The Desired Future of Pennies

I've been asked several times, "What will we do with the pennies we have now, if the government eliminates them?" I suppose they want to know all of the minute details of how the logistics of the situation would work. So let me lay out the scenario for you and explain all the details of how it will work, and explain the repercussions.

So we've finally come to the point where both the House of Representatives and the Senate have passed a law eliminating the penny. Yyyyyeeeeesssss!!!!! First, we'll throw a big party and sing and dance all night. Then we'll wake up the next morning and try and figure out who is affected and what will have to happen next. Ideally, this law will be simple and just give an ending date for when the mint will stop producing pennies. This date will most likely be 6 to 12 months in the future, to give all parties time to adjust, but it doesn't have to be. It could be immediately and the results would be the same.

Almost immediately, the demand for pennies will disappear! The mint produces pennies based on requests from the Federal Reserve. The Federal Reserve's requests are based on requests from banks, and banks' requests are based on requests from account holders, primarily retailers, who use the pennies for change to customers. With the realization that pennies will eventually go out of circulation, retailers will begin rounding cash transactions to the nearest nickel. Since they won't be giving out pennies as change anymore, retailers will deposit any pennies they receive in payments into their bank accounts. (As a side note, pennies will still be legal tender, and most retailers will still accept them as payment for goods and services in normal, small quantities.) The banks will then return all of their excess pennies to the Federal Reserve, and the Federal Reserve will return their excess pennies to the mint for melting them down to be used in other projects. (Another side note, I here that Australia used a bunch of their leftover 1 and 2 cent coins in making the Olympic Medals for the 2000 Olympics in Sydney.)

So shortly after the law is passed, the government starts getting all of the pennies returned. There are no more requests for pennies, so the mint stops producing them immediately since the demand is gone. So here we come upon 1 issue. Currently over half of the coins produced by the mint are pennies. There are more pennies than all other coins, proofs, commemoratives, medals, gold, silver, etc. combined. They are minting over 8 billion pennies every year and only about 6-7 billion of everything else combined.  This basically cuts the mint's production levels in half. So unless they have something else to replace it (which they don't) then about half of their labor force will need to be laid off. Since they employ about 2,000 people, that means 1,000 people could lose their jobs.

Also the company that makes the penny planchets (blank zinc disks from which the pennies are struck) would also stand to lose money in the deal. Of course, the US government is not the only government that they make coin blanks for, and the zinc portion of their business is a very small percentage of the whole conglomerate, so they will not suffer too terribly when the penny goes away. If you feel bad for them anyway, then you should realize that this is the nature of business. Think of the companies that made landline telephones, typewriters, folding maps, dial-up modems, newspapers and magazines, computer floppy disks, camera film, records, cassette tapes, 8-tracks, answering machines, payphones, or pagers. They had to adapt to new products or go out of business. It will be the same for the zinc industry. They will find someone else to sell their zinc to.

Another issue that is brought up is the fixed costs for the mint. These are costs that do not go up and down with production levels. Some people mistakenly think that these costs can't change. This is an incorrect assumption. These costs CAN be changed, just not by increasing or decreasing production. Variable or production costs vary with how much you produce. These are costs like the zinc materials, the labor to run the machines, machine hours, maintenance and repair of the machines, etc. The fixed costs are costs like rent for your facility, management salaries, overhead costs, etc. These don't go up and down with production, they go up and down with how the business is structured. When you restructure how the business runs or operates, then you can impact the fixed costs.

On an income statement, these fixed costs are typically spread out over all of the products evenly. This is why the penny and nickel lose money for the mint, but the dime and quarter make money for them. The variable costs for the penny and nickel are at about 75-80%, but the dime and quarter are at 25-30%. So when you add in the fixed costs, then the penny and nickel become losers, but the dime and quarter are still gainers. Their thinking is that with 1 less coin being produced, then those fixed costs have to spread out over the other coins and make them all less profitable. They are assuming that fixed costs don't change, but this is incorrect. When the penny is eliminated, there will have to be some changes at the mint. These changes will eliminate some fixed costs and allow the other coins to be just as profitable as before.

Another concern is that if pennies are gone, then we'll need more nickels. I debunk this fallacy here, but in a nutshell, the need for other coins will not go up or down when the penny is removed.

So eventually, the mint will say that eventually they will not take back any more pennies, probably 2 to 5 years after they are discontinued, so the penny hoarders will have a while to get their pennies turned in before they become useless. But here's the catch, the law on melting down coins will still be in effect and the penny will still be legal tender so if they don't turn them in, then the hoarders will get nothing for them legally. This is why hoarding pennies is a bad idea.

So the penny will be gone, life will go on normally, the government will be saving millions of dollars but they'll find something else to waste it on, zinc will be used in much more noble endeavors, and people will make more and more jokes about how idiotic we used to be when we had the penny. Then we'll just hope for the day they get rid of the nickel and dime.