cyrus J. Lawrence & Sons.)

POSSIBLE REMEDIES

Disregarding proposals that would only make the situation worse, three possible solutions have been offered to this problem: (1) an immediate cut in the silver content of all newly minted silver coins to one-half or less; (2) a complete abandonment of silver in subsidiary coins, substituting some cheaper metal; and (3) the Groseclose proposal to revalue all silver in circulation by double.

The snag in the first two proposals is that either would probably lead to immediate hoarding of existing silver coins, causing a serious coin shortage until perhaps the existing full supply had been replaced. The third proposal is designed to avert this, but might cause it to an even greater extent while it was being debated in Congress. It would mean a windfall profit to holders of such coin. More importantly, it would cause great confusion to count a dime as 20 cents, a quarter as half a dollar, and a half dollar as a dollar, particularly if substitute coins circulated side by side.

But the longer action is postponed the more serious the problem will become. A fundamental cause in the rise in the price of silver in the last 25 years, of course, has been the depreciation of the dollar through inflation.