“The penny is falling, the nickel is falling!” comes the cry of Chicken Little. Chicken Little is not alone in his fear that disaster is looming for the Penny and Nickel, the long time base of US currency. In addition to inflation causing the value of pennies to decrease as discussed by my fellow writer, the rising costs of copper, zinc and nickel have worked in tandem to bring about a situation where the metal in a penny or nickel is now worth more than the face value of the coin itself (though it isn’t clear the prices will remain high). The real kicker came this year when the US Treasury announced that it would be placing limits on the number of these coins that travelers could remove from the nation, and that it was making it illegal to melt the coins down to extract their base metals.
The concern stems from the fact that the metal contained in a penny is now worth around $0.0173, and the metal in a nickel is worth around $0.0834. While it is still possible that the US government is making money from minting pennies and nickels (due to the long life span of a coin amortizing the cost of minting and materials), it has created a damaging black market for the coins themselves. Obviously something must be done to fix this problem beyond toothless legislation. While some call for the elimination of the penny and the nickel, I see a far better answer. Currency debasement.
Debasement of currency occurs when the metal content of a coin is altered such that the total cost of the materials is below the value of the coin itself. As an example, the US penny was debased in 1982 when the Mint switched from pure copper to copper plated zinc. The result was higher profits for the mint per coin struck, and an extended life span for the penny. The penny was debased by an even more dramatic level in 1943 when the US mint struck steel pennies due to the large wartime copper needs. Given that we haven’t been on a gold or silver standard in a long time, but rather a system of fiat currency where value is determined by the faith and credit of our government and not the value of materials, this change is an easy one. Simply begin minting the pennies and nickels out of another compound which is less valuable and our problem is solved.
So why keep the penny around? Some have posited that nuking the penny wouldn’t result in appreciable financial loss for Americans, though it is hard to see why. Even if we take such arguments at face value, they begin to look shakey when one realizes the sheer number of transactions which would be affected by eliminating the penny. Many stores would end up rounding the familiar prices which end in 99 cents to the next highest dollar, resulting in a price bump for consumers. Given the sheer number of consumer transactions each year (7-11 alone reports 2.19 billion transactions at its US stores each year) even a small increase means a big hit to the American consumer as a whole. The total cost of this “rounding tax” to consumers has been estimated at $2 billion in just five years. Given that these figures only take into account the elimination of the penny, and not the nickel, it quickly becomes obvious that we can’t just do away with the coins altogether without paying a steep price (a fact Canada, the EU, and Japan have also realized).
The haters will of course argue long and hard against this scheme, especially the internet crack pots who try and equate fiat currency with theft, but in the long run this sort of plan will be good for our economy, and help to preserve the finer level of resolution the penny and nickel provide to us, saving American consumers quite a bit of money, and helping the Mint continue to profit off of pennies and nickels.
Arbitrage, the Washington way…. CNN Money, 2007.