We spend more money making pennies than pennies are worth. Right now making a penny costs 1.7 cents. Yet we continue to mint more pennies every year, costing the government millions of dollars. Both pennies and nickels cost more than their face value to produce. In 2014, the United States spent $132 million on manufacturing 8 billion pennies. That does not even take into account the added costs of using pennies, like the time it takes to find them in the bottom of your purse or pocket and for the cashier to count them. According to the organization “Citizens to Retire the Penny” the economic drain every year from the penny is almost $900 million dollars.

So why on earth are we still making pennies? The two main arguments for continuing to produce the penny are the impact that eliminating them would have on pricing and the penny’s role in charity fundraising. If there were no one-cent coins in circulation, businesses would likely round the prices of their goods up to the nearest nickel, raising costs for consumers. And charities that promote penny drives would suffer because there would no longer be coins that people don’t want and are therefore willing to give to charities. The third argument, which is more sentimental than practical, relates to President Lincoln–many simply don’t want to eliminate the coin because it commemorates him.

Throughout our history, the coining of money has had political ramifications that go far beyond whose face we put on our currency. Changes in the supply of money and who has access to it have the power to promote the interests of a particular class and stimulate sectors of the economy. Eliminating the penny may be efficient, but it could also have unforseen consequences for the economy.

The Penny Debate

The video below does a great job of being both an educational and entertaining introduction to the many practical, efficiency-based arguments in favor of eliminating the penny. Featured on Freakonomics.com by Stephen J. Dubner–who seems to be on an economic-moral crusade to denounce the penny–it not only shows the base numbers of how much money we are wasting by manufacturing pennies but also the added costs of keeping them around.

The numbers in favor of eliminating the penny are pretty clear. Firstly, pennies cost more to produce than they are worth, which right there should give those who are at least neutral on the penny some food for thought. Secondly, they aren’t even worth your time to bend over and pick them up, let alone the 120 million of hours of time per year that are spent counting pennies in cash transactions. In fact, when John Oliver delivered his own anti-penny rant he looked at news stories with people who actually would not bother to pick up free pennies. At first glance, one might think these people are wasteful and foolish to not pick up free money. But they are actually making a smart economic choice because the small amount of time it would take to pick up the penny is worth more to them than the penny itself.

Some people even throw pennies in the trash. Actually, a lot of people will throw pennies in the trash (2 percent actually admit to it, which makes me think that the number may actually be higher). Even for those who don’t literally throw pennies away, many will still not spend them. This means that pennies, once created, don’t circulate as much as other coins. It also means that we make more of them so that businesses can continue to have shiny new ones.

Proponents of the Penny

The penny does have its advocates. The group Americans For Common Cents advocates for the continued manufacturing of the penny. According to a 2006 Gallup survey, 55 percent of Americans said that pennies were useful, versus 43 percent who said they were not; 2 percent had no opinion (they could be the same 2 percent who end up throwing them in the trash). But Gallup broke this down even further by income per household. Lower-income groups are more likely to think the penny is useful. For example, households that make less than $30,000 a year have a 65 to 34 split in thinking pennies should be kept, while households that make $75,000 a year or more had a 45-53 split in favor of eliminating the penny. It isn’t until you reach that income strata that the anti-penny opinion takes the lead.

Americans For Common Cents cites the effect on consumers, particularly low-income Americans, as a reason for keeping the penny. Businesses would have to round to the nearest nickel if there were no pennies and therefore consumers would have to pay more. Some people might not notice, but to low-income Americans, that might actually make a difference. In its own research, Americans For Common Cents found that 73 percent of Americans were concerned that eliminating the penny would increase prices.

There is also a concern about the potential effect on charitable giving. Most of the arguments focus on gifts to charitable organizations, rather than giving to individuals, but panhandlers and homeless individuals receive loose change from people and might be adversely affected by pennies going out of circulation. Large charities like the Salvation Army also collect loose change and rely on people donating in pennies. The unpopularity of the penny may actually be a good thing for these charities, prompting people to donate them rather than throw them away or spend them. Other countries that have abandoned the penny, notably Canada, have not seen a drop in charity donations, but they may have other customs that don’t rely as heavily on penny donation to support charities.

Lincoln, Lobbying, and REAL Money

Keeping the penny has as much to do with preserving the great American tradition of specialized lobbying groups as it does with promoting the image of Abraham Lincoln. In this CBS Morning News segment, the reporters interview the head of Americans For Common Cents, which uses the mystique of Lincoln to promote the pro-penny position.

Americans For Common Cents gets a lot of its funding from Jarden Zinc, which manufacturers the zinc discs that become pennies. (fun fact: pennies are made of zinc and only covered in copper since copper is much too expensive). Jarden Zinc. has a very real financial interest in the United States continuing to produce pennies, so it spends money to promote this position. It spent $140,000 on lobbying efforts and was later awarded a contract by the federal government worth $48 million.

