When the United States first began minting coins in 1793, the smallest denomination made was the half cent. By 1857 the half cent coin was worth only about 13.5 cents in 2014 dollars and was discontinued, leaving the penny as the smallest denomination, then worth just over 27 cents in 2014 dollars.
At that time, the remaining coin denominations still being made were worth, in 2014 dollars, 27 cents, $1.35, $2.70, $6.76, $13.51, $27.03, $67.57, $135.14, $270.27, and $540.54 (cent, "half dime", dime, quarter, half dollar, dollar, $2.50, $5, $10, and $20 coins). Later a few more denominations were added, ranging from (in 2014 dollars) 54 cents to $81.08.
(If the highest of those denominations seem strangely high for coins, it's because America didn't have it's own paper currency until later.)
I wonder what Americans in 1857 would have thought of Congress if, instead of discontinuing the half penny that year, they had not only kept it but added even smaller denominations, down to a "1/25 cent" coin or even less -- the value then of a penny today. Especially if that coin cost about twice as much to make as it was worth, as is the case with today's penny.
The annual cost of making pennies is now $58 million more than the value of the pennies made. That's the reduced number after factoring in fixed costs and overhead that would be allocated to other coins if the penny were eliminated. That's like throwing $58 million dollars into the garbage can, every year. It will only get worse in the years ahead as the costs of production rise while inflation reduces the value of a cent. I wonder if anyone in Congress can imagine any other uses for that annual $58 million dollars.
Some of that $58 million is recovered by individuals by melting down pennies and selling the metal. Your tax dollars are paying for that, though it's less common now that melting or exporting pennies has been made illegal, with a 5 year prison sentence.
Since nickels are also minted at a loss, and eliminating pennies would increase demand for and production of nickels, the losses on making more nickels would subtract from the savings on eliminating pennies. However, the Mint is already looking at reducing the cost of making nickels (and dimes and quarters too) by about 85% by using different metals (pennies are already made about as cheaply as possible). Once that change is in place, making nickels would once again be profitable, so increased demand for and production of nickels due to eliminating pennies would increase the gain from eliminating pennies, not reduce it.
Eliminating pennies would have no effect on electronic, check, or any other non-coin kind of transaction, which could still be done down to the 1-cent level (or even lower). Since most transactions are electronic, most transactions won't be affected.
Some argue (I'm looking at you, Snopes.com) that since pennies change hands many times, they add a penny to the economy every time they are used. But using a medium of exchange to buy something does not add the face value of that medium of exchange to the economy. If it did, you and I could just buy $100 dollar bills from each other repeatedly (paying for them with $100 bills, just by passing two bills back and forth!) until the economy reached economic nirvana. Gosh, why didn't Ben Bernanke just do that to get us all out of the Great Recession? No, a transaction improves the economy by how much it improves the overall well-being of the parties to the transaction -- the seller's profit plus the buyer's net benefit. More importantly, whatever positive effect each penny does have on the economy each time it is spent, a nickel has five times as much positive effect, plus more since using a nickel is more efficient than using 5 pennies.
Others argue that the problem is caused only by rising metal prices, and we should just wait for metal prices to come back down. But even if huge motherloads of metal ore are discovered, driving metal prices down, eventually inflation would catch up to the cost of producing a penny, even if the metal itself were absolutely free; the production cost alone is already well over half a cent. Also, it seems more likely that metal prices will continue to rise long term due to rising demand, than to drop back down. As the huge populations of China and India become ever more industrialized, their demand for metals will certainly not decrease. Well, maybe if China pollutes its population literally to death, but even if it did, India would pick up the slack.
Some argue that eliminating the penny would increase prices, as sellers round up to the nearest nickel. But that would create an opportunity for the competition to take market share by rounding to the nearest nickel, making customers happier. Perhaps the most worrisome example for some might be gas stations. But gas stations already price to the tenth of a cent, and most customers buy with a credit card. Eliminating the physical penny won't change what those customers pay. If you pay for your gas with cash, you might lose as much as 4 cents per fillup until you find a gas station that rounds to the nearest nickel for cash customers, as you can be sure some will do to get your business.
