Friday, February 02, 2007

A Penny Saved Is a Nickel Earned

An interesting proposal circulating among economists suggests that the government should "rebase" the penny and make it worth five cents, and then eliminate the nickel.

The economists point to the fact that, because the price of the metals that go into pennies and nickels has risen so rapidly in recent years, the mint loses about $40 million each year making the coins.

Writing in the New York Times on February 1, University of Chicago economist Austan Goolsbee explains that initially, proclaiming that a penny is worth 5 cents "sounds impossible":

But our coins are just tokens the government gives a value to. We can say they are worth whatever we like... the United States did something similar in 1834, when it changed the gold-silver ratio and suddenly the half-eagle $5 coin was actually worth $5.625.

Pennies would then cost a little over 1 cent to make and would be worth a nickel, so the government would again be making a profit on money. We would have plenty of new Lincoln nickels so we could stop minting our current nickels at a heavy loss. The Jefferson nickels would stay in circulation, just as the old wheat pennies do now. Because metal in nickels is valuable, though, they would probably be melted down.

Rebasing pennies is printing money. But don’t get too worried about inflation. With about 140 billion pennies in circulation ($1.4 billion) — counting the ones in your couch and your kids’ piggy banks — this rebalance would make them worth $7 billion, adding about $5.6 billion to the money supply. For comparison, at the start of 2007 there was about $1.4 trillion in currency and money available for purchases, to say nothing of credit cards.

If this proposal takes shape and is eventually adopted, we may have to abandon some idiomatic expressions, though "a penny for your thoughts" might still work -- it's just that those thoughts will be worth an additional four cents.

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