The Word of the Day is "seigniorage"

After two bellyflops, Congress is considering a dollar coin again. This time it might actually work. http://money.cnn.com/2005/04/27/pf/new_dollar/

Why the push for dollar coins? The nominal argument is that it would save the Mint a mint. Paper money doesn't last long. Coins do. Believe it or not, the savings add up to billions over the long hall.

In this new push, however, the motivation is the seigniorage. That delectable word refers to the difference between the cost of producing a coin (or stamp) and its face value (its selling price.) Seigniorage happens when money is lost or put into collections.

Consider the very successful State's Quarters program. It costs the Mint less than five cents for each 25-cent piece it produces. The government makes money whenever someone "buys" a coin then chooses not to spend it. The Treasury estimates that it has earned about $5 billion in seigniorage profits from the quarters so far.

So the new dollar coins are an attempt to cash in on this phenomon.

But this begs a larger question about our currency. Why are we using the 4 coins and 6 bills currently in widespread distriubtion (if you include the $50 bill?)

The last time we kicked out a coin for being too "cheap" was the half cent which was retired in 1857. Note, the actual story of retired coins is a bit more complicated.

So, for almost 150 years a penny has been the smallest denominated coin. In that time a penny has lost 95% of its value. That is, what cost 1 cent in 1857 now costs 20.5 cents. A dime back then bought what $2.05 buys now.

Here is the cost of each coin, the seigniorage for each, and the margin the Mint makes on each.

Coin	Cost	Face	Seigniorage	Margin
Dollar	10	100	90	900.00%
Quarter	4.25	25	20.75	488.24%
Dime	1.9	10	8.1	426.32%
Nickel	3.1	5	1.9	61.29%
Penny	0.8	1	0.2	25%

The conclusion is obvious. Lose the nickel and penny. Make the dime the smallest value coin, which is worth almost exactly what the half penny was worth when it was phased out.