Weird Effects of Inflation: The Costs of Coinage

Posted By PK Last updated April 9th, 2012 30 Comments

“Currently, the costs of making the penny and the nickel are more than twice the face value of each of those coins.” – Timothy Geithner

As a personal finance web site, we here at DQYDJ tend to spill more than the average amount of (digital) ink on the topic of inflation. The correct way to measure inflation, the comparison of interest rates and mortgages, and loads and loads of articles on market inflation expectations… we’ve covered it all. One thing we haven’t covered is the specific irony the US Treasury encounters when it comes to coining currency – specifically, small denomination coins currently cost more in raw materials to produce than the actual value of the coin. A note to our readers: this is a companion piece to our segment on the Worst of The Free Financial Advisor podcast.

We’re sure you’ve heard the quote “greater than the sum of its parts”. In this case, the value of certain coins is less than the sum of its parts… Oy Vey!

Losing Money Due to Seigniorage

How bad is the issue? According to the United States Mint’s Fiscal Year 2011 Report, “Minting and issuing the penny and nickel denominations resulted in a loss of approximately $116.7 million in FY 2011, the sixth consecutive year the penny and nickel were produced at a loss. That value was compounded by the low demand for the dollar coin (and the fact that this is the 6th straight year where the cost to produce the coins remained above their nominal value).

Here’s a chart of United States currency nominal values versus production costs from the US Mint and Federal Reserve:

On the Topic of Seigniorage…

In our article, we refer to seigniorage as the difference between the true value of a coin and it’s face value. You’ll note that it is actually one method of Government revenue – since in the cases of most currency it actually costs a lot less to coin/print a coin or a bill than the face value of the bill itself. That relationship reverses itself for the penny and a nickel… to the point that if you took a penny or a nickel and melted it down (by the way, that would be illegal…), it would be worth more than the value of the coin.

Taking it a bit farther, it’s why the US Mint encourages collectors to pull money out of the market year after year by issuing collectible coins… but we digress. What do you think?

What do you think of this interesting inflation consequence? Should the US continue to issue pennies and nickels? Do you now understand the topic of Seigniorage (and why the US Mint would love to print $100 bills)?

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http://marriedwithdebt.com/ John @MarriedWithDebt

Isn’t the US Mint one of the few agencies that doesn’t run with a defecit (the collector coins subsidize the business strikes)? Interesting topic since Canada just killed their penny.
- freeby50
  
  Correct, the mint as a whole makes money due to coin collectors. They lose money on the pennies but make money on the quarters, etc. Gold coins have made the mint a lot of money in recent years.
  - http://marriedwithdebt.com/ John @MarriedWithDebt
    
    That’s what I thought. I made some nice cash from flipping the 25th Anniversary Silver Eagle set last year and am waiting for their next “must have” product so I can make some quick cash.
  - http://www.dqydj.net/ PK
    
    The other problem is the replacement rates on bills. You can generally find coins from the 60s and 70s randomly in your pockets, but good luck finding bills before, perhaps, 2008. Future article? Haha.
http://www.mastertheartofsaving.com/ Jen @ Master the Art of Saving

That’s crazy! I can’t believe they continue making pennies and nickels if they’re just losing money year after year.
- http://www.dqydj.net/ PK
  
  Yeah, round everything off to 10 cents? Either that or credit cards?
http://www.thegeezergadgetguy.com/ Thad Puckett

Interesting post. I think they impact of inflation will probably kill off the penny and the nickel sooner rather than later. I just hope it doesn’t kill off the $100 bill.
- http://www.dqydj.net/ PK
  
  If inflation continues in the positive direction? There won’t be any coins to speak of, haha.
http://www.investitwisely.com/ Invest It Wisely

Well the penny just got eliminated up here in Canada. The nickel’s probably next…

P.S. I’d love to see a post on how much the government gains from cap-gains etc… that are not indexed to inflation, as well as cantillon effects (the effects of money having more purchasing power when the early beneficiaries of heavy government spending receive it first).
- http://www.dqydj.net/ PK
  
  I did one on capital gains of the short term variety… I agree, it’s a sneaky way to increase the velocity of money (and, yeah, blow bubbles).
  
  Cantillon effects might be tough to model with my limited access to data. Correct me if I’m wrong, but I’d be looking for the increase in demand in some sectors and the resulting price rise at the expense of other sectors, while siumultaneously tracking the spending of the ‘favored groups’ who received money first versus those who didn’t?
  
  So, I guess one example would be the increase in demand for medicine due to more and more government subsidies, with groups like construction workers receiving money first from programs like the stimulus. I suppose that there might be a lesson in commodity prices, but I’m not sure how to teach it, heh.
  
