EclectEcon

I have been urging the Cdn gubmnt to stop minting pennies for a long time. When former student, Scoop, saw this, he quickly penned the following press release:

UWO prof supports campaign to scrap the penny
31 March 2008

University of Western Ontario Economics Professor John Palmer today threw his support behind Winnipeg MP Pat Martin's Private Member's Bill to scrap the penny.

"We need to scrap the penny – it doesn't even have value as scrap metal. The simple fact is that prices and incomes are somewhere between 20 and 100 times what they were a century ago, and there is no reason to keep meaningless little coins like the penny and even the nickel around -- they won't buy much, if anything, anyway," Palmer said. "With so few of them used in transactions, and a copper and zinc mines' worth of pennies sitting stagnant in jars, it's time to relegate the penny to its proper place – the history books next to half-penny and the farthing. With the reality of today's economy, the dime is the new penny."

Palmer has been campaigning to get rid of the penny for over two decades. If the penny and the nickel were scrapped, he said it would be easy enough to round prices to the nearest decimal point – or dime.

"The minting of pennies and nickels takes up valuable resources – and mining and smelting of the metals, not to mention the greenhouse gas emissions generated creating and transporting these useless coins, are a burden on the environment," Palmer said. "I am pleased MP Martin has joined the ban the penny campaign – and I hope that all Canadian MPs will see the wisdom of his useful bill to scrap a useless coin."

In 2005, The Bank of Canada did an in-house draft study that recommended elimination of the penny in Canada, something I have been urging for nearly two decades. Details from the Globe and Mail.

“Today's purchasing power of the five-cent coin is equivalent to the purchasing power of the penny in 1972,” the study noted....

As of last summer, the Finance Department had not directly consulted retailers or the public on the penny. A Royal Canadian Mint survey conducted a decade ago found that 35 per cent of Canadians were in favour of eliminating the penny and 26 per cent wanted to keep it.

Australia stopped making one- and two-cent coins in 1990. New Zealand stopped making them three years before that. France, Norway and Britain are among the other countries that have eliminated low-denomination coins.

The case for getting rid of the penny is even stronger nowadays with the high price of metals: the cost of minting pennies has risen dramatically and greatly exceeds a penny, especially when transaction and transportation costs are taken into consideration.

For more see this, this, and this.

Not that I am all that keen on subsidizing the Vancouvre 2010 Winter Olympics, but I enjoy curling enough that I bought an entire roll of these quarters last week (10 bucks! big spender, eh?)

Once again, the US is bringing out a one-dollar coin. And once again, the effort will likely be a failure in the sense that the coin will not become generally accepted and displace the paper dollar bill. The reason: rent-seeking by vested interests, including the Bureau of Engraving and Printing, the Mississippi cotton producers who produce the cotton used in the dollar bills, and the papermill with the contract to convert that cotton into paper for the dollar bills. From Slate,

Around the time the Sacagawea [a one-dollar U.S. coin] was proposed, they [the vested interests] formed a lobbying group called Save the Greenback, which, according to press accounts, had the ear of Sen. Trent Lott of Mississippi and, back when he was in Congress, Rep. Joe Kennedy of Massachusetts. Save the Greenback's annual lobbying expenses average a couple of hundred thousand dollars, presumably paid in crisp new singles. The group managed to get a piece of legislation called the Save the Greenback Act of 1997 introduced in the House; it died in committee, but the $1 Coin Act, which authorized the Sacagawea that same year, required that the bill be retained. The group's archenemy is a pro-dollar-coin lobby called the Coin Coalition, backed by vending-machine and car-wash interests.

You know the Feds are acting like the Keystone Koin Kops when they're outgunned by a New York state agency, but the Treasury really ought to look to the Metropolitan Transit Authority, which runs the New York subways. The MTA introduced an electronic fare card in 1997 but kept the token around for several years, making silly noises about the MetroCard's poor "public acceptance." New Yorkers were slow to adopt the card, even when a volume discount made it worth their while to do so. But the moment tokens went away in 2003, "public acceptance" was inevitable, and four years later, no one (except a few railfan cranks) is whining about the good old days. The public is slow to accept new currencies, but that same public has a mercifully short memory. Get rid of those dirty handkerchiefs tomorrow, and you'll have forgotten about them by the time the first Martin Van Buren dollar lands in your palm.

In light of these lobbying efforts, it is amazing that Canada was able to get rid of its one-dollar and two-dollar bills, replacing them with coins. It was a shock at first, and merchants complained about needing extra slots in their cash drawers. But I have a solution for them: stop using pennies and you'll gain an extra slot.

[h/t to JH, who claims he wants to start a campaign to save the penny. I doubt it.]

When I first wrote about getting rid of the penny (one-cent coin) nearly twenty years ago, one of the points I emphasized was that no matter what policy makers decide, no matter how emotionally attached some people might be to the penny, eventually with continued inflation, people will just stop using the coin. The transaction costs of using it will outweigh whatever benefits there are.

