The following article is from the New York Times, published on April 7, 2012.
Penny Wise, or 2.4 Cents Foolish?
The news from north of the border is both trivial and unsettling: they won't be making shiny new pennies in Canada anymore.
The government in Ottawa has made this decision after years of deliberation1, for reasons that would seem to apply equally well in the United States.
"Pennies take up too much space on our dressers at home," Jim Flaherty, the Canadian finance minister2 said in a speech last month. A persuasive government brochure put it this way: "We often store them in jars, throw them away in water fountains, or refuse them as change."
Pennies cost more to produce than they are worth. [T]hey are worth so little that many Canadians don't bother to use them at all...
Do we really need pennies?
The Canadian government doesn't think so. By the fall, it plans to stop minting them and stop distributing them through banks. It won't actually ban them, though. Some people have grown so attached to pennies -a penny saved is a penny earned, after all-that they may want to keep using them indefinitely, and they can, the Canadian government says.
But those who can bear to part with their pennies are being encouraged to bring them to banks for eventual melting or to donate them to charities-which will presumably bring them in for melting. Electronic transactions will continue to include cents, while retail sales will be rounded up or down.
Inflation3 is sometimes cited as a threat whenever small coins are phased out. A $2.01 cup of coffee should be rounded down to $2, while $2.03 should become $2.05, for example, but retailers in the real world might raise prices more than lower them. That could cause a small, one-time inflation burst, says François Velde, an expert on the history of small change. ...
"But in a competitive market, you might well see price decreases," says Mr. Velde, a senior economist at the Federal Reserve Bank of Chicago who is working this year at the Bank of France. "In a place like New York, a 99-cent price of pizza might go down to 95 cents rather than $1 to avoid crossing that higher price threshold." Over all and over time, there should be no net price effect, he says.
He finds the argument for phasing out the penny to be at least as strong in the United States as in Canada because the two nations' small coins, political history and socioeconomic culture have so much in common. "That's what makes the Canadian decision a little unsettling," he says. "Their pennies even look a lot like ours."
In the United States, the mint says, each zinc and copper coin costs 2.41 cents to produce and distribute. It costs 1.6 Canadian cents to make a penny at the mint in Winnipeg, according to Canadian government figures. (A Canadian cent is worth about 0.99 cents at the current exchange rate.) "From the standpoint of economics, that's just a total waste of money," Mr. Velde says.
Pennies may not be big money, even if you add them together. But we are paying a cost for the privilege of squirreling them away in drawers and on dressers. The United States government-that is, taxpayers-lost $60.2 million on the production and distribution of pennies in the 2011 fiscal year, the mint's budget shows, and the losses have been mounting: $27.4 million in 2010, and $19.8 million in 2009.
A number of countries, including Australia, New Zealand, Brazil, Finland, the Netherlands, Norway, Sweden, Switzerland and Britain, have already dropped their lowest-denominated coins, without dire consequences.
What is to be done in the United States? The mint defers to Congress, and Congress hasn't told it to abolish the penny. Lawmakers have directed the mint to study ways to make small coins more cheaply. Mike White, a spokesman for the mint, says a report will be completed in December. ...
At the very least, a change in the composition of the American penny seems likely.
In 1982, Congress authorized the Treasury to make such a change, and it did. Before then, pennies were 95 percent copper and 5 percent zinc. ... Pennies manufactured since have been copper-plated zinc, with zinc making up 97.5 percent of the coin and copper only 2.5 percent. Steel, which was used in pennies in World War II, could be substituted next.
But why stop at the penny? It's not the only American coin that costs more than it's worth. Each nickel costs 11.18 cents to produce and distribute, the mint says, at a loss to taxpayers of $56.5 million in the last fiscal year. In its 2013 budget proposal, the Obama administration has asked for authority to alter the composition of the nickel, too. ...
"The whole situation is ridiculous," Mr. Velde says. "... The serious, simple solution is to do away with the penny."
A penny for your thoughts?
1deliberation: discussion or debate
2Canadian finance minister: responsible for presenting the Canadian government's budget each year and helping to determine the funding levels for government departments
3Inflation: causing prices to increase
Sommer, J. (2012, April 7). Penny Wise, or 2.4 Cents Foolish? New York Times. Retrieved from: http://www.nytimes.com/2012/04/08/your-money/canada-drops-the-penny-but-will-the-us.html?_r=0