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Ditching the Penny Doesn't Go Far Enough

3/30/2012

2 Comments

 
Yesterday in the federal budget, the government of Canada announced its plan to eliminate the production of the 1-cent coin. It’s an excellent move, but the questions to ask are: what is the optimal coinage system in Canada, and could there be additional savings by revamping the whole system?
The penny has almost no purchasing power and costs Ottawa 1.6 cents to produce.

It’s been our lowest denominated coin for around a century, back when the penny actually bought something. Now the penny can’t buy anything. Not even a nickel can buy much.

Other countries, such as New Zealand, Australia, the Netherlands, Norway, Finland and Sweden, have ditched their penny, and it hasn’t led to the collapse of their economies or societies.

So why does Canada still have them? Why do retailers continue to hand out fist-fulls of coins for simple transactions? The reason is simply that they exist. The Royal Canadian Mint – the federal government Crown Corporation that produces the coins – says that they produce 600 million pennies each year because the banks and retailers order them. But we don’t need them, and if the Mint stopped producing them there would be no demand.

Transactions at the cash register for bank debit card and credit card transactions could still be kept to two decimal places, as could all accounting practices.

But if Ottawa wants to save money and simplify the coinage system, why stop at the penny? Let’s drop the nickel and the quarter, too, and move from the 7-coin system to a much easier 4-coin system: the toonie, the loonie, the 50-cent piece (call it a half-loonie) and the 10-cent piece.

In a cash transaction with our current 7-coin system, it’s possible to be handed back an astounding eleven coins in change. With the 4-coin system, the most you could receive is seven coins in change.

Getting rid of the penny, nickel and quarter will really only involve a change at the point of sale for cash transactions. A convention would develop whereby retailers would automatically round UP or DOWN to the nearest dime depending on the final price. New Zealand has such a policy in place, its understood by the retailer and the customer, and it works just fine. (Those who suggest businesses will always gouge the customer by rounding UP don’t understand competition.)

There are others who fear this system of rounding to the nearest dime would cause inflation. Hogwash. First of all, if we safely assume that retailers and consumers will develop a convention of rounding up and down, prices will all even out in the end. Secondly, cash transactions make up a very small percentage of the average consumer’s total purchases. Most large transactions – such as a home, a car, a stereo, or even clothes – are not paid for in cash. Only very small transactions such as buying a coffee, lunch at the food court, or a pack of gum, are regularly paid in coins.

Aside from the savings in production costs, the economy would benefit in other ways, too. Counting, sorting, rolling, and packaging coins is a costly effort by people who work in banks and behind the retail cash register. This takes up valuable time – and what retailer wouldn’t want to find ways to speed up the movement of customers through the cash line?

If the federal government is trying to save money, dropping the penny is a very good place to start. But why stop there? With the 1-cent coin soon to be making an exit, now is the perfect opportunity to rethink and redesign our entire coinage system. Rationalizing and modernizing it makes good sense, and is long overdue.
2 Comments
bluecollargoldtieguy
4/23/2012 03:36:00 am

How's the KoolAid, Todd? As an 'economist', don't you think it would be of value to mention, even in passing, that the reason for dropping the penny might have something to do with the increase in the money supply... or did you miss that class? Let me guess - you are likely a proponent for a cashless society, too.

Reply
Tyler
5/3/2012 03:09:23 am

Canada already produces a 50 cent coin.....

In fact, I have one sitting on my desk right now.

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