This is a preliminary draft of the remarks I will make on Tuesday when I appear before the Senate Committee looking into the elimination of the penny. I have no idea whether I'll be allowed enough time to say all this. Comments and feedback welcome.
Ladies and Gentlemen:
Thank you very much for inviting me to be here today.
I first started thinking and writing about the role of the one-cent coin in our economy over twenty years ago. I was prompted to give it somewhat serious consideration one day when, in a longish check-out line, a number of us were held up as several people ahead of us each said something like, "Wait a minute.... I think I have the three cents here." or "Just a minute.... I have the pennies in here with these coins...." I looked at the people in the line and wondered how much time was being wasted while people waited in line as customers and clerks counted out pennies.
At the same time, I realized that even then, in 1990, a one-cent coin wouldn't buy anything. When I was a child, I was able to buy two root-beer barrels, a pack of soft candies, a baseball card with gum, etc. for a penny. By 1990, as a result of inflation, things like these had prices much higher. It occurred to me then that the one-cent coin had out-lived its usefulness. As I wrote then,
Sixty years ago, we had the same denominations for our currency that we have now. But a penny could buy something then. Since 1933, the average price level (as measured by the Consumer Price Index) has increased by a multiple of 20. What we used to buy for a penny would now generally have a price of about twenty cents. "Penny" candy and "penny" whistles are now priced in dollars or tenths of dollars, not pennies.
Shortly after I wrote that piece, my younger son, Adam Smith Palmer who was 15 at the time, let me know in no uncertain terms that he thought it was silly of me to have raised such a fuss about pennies. Before the year was out, however, he had completely changed his tune. Why? Because he had a part-time job with a local fast-food coffee shop and did not like having to
- deal with pennies himself (extra counting and hassles)
- wait while customers said, "Wait a minute... I think I have the four pennies here somewhere..."
In July of 1990, a major Canadian news story picked up my initial writing on this topic, and that story hit the wire services, as I recall, on August 2, the day Iraq invaded Kuwait. That day, and over the next few weeks, many news organizations, looking for a lighter story to add to their news lineup for the day, called me, interviewed me, and added a reference to the idea of getting rid of the one-cent coin to their newscasts or newspapers. Soon I became informally known as the unofficial chair of the "Ban the Penny" campaign, appearing on interview shows, including CBC's The Journal, and making appearances for charitable groups.
A few years ago, before appearing on a CBC radio interview, I did a rough back-of-the-envelope calculation about the value of the time lost because of the use of pennies, just to get an idea of only the transaction costs involved with using a one-cent coin. The results were startling:
- assume that when cash is used, pennies add, on average, 2 seconds to each person's transaction time, either because of their own use of pennies, because of the clerk's added time, or because of the time added by someone ahead of them in line.
- assume this extra transaction cost is incurred, on average only once a week. I realize these numbers are low, but I tried, if anything, to bias the estimate downward.
- assume these transaction costs affect 20 million shopping trips each week. The population of Canada is roughly 35 million people, so this assumption is again likely pretty low, given that many people are affected by these transaction costs on a near-daily basis or even more often than that.
- Based on these assumptions, the time lost by Canadians due to the use of the one-cent coin is, at a minimum, 5-6 million hours each year in total. It doesn't seem like much when we are standing in line, but in total it is quite a bit.
- A very difficult question is how to value that time. Some people value the time lost at the average wage rate, and a compelling case can be made for this assumption. Others, like me, prefer once again to bias the number downward and use a nominal number such as only $4/hour.
- Even so, using such low numbers that stack the deck against the case for getting rid of the one-cent coin, it seems reasonable to argue that the transaction costs alone from using the one-cent coin in Canada amount to between $20m - $25m per year.
And these estimates do not include the costs to merchants and financial institutions who have to deal with pennies at their end.
