The Useless Penny
David Owen writing for the New Yorker (Penny Dreadful: They're horrid and useless. Why do pennies persist?) provides a number of anecdotes illustrating the perversity of our monetary system:
- Pennies cost about 1.7 cents to manufacture
- Nickels are even worse in percentage terms, costing almost ten cents
When the metallic value of the coins exceeds their face value, an obvious arbitrage is to melt them and refine the metal. A firm that separated the older copper pennies from the newer zinc pennies and then sold the copper was shut down when congress banned the melting of coins.
As the value of these coins declines to ever smaller amounts, the cost of manufacturing small, nearly worthless coins is increasing, as is the amount of our time spent keeping track of them and searching for them in checkout lines.
The main focus of the article is on various reform plans to address the problems. Among the options are legislative reforms to alter the metallic content of coins. Pennies are now made mostly out of zinc. It turns out that the zinc industry has a lobbying association which strives to prevent congress from changing the metallic content of coins. The author discusses other reform plans involving rounding transactions to the nearest five or ten cents.
The article does not mention the most common reform, which is to do a 100-for-1 or 10,000-for-1 reverse split of the currency system. "New dollars" are issued at a fixed exchange rate compared to old dollars. Typically the exchange rate is chose to give 1 of the new currency units a reasonable amount of purchasing power.
The article notes that, as recently as 1940, the penny had "more purchasing power than a modern quarter". But "inflation has eroded" the penny's purchasing power. But this is about as much as it has to say. Inflation is an endogenous factor that somehow erodes the power of money.
Where the article fails is in ignoring the real problem: inflation which is inherent in our system of fractional reserve banking and paper money. How about the following reform proposal: shut down the central bank, use gold as money, and adopt a system of 100% reserves?
Comments (27)
Jim Fedako
What an absurd system! A system where a token is worth more than its face value. What next? The paper used to print the dollar worth more than its face value? It's happened before.
Published: May 25, 2008 9:53 PM
Walt D.
Jim
Dollar bills are made out of cotton, not paper. (This is why you can still use them if you leave them in your pants pocket when you do the laundry).
So look on the dollar bill as the future Cottonelle rather than Charmin!
Published: May 25, 2008 10:37 PM
Jim Fedako
Walt D.:
Point taken. Thanks! ;-)
Published: May 25, 2008 10:56 PM
Ellen
While I certainly can agree with the conclusion that a gold standard would be better, I don't quite understand how a 100% reserve system would be adopted without some sort of government enforcing it. Under an anarcho-capitalist system, I'd imagine both fractional and 100% banking system would exist - while fractional reserve banks aren't good for the business cycle or for anyone with money in them when they fail, they're great while they're working for people who want a loan or people who would rather get money back for putting it in a bank, instead of having to pay a fee.
Published: May 25, 2008 10:58 PM
Jim Fedako
Walt D.:
I take back my ;-). The component material of the dollar bill is considered paper since paper is not limited to wood pulp. Refer to the Wikipedia entry on paper.
Published: May 25, 2008 11:32 PM
Walt D.
Jim
I stand corrected!
Published: May 25, 2008 11:42 PM
TLWP Sam
So when a round metal thingy has a metal content less than its face value - it's a token, if the value's the same as the face value or its value is derived from its metal content then - it a coin . . . but if the metal content exceeds it face value does that make it an investment coin? Who knows there could be a small fortune in retaining these coins rather than respending them (*cough* *cough* Gresham's Law *cough* *cough*). After all, who says all investment coins must be gold and silver. :P
Published: May 25, 2008 11:48 PM
gene berman
Ellen:
Interest (or not) on bank deposits has nothing to do with whether fractional-reserve is in place; it's whether it's a demand account (a checking account--subject to withdrawal any time) or in a time (such as a CD or savings) account.
A demand deposit can't be lent (because it may be withdrawn)--so involves the cost of its storage; those on which the bank can "count" for a period can be lent for a shorter period and thus earn interest for both bank and depositor. The typical NOW (negotiated order of withdrawal) account creates the fiction that you put it in a demand deposit but, that every millisecond thereafter and until actually withdrawn, it's a "time" deposit and pays interest.
Fractional-reserve creates money (out of nothing, basically) that can be lent, enabling both lower interest to attract more borrowers (so they like it) and mo' money the bank can lend/earn interest (so they like it!). But it causes the "business cycle, the phenomenon we perceive as inflation, financial crises, and inevitable instability of an entire system. It "counterfeits" money everyone must rely on by ("legal tender") law.
Whether a gold standard requires 100% reserves is unsettled, a matter of opinion among "sound money" folk. One is Rothbard's--for 100%--on grounds that less is willful fraud. Mises held (probably because of the impossibility of proving malicious intent) that, just as competition among banks to loan (lower rates) would encourage over-lending, it (competition) would temper expansion by the prospect of insolvency and ruin--in other words, absence of regulation (and of protection) would itself force most to prudent behavior and ruin misbehavers.
