Recently there has been a lot of excitement and discussion about the real value of a penny. In one article from December of 2011, ABC News(1) talks about the waves of people going out of their way to sort and hoard pennies. The story mentions one individual who spent upwards of $500.00 on a coin-sorting machine to assist with the process. Another person made an entire business of sorting and selling them at nearly 50% profit. This obsession over the smallest unit of our currency got us folks at the American Open Currency Standard thinking, “What is a penny really worth?”
Understanding the Discussion
Every currency has three values, and knowing them is an important prerequisite to joining the penny discussion.
Value #1 – Currency’s Intrinsic Value – a currency’s most basic value, what it is worth intrinsically, or the value of currency as determined by the weight, composition and prices of its material.
Value #2 – Currency’s Value in the Marketplace – the definition of fiat money illustrates its real currency value: marketplace. This value is typically labeled on the unity of currency itself and is also the value at which merchants and business owners accept it (although not necessarily and absolutely by fiat). Simply stated, this value is directly related to what goods and services it gets you in any particular marketplace.
Value #3 – Currency’s Value as a Collectible – this value is determined by things such as the year a particular note or specie was produced and the total number of units issued. A standard $10 Federal Reserve Note would be a good example of the third value if it were much older: take a look at this $10 bill from 1928(2), priced at $1,175.00.
As illustrated, the collectible value can be substantially higher than the intrinsic and market values. In the case of the paper money, such as the $10 bill from 1928, this value is 11,750% of its market value. On the other end of the spectrum, a currency’s intrinsic value is usually substantially lower than the the market value.
Paper money is a good example of why some people think fiat currency is otherwise essentially worthless. A $10 Federal Reserve Note, after all, is nothing but a thin sheet of cotton and linen, right? While many people are quick to suggest that paper money is worthless, it does have some value: you could use it as toilet paper (personal hygiene value) or as a paper airplane (entertainment value) or even to burn as heat (utility value)! As you can see, fiat money is not worthless, but there is a very big gap between the marketplace value ($10 for a $10 Federal Reserve Note) and the intrinsic value of the paper (a fraction of a penny when compared to conventional paper sold by the ream). In fact, if the paper and ink on the federal reserve note is valued at $0.02, the marketplace value is 50,000% greater than the intrinsic value. Though certainly a huge gap, it does mean that paper money is not worthless.
In earlier times, when gold, silver and copper were actually used as currency, there was no gap between the intrinsic and marketplace values. Goods and services were priced by weight of metal. Today, however, the difference between these values is much more significant and in all national fiat currencies, the market value far exceeds the intrinsic value.
The pre-1982 U.S. Penny, however, is a rare exception to the typical relationship between the intrinsic and market values.
What People are Doing
Today’s pennies contain 97.5% zinc and only 2.5% copper, rendering them not much more intrinsically valuable than paper money. But pennies produced in the US between 1909 and 1982 fall in to a different category: at 95% copper and 5% zinc, the metal “melt” value (at current prices) is 247% of its denominational marketplace value of one-cent. For the copper alone, at $3.72 per pound, the intrinsic value is about 2.5-cents. So if you had 100 pre-1982 pennies in a bag with a face value of $1.00, your bag would contain about $2.50 worth of copper. On a larger scale, a $100 face value worth of pre-1982 pennies would net about $250 worth of copper. Copper is what the penny hoarders really seek.
Criminals are cashing in(3) on spiking copper prices. At the AOCS, we hear stories again and again about how people are stealing copper from air conditioning units and out of pipes in housing and construction sites. Some are even cutting into live electrical wires(4)! Others are taking a less unlawful position and developing methods of acquiring, sorting and collecting the copper pennies.
Some of these activities are illegal, but all of them are, in our perspective, insane. Let’s take a look at the economics for hoarding pennies.
The Economics of Penny Hoarding
Let’s assume for a moment that collecting and melting pre-82 pennies or treating them in some way for their copper was legal. Would trips to the bank actually yield a high enough number of pre-82’s to make it worth the effort? To answer that question, we went to our local bank and bought a $25.00 box of pennies to see for ourselves. Here are the results:
The $25.00 box of pennies, strangely enough, contained 2,500 coins. Of those, three were Canadian one-cent pieces and one was a five-cent piece from Latvia. 21 pieces were unreadable (covered in unknown growths and substances). Curiously, 42 were from 1982, the year the changeover occurred (some were produced with 95% copper and some were only 2.5%). So out of our box of 2,500, we could only count 2,433 (97%) of them. Of this 97%, only 438 were pre-1982. That’s 18%. So out of the 2,500 pennies we got from our trip to bank, only about 17.5% were the pre-1982 pennies. Was it worth the effort?
So let’s assume we liked sorting pennies enough to do it for a while…say…the next 10 years.
Each week, for a period of ten years, we make two trips to the bank in the course of our normal lives (no special visits). In each visit, we can reasonably carry two boxes of pennies, each costing $25 (while returning the post-82 from the previous visit). At 2,500 pennies per box, that’s 5,000 pennies per trip. Over 10 years, we’ll make 1,040 trips to the bank yielding 910,000 pre-82 pennies (out of 5,200,000 pennies; 17.5% based on our experiment). We’ve invested $9,100 for these pennies, plus the time, effort and space to hoard them and now we’re ready to melt!
(Editor’s Note: as time goes on, we did not consider that the actual % of pre-82 pennies would decrease as they continue to be removed from circulation by people like you and the banks, which can do it much more efficiently)
Continuing the fairytale, let’s assume for a moment that the laws have changed in our favor and melting pennies is now okay. Let’s also assume that the value of copper, the price of which is largely hinged upon [decreasing] industrial demand, holds its current price of $3.72 per pound. We call around to local scrap yards, since it will be expensive to transport nearly three tons of copper across the country, and find that scrap buyers are paying around 75%-80% of spot for copper. At 2.95 grams of copper per penny, we have a total of 5,919 pounds, which a scrap dealer might be willing to buy for $17,757 ($3.00 per pound).
After 10 years of time, effort, and a few lucky breaks in your favor, our gross profit is $8,657. In the meantime, you tied up $9,100 in capital and barely kept up with inflation.
So what is a penny really worth?
Hoarding pennies is time consuming: the sorting, investment, upkeep, and bulkiness make penny hoarding more labor-intensive and less financially rewarding than what most entrepreneurs seek in a business venture. But to really test the value of a penny, take it to a store and ask the cashier to give you $0.025 or even $0.02 and see if you are successful. You will discover what a penny is really worth…exactly one penny.
If you’re unconvinced and still want to hoard pennies, keep an eye out for a copper penny from 1943(5); you could sell it for as much as $82,500, if not more. And if you are lazy and one of those people that doesn’t trust banks and refuses to get in to gold or silver (which over the past ten years have produced ‘returns’ far superior to what the penny may be able to do), you just might be better offer collecting U.S. nickels.