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What's a Penny (Or a Nickel)

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What's a Penny (Or a Nickel) ESSAYS ON ISSUES THE FEDERAL RESERVE BANK FEBRUARY 2007 OF CHICAGO NUMBER 235a Chicago Fed Letter What’s a penny (or a nickel) really worth? by François R. Velde, senior economist On December 14, 2006, the United States Mint announced new regulations to limit the melting and exportation of pennies and nickels. The goal is to prevent a shortage of small change in circulation. This article looks at the problem in historical context and suggests solutions. In this Chicago Fed Letter, I examine the of coins. If the price of metal in terms reasons behind the United States Mint’s of money fell enough, it became prof- recent decision to issue new rules on the itable to convert metal into money by melting and exportation of pennies minting it. Conversely, if that same price and nickels in the broader context of rose high enough, it became profitable our small change. These regulations to convert coins into metal by melting were prompted by recent inquiries the them down. Minting and melting main- Mint received asking whether melting tained within bounds the value of money coins was legal and by other anecdotal relative to metal and to all other goods. The prohibition on melting reports of “recycling and speculation.” Import and export of coins served the pennies and nickels is a What is happening and what is to be same purpose in keeping domestic prices done about it? in line with world prices. stopgap measure that at best increases the costs of A brief history of money Over time, the needs of trade required large silver coins and gold coins. The dif- In the old days, a commodity was chosen melting by a small amount. ficulty of maintaining fixed exchange to serve as both the standard to measure values between coins of different sizes value and the medium of exchange. and different metals had two conse- Thus, if silver was the chosen commodity, quences. One was a process of repeated prices were measured in, say, pounds of “debasements” that increased the pro- silver, and lumps of silver of a standard portion of copper in small denomina- size (called “coins”) were exchanged for tions to make its content cheaper, so goods and services. This is called a com- that by the eighteenth century the penny modity money system. In the early Middle was made of copper. The other was, af- Ages, there was only one size of coin; it ter much experimentation, the adop- was called the penny and made of silver tion in the nineteenth century of the with a little copper alloyed for hardness. gold standard.1 The quantity of money in circulation Under the gold standard, adopted in was determined by two actions: mint- the U.S. in 1900, the unit of account ing and melting. The stock of money (the dollar) was embodied in large- increased through minting new coins, denomination gold coins and defined which could be done by monetary au- as a fixed quantity of gold. The minting– thorities on their own account or by pri- melting mechanism continued to vate individuals taking metal to the mint regulate the value of those coins. But for conversion into coins. The stock of smaller-denomination coins became money decreased through the melting 1. U.S. coinage’s intrinsic value, 1900–2006 Coinage Act to ban suggests the importance of habits in our the melting and ex- attitudes toward coinage and currency. percentage of face value portation of dimes 120 and quarters (May 20, The current situation 1967). Although the In late 2004, the price of copper rose 100 ban resulted in sever- above $1.50 per pound and has not come al indictments, it did below that level since. Other commodi- 80 not prevent the com- ties have surged as well, notably zinc and plete disappearance nickel. Figure 1 shows how the intrinsic 60 of silver quarters and content of quarters, nickels, and pennies dimes from circula- as a percentage of the coins’ face value 40 tion, and it was lifted has changed over time. As of January 9, in June 1969. 2007, the content of a zinc penny is worth 20 6% less than its face value; the pre-1982 The new pennies 0 penny and the nickel are 72% and 24% 1900 ’10 ’20 ’30 ’40 ’50 ’60 ’70 ’80 ’90 2000 of 1982 above face value, respectively.3 penny The provisions of the These values do not accurately measure nickel Coinage Act were used quarter once more, this time the profit to be made by melting down the coins. It would be necessary to sub- NOTE: The data plotted are annual averages. to protect the penny. SOURCES: Author’s calculations based on data from the United States Mint tract melting and refining costs (scrap and U.S. Department of the Interior, U.S. Geological Survey, The peg to gold had http://minerals.usgs.gov/ds/2005/140/#data. ended in August 1971. copper is worth about 20% less than high- Many prices were ris- grade copper). Also, collecting and ship- ping costs would be relatively larger for fiduciary: Their face value was higher ing, and on April 1, 1974, the price of the smaller denominations, since dig- than justified by their intrinsic con- copper reached a record $1.40 per ging a penny or a nickel out of a sofa tent. This was possible because the U.S. pound. At the time, 154 pennies con- requires the same effort. This probably Department of the Treasury stood ready tained one pound of copper. The public’s explains why pre-1982 pennies have to exchange subsidiary coinage for demand for pennies rose to suspiciously not disappeared yet. Still, nickels and gold coins, and conversely, at a fixed high levels. The Treasury concluded pennies remain close to their melting rate. Thus, although the value of the that people were preparing to melt point (hence, the new regulations). silver in a quarter was around ten cents, pennies, and it announced the ban a quarter was worth 25 cents because (April 18, 1974). A few months later, The prohibition on melting is a stopgap the Treasury was always willing to ex- Public Law 93-441 (31 U.S.C. 5112(c)) measure that at best increases the costs of change 40 of those silver coins for a granted to the Secretary of the Treasury melting by a small amount—the probabil- gold ten-dollar coin. the power to change the proportion of ity of being caught times the penalties zinc and copper in pennies. But copper imposed, or the storage and time costs of This system of coinage remained essen- prices stayed around $0.60 per pound hoarding the coins until the regulations tially unchanged until the early 1960s,2 in subsequent years, and the ban was are repealed. History shows that when when the world price of silver began lifted in June 1978 without any further coins are worth melting, they disappear. to rise. By 1963, the value of the silver action. After copper prices hit another content of quarters had reached 25 record of $1.44 per pound on February 12, What is to be done? cents, and any further rise would make 1980, the Treasury briefly considered In our current (fiduciary) system, the it worthwhile to melt silver quarters and another ban. Then, it opted instead to stock of tokens we use in transactions, dimes. In July 1965, Congress passed the change the composition of the penny. and their value, is determined not by Coinage Act, which authorized the mint- The Mint started making copper-coated minting and melting—as under the old ing of quarters and dimes made of cop- zinc pennies in January 1982. (commodity) system—but by the mon- per and nickel. This action was intended etary authority’s policy. In this respect, not to replace the existing stock of silver Most people don’t know that all pen- there is no difference between notes and quarters and dimes, but to reduce global nies are not the same. Lincoln’s pro- coins. The value of a dollar bill has noth- demand for silver. To prevent the existing file has been unchanged since 1909. ing to do with its alternative uses as wall- coins from disappearing, the Treasury But if you take a penny dated 1983 or paper or insulating material. The same used in succession two means at its dis- later and scratch its surface, you will see should be true of pennies and nickels, posal. One was to sell its large stockpile the shiny white zinc underneath the which are like notes, only made of some- of silver at $1.29 per ounce, the price at copper coating. As for the nickel, its thing more durable than paper. which a quarter’s content was worth size and composition haven’t changed 25 cents. When it ran out of silver, the since 1866. The effort to maintain the Whenever the value of a coin reaches Treasury used its authority under the outward appearance of the coinage the floor set by its intrinsic content, it 2. Ratio of U.S. coin production to GDP, 1946–2006 countries, such as by other means of payment, notably Canada, the United electronic alternatives. These factors log scale Kingdom, and those suggest that, sooner or later, the penny 10–3 of the eurozone, have will join the farthing (one-quarter of a found steel a cheap penny) and the hapenny (one-half of and convenient sub- a penny) in coin museums. Perhaps now stitute for their equiv- is the time.
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