I believe that both "missed the boat" and did not fully appreciate the fundamental problem: the involvement of authority--coercion other than social "pressure"--in money's definition and value, including the very idea "management" of quantity. Nothing I've seen on this (or other) site offers the slightest prospect for true reform of the basic (ever-recurring) "monetary problem." Indeed, the problem is virtually universal--worldwide--for the first time in history, with (since about 1974) not a single convertible currency, all being subject only to management of their quantity by governments (and inter-gov't. agreements), relying on markets to equilibrate them as they head, ultimately, toward no value at all.
Published: May 26, 2008 8:58 AM
fundamentalist
While I would love to see free banking in the US, I'm not holding my breath. In the short term, the Feds need to target the price of gold as Greenspan did in his early years. He used to try to keep gold between $250 and $350. Then something caused him to go insane. The Feds could achieve most of what we want in terms of sound money by simply targeting the price of gold.
Published: May 26, 2008 9:13 AM
gene berman
Twenty-five years ago, I was involved in a business (a restaurant) involving about 125 orders a day at an average of about $12 per sales slip, when there occurred a "penny shortage." There were even lines of businesspeople or their employees at banks to get pennies on a rationed basis.
My analysis was that rounding the check down to "give away" the 1, 2, 3, or 4 cents would cost an average of 2-1/2 cents per order X 125 orders X .8 (because 20% of the orders would already end in a 0 or a 5) = $2.50 (daily cost of rounding down), an almost infinitesimal fraction of the $1500 gross.
Further, even that could be somewhat offset by increasing menu prices ending in .95 or .99 to the next whole-dollar figure. It worked well, made life (and change-making) simpler, so we kept on even after the "shortage" ended in a few days.
Published: May 26, 2008 9:31 AM
gene berman
fundamentalist:
There's no policy that the Fed could adopt that would be "good." The entire reason for having a Fed in the first place is to enable coordination (between banks) in a steady increase in the quantity of money--with the purpose of achieving lower interest rates (felt to be "good for business") than would otherwise prevail.
The policy itself hold the seeds of its failure in that further increase in quantity cannot achieve the same effect (on interest rates and business conditions) without further increase in the rate of increase--"compounding" of the rate--just to "stay even." Any decrease--or even decrease in the rate of increase--leads to the phenomenon of recession.
In the short term, government(s) hold the "whip hand" against speculators in the gold market--in the form of their gold reserves which can be sold (or even threatened to be sold) to chasten (by losses) the gold-holders and those "long" gold in commodity markets. But those sales (and many governments have sold significant fractions of their former reserves--the U.S. has not sold but has engaged in "leasing" of metal it is unlikely to ever recover in quantity) ultimately lead to ever-smaller quantities of reserves supposedly "backing" (though legally
inconvertible) ever-expanding quantities of currency. The eventual outcome can't be foreseen with any accuracy--except that it won't be pretty..
Published: May 26, 2008 10:04 AM
Denny5
...but this David Owen essay never answers his prime question: "Why do pennies persist ?"
Short answer is that eliminating pennies would be very bad publicity for the Federal ruling elite -- it would clearly show to average Americans how the U.S. currency has been debased... with common coins now being worthless.
The politically safe approach is to maintain the appearance of a sound coins & currency.... no matter how worthless they become in reality.
It's all public relations.
The huge cost in maintaining that charade doesn't bother Congress at all.
Published: May 26, 2008 10:55 AM
Curt Howland
It's been done already. No one remembers the "mil", 1/1000 of a dollar.
Published: May 26, 2008 11:21 AM
Eric Schleien
100% reserve banking is inappropriate for a gold standard. Refer to the book by Nathan Lewis, Gold: The Once and Future Money which is considered the bible on understanding monetary policy as it relates to hard currency.
Published: May 26, 2008 12:22 PM
Robert Blumen
I've read the Lewis book. I'm not sure who appointed this book it the "bible" but I certainly don't. It was a poorly reasoned and poorly argued book, full of misunderstandings, contradictions, economic fallacies, and shows no evidence of having any familiarity with the Austrian view. It seems primarily to be based on elements of the supply side and monetarist frameworks. The guy's understanding of monetary theory was seriously deficient. In any case, he does not address the 100% bank reserve position systematically. He has a short section title "The 100% Gold Standard" in which he mischaracterizes the problem and then presents a non-solution. He states that 100% gold standard advocates wish for central banks to back the entire existing supply of fiat money with gold, and then points out that, at the current price of gold, this would not be possible. While his point is true, it has nothing to do with the commercial bank reserve issue, which is the main focus of the 100% advocates. He shows no evidence of having read the real bible on monetary policy, Huerta de Soto's book on banking and credit cycles, which presents the most through defense of the 100% reserve view.
Published: May 26, 2008 12:35 PM
gene berman
Curt:
The mil was never a coin or currency unit--merely a fractional designation used for the purpose of tax rates. To my knowledge, we've never had anything less than the one-cent piece (though the English had their "ha'penny").
