Canada Kills Its Penny; Can We Please Be Next?

(Photo: mrgreen09)

If you’ve been reading this blog for a while, you may know that I am devoutly anti-penny. This includes a rant on 60 Minutes in which I argue that the penny should be killed off, as inflation has rendered it worse than worthless. 

The U.S. government remains unpersuaded, but our good neighbors to the north are about to take the leap (following the lead, it should be said, of several other countries).

Here are details from Canada’s Budget 2012 and here’s a CBC report:

In part because of rising prices for the metals it’s made of, it actually costs 1.6 cents to produce every penny. The government estimates it loses $11 million a year producing and distributing the penny, and that doesn’t include the costs and frustrations for businesses and consumers that use them in transactions.

A 2008 report by Quebec-based bank Desjardins estimated the penny’s existence cost Canada’s economy about $150 million in 2006. Canada’s big banks alone handle more than nine billion pennies a year, which costs them $20 million annually to process. …

A 2005 study by the Bank of Canada concluded that doing away with the penny wouldn’t lead to any inflation. And Ottawa says similar systems implemented in Norway, Australia, New Zealand and elsewhere didn’t lead to systemic price increases.

(HT: Adam Scott, Tyler Griffin)


Gkm

It's very disappointing to see that Mr Dubner also falls into the oft misperception. The issue isn't that the penny has been rendered worthless - it has been rendered worth TOO MUCH.

Some one above noted government doesn't make money by making money. In fact, that is all that government does. In the case of the penny, the Canadian government has decided that is not so. They aren't willing to support a loss leader.

So what is the real impact? Is $11 million in savings significant? Of course not. It's a joke. It does highlight fiscal mismanagement. Money is meant to be a store of value. The other tenants of currency are less important because they function even to the extreme edges of monetary collapse. Just ask Mugabe.

This is indeed a sad time for Canada, but is a grand time for financial illiteracy. The more frightening notion is that Canada is seen as the beacon of fiscal management in the developed world...

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Dark Penguin

@GKM: "Money is meant to be a store of value."

But it's also supposed to have significant value in the marketplace far above its actual intrinsic worth. Fifty years ago you could buy a five-stick pack of gum for five cents, which meant that a penny was worth, essentially, one stick of gum. A stick of gum chewed was a penny spent, and a penny save was a stick of gum not chewed. One fifth of that pack of gum is something anyone can physically visualize and comprehend. Nowadays gum costs $1.50 or more. Although you do get more gum in the package, 1/150th of it is beyond most people's visual imagination. I can't see any justification for using such a small denomination.

If you live in Canada be grateful, because you aren't surrounded by heedless reactionaries.

B_Y_O

The New Zealand government removed the 1 and 2 cent pieces and no one missed them. Then an interesting thing happened... New Zealanders traditionally saved the 1 and 2 cent pieces. The NZ government dropped them as legal tender partly because the small coins dropped out of circulation as they accumulated in piggy banks and empty jam jars nationwide. So what happened? That's right - the 5c piece became the smallest demonination pulled out of circulation by people saving their spare change. The government (years later) then dropped the 5c piece as legal tender. We now have a tiny 10c piece that's cheaper to produce and (presumably) stays in circulation longer. They also changed the sizes of the remaining coins (the 20 and 50 cent pieces) as a smaller coin is less costly to produce.

As to pricing... The economy works as if there are still 1,2 and 5 cent pieces available. (So a price can be $1.99). If you pay electronically by debit or credit card then you still pay $1.99. If you pay by cash then the rounding system is used - prices are rounded down or up depending on the price (for example $1.99 would be rounded up to $2.00 but a price of $1.45 would be rounded down to $1.00. Prices of $1.50 seem to be generally rounded down.) Sales tax (GST) in NZ is usually (nine times out of 10) inclusive in the price so the retailer would either have a till system that figures out the GST component at the time of the sale or they determine it later based on the price it was sold for.

Lastly NZ has experienced price increases in food items but this is due to multiple factors and I don't think anyone has looked at whether eliminating the 1, 2 and 5 cent pieces has in some way contributed to the price rises of recent years.

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Susana

Isn't one of money characteristics to be fully divisible?

Dark Penguin

Not necessarily. When the Italian lira was worth about a dime, before WWII, I believe they did have subsidiary coins all the way down to one centesimo, which wasn't too unreasonable given what things cost. But in the era leading up to the euro, when a lira was only worth a half cent or less, they didn't certainly didn't have anything less than 1 lira, and I'm not sure they even had that.

Money does need to be divisible, but only to the extent needed to faciliate commerce. If a two-inch box nail costs one cent, then that doesn't necessarily mean that we need to manufacture a one cent coin to buy it with. We can dictate, or we should be able to dictate, that the customer has to buy five or ten nails at a time. Even today, nobody expects to buy soda at McD's by the sip, even though these days one penny doesn't nearly pay for even one sip.

Pennies or their equivalents in other countries aren't altogether bad, provided that the upper end of the range of coins reaches the purchasing parity of at least a dollar or two. For reasons that should be self-evident, it's easier to spend the little coins along with the big ones when you can pay for the entire purchase in coins. This is also why the issue of pennies and nickels is tightly bound with the issue of dollar coins. They're really different facets of the same issue.

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Dark Penguin

I don't understand this at all. What should be a no-brainer decision that we shouldn't even be asked to weigh in on -- after all, we never voted for the particular denominations we have now -- has become bound up with people's paranoia about big government over-reach and the erosion of the people's right to liberty and justice. Penny advocates also like to like to point fingers at inflationary monetary policy, which is obviously a factor but definitely not the only one. Historic inflation isn't any justification for wasting money now to make pennies. The most absurd comment appeared under another article recently. The poster argued that eliminating pennies would make it more expensive to buy articles that cost $.03 or $.08. This is delusional to the point of absurdity, because I can't imagine what on earth they think still costs eight cents. And I was the only respondent in that thread who called him on it. I'm well into my fifties myself, and even I can barely remember anything costing as little as a nickel or a dime. We'll always be stuck where we are unless more people can take the rational view.

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auser

Sorry to tell you but America will "never" get rid of the penny or the dollar bill. Just ask Susan B.A. Americans just can't deal with change.

Dark Penguin

@James: The cost of making a penny – or any coin or bill – is irrelevant to its function as money.

Actually it's not irrelevant at all. To be useful as money, the the face value of a base metal coin needs to be well above its intrinsic material value. Otherwise it's just a nuisance. We don't need a coin worth only about the same as a two-inch nail, because nobody needs to buy one nail at a time.

mikef

The absolute denial of inflation in this country is amazing.
I think we should eliminate all coins under the quarter.