Raymond E. Owens

English

Research Papers in Economics

T
he penny is under attack. Soaring prices of metals
have pushed the cost of producing a penny above 1
cent. The U.S. Mint recently estimated that it could
soon cost as much as 1.23 cents to produce a penny. (Today’s
pennies are mostly made up of zinc; it hasn’t been since 1837
that they were pure copper.) Right now, the Mint says that it
makes a profit on the coins, which the Federal Reserve pays
face value for to distribute. But with escalating metal prices,
by some estimates the government could lose $20 million a
year on the production of pennies alone.
The inference in the popular media has been that pennies
are now a losing proposition for our nation. That may be, but
not necessarily for the reasons most often discussed in the
articles.
The “cost exceeds value” argument seems plausible at
first glance. After all, if it costs more to produce a good 
than the good can be sold for, no private individual or firm 
in their right mind would engage in
that business. But the penny situation
is different.
The penny is produced by the gov-
ernment, not the private market. The
United States mints pennies (and other
coin and currency) because it knows
that money makes the exchanging of
goods and services easier. This means
that we don’t have to go to the consid-
erable trouble of trading between
ourselves or bartering, for example,
freeing up a lot of time for work and
leisure. The more precisely that coins and currency allow us
to determine prices, the more effective is money in freeing
up our time. 
Consider if we had just $100 bills. Something worth far
less than $100 — a haircut, for example — would still
require some bartering to make up the difference. Or you
may decide to do without or overpay. In either case, the out-
come is more time-consuming, less satisfying, or more costly
than if $1 bills were available. 
The value of currency is not determined by its nominal
value alone. It also depends crucially on the transaction
costs that are saved by having a particular denomination.
Thus, the value of a penny is its role in allowing you to 
determine prices to the penny rather than, say, to the 
nearest nickel. If you were at a street corner with one gas 
station charging $2.52 a gallon and the other $2.55, where
would you fill up your tank? Now, if a single penny can be
used in thousands of transactions, the added value per 
transaction can be quite small, but the value of the penny 
relatively large. Taking this perspective, whether it costs a
little more than a penny to produce a penny may not be so
terribly important (though if there is a penny alternative
that is less costly, that would be a little better). 
This does not suggest that pennies play as important a
role in daily transactions as they always have, however. I see
pennies lying on the ground nearly every day. People simply
don’t place much value in picking them up. If they are like
me, they probably have more than enough lying around their
house anyway. In addition, pennies cause inefficiencies in
the form of lost time when people fumble for them at cash
registers.
On the other hand, it may be worth noting that the
penny remains the most widely used denomination in 
circulation. In fact, the government mints more pennies
than any other coin — 7.7 billion last year, compared with
about 3 billion quarters. Apparently, the demand endures.
The casual attitude toward pennies
probably reflects price inflation over
time. The prices of most goods and 
services are well above the 1 cent level
and few people probably care whether
most prices are calculated to the near-
est nickel. (Though they certainly
might notice if pennies were suddenly
pulled from circulation.) That is, when
prices rise, a penny represents a small-
er fraction of the price of a typical
good, so the gains from calculating
prices to the penny erode.
Thus, the popularity of the penny likely wanes not
because of its high cost of production but because of its
declining ability to make us much better off. Inflation has a
long history of making some coins (and even some larger
denominations) meaningless. After all, when was the last
time you saw a halfpenny?  (Hint: The Mint stopped mak-
ing them in 1857.) Another factor behind the penny’s
declining popularity is the increased use of electronic pay-
ment technology, which has made our life easier while
reducing demand for physical currency.
The bottom line is that the future of the penny may 
continue to be debated. But within limits, the cost of 
producing a penny (or a nickel or a quarter) shouldn’t be
the decisive factor in deciding the penny’s future. The real
key is how much time and effort it can save us relative to
the actual cost of production.  RF
Raymond E. Owens is a research economist at the Federal
Reserve Bank of Richmond. 
BY RAYMOND E. OWENS A Penny’s Worth
64 Region Focus • Fall 2006
OPINION
The value of currency
depends crucially on the
transaction costs that are
saved by having a 
particular denomination.
RF Fall v23  10/30/06  2:18 PM  Page 64

Opinion: A penny's worth

http://www.richmondfed.org/publications/research/region_focus/2006/fall/pdf/opinion.pdf

Opinion: A penny's worth

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