Canada just decided to kill their penny, which is more or less worth the same as our penny. The cost of producing them is just too high. They cost 60% more than they’re worth in Canada. Coins are a throwback to the days when the coin was literally worth its weight in the metal it was made from. But in more modern times they became a means of transaction, with their worth equal to how much gold it could buy. A penny in the 1800s bought a penny’s worth of gold. That is how value was established. In modern times there is no underlying value. A penny is worth as much as a penny. This is the nature of most money in the world.

And the penny just isn’t worth much anymore. Canada’s ending of penny production has stirred up a regular conversation in the US about whether or not to kill ours. It’s just as expensive to produce as the Canadian penny and Obama’s budget for 2013 includes provisions for changing the makeup of the penny to make it cheaper to produce again. It’s previously been an issue to melt down coins when the are worth more as raw material. This video makes the full case for killing the penny quite well:

Not only are pennies a drag, but as the video points out they are already refused in many areas of the economy. But does that mean we’ll be killing the penny? Don’t bet a 1943 Copper Wheat Penny on it happening soon. I wouldn’t even bet a 1912 D Wheat Penny. There are a lot of considerations that would have to be addressed.

The biggest problem with killing the penny is the fact that we buy things that require pennies all the time. If you pay cash, you’ll probably get pennies back. If you left your card at home and don’t want change you probably need to have some pennies on you. This is due to the pricing system in the US (“Only $19.99”) and a sales tax system that adds cost on top of the list price. In Canada, and in other countries, retailers are encouraged to round to the nearest nickel to adjust their pricing. In the US, we’d need that as well as a simplified sales tax system that either builds the cost into the price or adds everything easily at the point of sale. An example:

Buying a shirt for $14.99 with a 7.5% sales tax costs $16.11. A cash transaction would require pennies. So move the price $14.95. But with sales tax that would be still be $16.07. Still need pennies. So stores would need to simplify pricing or round up. There’s a cost to rounding up to consumers that isn’t insignificant over the course of multiple transactions.

And think about the cost for the nearest currency to the penny. The nickel. The nickel costs more than the penny to produce, significantly more. More nickels would be needed to pick up the slack. That’s going to increase the burden on the government. It’s not until you get to the dime that you start to see any real efficiency in coinage.

But the problem persists that pennies are difficult to use today. They are accepted wherever most cash registers are available, but that’s about it. And there is a cost for dealing with them. As inflation continues to drive down the value of 1 cent, it becomes a greater problem figuring out the value the penny adds to society. Don’t expect to see the penny get cut in the US anytime soon. It would likely take some kind of crisis like a shortage of metal or massive government austerity to bring it down in the next decade or so. It isn’t out of the question though for people who grew up barely knowing what a checkbook was to see it sent to pasture in their lifetimes.

Image: eurleif

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categories: banking, economics, government