John Pugsley is the Chairman of The Sovereign Society. A long-time hard-money advocate, he authored several best-sellers in the 1970s and 1980s, including Common Sense Economics, The Alpha Strategy, and The Copper Play. He is currently editor of The Stealth Investor, The Sovereign Society's investment trading service that focuses on precious metals and other hard assets.
Dear A-Letter Reader,
Of all the tricks devised by thieves and politicians (apologies for the redundancy), the debasement of coins must go down as the oldest con game in history. And yes, it's still working on a gullible public. The elderly among us remember the disappearance of the $20 gold piece in the 1930s. Most baby boomers remember the burial of the silver dollar a scant four decades ago. Now, sadly, the death of our dear old penny approaches.
What a wry joke on old Ben Franklin (who, by the way, suggested the design for the first American penny), that he must revise his aphorism from "A penny saved is a penny earned," to "A penny saved is a waste of time." The penny ain't worth a penny anymore.
You're watching Gresham's Law in action. Sir Thomas Gresham, a sixteenth-century English merchant and financier, gave his name to the economic principle that "bad money drives out good." When depreciated or debased coinage (or currency) circulates alongside money of high value in terms of precious metals, the good money automatically disappears from circulation.
You see, the penny is the "good money." Then what's the "bad money?"
The U.S. Dollar. One penny is 1/100th of a dollar, and since the dollar has lost some 99% of its purchasing power over the past century...then so has the penny. The penny coin is just too close to worthless to be made out of something as valuable as metal. So, the valuable metal has been gradually stripped out as the purchasing power of the dollar has fallen.
The first U.S. one-cent coin, struck in 1787, was 100% copper. This composition continued until the mid-1800s, at which point it was alloyed with a slight amount of tin and zinc. From then until about 1942, the penny was composed of 95% copper and 5% tin and zinc. With copper and tin in short supply during World War Two, the government started making pennies out of galvanized steel. (Over a billion of these grey coins were minted, and as a kid I remember them well.) After the war it was back to copper, tin and zinc.
By the early eighties, however, surging copper prices (due to the falling value of the dollar) brought the manufacturing cost of a penny close to its denomination. Pretending to be frugal, and to save us poor taxpayers money, the Treasury stripped out most of the copper and substituted a cheaper alloy of 99.2% zinc and 0.8% copper. But today the price of zinc, too, has soared, so it now costs the mint 1.23 cents to make a zinc penny. Aye, Mr. Gresham, smile knowingly in your grave. The bad old dollar has driven the good old penny out of circulation.
It's an old story that was well documented way back in Gresham's day. Kings discovered early in history that debasing coinage was a slick way to secretly tax their subjects when their tax collectors ran up against resistance. Knowing that copper, silver, and gold were the public's preferred barter-medium, kings and emperors had their royal portraits stamped on slugs of the metals, announcing that this was the king's guarantee that there was a certain amount of gold, silver, or copper in each coin.
Ah, folly. Never trust the government. Soon the public came to trust the coins, and then as coins were collected in tax, the crafty monarch would have his royal treasurer clip a bit of metal from their edges, and mint the clippings into more coins. As he spent them, more and more coins in circulation reduced each coin's purchasing power. Voila! Inflation.
As you pass up that penny lying in the street, reflect on Ancient Rome. In the fourth century BC, a widely-accepted Roman "coin" was an ingot of copper-the as-weighing in at a hefty one pound. Over the ensuing four centuries, a string of emperors steadily whittled away at it. By the middle of the third century BC, the weight had dropped to four ounces. By the end of the First Punic War, around 240 BC, it had shrunk to a mere two ounces, and by 70 BC, it weighed no more than half an ounce.
Ha! Those novice debasers were pikers. It took them 300 years to steal 97% of the coin's value. The U.S. government has taken less than 100 years to strip out 99% of the value of the penny. Well, we might as well call it 100%, since these little tokens aren't worth bending over to pick up off the sidewalk.
The Roman emperors were slow debasers because they were using primitive monetary technology. Some 2,000 years later, with the invention of paper money, the printing press, and now cyber money, our modern coin-clippers have reached a new level of efficiency. And the debasement is accelerating. Soon you won't bother to pick up a dime, or a quarter, or even a 50-cent piece! (Unless, of course, you find one of those pre-1965 ones that were still made of real silver.)
What's a frustrated citizen to do in the face of such chicanery?
Begin doing the same thing the citizens of Ancient Rome did. Start using and hoarding the "good" money that bad money has driven away. The best defenses against the old con game of monetary debasement are still good old natural resources including copper, silver, and gold, using everything from coins, to bullion, to mining stocks, to electronic money such as GoldMoney.com.
Then you can walk right by those worthless pennies on the sidewalk without a care in the world.
JOHN PUGSELY, Chairman
on behalf of The Sovereign Society