Make pennies into nickels

Mr. Velde, in a Chicago Fed Letter
issued in February, has come up with a solution that would abolish the
penny, solve the excess costs of making nickels, help the poor, keep
the Lincoln buffs happy and save hundreds of millions of dollars for
taxpayers.

As Mr. 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.

We would then stop coining nickels at a loss.  Here is more, from Austan Goolsbee.  I am reminded of Neil Wallace’s work from the 1980s on the indeterminacy of equilibrium exchange rates in the absence of legal restrictions.  If we take away government acceptance at par for taxes and the like, is there not an equilibrium where each penny is worth a million dollars?  More ambitiously, if the U.S. government declared that each $20 bill is now worth $100, or each $100 worth $500, would the real exchange rate adjust immediately?
 

Comments

start investing in pennies, now.

How many pennies are out there? and how would a five-fold increase in their value affect the inflation rate?

I'm with snoopy and Joe Levy here. Couldn't this result in a.) a spike in the rate of inflation, and b.) people stockpiling pennies (perhaps some already are), waiting for their value to increase fivefold? Wouldn't we be better off to just start printing a five-cent coin that is as cheap to make as a penny (and probably looks similar to one), but is not the same?

Amber, the Jefferson buffs of the world still have the $2 bill to cling to... Oh, wait. You don't. Maybe the first ever (that I know of) coin with two heads is in order?

I'm sure the Fed would be quite alert to just how much inflation this would incur, and would simply counterbalance that by selling Treasuries.

Thus the net effect on inflation would be zero, +/- measurement error on the Fed's part.

After reading the article I see that all he is suggesting is to do away with the nickel. Wouldn't it be easier to just do away with the penny?

Daniel:

The nickel also costs more than its face value to mint, about seven cents. The penny costs a little more than 1 cent to mint. By making the penny the new nickel, he's solving both problems at once.

David Tufte is right: that stuff was cool. Unfortunately, most (or all ) lessons from the work of Neil Wallace, Tom Sargent, John Kareken and some of their students have been ignored in the analysis of monetary and exchange rate issues. Just one or two days ago Tyler ignored them when posting about a paper on equilibrium REAL exchange rates and attempted to draw conclusions about nominal exchange rates. At the practical level, the problem posed by the proposal to users of vending and other machines can be solved by circulating both the nickel and the penny although not more nickels should be issued (this may imply that a nickel's price will be higher than five cents). To those worry about the impact on inflation, although I don't know the amounts, the total value of pennys in circulation is too small for a 500% increase to pose a problem, and the hoarding of nickels most likely will compensate the inflationary effect of such an increase.

I am reminded of a children's story by Isaac Baashevis Singer about the fabulous village of Chelm. As I remember it, Chelm fell desperately short of sour cream one Hanukah season, disappointing latke eaters throughout the community. So a law was adopted to rename water "sour cream" and sour cream "water." (Chelm was not just known for good government. In Chelm a village elder slapped by the tail of a carp imposes capital punishment on the fish--death by drowning.)

Many vending machines [and toll collection tools, etc] don't take pennies but do take nickels, and they would need a new coin separation engine, not just new programming.

-dk

Thats really not the end of the world.

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