US Coin Composition to Change Soon: Evidence of Inflation

This article was first published here as What is a Penny Worth?

Gold, silver and copper have always served as a measure of wealth that is easy to transport and easy to understand.  To facilitate commerce, historically the government would mint the three monetary metals into standardized coins of a known weight.  Coins were stamped with a stated value. Generally the imprinted leader’s image or other government symbols certified the stated and intrinsic value of the coins.

This system worked great until some Roman’s invented the idea of debasing coins.  Roman emperors needed to borrow money to fund wars so they went to the public and sold what we now call bonds. Faced with the requirement to repay the borrowed funds, some over stressed imperial treasurer got the bright idea to issue more coins for less cost by making changes to the size and composition of the coins while retaining the stated value.

Since the government sets the value of the coins, the public was forced to accept the now more plentiful and less intrinsically valuable coins as payment for public debts.  With debased coins, the government could pay back bonds and pay government employees with less gold, silver or copper then would have been required under the old coinage system.

However, merchants, laborers, farmers and others not paid directly by the government could not be forced to accept the same number of, now less valuable, coins for payment.  If the government took one-half the gold out of the coins, people selling good and services would just demand twice the number of coins or twice the stated value of the money as they did before.  Thus inflation was born and continues today as a tool of governments to effectively tax the value of citizens’ cash savings.

The United States Government has practiced coinage debasement for nearly 80 Years.  Gold was eliminated from circulating US coins in 1933.  Silver content disappeared or was reduced in 1965 and eliminated in 1970.  The lowly penny lasted as a copper based alloy coin for 189 years, from the first Chain Cent of 1793 to the final Lincoln Memorial copper penny minted in 1982.

Inflation in the late 70’s reduced the purchasing value of the US penny to the extent that the value of copper used to make a penny, with other minting costs, started to exceed face value.

As a result, part way through 1982 the United States Mint switched from 95% copper pennies to a coin that looks the same but is really a thin copper shell over a much cheaper zinc core.  These modern zinc based pennies only contain about 2.5% copper by weight.  To see the white zinc core just scratch the copper shell of a post 1982 penny hard or cut the coin in half in the interest of understanding economics.

The pre 1982 95% copper penny contains about 2 cents of copper while the debased post 1982 zinc penny contains about a penny of zinc at early 2010 metal prices.  Daily updated values of United States circulation coins are found at coinflation.com

With the coming changes to coin composition, the lowly zinc cent is going to be debased yet again. The Obama Administration blames rising metal prices for the need to change the coins, but hard money advocates correctly point out the falling purchasing power of the US dollar as the real culprit.

It is hard to say when exactly the US Mint will switch to new materials for the penny and other coins but it is unlikely to be very long from now.  Pressure on the US Mint’s bottom line from continued rising metal prices will only intensify as worldwide infrastructure spending increases demand for copper and zinc in industrial uses and post recession construction material demand picks up.

Congress and the Administration must resolve who has the right to make changes, but regardless who wins that argument, the United States Mint is working on alternative coin materials already.  Expect the replacement for zinc and copper in the penny to be something essentially worthless to match the near zero purchasing power of the cent.

Copper pennies now trade above face value, and here is an example.