That coins are being used for any other purpose than settling transactions always worries authorities. So reports about coins being melted in Bengal and Jharkhand will inevitably attract attention in Delhi (the finance ministry) and Mumbai (RBI). Coins, as economists say, are a medium of exchange and a store of value. The fact that they have an underlying value that derives from the material they are made from — therefore their value is not solely determined by fiat — adds to their attractiveness as a store of value. This is why coins are an important medium of exchange during periods of political uncertainty when faith in government treasuries run low.

Some smart operators in Kolkata are melting coins, yet others are taking Indian coins to Bangladesh — all for good economic reasons. The value of the Indian coin is far higher than what the government has decreed its value to be. In May last year the UK faced a similar problem. The BBC reported that copper had become so valuable that melting coins was a profitable activity. In December last year the US faced a similar problem, and it reacted by decreeing that melting US coins was illegal. In both cases India was assigned some part of the blame: high economic growth in India and China was pushing up commodity and metal prices, that of copper in particular.

In India anti-reformists will soon start complaining that not only have reforms taken away livelihood, but are also now taking away coins. But the problem is quite simple. Rational Indian operators are melting coins and getting greater value than would otherwise be available from them. Others are doing the same in Bangladesh. The fact that they are breaking the law has not really deterred such profit maximisers in the past, neither are they deterred now.

... contd.