Rebasing the Penny

More talk of eliminating the penny:

Economic Scene Now That a Penny Isn’t Worth Much, It’s Time to Make It Worth 5 Cents, by Austan Goolsbee, Commentary, NY Times: How dumb do you have to be to mint money at a loss? In the latest only-in-Washington episode, we find that the government may have lost as much as $40 million coining pennies and nickels last year.

The metal in them — the zinc, copper and nickel — has soared in value in the last few years, making the coins more valuable as raw materials than they are as currency. The government reaction has been to ban the melting of the coins to get the metal. ...

Our coins are just tokens... They are valuable only because the government says they are — because the government is willing to trade them for dollars.

And making tokens that cost more to manufacture than they are worth is monetary insanity. We could make them out of any material we want, so why in the world would we lose money?

To stop this senselessness, we would seem to have only two choices: debase the coins (i.e., make them out of something cheaper) or abolish pennies (and, perhaps, even nickels).

The United States has debased money in the past. In World War II, we made steel pennies to save copper. In the 1960s, the high value of silver caused a run on quarters and dimes and led to a full-blown coin shortage until we substituted copper and nickel. We also took most of the copper out of pennies in 1982 for the same reason.

But debasement only puts off the inevitable for a short time. Because the penny is fixed in value at 1 cent, no matter what the penny is made of, the cost of its material will rise with inflation and eventually be worth more than a cent.

Most economists, then, argue that we should use this opportunity to abolish pennies... But polls show that a majority of Americans like their pennies, and abolition might lead people in Illinois — the land of Lincoln, where pennies still work at tollbooths — to outright currency rebellion.

On top of that, Raymond Lombra, an economist at Pennsylvania State University, claims that the rounding of prices — a $6.49 bill would cost you $6.50 — might not be evenly distributed and might cost consumers as much as $600 million a year, a cost that would be paid disproportionately by the poor who use cash more often.

Others counter that retail stores could not get away with such shenanigans. But, clearly, the case for abolishing pennies is not universally believed. So what to do?

Mr. Velde, in a Chicago Fed Letter issued in February, has come up with a solution that would abolish the penny, solve the excess costs of making nickels, help the poor, keep the Lincoln buffs happy and save hundreds of millions of dollars for taxpayers. ...

Mr. Velde ... would rebase the penny by having the government declare it to be worth 5 cents.

At first that sounds impossible. But our coins are just tokens the government gives a value to. We can say they are worth whatever we like. ...

So pull out those sofa cushions, ladies and gentlemen, and start looking for the shiny face of Honest Abe. All that glitters may not be gold, or even nickel, but it may be worth 5 cents.

If you are wondering how the government could simply declare that pennies are worth five cents, it could offer, on demand, to exchange a nickel for a penny. Once that offer is in place, a store would accept twenty pennies in payment for a good worth a dollar because it knows the bank will always exchange twenty nickels for the twenty pennies.

I know this isn't a very good reason, but not having a "one" in the monetary system - not being able to cover all the natural numbers as prices - would bug me. But it's also true that I leave pennies in the tray at the cash register - they don't have enough value to bother carrying around.

So here's what we do. Define the base unit to be five cents. Call them fents (or something, I realize that's not a great name). One fent = five cents. Then I have my "one" back. A nickel is "one fent" and new coins could be stamped that way, a quarter becomes "five fents", a fifty cent piece would be a dime, a five dollar bill is a one dollar bill in fents, and so on.

Pennies would be gone and replaced with the new one fent piece. There are some sloppy conversions. For example, the dollar bill would become a twenty fent piece. But it could gradually be taken out of circulation and replaced with a standard 25 fent quarter, i.e. a 125 cent coin. This would appeal to people who have wanted a higher valued coin - a dollar coin in current units - for use in vending and other transactions.  Other conversions, such as the hundred dollar bill, could be handled similarly.

Comments

[RCShelburne]

In Switzerland there are no pennies, the 5 franc piece is the lowest value coin. Maybe that's why everything is so expensive here.

[reason]

5 franc? Don't you mean 5 cent?

[Movie Guy]

Why don't we have a little fun with this.

The U.S. Treasury can advise the public that the Penny is now worth 75 cents. Sort of give the little people a sudden surge in savings.

I vote YES.

[RCShelburne]

Of course, .05 francs; or 5 cents, or officially 5 rappen in German, 5 centimes in French or 5 centesimi in Italian.

[callahan]

I like pennies from heaven, where a penny is a penny and the value of all things other than money is deflated to those of the 1940's. Now a penny saved will mean something.

[rana]

The government should stop minting pennies. That's it. Leave the existing pennies in circulation. That will force retailers to adopt pennyless pricing over time.

