Collecting Problems: U.S. Mint Faces a Coin Cost Dilemma

A recent move by the Obama administration may lighten wallets across the country -- but not in a bad way. According to The Wall Street Journal, the White House is considering proposals that would alter the metallic composition of America's pocket change to make it cheaper to produce the coins. Although some groups -- notably, coin collectors -- are wary of any change in the nation's metal currency, it looks like this could be a profitable move for the country.

The big problem is that some U.S. coins cost more to make than they are actually worth. The prices of coin metals, which fell to five-year lows at the beginning of 2009, have risen back to 2007 levels, driving the production price of some coins up above their face value. According to the United States Mint's 2009 Annual Report, pennies currently cost 1.6 cents apiece to produce and nickels cost 6 cents apiece; more recent estimates claim that the cost of manufacturing a nickel is closer to 9 cents.

While this may seem like pocket change, it adds up: In 2009, the U.S. Mint issued 3.2 billion pennies, worth $32.2 million. With manufacturing costs pegged at 1.6 cents apiece, the Federal government lost $19.8 million on the deal. In the same year, it also shipped 207 million nickels, at a loss of $2.2 million. By comparison, the Mint made $15 million off its sales of dimes, $132 million off its sales of quarters and a whopping $318.7 million off its sales of dollar coins.

While the dollar coins are less popular than smaller-denomination coins, they are far more profitable. A large part of the reason for this is that the U.S. Treasurer is authorized to change their content without outside approval: As metal prices rise and fall, shifting "recipes" for the coin can help save money. The composition of other coins is dictated by statute, and changing them requires an act of Congress.

Commemorative Pennies and Nickels Add to Demand

Another big problem lies in the government's commemorative coins, which are usually big money generators, but which faltered in 2009. Apart from pennies and nickels, pocket change is profitable for the U.S. Mint: The government makes money on every dime, quarter and dollar that is taken out of circulation. Quarters, for example, cost approximately 12 cents apiece to make, which means that the government pulls in about 13 cents every time one goes into a coin collection. The state quarters program, which wrapped up in 2008, inspired an estimated 147 million people to hoard quarters. The U.S. Mint issued 34.3 billion quarters in the program, yielding a profit of $6.3 billion.

Last year, the U.S. Mint tried to repeat its success by issuing quarters commemorating the District of Columbia, Puerto Rico, Guam, American Samoa and the Virgin Islands. Unfortunately, the new line only generated $48.2 million in profit.

Adding to the problem, the U.S. Mint has been issuing commemorative pennies and nickels, inspiring amateur coin collectors to hold onto the lower-value coins, while spending their dimes, quarters and dollars. As a result, the Mint's coin production in 2009 fell to a 45-year low, driven by a drop in demand for quarters and dimes. Meanwhile, production of pennies and nickels stayed high.

On the bright side, stock market fears drove up bullion purchases, and the Mint's sales of bullion coins soared to the highest levels in its history. Overall, however, the Mint's profitability tanked -- according to chief financial officer Patricia Greiner, it only transferred $475 million to the Treasury's general fund in 2009, a 37% decline from 2008.

Although the proposals to solve the cost problem range from plastic currency to industrial porcelain coins to (gasp!) dropping the penny, the most likely result of all this will be that the government will add a base metal -- probably aluminum -- to its pennies and nickels. This will be similar to what happened in 1983, when the Reagan administration shifted from solid copper pennies to ones made out of copper-clad zinc. While this could result in lighter, cheaper-feeling coins, the Mint is like to avoid that by using increased proportions of cheap, but heavier, metals to keep the coins weight high.

In the meantime, there's a quick solution to the Mint's problems: A commemorative dime series honoring either Franklin Delano Roosevelt or World War II would increase demand for -- and thus production of -- dimes, which are among the most profitable coins. Perhaps the time has come for a Tarawa ten-cent piece.