It happened. The federal budget in Canada was revealed a few days ago and one of the biggest announcements to come out of it was the death of the penny. They plan on stopping production of the one-cent coin some time this fall.
We have to realize that this news didn’t exactly come out of left field. I discussed the death of the penny last year when the idea was proposed by Finance Minister Jim Flaherty. By far the biggest motivation is simply that of cost: in order to produce a single one-cent penny, it costs 1.5 cents. That just doesn’t make sense, especially when you factor in all the secondary costs of accounting for the pennies, transporting them, and so on.
As far as the logistics are concerned, the death of the penny only affects cash transactions. Everything gets rounded to the nearest nickel, so something that was 98 cents would cost a dollar in cash. If it was 97 cents, then it gets rounded down to 95 cents. Again, remember that this is for cash only. If you use a credit card or debit card, you will still pay the actual amount of 97 or 98 cents.
In my original post, Ray pointed out that the “nightmares that would be required for rounding up and down would be so costly,” particularly when it comes to coding. That may be true, but it is a system that is already working in places like Europe and Australia. All transitions will cost money in the short term, but this looks to be beneficial in the long run. The government will be saving millions of dollars each year by not having to produce the penny, and this money can then be allocated to other budgetary concerns.
While I don’t think that we will be moving to a cashless society any time soon, it does make sense to transition out denominations that are virtually obsolete. It happens with countries whose currencies undergo severe inflation and, in the long haul, it happens to every other country too. It may be a while, but it’s only a matter of time before we start to consider eliminating the nickel too.
What’s your take on the death of the penny? Will it have any real impact on your day-to-day life? Will the trays at cash registers get replaced by “leave a nickel, take a nickel” trays? Will we have to start paying a nickel for your thoughts?
Update: As an aside, a conversation on the penny and credit cards did come up during Dot Com Pho on Saturday. Check out the first video for that.
As an Australian (albeit one who was born after we abolished the one and two cent coins) I feel I can confidently say there really is no reason not to do this.
It certainly hasn’t harmed our economy in any way, and quite frankly those coins are worth so little now there’s no reason to have them.
I don’t know about Canada, but the USA got rid of a sub one cent coin (not sure if it was a half-cent or 1/10th cent) at a time that it had more real value than their current one cent does. I just hope that America can see the sense in this decision from their northern cousins, and follow suit.
Are they going to collect all the pennies from circulation? I also don’t see why they would take the actual penny away, but still allow it on credit sales.
It is gonna be a mess.
I imagine that they will:
1. Stop production of the penny
2. Phase it out of circulation. As banks receive the pennies from business deposits, they’ll send them back to the Bank of Canada.
It is a sad day not necessarily because of the penny being taken out but because is speaks volumes of the continuous dilution of our currency. Next up is the nickel and then the dime, quarter and finally the dollar.
Good thing we already have the looney, so when the dollar coin is abolished we’ll just make more looneys.The looney of course will become worthless one day too.
As for the penny being kept in credit card and other cashless transactions that is a deception to calm people down. The prices will soon stop reflecting pennies so they will not show up on credit card statements either. And all prices will be rounded up. Does anyone think otherwise?
So hurray, let’s join the majority and celebrate how smart we are diluting the value of everything. I’m being sarcastic here.
I can’t believe how easily people are manipulated into believing that this is good.
Jesus Christ, I don’t even know where to start with this.
Before I go off let’s be clear about a few things first.
What does dilution mean and why is it bad? Are you referring to inflation?
I’m also curious to know how we’re being deceived. Why would we need to be calmed down.
And I’m really curious to know the what agenda behind the manipulation is, and why is this agenda is trying to convince us that getting rid of the penny is good?
Hi Aaron,
Please calm down. Dilution is the penny and soon the dollar having no or very little value. Call it inflation. It’s caused by diluting the value of money by printing more of it or putting it in the system in other ways which is usually called increasing the money supply or, more recently quantitative easing. Saying that pennies or cents will still show up in non cash transactions is a manipulation since prices won’t reflect them when the penny goes out of circulation.
I see you like this situation. If it keeps going on we may one day need a wheel barrow to carry the cash to buy a loaf of bread with. This has happened historically and recently in some countries and unfortunately it looks like it may happen here too. Oh wait, by that time we’ll have cashless society so it will be a figurative wheel barrow. If you think that it doesn’t matter you may want to check into how the purchasing power is now considerably lower than 25 or 20 years ago even after accounting for inflation.