Lobbying efforts like this are found on nearly every issue in American politics, many of which involve much more money. When it comes to getting rid of the penny, Jarden Zinc is very passionate, while most of us have not considered the issue much at all. And if we have, we don’t feel that it is an issue of grave national importance and so no action is taken on it, allowing the status quo to continue.

There may be another compelling reason to keep pennies that Americans for Common Cents hasn’t touched on much in their advocacy efforts. Our monetary system was initially based on precious metals. Paper money (fun fact: paper money is actually made out of linen and cotton–not paper) became a stand-in for precious metals like gold and silver, but early on the money was still backed by gold and silver. Paper money was more convenient to use than carrying around bars of gold with you but the money had a bar of gold somewhere that gave it value. A dollar was actually worth something tangible.

Our currency is no longer backed by precious metals, except for pennies and nickels because those are actually made from semi-precious metals. But these are substances with value. It’s illegal to do it, but you could melt down a bunch of pennies and get zinc out of them (and a small amount of copper), which you could then sell. And because the zinc in the pennies is worth more than the pennies themselves that would be a great idea–if the government hadn’t made it illegal precisely because people started doing that.

Keeping pennies avoids the potential issues for charity donations and price increases but it also, according to Brian Domitrovic of Forbes, is a symbol of a monetary policy that we should encourage. One that responds to market signals and promotes a more healthful economy. In his view, keeping the penny, even if it is inefficient, is worth doing for that reason.

Conclusion

The penny has great sentimental value to many Americans. We have countless aphorisms about pennies. About picking them up, which we don’t do. About saving them, which we also don’t do. Even about giving them to people for their thoughts–which Stephen Dubner from Freakonomics considers to be an insult. But what we don’t have for pennies is a policy that deals in rational economic terms with the cost-benefit of producing and using them. Concerns about the impact on charities and on pricing are hurdles that our neighbors to the north and around the world have dealt with when abolishing their one-cent coins. We merely lack the political will to confront it as an issue because to most Americans pennies are unimportant, but to some, they are worth millions. It is literally a case of being penny wise and pound foolish.

Resources

Primary

United States Mint: 2015 Annual Report

Additional

History Matters: Cross of Gold Speech

Freakonomics: Pennies

Huffington Post: Get Rid Of The Penny 

The Odyssey Online: Why Are Pennies Still A Thing?

The Wall Street Journal: Easy To Lose and Expensive To Produce: Is The Penny Worth It? 

Fortune, Don’t Mess With the Penny Lobby

Retire The Penny

Americans For Common Cents

Gallup: Penny Worth Saving Say Americans

Forbes: Don’t You Dare Eliminate The Penny

 Editor’s Note: This post has been updated to make the cost of producing a penny clear. 

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

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Despite China’s strong and consistent economic growth, there have been two areas that are clearly understood to be American-dominated spheres–military and finance. While America still holds a large lead over other countries in terms of military power–at least based on money spent–that other sphere of power may be waning. Although China has long been dismissed as lacking in infrastructure and innovation, that belief is likely about to change. With the formation of the Asian Infrastructure Investment Bank, China is throwing itself into the financial arena. Read on to learn about China’s latest push for superpower status that has the potential to change the global financial system that has been in place since WWII, and casts into question the future of who controls the world’s purse strings.

History of the Current System

The history of the modern financial system began in 1944. While WWII still raged, representatives from the Allied powers met to decide the future of the global financial system. The result of this was the Bretton Woods Agreement, named after the town in New Hampshire where the meeting was held.

Bretton Woods Agreement

This agreement essentially pegged global currencies to the U.S. dollar. Countries were required to maintain a fixed exchange rate with the U.S., buying up dollars if their currency was too low and printing more money if their currency’s value was too high. It was a basic concept of supply and demand, but with physical currency.

This, in effect, made the United States the preeminent global economic world power. It also relied on the relationship between U.S. dollars and gold, because the dollar itself was tied to a gold standard. However, the Bretton Woods system came crashing down in 1971 when the U.S. experienced something known as stagflation–when a country simultaneously sees a recession and inflation–and was forced to abandon the gold standard. In an unforeseen result, the rising demand for the dollar had made it more valuable even though its value was pegged to a certain amount of gold. The resulting disparity led to shortage and the need to scrap the existing system. Despite the end of the Bretton Woods system, two of its guarantor agencies, the International Monetary Fund (IMF) and World Bank, survived and continue to this day.

