The Curse of Coins

An Asian restaurant near my place prices everything in odd-lot denominations, where it’s $7.36 for a chicken bowl and $1.84 for a drink. I thought the owners must be doing some weird mind trick to take advantage of customers who can’t do math, but when it came time to receive the bill, it turns out my total was exactly $10. After tax.

That is so brilliant. All the menu items were priced to come out as round numbers after accounting for sales tax. By removing the asspain of handling coins, customers are more inclined to pay with cash. I’m sure the restaurant owners are law-abiding citizens who dutifully report all their sales; cash transactions simply allow them to avoid a 3-5% card-processing fee. After all, nothing sends me reaching for a credit card faster than being rung up for a sum like $10.06. If I don’t have change, I’m trading a paper bill for nine irritating coins.

That said, pennies and nickels can’t be used to buy much anymore. They weigh down our pockets and accumulate between couch cushions. Sometimes people use them to deliberately irritate debt collectors. Maybe instead of railing against large-denomination bills, former IMF chief economists ought to do something useful for once and advocate the removal of small-denomination coins.

Here’s a secret: Pennies aren’t really money. Nickels aren’t either.

In 1792, the smallest silver coin was the half-dime. Copper cents and half cents were also minted, but those weren’t the bush-league pennies you see today. Copper cents were solid discs as big as a half-dollar. Half cents were the size of quarters.

2016 penny, 1849 copper cent, 1854 half-dime, 2016 nickel.

The copper cents were introduced as a way to bridge conversions between American dollars, English shillings, and Spanish eighths 1. Even though the first US Congress authorized an American currency, foreign gold and silver coins were given legal tender status because the Philadelphia mint couldn’t meet the currency demands of a growing nation. When foreign currency was demonetized in 1857, large copper coins were discontinued and a small one-cent token was created to pay out the fractional parts of Spanish dollars2.

Nickel-clad coins came later. During the Civil War, Americans hoarded gold and silver due to economic hardship. The lack of silver led Congress to create five-cent tokens out of nickel as a substitute for silver half-dimes. The five-cent tokens were legal for payments of up to a dollar, and one-cent tokens were allowed for amounts up to ten cents.

Those tokens are the nickels and pennies we know today. Coins with intrinsic commodity value were made with reeding, or ridges around the sides, to prevent people from clipping precious metal off the edges. Tokens have smooth edges, because there’s nothing worth clipping off a piece of base metal. Today it doesn’t really matter; all coins are effectively tokens even though quarters, dimes, and half-dollars still have reeded edges.

We’re well past the era of needing tokens as placeholder currency. Canada, Australia, and Brazil have all done away with their one-cent coins. Hong Kong, New Zealand, and Mexico eliminated anything smaller than a ten-cent piece. Why is the United States still holding onto its most worthless tokens?

Blame the zinc lobby. Is there any industry that doesn’t have a lobby these days?

Today’s pennies are made of zinc, and lobbying efforts are funded by Jarden Zinc Products, a zinc producer that makes coin blanks for new pennies. Their front group, Americans for Common Cents, argues that the elimination of small change will create a regressive tax on consumers, as everything priced at 99 cents must be rounded up to a dollar. They claim the missing cents will add up to hundreds of millions of dollars a year, and you shall not crucify mankind upon a cross of nickel-clad metal alloy, or something to that effect.

It turns out we’ve had this discussion before. The last time people agonized over rounding errors was during the Great Depression, when the application of sales tax often resulted in fractional totals. Merchants and many state governments responded by issuing sales tax tokens to account for partial pennies, so consumers would not feel robbed. If the country ends up in permanent economic fallout as some economists predict, grocery stores can go back to distributing S&H Greenstamps and everything will be fine.

One-thousandth of a dollar.

Money was created to reduce the amount of work required for economic transactions. Tokens can provide finer granularity for price representation, which lowers transaction costs. But the goal of any currency structure is to require as few denominations as possible to represent all desirable values. When unnecessary tokens are used, it burdens the market with the extra effort of carrying and counting cash.

In theory, market forces would take small change out of circulation if consumers stopped demanding them. Unfortunately, the persistence of sales tax all but guarantees that stores have to keep handing them out. If we round all transactions to the nearest tenth, the Mint can finally stop distributing nickels and pennies, and the coins will gradually fall to disuse. Any remaining stragglers can be thrown into a wishing well or retired for good.

1. Spanish silver dollars were divided into pieces of eight, each worth 12.5 cents. Because trade was often conducted using Spanish dollars, equities were priced in 1/8-dollar denominations on US stock exchanges until 1997.

2. The country had acquired sufficient silver to replace foreign coins, so The Coinage Act of 1857 was passed to demonetize all foreign currency and create a small cent.

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