Thursday, February 01, 2007

Five Cents for Your Thoughts?

Pennies suck, but most Americans like them, poor people need them, and they're a tradition. Thus, François R. Velde, an economist at the Federal Reserve Bank of Chicago, proposes to "rebase" the penny to equal five cents.

Velde explained in an interview, “We face a very medieval problem so I took inspiration from the medieval practice of rebasing.”

He would rebase the penny by having the government declare it to be worth 5 cents.

At first that sounds impossible. But our coins are just tokens the government gives a value to. We can say they are worth whatever we like. Indeed, Mr. Velde observes that the United States did something similar in 1834, when it changed the gold-silver ratio and suddenly the half-eagle $5 coin was actually worth $5.625.

Pennies would then cost a little over 1 cent to make and would be worth a nickel, so the government would again be making a profit on money. We would have plenty of new Lincoln nickels so we could stop minting our current nickels at a heavy loss. The Jefferson nickels would stay in circulation, just as the old wheat pennies do now. Because metal in nickels is valuable, though, they would probably be melted down.

Rebasing pennies is printing money. But don’t get too worried about inflation. With about 140 billion pennies in circulation ($1.4 billion) — counting the ones in your couch and your kids’ piggy banks — this rebalance would make them worth $7 billion, adding about $5.6 billion to the money supply. For comparison, at the start of 2007 there was about $1.4 trillion in currency and money available for purchases, to say nothing of credit cards.