If pennies and nickels are largely useless, why does the U.S. Mint continue to manufacture them? In this excerpt from The End of Money: Counterfeiters, Preachers, Techies, Dreamers—and the Coming Cashless Society, out this week, David Wolman investigates why eliminating the penny is problematic.
In the Victorian ballroom of the Charing Cross Hotel in London, the thirteenth annual Digital Money Forum is wrapping up with a session of free beer and wine. Beneath brass chandeliers, people from the worlds of banking, telecom, academia, and international development have absorbed an entire weekend’s worth of talk about money in the form of bits and bytes, and tomorrow’s technologies for handling it.
I came here with high hopes, thinking it would open up a world of dazzling ideas and Star Trek–like technologies that are poised to usurp cash. But the forum proved to be just too conferencey, with its drip, drip, drip of PowerPoint presentations, impenetrable corporate jargon, and technical speak. There were a few high points, but by the tea-and-cakes break on the ﬁrst afternoon, I was already feeling ﬁdgety and uneasy. I’d lost sight of why I was here—whether it even matters, really, what form of money we use.
To get back on the cashless society track, the next morning in nearby Covent Gardens I meet technologist, ubiquitous future-of-money commentator, and self-described “anti-cash maniac” Dave Birch. Birch is the spiritual guru, organizer, and emcee of the forum. I had invited him to accompany me to the Bank of England so that I could hear him make the case against cash on its home turf.
With a gray beard and round glasses, the ﬁfty-year-old Birch looks more like a theology professor than an electronic money and digital se¬curity expert. As we walk to the Tube station, we pass a street performer with a guitar singing Michael Jackson’s “The Way You Make Me Feel.” Birch slows to deliver a £1 coin into the man’s guitar case. “We are going to have to ﬁgure out how to do that in the digital money future,” he says.
A huge portion of the workforce, especially in the United States, depends on tips. They are real people with real jobs, often the kind that require long hours on your feet and the ability to provide service with a smile to customers undeserving of one. They are waiters, doormen, baristas, cab drivers, bartenders, strippers, and more, and it goes without saying that shunning cash for a year would be severely costly, if not impossible, for many of them.
Yet as straightforward a transaction as tipping appears—it’s just a reward for good service, right?—think about the confusion that sometimes arises when trying to ﬁgure out how much you should leave when all you had was a beer, while your friend had the ribs-and-pork combo platter. Then there’s the condition you might call Non-natives’ Tipping Anxiety. I’ve seen many friends visiting from overseas fret about whether or how much to tip, where, and when. There are even disagreements among those of us who grew up with this custom. Leave a tip for the hotel staff that tidies your room? Some say only upon checkout, others say not at all. My sister says absolutely yes, every morning of your stay. And, of course, there is the mystifying calculus for determining just how much to leave. As Benjamin Franklin is believed to have said while living in Paris: “To overtip is to appear an ass: to undertip is to appear an even greater ass.”
The countries of Europe where wealthy Americans originally picked up the custom of tipping have long since replaced it with a more equitable and economical service tax. Should you be tempted to think that we simply must keep cash around because the generous act of tipping would become endangered without it, consider the fact that people tip more, on average, when paying with plastic. As for the street performers of the future, Birch says this is in fact a nominal obstacle, technologically speaking, on the road to cashlessness. Soon enough, we’ll be able to give someone a few dollars or pounds simply by aiming an electronic device—if not our iPhones, Androids, and Blackberries, then something similar—and pressing a few keys. “The barriers to going with digital money across the board are coming down,” he says.
We step into a coffee shop, but the queue is a dozen people deep. Birch U-turns for the exit, catching the swinging door. “I wouldn’t be a real capitalist actor if I stayed to wait,” he says, heading for another café just a block away.
The second stop is a window facing out onto the street. No line this time. Birch orders a latte to go. While ﬁshing change from his pants pocket, he spills a handful of coins onto the curb. He pauses, staring down at the shrapnel. “There. Now you have another reason to do away with cash,” he says, before stooping his portly frame to retrieve scattered 1-pound, 50-pence, and 25-pence pieces. His expression is reminiscent of a homeowner removing someone else’s dog’s crap from the front lawn. (The metaphor has precedent: Freud ventured that there is a psychological connection between money and feces.)
