Does It Make Sense To Keep Minting Pennies?
Dear Cecil: I have a question for you. How much does it cost to make an individual penny? Also, how many are made each year? (OK, so it's more than one question.) Are they ever going to stop manufacturing them?
— Michael Notzen, via the Internet
Cecil replies: A lot of people have been wondering about this.
The mint makes something like 13 billion pennies a year, accounting for two-thirds of all U.S. coinage.
Half of these pennies will disappear from circulation within a year, having been squirreled away in penny jars and who knows where else.
The U.S. General Accounting Office estimates that of the roughly 170 billion pennies currently in existence, two-thirds have been effectively withdrawn from circulation by people who think they're too much trouble to carry around.
The penny has by far the lowest seigniorage (profit) rate of any U.S. coin. Each costs four-fifths of a cent to make, netting Uncle Sam just one-fifth of a cent, or 20 percent.
The profit on a quarter, by comparison, is more than 20 cents — 80 percent. Were the penny still made mostly of copper, as it was until 1982, the government would have to manufacture them at a loss. (The coins are now copper-plated zinc.) The time has come to ask — ****, it came long ago — why are we doing this, anyway?
The issue came up in 1996, when the GAO concluded that, figuring in the cost of overhead and distribution, the U.S. Mint loses $8 million a year manufacturing pennies.
The agency suggested eliminating the penny and rounding all cash transactions to the nearest nickel. Mint officials disputed the GAO's numbers, claiming the coin earns the government $18 million to $27 million annually.
Congress held hearings, but opinion was sharply divided, not only within the government but among merchants and ordinary citizens. In the end nothing was done.
Too bad. The arguments in favor of retaining the penny are weak, arising from the same wellspring of nostalgia and we've-always-done-it-this-way inertia that's hindered conversion to the metric system.
The real question is not whether the government makes money on pennies but whether the coin serves any commercial purpose. The "take a penny, leave a penny" jars that many merchants keep by their cash registers suggest strongly that it doesn't. If people don't want to make change with pennies, why bother?
Some claim that if pennies are eliminated consumers will get screwed. In a 1989 Atlantic article one penny advocate claimed, "Get rid of [the penny] and nothing will cost less than a nickel." Baloney.
No one is suggesting that all prices be rounded to the nearest nickel. Real estate tax rates have been computed in mills, a tenth of a cent, since the foundation of the republic, but no mills have ever been minted; the sums are just rounded.
Others claim that merchants will use rounding as an excuse to gouge consumers, either by raising prices or by cheating. But competitive pressures are likely to keep most retailers honest, and in any case the amounts are trivial.
Many other nations cease minting low-value coins when they become irrelevant. The U.S. doesn't, feeling no doubt that we've got a big-time currency here and its value is like unto the Rock of Ages.
By eliminating the penny we'd be admitting that we're just like other countries. But in the 30s a penny was worth the equivalent of today's dime; in the 50s it was worth today's nickel. Now it's not worth the trouble.
— Cecil Adams
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A debate exists within the United States government, and American society at large, over whether the one-cent coin, commonly called the penny, should be eliminated as a unit of currency in the United States.
Two bills introduced in the U.S. Congress would have ceased production of pennies, but neither bill was approved. Such a bill would leave the nickel, at five cents, as the lowest-value coin.
On February 15, 2013, President Barack Obama stated his willingness to eliminate the penny.
In 1990, United States Representative Jim Kolbe (R-AZ) introduced the Price Rounding Act of 1989, HR 3761 to eliminate the penny in cash transactions, rounding to the nearest nickel.
In 2001, Representative Kolbe introduced the Legal Tender Modernization Act of 2001, HR 2528,
and in 2006 he introduced the Currency Overhaul for an Industrious Nation (COIN) Act, HR 5818.
While the bills received much popular support from the public, and therefore from their representatives, the bills were not made to law when Congress adjourned.
There are public pressures on many Representatives to reintroduce these bills back into the legislature. One such example is the constituency of the 2nd District of Colorado, represented by Jared Polis.
Arguments for elimination
Production at a loss — As of 2013, it costs about 1.8 cents to mint a penny.
In 2007, the price of the raw materials it is made of exceeded the face value, so there was a risk that coins were illegally melted down for raw materials.
Lost productivity and opportunity cost of use — With the median wage in the U.S. being about $17 per hour in 2011,
it takes about two seconds to earn one cent. Thus, it is not worthwhile for most people to deal with a penny. If it takes only two seconds extra for each transaction that uses a penny, the cost of time wasted in the U.S. is about $3.65 per person annually,
about $1 billion for all of the USA.
Using a different calculation, economist Robert Whaples estimates a $300 million annual loss.
Limited utility — Pennies are not accepted by all vending machines or many toll booths, and pennies are generally not accepted in bulk. Pennies often end up sitting in jars or are thrown away and are not in circulation. Economist Greg Mankiw says that "The purpose of the monetary system is to facilitate exchange, but... the penny no longer serves that purpose."
Prices would not be higher — Research by Robert Whaples, an economics professor at Wake Forest University, using data on nearly 200,000 transactions from a multi-state convenience store chain shows that rounding would have virtually no effect. Consumers would gain a tiny amount – about 1⁄40¢ or $0.00025 per transaction.
Historical precedents — There has never been a coin in circulation in the U.S. worth as little as the penny is worth today, although currently other countries have coins with less purchasing power in circulation. Due to monetary inflation, a nickel (5-cent piece) in 2007 was worth approximately what a penny was worth in 1972.
When the United States discontinued the half-cent coin in 1857, it had a 2010-equivalent buying power of 11 cents.
After 1857, the new smallest coin was the cent, which had a 2010-equivalent buying power of 23 cents.
The nickel fell below that value in 1974; the dime (at 10 cents) fell below that value in 1982; the quarter (at 25 cents) fell below that value in 2013.
Arguments for preservation
Consumers and the economy — Research by Penn State University Economist Ray Lombra in 1990 shows that were the penny to be eliminated, consumers might be hit with a "rounding tax".
He further stated that rather than eliminate the penny, it could make more sense to change the composition of the penny to a cheaper metal than zinc if the costs of zinc do not come down and there continues to be a significant loss per penny.
Popular support — A poll conducted March 22–25, 2012 by Opinion Research Corporation International on behalf of the zinc lobby and its front group Americans for Common Cents found over two-thirds (67%) of those surveyed favor keeping the penny in circulation.
The poll results showed 77% are concerned that if the government implements a rounding system for cash purchases, businesses might raise prices.
Second, under current Mint accounting, the nickel costs eleven cents to manufacture. In a scenario where nickel production doubled without the penny, Navigant concludes that with existing fixed costs, eliminating the penny would likely result in increased net costs to the Mint of $10.9 million, relative to the current state.
Price rounding cannot be done fairly — Consumers will be hit with a "rounding tax" without the penny. The claim that rounding will have no appreciable effect on the consumer is predicated on the notion that there is an equal 10% probability of purchase prices ending in a particular digit.
Evidence suggests the equal probability assumption is false. Americans for Common Cents claims there is no obvious incentive for businesses to set prices in a way that will lead to rounding down.
Rounding hurts the poor — Millions of transactions are conducted each day in the U.S. economy, and with 26% of Americans either not having savings or checking accounts or relying on payday lending services, the amount of cash transactions each day is simply not dismissible.
Federal Reserve studies have shown that people with relatively low incomes (particularly the young, elderly, and minorities) use cash more frequently than individuals with higher incomes.
Since only cash transactions will be subject to rounding, any move to eliminate the penny would be regressive and hurt "unbanked" Americans who have no other option and lack the means to make non-cash transactions.