The Con of Coinage is a Distraction

The front page of yesterday’s WSJ carried an article about the inefficiency of the United States’ current system of coinage.

It costs the federal government up to nine cents to mint a nickel and almost two cents to make a penny. So, in addition to overhauling Big Finance, President Barack Obama wants to tinker with America’s small change.

The president’s plan to save money by making coins from cheaper stuff seems simple on its face. But history shows it would rekindle an emotional debate among Americans who fear changing the composition of their currency will hurt its value.

The idea of changing the composition of the currency sparks an emotional debate. Above, penny blanks at the U.S. Mint in Philadelphia.

On top of that, trade groups from the coin-laundry owners to the Zinc Association have lobbied for years to keep small change just the way it is.

Like many things produced in Washington, U.S. coins aren’t what they seem. A penny is a copper-coated token made mostly of zinc. The nickel contains more copper than it does actual nickel. And no coin contains silver anymore.

Market forces, not metal prices, determine the value of American currency. Yet Americans persist, on websites like coinflation.com, in tracking the value of the metal in their currency.

“People believe that we are still on some sort of precious-metal standard,” says Rod Gillis, educator at the American Numismatic Association.

As the White House looks to cut costs across government, “making coins from more cost-effective materials could save more than $100 million a year, which isn’t just pocket change,” says Dan Tangherlini, the Treasury Department’s chief financial officer.

A few unrelated thoughts are in order.

Stephen J. Dubner has been making the case for abolishing the penny for a while, but I had no idea that the manufacture of nickels was actually worse.

Public choice sheds some insight on this article. It’s not surprising that people don’t have a clue as to why coins are valuable. They do not consist of some precious metal actually worth their own weight. Melting a penny down won’t give you one cent’s worth of copper.  Not knowing this is rational ignorance.  How would understanding the institutional structure of money add utility to the median individual’s experience?  It wouldn’t.  It’s also not surprising that there is a zinc lobby gaming the political system to their favor. That’s politics as usual. On the other hand, it is a welcome possibility that politicians might actually be considering policy on the basis of marginal costs and marginal benefits, weighing the costs of updating vending machines and similar technology against current production costs of coins.  That’s an empirical question.  Do political channels of action ever consist of such rational deliberation though?  Don’t hold your breath.

Something annoying popped out at me in this article. Tangherlini implies just how important it would be for the federal government to save $100 million per year. He puns, “making coins from more cost-effective materials could save more than $100 million a year, which isn’t just pocket change.” Well, actually, it is. Humans are awful at understanding large numbers. It’s just an artifact of evolution that we don’t intuit such large numbers; we never would have encountered them in our ancestral environment. We understand small numbers, the practical significance of the difference between 3 and 17, but once we add in a few zeros, the meaning becomes incomprehensible to us.

It’s convenient that Tangherlini actually cites the quantity $100 million, because a while back, one enterprising fellow produced a great video to help people understand how insignificant exactly that quantity really is, in terms of the federal budget.

Politicians exploit the populace’s terrible intuition for large numbers to create political capital. In reality though, we should direct our anger towards Social Security, one of the largest crimes the United States has ever perpetrated. If Madoff deserves 150 years in prison, so do 535 specific people in Washington, D.C.

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One Response to The Con of Coinage is a Distraction

  1. Thomas says:

    Actually Seth, there’s a much better video out there depicting exactly what $100 million is worth: http://www.youtube.com/watch?v=n2RZLbkBfDc&feature=related.

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