In 2006, when I was a full-time economics professor at the Naval Postgraduate School, a student whom I hadn’t had in class came to my office with a thesis proposal. She had been sent to me by another professor who was not interested in her idea. When professors were not interested in students’ ideas but the ideas were in economics, they often sent the students to me. Although they never used this language, I think some of the professors regarded me as a weirdo. They were right.
The student, a Marine officer named Stephanie King, wanted to do a thesis advocating the end of the penny. I was always hesitant to take on a student who knew from the get-go what bottom line she wanted to find. The research process should typically be more open ended than that. So, I asked her what her main argument was. She noted that the cost of producing a penny exceeded the value of the penny. I was sold, and Stephanie did a great job. The case against the penny has become even stronger since she wrote. In fact, President Trump announced on Super Bowl Sunday that the US government would no longer produce pennies. That’s a wise decision. The next step should be for him to announce that the US government will no longer produce nickels.
Seigniorage: the government’s gain
One of the concepts you come across in a well-taught monetary economics course is the idea of seigniorage. An online dictionary does a pretty decent job of defining it: “The profit made by a government by issuing currency, especially the difference between the face value of coins and their production cost.” Although the definition highlights coins, the concept applies to paper money also.
The US government makes a pretty penny (pun intended) on seigniorage. It’s not as much as it used to be because more and more people use credit cards and even cryptocurrency to buy goods and services. Still, it’s a good amount.
The biggest gain from seigniorage is on the $100 bill. Printing one costs the federal government just 9.4 cents. So, when the feds spend this $100, they make a nice profit of $99.90. Not bad. Printing a $1 bill costs the feds 3.2 cents. So even on a $1 bill, the feds make 97 cents.
But minting small coins loses money for the feds. In its 2024 Annual Report, the US Mint reports the cost of producing each coin denomination. The cost of producing a penny was $0.03. In other words, the cost of producing a penny was three times the value of the penny. Interestingly, the feds went underwater even on the nickel, whose cost, at $0.11, was over twice the value of the nickel. That’s why I stated earlier that the federal government should stop producing nickels also. It isn’t until you get to the dime that you find a coin that the feds make money on. Interestingly, the cost of producing a dime, at $0.045, is less than the cost of producing a nickel.
That surprised me at first, but it shouldn’t have. First, the nickel is bigger than the dime. Second, the nickel and the dime are made up of almost the same metals. The nickel is made up of 75 percent copper and 25 percent nickel; it’s actually an alloy called cupronickel. Interestingly, since 1866, except for a period during World War II, when the US government wanted nickel for military uses, nickels have been made of cupronickel. The dime is made up of a copper core within an outer layer of cupronickel; the overall composition of a dime is 91.67 percent copper and 8.33 percent nickel. Unlike with the nickel, the dime’s composition has changed dramatically. Before the Coinage Act of 1965 removed silver from dimes, dimes were composed of 90 percent silver and 10 percent copper. I still have some silver dimes and quarters hidden away in my sock drawer. It should be obvious why the feds changed the composition of the dime: with increases in the price of silver, producing a dime the pre-1965 way was a losing proposition.
Adding up the savings
In the aforementioned 2024 Report of the US Mint is a table than can help us compute the amount the Mint would save by ceasing production of pennies and nickels. In 2024, the Mint produced pennies whose gross cost (including not only production cost but also selling, general, and administrative costs) was $117.0 million. The value of the pennies was $31.7 million. Ending production in 2024, therefore, would have saved $85.3 million. In 2024, the Mint produced many fewer nickels than pennies, for a gross cost of $27.8 million. The nickels’ value was $10.1 million. So, by not producing nickels, the Mint would have saved $17.7 million. The total saving would have been $103 million.
That is not small change (pun intended). It’s not large either. But a simple decision to save $103 million is one that the feds should make.
How would it work?
Because the bigger gains would come from getting rid of the penny, not the nickel, that’s what I’ll focus on here. How would we make the transition?
First, no real transition would be necessary for the vast majority of transactions. Most people use credit cards or debit cards to buy items. If you bought an item on your Visa card for, say, $19.99, the merchant could charge you $19.99. No penny would need to change hands. Let’s say that that’s the only thing you bought that month and that you pay off your credit card in full each month. You would pay the credit card either by transferring funds from your bank electronically, or, as is rare now, writing and sending in a check. Again, no pennies would be necessary.