Cheers.
You seem to misunderstand how inflation works. It’s not only caused by printing more money (as you claim below), that is one single type of inflation.
More common, and completely natural, are cost push, and demand pull, for example. Demand pull happens as people demand more, thus allowing businesses to charge more, thus increasing the price level in the economy. That’s inflation. It happens naturally in any economy as it develops.
Also, you claim that prices will stop reflecting the one cent. While it’s possible that this may happen, it certainly hasn’t happened in Australia. We still have things priced at $9.99 etc., and we got rid of our one and two cent coins 20 years ago. For things paid on credit and debit cards, there is no difference. In cash transactions you will lose one cent, but only if you buy a *single* item. If you buy three items it will end up at 7c, which means you actually gain two cents. In this way, it evens out over time. Besides, even over the course of an entire lifetime, one cent per item won’t add up to much. 10,000 purchases would only make $100 lost, if you *never* bought any more than one item at a time.
If you wish to explain, using economic theory (including diagrams and, if necessary, case studies) why you think the loss of the penny will lead to “dilution” (which, by the way, is not an economic term, you’re clearly showing your ignorance by using it), then please do. I will be glad to have an intelligent economic debate with you. Otherwise, don’t speak about what you clearly don’t know.
Honestly, I still feel it isn’t the best thing to do because of the technology that needs to be reprogrammed for the cash/credit difference with the penny.
I do feel that it would work much better if they gave a future deadline then just phased out the penny right away and did away with cash/credit difference. Then it would be completely even, while at the same time the technology would be easier to reprogram and maintain.
Hi Zagorath,
Are you an economist and an expert on inflation? I’m not so feel free to educate me. But I have been reading about it in the Economist for years and watching and listen to a lot of experts that should know as thing or two about it and to them most inflation is caused by increasing the money supply.
The price push that you talk about which is caused by increased demand that you mention does happen too but it’s not the main driver of inflation. When extra demand happens it’s usually filled very quickly and price increases are temporary then.
Be it as it may, the main reason cited for getting rid of the penny is that it has very little value. There are still people alive who remember being able to buy for a penny as much as we now can buy for a dollar. How did that happen?
Go ahead and educate me about how inflation happens according to you and also enlighten me about the recent term of quantitative easing. Everything about it that I ever read or most of it was pointing out to increasing the money supply or creating of fiat money which central banks can do and have been doing to fix things that are caused by government overspending, deficits and debts.
Cheers.
I’ll admit, I’m not an economist either, but I do study the subject. When we get back from holiday I’ll ask someone who *is* an economist.
The penny doesn’t have very little value, it has a NEGATIVE value. It costs more to produce than it’s worth. By abolishing them, Canada gains $20 million per year (can’t remember the exact value, but I think that’s the figure). Sure, it’s not a huge amount on a governmental scale, but perhaps that should also serve to show just how little an effect it could have on inflation if it were capable of having any effect at all.
I must admit, what I was saying on my previous post about inflation was not entirely correct. It’s partly because I cannot see how this would lead to inflation of any sort. I repeat my request. Give me some sort of economic diagram showing what would happen. If you don’t know how to do it yourself, then surely one of the articles will have one, no? Actually, for that matter I’m curious to see what article actually said that this will happen. I’d appreciate a link to that, too. The burden of proof here really is on you.
If you (are anyone here) wants some good evidence that this is a good thing, I strongly recommend cheking out YouTubers CGPGrey (he did one a few months back on why America should remove the penny, and one a few days ago congratulating Canada for it), and vlogbrothers (specifically, it’s by John Green), who did one on why America should abolish the penny back in September 2010.
The whole debate about the penny going out of circulation is not to me really about the penny itself as much as the underlying causes for it and what may happen with the next smallest coin and the one after that and so on because of the currency as a whole has been losing value. (By the way in Canada the savings of not making the one cent coins any more is said to be 11 million dollars per year).
If you want to focus only on the present savings and just the immediate situation with the penny then it may be a good thing to get rid of it. But what will be next? When is the erosion in value of our money going to end?
If in Australia they still keep the prices like 99 cents that’s great. I think it’s a rarity. I know of a country (and there are likely more of them) where they’ve abolished their cents altogether, gradually, abolishing one cent, then 5, 10 20, and 50 cent coins and now they don’t even have cents at all in prices and thus in cashless transactions either.
