Paul Solman answers questions from Next Avenue readers about what the U.S. Mint can learn from Canada about the penny and why Germany is pulling their gold from the New York Fed.
Photo by Flickr user hto2008.
Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Friday’s question comes from a reader at Next Avenue. The NewsHour has partnered with Next Avenue, a PBS website that offers articles, blogs and other critical information for adults over 50.
Member of NewsHour staff — D.C.: This week, Canada announced that they planned to stop minting Canadian pennies because it was costing more to make them than spend them. I was interested in knowing your take on American pennies and why the U.S. continues to mint pennies? Is this something that they have considered ending in the past but then decided against it? Should the U.S. stop minting pennies?
Paul Solman: Yes. Allow me to quote Harvard economist Greg Mankiw, who headed President George W. Bush’s Council of Economic Advisors. He wrote this on his blog about the downfall of the U.S. penny all the way back in 2006:
“It costs the mint well more than a cent to make a penny.
The solution, in my view, is to get rid of the penny.
Indeed, I would advocate this even if the penny were free to manufacture, as I argued earlier this year in the Wall Street Journal. The purpose of the monetary system is to facilitate exchange. The penny no longer serves that purpose. When people start leaving a monetary unit at the cash register for the next customer, the unit is too small to be useful. It is just wasting peoples’ time — the economy’s most valuable resource. The fact that the penny is costly to make only adds force to the argument.
Maybe we should get rid of the nickel, too. We can then round all prices to one decimal rather than two.”
Paul Solman: I agree with Greg. But the most definitive brief against the penny was created by master video explainer C.G.P. Grey years ago.
In Grey’s video, he notes that in 2006, even with pennies only 5 percent copper and 95 percent zinc, “the value of copper rose to more than the value of the penny, meaning they were worth more dead than alive.”
And yet the government continues to mint four billion pennies every year, even when it costs 1.8 cents to mint one penny.
That means the U.S. government pays $8 million more than pennies are worth.
Video from C.G.P. Grey’s YouTube channel.
There would be some casualties, however; among them, a superb non-profit in New York City which I’ve seen in action known as Common Cents.
Germany Relocates Much of Its Gold
Lucy Debisschop — Weybridge, Vt: Last week it was announced that Germany took all its gold from Fort Knox after storing it there for many many years. Why did they do that and is there some important significance to it?
Paul Solman: A slight correction to begin: the gold is stored not in Fort Knox, but at the New York Fed, where it sits with much of the world’s gold — in bars, stacked in locked cages — five floors below the sidewalks of New York City. I was only there once, back in the late 1980s and was amazed to watch international accounts efficiently balanced as loads of gold bars, on wooden pallets, were forklifted from one numbered cage to another.
The initial impetus for the German relocation is a court ruling, last year, that gold reserves in foreign hands must be audited — to make sure the gold is actually there. The German decision was a bit paranoid, arguably, since the U.S. would have to make good on any shortfall. It’s hard to imagine the U.S. saying, “Sorry, Germany. Your gold is missing. Tough luck.”
But once the issue became a national talking point, it didn’t go away, and now Germany is going to actually bring back billions of dollars worth of gold bars from New York and France over the next several years. The best summary I’ve read was Neal Irwin’s blog post for the Washington Post.
Significance? I don’t know. But it is always worse, not better, when countries display a lack of trust in one another, however symbolic. The more nationalistic any state becomes, the more troubling.
How Do Current Bondholders Benefit the Next Generation?
Guy Van Dusen — Sherman, Texas: You replied to a gentleman regarding the effect of the debt on the next generation and listed who holds the debt. Treasury bonds were a large portion of that debt. But the average individual holds relatively small amounts of Treasury bonds; many are held by institutions and wealthy clients for tax shelters. So why would there be any great benefit to the next generation?
Paul Solman: Because of inheritance. There are lots of “average individuals” likely to bequeath assets to their children, unless they run through them all first. Most “institutions” hold their assets on behalf of clients who will also have children – or others – to whom to bequeath. And the wealthy typically leave plenty to the next generation, which is why they make such a fuss about the estate or “death” tax.
This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.