Those closest to me know that an issue which has always been one of my pet passions is that of penny and nickel elimination. As such, it was with joy that I read reports this week that the Treasury Department will begin removing pennies and nickels from circulation starting in 2013. This should be just the first step that the nation takes to modernize our currency system in order to save money.
Some may argue against the elimination of these two coins by claiming that it is unprecedented to simply remove a monetary denomination from the system. This is not true, however, as American history tell us. Along with the coinage we use today, there was an additional coin minted at the beginning of the nation: the half-cent. As the name clearly suggests, this coin was worth half of a penny. These coins were minted for sixty-four years until Congress discontinued them in 1857 due to popular disuse. While the half-cent was the oldest of all discontinued coinage, it is not alone. At various times Congress authorized the production of two-cent and three-cent coins, but these never lasted more than a decade.
Additionally, the United States will by no means be the first nation to eliminate its smallest and second smallest denominational coins. Canada has decided to eliminate its penny as well; its final penny was minted on May 4, 2012. Sweden, Norway, and Denmark have all discontinued production of almost all their coin denominations. Australia, New Zealand, and Mexico have all removed their lowest cent coins as well. As have Israel, the Netherlands, Brazil, India, Argentina, and Costa Rica.
There are two fundamental arguments for the elimination of the penny and nickel. The weakest, but still potent, is that of use. Pennies and nickels are almost never used outside of being exchanged at a Coinstar machine. Vending machines even accept pennies and I defy anyone to tell me they use nickels in vending machines with any frequency. The most common use of these two coins is that of receiving them as change. Once a consumer receives them as change, they often end up in a jar somewhere waiting to be taken to the aforementioned Coinstar machine.
The more important reasoning for the elimination, and the one which can hardly be argued against, is the simple fact that they are a waste of money. In this era of spending cuts, the fact that the penny and nickel have survived this long is astonishing. A 2012 penny, worth one cent, costs the government nearly two and a half cents to produce. A 2012 nickel, worth five cents, costs the government over eleven cents to produce. All told, the annual loss the government sustains due to these two coins is over $116 million dollars.
This problem did not catch the government by surprise. The Treasury Department has minted pennies and nickels at a loss for a decade. When the worth-to-value discrepancy became known to the general public, the U.S. Mint had to scramble to approve new rules which forbade the melting down of the pennies and nickels in order to sell the metal at a huge profit. The fact that there was never a serious proposal to eliminate these coins in the past four years, which were marked by constant dealing over spending cuts, is astonishing.
The elimination of the one-cent and the five-cent pieces will change the pricing game nationwide, but not in any serious way. Total prices will be rounded to the nearest dime before the sales tax is levied. Sometimes, in the case of a total purchase of $75.36, the consumer will have to pay more due to rounding, but other times, as in the case of a $65.84 price, the consumer will save money. However, an additional factor which provides support for the elimination is that this rounding will only occur for purchases which are paid for with physical currency. These types of purchases do not occur as often as they used to, as most transactions in contemporary society are paid for via credit or debit card. Costs will not be rounded when paid by credit or debit card because there simply is no need to; the eliminated coins never enter the equation. Similarly, money in bank accounts will not be rounded as banking services become more and more computerized.
This is just the first step in the right direction towards a cost effective and efficient currency system. The next logical issue to tackle is that of dollar coins. The Mint has tried several times in the past two decades to introduce dollar coins in the system, but each attempt has been met with failure. This is not because the plan is faulty, but rather because the general public believes that the dollar coins will become more valuable as time goes on so they hoard them. This takes most of the coins out of circulation, thus defeating the purpose of introducing them in the first place.
In a perfect world, the Mint would slowly phase dollar bills out of circulation and reintroduce dollar coins. The phase-out of bills would require the public to actually use the dollar coins as opposed to hiding them in their sock drawer. While bills are cheaper to print than the coins would be to mint, the government would save money in the long run ($4.4 billion over thirty years according to the GAO) due to the durability of coins. Bills can be destroyed countless ways, while coins can only be destroyed in one: melting, which would take a crucible to achieve. As I type this, I have an 1877 Trade Dollar silver-dollar coin in my pocket. There is a reason why the coin has lasted one hundred thirty-five years while the bills in circulation at that time have not.
With the elimination of the penny and nickel, the government not only scores a victory for common sense, but also an important spending cut. One can only hope that this is not the last reform done to the American currency system in the coming years.