I’m glad that co-blogger Scott Sumner took on one of the fears about ending the production of pennies.
His post made me realize that I had neglected to post on my article on the demise of the penny that I published at Hoover in March. The article is “Thoughts for Your Penny?“, Defining Ideas, March 13, 2025. No, I didn’t come up with that great title. My editor did.
Some highlights:
The US government makes a pretty penny (pun intended) on seigniorage. It’s not as much as it used to be because more and more people use credit cards and even cryptocurrency to buy goods and services. Still, it’s a good amount.
The biggest gain from seigniorage is on the $100 bill. Printing one costs the federal government just 9.4 cents. So, when the feds spend this $100, they make a nice profit of $99.90. Not bad. Printing a $1 bill costs the feds 3.2 cents. So even on a $1 bill, the feds make 97 cents.
But minting small coins loses money for the feds. In its 2024 Annual Report, the US Mint reports the cost of producing each coin denomination. The cost of producing a penny was $0.03. In other words, the cost of producing a penny was three times the value of the penny. Interestingly, the feds went underwater even on the nickel, whose cost, at $0.11, was over twice the value of the nickel. That’s why I stated earlier that the federal government should stop producing nickels also. It isn’t until you get to the dime that you find a coin that the feds make money on. Interestingly, the cost of producing a dime, at $0.045, is less than the cost of producing a nickel.
That surprised me at first, but it shouldn’t have. First, the nickel is bigger than the dime. Second, the nickel and the dime are made up of almost the same metals. The nickel is made up of 75 percent copper and 25 percent nickel; it’s actually an alloy called cupronickel. Interestingly, since 1866, except for a period during World War II, when the US government wanted nickel for military uses, nickels have been made of cupronickel. The dime is made up of a copper core within an outer layer of cupronickel; the overall composition of a dime is 91.67 percent copper and 8.33 percent nickel. Unlike with the nickel, the dime’s composition has changed dramatically. Before the Coinage Act of 1965 removed silver from dimes, dimes were composed of 90 percent silver and 10 percent copper. I still have some silver dimes and quarters hidden away in my sock drawer. It should be obvious why the feds changed the composition of the dime: with increases in the price of silver, producing a dime the pre-1965 way was a losing proposition.
And:
Because the bigger gains would come from getting rid of the penny, not the nickel, that’s what I’ll focus on here. How would we make the transition?
First, no real transition would be necessary for the vast majority of transactions. Most people use credit cards or debit cards to buy items. If you bought an item on your Visa card for, say, $19.99, the merchant could charge you $19.99. No penny would need to change hands. Let’s say that that’s the only thing you bought that month and that you pay off your credit card in full each month. You would pay the credit card either by transferring funds from your bank electronically, or, as is rare now, writing and sending in a check. Again, no pennies would be necessary.
So, the only transition required would be for people who pay cash. How would that work? We can look to Canada for guidance. Under Conservative former prime minister Stephen Harper, Canada’s Royal Mint quit producing pennies in May 2012, and Canada’s government stopped distributing them in February 2013. I go to my cottage in Canada every summer and the few times I have paid cash, it has been seamless. If the bill came to, say, $19.97, the cash register rounded down to $19.95. But if the bill were $19.98, the cash register rounded up to $20.00. Interestingly, pennies are still legal tender in Canada, but for the past ten years, I have not seen anyone using them. Gone are the days with the little dish on the retail counter labeled “Take a penny, leave a penny.” There’s no need.
Read the whole thing.
READER COMMENTS
Warren Platts
Jun 10 2025 at 5:15pm
Remember when Kyle Bass bought 20 million nickels? I think he still has them. Supposedly their melt value would be worth $1,115,700 nowadays..
Craig
Jun 11 2025 at 12:45am
Melting coins is illegal actually.
john hare
Jun 10 2025 at 6:57pm
If you are down to worrying about 2 to3 cents on a dozen or so purchases a week, I think you have larger problems than penny finance.
Rob Rawlings
Jun 10 2025 at 11:07pm
I’m a bit confused by the idea of the government earning seigniorage by printing new notes. Happy to be corrected if I’m wrong but don’t they earn seigniorage when they buy back their own bonds with newly created electronic money rather than when they print new paper notes? When they print these new notes (to match an increased demand to hold them rather than electronic money) then the costs of printing seems like it would be a real cost.
David Henderson
Jun 11 2025 at 12:07am
The cost of printing IS a real cost. To compute seigniorage (or maybe we should call it “net seigniorage”), you subtract the cost of printing from the value.
Rob Rawlings
Jun 11 2025 at 12:15am
If the newly printed note is provided to a bank in exchange for an equivalent amount of base money then where is the “net seigniorage” ? It seems the seigniorage occurred previously when the government created new base money by buying back bonds.
Rob Rawlings
Jun 12 2025 at 12:45am
You say: “The biggest gain from seigniorage is on the $100 bill. Printing one costs the federal government just 9.4 cents. So, when the feds spend this $100, they make a nice profit of $99.90.”
Are there situations where the government prints up $100 bills and directly spends them? My understanding is that it rather makes them available to banks that wish to swap base money for them – and I’m not not seeing where the seigniorage is on that (apart perhaps from the sense that the public holding paper money is in effect loaning the government money)
David Henderson
Jun 12 2025 at 10:13am
You ask:
Not as far as I know.
You write:
That’s not my understanding. Swapping base money for $100 bills would be swapping money for money. My understanding is that the Fed buys bonds with the money. So it gets something worth $100 in return for $10o. The seigniorage is then approximately $99.90.
Rob Rawlings
Jun 12 2025 at 12:46pm
I would normally place money on your understanding being better than mine on these issues but this time (somewhat nervously) I’m going to stand my ground!
I see 2 different operations:
The CB creates new money by buying bonds. There is seigniorage here but no paper notes are involved – its all electronic.
Separately, banks can swap reserves for physical currency (or vice versa) based on customer demand. This is a one-to-one exchange of forms of base money—reserves for cash. There’s no new money created and, as I understand it, no seigniorage is involved.
No gurantee its correct of course but Wikipedia (https://en.wikipedia.org/wiki/Federal_Reserve_Note) seem to support my views on how paper notes get into circulation.
David Henderson
Jun 13 2025 at 4:33pm
I’ve been spending time working on figuring this out and I’m not there yet.
I’m not ignoring you. Once I do figure it out, I’ll post it as a separate blog post.
Knut P. Heen
Jun 11 2025 at 9:08am
Who carries pennies nowadays? When I lived in the US 20 years ago, I collected them all in a big jar that went straight into the garbage bin when I left. The opportunity cost of going to the bank to exchange them to paper money was too large to bother. Spending 1 hour on exchanging pennies for a whole year probably pays below the minimum wage for most people. 5 pennies each business day is about $12.50 a year.
Digging up copper and nickel to rebury them in garbage is even worse than digging up gold and rebury it at Fort Knox. The latter is in concentrated form if needed.
Craig
Jun 11 2025 at 10:03am
I’d have some walk around money and on a daily basis whatever change I had when I got home, irrespective of what it was, I’d throw into a large half gallon jug I had. You’re right? It would have taken time to sort them, roll them etc, but TD Bank had a coin counter and coin star has counters right at Walmart, get a gift cars for Walmart right there and then. Now of course I use hardly any cash at all so I get back very little change. When I do get it its in my car tray. I use it at grocery store and pay balance with the card? Why not?
Monte
Jun 11 2025 at 2:03pm
One man’s trash is another man’s treasure:
Monte
Jun 11 2025 at 1:57pm
A lot of good luck and well wishes would disappear with the penny.