What's the value of a penny?

By DAVID MOON, Moon Capital Management
March 16, 2008

I was trying to explain to a couple of seven-year-olds why a $5 bill is worth more than a $1 bill, and why each of them is worth more than an orange $500 Monopoly bill. Even though the children have exceptional intelligence (they are my progeny, after all), I struggled with a successful explanation.

There is a concept of fiat, which says that money has value simply because the government says it has value. The word fiat comes from the Latin term 'fiat lux,' which is used in the first chapter of the book of Genesis and typically translated into English as 'let there be light.'

The little green George Washington portrait in your pocket will buy almost a third of a gallon of gas simply because someone in Washington said, 'Let there be money.'

The government starts with almost nothing ' pieces of paper ' and creates a thing that we honor as being representative of the value of our work and any other asset we possess.

I was coming to grips with that, even if I wasn't doing a good job explaining it at home.

Then I ran across some statistics about coinage, and I was back at square one.

Unlike paper money, where the government takes an almost worthless thing and declares it to be worth much more than the paper, with coins it's the exact opposite. Government performs its more traditional task, where it takes something of value and, through the magic of bureaucracy, manages to waste some of that value.

Look at the meager penny, for example. The government starts with zinc and a little bit of copper. It puts those metals through a process, stamps a picture of Abe Lincoln on it and, voila! a penny is born.

It costs 1.67 cents to make that penny.

The nickel is even worse. A nickel costs almost a dime to make. The government's profit margin on this product is a negative 97.5 percent.

That jar on your dresser is full of tiny round versions of $200 hammers and $300 toilet seats.

Since the government says a penny and nickel are only worth 1/100 and 1/20 of a dollar, that's all you can get for them at Wal-Mart. Fiat lux.

Lest the arbitrager in you begin to see an opportunity, the U.S. Mint makes it illegal to melt pennies or nickels. Not only can't you melt these coins, you can only legally carry $5 worth of these coins out of the country. Uncle Sam is concerned about offshore penny smelters.

Violators are subject to $10,000 in fines and up to five years in prison. And they forfeit their melted or smuggled coinage.

Archeologists and historians debate who issued the first coin. It might have been the trite, a Lydian coin made of a natural mixture of gold and silver. These were produced around 600 BC in an area that is now part of Turkey. Coins were used in Pakistan (silver) and China (bronze) about the same time.

Although we don't have good records, I'm willing to bet that these early civilizations didn't consume value to make these first coins. Sticking with the barter system might have been better economics.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Add me to your commentary distribution list.

MCM website