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Resesurdh Bep&irtnMimtb

August 23,1974

The American public has been
hoarding pennies in recent months
in the expectation that the price of
copper would rise above $1.51
per pound, making the metal value
of the coin greater than its face
value. Many people also have been
hoarding because of a belief that the
Lincoln copper penny would be­
come a prized numismatic item, in
view of the Treasury's proposal for
changing the metallic composition
of the coin.
However, the public apparently has
overlooked the fact that prices have
declined sharply following the 1973early 1974 upsurge in free-market
copper prices. The price of copper
on the London Metal Exchange—
the freely fluctuating quotation
upon which foreign producers base
their selling price— has plunged
during the last several months from
a record $1.52 per pound to less
than the 85-cent price currently
quoted by domestic producers. That
decline has occurred in the face of
supply interruptions caused by a
month-long strike in the U.S.
copper industry.
Demand versus supply
The Treasury's decision to seek
Congressional authorization for
changing the copper content of the
one-cent coin was motivated by
last year's unprecedented upsurge
in world prices. The demand for
copper rose sharply in 1973 as the
industrialized nations of the world
experienced their strongest expan­
sion in economic activity since the
Korean War. As a result, deliveries
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of refined copper to fabricators
throughout the non-Communist
world rose by 9 percent— or twice
the annual rate of gain during the
prior decade. Speculators mean­
while bid feverishly for copper on
the commodity exchanges as they
sought protection against world­
wide inflation and depreciating
currencies.
In the face of this upsurge in
demand, world production rose by
only 1 percent last year, as labor
disputes, equipment breakdowns
and political upheavals adversely
affected output. The copper industry
had long been subject to frequent
interruptions in supply, since many
of the world's largest mines are
located in politically unstable coun­
tries. The United States and Canada,
the two largest producers in the
non-Communist world, account for
about one-half of total mine pro­
duction, but another one-third is
produced in Chile, Zambia, Zaire
(Congo) and Peru, where political
upheavals and changes in mine
ownership have held the growth of
output in recent years below
targeted levels. By early 1974, all
four of these countries had taken
over full or partial ownership of the
copper properties located within
their boundaries.
Even with the industry's long his­
tory of instability, an inordinately
large number of "forces majeures"
— noncontrollable cutbacks in ship­
ments— occurred last year. In
Zambia, a border dispute with
Rhodesia delayed exports of metal
(continued on page 2)

Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.

as well as imports of copper-pro­
ducing equipment. In Chile, work­
ers struck the El Teniente mine for
77 days, resulting in production
losses of nearly 75,000 tons, and
the internal political discord which
culminated in the September coup
d'etat disrupted production even
further. In the U.S. and Canada, fur­
nace breakdowns and the difficulties
of installing pollution-control
equipment resulted in a rash of
force majeures by major producers.
The gap between refinery produc­
tion and shipments was filled by a
sharp reduction in inventories.held.
by producers, fabricators and metals
exchanges.
Initial price surge
The outcome of this tight supply
situation was a doubling of world
copper prices over the course of the
year, with the London price soaring
from 51 cents to $1.01 per pound.
The Cost of Living Council per­
mitted domestic producers to raise
their price 17 percent (to 60 cents
a pound) by March 1973, but a wide
gap later developed between the
soaring world price and the domes­
tic ceiling price, leading to a
heavy outflow of U.S. metal to
higher-priced overseas markets.
Another (December) increase in the
U.S. price, to 68 cents a pound, did
little to stem the outflow.

The Treasury thereupon asked Con­
gress for authority to change the
one-cent piece from 95 percent
copper and 5 percent zinc to a 96percent aluminum alloy. The freemarket (London) price at that point
was $1.11 per pound, and the
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Treasury feared that it might soon
reach $1.20 per pound— at which
price the cost of producing the
penny, including material and labor,
would exceed the face value of
the coin. For that matter, at a $1.51
price, the metal content alone would
equal the face value, stimulating the
hoarding of coins for melting.
Downward spiral
Two important developments later
obviated the need for a new coin­
age. First, Congress passed legisla­
tion last December authorizing
the sale of copper from the national
stockpile. The Mint then purchased
30,000 tons from this source at 75
cents per pound, and last month
bought another 5,000 tons from
dealers at 89 cents per pound, to
meet its copper-penny require­
ments through the rest of this year.