It looks as if we in North America are slowly moving in this direction [with thanks to Jack and CT]:

A recent survey conducted by Desjardins Financial Group shows only 37 percent of Canadians still pay with pennies and the organization is suggesting we ditch the one-cent coins, following in the footsteps of countries like Australia and New Zealand.

There are few things, if any at all, you can purchase with a single Canadian cent. Long gone are the days of penny candy, penny matchbooks and penny arcades. A one-cent stamp even costs more because of the tax.

The coinage also costs more to produce than it's actually worth. Desjardins estimates that producing pennies and keeping them in circulation costs Canadians an estimated $130 million per year. [EE: for more details, see this.]

There are about 20 billion one-cent pieces in circulation yet the Canadian government continues to issue about 820 million a year to replace the ones tossed in fountains and thrown out.

Please, no arguments that getting rid of the penny will lead to higher prices:

• It hasn't in New Zealand and Australia, both of which got rid of their one-cent and two-cent coins long ago. And here is why:
• Competition will keep merchants all from rounding up automatically. And even if all merchants could round the purchases up,
• I quite frankly don't care if the final tally is always rounded up — I'd just as soon not get the pennies and would be just as happy if the merchants kept them.

I read recently that residents of Illinois are reluctant to give up a coin with Lincoln's image on it. There is an easy solution: The U.S. could take paper one-dollar bills out of circulation [and they will, sooner or later] and put Lincoln's image on a one-dollar coin, and Washingon's image on a two-dollar coin.

I have posted extensively about pennies in the past. For a list of some of the postings, see this.

Scoop, an anonymous politico, sent me the following suggestion:

...you can bring back the ban the penny campaign and kick it into high gear...all you need to do is remind people that the mining and smelting of copper, nickel, and zinc creates green house gases. Ban the penny to save the world!

For some background on getting rid of the penny (and nickel) see this, this, and this or just follow this blog's category, "Pennies".

I have long advocated abolishing the penny (one-cent coin, as it is properly called) in Canada [see here, here, and here, for example]. I'd be just as happy to get rid of the nickel and quarter, too and round everything to one decimal point.

Imagine my surprise and wonderment (and possible enlightenment) when I read today in a NYTimes column by Austan Goolsbee that

Most economists, then, argue that we should use this opportunity to abolish pennies the way Canada, Britain and the European countries that use the euro abolished their smallest coins.

I'm pretty old, and I have lived in Canada for over 35 years. I don't remember when this happened or what coin it was. Can someone please help me (and possibly Austan) out? Thanks.

Update #1: Austan sent me e-mail saying,

Ack! It was supposed to be Australia not Canada. Thanks for finding the gaff. I will send them a note.

Update #2: He followed up with this:

Actually, my original source informs me that a couple of Canadian provinces had half-cent coins in the mid 1800s that they got rid of, just like they did in the U.S. (so 35 years there makes you but a babe), so the statement was not incorrect.

More relevant to the current discussion, though, I meant that Australia had dumped its penny. And New Zealand recently did, too.

Regular readers of The EclectEcon know that I have long urged that we stop minting pennies (see here, and the references cited there). Now the Houston Chronicle is reporting that it costs the U.S. Mint 1.2 cents per coin to manufacture pennies. [h/t to MA]

For the first time, the U.S. Mint has said pennies are costing more than 1 cent to make this year, thanks to higher metal prices. ``The penny is going to disappear soon unless something changes in the economics of commodities,'' says Robert Hoge, an expert on North American coins at The American Numismatic Society.

And that does not include the administrative, transportation, and transaction costs for actually getting the coins into circulation.

It is time to stop minting pennies (and nickels and quarters, too — let's round everything to one decimal point instead of two).

EclectEcon welcomes Greg Mankiw to the "Ban the Penny" movement.

A growing number of experts are concluding the penny is too picayune to bother with. "The purpose of the monetary system is to facilitate exchange, but the penny no longer serves that purpose," says Harvard professor Gregory Mankiw, a former chairman of President Bush's Council of Economic Advisers. "When people start leaving a monetary unit at the cash register for the next customer, the unit is too small to be useful."

Tyler Cowen agrees, but wonders about the effect on the sales tax, which puzzles me. As it is, the sales tax is rounded to the nearest penny, so why not just round it to the nearest nickel (or preferably get rid of the nickel, too, and round everything to the nearest dime)?
I've written considerably on this topic for nearly two decades.

• see here,
• see here,
• see here,
• or see here.

[h/t to The Emirates Economist]

In a follow-up post, Tyler Cowen predicts prices would go up if the US or Canada banned the penny (or one-cent coin). I'm not so sure, and I don't know the evidence from Australia or New Zealand, where indeed the penny was removed circulation (along with two-cent coins) over a decade ago. My argument in favour of banning the penny is that I'd rather pay a few extra cents and be freed from the nuisance of pennies.