  Any pointers? I’d love to take it on if we can figure out a methodology.
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http://www.thefreefinancialadvisor.com/average-joes-money-blog/ Average Joe

Nice companion piece to the podcast work.
http://www.joyfulselfmanager.com/ Anthony Thomspon

“…if you took a penny or a nickel and melted it down, it would be worth more than the value of the coin.” I find it almost amazing that the two lowest valued coin on the market cost more to make than they’re actually worth as coins. Go figure!
- http://www.dqydj.net/ PK
  
  The opportunity for arbitrage isn’t just in the coins – if you can find a dilapidated house which hasn’t yet had it’s copper stolen, it’s possible that the plumbing and electrical is worth more than the house itself. We live in interesting times!
http://blog.familymoneyvalues.com/ Marie at Family Money Values

I wonder how much of ‘the cost to produce’ is actually the metal/material vs. the labor/machinery/power and etc. I know that some electric companies in our area are just ’rounding up’ the bill to the nearest dollar now. I could see that happening to the penny or I could see a metal penny/nickel being replace by plastic or some other material.
- http://www.dqydj.net/ PK
  
  It’s actually broken down in detail in the Mint Report, but here are the numbers for the penny, as requested:
  
  Shipped: 4,289,000,000
  Value: $42,890,000
  -Gross Costs-
  Cost of Good Sold: $85,400,000
  Sales, General & Administrative: $17,700,000
  
  Seignorage: -$60,200,000
  Seignorage Per Dollar Issued: -$1.40
  
  So the US lost $60 million producing pennies last year – pretty hefty!
http://twitter.com/smartfamfinance Shaun

*sigh* If only I could melt down nickles and pennies….a dream only rivaled by the hopes that one day, I alone, could be the first multiple in the money multiplier for all fiscal expansionary policy.
- http://www.dqydj.net/ PK
  
  You don’t have the ability to melt copper at home? Oven doesn’t have a setting for 1,984 degrees Fahrenheit?
http://www.facebook.com/profile.php?id=100002637635109 Frugal Toad

I just heard a piece on the radio about Canada getting rid of their penny. I think the US should get rid of the penny and nickel both. Another sign of inflation PK is the fact that no one even bothers to pick up a penny on the ground anymore!
- http://www.dqydj.net/ PK
  
  Yeah, in the podcast (see attached) I actually do discuss our Canadian neighbors. The funny thing is I started to look at these costs once I saw the Mint report, so that was just a bonus!
http://www.docstoc.com/docs/118399906/Exchange-Amount---a-Part-of-Foreign-Exchange-Market-That-will-Is-available-Among-Any-kind-of-Couple-of-Money George Bourgeois

the face value of circulation coins has usually been higher than the
gross value of the metal used in making them; exceptions occurring when inflation
causes the metal value to surpass the face value, causing the minting
authority to change the composition and the old coins to begin to
disappear from circulation
- http://www.dqydj.net/ PK
  
  … and causing those very coins to stop working in vending machines. How annoying!
http://www.pfblogwatchdog.com/ Bichon Frise

You finally got to my point. The cost may be higher, but the longevity of a coin is much greater than a paper currency. BUT…we are fortunate to have recent experience in the US which shows that coins, despite lasting longer, do not save American tax payers money, at least with dollar coins. If they stopped printing paper money, it may be worth it. I won’t steal what these guys did, but it is worth a listen. And it got me hooked on travel hacking! Guess who’s flying first class to Asia this year?!

http://www.npr.org/blogs/money/2011/06/29/137400808/the-friday-podcast-wasting-money-making-money

http://www.npr.org/blogs/money/2011/07/13/137795995/how-frequent-fliers-exploit-a-government-program-to-get-free-trips

http://www.npr.org/blogs/money/2011/07/05/137481077/ecuador-needs-your-dollar-coins
- http://www.dqydj.net/ PK
  
  I saw a thread on Slick Deals back in 2008 about doing that Dollar Coin shuffle. Pretty slick… ahem.
  
  Didn’t the Mint stop accepting credit cards? Is there a new hack, haha?
  - http://www.pfblogwatchdog.com/ Bichon Frise
    
    Just to save face, I have never done the dollar coins through the mint. Just credit card sign on bonuses.
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http://issuu.com/gerardohudson/docs/to_confine_a_trading_pastime_towards_a_foreign_cur Tina Valente

With our paper money, credit cards, internet banking and sophisticated
investment opportunities, it’s difficult to imagine what it was like
when all our money was in the form of gold, silver and bronze coins. A
simpler age maybe? Everyone knows that ancient silver and gold coins
were worth their weights in those metals. But what did this mean in
practise? The Roman Empire lasted for hundreds of years, so how was
money actually used over that period? Political and economic conditions
changed enormously throughout the life of the Empire, so what may be a
valid model for one point in time may not be valid for another.
- http://www.dqydj.net/ PK
  
  Well, yeah, but I think a lot of it was inflation – coins started as gold, moved to gold alloys, then plated, then copper, then silver, etc. That form of inflation was every bit as real as the one we see with our fiat currency.
  
  I suppose that’s why we use goods to track it, as opposed to the amount of money someone has, heh.
http://thecreditdude.net/2012/03/charged-off-now-what/ Charged Off Chuck

to me I think a penny-dime is silly. Why not round everything up to the quarter?
- http://www.dqydj.net/ PK
  
  Why not round everything to the dollar, drop the paper coin and give everyone those dollar coins? Haha, or force credit cards on the unsuspecting masses. Worth a shot!

Weird Effects of Inflation: The Costs of Coinage

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