More importantly, world copper
prices have declined sharply from
the $1.52 peak reached in April,
when the speculative bubble asso­
ciated with the Arab oil embargo
was at its worst. The quotation sub­
sequently plunged almost without
interruption to a present level of
82 cents per pound— below the pre­
vailing U.S. producer price of 85
cents— and undoubtedly would
have fallen even further but for
this summer's strike in the U.S.
The decline was triggered by a
heavy speculative sell-off, attribut­
able to rising interest costs on
inventory and (especially) to a
fundamental improvement in the
overseas supply-demand situation.
Copper production outside this
country ran 15 percent above the

year-ago level during the first six
months of this year, and since de­
liveries to fabricators rose by only
1 percent, inventories jumped 45
percent above their year-earlier
mark. For this reason, prices on the
exchanges are likely to continue
downward now that the U.S. strike
has been settled, despite the tight
supply situation in this country
caused by persistent equipment
problems and the end of stockpile
sales. Moreover, the huge increase
in worldwide primary capacity
scheduled to come on stream
during the 1974-78 period suggests
the absence of significant price
pressures for several years to come.
The evidence thus indicates that
the Mint will be able to purchase
all the copper it needs to meet its
1975 penny production require­
ments for less than $1.00 per pound
and, in addition, will have little
difficulty in meeting its later needs.
The Mint plans to purchase 20,000
tons from dealers this month on a
sealed-bid basis in an attempt to
satisfy the bulk of its 1975 coin­
age requirements.
Even if copper prices were to rise
above the $1.51 per pound "melting
point" and the composition of the
penny had to be changed, it is not
at all certain that the new coin
would be an aluminum alloy. Ad­
mittedly, aluminum is durable,
widely available, and easy to fabri­
cate, and its light weight assures
that the metal cost of the penny
would remain significantly lower
than its face value for a long time
to come. Approximately 500 pen­
nies can be produced from a pound
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of aluminum, compared with 150
for copper. But because of the oper­
ating problems that aluminum pen­
nies would cause for the vendingmachine industry, it is unlikely that
Congress will authorize such a shift.
In June, the House Banking Com­
mittee approved a measure that
would authorize the Treasury to
reduce the copper content of the
penny to 70 percent if necessary,
but it rejected the use of an alumi­
num alloy.

l ------------3

Meager return
The introduction of a new coin
would not necessarily endow the
present Lincoln penny with numis­
matic value. The Mint has produced
over 62 billion Lincoln pennies of
identical design during the last 15
years, so the coin does not have
the characteristic of rarity required
in establishing value for any col­
lectible item. Currently the Mint is
producing 35 million every day—*
almost twice as many as a year ago.

Moreover, because of the miniscule
amount of metal in each coin, a
collector would have to acquire
an enormous number of pennies to
earn even a modest return. For
example, even at a price of $1.57
per pound, a person would have to
collect 240,000 pennies— with cop­
per content of 1,600 pounds—to
earn only $100 more than the $2,400
face value. Furthermore, out of that
$100, storage, transportation and
brokerage costs would have to be
deducted. And melting could not
occur at all unless the Administra­
tion lifted the present ban against
melting or treating of coins.
Yvonne Levy

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BANKING DATA— TW ELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks

Amount
Outstanding
8/7/74

Change
from
7/31/74

Change from
year ago
Dollar
Percent

+
+
+
+
+
+
+
+
+
+
+
+

+8,653
+ 7,760
- 490
+ 3,082
+ 2,695
+ 750
- 188
+ 1,081
+ 7,261
+ 1,311
+
99
+ 5,992
67
+ 5,991
- 312
+ 3,926

417
212
110
73
25
2
200
5
296
651
46
51
11
185
214
122

Loans (gross) adjusted and investments*
Loans gross adjusted—
Securities loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other Securities
Deposits (less cash items)— total*
Demand deposits adjusted
U.S. Government deposits
Time deposits— total*
Savings
Other time I.P.C.
State and political subdivisions
(Large negotiable CD's)

84,461
66,370
1,712
23,494
19,677
9,425
5,059
13,032
79,419
22,679
401
55,286
17,804
28,339
5,960
15,138

Weekly Averages
of Daily Figures

Week ended
8/7/74

Week ended
7/31/74

Comparable
year-ago period

86
181
95

40
477
437

68
239
-1 7 1

+ 1,417

+ 1,857

+ 109

+

+

+ 266

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free (+ ) / Net borrowed (—)
Federal Funds— Seven Large Banks
Interbank Federal funds transactions
Net purchases (+ ) / Net sales ( - )
Transactions: U.S. securities dealers
Net loans (+ ) / Net borrowings (—)

-

480

-

399

+
+
+
+
+
+
+
+
+
+
+
+

11.41
13.24
22.25
15.10
15.87
8.65
3.58
9.05
10.06
6.14
32.78
12.16
0.37
26.81
4.97
35.02

*Includes items not shown separately.
Information on this and other publications can be obtained by calling or writing the
Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
San Francisco, California 94120. Phone (415) 397-1137.
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