On February 12, 2009, the 200th anniversary of Abraham Lincoln’s birth, an irreverent group of protestors in Concord, Massachusetts launched a protest against the lowly penny. With hopes of sparking a nationwide movement, numerous retailers announced plans to stop handling pennies. In the birthplace of American civil disobedience, demonstrators flung the copper-coated nuisance into the streets.
At the heart of this penny-anti protest is the realization that the value of our smallest monetary unit is simply too low. It costs the U.S. government more than one cent to produce and distribute this coin. Worse yet, according to a recent study, using a penny adds about two seconds to a retail transaction—while the average American wage is slightly more than a cent per two seconds. Thus, even if pennies could be created out of thin air they would still be a losing proposition. Reassuringly, recent research concludes that rounding purchase totals to the nearest nickel would harm neither buyers nor sellers. Most retailers feel compelled to continue using pennies, but when Americans receive them as change, we tend to stash them in piggy banks, sock drawers, and other hoarding places. Because we siphon them out of circulation, retailers ask banks for replacements and the government obliges by minting up several billion more every year—as the vicious cycle continues. The Mint doesn’t seem to care (or even notice) that it is at the center of this dysfunctional vortex. Curtailing penny production would require layoffs and dislocations at the Mint, so this cozy, lazy monopolist has little incentive to push for a more efficient, penny-free world.
Americans are burdened with too much small change. Two centuries ago, Britain faced the opposite problem. The Royal Mint, another cozy, lazy monopolist, neglected the interests of the British populace, causing shortages of low-denomination coins. As George Selgin (Department of Economics, West Virginia University) explains in this carefully researched book, commercial firms eventually came to the rescue—supplying high quality coins and igniting a competitive fire to the feet of the Royal Mint—before they were chased out of business by a jealous, skeptical government.
Selgin begins with a clear explanation of the coinage options facing any society and then examines British practice in the late 1700s. Britain had a pseudo-trimetal standard. Its larger-denomination coins were made of gold and silver, but the Royal Mint generally disdained small-denomination coins such as pennies, half-pennies, and farthings. The Mint was paid on commission based on the value of the money struck, so minting small change didn’t pay well and was only done in fits and starts. Moreover, these copper coins weren’t really legal tender and were refused for tax payments. Yet, there was a huge public demand for them because the average workingman’s pay was roughly a penny or less per hour, and many goods purchased by workers and their families cost a few cents or less.
Inevitably, as a result of considerable demand in the face of a piddling supply, frequent shortages of copper coins arose. When payday rolled around, many employers—especially manufacturers and mining concerns—were hard pressed to amass the small coins they desired to pay their workers. Some sent agents riding from place to place in search of small change. Others burdened employees with large-valued coins. (Imagine being paid in twenty or fifty dollar bills today and being unable find ones, fives, and tens when you wanted to buy a sack of flour or a couple of pints.) Some tried payment in kind or ran company stores. Others staggered pay, so that the coins of workers paid in the morning were collected from retailers and paid out to another group of workers in the afternoon. Amid these make-do efforts, the quality of the Royal Mint’s copper coins deteriorated after years of circulation. This provided an opening for counterfeiters, who could profit by producing underweight coins that bore a passable likeness to the Mint’s product. Contemporary estimates and evidence from a coin hoard unearthed years later suggest that by 1750, almost half of all copper coins were counterfeits, rising above 80 percent toward the end of the century. The Royal Mint did such a poor job supplying small change that people eagerly accepted obvious counterfeits, and Selgin concludes this counterfeiting was a “victimless … largely beneficial” non-crime.
Then, perhaps surprisingly, private industry took the next step. Instead of counterfeiting the government’s coins, firms began producing their own. The ice broke in 1787, when “Copper King” Thomas Williams began producing his own coins and using them to pay his employees at the Parys Mine Company on the Welsh island of Anglesey. Employees welcomed these coins—which bore the likeness of a bearded Druid—”with open palms.” Because the firm promised to redeem its tokens with legal tender in both London and Liverpool, they quickly began circulating throughout the country. The Mint “responded with a shrug.” The Druids were not proper money, after all, and didn’t infringe on its prerogatives; the masters of the Mint were initially “more than happy to let private industry supply its own small change … so that they could be left to enjoy their sinecures in peace.” Meanwhile, Williams realized a tidy profit of about a quarter cent on each unredeemed coin. The scent of profits in the air attracted imitators and Selgin does much to describe the personalities and intriguing interactions of the leading competitors in this dynamic field.