But another consideration is that in Australia, prices are still denominated in hundredths of a dollar, as in $8.98. Then the rounding occurs after all the items are added up. In this case, there's no reason at all for prices to change.

I have long advocated that we get rid of the penny in Canada and the US. [see here, here, and here, for example].

I don't think the fact that the gubmnt earns negative seignorage on minting pennies provides a very strong argument for not using them. But that fact certainly adds to the case against having pennies (And, as I pointed out earlier, the negative seignorage that has made the news lately doesn't even take into account the distribution costs, which amount to several cents per penny). [thanks to Skip Sauer and JohnH for the pointer to this story from the NYTimes-Guardian]:

This week the cost of the metals in a penny rose above 0.8 cents, more than twice the value of last fall. Because the government spends at least another six-tenths of a cent — above and beyond the cost of the metal — to make each penny, it will lose nearly half a cent on each new one it mints.

The real problem could come if metals prices rise so high that it would be economical to melt down pennies for the metals they contain.

Appearances aside, pennies no longer contain much copper. In the middle of 1982, after copper prices rose to record levels, the mint starting making pennies that consist mostly of zinc, with just a thin copper coating.

But these days, zinc is newly popular. Rising industrial demand and speculation have sent the price rocketing. Since the end of 2003, zinc prices have tripled.

Tyler Cowen recommends that you hold onto your pennies awhile longer before selling them to the scrap metal dealer:

We all know, of course, that you should not exercise an option before its expiration. The longer time runs, the greater the chance for price to bounce around. Once you are "out of the money," further drops in price don't hurt you any. But "in the money," you gain from price movements in your favor. So hold onto those pennies and wait.

But what really frosts my whiskers in the NYTimes article is this:

Pennies, meanwhile, are in high demand. Last year, the mint made 7.7 billion of them — more than the number of all the other coins it produced. In the first three months of this year, the pace of penny production rose to an annual rate of 9 billion — the highest since 2001.

... [R]etailers demand pennies from their banks, the banks demand them from the Federal Reserve, and the Fed orders them from the mint. Many of the people who get the pennies in change throw them into a jar, where they may sit for years, requiring the mint to make more and more of them.

This argument is precisely the same as one I heard from a former executive with the Canadian Mint: banks want pennies, so we keep stamping them out. Surely if Parliament and Congress would just pass laws saying they aren't going to mint the one-cent coin any more, we would all be better off.

I must confess that I do not understand why retailers haven't gone this route themselves. They all have penny cups, but why don't they just round the final total, after taxes, etc., down to the nearest nickel? Heck, I'd be happy if they rounded it up to the nearest nickel (or dime even).

Oddity: last week at Starbucks, I received two pennies in my change. One was a 1946 and the other 1947 penny.

I have long argued that Canada (and the U.S.) should stop minting pennies and stop using them (for example, see here and here). My argument has been

• Pennies don't buy anything any more.
• The transaction costs of using pennies are seriously non-negligible.
• When transportation and other costs are included, minting pennies generates negative seigniorage.

Imagine if the smallest-valued coin had the purchasing power of only one-quarter of a U.S. penny. In such an economy, one can readily imagine that people would just stop using the coin. And that is pretty much what has happened in the United Arab Republic [h/t to the Emirates Economist]

Despite Central Bank of UAE figures saying that 1, 5, 10 fils coins are in mass circulation, residents and shopkeepers say they rarely see them.

“The Central Bank has not withdrawn from circulation any of these denominations and continues to issue them according to the needs of banks in the amounts they require on a weekly basis,” Rashed Al Fandi, UAE Central Bank’s executive director for banking operations, told Emirates Today.

“The large quantities of these denominations in circulation shows their availability in the market.” The Central Bank maintains that there is a demand for small fils coins and that the denominations are in circulation in significant quantities.

But if you buy vegetables and fruits in Dubai, you are likely to end up with a bill that totals 95, 48 or even 60 fils. Stores round off the bill, often in favour of the customers.

“We round it off to the nearest 50 fils or one dirham,” says Zorayda Esquerra of Carrefour, Bur Dubai. [1 Dh = 100 fils]

Plus de change .... The Canadian Mint says the same thing:

Banks want the pennies, so we mint them.

They take the orders from the chartered banks as a sign of demand, a sign that people actually want these small, useless coins. But that is just plain silly.

Look at the markets: people do not want these small coins. In Canada, people take and leave pennies in the penny cups at cash registers. In New Zealand and Australia, virtually everyone is happy to be rid of their one-cent and two-cent coins.

In the United Arab Emirates, people round to the nearest 50 Fils. And they do this not because the smaller coins are unavailable; they do it because they are a nuisance.

The solution is to declare legally that pennies (in North America) and small-denomination coins in the UAE are no longer legal tender but must be accepted for deposit by financial institutions.