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The Useless Penny

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05/25/2008

David Owen writing for the New Yorker (Penny Dreadful: They’re horrid and useless. Why do pennies persist?) provides a number of anecdotes illustrating the perversity of our monetary system:

  • Pennies cost about 1.7 cents to manufacture
  • Nickels are even worse in percentage terms, costing almost ten cents

When the metallic value of the coins exceeds their face value, an obvious arbitrage is to melt them and refine the metal. A firm that separated the older copper pennies from the newer zinc pennies and then sold the copper was shut down when congress banned the melting of coins.

As the value of these coins declines to ever smaller amounts, the cost of manufacturing small, nearly worthless coins is increasing, as is the amount of our time spent keeping track of them and searching for them in checkout lines.

The main focus of the article is on various reform plans to address the problems. Among the options are legislative reforms to alter the metallic content of coins. Pennies are now made mostly out of zinc. It turns out that the zinc industry has a lobbying association which strives to prevent congress from changing the metallic content of coins. The author discusses other reform plans involving rounding transactions to the nearest five or ten cents. The article does not mention the most common reform, which is to do a 100-for-1 or 10,000-for-1 reverse split of the currency system. “New dollars” are issued at a fixed exchange rate compared to old dollars. Typically the exchange rate is chose to give 1 of the new currency units a reasonable amount of purchasing power.

The article notes that, as recently as 1940, the penny had “more purchasing power than a modern quarter”. But “inflation has eroded” the penny’s purchasing power. But this is about as much as it has to say. Inflation is an endogenous factor that somehow erodes the power of money.

Where the article fails is in ignoring the real problem: inflation which is inherent in our system of fractional reserve banking and paper money. How about the following reform proposal: shut down the central bank, use gold as money, and adopt a system of 100% reserves?

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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