My grandfather used to say, "Don't accept wooden coins."
The idiom basically meant: "Be careful! Don't be fooled."
In the past, small banks and merchants sometimes handed out wooden nickels as promotional items. Of course, they were worthless. You didn't want to be tricked into accepting a wooden nickel in lieu of real money.
Today, one could just as accurately say, "Don't take a penny."
President Donald Trump recently announced the demise of the penny and ordered the U.S. Mint to stop producing the 1-cent coin due to its cost. According to the Mint, minting and distributing a penny costs 3.69 cents.
But there is still a problem: nickel.
The nickel problem
By phasing out the penny, the Mint will have to produce more 5-cent coins. The problem is that they cost more to produce than a penny.
In fact, a "pro-cent" group called Americans for Common cents argues that eliminating the cent will cost the government more than continuing to produce it.
"Without the penny, the volume of nickels in circulation would have to increase to fill the gap in small-value transactions. Far from saving money, eliminating the penny displaces and amplifies the financial burden."
(Full disclosure: according to CNN, Americans for Common Cents is funded primarily by Artazn, the company that has the contract to supply the banks used to mint pennies.)
Possible biases aside, Americans for Common Cents is not wrong about the cost of the nickel.
According to the most recent annual report prepared by the U.S. Mint, it costs 13.8 cents to produce and distribute a nickel.
To cut costs, the Mint reduced the number of nickels it produced last year by 86 percent. It produced 202 million nickels, compared to 3.2 billion pennies.
Here's the problem.
If the Mint must produce only 850,000 more nickels to fill the void left by the penny, it will completely eliminate the savings promised with the elimination of the 1-cent coin. According to AP estimates, if the Mint goes back to producing 1.4 million nickels a year, it will cost $78 million more than the cost of the pennies it is no longer minting. Americans for Common Cents says it will have to produce between 2 million and 2.5 million more nickels to replace the penny.
Why are nickels so expensive?
The higher cost is primarily due to the metal used to produce the coin. Five-cent coins are made up of approximately 75 percent copper and 25 percent nickel. Meanwhile, the "copper" penny now has very little copper.
In 1982, the Mint eliminated most of the copper from the pennies. Prior to that year, the cents were composed of 95 percent copper and 5 percent zinc. Due to rising copper costs (a result of inflation), the Mint changed the composition to 97.5 percent zinc with 2.5 percent copper plating.
What is the government doing with your money?
CNN points out that one of the reasons the U.S. Mint makes so many pennies is that they quickly fall out of circulation. People tend to throw them away in a jar or junk drawer. In stores, people tend to throw them in the "leave a penny, take a penny" dish. And, by the way, you see more and more nickels in those dishes.
One economist told CNN, "When people start leaving a monetary unit in the cash register for the next customer, the unit is too small to be useful " .
But why have nickels and dimes become "worthless"? Because the government is constantly devaluing your money.
According to the CPI, an item that cost five cents in 1970 costs about 41 cents today.
Note that the CPI does not reflect the entire history of inflation. The government revised the CPI formula in the 1990s so that it underestimated the real increase in prices. According to the formula used in the 1970s, the CPI is close to double the official figures.
In other words, when someone gives you a nickel today, it's not worth much more than the wooden nickel my grandfather warned me about.
This is precisely why the government eliminated copper from the penny, and nickel costs much more to produce than it is worth.
And, of course, the problem is not limited to pennies and nickels. The government has devalued all money.
Under the Coinage Coinage Act of 1965 signed by President Lyndon B. Johnson, the U.S. Treasury eliminated all silver from the dimes, quarters and fifty-cent coins. Instead, the government now mints coins from "composite materials, with faces of the same alloy used in our nickel, which is bonded to a pure copper core."
Today, one sometimes hears coins minted before 1965 referred to as "junk silver".
Actually, we should call modern U.S. coins junk. In fact, it is difficult to find pre-1965 silver coins in circulation. They have been driven out of circulation by Gresham's law: bad money drives out good.
If you find one of these old silver coins, keep it. The metal of a silver quarter is worth more than 23 times the face value of the coin.
The problem of money
The removal of silver and copper from U.S. coins is symptomatic of a larger problem: government money printing.
The government and its central bank constantly expand the money supply. This is, by definition, inflation. More dollars in circulation means that each dollar is worth less. We experience this phenomenon in the form of rising prices.
Of course, as each dollar loses value, each fraction of a dollar loses value and ultimately becomes worthless.
Currency devaluation benefits the government because it allows it to borrow and spend much more than it could in a sound monetary system. This is precisely why President Franklin D. Roosevelt began the process of separating the dollar from the gold standard, and Richard Nixon cut the link permanently in 1971.
The bottom line is that we don't really have a penny problem or a nickel problem. We have a money problem.
Mike Maharrey, Money Metals