Thoughts for Your Penny – Econlib

The Case for Ending the Production of Pennies

After reading co-blogger Scott Sumner’s take on the fears surrounding the elimination of pennies, I was reminded of my own article on the subject that was published on Hoover in March. Titled “Thoughts for Your Penny?” on Defining Ideas, this piece delves into the financial implications of continuing to mint pennies in the United States.

Key Points from the Original Article:

The US government profits from seigniorage, with the production costs of certain denominations of currency yielding significant returns. For example, it costs just 9.4 cents to print a $100 bill, resulting in a profit of $99.90 for each bill circulated. However, minting small coins like the penny and nickel actually incurs losses for the government. The cost of producing a penny is three times its face value, while the nickel’s production cost is more than double its value. In contrast, the dime is the first coin where the government starts to make a profit, thanks to its lower production cost compared to its value.

The composition of coins, particularly the nickel and dime, plays a significant role in production costs. The nickel, made of cupronickel, costs more to produce than the dime, which underwent composition changes over the years due to fluctuations in metal prices. The transition from silver to copper-nickel alloys in dimes was driven by the rising cost of silver, making the old silver dimes valuable collectibles today.

Proposed Transition Plan:

Given that the potential savings from eliminating pennies outweigh those from phasing out nickels, the focus should be on discontinuing penny production. Fortunately, the transition for most transactions would be seamless, as electronic payments via credit or debit cards are already prevalent. For cash transactions, Canada’s example of phasing out pennies offers a blueprint for a smooth transition. With cash transactions rounded to the nearest five cents, the need for pennies becomes obsolete, simplifying the payment process for consumers and businesses alike.

For a detailed analysis and further insights, you can read the original article on Hoover’s website.