[baileyman]

I know that not having a 0.001 in the price system would bug me, too. Or a 0.0001. Or a 0.00001.

[Holly W.]

Since stores don't like going over whole dollar amounts for pricing, it seems just as logical to me that items that cost $9.99 would become $9.95, instead -- who could complain about that?

I buy a cup of coffee every morning that costs $1.04, so I palm off alot of pennies at that store. Often I'm able to use coins I've found on the ground, which says to me that people are not really very attached to the penny, no matter what they claim.

[reason]

RCShelburne...
Phew,
I can afford to visit my relatives in Geneva after all. You had me worried for a minute there.-)

[John H. Morrison]

If I had my druthers, I'd rather they stopped minting pennies and dimes. Also, they would stop printing dollar bills and stick to the dollar coins (both gold and SBA).

Cash purchases could be rounded to the nearest nickel, and it suffices to divide the quarter into five nickels. Check, charge, electronic transfers, etc. could still be done to the nearest penny -- or even the nearest mil.

[Carolyn Kay]

If we were to revalue all dollar holdings to one-tenth of the former value, prices would be only slightly higher than they were when I first started working in 1966.

Carolyn Kay
MakeThemAccountable.com

[callahan]

Make them accountable for this:

US personal savings at 74 year LOW.

Exxon/Mobil has record year with 36 BILLION in profits not counting bushes tax break for "exploration".

Hmmmmm.

[callahan]

Correction: Exxon profits for 06 are 39 billion.

Bushes ownership society is proving to be costly, we are spending a bit more than we earn. Savings rate as low as that of the Great Depression I era.

Watch out for Great Depression II.

[cm]

Even when looking at my sizable penny jar, making them 5 cents a piece would net me at most a few dozen bucks. With today's prices that would be a drop on a hot stone.

[callahan]

Today's prices, for me one of the worst is the cost of food.

If only I could get by without it, then by god I'd be able to save a nickle or two I betcha.

[pinus]

I don't see a problem in abolishing one-cent coins at all. We did a the same in the Czech Republic. The Czech crown is split into 100 hellers, and until about five years ago, the smallest unit was 10 hellers. But, as in the USA today, producing these 10 heller coins was too costly. Thus we abolished them.

Prices can be still quoted in multiples of 10 hellers (and they are), but your final sum in the shop is rounded to the nearest 50 hellers. If you pay by plastic, you are charged the exact price. There is not a slightest problem with that.

Some people argued heavily what inflation it would cause, but the real effect was zero. It bugs nobody today.

Currently, the Central Bank is thinking about abolishing the 50 heller coins as well, leaving 1 crown coin as the smallest unit (still, prices could be quoted in hellers). 1 crown is about 5 cents today.

I really don't think abolishing one cent is a big deal. Nobody in the U.S. really cares if you are charged 37,58 USD or 37,60 USD. And, since rounding would be to the nearest 5 cents, you will be the same off in the long term (8, 9 rounded up, 7, 6 rounded down etc).

[pinus]

To RCShelburne:

The reason why Switzerland is so expensive regarding food is the heavily protected domestic market, together with a state-supported (almost) duopoly in the retail market, consisting of the dominant Migros and the smaller brother Coop. It has got nothing to do with how the currency is split.

[dWj]

We could call them "shillings".

[bullbust]

I have wondered how these units are determined. The Japanese seem to have no problems with yen (equivalent to the dollar). The fractional units Sen (1 yen = 100 sen) rin (1 rin = 1/1000 yen)are not used anymore, they just eliminated it. Everything is just yen. Imagine there was no dollar and everything was quoted in cents. We would be dealing with large numbers.

What is the basis of currency units?

[tkuipers]

The reason the Mint has continued to make pennies is that a huge proportion of them immediately drop out of circulation and end up in change dishes around the country. The public buys billions of these trinkets and then doesn't use them, essentially giving the mint (and hence the government) a free gift.

That said, it's only a useful tax until the cost of minting is less than face value - with current commodity prices, someone at the Mint is a bit clueless.

Getting rid of it would be easy - it's been done in many countries with little or no complaint - take them out of circulation and have shops round to the nearest nickle.

[Nick]

The Netherlands has all but abolished 1 and 2 cent coins. It was really simple actually.

Prices in supermarkets, for example, didn't have to be changed -- things still cost 0.69 euros or 1.99 euros, and you pay the exact price if you pay by card. If you pay in cash, however, the *total* is rounded to the nearest 5 cents, up or down. That means that even on a shopping bill of 70 euros, you will only pay an extra 1 or 2 cents (or save 1 or 2 cents) due to rounding.

Studies say that in the end it pretty much equals out for the shopper and the store, and stores actually save a lot of money because they don't have to handle 1 or 2 cent coins anymore. (Retailers were in favour of the scheme because of that.)

