Trump Fixed the Penny Problem But Now We Have a Nickel Problem

My grandfather used to say, “Don’t take any wooden nickels.”

The idiom basically meant, “Be careful! Don’t get cheated.”

Back in the day, small banks and merchants sometimes handed out novelty wooden nickels as promotional items. Of course, they had no value. You didn’t want to get tricked into taking a wooden nickel instead of real money.

Today, you could just as accurately say, “Don’t take any nickels.”

President Donald Trump recently announced the demise of the penny, directing the U.S. Mint to stop producing the 1-cent coin due to the cost. According to the Mint, it costs 3.69 cents to mint and distribute one penny.

But there’s still a problem – the nickel.

The Nickel Problem

By phasing out the penny, the Mint will need to produce more 5-cent coins. The problem is it costs more to make than it does a penny.

In fact, a “pro-penny” group called Americans for Common Cents argues that eliminating the penny will cost the government more than continuing to produce them.

“Without the penny, the volume of nickels in circulation would have to rise to fill the gap in small-value transactions. Far from saving money, eliminating the penny shifts and amplifies the financial burden.”

(Full disclosure: According to CNN, Americans for Common Cents is primarily funded by Artazn, the company that has the contract to supply banks used to mint pennies.)

Potential bias aside, Americans for Common Cents isn’t wrong about the cost of the nickel.

According to the most recent annual report produced by the U.S. Mint, it costs 13.8 cents to produce and distribute one nickel.

To cut costs, the Mint cut the number of nickels it produced last year by 86 percent. It churned out 202 million 5-cent coins, compared to 3.2 billion pennies.

Here’s the rub.

If the Mint must produce just 850,000 more nickels to fill the gap left by the penny, it will completely wipe out the savings promised by eliminating the 1-cent coin. According to calculations by the AP, if the Mint goes back up to making 1.4 million nickels a year, it will cost $78 million more than the cost of pennies it is no longer minting.

Americans for Common Cents claims it will have to produce 2 to 2.5 million more nickels to replace the penny.

Why Are Nickels So Expensive?

The higher cost is primarily due to the metal that goes into producing the coin. Nickels are formed of about 75 percent copper and 25 percent nickel.

Meanwhile, the “copper” penny now has very little copper.

In 1982, the mint removed most of the copper from the penny. Before that year, pennies were composed of 95 percent copper and 5 percent zinc. Due to rising copper costs (a result of inflation), the mint changed the composition to 97.5 percent zinc with 2.5 percent copper plating. 

What Is the Government Doing to Your Money?

CNN notes that one of the reasons the U.S. Mint makes so many pennies is that they quickly fall out of circulation. People tend to throw them in a jar or a junk drawer. At stores, people often toss them in the “leave a penny, take a penny” dish. And by the way, you increasingly see nickels in those dishes.

An economist told CNN, “When people start leaving a monetary unit at the cash register for the next customer, the unit is too small to be useful.”

But why have nickels and pennies become "useless?"

Because the government is constantly devaluing your money.

Based on the CPI, an item that cost a nickel in 1970 costs about 41 cents today.

Keep in mind that the CPI doesn’t tell the entire story of inflation. The government revised the CPI formula in the 1990s so that it understated the actual rise in prices. Based on the formula used in the 1970s, CPI is closer to double the official numbers. 

In other words, when somebody hands you a nickel today, it’s not worth much more than the wooden nickel my grandfather warned me about.

This is precisely why the government removed copper from the penny, and the nickel costs so much more to produce than it’s worth.

And, of course, the problem isn’t just with the penny and nickel. The government has devalued all your money.

Under the Coinage Act of 1965 signed by President Lyndon B. Johnson, the U.S. Treasury removed all the silver from dimes, quarters, and half-dollars. Instead, the government now mints coins from “composites, with faces of the same alloy used in our 5-cent piece that is bonded to a core of pure copper.”

Today, you will sometimes hear coins minted before 1965 referred to as “junk silver."

In reality, we should call modern American coins junk.

In fact, it’s difficult to find pre-1965 silver coins in the wild. They have been driven out of circulation by Gresham’s law – bad money drives out good.

If you run across one of these old silver coins, hold on to it. A metal in a silver quarter is worth more than 23 times the coin’s face value.

The Money Problem

Removing silver and copper from U.S. coinage is the symptom of a bigger problem - government money printing. 

The government and its central bank constantly expand the money supply. This is, by definition, inflation. More dollars in circulation means each dollar is worth less. We experience this phenomenon in the form of rising prices. 

Of course, as each dollar becomes worth less, each fraction of a dollar becomes worth less - and eventually worthless.

Currency devaluation benefits the government because it allows it to borrow and spend far beyond what it could in a sound money system. This is precisely why President Franklin D. Roosevelt began the process of severing the dollar from the gold standard, and Richard Nixon cut the final tie in 1971. 

When you boil it all down, we don't really have a penny problem. We don't have a nickel problem. We have a money problem.

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