Good-Bye Pennies and Nickels

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.

Blame the Fed

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, particularly metals.

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 Nickels

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 on nickels.

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 should increase.

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.