I checked online to see if there’s anything new there regarding inflation and the main cause of it appears to be, as I said before, increase in money supply.
We are likely not going to get to the absolute truth here and even economists and experts in that field have large disagreements. There are a lot of conflicting economic theories.
I’m just about done with this topic. The economist you are going to ask could shed some light on this and I look forward to that.
Cheers,
Vance
Hey Vance,
I’d still very much appreciate a link. I think Michael allows them, or I could find it based on the headline and name of website. If you’ve found this information on a reliable site, I’m sure I could be persuaded that what you’re saying has some basis.
Of course, even economists (at least, the aware ones) refer to their study as “the dismal science”. It’s virtually useless at predicting what will happen. My teacher often says, you put four economists in a room and they’ll come out with five theories.
I wonder if this will happen in the states, I can see where it would be annoying, and I would probably start using my debit as to have to worry about if I am getting ripped off by the rounding up.
Hey Zagorath,
Economists are the most overvalued opinionated people that almost like the weather forecasters aren’t held very accountable if their predictions are wrong.
Here is a link that will hopefully show you that what I was saying had some basis in truth and not ignorance as you originally accused me of.
http://en.wikipedia.org/wiki/Inflation
Cheers,
Vance
I have to say that while I am quite opinionated, this topic seems to bring out the “politics and religion” fever in people.
I never listen to economist or meteorologist because they can say anything and be close. I can say “partly cloudy with a chance of rain”. Wish I had went to school for meteorology so I could get their salary. The economy does have some more set rules, but they are way too often influenced by the politicians and rich moguls.
That’s an incredibly lengthy article. Could you point me to the section, or post a quote, that relates to what you believe?
I’d still appreciate some article claiming that removing the penny—be it in Canada, the United States, or any of the countries that have already removed their one cent coins—would result in inflation.
Case study 1: New Zealand removed the one and two cent coins in 1990. Inflation rates dramatically dropped that year. Correlation does not prove causation, but certainly there is no evidence here that removing their lower coins caused inflation. In 2006 they went a step further and removed the 5 cent coin. Another (smaller) drop in inflation that year.
2: Australia removed 1 and 2 cent coins in 1992, same deal. A noticeable drop in inflation. Not necessarily caused by the removal of the coins (in fact, I doubt it is), but it shows there isn’t necessarily an upward push in inflation.
3: Brazil, 2005, no more 1 cent. Relatively steady decline in inflation for 2 years.
4: Hungary, 2008, 1 and 2 forint.
There are counter examples, including Malaysia, Hong Kong, and Sweden
Worth noting that US overseas military bases have eliminated the use of the penny.
Sources:
http://www.rbnz.govt.nz/keygraphs/fig1.html
http://www.colonialfirststate.com.au/market-iq-news/economic-insights/inflation-rates.aspx?menutabtype=m
http://www.tradingeconomics.com/brazil/inflation-cpi
I agree with you that inflation is not at all tied to the removal of the coinage. I feel that it would be a great move throughout the world if the technology kinks are all worked out. Rounding would be the best solution to local tax rates that are in place such as the 7% in Sarasota County versus the 6% for the state.
It might be wise, as I said somewhere else in these comments, to actually phase in/out the coinage and the rounding and technology changes. I just think doing cold turkey actually would waste some extra time and money in an era that we don’t have that luxury.
What I meant was that the removal of the penny was the result of inflation and not the other way around. Remember, the penny did have a considerable value a long time ago. And if inflation will continue it may result in the removal of the other coins as well.
Thanks for all the links and writing what has happened elsewhere.
Time will tell how much value the dollar and other currencies will have down the road. There is no link about pennies that I based what I wrote on.
Ray,
It’s worth noting that in a way, they are phasing it out, rather than going cold turkey. They’re not saying that as of next quarter all pennies will be unusable as legal tender, they’re just stopping the production of them. They’ll still be legal tender for as long as they exist. It’s just that as shops get them they’ll send them back to the mint (or bank, or some relevant entity, I’m not entirely sure) to be melted down.
Vance,
Ah sorry, I must have misunderstood. Yes, the removal of the penny is definitely as a result of inflation over time. What I don’t, then, understand, is why it’s a bad idea to take the penny out of service?
