A Penny for Your Thoughts

Abstract

I don’t remember the last time I used a penny. It has, after all, been a while since I used a gumball machine. On the other hand, if I see a penny on the ground, I will pick it up because all day long I will have good luck—as the adage goes. It is with this sort of duality that I view the current debate about eliminating the United States’ least valuable coin.

Eliminating the penny is not a new idea. This is actually the seventh time since 1990 there has been a government attempt to stop penny production. Also, it is worth noting that some countries, Canada being one of them, have successfully eliminated their one-cent coins.

The US government is motivated to eliminate the penny because of the cost to make it (see accompanying table). Right now, it costs 3.7 cents to make a one-cent coin. At first blush, it seems obvious that making this coin does not make sense. One might say the penny is financially upside down because the cost of the materials used to make the coin, plus the labor of manufacturing it, is greater than one cent by 2.7 cents. Nickels are also upside down. The good news is that the value of dimes and quarters is greater than the cost of making them.

An internet search shows that pennies and other coins are typically in circulation for about 30 years. Think of the multiple times a penny will be used over three decades—logically, the cumulative uses of a penny, one cent at a time, provide value in excess of the one-time cost to make it. On top of that, when a coin is taken out of circulation, the US Mint recycles the metals to make new coins—a true circular economy.

Money and water have a lot in common as well as distinct differences. As for similarities, water and money are used multiple times by many people. The penny you use is then used by another person, and then another, and so on, just as water is used repeatedly by you and other people. In both cases, water and pennies provide value for each person using them. Also, it costs money to produce water and coins. And importantly, unlike a penny, which is made once and used by multiple people over decades without new investments, water's cost is repeated in advance of each time it is provided to the next “downstream” user.

One important difference between pennies and water: we can make more pennies, but we cannot make more water. While water is used over and over again, it is the same water we have always had. Pennies, on the other hand, are minted each year (at least for now), resulting in more fresh pennies going into circulation. Wouldn’t it be great if water scarcity could be solved by introducing “freshly minted” water into the supply?

Because the supply of water cannot expand, water professionals have to protect the supply, making sure each usage is free of contamination and that it is available in the quantity and quality needed. All of this protective care requires new financial investments each time water is delivered. Pennies, on the other hand, don’t need to be protected. We can lose them, let them tarnish and get scratched, and toss them into wishing fountains. No reinvestment is needed to retain a penny's value; it is always one cent.

One last comparison to consider. When other countries have eliminated their one-cent coin, cash payments have often been rounded up or down to the nearest nickel. For example, something that costs $10.92 will round down to $10.90, while something costing $10.98 will round up to $11.00. Similarly, water utilities use rounding in their billing. The rounding is not, however, an adjustment to the price but rather is applied to the amount of water used. Typically, billed water consumption is based on thousands of gallons or hundreds of cubic feet and as such, the customer's bill reflects consumption amounts rounded to the nearest full thousand gallons or hundred cubic feet.

Ultimately, the case to stop minting the penny is a case for change (pun intended). But does that change hold water, or by keeping the penny, have we proved that a penny saved is a penny earned?