The IMF

The IMF was created as part of the Bretton Woods agreement. Its original purpose was to help countries adjust their balance of payments with regard to the dollar, which was the reserve currency. Once the gold standard was abandoned, the IMF offered members a variety of floating currency options, excluding pegging the value of currency to gold. Additionally, the 1970s saw the beginning of the Structural Adjustment Facilities, which are loans out of a trust fund offered by the IMF to countries. The IMF was instrumental in guiding a number of countries, particularly developing ones, through a series of crises including the oil shocks in the 1970s and the financial crisis in 2008.

World Bank

The World Bank was originally known as the International Bank for Reconstruction when it was created as part of the Bretton Woods Agreement. Initially, the bank was created to help with reconstruction in Europe, with its first loan going to France in 1947. However, over time and following the collapse of the Bretton Woods system, it has changed its focus to fighting poverty. The World Bank’s footprint has also expanded from a single office in Washington, D.C., to offices all over the world, and it is now made up of five different development institutions. Like the IMF, it has also tackled issues as they have arisen over the decades, such as social and environmental challenges.

Criticisms of the IMF and World Bank

Although the IMF and World Bank have survived for more than 70 years, they have faced extremely harsh criticism. The IMF has been criticized far and wide. Mostly the criticisms boil down to the conditions upon which the IMF grants loans. Namely, many people believe the IMF intervenes too much in a country’s operations by forcing it to meet arduous standards before it will be given a loan. The problem here is there is no one-size-fits-all way for countries to operate and the parameters the IMF sets are sometimes seen as more detrimental to a country than its existing financial situation. There are also accusations of supporting corrupt regimes and a lack of transparency.

The World Bank faces several of these same criticisms and more. On top of not taking into account individual local situations, the World Bank has also been criticized for enforcing a de facto Washington consensus along with the IMF. In other words, by controlling the money, the World Bank and IMF can force countries to do what Washington wants. Additionally, the World Bank and IMF have been accused of helping large corporations at the expense of poor and developing nations. In particular, the debt associated with the loans, has left many recipients mired in a perpetual state of debt and therefore beholden to the IMF and World Bank structure.

The video below offers a detailed explanation of Bretton Woods, the IMF, World Bank, and the criticisms they face.

 The Asian Infrastructure Bank

With the existing state of finance the way it is, it comes as little surprise that China and other nations who do not agree with many American policies would seek to create their own institutions of last resort. This indeed is what China, India, and a number of other smaller countries now intend to do. This has led to the creation of the Asian Infrastructure investment Bank, or AIIB. Although the details of the bank are still murky it will essentially be a clone of the World Bank.

Aside from differing with the U.S. over policy, China and other nations are also upset over representation within the World Bank and IMF. The way the system is currently set up, an American is traditionally in charge at the World Bank and a European at the IMF.

The video below explains what the AIIB is, what it means for the U.S., and how it will impact the existing system.

With Friends Like These

While it is not that shocking that a rising country like China desires its own system and to be free of the constraints placed upon it by the United States and its allies, several other countries that have been quick to sign up for the AIIB have been surprising. These nations included a number of traditional American allies including Germany, France, the U.K., and South Korea. Nevertheless, while it is still unclear what these countries hope to gain from membership, the fact that they would willingly flout American criticisms and join with China is certainly a diplomatic blow.

Progress on the AIIB

Whereas China’s new bank appears as a smack in the face to the U.S., there is still much to be decided. First of all, there was already an Asian Development Bank, so if anything the AIIB seems to be replacing that more than the World Bank or IMF. Additionally and most importantly, the AIIB has not actually been created yet, so all these defections and statements are just plans, not concrete actions. Furthermore, while countries were upset at and critical of the IMF and World Bank as being puppets of U.S. interest, this new Asian Infrastructure Investment Bank is seemingly being designed specifically to make China its unquestioned leader. Thus it bears watching how long countries want to suffer under China’s yoke and if the grass really is much greener.

There are other projects in the works as well. The U.S. has a new trade proposal of its own for the Asian Pacific that would also aid in the development of infrastructure. The following video shows how the IMF and other groups plan to work with the AIIB in the future financial environment.

Conclusion

America’s position as the global hegemon seems increasingly to be challenged in every facet from sports to entertainment to now finance. For roughly 70 years America has been the guarantor of the world’s economy; however, that is beginning to change as revealed by its inability to prevent the financial crisis in 2008 and through tests from other countries such as China. The U.S. therefore, may have to adjust to its new position in a world, where it wields less control and enjoys less prestige. The only lingering question then is not if this degradation of power will occur, but how will the U.S. respond to it?

Resources

Primary

International Monetary Fund: History

World Bank: History

Additional

About News: Bretton Woods System and 1944 Agreement

Vox: How a Chinese Infrastructure Bank Turned into a Diplomatic Disaster for the United States

Economics Help: Criticism of the IMF

Globalization 101: Why the World Bank is So Controversial

Financial Times: Superpowers Circle Each Other in Contest to Control Asia’s Future

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

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