## Thursday, May 27, 2010

### Endless Debate about the Penny

Politicians will once again debate the elimination of the penny. As I’ve argued before, pennies are a waste of time. We’ve managed to delay killing off the penny so long that it’s time to get rid of nickels and dimes as well.

Let’s look at the numbers. Suppose that Joe still primarily uses cash and makes 500 cash transactions for “random” amounts per year. This does not include any cash transactions that are designed to be for an already rounded amount.

If these random-amount transactions are paid for without any pennies, they will get between 0 and 4 pennies in change. If Joe just throws the pennies away (as I do), he loses about two pennies per transaction on average, or about \$10 per year. (I actually lose much less than this because I have fewer cash transaction in a year.)

Many people may not be willing to give up \$10 per year even if it means not having to deal with pennies. However, let’s see how things change if the final amounts are rounded to the nearest nickel. On each transaction, Jim will be ahead one or two cents, down one or two cents, or even. Using some statistics, we can calculate that over the course of one year, there is a 99% chance that Jim will be up or down 81 cents or less.

If we eliminate nickels and dimes as well, there is a 99% chance that Jim will be up or down by \$4.14 or less in one year. I’d be happy to get rid of all these coins for such a small amount of money, especially considering that the “error” amount is unlikely to be as high as \$4.14 and could be a gain rather than a loss.

It’s possible that retailers could choose prices that always cause the final price to be rounded up after the taxes are calculated, but this would be easy to detect and would lead to bad press for the company.

Maybe if these politicians were to debate eliminating nickels and dimes as well, they could decide to eliminate just the penny as a compromise.

1. I agree that if the government debated removing dimes, nickels, and pennies from circulation, they would be more likely to succeed in pulling the penny.

We donate our pennies to the coin fountain at the local mall. My young daughter likes throwing them in. Penny elimination would hurt this charity. ;-)

I don't think retailers could fix prices to round up to the next quarter, unless they are generally selling only one item at at a time. Maybe car dealerships will do this: "Your final bill is \$24,214.13. That rounds up to the next quarter."

Personally, I find cash inconvenient and would survive a world with only electronic payments.

2. I agree with the penny being annoying. I transfer my excess pennies from my pocket to a bowl on my dresser. The bowl is getting quite full. Once it fills up, I give the pennies to a buddy's kids. They get about 20 bucks from it.

Here's the issue I have with eliminating it though: stocks trade to the penny, so how would we figure out transactions like that? Would everything round up to the nearest nickel? Perhaps the government could take that extra couple pennies from each transaction and add them to the GST. It would help the deficit, that's for sure.

3. Including all taxes and all spurious charges would be very nice indeed.

I like the penny, it has such magical powers, that some people will not pick one up if it is showing tails yet they will pick up one showing heads assuming this will give them luck for the rest of the day. What other mythical device can give such pleasure for such a small amount?

Also, if you fill a sock with them you have a cheap weapon as well.

Keep the penny get rid of the \$1!

4. @Passive Income Earner: All-in pricing would definitely be nice for HST/GST/PST, but also for other surcharges like the ones that airlines have become known for.

@Gene: You're right that there are challenges with trying to fix prices to win the rounding game. Partial victories are possible, but probably aren't worth worrying about.

I agree that electronic payments are more convenient, but I don't like paying more than I have to in fees to banks. Also, some people need to use cash to maintain control of their spending.

@Financial Uproar: As far as I'm concerned we should be able to specify prices to any precision we want and only round when it comes time for a payment. So, we could still have stock prices to two decimal places (or even three if we wanted). We'd take the share price, multiply it by the number of shares traded, add commissions and possibly other fees, and then round off the final amount.

@Big Cajun Man: It's hard to argue with that logic :-)

5. I'd like to see us drop the penny, nickel, and quarter, and go to a 10,20,50,100 system like the Euro. (Fat chance...)

6. Every penny I get in change goes in a tin on my desk. Come Christmas, the tin gets dumped in the "coins for charity" bin.

