The dollar has its woes, and now the penny does too!

Posted by Michael Kitces on Thursday, March 13th, 8:44 pm, 2008 in Investments

The rising price of various commodities, linked in part to the falling dollar, have begun to impact the cost of a broad array of goods in the U.S., from the cost of building construction to gasoline at the pump to food at the grocery store. Now, the decline of the dollar is being felt directly by the U.S. government, with a painful rise in the cost of the penny!

A recent article in the Chicago Tribune revealed that with the rising cost of zinc (which comprises about 97.5% of the composition of a penny; the other 2.5% is the copper plating that gives the penny its look), a single penny now costs about 1.7 cents to produce. And the problem isn't isolated there - a nickel costs the U.S. mint about 10 cents to produce with the current price of commodities.

In the long run, it's not a good thing when it costs the government more to create the currency than the currency itself is valued, and the U.S. mint has acknowledged that it has never before reached the point where creating coins cost more than the face value of the coin. Rising commodity costs at various points in history have led the U.S. to change the composition of currency - ranging from the decision to change from the copper penny to the current copper-plated-zinc version now in circulation, to the infamous steel penny (a fascination of mine during my childhood years as a penny collector!) of the early 1940's when other metals were being rationed for the war.

Of course, coming to agreement in Washington about anything is a challenge, and surely changing the composition of the penny will be no different. On the other hand, reducing spending is even more popular with today's rising fiscal deficits, and with estimates of cost savings upwards of $100 million by changing the composition of coin currency, progress may come about sooner rather than later. Perhaps we'll even end out with a return of the steel penny - who knows!

Discussion about the composition of the penny in particular, though, has resurfaced another discussion as well - is it time for the penny to go away. Should we just operate with a currency that functions in 5 cent increments, and round everything off to the nearest nickel at the cash register? We'll see what happens, but it suddenly seems possible that the decline of the dollar really will lead to the demise of the penny!


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