So, the only transition required would be for people who pay cash. How would that work? We can look to Canada for guidance. Under Conservative former prime minister Stephen Harper, Canada’s Royal Mint quit producing pennies in May 2012, and Canada’s government stopped distributing them in February 2013. I go to my cottage in Canada every summer and the few times I have paid cash, it has been seamless. If the bill came to, say, $19.97, the cash register rounded down to $19.95. But if the bill were $19.98, the cash register rounded up to $20.00. Interestingly, pennies are still legal tender in Canada, but for the past ten years, I have not seen anyone using them. Gone are the days with the little dish on the retail counter labeled “Take a penny, leave a penny.” There’s no need.
Replace coins with cardboard?
In 1974, people started to hoard pennies. The reason was that the copper content of pennies at the time made the copper in each penny worth more than one cent. In May 1974, the US Mint waged a campaign to persuade people to turn in their pennies to banks. The campaign was somewhat successful.
Meanwhile, though, there was a shortage of pennies. I vaguely recall reading about merchants in Ithaca, New York, cutting out round cardboard shapes and writing “1 cent” on them. I wasn’t the only one who found out. So did the feds. And they came down hard on the merchants for counterfeiting.
When I was telling an economist friend about this article, he suggested that the US Mint could be the one to start producing cardboard pennies. It turns out, as my student Stephanie King reported in her 2006 thesis, that the Department of Defense had already been doing this for many years for higher-denomination coins.
Major King wrote:
In the early 1980s, the Department of Defense decided to stop transporting pennies to its overseas bases. Because the DOD was responsible for all costs associated with transporting US currency to its facilities overseas, the agency decided that it was not worthwhile to continue transporting the penny. At military facilities overseas in locations such as Germany and Italy, all cash transactions are rounded up if they end in 3, 4, 8, or 9 cents and are rounded down if they end in 1, 2, 6, or 7 cents. These facilities include US banks, post exchanges, restaurants such as Burger King and Taco Bell, gas stations, and all other businesses that operate on DOD bases overseas. The leadership of the Army and Air Force Exchange Service (AAFES), one of the largest organizations that operate on military bases overseas, feels confident that the rounding system neither helps nor hinders both the store and its consumers. (p. 29)
Major King noted that even decades ago, the Defense Department did not bother printing one-cent cardboard coins.
That makes sense. As my EconLog co-blogger Scott Sumner pointed out, in 1900, the penny, which was the lowest-value coin even back then, was worth a whopping 38 cents in today’s dollars. When you consider that real incomes for the average American are almost ten times real incomes in 1900, you realize that the value of the penny, relative to average real incomes, is now less than half of 1 percent of that relative value then.
Interestingly, noted King, people had little trouble adjusting to the absence of the penny:
Most service members who are stationed overseas for the first time are surprised to find that the businesses on base do not conduct transactions using pennies. While there are some concerns expressed here and there, it appears that for the most part service members, DOD civilian employees, and US contractors do not have an issue with the rounding system. If any of these groups did have an issue with this, it would have been raised by now. (p. 30)
One thing that is not clear is whether President Trump has the unilateral authority to stop making pennies. As with many moves Trump has taken, we will have to wait and see. The fact that some members of Congress have promoted a bill to change the metallic content of coins suggests that Congress has a role, and that the inefficiencies of making coins have not gone unnoticed. On the other hand, the fact that DoD has refused to use pennies on US bases abroad, and actually started printing cardboard coins decades ago, suggests the executive branch of the US government can make unilateral decisions.
Conclusion
Whatever the legalities, even if one could find a cheaper way to make pennies, how much cheaper could it be? My earlier point that the value of the penny relative to real incomes is less than one half of 1 percent of what it was in 1900 suggests that the penny should be consigned to the scrap metal dustbin of history.
The Canadian government did it over a decade ago and the Department of Defense, at its foreign bases, did it decades ago. The road is well traveled. It’s time to get on that road. End the penny. And let’s beat the Canadians to the punch by ending the production of nickels as well.
