Are You Ready for the Death of the Penny?

If you have been paying attention to the news(1) (or even if you haven't, which I have not), you may have noticed references to a bill in Congress which, while not expressly terminating the penny, phases it out by implication.(2) The "Currency Overhaul for an Industrious Nation (or COIN) Act," among other things, requires that monetary transactions be rounded to the nearest 5 cents.(3) The most likely cause of this attempt to eliminate the penny is that the coin "now costs 1.4 cents to make, according to the United States Mint."(4)

I, for one, am uncomfortable with the idea that the penny should be eliminated. The reasons for the drive to kill the penny stem directly from the Bush Administration's Weak-Dollar Policy.(5) The dollar has lost so much purchasing power that 1/100 of one is not even worth the metal it's stamped on. The powers that be seem to think that the appropriate solution is to eliminate the cost-ineffective unit of currency. This solution is not a good one. Making the penny disappear isn't going to solve the underlying problem -- that Americans are losing purchasing power. Instead of eliminating the penny, the value of the dollar should be addressed.

Consider that in 1956, what you could buy for $1.00 would cost $7.44 in 2006.(6) That means that we have lost quite a bit of purchasing power over the last 50 years. If 1956 America existed today as a separate country, our dollar would compare to theirs only a little better than the Mexican peso compares to ours. This is not good. If you think that there is some benefit to a weaker dollar, consider that the dollar has devalued since even last year. Compared to last year, it now takes $1.04 to buy a good that would have cost $1.00.(7) When was the last time you had a raise? Was it enough to offset the $110.60 extra you now pay on assorted goods and services that would only have cost you $3000 last year?(8). Maybe it was. It wouldn't take more than 4 cents for every dollar you make to keep up. What about the money in your bank account? What kind of interest does your bank offer? Is it enough to keep up? Here's a hint: using our last example, your interest on a $3,000 savings account would have had to yield $110.60 in 2005 in order to keep up with the devaluation of the dollar. And that's only to break even in 2006.

The bottom line is that eliminating the penny does not solve the underlying problem of currency devaluation. In fact, the proposal distracts from the problem by leading people to believe that the only problem associated with a falling dollar is the now too-expensive-to-produce penny. Maybe we can "solve" the expensive penny problem like we solve all our other problems -- out source its production to another country where we can get slave-labor prices.



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(1) Reuters Staff Writers. "Nickel for your thoughts? Bill seeks penny's end," Reuters, 2006 August 21, http://today.reuters.com/news/articlenews.aspx?type=reutersEdge&storyID=
2006-07-21T064539Z_01_N17321144_RTRUKOC_0_US-LIFE-PENNY.xml.
(2) H.R. 5818, 109th Cong. § 3 (2006).
(3) Ibid.
(4) Reuters Staff Writers, para. 3.
(5) BBC Staff Writers. "Weak US dollar weighs on markets," BBC News, Business, 2006 May 15, para. 9, http://news.bbc.co.uk/1/hi/business/4771495.stm.
(6) Federal Reserve Bank of Minneapolis. Consumer Price Index Calculator, http://minneapolisfed.org/research/data/us/calc/.
(7) Ibid.
(8) Ibid.

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posted by The Sovereign Editor | 1:08 PM

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