The penny and our changing constitution
Since the United States established its own currency in 1792, we’ve produced a number of coins that have since been discontinued. Most were eliminated because they didn’t serve a useful purpose. For example, there was a time when we had three-cent pieces because a stamp cost 3 cents. The existing two- and three-cent pieces were eliminated in 1873 because people found that one-cent and five-cent pieces were a more comfortable combination.
Before the penny, only one coin had been eliminated for its low value: the half cent. At that time, also 1873, the value of a dollar (and therefore also a cent) was 10 to 25 times higher than it is today. In other words, the last time we eliminated a coin for its low value, it was worth something in the range of a nickel or a dime. (And yes, I do think this means we should also be eliminating the nickel and the dime and rounding to the nearest quarter of a dollar.)
Aside from the ridiculously low value of the penny, it was also costing the American people money. It took about 3 cents to mint a penny, and we were minting about 5 billion per year, leading to a loss of about $100 million per year.1
All the proposed reasons for keeping the penny were either blatant special interest or painful ignorance. The blatant special interest came from the one company that manufactured the zinc blanks used to make pennies. The painful ignorance came from people not understanding how rounding would work if we eliminated the penny, or from convoluted arguments that it would hurt the poor.2
As an aside, I’ll also note that people —in the world generally, if not Americans— are grownups and can deal with change to their money. All the Euro countries converted to the Euro. In 1971, the UK converted from its delightfully insane pounds-shilling-pence system —where 1 pound had 12 shillings, and each shilling had 20 pence, so that 1 pound was 240 pence— to a decimal system where 1 pound is made up of 100 “new” pence. In 1998, the Russians simplified the ruble by cutting off three zeros: 1,000 “old” rubles equaled 1 “new” ruble.
So why hadn’t we already eliminated the penny? The US Mint’s FAQ answers with a simple “Until now, no Secretary of the Treasury had determined that the production of one-cent coins was no longer necessary to meet the needs of the United States.” Clearly, this doesn’t really answer the question.
To me, the penny was an example of what kind of inefficiency we are willing to tolerate in our political system. To a layperson, $100 million per year sounds like an enormous quantity of money. In the world of the federal budget, this is an amount barely worth talking about. Said another way, the opportunity cost for Congress members is to eliminate the penny was too high. It was not worth their time to develop a coalition to incrementally reduce the federal budget by opposing the pernicious special interest of a single company. They have other, better things to do.
I certainly celebrate the death of the penny. (Again, I would lobby to get rid of the nickel and the dime.) But if we were going to do it, I would want it to have come via Congress, because penny elimination had become so ridiculously necessary that it cut through Congress’s opportunity cost.
In other words, I would rather pay the cost of small inefficiencies like the penny to ensure a representative government. Democracies tend to outperform autocracies economically (and have many other, arguably more important benefits). I hypothesize that incremental accumulation of power in the American executive will set inefficient and otherwise unfortunate precedents, even if there are small wins like penny elimination or even more substantial, near-term gains.3 In this sense, the elimination of the penny may not actually be a win for efficiency.
The nickel is the only other coin that costs more to produce than it is worth. It costs about 13 cents to mint a 5-cent nickel. We make about 1 billion nickels per year, so this is another $100 million or so per year.
If it were true eliminating the penny hurts the poor, then it would follow that making half cent pieces would help the poor, which is absurd.
Autocracies try hard to give the impression of efficiency. I was personally shocked when I read Inside the Third Reich how the Nazis were ever capable of presenting some kind of myth of efficiency. Aside from being evil, they had a preposterously inefficient government and economy. They were so successful in WWII mostly because of the Germany army’s effective reforms responding to their failures in WWI.