Daily Article | Posted on 4/21/2008 by Max Raskin
It costs money to make money. This fact is not only true for businessmen, investors, and entrepreneurs, but also for the moneymakers themselves — the Department of the Treasury.
To print bills or mint coins, the United States Mint and Bureau of Engraving and Printing must purchase all sorts of resources, including paper, ink, equipment, and metals. In the case of bills, these purchases are an insignificant fact because it takes very little to add on an extra zero to cover the costs.
Coins, however, are different. The price of the zinc required to mint pennies has been steadily increasing; according to a recent article in the New Yorker, the cost of producing a penny is now 1.7 cents — it costs nearly two pennies to make one. Producing a coin at a higher cost than the value of the coin itself is known as “negative seigniorage.” This phenomenon has led many to question the continued existence of the penny and suggest it be abolished. Understanding negative seigniorage in economic terms will lead to an opposite conclusion: hundred dollar bills should be done away with.
Why is the price of zinc going up? Has there been some dramatic shift in the mining industry or a sudden catastrophe? No, because in comparison to many other of the world’s currencies and commodities, the price of zinc has not risen. Instead, it is the falling value of dollars themselves that is causing the price to go up. The greater the supply of a good, the less value each individual unit of that good will have. This is known as the law of marginal utility. Applying this law to money leads to the conclusion that when the mint prints more dollars, the value of existing dollars will decrease, and thus it will take more dollars to purchase metals and other goods.
The government is able to “print” money both electronically by manipulating the interest rate and through the physical creation of more dollars and cents. Though it has become more convenient to increase reserves simply by pushing a button, if people suddenly demanded all their deposits in banks it would be necessary for the government to print a tremendous amount of money (or default and cause a major panic). Such a dramatic increase in the money supply would lead to hyperinflation and throw society into chaos. Money is the lifeblood of an economy as it makes economic calculation possible. Businesses are able to decide what to produce based on profits, which are understood in money terms. Without money, there can be no advanced economic calculation. It would be like trying to build a house with a ruler that constantly warped and stretched.
However, there does not have to be a hyperinflation for the effects of printing more money to be known. Any increase in the money supply, however minute, dilutes the purchasing power of existing dollars and thus throws off economic calculation. Curtailing the power of the government to print money means creating a more sound, prosperous economy.
How can this be achieved? Given that bills can be printed at an extremely high seigniorage, they do not offer a solution because the government will always be tempted to pay for its bloated expenditures with easy-to-print bills. What makes coins and other hard commodities desirable as currency is that they cannot simply be printed. Gold, copper, and silver must be dug out of the ground, so the government is limited in the amount that it can spend and, therefore, inflate.
Thus, the more expensive the penny — or any coin for that matter — the better. It is the paper that ought to be questioned. Does it make sense to give any institution in society the legal right to print money whenever it suits them? There can be no fiscal responsibility with a blank check.
A perfect example of the devastation caused by aggressive central banks is Zimbabwe‘s new fifty million dollar banknote that can buy three loaves of bread. Though initially printing more dollar bills or adding on zeros may cause a temporary boom and allow people to spend more, the economy will eventually be thrown into shambles.
Government fiat does not raise the standard of living; production on the market does. In industries where there is innovation and more production, prices fall. This is best seen in the technology industry (not surprisingly, the sector of the economy with the least government regulation — contrasted with our interventionist health care system with its rising prices.) The reason prices are falling in technology is because the pace of innovation and production is faster than the pace of government-fueled inflation. Imagine if we had a stable currency and prices were able to reduce dramatically in all sectors of the economy.
In a world without government intervention in the money supply and economy, prices would fall to the point that the penny would take on a new relevance. Instead of decrying the penny, economists should recognize its potential to combat government inflation and advocate a return to an even harder currency. Coins may be expensive for the government to make, but this ensures that our money retains some value, regardless of what the government does. Do we really want free money?
Max Raskin was a summer fellow at the Mises Institute in 2007. He goes to high school in New Jersey.