The U.S. Mint has released its latest biennial report to
Congress. For all four major coins
– pennies, nickels, dimes, and quarters – production costs fell in 2014. The Mint says it “saved” $29 million in
production costs as compared to last year, primarily due to lower copper prices.
The catch is that the Mint is still losing money on the
production of pennies and nickels.
It now costs about $1.62 to make 20 nickels, or one dollar in face
value. It costs approximately
$1.66 to make 100 pennies.
So while the prices of the metals used to make coins has
dropped in recent times, they are still high enough to produce losses on the
two coins with the smallest denomination.
To say that the Mint saved money is similar to cheering a
reduction in deficit spending while the overall debt continues to
increase. The rate of loss is
going lower in percentage terms, but the losses keep coming.
As of 2013, the Mint was losing $105 million annually to
produce pennies and nickels. This
is mostly a drop in the bucket when compared to the annual federal budget, but
it is still another little thing that adds up.
And these losses are not fixed. If the prices of certain metals go up significantly, then
the losses will accumulate quickly.
There are discussions about ditching pennies and nickels,
but this proposal hasn’t gained a lot of traction up to this point. The move would be highly opposed by
certain special interests including metal alloy industries and Coinstar, which
makes money when people trade in their change for cash.
The Mint could also change the metal composition in its
coins, including dimes and quarters, to use more inexpensive metals, but this
is not quite as easy as it sounds.
It would affect vending machines nationwide, requiring an upgrade to
read the new coins based on the new weights.
Of course, the only reason this is an issue is because of
monetary inflation. As the money
supply is increased by the Federal Reserve, our fiat dollars become worth less
and less. The purchasing power
decreases with more dollars in circulation. Therefore, most things will go up in price in nominal terms,
Over time, this adds up. Since the Fed’s inception 100 years ago, the purchasing
power of the dollar has declined over 95%. Some things may get cheaper such as computers and other
electronics due to increasing technology and production. But in the case of most commodities,
production and technology are not enough to offset the monetary inflation. Prices will rise over time. As metals such as zinc and copper rise
in price over time, the value of the metal eventually exceeds the artificial
values of 5 cents and 1 cent for nickels and pennies.
When metal prices began to soar in the mid-2000s, the metal
value in nickels and pennies exceeded the monetary value of the coins.
Hoarding Pennies and
We can be sure that the days for pennies and nickels are
numbered, at least in their current state. If metal prices continue to rise, then losses for the U.S.
Mint will continue to mount. In
other words, losses for taxpayers will continue to mount.
We will also see Gresham’s law take over. This is where good money is driven out
of circulation when there is an artificial government price control. In this case, the government’s
artificial price is putting a one-cent value on pennies and a five-cent value
More people will begin to hoard pennies and nickels. I can envision nickels going out of
circulation faster because it is more cost effective and space effective to
hoard nickels over pennies.
You could say that collecting pennies and nickels are the
safest investment you can find.
They protect you from deflation and inflation. If we have deflation, you can always just spend them based
on the government’s monetary value.
And in a deflationary environment, the purchasing power of your money
If we have inflation, then the coins will increase in value
based on the content of their metals.
They will end up trading just as we see “junk silver” traded today. These silver coins are not really junk
at all. They are pre-1965 dimes,
quarters, and half dollars that trade based on their silver content.
The same thing that happened to pre-1965 silver coins, which
actually contain silver, is going to happen to pennies and nickels.
If the Fed keeps printing money, then we can say good-bye to
pennies and nickels in their current state. We can make a safe assumption that the Fed is going to
continue to print money, whether it is done on a computer screen or outsourced
to the Mint.