Two Letters Re: Nickels as an Inflation Hedge

Just another data point for you about Nickels, from North Carolina.  My bank continues to order boxes [of $100 face value in nickel rolls] for me, but they were told by their supplier that 20 boxes was the new limit per week (I had asked for 55 boxes).  The funny thing is the manager said they would simply order me 20 boxes/week until I had what I wanted!

They also noted a strong uptick (from essentially none) in customer requesting nickels for the same reason I am getting them – base metal value.  Though none more than a couple of boxes.

I get a sense that pretty soon banks will be either unwilling or unable to give customers nickels in large enough quantities to satisfy demand. Cheers, – Pete C.

I have been following your blog and my wife and I are looking to be more prepared and have been at if for some time.  Your posting on nickels makes sense to me, with one exception:  What good are nickels going to be in hyper-inflated, blown up economic world?  Wouldn’t hyper-inflation make them essentially worthless even if they double?  Shouldn’t already stretched budgets be better directed at larger silver denominations, I.E. – pre-1965 coins?  So, even if the cost doubles shortly, would it be worth storing and carting around for purposes of barter?   Thank you, – David S.

JWR Replies: To clarify, the face value of U.S. five cent coins will soon be just as meaningless as the value markings on seen pre-1965 U.S. silver coinage. (Dimes, Quarters, Half Dollars, and Dollars.) Only a fool, a crack head, or an uneducated child would spend silver coins at face value. Eventually the same will be true for nickels. Why? Pre-1965 U.S. silver coins are now worth more than 25 times their face value. (“25x face.”) Unlike paper money, the nickel coins of the current composition will be never be “worthless”. Since they are composed of 75% copper and 25% nickel (“75/25”), they will always have at least the base metal value of those metals. (Currently about 130% of their face value.) And, as insurance against unlikely deflation and falling metals prices, the nickels could always be spent back into circulation. Thus, they are as close to a “you can’t lose” hedge as you could ever hope for.

Presently nickels are in odd and always short-lived situation for a circulating coin: Their base metal value exceeds their face value. But for now, they are still freely available at their face value. Gresham’s Law dictates that they will soon be driven from circulation. Mark my words: Once the base metal value surpasses 10 cents for the 75/25 composition Nickels, they will almost magically disappear from circulation. Poof! They will be gone.

Something very similar happened to silver Dimes, Quarters, Half Dollars in the mid-1960s. In 1964 they were still found in everyone’s pocket change, but by the end of 1965 they had nearly all been wisely gathered in Mason jars at home and put under lock and key. This is explained by the Coinage Act of 1965, that introduced debased coins (copper slugs that were just flashed with silver), that started circulating side-by-side with the genuine 1964 and earlier silver coins. Gresham’s Law dictated that the new, debased “bad” money would drive the older genuine “good’ money out of circulation. Just a few years later, most of the the 90% silver coins that were deem non-numismatic (derisively called “junk” silver by collectable coin dealers) had been gathered into $500 and and $1,000 face value bags, and traded as a commodity. We need to learn from history. It doesn’t repeat, but it often rhymes.

The same thing will happen to nickels, when the U.S. Treasury inevitably introduces a debased nickel. Coin experts predict that the new five cent piece will either be a stainless steel slug, or a zinc slug that is flashed with nickel or silver. Either way, a “nickel” will no longer contain any appreciable amount of nickel. But being sheeple, folks will probably still call them “nickels”.

Inflation is inexorable. The abandonment of silver coinage by the U.S. Treasury in the 1960s was the inevitable result of currency inflation. The debasement of the lowly nickel is merely the next logical step. There no way that a nation can afford to continue to produce a coin with a metallic content value that exceeds its circulating face value. I therefore strongly recommend that my readers take advantage of this opportunity before the window closes.

Yes, silver coins are great for barter. So is common caliber ammunition. But I predict than nickels might someday have a favored status for small day-to-day purchases. If and when the spot price of silver shoots up past $100 per ounce, it will make even a silver dime too valuable to be used as the smallest currency unit. How will you make minor purchases like a can of beans or a loaf of bread? Even today, with silver at $34.60 per ounce, one silver dime is worth around $2.55. Extrapolated to $100 per ounce silver, that means that one silver dime will be worth the equivalent of about $7.50. So how are you going to make “change” for small transactions? I posit that 75/25 nickels will be ideal for use as that small change. Perhaps people might by consensus make them the equivalent of pennies, with 100 nickels equaling the value of $1.00 face value in pre-’65 silver coinage.

It is difficult to predict exactly how nickels will be traded in the event of a currency collapse. But we can be assured that they will be traded. One of the most dependable constants of a free market is that every tangible product with both usefulness and a limited supply does reach price equilibrium quickly.