Economists who have studied the nickel rounding issue in great detail disagree as to its effects, and even quote contradictory real-world results from countries that have already done it. If there is a small net increase due to rounding, it is probably less than $58 million per year. On the other hand, if we should keep the penny because the rounding issue saves money, we should introduce 1/10 cent, 1/25 cent, and even 1/100 cent coins immediately to save even more money. What are we waiting for?
Similarly, some argue that eliminating the penny would be a tax increase because sales taxes are rounded up. But that would create an opportunity for political candidates to get votes by promising to round sales tax to the nearest instead of rounding up.
Some say even a tiny increase in prices and sales tax caused by eliminating the penny would cause massive inflation. If so, again we should introduce 1/10 cent, 1/25 cent, and even 1/100 cent coins immediately for the undoubtedly massive economic benefit. Why aren't penny advocates demanding these coins?
Looking at both seller rounding and sales tax rounding, some argue that we should keep the penny as long as there is even the slightest economic benefit. But they should first subtract the large economic cost of making pennies and consider the net result.
Some argue that we should keep the penny just because it is traditional, and because of course we love Lincoln. But Lincoln could be put on any other coin we choose, and anyway he is also on the $5 bill. Why not introduce a $5 coin featuring Lincoln? Also, there have been any number of beloved traditional things we have forgone due to their cost, even where the cost was much less than $58 million per year. Many want to keep traditional things, but few offer to pay so much for them.
Some argue that people are more willing to give pennies to charity than larger denominations. But most money given to charity is not by coin, and many people who now give pennies would give nickels if there were no pennies to give. Total giving might remain steady or even increase.
There are a lot of silly arguments out there too. For example, "eliminating the penny would ruin the economy by requiring the revamping the entire monetary system" (no it wouldn't, and no it wouldn't). "It would require replacing all vending machines" (most of them don't take pennies anyway, and few if any still take only pennies). "Pennies add up" (sure, but so do nickels). "It would mess up how we pay for things" (but it's messed up now, and eliminating the penny would make it less messed up). "People will save less because the old saying 'every penny counts' will become meaningless" (but people will probably just start saying "every nickel counts"; after all we haven't been saying 'every half-cent counts' since 1857). "Keeping the penny shows our independence" (no it doesn't; we can be independent without throwing money away). "It's fun to look for old pennies in your change" (but you can do that with any coin). "Small children like to save up pennies because they don't know they are worthless" (okay, but they can save nickels too, even if they don't get as many of them). "All the other denominations are multiples of the penny, so their value will become arbitrary" (no, all denominations are fractions or multiples of the dollar, and anyway eliminating it wouldn't make other denominations arbitrary). "We depend on the penny" (no we don't).
Why is there so much more resistance to dropping the penny today than there was to dropping the half-cent in 1857? What's so different today? It's pretty simple -- what's so different is that today we have the Zinc Lobby. The US Mint is the #1 consumer of zinc today, and it is mostly used for pennies. Dropping the penny would be catastrophic for zinc mining. The Zinc Lobby has been engaged in an all-out propaganda war to make people feel sentimental about the penny and fearful of dropping it. They have been very successful propagandists.
Of course, eliminating the penny would have other repercussions too. Jobs would be lost; the economic base of some towns would shrink, even if only by very little. No doubt Coinstar would suffer. No one wants a good worker to lose their job, nor for any town to be blighted by economic loss. But we would all be better off if a few years' worth of the $58 million were applied toward investing in new industry in affected areas and in retraining affected workers for new jobs, rather than continuing to throw it away each year.
As for Coinstar, perhaps nothing can be done to mitigate their loss from the elimination of the penny. But ask yourself whether you want your tax dollars to continue to be spent effectively subsidizing their success.
Inflation will continue to erode the buying power of a penny while increasing the cost of producing one. Today we're paying $58 million more than they're worth; in the years ahead it will be more and more. How much is too much?
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