Monday, January 17, 2011

Penny Supporter Misses the Mark

I’m not sure if there are any good arguments in favour of keeping the penny, but there is a bad argument from David Howden who teaches economics at St. Louis University. Howden thinks that the high cost of making pennies puts the brakes on inflation. Back when money was made out of gold, governments were limited in creating more money by the cost of acquiring gold. Howden believes that the high cost of pennies has a similar effect on modern governments that seek to create new money.

According to Howden each penny costs about 1.5 cents to make. With more inflation the nominal cost of each penny rises causing an increasing “loss” per penny. Howden believes this effect helps to hold the government back from causing ever more inflation. This effect is obviously miniscule compared to the costs associated with gold back when we used the gold standard for money.

The cost of handling pennies by businesses is a drain on Canada’s productivity. I’m sympathetic to frustration about governments using inflation to deal with past overspending, but continuing to make and handle pennies is not the answer.

A common unfair tactic in debating is to highlight good arguments for your own point of view and bad arguments for the other side. One could argue that I’m guilty of this in the penny debate. So, I invite penny supporters to write comments offering reasons to keep the penny.

13 comments:

  1. I like Penny, she is the best character on the Big Bang Theory, if it wasn't for her acting.... no wait, you are writing about something else? Never mind...

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  2. There are still penny supporters?

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  3. @Big Cajun Man: There are other characters on Big Bang Theory?

    @Potato: I'm not sure if Howden really likes the penny or if he just wants to keep it around as a symbol of government excess.

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  4. I've told you where I stand: get rid of pennies and nickels, and go to a 10/20/50 system like they do with Euros.

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  5. @Patrick: Such a system would be logical (and therefore will never happen :-). I fearlessly predict that we'll get rid of the penny some time in the next decade and then it will be a race to see whether we eliminate physical money altogether or eliminate nickels and dimes together.

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  6. I agree with your point. Besides, the penny battle is already lost. Most retailers are perfectly willing to round up or even down to the nearest nickel.

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  7. @CC: Hopefully the number of retailers who stop handling pennies will continue to grow. I still have to flick them out of the change I get at many places (even after asking the clerk not to give me any pennies).

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  8. The other proponents of pennies are the companies that produce the metal that comprises pennies and perhaps those who manufacture the pennies.

    And what about the rhyme: "Find a penny, pick it up, and all day you'll have good luck"? That's a more compelling argument than purposely wasting money to produce nuisance coins.

    He misses the point though, that much of the money created never really goes into circulation as physical money. When I pay my mortgage, I don't take a bag full of twenties to the bank (that would make me cry).

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  9. @Gene: I think you're right that the support for pennies will come from a small minority of people who benefit from their manufacture and others with an emotional attachment.

    Taking a wad of twenties to the bank would be enough to make one cry. On the other hand I can remember when my father used to take his pay cheque to the bank and come home flush with actual cash. Somehow that seemed more satisfying than seeing a bigger number when checking my bank account online.

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  10. You're right, literally cashing a paycheque would be very satisfying. I read that physically counting money improves one's mood. Here's the article:

    http://www.npr.org/templates/story/story.php?storyId=111579154

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  11. @Gene: Cool! I used to count my money a lot when I was a kid. Maybe I was self-medicating.

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  12. Of course the main point of the article is summed up in the last few paragraphs.

    Within a fiat currency system there are no brakes in inflation, so we will eventually lose our coinage, and of course the value of the dollars we hold if we continue to allow it.

    Contrary to some writers, eliminating the penny may not be immediately inflationary, but it will remove one of the Bank of Canada’s main inflationary constraints. Unconstrained by this increasingly costly coin the BoC will have free reign to inflate away. That is, until the Nickel is placed in the same position. And what then? Will we eliminate the Nickel as a barbarous relic? The Quarter? The Loonie? The Toonie?

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  13. @Redmond: I understand the author's point, but I just don't believe that the existence of the penny has a meaningful impact on the government's ability to inflate the money supply.

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