With Philip Diehl, Former Director of the U.S. Mint
In Steve’s conversation with Philip Diehl, former director of the U.S. Mint, Diehl argued that the Mint should have gotten rid of the penny years ago. In addition to overseeing the Mint, Diehl has also served as chief of staff at the U.S. Department of the Treasury and as staff director of the Senate Finance Committee.
Why The Mint Should Get Rid Of The Penny
Diehl has been advocating the Mint ditching the penny for more than two decades now, since back when he was the director of the Mint under President Clinton. He says that despite the fact that there are between 200 and 250 billion pennies in circulation, inflation has put the penny in a position where it has basically outlived its usefulness.
Diehl noted that the penny became basically a zinc coin about 30 years when it became prohibitively expensive to produce pure copper pennies. The current pennies are only about 2.5% copper, just enough to retain their copper color – the rest is zinc. However, even with that manufacturing change, the penny is a losing proposition for the Mint, as it costs about two cents to produce each penny.
The simple fact is that the penny has very little purchasing power. An indication of the penny’s lost value is the fact that there’s virtually no technology today that accepts the penny, with the exception of Coinstar machines, which charge you a hefty fee to take them off your hands.
So Why Is The Penny Still Around?
When Steve asked Diehl why the penny is still around, they both agreed that, for one thing, the population has a bit of an emotional attachment to a coin they’ve seen and used all their lives. However, there are practical and political reasons for the penny’s survival, too. The private companies that make the penny blanks for the Mint obviously have a vested economic interest in keeping the penny alive, and so do zinc mining companies, since the penny is now virtually all zinc. On the political side, the Illinois Congressional delegation has steadfastly opposed retiring the penny because it’s the coin that features Abraham Lincoln on its face.
Steve asked about another practical consideration: If you don’t have any pennies, what happens with all the thousands of items that have price tags such as $3.99 or $4.99? Diehl’s answer is that retailers would simply round off such prices to the nearest nickel amount. He also noted that in today’s computerized world, 75% of commercial transactions are done in electronic form, not in cash, and that percentage is only likely to rise.
What About The Nickel?
Steve’s final question to Diehl was about the future of the nickel, whether there’s an equally valid argument for doing away with that coin. Diehl answered that, unlike the money-losing penny, the nickel’s current production cost is at about breakeven, and could possibly be lowered by making nickels out of steel. The case for eliminating the penny is much stronger and, well, first things first, one coin at a time.
Click the link to learn more about Philip Diehl’s current work as President of U.S. Money Reserve.
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Steve Pomeranz: Should we ditch the penny? Should the US government get rid of the penny? Is it something that should be relegated to history? Well, we’re going to get the opinion of the former 35th director of the United States Mint. And it is said that he orchestrated one of the most impressive government agency turnarounds in recent history.
He also served as chief of staff at the US Department of Treasury and as staff director of the US Senate Finance Committee, and he’s with me now. His name is Philip Diehl, and he’s got some very strong opinions on the penny. Welcome to the show, Philip.
Philip Diehl: Thank you very much, Steve.
Steve Pomeranz: So should we ditch the penny? And if so, why?
Philip Diehl: Yes, we should. We should have done it 20 years ago. When I was the director of the Mint, back during the Clinton administration, I supported eliminating the penny. And that doesn’t happen very often where a government agency wants to get rid of one of its programs, but I even had the support of my union to do it. It had really outlived its usefulness 20 years ago, and even more so today. But, today, between 200 and 250 billion pennies are in circulation.
Steve Pomeranz: What is the penny made up of these days? It’s not copper anymore, right?
Philip Diehl: No. Well, there’s a little bit of copper, maybe 2.5%. The rest of it is zinc. It’s basically a zinc coin. And that happened, oh, maybe 30 years ago, where the copper penny disappeared because the price of copper got so high that people were melting down pennies because they were more valuable as just copper on the market and nowhere as pennies.
Steve Pomeranz: So with inflation rising every year, the usefulness of the penny has declined.
Philip Diehl: That’s right. A penny today is worth what a nickel was in the mid-1970s.
Steve Pomeranz: Yeah, wow.
Philip Diehl: So it has very little purchasing power. An indication of that is that there’s virtually no technology today that accepts the penny with the exception of Coinstar machines, which will charge you a fee to take them off your hands. I can’t think of a more ubiquitous product created by man that does not interact with any kind of technology.
Steve Pomeranz: Yeah. It’s not rational. It’s a lot that’s emotional. You know, when I was thinking about the segment, I was thinking about how I feel when I see a penny on the ground. I’m so conflicted because I know that it’s going to sit in my pocket and I’m going to collect it in these jars that I have all over the house, but I know it’s really not worth anything. But I hate to see money left on the ground. So it’s emotional, you know?
Philip Diehl: Yes. That’s right. And you know what? Somebody did an analysis and they said taking the time to stop and pick up a penny and put it in your pocket compensated you less than minimum wage.
Steve Pomeranz: Wow.
