Time For Change To Change

The US could save $100 million per year by changing the way we make our smallest coins, even more if we eliminate them. Upgrading our bills could add further savings. Currency reform is the fiscally responsible thing to do, but look out for a bitter fight if it is proposed.

The US is the laughing stock of the world when it comes to our money. Our bills all look and feel the same, and only last in circulation for a few years. We have coins that can buy literally nothing, and cost far more to make than what they are worth. The time might be right to put currency reform on the table with any financial reform package.

“Making a penny costs two cents; making a nickel costs nine cents.  This makes no sense. We can’t even change change.”
-Bill Maher

Coins

The American penny (one cent piece) is composed of 97.5% zinc and 2.5% copper. The cost to make and ship a single penny is $0.0167 (1.67¢). There is literally nothing you can buy with a penny anywhere outside of a novelty penny slot machine in a casino. It is a fractional coin, nothing but dead weight in the pocket, and is as useless as the no longer used half-penny. It has a negative seignorage (net loss) of over $50 million per year just to make these coins.

The American nickel is composed of 75% copper and 25% nickel. It is worth five cents (1/20^th of a dollar), but costs 9.5 cents to manufacture. According to Wikipedia “As of April 5, 2010, the value of the metal in a nickel is $0.0615744, 23.14% more than its face value. Costs of producing and shipping 5-cent (nickel) coins during fiscal year 2007 was $0.0953 per nickel.” In 2010, the costs to make a nickel coin have likely reached the 10 cent mark. Outside of a thrift store, flea market, or yard sale, literally nothing can be bought for a nickel. It is thus a fractional coin.

Several nations in the world have already abandoned their one cent piece, including Australia, whose lowest coin is now the five cent piece. New Zealand also eliminated their one and two cent coins in 1990, and their five cent coin in 2006. The UK killed their half penny in 1984. The more progressive nation Sweden had stopped using one and two öre (cent) coins 40 years ago, and in the 1990s rid themselves of their nickel, dime, and quarter. Norway and Denmark also have their smallest coin as the 50 cent piece (none have converted to the EURO currency yet). Currency reform has also taken place in The Netherlands, Finland, and Hungary (pre-Euro), as well as Israel and Brazil.

Why are we still using the penny and nickel? If micro-currency is so good, why not bring back the half-penny, and introduce the 1/10^th of a penny coin as well.

The fact is pennies and nickels cost twice as much to make and ship than what they are worth, and are worthless in terms of purchasing power. If it takes only two seconds extra for each transaction that uses a penny, the cost of time wasted in the U.S. is between $300 million to $1 billion each year for America. Pennies can’t be used in vending machines or toll booths. Eliminating pennies would not raise prices, in fact research done by Robert Whaples, an economics professor at Wake Forest University demonstrates that 1/40^th of cent per transaction would actually be gained by consumers. Finally, in the entire history of the US, there has never been a coin in circulation worth as little as the one cent piece is worth today.

The LA Times reports, “President Obama is proposing to save money by making the coins from cheaper material than their namesakes. Mindful of the likely uproar from the zinc industry, laundromat owners and coin collectors, the government is not disclosing its option. Speculation centers on aluminum alloy, which other countries use, or perhaps industrial porcelain, embedded with an ID chip.”

“Making coins from more cost-effective materials could save more than $100 million a year, which isn’t just pocket change,” said Dan Tangherlini, the Treasury Department’s chief financial officer.

The History of Coin Composition

Changing the way we make coins in the US has never been easy. The Wall Street Journal states, “No other stable nation has changed the metal content of its coinage less frequently.”

There were a number of changes during the World War II years when various metals were needed for different aspects of the war machine. Richard Nixon unsuccessfully attempted to make pennies out of aluminum in 1974. Ronald Reagan’s attempts to make it from zinc were stalled for years in the 1980s.

The WSJ continues, “Market forces, not metal prices, determine the value of American currency. Yet Americans persist, on websites like coinflation.com, in tracking the value of the metal in their currency. “People believe that we are still on some sort of precious-metal standard,” says Rod Gillis, educator at the American Numismatic Association.”

Previous Reform Attempts

“I will seriously consider eliminating the penny”
-Candidate Barack Obama in a March 2008 town hall meeting in Greensburg, Pennsylvania

Another solution, and a more cost-effective one would simply be to finally get rid of the useless pennies and possibly nickels in America. Pennies account for over half the coins minted by the US Treasury each year. Eliminating them should nearly halve the costs.

That said, reforms have been attempted many times in the past. The last push was the Legal Tender Modernization Act in 2001 and Currency Overhaul for an Industrious Nation, or COIN Act in 2006, both penned by Jim Kolbe (R-AZ). The COIN Act was introduced and referred to the Subcommittee on Domestic and International Monetary Policy in the US House of Representatives in 2006, but no further action was taken.

Outside of an act of congress, there is another novel solution to ridding the US of pennies. It could be done with a simple executive order by President Obama. Last year, Al Lewis of Thinkoob.com floated this idea:

…the key insight which we have had that no economist has had is, this whole thing can be done with an Executive Order, rather than an Act of Congress, because it is within the Treasury Department’s jurisdiction. They have already given some exceptions to the penny-as-legal tender, such as tolls. The Executive Order would say “Establishments which agree to round down cash transactions to the nearest nickel may refuse to handle pennies.

In other words, according to Mike Barone at US News and World Report, “Retailers should simply round down the total checkout tally for cash purchasers and not handle pennies at all. There will be no need for pennies in change and anyone who wants to use pennies to pay can put them in a charity jar instead. The first retailer to do this will reap a PR bonanza and others will quickly follow. Within a couple of years, retailers who don’t round down will be as rare as those who don’t accept credit cards. Not getting pennies in change, like being able to pay with credit cards, will be considered a birthright.”

Other Currency Reforms and Resistance

America could save more money by eliminating our paper dollars all together, and pushing the Sacagawea dollar coins harder. We might think of doing the same with 5 dollar notes, as coins are more cost-effective over their lifespan.

We could also stop making our bills with paper, and switch over to plastic money. This conversion has already taken place in Australia, Mexico, China, Brazil, Romania, Kuwait, Taiwan, Chile, and many other countries in the world. Countries where it will soon be implemented include Canada and India. Plastic notes, made from a polymer substrate developed in Australia last 10 times longer (5 years vs 6 months for paper currency), stay cleaner, are more difficult to counterfeit, and are recyclable. To boot, we could change the sizes or include braille to make notes distinguishable to the blind, and perhaps even eliminate the words “In God We Trust” to finally stop the unconstitutional state sponsoring of monotheistic religion.

There are 10 special interest groups monitoring the currency reform being floated by Obama staff.

The real challenge to currency reform is not going to be special interest groups however, but stubborn resistance from conservatives who will rally behind the archaic coins in an effort to further obstruct reform in America, and to attack Obama. If currency reform is put on the table by the Obama administration, expect the penny (and possibly nickel) to be on Tea Bagger protest signs, and fiery denunciations from conservative commentators who will liken defending the penny with American patriotism. Currency reformers will be painted as evil socialists trying to subvert the American way of life.

Well, if the way we are doing things isn’t working, then it’s time to change it, to try something new. That time has long passed in terms of our currency, so it is time to change change.