Death of the Penny (Part 2 of 3 Part Series)

Sheena Moore, an analyst for our sister site Spend Matters’ popular Friday Latte segment, reported that Canada will no longer produce its pennies citing increasing costs of production and decreasing relevance.  “Pennies take up too much space on our dressers at home.  They take up far too much time for small businesses trying to grow and create jobs,” stated Canada’s finance minister during his budget speech in front of the lawmakers in the House of Commons.

Growing up in Korea, I vaguely recall when the South Korean government ceased production of 1 won coins (~tenth of penny at today’s exchange rate) during the 70’s (yes, I am giving away my age).  Transactions were rounded up to 5 won denomination which caused much ire at the time before 5 won coins faced similar fate.  Now 10 won denomination is the lowest.  Many economists agree that getting rid of pennies won’t pose adverse impact on inflation and that sound policy dictates dismissal of the lowest denomination when raw material used in creation is worth more than the denomination itself.

Indeed, there are many precedents in addition to Canada.  Singapore, Mexico, Sweden, and Israel all eliminated their lowest denomination in the past two decades in a smooth transition.  But just three years ago, businesses in the East Coast were begging for households to break their penny jars when shortage occurred in the marketplace.  Question is, if the US follow Canada’s lead in abolishing our pennies, will it go away quietly like Hungarian forint or will it cause a stir as it did in 1999 shortage or an upheaval as it did during the Reagan Administration shortage?

Editor’s Note – This story really has two major angles that are subject to analysis and debate, and perhaps we’ll spark some further discussion on such topics:

(1)   The production costs of coins have shifted significantly in some countries, largely as the result of price fluctuations in the raw metal commodities that are used in the minting process.  Some nations take the prudent route of changing the metal content of their coins, but the market value of the materials used in coins has spawned cottage industries among coin hoarders, who hope to capitalize on extracting the metals from coins which are (sometimes) worth more than the face value of the coins themselves.  Sovereign control over currency production and laws preventing the destruction of coins serve as a practical limitation on melting down coins, but that doesn’t mean some people aren’t intent upon doing it.  http://abcnews.go.com/Business/laws-change-penny-hoarders-cash-thousands-dollars/story?id=15076522

http://tech.fortune.cnn.com/2012/04/11/penny/

(2)   The second issue is when some countries legislate a unit of currency out of existence, not just stopping the production of coins, but by getting rid of units that are deemed too small to remain practical.  While economists have largely supported the historical efforts of countries to “retire” coins and currencies of negligible value, there is some anecdotal evidence that consumers perceive or experience inflation when coins or currencies are dropped.  How much penny candy can you buy when there are no more pennies?  Some research and analysis of the Euro transition’s effect on pricing and consumer perception shows that there are some potential risks when currencies are transitioned out of circulation.

http://www.princeton.edu/ceps/workingpapers/101mastrobuoni.pdf

http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp588.pdf

Editor’s Note 2 – If economists are quick to dismiss the inflationary effects (real or perceived) of coin abolition on consumers of penny candy, you have to wonder if they’d be as dismissive of the interests of investors in the enormous penny stock industry?  I’m just sayin’…

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About Richard Lee
Experienced finance and operations professional. Currently partner in five companies, adjunct professor of economics at Columbia College and executive contributor to a small business blog (www.SMBmatters.com); following corporate finance, M&A and management consulting tenures with Orbitz and Diamond Technology Partners; and six years of service with the United States Army.

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