Coins of 1 or 2 cents are still accepted as payment of course -- in the euro area, you can't just decide not to accept euro coins.

[Carolyn Kay]

callahan,

Did you see this at Brad DeLong's place?

"The increase in inequality that we have seen in the past generation is predominantly a result of failures of social investment and changes in regulations and expectations, and has not been accompanied by any acceleration in the overall rate of economic growth. For the most part, it looks like these changes in economy and society have not resulted in more wealth but in an upward redistribution of wealth: a successful right-wing class war."

No wonder ordinary people can't save. The upper classes are robbing us blind.

Carolyn Kay
MakethemAccountable.com

[callahan]

Thanks for the link Carolyn Kay. I've been of a mind for a while that what we have is reverse socialism. The poorer masses are supporting the relatively few rich. I'm encouraged that people like Brad Delong, Lou Dobbs and others are getting people to think about this issue. Maybe it is time to put a CAP on Capitolism.

[Suvi]

Cash purchases could be rounded to the nearest nickel, and it suffices to divide the quarter into five nickels. Check, charge, electronic transfers, etc. could still be done to the nearest penny

Same as we did when the €uro was introduced - one and two cent coins were not produced to be used as money - only for "starter packs" (to familiarize) and later for collectors. No one uses them, and they aren't in general circulation. All cash-sale prices are rounded, but credit card bills are exact.

[Carolyn Kay]

callahan,

I call it the Hobin Rood system, robbing the poor to give to the rich.

Carolyn Kay
MakeThemAccountable.com

[jaim klein]

No good abolishing pennies. The outstanding value of all pennies is billions of dollars, all those people holding pennies will be cheated out of their savings. And yes, they are mostly very poor landless small people, with their piggies stuffed with small change. And having no small, worthless coins at hand, parents will stop giving them to their children to impart saving habits. Bad, very bad.

[Kim]

For those who think abolishing the penny would rob the poor, think again. When a denomination is abolished, it doesn't simply become valueless. There is generally a period (I believe that it was 12 months for Australia) where that denomination can be taken to banks, and swapped for larger denominations. Your piggy banks won't become worthless.

When the 1 and 2c coins were abolished in Australia, there was no inflation, because things are rounded to the nearest 5c ($2.32 rounds to $2.30, $2.33 rounds to $2.35).

Furthermore, shops would round $x.99 prices to $x.95, because they were willing to lose 4c in order to keep the '$2.95 is less than $3' advantage. The net effect was no inflation.

It's all moot anyway. The US Mint is self-funded (they literally make their own money). The penny now costs more to mint than it is worth. Hence, at some point in the not too distant future, it will become impossible for the US Mint to be self-funded, and produce pennies. At that point, they will be financially forced to discontinue minting of the penny.

[Phil Ryan]

"How dumb do you have to be to mint money at a loss?"

Virtually every mint on the planet spends more than $1 to make $1 - or at least, there is no relationship between how much it costs to make a coin (or a note) and how much the materials in that coin or note cost. A penny gets used many many many times in its life (notwithstanding people's propensity for piling them up and not using them), and its value to the country is in this representational usage. The mean lifetime of coinage is typically 10 years, for paper currency a year or so. If you recycled a penny out of the money supply after 10 years, or some large number of usages, by which time the faces are wearing out, then it will have had a fraction of its build cost as the "transaction cost" for each transaction that it was involved in.

So, say a penny costs 10c to produce, with metal cost of 2c, then the overall transaction cost for each of (say) 2000 usages would be 1/20000 or one-two-hundredth of a penny, which is still ten times cheaper than a mastercard transaction.

I accept that coins are easier to convert into their component metals than other items of currency, but the point is that it may cost $1 billion, say, for a mint to make $100 million worth of currency units, and so the mint is always "making a loss". This is not at all confined to Washington.

[chicken]

I hear that India is facing a coin shortage as coins are worth more when melted and sold. Before that happens, the Govt ought to revalue pennies upwards to 5 cents. Making it illegal to melt coins is simply a futile exercise, when the coins can just be taken out of the US for melting:)

[Bill Howard]

Here's a novel idea: force a seperation of economics and state, ie: no more "Federal" Reserve and put the U.S. back on some kind of currency standard, ie: gold or otherwise and then make the penny worth something again. Arbitrarily changing the value of currency has never lasted anywhere in history. Never. As in, never ever ever and it never will. Inflation sets in, as it is now, debasement of currency will continue and the value of the dollars in your pocket will continue to go down. If you can arbitrarily change the values of currency and the intrinsic value of your currency is based on nothing but whim, then it is based on nothing and will fail. No, not "might" fail, will fail. Disagree all you want.

[alice]

.....i need to write an essay and i dont get it