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Making cents not making sense

A committee in the Senate has recommended that the penny be discontinued. They also recommend that it eventually be demonetized and withdrawn from circulation, although the Bank of Canada would continue to accept them for redemption on an indefinite basis. If that happens, the nickel would become the lowest denomination of coin. Prices would likely be rounded to the nearest five cents, likely through the following system:

Prices ending in 0 or 5 cents would stay the same; prices ending in 1 or 2 cents would be rounded down to 0; prices ending in 3 or 4 cents would be rounded up to 5; prices ending in 6 or 7 cents would be rounded down to 5; and prices ending in 8 or 9 cents would be rounded up 0. This is symmetrical.

I think eliminating the penny is a good idea. It has numerous benefits, and issues raised by its elimination are insignificant and overblown.

I often find myself either rolling up pennies and depositing them in the bank, or hoarding them so they can be used to add a few cents to a payment so that I won’t get pennies for change. In addition, vending machines, parking meters, and the like, usually do not accept pennies. The purpose of money is to facilitate trade and exchange, and the penny is not fulfilling this purpose.

In terms of value, the penny is nearly worthless. Due to inflation, the real purchasing power of any denomination of currency is declining. As it is our smallest denomination, no unit of the Canadian dollar has ever bought less than a penny.

Seigniorage is the “profit” made when the face value of currency exceeds the value of materials and costs invoked to make it. Pennies are expensive and have negative seigniorage. It costs 1.5 cents to make a penny (cite). It has been argued that once distribution costs are included, it costs 5 cents to make a penny (cite). Clearly, the mint is losing money by making it.

Even though many prices end in 99 cents, and without thinking about it much, poor would seem to lose due to widespread rounding up. This is not the case. A study found that consumers would actually have a small gain 1/20 of a cent per transaction (cite). In addition, the reason prices end in 99 cents is to exploit the psychological perception that a price of (say) $19.99 is in the $19 range, rather than the $20 range. The best way to maintain that psychological perception would be to end prices in 95 cents (making our example $19.95). Hence, in this sense the gains for consumers would be larger.

Although many charities do raise funds by collecting pennies, eliminating the penny likely won’t have any appreciable impact on their fundraising. I see no reason why the nickel can’t replace the penny in this area.

Provincial sales taxes/HST/GST often lead to amounts ending in any digit. Although this is true, it won’t result in issues with eliminating the penny. First, rounding is only necessary in a cash transaction. When you use a debit or credit card, no one goes from one bank to another carrying a bag of money filled with cash from one box and dumped into another. Rather, the transaction is recorded merely through entries in the books. This exact method is used in Sweden, for example (cite). For cash transactions, the rounding can be done to the final total. A better method, however, would be for provinces to mandate that displayed prices already include taxes (as is already done for gasoline). This will create an incentive for merchants to tinker with their prices so that the final amounts end in 5 or 0 cents. Doing this will also make managing ones money easier, as it is easier to add totals that already have taxes included.

All in all, eliminating the penny has numerous advantages without significant disadvantages. It will save money for both the government and individuals, and will ease business and commerce.

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Comments on: "Making cents not making sense" (1)

  1. […] won’t rehash the arguments I made when a Senate committee first recommended getting rid of the penny. To summarize, consumers will […]

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