Published: May 26, 2008 5:28 PM
Mike Gogulski
Slovakia eliminated the less-than-penny-value 50 halierov coin about 4 years ago, and there wasn't much of an outcry.
Pity, that, since they're about to dump a strong, small fiat currency in favor of a big fat one. Oh well, at least they got the kiddies excited: http://www.nostate.com/49/turning-central-bankers-into-flying-ponies/
Published: May 26, 2008 6:56 PM
Ellen
Gene: That still doesn't answer my fundamental question: Who will enforce a 100% reserve standard?
If the market would enforce a 100% reserve standard, why don't we have one now?
Published: May 27, 2008 1:57 AM
newson
in italy in the good old days of the the lira, the high inflation used to result in regular coin shortages. one was offered sweets (lollies) instead of coins for change.
Published: May 27, 2008 4:31 AM
gene berman
Ellen:
I hadn't meant to sidestep answering your question--I just assumed it was more or less rhetorical in nature.
The short answer is that you were right in your assessment that a 100% reserve standard (or any other particular standard, for that matter) would require the standard's establishment in law and a roster of sanctions and penalties. That's no guarantee, however, because the enabling legislation of the standard itself is most likely to contain "outs" available to the executive branch for "emergencies" or "contingencies." Let me put it this way: an ordinary, fully-backed (but whether 100% or not no one can say accurately) "gold standard" was the norm for a good portion of modern history, honored even in the breach in the opinion of the public. But "The Gold Standard" was a creation of governments attempting to regularize and promote money capable of serving the needs of peoples heavily involved, and to a rapidly increasing degree, in international trade.
Under a "free banking" regime, it cannot be predicted just what legal framework would be in place. As I noted, Rothbard believed that the law should treat an example of less-than-100% reserve as nothing less than fraud. Of course, this would probably entail bank licensing and oversight of one degree or another--or else the fraud would come to light only in the aftermath of a failure (locking the door after the horse is out of the barn). Mises considered it unnecessary for authority to have anything whatever to do with bank policy. Fear of failure would serve to keep reserves (whether 100% or not) and, therefore, inflationary pressure, well within bounds--and without any need for special licensing and oversight of banking business. A bank would be no different than any other business and would be subject to the very same code of commercial and contract law.
I want to emphasize that I "have no dog in this fight," insofar as favoring one or the other opinion--in fact, believe that both missed the mark in the very same fashion. Put another way, I'm a believer in "sound money" and, moreover, convinced that gold is the best (and only necessary) monetary commodity, capable of underpinning universal monetary stability but equally convinced that any "standard" is a step in the wrong direction. My "proof" of this contention is that such standards have been part and parcel of the evolutionary process by means of which we've been brought to the precarious position of the present (with respect to monetary matters). The core of my position is that authority has no legitimate role whatsoever in the determination of either money's form, its value (purchasing power), or the stability of that value, whether in the short or long run; moreover, that until those functions now exercised by government have been surrendered completely to the market, there is not the slightest chance of monetary stability of a quality any different from our experience right up to the present.
Published: May 27, 2008 6:41 AM
MatthewWilliam
Interesting fact:
One and two cent coins were recently withdrawn from circulation in Australia and the copper was used to make the bronze medals for the 2000 Sydney Olympic Games.
Published: May 27, 2008 7:16 AM
TLWP Sam
Do 17 years count as 'recent'? The one and two cent pieces were discontinued in 1991.
Published: May 27, 2008 7:30 AM
Frank
Leave it to government to turn a sure-win (seigniorage) into a loss!
It would be funny except for the fact that the taxpayers end up with the bill.
Published: May 27, 2008 4:28 PM
Axel Riemer
Gene and Curt -
I always thought the mil was a thousandth of an inch.. that's how I run across it anyway.
Published: May 27, 2008 4:38 PM
Kenneth
Don't forget British Farthing (1/4 of a penny) coins
Published: May 28, 2008 8:05 AM
gene berman
Alex:
You're right--but it's just a tad more complicated. "Mil" is an abbreviated form for several other words used in mensuration. It's derived from the Latin word for 1000 but when used as a prefix (milli) means a 1/1000
part. A millimeter is 1/1000 of a meter; the "mil" to which you refer is the milli-inch, used commonly in precision engineering and manufacturing (there's also a micro-inch, a thousandth of the mil, used in such places as plating); in angular measurement, there's the milliradian (also expressed as a "mil" in those circles--that's a pun, by the way). Of course, we understand that our "cent" (like the Frenchman's "centime") is the hundredth part of our monetary unit (dollar/franc), so the mil is just an extension to the thousandth. And don't think--for even a moment--I'm out to convince you that the girl's name Millicent must suddenly be seen in a new light. The only advice I have on those mini-, milli-, and micro- monetary measures is: don't spend them all in one place.
Published: May 29, 2008 5:30 AM
Mark E Hoffer
The U.S. minted half-cent coins, of copper, from 1793-1857.
Just an FYI..
Published: May 30, 2008 1:13 PM