Mises Wire

Nickel: How Government Alchemists Turned a Base Money Hard and Now Are Expected to Kill It.

The nickel, the once popular US five-cent coin, is known for its nickel content (25 percent nickel and 75 percent copper). It originated as a type of fiat money in that its intrinsic metal value was far less than the purchasing power stamped on it. The final act in the illustrative monetary career of the nickel is expected to be extinction, as with the penny, as inflation increases the coin’s cost of production and reduces its real purchasing power.

Nickel is an important metal for many industrial purposes, and its hardening and anticorrosive properties explain why it is used in many US and EU coins. There are a few thousand different nickel alloys used in commercial production and a few hundred thousand aerospace, architecture, consumer, industrial, and transportation products that require nickel. Its use is highlighted in military, monetary, and battery applications.

Despite nickel’s economic importance and even the recent chaos in its wholesale market, there is almost no media coverage or economic commentary on the metal. Most economists do not know anything about nickel and generally ignore it.

However, like many commodities, nickel can serve as a microcosm for economic analysis and improve our historical understanding of inflation. Despite its origins as a fiat money, nickel has ironically become a marker for price stability in more recent decades. However, in the end, economists are expected to sign off on nickel’s death sentence handed down by the Federal Reserve and its inflationary crusaders.

Nickel and Society

The very core of the earth is thought to be made of iron and nickel, and the outer core is estimated to contain 5 percent nickel by weight. Nickel’s use has been recorded for more than five thousand years, although it was only identified as a unique chemical element in 1751.

Nickel got started in the US as a fiat coin money after the Civil War, when money was tight and the government was slowly moving back to the gold standard. With standard money such as gold or silver, undervalued coins like the nickel will circulate based on Gresham’s law (“bad money drives out good money”). However, you could still collect twenty nickels and get a silver dollar or collect twenty silver dollars and get a one-ounce gold coin, such as the US Liberty Double Eagle, so the dollar and its nickels were tied to gold.

In contrast, token coins, such as wooden nickels, are usually local novelties and do not circulate widely, but they have some value. Even worse are the “plug(ged) nickels,” which had monetary value until the valuable metal was taken and replaced with an inexpensive substitute, or plug, and therefore are practically worthless.

With the US entry into World War II, nickel was designated by Congress as a crucial war commodity. The Mint removed nickel and substituted an alloy of copper, silver (35 percent), and manganese during the war.1  While ostensibly used to conserve nickel, coin expert Mark Benvenuto suggested that the nonnickel was a “token” reminder of the importance of wartime sacrifice and not for the purpose of diverting nickel for battlefield purposes.

From its origins as a fiat coin, the nickel became an unlikely popular benchmark of monetary stability after World War II. It was used in vending machines of all sorts and was widely used in consumer transactions. Additionally, the nickel was the exact price of many typical consumer goods over extended periods of time, such as theater tickets, vending machines, jukeboxes, and payphones. You could buy candy bars, shoeshines, a pack of bubble gum, or a bottle of Coca-Cola for a nickel. A first-class letter stamp was less than five cents until 1963!

Of course, the most famous economic statement related to nickels was made by Vice President Thomas Marshall in 1914. He appears to be a good enough politician for a separate article, but for now he is said to have proclaimed, while listening to a speech in the Senate, “What this country really needs is a good five-cent cigar.” 

Given that the Senate had just passed the Federal Reserve Act a few weeks prior and that Marshall held many good political positions, he may have been in part commenting on the inflationary aspects of the Fed and the deflationary process that occurs on the gold standard. Deflation under the gold standard would have made a good five-cent cigar a possibility. Alas, with the Fed, it was not meant to be. However, it is more likely that Marshall was commenting on a boring and unrealistic speech and his own need for a smoke break!

Possibly more familiar to readers is Lucy Van Pelt’s admonishment that everything should cost five cents. Indeed, that is what she charged at her “Psychiatric Help” stand for the many decades over which Charles Schultz’s cartoon Peanuts appeared.

Lucy’s only exceptions to her five-cent price rule were an occasional seasonal price increase to seven cents and the very disturbing increase to forty-seven cents in September 1992. This last increase matched the average price increase due to inflation and the change in average wage rates since Lucy started her practice in the 1950s.

Lucy returned to the TV camera to declare that life insurance should also cost five cents despite her employer planning on a fourteen-dollar price. I show here that on the old gold standard, one nickel per week was exactly sufficient to make the fourteen-dollar monthly insurance payment. I am not suggesting that Charles Schultz and MetLife were arguing for a return to the gold standard. However, the insurance market would indeed work more efficiently on such a sound monetary system. Lucy was right!

This takes us to the recent chaos in the nickel market. Prices briefly spiked to over $100,000 per ton, more than three times the price prior to the spike and more than five times the normal price. This was not caused by “market failure,” as mainstream economists might describe the situation, but rather by the US government taking on a war footing (increasing its nickel demand) while simultaneously enacting sanctions (decreasing the nickel supply), hitting the relatively small market under tightening credit conditions (caused by the Fed) and government controls (by China and others).

The other current concern about the market for nickel is the much higher prices experienced for this vital and versatile metal prior to the spike. Prior to 2022, the nickel price stayed below $20,000 for a decade, with the only larger spike occurring during the housing bubble. The price was already headed much higher in 2022 before the invasion, and it has remained at elevated levels since the spike receded, suggesting that much of the increase is in line with the Fed-caused price inflation experienced by commodities in general.

It can easily be seen that the nickel price was rising well before hostilities began and that many other commodity prices were likewise already rising at a significant pace, showing that it’s not just war and sanctions that have caused the increase. Beginning in 2022, the price rose almost 25 percent before the hostilities began and afterward quickly receded from the war spike and market closure but still remained about 25 percent above prewar levels. The blame for most of this, along with all the other commodity price inflation (“at the wholesale level”) clearly rests with the Fed.

The Fed recently released information that commodity markets and its lenders are a prime source of potential contagion in the economy. They noted that the nickel market was a prime example of this risk. However, their explanation shows that the Fed itself is responsible for all the underlying risk factors, such as the decrease in liquidity that is the purpose of the Fed’s return to normal policy. This is clearly not a market failure, but a true Fed failure in the making.

In this highly inflationary environment, the US penny and nickel are in danger of extinction. Their cost of production now exceeds their purchasing power, while at the same time the use of small change is steadily declining, helped along by the government’s coin shortage ruse. However, all these factors are driven by persistent Fed inflation. The nickel could be reinvented using cheaper metals, but the time draws near for the end of small change in the relentless drive for a cashless society.


The market for nickel tells us a great deal about the progress of society as well as the inflationary pitfalls that government throws in our way.

On the one hand, you have an element that has been used, unknowingly, for much of the history of civilization. Only discovered as a unique element in the mid-eighteenth century, nickel is used in an ever-increasing number of production processes and goods, while potential supplies of it are being discovered. Because of its properties, we can expect nickel to be an important component of improvements in economic development and human flourishing.

On the other hand, nickel is considered a type of fiat money and a tangible marker on the road of monetary decline. Economists tend to be ignorant of the positive market aspects of the metal but will sign off on nickel-related issues when it comes to government intervention and inflation.

Also, when that time comes, your typical educated voter will yawn and welcome the elimination of small change, being blissfully ignorant of the Fed-heated tub that they have been steeping in.

  • 1These war nickels contain 0.056 ounces of silver and are worth about $1.25 when silver is $20 per ounce, and there is no numismatic value.
Image Source: Getty
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