“Today something like one out of every twenty £1 coins is counterfeit,” Birch says as we continue our walk through the drizzle. Those forged coins are presumably manufactured in grungy machine shops in countries like Romania and Bulgaria—someplace so poor that the economics of counterfeiting £1 coins makes sense. In the United States, we don’t have counterfeit coins. Let me rephrase that: the government’s tacit assumption is that coin-counterfeiting operations don’t exist, or don’t exist on a scale sufficient to justify the expense of looking for fakes. “Not that people even want coins,” says Birch. “Something like 40 percent of all the pennies ever issued in the UK are unaccounted for. Did you know that?” Pennies are unaccounted for because people don’t use them. The ones we get stuck with at the checkout counter usually end up lost for years in desk and bureau drawers.
The useless coinage picture is no better in the United States. The U.S. Mint has manufactured about half a trillion coins over the past generation, yet the mint itself estimates that 200 billion of them have fallen out of circulation. According to one estimate, Americans forfeit $1 billion a year due to the time spent dealing with pennies at cash registers and in wallets, when we could be doing something else, like generating income or thinking up the next Facebook. These small-change realities have compelled countries like Israel, Brazil, Australia, Finland, Argentina, and New Zealand to euthanize 0.01, and sometimes 0.05, currency pieces, while also shrinking the dimensions of their larger-denomination coins to further bring down manufacturing costs. Over the past few decades, Norway, Denmark, and Sweden eliminated all coins of value less than ﬁfty øre (like ﬁfty cents), and last year, Sweden’s ﬁfty øre was the latest to get the axe. It’s an odd thing: killing money to save money. But that’s exactly what’s happening.
Pennies, nickels, and dimes can barely be described as money anymore. Legally they are, sure, but they don’t exactly circulate. A store of value? Practically nil. Medium of exchange? Only if you have a boatload of them, which won’t exactly endear you to whomever you’re transacting with. A unit of account? Technically, but I don’t know anyone who uses the hundredths place in his mental accounting. Marketing types will be quick to tell you that consumers treat $2.99 differently from $3.00, but that’s because of the hypnotic power of the left digit. No one cares about the right one anymore. It’s no wonder then that people so willingly pay the usurious 8.9 percent fee to use one of Coinstar’s 20,000 kiosks to convert unwieldy jarfuls of metal into paper money.
In the United States, the question of killing at least the penny and nickel surfaces whenever the price of metals spikes. A few years ago, the cost of making a penny peaked at 1.8 cents per cent, and nine cents for a nickel. The penny has since come down; nickels are still at about six cents apiece, while each of the new dollar coins costs an impressive thirty-four cents. “The current situation is unprecedented,” the director of the U.S. Mint told Congress in the summer of 2010. “Compared to their face values, never before in our nation’s history has the government spent as much money to mint and issue coins.” Never before has the United States faced such “spiraling” costs to issued coinage—more, in fact, than the coins’ legal tender value. “This problem is needlessly wasting hundreds of millions of dollars.”
“Absolutely anyone else would get right out of the penny and nickel business,” says Birch. At this point, you’d think the only staunch defenders of the penny and the nickel are the companies that provide the base materials, Coinstar, and politicians with a metallic sense of nostalgia or a coin-enthusiast relative. Yet a USA Today/Gallup Poll from a few years ago found that 55 percent of Americans say the penny is “useful” and shouldn’t be eliminated. Who are these people?
The $1 note has its own powerful supporters, not the least of which are employees of the money factory itself, the Bureau of Engraving and Printing (BEP). In the mid-1990s, BEP employees, under the banner “Save the Greenback,” stymied congressional efforts to phase out the $1 bill. (Paper money is cheaper than coins to produce, but it doesn’t last as long, so it’s actually more expensive in the long run.) Greenback defenders had help from Mississippi Senator Trent Lott and Massachusetts Senator Ted Kennedy, who had in mind the interests of Crane Paper of Dalton, Massachusetts, sole provider of U.S. currency paper, which is made from Mississippi-grown genetically engineered cotton. The group even proposed legislation explicitly prohibiting the elimination of the greenback, but the bill—the legislative one—never passed.
Yet there are at least a few signs that U.S. officialdom is rethinking coins. “What’s a Penny (or a Nickel) Really Worth?” was the title of a 2007 paper published by the Federal Reserve Bank of Chicago. Since medieval times, the traditional ﬁx when minting costs surpassed the face value of the coinage was to “debase the threatened coin, that is, make it of a cheaper material.” Noting that this isn’t possible under current law, the author’s advice to Congress is to either give the Treasury the green light to ﬁnd some cheaper substance for future pennies, or “discontinue the one-cent denomination and rebase pennies to be worth ﬁve cents.”
