Wednesday, June 18, 2008

Steeling seigniorage 

A recent bill, HR 5510, authorizes the substitution of steel for zinc and a bit of copper in U.S. pennies. But they can't look different -- the law says the coins must continue to "impart a copper color to the appearance" of the steel penny. This wasn't true of the pennies issues during WW2 when, like now, copper was scarce. Nobody complained then because the scarcity was due to the use of copper in war munitions. Now it's foreign competition for precious metals, which has driven the cost of the zinc-copper penny to 1.26 cents.

Dan McLaughlin
writes that this is inflationary, a form of seigniorage. Yes it is, but in an oh-so-small way, not likely to be noticed by any of us. The U.S. Mint makes approximately $74 million face value in pennies each year, which it sells to the Federal Reserve. The Mint receives back Federal Reserve notes. As long as those notes are not new (or otherwise sterilized), the new coins are not adding to money. And this is a gross value -- we would want to deduct the pennies that are taken out of circulation by the Fed because they are too worn. On currency issue of hundreds of billions of dollars, it's unlikely that even $50 million in penny-inflation is going to make that big a deal.

Of course the best reasons have been offered already by John Palmer. The penny is a waste of time, it is argued. Removing it might cost us a few cents from rounding up prices, but the return in saved time might be worth that. But worth it to whom?

(says he whose daily coffee-and-bagel-with-cream-cheese at Panera currently costs $3.51.)

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