When Entrepreneurs Privatized the PennyGeorge Selgin
(Corrects name of beverage in first paragraph.)
May 8 (Bloomberg) -- Our poor penny. Half a century ago, it was a respectable, if humble, piece of money. Just one could buy all sorts of candy or a postcard; three might buy a cherry cola or a newspaper.
They were made of bronze -- copper with a touch of zinc and tin. Though not exactly precious, that metal was at least august enough for decorating brave soldiers and Olympic athletes.
But pennies have been on a downward slide ever since. By 1982, they were worth so little that people were melting them for their copper, causing the U.S. Mint to introduce today’s version, made of cheap zinc disguised by a thin copper coat. Today even the zinc versions cost almost 2.5 times as much to make as they are worth -- costing taxpayers about $60 million last year. So Congress is considering another switch, to lowly steel.
Would it be better to simply give up on the penny, as Canada decided to do in March?
The story of the British penny, first minted in the eighth century, offers an instructional case. It, too, came within an inch of dying. But it was saved by a handful of entrepreneurs.
Counterfeiters and Retailers
The British penny started out as a silver coin. By the start of the 18th century, silver had become so valuable that pennies made from it were quickly melted down. So the Royal Mint quit making pennies except in tiny quantities used for ceremonial purposes. Halfpennies were made of copper, but they attracted enterprising counterfeiters. By 1775, the mint stopped coining copper altogether.
The hitch was that its decision came just as the Industrial Revolution was gaining steam. And that revolution called for unprecedented amounts of small change for paying workers’ wages and stocking retailers’ tills. Unless someone supplied the necessary coins, British economic development would come to a halt.
The Royal Mint stuck to its decision. Help came instead from some of the same entrepreneurs responsible for Great Britain’s industrial liftoff. Leading the way were Thomas Williams, the owner of what was then the world’s biggest copper mine, on the Welsh island of Anglesey, and Matthew Boulton, the owner of the world-famous Soho Manufactory, located just outside of Birmingham.
Both men first proposed to produce copper coins for the government that were less expensive and harder to imitate than those issued by the Royal Mint. Williams hoped to take advantage of his access to cheap copper, while Boulton built a high-capacity steam-powered mint -- the first of its kind -- just for the purpose.
When the government refused their offers, Williams decided to coin copper for himself. The coins he produced -- called “Druids” because their obverses bore the bust of a Celtic priest -- were in fact the very first copper pennies. Williams initially handed them out to workers in 1787. They were soon circulating as far away as London, becoming so popular that some merchants insisted on them while refusing “official” copper.
Boulton put his high-tech mint to work striking custom-made copper halfpennies for private clients who were tired of scrounging for change or dealing with back-alley forgers. Before long, a score of smaller private mints were following Boulton’s example.
The new copper coins proved much harder to imitate than those issued by the government mint. More importantly, because their makers sold them for their cost of production plus a modest profit, rejecting the Royal Mint’s practice of selling official copper coins for their full face value, they drove counterfeiters out of business. Businesses could now have their own custom-made coins, for little more than it might cost them to buy fake “official” ones, without breaking any laws and with the advantage of the custom coins’ marketing value.
By 1797, private coiners and their clients had issued almost 600 tons of private copper pennies and halfpennies -- half again as much copper as the Royal Mint had issued over the course of the whole century. Within a single decade, private coiners managed to do what the Royal Mint had been unable to do for hundreds of years: provide the British people with honest, reliable and efficiently made small change.
Unfortunately, the British government wasn’t keen on having private coiners usurp even the least lucrative part of its ancient “prerogative” of coinage. So in 1797 it tried to re-assert itself, while still taking advantage of private-sector know-how, by at last awarding Boulton an official coinage contract.
Soon the Soho Mint was striking huge quantities of Great Britain’s first official copper pennies. Planning also began for a new steam-powered Royal Mint. Boulton agreed to outfit the new mint with equipment in return for the government’s promise (which it eventually broke) to stick to coining only silver and gold, leaving the copper coinage to Soho.
But even before work began on the new mint, the Royal Navy’s demand for ships’ sheathing had sent the price of copper so high that large quantities of Boulton’s new official pennies and tuppence -- like U.S. pennies in the early 1980s -- found their way into melting pots, giving unofficial private coins a new lease on life. Their emboldened makers now dared to add silver shillings to their copper offerings; one even went so far as to issue a private 40-shilling gold piece.
That proved too much for the government, and for the Royal Mint, which feared that its expensive new plant would end up with no work to do.
Thus began a campaign to stamp out private coinage altogether, starting with private silver coins, which were banned in 1813. Private copper coins were banned five years later. Yet the new mint wasn’t ready to issue its own copper coins until 1821. So for several years the British public was left starving for small change -- in many paupers’ cases, literally.
In light of the British experience, one can’t help asking what the fate of the U.S. penny would be if responsibility for it were simply left to the private sector. Perhaps American entrepreneurs would find a way to make pennies profitably; or perhaps they would get no orders for them and respond accordingly.
But we can be sure of one thing: They wouldn’t be striking coins at a loss of tens of millions of dollars a year, and having the difference made up by taxpayers.
(George Selgin is a professor of economics at the University of Georgia’s Terry College of Business, and the author of “Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821.” The opinions expressed are his own.)
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