Junk silver is an informal term for any silver coin which is in
sufficiently poor condition to have no special value to a collector or
numismatist. The market price for these coins is based on their
"melt value" - the value of the silver they contain. Thus they are
considered a cheap and relatively easy way of investing in silver.
Modern coins are composed of cheap metals like copper and
nickel. Looking historically this is an aberration; the gold ducat
was in wide circulation in Europe from the 1200s until just before
World War I. After most nations came off the gold standard during
the Great Depression, these coins quickly vanished from circulation,
as predicted by Gresham's Law. Silver remained in use for regular
everyday coinage for a bit longer - dimes, quarters, and half-dollars
were composed mostly silver until 1964 in the United States, and until
1967 in Canada.
Many of these old silver coins were melted down in the late 1970s,
when the Hunt Brothers briefly cornered the silver market and the
price on the open market for an ounce of silver reached over $US 50.
An article about this event, "After the Melts", quotes a silver
dealer who was involved in the process as "When silver went so high,
they (the coins) were worth more money dead than alive." Even so,
many millions of these coins survived the furnaces, and they are
bought and sold on a regular basis.
The reasons for wanting to purchase junk silver vary, but typically
relate to concerns that the local fiat money will experience some
sort of dislocation, such as Weimar
Republic style hyperinflation, and reduce dramatically in value. The
theory is that in such an event precious metals like
silver would continue to retain value, and could be used to purchase
necessities.
This is in contrast to a modern cupro-nickel coin, whose value is
based almost entirely on the fact that the government claims it is
worth something, and has the force to back that claim up. Specifically, the government
requires each of its subjects pay the taxes and fines it levies on
them using the coin of the realm it issues. If tax time rolls around
and you are short on USD, the Internal Revenue Service is not
going to be interested in your silver coins, the vegetables you grew
in the back yard, or your Ithaca HOURS - go directly to jail, do not
pass go. The value of Sacagawea dollar coin is about 2.5 cents at
current metal prices, but the government says it is
worth a dollar, and so it is. But if the government ever intentionally
inflates its own currency to make its public debt worthless, as some
governments have been known to do in the past, or even
goes away entirely, then these coins return to their
'natural value', which is to say almost nothing. It is this concern
(or in the second case, perhaps hope) which drives the interest in junk
silver.
As of this writing, a Mercury dime, which has a
face value of 10 cents, is worth about 75 cents as raw melted
silver, and will typically sell for between $1 and $1.50 on an open
market like ebay. I assume the premium on the coins over the melt
value is mostly related to the small volumes these coins usually trade
in (lots of 10 to 100 coins seem common at the moment) versus the
enormous quantities raw silver is traded in on the major commodities
markets, where lots of hundreds or thousands of kilograms are
common.
Some of this premium may also derive from the fact that in the
specific context of a hedge against hyperinflation, common
coins like Mercury dimes or old half-dollars have certain advantages
over other forms of precious metal, like silver bullion, specially minted silver coins, or gold in any form. Old coins,
while not as familiar to most people as modern currency, do remain
relatively well known, so it would not be too hard to trade a few for
a loaf of bread or some toilet paper - there will always (in
theory) be someone who will recognize them, know they are made of
silver, and be willing to trade something of value for them. They are
also easily divisible - unlike a 100 oz silver bar, which would
require you to carry a hacksaw and scale with you whenever you wanted
to go shopping. And gold is simply too valuable for everyday
transactions - a single Krugerrand or gold American Eagle is worth
hundreds or thousands of dollars.
In the US, the most common forms of junk silver are Mercury dimes,
wartime nickels, Morgan dollars, pre-1965
Roosevelt dimes and Washington quarters,
and pre-1971 half dollars. Older or more exotic coins tend to
retain some level of collectors value even if they have been circulated
and somewhat damaged, and so are not usually sold as junk silver. The
silver Roosevelts and Washingtons are particularly interesting since in
theory one might get handed one as common change, though most have long
since been removed from circulation either to hoard or melt.