There are numerous arguments that I have come across in the past twenty years for why we should keep the penny. I should like, time permitting, to address them:
- Won't all the merchants just round up and rip off the consumers? My personal reaction is to let them. I don't want the pennies, and I don't care. But we all know that many other Canadians will object. But we do not need explicit gubmnt invtervention to deal with this. Many merchants will round down, customers who care will favour those merchants who round 3 and 4 up to 5, while rounding 1 and 2 down. Letters to the editor and news stories will create informal pressure for most merchants to fall in line with this rounding practice. There are much more valuable things for gubmnt policy-makers and authorities to do with their time than wrangle over things like this that will be solved readily by market forces. Keep in mind, too, that the rounding would take place on the total, after-tax, bill, not on each item. But as I said this concern is a non-issue and never amounted to anything in Australia when they eliminated their one-cent coin.
- What about young people who want to start coin collections? Yes, this argument has been raised many times. There is no reason why they cannot start collecting nickels and dimes, both of which have less purchasing power than pennies did in the 1950s when I began collecting pennies.
- What about the people at the mint who will lose their jobs? I don't know of anyone who jumps for joy when others lose their jobs. At the same time, we live in a dynamic, changing world, and that is why we have a social safety net in place; that is also why we have gubmnt programmes designed to encourage people to save for contingencies. In the end, society will be better off if those who lose their jobs are freed up to produce something else, some other good or service, rather than produce something that adds costs to our economy.
- Won't the mint have to use a lot of other coins to "buy back" all the pennies out there? Why? The simplest way to eliminate the one-cent coin is for the mint (and the gubmnt of the day) to announce that as of January first they will no longer be minting any new one-cent coins. As a result, to plan for this eventuality, merchants will begin rounding automatically. As they receive pennies in payment for items, they will take the pennies to the bank where they pennies will be sent to the mint to be melted down and the metal recycled.
- What about the charities that depend on pennies as a major source of contributions? This concern will not go away by fatuously replying, as one person has, that people can donate nickels and dimes instead. As my older son David Ricardo Palmer recently said, "Lots of people will gladly throw six pennies in a charity bucket but would not even consider putting a nickel in one." These organizations will lose, in the short run (though it is easy to imagine some creative campaigns they might use to collect pennies during the transition phase, during which they might actually gain donations). But their loss should be no reason for imposing such high transaction costs on all Canadians. Times change, economic conditions change, we experience what Joseph Schumpeter referred to as "creative destruction" during the changes. It behooves us all to encourage and foster the "creative" part of that phrase.
- What about the costs and confusion of having prices rounded to the nearest five cents for cash customers to the nearest penny for credit- and debit-card customers? My expectation is that, if left to decide for themselves, merchants will deal with this question in an efficient manner. Some will round every purchase total to the nearest five cents. Others won't. At this point, gasoline credit cards do not record all my purchases of gasoline to nearest tenth of a cent and provide me with a tally at the end of the month. I would expect that analogously most merchants will eventually just round all totals to the nearest five cents, regardless of the method of payment.
Let me add that I know of some merchants, particularly fast-food coffee outlets, who set prices so that after taxes the total on many small-item purchases will not come out even, say to the nearest dollar or so. They do this to reduce employee theft. If I buy a coffee for a dollar and give the clerk a dollar, it is easy for the clerk to say "Thank you", take the dollar coin, but not ring it in, and later put it in his/her pocket. But if the coffee, with tax, has a price of $.94 or $1.02 or something like that, customers will tend not to have the correct change (note: or will hold up the line looking for it), forcing the clerk to ring in the sale.
As you will note, I have not addressed the seigniorage argument. Even though it is a compelling argument, as other witnesses before your committee will show, my approach to the topic has been from the perspective of transaction costs. These costs are in addition to any seigniorage losses suffered by the mint and the federal gubmnt.
Thank you for your time and interest.
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Additional links:
http://www.eclectecon.net/pennies/
http://the-econoclast.blogspot.com/2005/12/pennies-coins-dirhams-and-fils.html
http://the-econoclast.blogspot.com/2005/01/lets-get-rid-of-pennies-and-nickels.html
http://the-econoclast.blogspot.com/2005/02/ban-penny-againstill.html
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/05/ban-the-penny-and-the-nickel-while-were-at-it.html?cid=6a00d83451688169e20133eee40094970b
