“A penny for your thoughts,” and “putting in your two cents worth” could lose some of their significance if the penny becomes extinct in the U.S., a possibility that has been considered in the past, and may be up for reconsideration now.
The latest threat to the red cent is the upward trend in the market value of metals. As the market price of the metals contained in the one cent coin approaches $.01, the total cost of striking the coin, including transportation and administration costs is now about 1.4 cents (under subscription). So with current production costs higher than the coin’s official exchange value, the U.S. Mint will probably contemplate some changes in the coming months.
Historically, problems arise when a gap appears between the market value of the metal used in a coin, and its value once it is minted into a coin. First, there is a loss in value elsewhere in the economy each time the metals and other resources used to make pennies are taken out of more valuable commodity uses. This is because they are transferred from a more valuable use to a less valuable, official-coinage use by the U.S. Mint.
The value discrepancy makes consumers reluctant to use the metal coins as money. Instead, consumers have hoarded coins rather than exchange them at the official rate, or melted them down to take advantage of the superior market value of the metal content. Either action makes the coins more scarce, a situation that has been occurring with the U.S. penny. The U.S. Mint now acknowledges that consumer hoarding, among other lesser reasons, is making it necessary to increase the supply of one cent pieces for monetary use. The Mint is in a perverse race with consumers and markets—it has to try to catch up by supplying more cents, as they are steadily withdrawn from circulation by consumers, who don’t really want them as a medium of exchange.
There is a familiar principle at work here known as Gresham’s Law. The most familiar statement of Gresham’s Law is that ‘bad money drives out good.’ If the value of the coin doesn’t rise when the value of the metals it contains rises, the metal becomes undervalued (can’t buy as much) in coin form. Gold, silver, copper, steel, and now zinc have all been used as a medium of exchange to produce coins, and all have eventually been subject to a discrepancy between their official and their market values.
The result: coins are undervalued relative to the value of the metals they contain; a good but expensive money. Thus coins are removed from circulation. They may even be melted down to obtain the more highly-prized raw metals.
Replacing the ‘good’ (valuable for their metal content) coins requires the introduction of a ‘bad’ or cheap money as a substitute for carrying out transactions. Substitutes will be made of intrinsically less valuable materials: paper, wood, plastic, cheaper metals—something that can be marked with an official exchange value, but supplied at a lower cost than the face value of the item itself. One cent pieces will be supplied, therefore, only if they are made of materials that cost less than one cent per coin. Even if all pennies are removed from circulation, it is possible that they may continue to be an accounting unit, much as the British guinea did after it ceased to circulate.
Gresham’s Law implies that ‘good’ but undervalued coins do not merely go out of circulation into hoards (until enough are accumulated to make it ‘worthwhile’ to cash them in), they may be destroyed entirely. Real copper pennies are hardly ever circulated as a result. Odd as it sounds, melting down coins has historically been a value-enhancing move, because it increases the economic value of the resources once contained in the coins.
As for the penny, the challenge seems to be recasting the cent in a material that is not so cheap and simple to counterfeit that it can be easily faked, but low enough in cost to warrant production at all. And a penny for your thoughts doesn’t buy much thinking these days.