The way I see it is, they’re not getting rid of the cent, they’re getting rid of the penny. What I mean is, they’re taking the penny out of circulation but they are not eliminating one cent as a monetary denomination…so there isn’t devaluing of anything going on.
Yes, cash transactions will be a little different but who cares? It takes the penny out, which reduces cost to the government (a penny costs approximately 1.5 cents to produce) and I don’t need pennies weighing down my pockets. I don’t see how this isn’t a win all around.
That isn’t how devaluation works, Vance.
And all the points you bring up against going cashless are based on people being stupid with credit cards. Yes, there are fees and interest but most don’t apply unless you carry a balance. Otherwise, there is no difference between paying in cash and paying with a card…other than by using a credit card, I get a bunch of rewards or points.
Hi Ed,
You make a lot of good points which I basically agre with at least partially.
Right now getting rid of the penny makes economical sense because the cost of making it is higher than it’s real value. The value of the cent which doesn’t have to have the form of a coin has gone down with the penny, obviously.
And that’s the proof in itself that the value of our money has gone down. It does mean devaluation that took place over time. I don’t see how anybody can dispute that.
For you Ed and for Zagorath above, please note that I never meant to say that getting rid of the penny in itself will cause devaluation. What I meant to say is that it is a consequence of devaluation. The penny did have a considerable value in the past but it doesn’t have it now. That’s a devaluation example of first class isn’t it?
And if the things that lead to the devaluation of the penny continue then the nickel and then the dime etc. will continue losing their value to the point where the penny is now.
Wont’ they?
Your reasoning is absolutely correct. I would caution you to be careful about your terminology, however. Devaluation refers to currency exchange rates, when one country has its exchange rate fixed to another currency, and decides to lower the value (as opposed to depreciation, when a floating currency becomes less valuable in relation to another currency). The word here is very specifically inflation. The cost of an average package of goods over time increasing.
After rereading some of your earlier comments, they seem very reasonable, actually. I think I must have misread them, on account of you saying that it’s a sad thing. I thought you were saying the action was sad, not the events that caused it. Yes, the penny now has less value than it did a long time ago. Interestingly, the American penny has less value now than the American half-penny did when they decided to remove that.
I wouldn’t say it’s sad, though. Inflation happens. Ideally it happens slowly, at 2-4%, but either too little or too much is a bad thing. (In general)
Hi Zagorath,
Thank you for going back and reading over what I wrote. I may have used an incorrect term somewhere.
I’ll watch the terms like a hawk from now on and hopefully avoid being misunderstood as much as possible. The main thing is that we both see these things a bit more clearly now.
There is always something deeper behind seemingly simple things. It’s good to try to understand those not so obvious deeper things and not focus only on the superficial ones.
You are right about depreciation being the correct word as opposed to devaluation here, although in both cases the word indicates loss of value.
I think that at this point Michael Kwan should chime in or even right a post about the different meaning of the two words.
Cheers,
Vance
Correction: I meant to type write a post. Right may sound similar but it’s the wrong word to use. I was being distracted by someone as I was typing and the wrong word got pulled out of the memory bank.
Devaluation would insinuate that the Canadian dollar is being lowered in its value relative to that of foreign countries, but that’s not the case, at least not over the long-term. Relative to the USD, GBP, JPY, or any number of other major currencies, the CAD hasn’t experienced any significant reduction. If anything, especially against the USD, it has increased in value. Either way, the elimination of the penny has nothing to do with this.
It’s not depreciation either. That usually has to do with a reduction in value of an asset over time, like how your car depreciates or how insurance companies calculate the value of your goods based on how long you’ve had them, marking them down from the original purchase price. In the context of currency, depreciation would again refer to the reduction of value relative to other currencies. And again, that’s not the case here.
What it does reflect is inflation. Yes, it’s true that the purchasing power of a penny is less now than it was 50 years ago, but everything else went along with it. If the average salary doubled, but the cost of goods doubled, then we are still in the same fundamental situation. The actual numbers themselves don’t matter, because they’re all relative. You could look at them relative to GDP or any number of other figures. Inflation is normal and healthy, so long as it is kept in a healthy range (typically 2-4%, as Zagorath mentions above). Too low and it means your country isn’t growing in wealth. Too high and you get into the hyper-inflation fiasco of, say, post-war Germany. In that latter context, price of goods went up without a corresponding increase in average income.