Friday, 3 April 2015

The Great Penny Debate Part II: Why The Penny Needs To Go.

Welcome back. Here in the second instalment of the debate on Pennies, we shall look at a selection of the arguments against the penny and for its abolition.

1) Value for Money
Many pro-pennyists counter-argue the idea that pennies are bad value for money for the government with the claim that, while pennies may well be financially inefficient, this doesn't mean their abolition will improve the financial efficiency of the Mint- in fact it may worsen it. They argue that should the penny be abolished, demand will rise for the next lowest coin- the silver nickel, worth 5 cents, which actually loses more money per coin than the penny. So, the argument goes, more investment will have to go into a bigger loss-making product should the coin be abolished.

With the cost of producing a nickel at 7.7 cents, and that of a penny at 1.26, this is theoretically true. Take the cost of making one dollar with either coin- it would cost (7.7*20) 154 cents to create a dollar with nickels, but just (1.26*100) 126 cents to do so with pennies. A 28 cent difference, quite decent proof that the penny is more cost-effective to produce. But this hits a snag- these figures are correct, but as of 2008. Seven years ago.

Today, the tables have figuratively turned. As of late 2014, a Nickel costs 8.1 cents to produce (a 3.1 cent loss), whereas a penny costs 1.7 cents to produce (a 0.7 cent loss). This may not seem to be a game-changing difference from 2008, but it makes all the difference. Today, making 1 dollars' worth of nickels costs 162 cents. Making the same from pennies costs 170 cents. The prices of the two have crossed, to the point at which nickels are now more cost-effective than pennies- rendering the pennies causing greater financial inefficiency.

2) Productivity
Just as the potential 'rounding tax' could have tiny but compounding impacts upon the spending of consumers, there already exists a tiny but recurrent way in which we lose because of pennies- not in terms of money, but time. Whether it's spending time rummaging in our pockets for a few remaining pennies, or waiting to receive them as change, it wastes time- not in the short term, but the seconds add up and become minutes, minutes, over the course of a year or two, hours. Hours that can be spent being more productive, whether it's a store employee gaining more time to perform other duties or the customer having more time to spend in town and buy other stuff.

It's difficult to imagine seconds making such a difference, but added up in the long term, they can. Economist Robert Whaples quantifies the losses that the penny can cause. Using the average American wage of $17 an hour, he evaluates every two seconds of the average American's work time to be worth a cent, and thereon estimates that time lost due to the complications brought on by pennies can cost around $300m per year to the US Economy.

Whaples proposes that rounded sale prices would help improve productivity of the economy as a whole, not by giving one significant boost but by trimming the excesses, the little seconds of time wasted because of the business of handling pennies.

3) Are they Useful?
Have a look at this menu here. The price of a full dinner with multiple courses, at just 25 cents, is one that you might think is ridiculous, but that was how things were in 1900, the year this American bistro menu comes from.

Go forward to 1931, and food was still ridiculously cheap in comparison to the modern day. A penny could buy you an egg, or a pound of flour.

Today? Well, if you can find anything that I could buy with a penny in any store today I'll give you one (not that you'd probably appreciate it). The fact is that pennies were not always the lowest valued coin- until 1857 you could get a half-cent, and currencies throughout the world have seen smaller denominations than a penny (think, for example, the British shilling). But over time, they have been taken out of circulation, for a number of reasons, but primarily because of inflation. Rising prices nullify the value of all denominations of money- and at one point we must re-evaluate whether any certain coin is necessary. We have very little use for pennies- so why should we carry on keeping them in circulation?

Economist Greg Mankiw summarises it effectively, stating "the purpose of the monetary system is to facilitate exchange... the penny no longer serves that purpose."


2014 Biennial Report to the Congress (US Mint)

Congress Looking At Steel Pennies And Nickels (2008)

How Much Does It Cost to Make A Penny?

The Penny's End Is Near
Mohammad Lone Editor