James Z. writes: I am a college professor who at California State University, Hayward. I work with students who will become elementary school teachers. I was visiting a school today, and a fourth grader asked me the following question, “Why is the dime so small?” The penny and nickel are both larger than the dime, but the dime is worth more. Why is the dime smaller than the nickel?
The United States used to have an intrinsic monetary system that relied on circulating precious metal coins for commerce. Coins were “the money”. The United States really didn’t have a national paper money system until 1861 and that was controversial because they were “Legal Tender” notes, not redeemable for coins. This fiat money was one way the United States raised funds to carry on the Civil War. Paper money redeemable for gold and silver coins were restored after the war but the paper was only a receipt for coins.
For money to be intrinsic, a dime had to have virtually 10 cents worth of silver, a quarter had to have virtually 25 cents worth of silver, etc. In the early days of the country the precious metal content of U.S. gold and silver coins was too high in relationship to precious metal prices in Europe and massive amounts of coins were melted, sold in Europe and resold back to the United States. The U.S. reduced the precious metal content in 1834 and then in silver coins in 1853 and then was able to keep coins in circulation. Half dimes, dimes, quarters, half dollars and dollars were struck in .900 fine silver and their value, size and weight were proportional (less a small amount of seigniorige to help defray the Mint’s cost of producing the coin).
Practical considerations demanded a low value token coinage in order to make change. The first copper cents were as almost as large as current day half dollars. This was an attempt to make that coin intrinsic (one cent worth of copper). It eventually became impractical to use such a coin in everyday transactions and that coin was tokenized and reduced by 1857 to the size we see the cent today. Token coinage was not directly redeemable for precious metal coins and therefore not legal tender. For example, a 19th century bank might refuse to change 25 one cent coins into a silver quarter)
The copper-nickel 5 cent was introduced as a token coinage in 1866 as was made larger for practical reasons. Though tiny, silver half dimes continued to be produced until 1873 the larger copper-nickel coin was easier to handle and less likely to be lost. (Note that only precious metal coins had reeded edges. Base metal coins had plain edges)
Though base metal coinage was not legal tender, It was vital to help complete transactions. The two major 19th century coin shortages, in the 1830’s and in the 1860’s, virtually brought commerce to its knees due the dearth of small change. A cottage industry developed during this period making small change in the form of tens of thousands of “good fors” and “advertising tokens” For more info, see: Tokens – The Peoples Money.
After 1964 virtually all precious metals were removed from the U.S. coinage system (a lower content, 40% silver half dollars continued to be produced until 1970) and the entire coinage system became tokenized. Coins were produced that mimicked the look of the old precious metal coins by the clever use of a copper-nickel sandwich with a pure copper core and a reeded edge. This composition is known as copper-nickel “Clad” coinage. The cent and nickel remained the same composition as before. The cent was further debased in 1982 by replacing copper planchets with zinc and then plating them with copper.
Today the size relationship between United States coins still exists but for reasons of tradition only. Also, none of our current coins are legal tender and no one is obligated to accept them as money. Money’s definition has changed radically over the years and now only paper money in the form of Federal Reserve Notes are considered legal tender.