Rebase the Penny!

A link to this story was posted in the comments section the other day. It begged for more attention and an image to go along with the words from Francois Velde, a senior economist at the Chicago Fed ... to enhance the reading experience.

Coin shortage could turn pennies to nickels

A potential shortage of coins in the United States could mean all those pennies in your piggy bank could be worth five times their current value soon, says an economist at the Federal Reserve Bank of Chicago.

Sharply rising prices of metals such as copper and nickel have meant the face value of pennies and nickels are worth less than the material that they are made of, increasing the risk that speculators could melt the coins and sell them for a profit.

Such a risk spurred the U.S. Mint last month to issue regulations limiting melting and exporting of the coins.

But Francois Velde, senior economist at the Chicago Fed, argued in a recent research note that prohibitions by the Mint would unlikely deter serious speculators who already have piled up the coinage.

The best solution, Velde said, would be to "rebase" the penny by making it worth five cents rather than one cent. Doing so would increase the amount of five-cent coins in circulation and do away with the almost worthless one cent coin.

"History shows that when coins are worth melting, they disappear," Velde wrote.

"Rebasing the penny would ... debase the five-cent piece and put it safely away from its melting point," he added.

Raw material prices in general have skyrocketed in the last five years, sending copper prices to record highs of $4.16 a pound in May. Copper pennies number 154 to a pound. Prices have since come down from that peak but could still trek higher, Velde said.

Since 1982, the Mint began making copper-coated zinc pennies to prevent metals speculators from taking advantage of lofty base metal prices. Though the penny is losing its importance -- it is worth only four seconds of the average American's work time, assuming a 40-hour workweek -- the Mint is making more and more pennies.

Velde said that since 1982 the Mint has produced 910 pennies for every American. Last year there were 8.23 billion pennies in circulation, according to the Mint.

"These factors suggest that, sooner or later, the penny will join the farthing (one-quarter of a penny) and the hapenny (one-half of a penny) in coin museums," he said.

Again, readers are referred to the always informative Coinflation website for more details on metal content and melt values.

Readers are also left to wonder about the condition of the nation's monetary system when the melt value of base metal coinage exceeds its face value. According to the table below, the current nickel appears to have a more serious problem than the penny.
Leading the list of coinage that has "disappeared" from circulation because of its high melt value is the 1945 nickel, a five-cent piece that contained one-third silver.

The value of its metal content today is 75 cents yielding a cool 1,300 percent gain for anyone who dares defy the new regulations from the U.S. Mint.