My grandfather used to say, “Don't take wooden coins.”
The idiom basically meant, “Be careful! Don't be fooled.”
In the past, small banks and merchants sometimes gave out wooden five-cent coins as promotional items. Of course, they had no value. You didn't want to be tricked into accepting a wooden five-cent coin instead of real money.
Today, you could say with equal accuracy, “Don't accept a penny.”
President Donald Trump recently announced the demise of the penny and ordered the US Mint to stop producing the 1-cent coin because of its cost. According to the Mint, it costs 3.69 cents to mint and distribute a penny.
But there is still a problem: the 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 manufacture than a penny.
In fact, a “pro-penny” group called Americans for Common Cents argues that eliminating the penny will cost the government more than continuing to produce it.
"Without the penny, the volume of five-cent coins in circulation would have to increase to fill the gap in small-value transactions. Far from saving money, eliminating the penny shifts and amplifies the financial burden.”
(Full disclosure: According to CNN, Americans for Common Cents is primarily funded 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 five-cent coin.
According to the most recent annual report from the US Mint, it costs 13.8 cents to produce and distribute a nickel.
To reduce 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 just 850,000 more nickels to fill the gap left by the penny, it will completely eliminate the savings promised by eliminating the penny. According to AP calculations, if the Mint returns 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 claims it will have to produce between 2 and 2.5 million more nickels to replace the penny.
Why are five-cent coins so expensive?
The higher cost is mainly 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 removed most of the copper from pennies. Before that year, pennies 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 a 2.5 percent copper coating.
What is the government doing with your money?
CNN points out that one of the reasons the US Mint manufactures so many pennies is that they quickly fall out of circulation. People tend to throw them into a jar or a junk drawer. In stores, people often toss them into the “leave a penny, take a penny” dish. And, by the way, you see more and more nickels in those dishes.
An economist told CNN, “When people start leaving a coin in the cash register for the next customer, the coin is too small to be useful.”
But why have five-cent and one-cent coins become “useless”? 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.
Keep in mind that the CPI does not reflect the whole story of inflation. The government revised the CPI formula in the 1990s to underestimate the actual increase in prices. According to the formula used in the 1970s, the CPI is close to doubling the official figures.
In other words, when someone gives you a five-cent coin today, it's not worth much more than the wooden coin my grandfather warned me about.
This is precisely why the government removed copper from the penny, and nickel costs much more to produce than it's worth.
And, of course, the problem isn't limited to pennies and nickels. The government has devalued all money.
Under the Coinage Act of 1965 signed by President Lyndon B. Johnson, the US Treasury removed all silver from the ten-, twenty-five-, and fifty-cent coins. Instead, the government now mints coins from “composite materials, with faces made of the same alloy used in our five-cent coins, which are bonded to a core of pure copper.”
Today, coins minted before 1965 are sometimes referred to as “scrap silver.”
In reality, we should call modern US coins junk. In fact, it is difficult to find silver coins from before 1965 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 in a silver quarter is worth more than 23 times the coin's face value.
The problem with money
The removal of silver and copper from US coins is symptomatic of a larger problem: government money printing.
The government and its central bank are constantly expanding 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 far 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 severed the link definitively in 1971.
In short, we don't really have a problem with pennies or nickels. We have a problem with money.
Mike Maharrey, Money Metals