published Wednesday, February 20th, 2013

Personal Finance: Nickel for your thoughts?

By Chris Hopkins

Another great debate on a burning issue is being joined: shall we eliminate the penny? Economists have advocated scrapping the one cent piece for years, but the question gained currency (excuse the pun) when President Obama mentioned it at his Google hangout last week.

The penny actually outstripped its own value some time ago, as the price of the metal plus fabrication and transportation costs relentlessly accelerated. According to the U.S. Mint, the cost of producing a 1 cent coin is 2.4 cents, arguing for either elimination or a radical redesign (plastic pennies anyone?)

In fact, the constituent elements of U.S. coinage have changed frequently over the years in a continual effort to contain the cost of production (and to combat the financial incentive to melt down the coins for their intrinsic value). The copper penny with which we are so familiar is in fact comprised mostly of zinc, with a small amount of copper plating. It weighs about one fourth as much as the first 1-cent piece and its composition has changed 10 times. During World War II, steel pennies were circulated to conserve precious supplies of copper for the war effort, and prototype aluminum pennies were coined in 1974 but never issued.

Of course, one argument against ditching the penny is its iconic status in the history of American coinage. This is one argument advanced by the penny lobby. Yes there is a penny lobby, led by Americans for Common Cents, which asserts that we love our penny and want to retain it as much as any of our other unalienable rights.

Although their website discloses no information about the group's sponsorship, it turns out that Americans for Common Cents is funded almost entirely by the zinc producers and certain vending machine associations. One of their primary weapons in the save-the-penny battle is a 2006 survey by Coinstar Inc. reporting popular support. Coinstar, incidentally, makes machines that count pennies. And according to Politico, Tennessee-based Jarden Zinc Products has spent nearly $1 million (100 million pennies) lobbying Congress to keep making them.

Nevertheless, it seems clear that its utility is nearing an end in 21st century commerce. Many countries already have eliminated their smallest denomination coins, including Canada, which recently stopped stamping out Canadian pennies but will continue to honor the ones in circulation. David Owen of the New Yorker notes that a quarter today has less purchasing power than a penny did in 1940. And most of the pennies minted each year never end up in the stream of commerce, but simply disappear. Perhaps you have a few thousand in a jar on your dresser?

The Mint will press nearly 4 billion pennies (11 thousand tons) this year, losing $40 million in the process. Without a hint of irony, Congress has ordered a study of alternatives to reduce the cost of the 1-cent piece. Instead, given the exigencies of debt and deficits, maybe it is time to bid good-bye to the cent. But keep the bedroom change jar; Coinstar also makes nickel counters.

Christopher A. Hopkins CFA, is a vice president at Barnett & Co.

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