Originally Posted by BigDaddyPete

From phrases.org

Plugs are the holes made in coins, which is then filled with a cheaper metal. Coins so tampered with are no longer legal tender and are thus worthless if spotted. The phrase is, of course, American. Before 'plugged nickels' there were 'plugged quarters' and 'plugged dimes'. The various versions of the phrase appear in the 1880s. The nickel, being a lower denomination coin, lends itself better than quarters and dimes to a phrase expressing worthlessness. Oddly though, the lowest denomination coin is the cent and the phrase 'not worth a plugged cent' doesn't appear until later. The earliest I've found for that is 1908.