We all have at least one collector of currency in our family; usually it's that weird-looking uncle with thick bifocals. Nonetheless, those old coins in that metal box of his, no matter how boring to you, are special! They are special because they are valuable, and their value derives not from their exteriors but from their metal composition (gold or silver).

Now, dig into your pocket and grab that freshly minted, 2001, Vermont quarter you've got in there. Is this coin special also? It certainly looks special!

A sophisticated arts advisor was probably employed in designing its image, which captures both the beauty of the state's mountains and the serenity of its people. Yet, underneath all its impressive engraved details, what is there? What is so special about a "two-bits" Vermont quarter?

Nothing! The coin's face value is derived mostly from magic!

Hundreds of miles away, there breathes a minting press that churns out these round little coins. These quarters are composed of copper and nickel (at a ratio of 9:1); yet the total cost of the metals employed in the quarters' production (their melt value) amounts to less than one fifth of their face value. Using the August 04, 2009 metal prices of copper and nickel, the melt value of a 1965 – 2009 quarter is estimated at 4¢.

Even that melt value is skewed upward. Think of the vast amounts of resources (labor and capital) that must be employed to operate such a scheme. Couple this with the opportunity costs of not employing such resources elsewhere, and add any deadweight losses associated with the distribution of the coin to and from government accounting. I am at a loss to indicate the true value of a quarter, but regardless, what is the point of producing quarters in this way? Why does the government indulge this scheme of generating 4¢ quarters?

The reason is a nifty little tax called seigniorage.

Seigniorage is the tax revenue generated from the difference between the face value of a coin and the cost incurred in producing it. The seigniorage of a Vermont quarter is 21¢ (25¢ face value, minus 4¢ cost) minus whatever costs are incurred by the mint in distributing and eventually retiring it from circulation. The US government is paying us 4¢ for a quarter and pocketing the rest! It is estimated that through this little scheme, the 50 State Quarters Program has generated about $3.5 billion of seigniorage since the program began in 1999.

That's $3.5 billion dollars in inflationary tax all virtually hidden from the public!

So then, what role does coin collecting have in this process? Why does the US government invest in new currency imagery, as in the Mint's 50 State Quarter Program and the newly proposed National Parks Quarter Program set to launch in 2010?

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If, by stamping their coins with different pictures of states or presidents, our leaders can entice a few hoarders into collecting these depressed coins, then the government will have eliminated some of the costs associated with the eventual retirement of the currency. Collectors get stiffed!

But in spite of all the ills I've mentioned regarding that state-sponsored, Vermont quarter you have in your pocket, I will happily trade you this here — even more worthless — Washington note for four of them any day of the week.