Philip Diehl: So, yeah, it’s not very productive. Plus, the fact of the matter is, they’re not clean. I’m not saying they’re diseases, but it doesn’t make a lot of sense to stop and pick them up.
Steve Pomeranz: So why don’t you think the penny has disappeared from circulation? Why do we still have it around, in your opinion?
Philip Diehl: Well, you’re absolutely right, there’s a strong emotional attachment to the penny. But there is also a very rational basis for why we have a penny today. In fact, I think the main reason we have a penny is because of very rational reasons.
Steve Pomeranz: Oh.
Philip Diehl: Those rational reasons had to do with economic interests and political interests that had a stake in the penny. Most of the production of the penny has been outsourced to private industry and has been for decades. The only thing the Mint does is take the penny blank, which is supplied by outside vendors, and stamp it to turn it from a round disc of metal into the penny. And then the Mint ships it off to the Federal Reserve.
So those penny blank manufacturers have a strong economic interest to keep the penny. And, of course, the zinc mining industry does, too. And then, believe it or not, the Illinois congressional delegation is a major factor in protecting the penny.
Steve Pomeranz: Because of the person that’s on the penny, right?
Philip Diehl: Yes. It’s the seat for Abraham Lincoln on American coinage. They don’t want to give it up. So those three factors are major obstacles, and nobody really on Capitol Hill cares enough about the issue to really push it hard and overcome that resistance.
Steve Pomeranz: My guest is Philip Diehl. He was the 35th director of the United States Mint. We’re talking about the penny. What does it cost to actually make the penny each year for the government?
Philip Diehl: Well, it’s more than the value of the penny. The Mint actually generates a profit for the American taxpayer with its other denominations, except the nickel. The nickel’s also below water, but it’s closer to a breakeven than the penny is. The penny cannot be made. You cannot change the composition of the penny to get it into the black. And so it’s costing something in the neighborhood of a little less than two cents a penny to produce a penny. So the Mint loses money on every one it produces.
So it’s more than just a nuisance to businesses to have to put up with and for consumers to jingle around in their pocket and put it into coin jars like you and I do and then someday dump them into a machine to get our money back.
Steve Pomeranz: We used to wrap them on our living room floor so we can go to Disney World. That’s…
Philip Diehl: That’s when they were worth something.
Steve Pomeranz: Yeah, exactly. And a ticket was only like $25 to Disney World. So what happens to pricing? What happens to the 3.99, 4.99 kind of pricing if the penny’s no longer there?
Philip Diehl: Well, there’s a couple things to bear in mind. The short answer is: Those transactions will be rounded. And one of the issues that the protectors of the penny has consistently brought up is that, inevitably, those prices are going to be rounded up. I don’t believe that’s the case. In fact, when you eliminate the penny, you could write into the legislation that they have to be rounded down, or up, depending on whether it was at the seven- or the three-cent level.
Steve Pomeranz: I see.
Philip Diehl: The other thing to bear in mind is that 75% of all transactions, and in the future, it’s going to be more than this, 75% of commercial transactions are done in electronic form of one kind or another, not in cash. So 75% of transactions aren’t even affected by this.
Steve Pomeranz: And growing.
Philip Diehl: Yes, yes, definitely growing. And then the other thing is that competition will restrain businesses from taking advantage of this. The reason why I believe this is if a company today can raise the price of a product by a penny, if competition will allow them to raise the price by a penny, they’re going to do it.
Steve Pomeranz: They would have already done it, mm-hmm.
Philip Diehl: Yeah, they would have already done it. And so, there is nothing in eliminating the penny that creates a new opportunity to raise the value.
Steve Pomeranz: All right. One more question before we have to go. If not the penny, then why not the nickel?
Philip Diehl: The nickel is closer to being at breakeven. And the composition of the nickel can be changed to steel. And we’d bring it down to at least breakeven and maybe even a profitable coin. And my attitude about it is, the penny has been useless for several decades. Let’s eliminate that before we tackle the issue of the nickel. So, you know, first things first.
Steve Pomeranz: Okay. One coin at a time. And by the way, to convert your coins in these Coinstars is not cheap. I don’t remember what the percentage is, but I remember looking at it once because I’ve got, I literally do have jars and jars of these things in my house as I collect them. And it’s like, “I’m not paying that.”
Philip Diehl: Yeah, I think it’s like 7 or 8%.
Steve Pomeranz: Yeah, it’s a lot. That’s exactly.
Philip Diehl: In their defense, there are ways of lowering that if you take the gift card or something like that.
Steve Pomeranz: Oh, I see. Okay.
Philip Diehl: But, yeah. They’re charging to take pennies off your hands.
Steve Pomeranz: My guest Philip Diehl, formally the 35th director of the United States Mint. And to find out more about Mr. Diehl and to hear this interview again, don’t forget to join the conversation at onthemoneyradio.org.
Steve Pomeranz: Thank you, Philip. Thank you. It was very interesting. Thanks for taking the time.
Philip Diehl: Thank you, Steve. Take care.