diehlphotoThe Real Diehl is a regularly-appearing column by former United States Mint Director Philip N. Diehl, exclusively for CoinWeek ………..

Should We Keep the Penny?

Penny for your thoughts? Well, they must not be worth much.

The idiom is 500 years old, dating back at least to Thomas More in “Four Last Things”. Of course, More was referring to the English peny, and his question suggested regard for another’s ruminations. The peny was worth something back in the day.

One hundred years ago, an American offering a penny per thought would have been shelling out $.25—not a very generous offer, but then it’s only a thought. Today, the value of a penny has shrunk to the point that, if you earn more than the minimum wage, you’re losing money stopping and picking up a penny on the sidewalk.

I’ve tipped my hand on what I think about eliminating the penny. It’s long overdue. Most of the arguments against doing it are silly and bear the fingerprints of interest groups with a stake in keeping the penny alive. I have no dog in the fight. I don’t represent anyone who wants to do away with the penny and never have.

In fact, I supported eliminating the penny when I was director of the Mint, even though it would reduce hours for our workforce. But less so than you might think. Most of the work of producing the nation’s one-cent coin has been outsourced to business. The Mint only stamps and bags the coin. All other steps in the process are done outside the Mint. These business interests have a lot to do with why the penny survives today, 25 years after its utility to commerce was over.

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Think for a minute: what product of the ingenuity of man is as ubiquitous and useless as the penny, and still being produced—in the billions—every year—at a loss? I can’t think of any type of coin acceptance technology that takes the penny, not even gumball machines, except for Coinstar kiosks, and they’ll charge you 11% to take them off your hands.

The Mint earns a profit by producing circulating, numismatic, and bullion coins. These profits are returned to the American taxpayer through the U.S. Treasury, reducing taxes and lowering the national dept. But for a decade, the Mint has produced pennies—60 billion of them—at a loss of about half a billion dollars.

So, what’s the case for keeping the penny?

Supporters of the penny say eliminating the coin will increase inflation by raising prices consumers pay at the cash register. They offer no research to support the claim, but let’s think it through.

Only about 25% of consumer payments today involve cash. The other 75% are processed electronically and would not be affected by eliminating the penny. How would cash transactions be dealt with? By rounding, and two out of ten transactions (those ending in a “0” or “5”) would be unaffected by rounding. In most cases, transactions that end in a “4” or a “9” will be rounded up and those ending in a “1” or a “6” will be rounded down. That’s a wash.

Why would we expect businesses to round in this way? Market forces. Competitive pressure will drive them to round in a way consumers consider reasonable. Why anger a customer over a penny?

lincoln_cents_6But what if competition isn’t strong enough? In that case, business already has the ability to raise prices by a cent. Eliminating the penny doesn’t create a new opportunity to do so.

So, that leaves us with the transactions ending in a “3” or a “7”, about 5% of all consumer purchases. Assuming every merchant decided to round up every one of these transactions, which is unlikely in a competitive market, the effect on consumers would be very small. More likely, some transactions will be rounded up and some rounded down with the net effect being a wash.

A 2006 study of 200,000 consumer transactions conducted by Robert Whaples, an economist at Wake Forest University, supports the conclusion that rounding would have virtually no effect on consumer prices. Other analyses reached similar conclusions, one for the accounting firm KPMG and another for the National Post (Canada) when our northern neighbor eliminated its penny.

Supporters also claim that Americans favor keeping the penny. True enough, polls they commission show popular support for the coin. But their polls never ask whether Americans are willing to spend $100 million a year to keep the penny, as we do today. I suspect the answer would be different if their pollsters revealed that fact before asking the question.

It’s noteworthy that the zinc industry (the penny is 97.5% zinc, 2.5% copper) doesn’t offer an obvious alternative to eliminating the penny: lower its cost by changing the coin’s metal composition. Maybe they prefer zinc pennies. On the other hand, the manufacturer of coin blanks the Mint uses to produce pennies helpfully suggests considering multi-layer plated steel, instead. They just happen to produce multi-layer plated steel.

In any case, changing the metal composition of the penny won’t solve the basic problem: the coin is useless.

We’ve eliminated previous coins that lost their usefulness in the past—the three-, two-, and half-cent coins, but these changes occurred before the coinage lobby became as powerful as it is today and money came to dominate policy making as it does today. You would think that losing $100 million a year minting a useless one cent coin would be reason enough to stop producing it, but I suspect the penny will be around for a while.

6 COMMENTS

  1. The cent and 5 cent (nickel) should be discontinued. Rounding
    to the nearest 10 cent amount is only logical. Replace the 1,2,5 and
    10 dollar notes with coins. Replace the ASE and AGE designs; they
    have run their course.

  2. I agree with this article, but I would ad possibly tossing the nickel as well, or make it out of aluminum. Also, as the previous comment suggests, I’d make dollar, 2 dollar, etc. coins and replace the notes. That would be awesome.

  3. I say keep the penny and all coins. It is not the peoples fault the currency has been devalued over the years. Without coins everyone is forced into electronic transactions and paying swipe fees to the banks even if it is indirectly. Privacy issues also come into play if all transactions are electronic. The solution is to have sound money backed by precious metals imo.

  4. Please kill the cent and also the nickel. Keep only the dime, half dollar & dollar coin. Maybe add a 30c coin and look at adding $2, $5, $10 coins as well!

    • A 30c coin has the same problem as the quarter because it’s not part of a decimal coinage system. However a 20c piece _would_ fit the pattern, which is why many other countries have that denomination. When Britain “went decimal” back in the 1960s and 70s they tried to use 10p and 50p coins but they found the gap between those denominations caused a lot of complications when making change. A decade later they introduced a 20p denomination which found immediate public acceptance. I was in London on the day of release and within a week the coins were in common use.

      And yes, let’s go with both $1 and $2 coins like other major countries, and maybe higher denominations in the near future. Experiences in Australia and the EU show that $2 coins quickly becomes the workhorses for making change in amounts above $1, demonstraing that the nay-sayers’ objections over “getting a dozen $1 coins in change” is nothing but fear-mongering.

  5. The $1 bill is at least as wasteful as the penny, but Congress doesn’t have the spine to stand up to Crane Paper’s lobbyists and the “don’t change anything anywhere anytime” crowd. Maybe we could compromise by replacing the $1 bill with all those dollar coins languishing in vaults, but ramp up production of $2 bills as a sop to those who can’t let go of paper. At least the BEP wouldn’t be wasting half its production capacity on one denomination.

    So long as we have quarters instead of a true decimal system with 20-cent coins, eliminating the nickel will complicate change-making because any combination of coins involving an odd number of quarters won’t be a multiple of ten. But we still have to be compatible with Spanish pieces of eight, right?

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