Discontinue. That is unusually decisive, if not subversive, language for a Fed official. Why? Because eliminating the penny is an admission of inﬂation. “You just don’t do that,” a seasoned ﬁnancial journalist once told me, as if I’d just suggested toppling the government. “What does a formal acknowledgement of the worthlessness of 1¢ say about the worth of $1?” In other words, it doesn’t help the economy to remind people that prices are continually rising, while the purchasing power of their money is continually falling, even though both are true. Acknowledging inﬂation makes people doubt, and as any priest, rabbi, imam, or shaman will tell you, doubt and faith don’t go well together. Even though research suggests that killing the penny would beneﬁt the economy, how can we be sure? All of a sudden, the seemingly small idea of ending pennies isn’t merely about inconvenient objects or the various uses for zinc. It’s about the whole damn economy.
We’re sensitive about inﬂation because higher prices are a drag, and because of concerns, rational or otherwise, that it might metastasize into something much worse: hyperinﬂation. This is when the purchasing power of a currency falls off a cliff, while prices rocket upward so fast that people must race to get money out of their pockets before it devalues further in the next few days or even hours. A lifetime’s savings last week can’t buy a loaf of bread this week.
The most famous example of hyperinﬂation hit the Weimar Republic (Germany) in the early 1920s, caused in large part by Germany’s inability to pay World War I reparations owed to its neighbors. At its nadir, the exchange rate was 4,200,000,000,000 marks to 1 U.S. dollar, and the government was printing 100,000,000,000,000-mark banknotes (yes, one-hundred trillion) in a failing attempt to keep up with rising prices. The situation was so traumatic that it helped the insane ideas of Nazism take root and fester.
Forty years since the steep inﬂation of the 1970s, the prices Americans interact with in daily life have remained remarkably stable relative to incomes. A cold Florida winter might bump up the cost of oranges, and the price of oil rose high enough a few years ago for President George W. Bush to acknowledge the U.S. addiction to oil, but that’s not inﬂation. In-your-face inﬂation is when you have to run down supermarket aisles, as people had to do for more than a decade in Brazil, to get ahead of the person whose job every few days was to increase the price of all the items. Younger Americans today have been so lulled by economic stability that the notion of all prices surging upward is alien. A $100 hot dog or a $10,000 sheet of plywood only reads like a typo because of our good fortune.
Still, those images from pathological instances of hyperinﬂation are plenty searing: banknotes used as wallpaper in Zimbabwe, swept into the gutter in postwar Budapest, or spilling out of wheelbarrows in Germany like so many leaves. One German artist during the Weimar hyperinﬂation covered a park bench with 100,000-mark notes. He titled the work “Deutsche Bank,” a pun on the German word for bench, which is bank. We can only pray that the same never happens here. Fears about inﬂation and hyperinﬂation may not always be rational, but countermeasures against them sure as hell are. In a roundabout way, then, maybe the wise move really is to spend whatever’s necessary to fund small coinage so as to prevent worries about inﬂation. What’s riskier: producing and circulating annoying coins at a loss, or injuring morale about the economy so much as to undermine faith in more than just the value of those little metal discs?
The elegant ﬁx to all of this, of course, is to keep the denomination known as the penny—heck, even bring back the half-penny if you’re so inclined—but keep it sequestered in the cheaper and more efficient digital realm. Yet the Federal Reserve, Bank of England, European Central Bank, and most other central banks on the planet are pressing ahead with their coin orders. The next big coinage spree in the United States will be the $1 presidential series. By 2016, the Fed should have about $2 billion worth of $1 coins available, even though many merchants and cash handling companies won’t stock them because people don’t use them. Aside from those that end up stashed in collectors’ cases, the rest will gather dust in government vaults until you and I can be convinced of their utility. If you’re wondering what in God’s name these money managers are thinking, you’re not alone.
David Wolman is a contributing editor at Wired. He's written for such publications as Outside, Mother Jones, Newsweek, Discover, Forbes and Salon. A former Fulbright journalism fellow in Japan and a graduate of Stanford University’s journalism program, he now lives in Portland, Oregon. Follow him on Twitter at @davidwolman. Excerpt from The End of Money reprinted courtesy of Da Capo Press.