Today’s Wall Street Journal (March. 19, 2017, page R1; online version is here) printed an article I wrote. They asked me to be part of a debate on “Should the U.S. Retire the Penny and Nickel?” I took the “no” side. This is a follow on article from the piece I wrote for TheConversation back in August 2017 (see the original piece here) that advocated the same idea. Because of space limits the Wall Street Journal edited down my piece. Below is the unedited version:
There is a growing war on cash, with even the smallest coins targeted for elimination. Senators McCain and Enzi introduced legislation in 2017 to stop the minting of pennies. This legislation, along with calls to eliminate the nickel, is misguided for four reasons.
First, both coins enjoy widespread popular support. When polled, the majority of individuals don’t want either coin eliminated. The majority has clearly spoken and they want these coins kept around.
Surveys and polls can be wrong. However, the poll’s findings are backed up by Mint production figures. The Mint creates coins based on current demand and demand is soaring for small denomination coins. Over the last decade, the Mint roughly doubled the number of pennies and nickels it shipped. We don’t need legislation to eliminate pennies. If people stopped using them, the Mint would automatically adjust by creating fewer of them. So far this drop in demand is not happening.
Second, opponents claim it costs the government more money to mint the coins than they are worth. This statement, formally called negative seigniorage, is correct. The U.S. Mint does lose money on pennies and nickels. In 2017 it cost the U.S. Mint 1.8 cents to make each penny and 6.6 cents for each nickel.
However, overall, the Mint is a profit-making machine. In 2017 it earned almost $400 million in profits producing circulating coins. For every dollar’s worth of coins it shipped out the Mint made 45 cents. That is a profit margin many business owners dream about.
Many businesses have loss leaders, which are products sold below cost to attract attention and customers. Pennies and nickels are the Mint’s loss leader. They help create demand for more profitable coins in the cash economy. Eliminating pennies and nickels could make people think coins overall aren’t useful. If we stop using all coins, the Mint will lose $400 million dollars of profit a year.
Opponents also argue the government would save money by eliminating low value coins. Yes, the government lost about $90 million minting pennies and nickels in 2017. Compared to overall Federal spending of about $4 trillion these losses don’t really register. Nevertheless, the government’s primary goal is neither to earn profits, nor minimize costs. If cost minimization were the goal, post offices in tiny hamlets and defense projects the military does not want would also vanish.
Third, some people and businesses feel pennies and nickels are a nuisance. They slow down lines and delay customers. Having low-denomination coins enables cash transactions to be as precise as cashless transactions and keeps the cash economy humming. However, people who dislike these coins can avoid dealing with them by going cashless. Simply using a credit or debit card for all purchases eliminates dealing with small coins.
Stores and restaurants bothered by small denomination coins can set prices so the final cost ends up in round numbers that eliminate using pennies or nickels even when sales taxes are taken into account. Numerous food trucks and some Chipotle Mexican Grills already use this kind of flat pricing to speed up checking out.
The last reason to keep the penny is to maintain confidence. Currently, all money around the world is backed only by faith. When people lose faith and stop accepting a country’s money it becomes valueless. In many developing countries, the local currency is used only for small transactions. Savings and large transactions are done in dollars, Euros and other major currencies.
Eliminating the penny and nickel is a signal to the world that the U.S. currency is no longer strong and secure. Eliminating the penny and nickel will make people wonder, what will be eliminated next? Any action that reduces faith erodes the dollar’s current position as the world’s dominant reserve currency.
Money is the lubricant that greases the wheels of commerce. Keeping the penny and nickel results in those wheels continuing to spin freely for small purchases.
Jay L. Zagorsky is an Economist and Research Scientist at The Ohio State University and also teaches at Boston University’s Questrom School of Business. His latest book is “Business Macroeconomics.” Follow him on Twitter @Prof_Jay_Z or read his blog at “TheConversation.”