Nickels and dimes are put aside, and when I get to \$1, I hit the vending machine.

Nothing smaller than a quarter in my wallet. Coins take up far too much room.

7. Here's Jim Flaherty's thoughts on removing the penny:

Of course, come Halloween, he'll reverse himself and impose a special tax on penny stocks. Actually, he seems like a decent guy.

8. I could not agree more with removing the penny and at the very least, the nickel as well. I'm not sure how doing so could be reconciled with stock prices, but I'm sure it could be worked out. Pennies are a waste of everyone's time and space.

Incorporating taxes and any other charges into the price of goods would also make our lives a bit more seamless. We know the tax is there, it's not a surprise when it is added at the end, it would just be nice to know the price when viewing an item without having to do some extra calculations.

Australia and New Zealand are good examples of how both of the above plans work well.

9. Stocks would have to be unaffected by any changes, since they occur internationally. Nobody really uses cash for stock purchases, so I don't see the loss of the penny affecting them. Just my 2 cents... round that down to 0 cents.

10. The idea is to eliminate the penny and nickel in the real world. I am all for that.

There would still be calculations, prices, and figures down to the penny. But coming around to the physical world, any transaction that involved CASH would be rounded to the nearest dime.

If someone charged to their credit card, used their debt card, or any other eleictronic sales, calcuations would be to the penny.

I think we are only talking about physical transactions with physical coins.

11. You actually have a pretty good point here. However, I think there are other interested parties who would stand to lose/benefit from the elimination of pennies, nickels and dimes. For example, this would affect the pricing strategies for all retailers. The \$2.99 price is more attractive to consumers than the \$3 price for psychological reasons, not financial. Or how about gasoline prices? A couple cents makes a difference in people's choice of where to fill up. In the long run I think things would even out, but in the short run I'd expect a lot of backlash from companies.

12. @WM: Maybe this concern would be offset by the savings businesses would have from their cashiers not having to handle pennies any more.

13. One interesting thing I've noticed is that the physical size of the coin usually increases with value.

If you look at the "history" of the size of the penny, it's gone from a coin roughly the size of a quarter to something with about half the diameter.

I bet given 20 years, if the quarter is still around it's going to be the size that pennies are today.

Parroting what you've said, maybe we should just get rid of all coins that are smaller than an inch in diameter ;)

14. @Anonymous: That's an interesting observation. Maybe we should suggest that rather than eliminate the penny, we should shrink its diameter to zero. Then we can pretend to hand a penny or two back and forth to complete transactions.

15. I think we should go from cent based, 1¢ = \$1/100, to disme based, 1Ä‘ = \$1/10 (where the “Ä‘”, “stroked ‘d’”, symbol = “& #273 ;” or “& #x111 ;”), get rid of the penny, nickel and quarter, create the US florin, 20¢ piece, and define and reemphasize the 50¢ piece as the US crown. So rather than the 1¢ penny, 5¢ nickel, 10¢ dime, 25¢ quarter and 50¢ half-dollar, there would be the 1Ä‘ dime, 2Ä‘ florin and 5Ä‘ crown (symbol and names just a suggestion).
Thus, prices could be defined in tenths, rather than hundreds, in most cases (financially sensitive transactions that require \$.01, \$.001 or even \$.0001 resolution, can certainly continue to do so).
I mean, really, other than pricing gimmickry (“...now only \$3.99!”), how often do you see something for 57¢ or 72¢?——it is most likely for 59¢ or 79¢, which, when it is all added up at the end of the year, could just as practically be priced at 6Ä‘ (6 dismes) and 8Ä‘ (8 dismes)!
What do you think?

16. @KMGC: It makes sense to get rid of a decimal place, but for any proposal to succeed, it has to seem like as small a change as possible. I think we have the best chance of simply eliminating the penny. A more ambitious goal would be to get rid of the nickel too, and try to get people to use 50-cent pieces instead of quarters. Any larger changes could not be done all at once for political reasons.