The greatest attention goes to Matthew Boulton, who built a pioneering steam-powered mint at his famed Soho Manufactory near Birmingham. Boulton’s initial quest for a royal coinage contract didn’t pan out. After the fledgling American government spurned his coinage offers, he took on jobs for colonial governments and the East India Company before reluctantly entering the domestic token business. Desirous of a peaceful monopoly, he was thrust into a competitive free-for-all. In fact, his mint was a chronic money loser, burdened by high fixed costs, until it obtained a royal contract in 1797. Nimbler competitors flooded into the market during the 1790s. Selgin counts at least two hundred individual token issuers and about twenty coin makers, most of whom entered from the button-making industry. The issuers were almost all persons of good standing in the community—including grocers, drapers, silversmiths, and brewers—and had to be, since they promised to redeem their coins for legal tender. The monetary value of the coins they issued was fairly modest in comparison to their capital and access to credit.
Selgin (clearly a numismatic buff) is especially impressed by the high quality of the images struck on these coins, including brick-by-brick depictions of factories and ships rigged down to the last ratline. The Carmarthen halfpennies engraved by John Gregory Hancock and issued by ironmaster John Morgan show “painstaking interior scenes of men raking coals and working a tilt hammer.” Selgin waxes poetic: “It is, of course, not possible to engrave heat. But someone forgot to tell Hancock.” Businesses could earn a small profit by producing these coins and found them to be an excellent form of advertising. Because issuers promised to trade their coins for legal tender, quality had to be high or they would have had to foot the bill for counterfeits. The market spoke, as these new tokens—most of them half pennies—drove royal coppers from the field.
Eventually, the Royal Mint decided to get back into the action. Boulton was virtually compelled to help modernize the Mint’s equipment, thereby putting himself out of business. Fear that the token business would soon be legally suppressed led most firms to withdraw from the field, triggering a vicious cycle in which good tokens were retired from circulation, leaving only counterfeits and those of poor quality. This helped besmirch private coinage’s good name, spurring an even greater political push to ban private coins. Passage of the Local Tokens Bill (which banned privately produced coins in 1812) renewed the earlier shortages. Despite a series of reprieves to relieve these shortages, the quantity and quality of small coins diminished as counterfeits and even defunct French coins filled the void, before the Mint finally expanded its output to meet the demand.
Selgin closes with convincing evidence that the long-term success of token coins and the demise of counterfeiting cannot be attributed to the new technology of steam-powered minting, since almost none of the successful token coin issuers used steam power. He argues that counterfeiting was originally widespread because the Mint didn’t care much about it. But counterfeiting didn’t afflict for-profit firms because they took necessary precautions against it by issuing high quality coins—thus driving up the costs of counterfeiting—while the steady supply of “good money” drained away the demand for counterfeits.
However, Selgin is less persuasive in arguing that “had it not been for commercial coins, Great Britain’s Industrial Revolution, instead of accelerating to a gallop as the nineteenth century approached, might have slowed to a saunter, if not a snail’s pace.” Supporting this thesis would require a plausible estimate of the time, resources, and opportunities lost dealing with coin shortages in the era before these commercial coins hit the market. Moreover, industrialization showed clear signs of accelerating in the decades before the arrival of commercial coins. Selgin estimates that the demand for coins grew five-fold between 1781 and 1811, but this calculation involves an error (p. 211) that suggests Britain’s population almost doubled between 1801 and 1811. This is a minor flaw in an otherwise excellent work—excellent in all its facets. Selgin, who portrays himself as “a writer with a weakness for clichés,” has a wonderful penchant for wordplay, a great sense of humor, an eye for interesting anecdotes, and—best of all—a talent for posing and answering interesting questions about a seemingly mundane topic.
The classical liberal philosopher and political theorist Herbert Spencer warned a century and a half ago “that had the baking and sale of bread been hitherto carried on by government-agents, probably the supply of bread by private enterprise would scarcely be conceived possible, much less advantageous.” Unfortunately, thanks to recent financial market problems (largely caused by government missteps, many economists agree), the pendulum seems now to be swinging toward having government expand into the contested zone where the market and the state overlap. In the end, Selgin’s most important contribution is to remind us that private enterprise has a tremendous potential to improve our lives whenever a cozy, lazy, floundering, government monopolist disserves its customers. (Did someone mention the U.S. Postal Service?)
Robert Whaples is professor of economics at Wake Forest University.
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