Penny for Your Thoughts

The decision of wether to keep the penny as a unit of American currency is becoming an increasingly hot topic. The debate has even been brought before congress, twice, but neither of the bills, advocating the elimination of the penny, were approved. Even President Obama has stated his willingness to abolish the penny on February 15th, 2013.  Saying,”Anytime we are spending money on something people do not use, its something that we should change.”

The first argument against the penny is that pennies actually cost more to make than they are worth. According to the US mint’s 2013 annual report, every penny cost 1.8 cents to make. Granted, the total cost of minting pennies was only $58 million last year, less than one-tenth of a percent of total federal spending, but groups like Citizens to Retire the U.S. Penny have long been making the economic case for getting rid of the penny. Even the U.S. military has already decided they’re essentially useless with Army and Air Force Exchange Service stores on bases rounding all cash purchases up or down to the nearest nickel.

When looking at the costs and benefits in aggregated terms, there have been studies that have shown that the penny results in an annual loss of $900 million in the US economy each year. How did they come by this number? The economist Robert Whaples stated that every cash transaction that involves pennies takes two extra seconds because people are fishing them out of their purses and pockets.  He and others have stated that aggregated, these two second delays add up to a loss of productivity and opportunity cost of use worth $900 million to $1 billion dollars. He also argues that eliminating the penny could make people keen on using $1 coins, which would save the US an additional $500 million a year because coins are more durable than bills which are torn and lost easily.

The second most compelling argument is that penny’s these days have limited utility, not being accepted at many parking meters or vending machines. Economist Greg Mankiw says that “The purpose of the monetary system is to facilitate exchange, but… the penny no longer serves that purpose.”  There has never been a coin in circulation in the US worth as little as a penny is today.

    Taking into account the arguments of those in support of abolishing the penny, which tend to focus on statistics of aggregated costs, it will not happen.  Popular support for the penny is still high, at 67%. In addition, Keynesian idea of “menu costs” is something that has not been researched fully.  If the abolitionists want the penny to be taken down, they will have to approach it from the stand point that we should limit all of our physical currency monetary transactions and switch to e-currency.

7 thoughts on “Penny for Your Thoughts

  1. njbeck@umich.edu'Nathaniel Beck

    Interesting read and I completely agree. If the penny were to actually be eliminated, I think it would be smart to have some sort of a repossession policy in which people can sell their pennies back to the government so they can be melted down and recycled instead of being left to clog our wallets for even longer.

    1. Dan Miller Post author

      Initially I thought, hey pennies are copper so they would be a great resource for the government to buy back because copper is an expensive commodity. Unfortunately, in 1982, they changed the composition of the penny from 95% copper to less than 2.5% copper, so most of the pennies we use today are actually zinc. Zinc is also a valuable commodity, but the government would have to double spend on buying them back. They had to pay to create it and now they have to pay to recycle it. Nonetheless, a very worthwhile idea.

  2. luctommo@umich.edu'Lucas Morrison

    While it may be true that the total opportunity cost loss from using pennies in transactions is equal to $1 billion, the loss to the economy would be nowhere near $1 billion since not all time is capitalized on. By that logic, all time that could be spent working represents a loss to the US economy.

    Also, I certainly don’t think $58 million is worth overlooking.

  3. Emily Attar

    For the amount of pennies that individuals likely have in their possession, I think the losses incurred by getting rid of them as a form of currency would be negligible. The problem would be among banks or businesses that do tend to hold larger amounts of pennies. With the inconvenience of using/having pennies right now, you would think that there would be less support for keeping them in circulation.

    1. Dan Miller Post author

      Absolutely, when I was researching for this paper, I found that there enough pennies in circulation for each and every American to own 4 pounds of them. The problem is that all the research on wether the losses (or gains) incurred by abolishing the penny are ex ante study and have widely varied findings. For now I believe the fed will keep the penny for the foreseeable future simply to maintain the status quo.

  4. Justin Lee

    To add another note, with most of our transactions are now electronic, keeping “idea” pennies may be viable option if we get rid of material currency (paper money and coins). In the end, some transactions need fraction down to hundredths.

    1. Dan Miller Post author

      This is an interesting idea, maybe if the penny were to be eliminated, it would cause there to be two separate costs for goods, the first, an exact cost to be paid electronically, or the second, a cash price to be paid at a premium or a discount rounded to the nearest nickel. If this were the case, would a premium be beneficial? It would certainly discourage the use of cash, but is that a good or bad thing? could the premium be used as a tax? I suppose if you are looking to limit the use of cash and encourage electronic currency then you would want it to be the premium.

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