 
Economics of Numismatics
Laws Show Some Changes
by David L. Ganz
Column 9 - December 2, 1999
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For nearly 35 years, I have been writing about the economics of numismatics - and how the events of our everyday lives impact our hobby, and the coin industry taken as a whole. This includes rises and falls in the stock market, changes in the consumer price index, announcements of changes in the gross national product of Pakistan.
In the backwater years, economic news was located in the daily newspapers' financial section, usually at the rear, often incorporated into stock tables. It made the front page when the Dow Jones Industrial Average went up 10 points in a single day.
Yes, a 10-point move was significant back in 1965. The whole Dow Jones was under 1,000 (it was 910 that year, declining to 792 in 1966 - and the rate of change for that 10 points was over one percent). It is today's equivalent of a change of more than 100 points on a daily basis - but that's become so commonplace that it doesn't even make the first page of the financial section of the dailies.
Back in 1965, the price of gold was immutably held at $35 an ounce by a force of government intervention. Much earlier, in 1933 during the Hoover Administration, it had been pegged at $20.67 an ounce - the same rate it had been stabilized at, irregularly, since 1837. (At that rate, a $20 gold piece had $19.99 worth of gold metal in it).
The stability of gold - it rose briefly during the Civil War, and a bit later when Jay Gould tried to corner the gold market - was important to American economic development, but also the cause of American economic depressions when the federal government, lacking an appropriate inventory of the metal, was unable to inflate the currency.
By the era of FDR, there was a solid Keynesian belief that the dollar's value relative to gold was seriously understated. The Great Depression is said to have begun when the U.S. economy sneezed, and the world caught pneumonia. One inability to combat it had to do with the government's continued problem in establishing currency into the marketplace.
Another had to do with the way that debt was financed in those days. People had home mortgages - much as they do today -but with an important difference: nearly all were "balloon" mortgages of two or three years duration during which interest-only, or interest and a small amount of principal was repaid.
As bank after bank failed, its first recourse was to seek capital from balloon loans that came due. The borrowers, who typically counted on a continuous refinancing of short-term mortgage debt, went into default.
Governmental ability to find financing was limited to several different sources. Customs and excise taxes (imports fell dramatically, and so did this source), taxes (incomes fell dramatically), taxes on exports (the world wasn't buying as much, either), and from investments (the stock and bond market were in the tank).
When collectors look to this period, and its economics, and politics, it is as exciting as it was then. During the last quarter of the 19th century, the "free coinage of silver" was the dominant political issue of the era - much as pro- or anti- Vietnam characterized the generation of the 1960's.
As government purchasing of silver authority expired, silver dollar production fell precipitously, from over six million pieces in 1892 to a mere 1.4 million in 1893. (The Treasury banknotes of 1890 are a testament to the other silver dollar coinage, since they backed their issue).
By 1894, Professor Friedman shows in his "Monetary History of the United States 1867-1960", the Treasury Notes of 1890 in circulation amounted to $153-million. More than $540 million in gold coin was in circulation that year, and some $390 million in silver coinage. (The bulk of this was not in government hands).
Flash-forward ahead to the Roosevelt Administration and the Depression that had started in 1929. The government's view was that if it could pump up the economy, it could cure the economic cold. To do that, however, there was a feeling that it needed to control gold - which had acted as a storehouse of value.
Gold clauses were frequently written into contracts in those days, calling for rental payments (for example) to be paid in gold coin. Actress Sarah Bernhardt's Broadway show contracts required payment in gold coin after each performance.
In 1933, FDR issued an executive order recalling gold coins, abrogating the gold clauses in contracts, and shortly thereafter, re-valuing gold from $20.67 to $35 an ounce - effectively devalued the dollar by 59%. Gold coins that were not "rare and unusual" - numismatic values were paramount - were declared forfeited to the government at their face value.
They were required to be turned in for melting, thereby increasing the government's control over the money supply. The government's gold stock in 1933 consisted of $2.3 billion in bullion and $806.4 million in gold coin of various denominations. The Federal Reserve held $743-million in gold coin, and a fraction of that amount ($66.5 million) in bullion.
The nation's national banks had $141,000 in gold coin, while the public, state and private banks (other than national banks) had $310-million. From 1934 to 1950, the U.S. Mint melted down the gold coins (most of it 1934-37). $1.3-billion worth of $20 gold pieces were melted ($1.59 billion for all gold coins). When it was over, only $260-million in gold coin remained.
This $260-million treasure trove was all the domestic gold coin and bullion that could legally be owned from 1933 until December 31, 1974, when private gold ownership was again re-legalized. By that time, gold's international convertibility into the dollar had been suspended, a two-tiered market initiated, and profits in gold began to march.
Gold's tie to various international events continued unabated, of course. Price spikes occurred during times of crisis. Inflation, started originally with the Vietnam War, and later from other causes, resulted in substantial runs on the precious metal. The free market governed from 1968 onward, however, and at one point in January 1970, the price dipped below $35 an ounce (slightly). Since then, it has never looked back.
Gold topped out in 1980 at over $800 an ounce; lately, the price has been more closely aligned with $300 an ounce mark - acting almost as a pillar of stability, even as the stock market has gyrated to the extent of two percent or three percent daily in value. Gold's change has been modest.
All of these numbers tie together eventually. Last week, IBM (the computer company) saw a major loss of $23 per share in a single day's trading. Because 1.8 billion shares are held by the public, the loss for that single day aggregated about $35-billion, which is about half of Pakistan's gross national product- for an entire year.
But the shock of that is that gold - and for that matter platinum and silver - simply did not react. Neither did gold react as expected when there was a suspected coup d'etat in the Soviet Union. Instead of going through the roof, it notched down more than a peg. To the same effect when Saddam Hussein sent chemical rockets toward Tel Aviv. Gold simply took to the tank and dropped another $50 an ounce.
Economics, from my perspective, is different now than it was 35 years ago when I first started writing. What is the same is that as the numbers are announced, they have an effect on coin prices - and on the coin industry - even if it is not necessarily what would have been predicted in the past.
This makes charts, and other analysis, more significant, because in part it allows for trend-lines to be created, and to get a general sense of where coin prices are going. What it also does is make periodic reviews and commentary essential, and make price guides published a useful tool in understanding the process.
As the year 2000 approaches, it seems clear enough that the universe of collectors is expanding. The Mint's 50 state commemorative coin program, alone, has seen to that. So have efforts of the American Numismatic Association and the Professional Numismatists Guild.
What that may well translate into, if it can be marketed properly, is a translation of the economics of the new millennium to move the rare gold coin market - those left from the major melts of the 'thirties, and the contemporary modern issues that are perhaps even more scarce than the melted-down remnants of a century ago, and more.
Look at your Guidebook or Standard Catalogue, and compare the mintages. Economics 101 tells you that supply and demand will set the price. There's an increasingly smaller supply, and a higher demand. Let's wait and see if the traditional laws still work here.
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David L. Ganz
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