Melt a Penny, Go to Jail

By Brian Lawler
Yahoo News

Tue Dec 19, 11:42 AM ET

It appears that car manufacturers such as Ford (NYSE: F - News) or aluminum producers such as Alcoa (NYSE: AA - News) aren't the only ones affected by soaring commodities prices. With the price of commodities such as the zinc and nickel used to produce pennies and nickels rising so much so that the coins are worth more in scrap metal than their face value, the United States Mint has passed new regulations making it illegal to melt the coins.

Commodity prices have gone through the roof this past year. Aluminum prices gained 37% in the third quarter alone, causing Alcoa's revenues to rise 19%. So, clearly, any producer selling commodities to the market, as Alcoa does, is feeling pretty good in 2006, whereas companies (or government agencies) relying on commodities in the production of its goods are hurting now. Not only did the Mint make it illegal to melt the coins, but if the regulations hold, traveling abroad with more than $5 of pennies and nickels with you will now be punishable by up to five years in prison. These rules have been implemented because it costs the Mint approximately $0.015 to produce every penny because of the rising commodity prices, and the Mint wants to prevent shortages of the coins in circulation.

This isn't the first time in history when it's been more profitable to melt money than to use it to facilitate economic transactions. In the 1920s, as a result of the crushing debt incurred in World War I, the German government printed more than the equivalent of trillions of dollars. This caused inflation on the magnitude of more than 300% in some months and gave rise to the idea of the "shoe leather costs" of inflation -- workers would get paid multiple times in a day and then run to spend their cash before prices rose again. Eventually, paper money became so worthless in Germany that it was cheaper to burn it for heat than to use it to pay for firewood.

Obviously, this situation in the U.S. is a little different, since it is commodity price inflation, rather than overall rising prices in the economy, that is causing some to resort to melting money. Inflation in commodities usually causes producer prices to increase, such as earlier in the year, when a number of the car manufacturers announced price hikes to make up for rising steel prices. So commodities such as the oft-mentioned value of a barrel of oil or steel are worth watching and often act as a harbinger of future economy-wide consumer-price inflation.

Fool contributor Brian Lawler used to love squashing coins on the railroad tracks behind his house. He does not own shares of any company mentioned in this article. The Fool has a disclosure policy.