Jan 062011

PennyWe’ve heard the call to get rid of the one-cent coin before and nothing has come from it.  Now we have a report from the Standing Senate Committee on National Finance renewing the call for its demise.

While I can’t say I really care one way or the other whether or not we keep or lose the penny I am curious as to the reason why some are asking for its “calling-in.”  That phrase by-the-way is the legal term used in Canada for when a coin is removed from circulation and is no longer considered legal tender.

The Committee’s report clearly identifies that the need to call-in the penny is the loss of value it has experienced since the coin was first domestically produced in 1908.  In that year one Canadian dollar was worth twenty 2010 Canadian dollars.  Cumulative inflation since 1908 is 1,826 percent.  Or to put it another way the dollar and hence, the penny, has lost 95% of its value since that time.

This reduction in value to the point where it is no longer worthwhile to bend over and pick up a penny you may have dropped is the cause for hoarding.  At the end of the day more and more of us throw our pennies, and sometimes the rest of our devaluing coins, into a container at home and wait until they have accumulate enough to make it worth our while to redeem them at a bank for larger denominations.

Since there still is a need for pennies this hoarding forces the Canadian Mint to continue to produce about 750 million pennies every year at a net loss to the government of about $5M since it costs about 1.3 – 1.5 cents to mint a single 1-cent coin.

The only reason there remains a need for pennies is because we have sales taxes which are calculated as a percentage of a transaction requiring us to make change often involving pennies.  Without sales taxes I’m willing to bet that most sellers would price their products so that change would not require pennies, for example selling something at $19.95 without sales tax would only require a nickel as the lowest denomination of coin used in the transaction.  Nickels, dimes and quarters are more economical to roll and handle than pennies and cost businesses less in handling charges at the bank.

The recommendation to eliminate the penny comes with another recommendation from the Committee; to round all cash transaction either up or down to the nearest nickel.

I have a better idea that would require no rounding at the till.  Redenominate the currency back to its 1908 value and keep the penny which will now be valuable enough that we would no longer need to hoard it.

Redenomination would work like this.  Parliament would pass a law saying that a new printing and minting of a new Canadian dollar would have a value 20 times what the current dollar has.  We would have a year or two to redeem our old dollars for the new dollars at the bank.  You would bring in 20 current loonies for example and get back in return one “New Canadian Dollar” which would now have a purchasing power 20 times what the old dollar had.  Likewise the new pennies, nickels, dimes and quarters would have purchasing power 20 times what the old coins had.  This new currency would have the word “new” stamped or printed on it and would be easily distinguishable from the old currency.

Many countries have had to redenominate their currencies with little or no effect on their economies.  Europe essentially did it when the member states adopted the Euro.  Any adverse economic effects following redenomination should be blamed on the economic policies of the European Central Bank   rather than the act of redenomination and conversion.

Historically, however redenomination has a bad reputation, as well it should, because it is an admission of failed inflation policies.  Weimar Republic Germany had to do it when inflation got so out of control it took one trillion Papiermarks to buy a loaf of bread.  The German government simply redenominated the Papiermark into the new Rentenmark.  Did this get rid of inflation?  Not at all, but you no longer needed a wheelbarrow to carry your money to the grocery store.

The brutal regime of Robert Mugabe’s Zimbabwe has had to redenominated its currency four times since 2006.  The last time was in February 2009 when one trillion third Zimbabwean dollars bought one fourth Zimbabwean dollar.  I realize the Bank of Canada’s inflationary policy is not as bad as Robert Mugabe’s but it is not unheard of that currencies have redenominated with a much smaller factor.  Consider that the German Mark ceased to be legal tender in 1999 when the Euro was introduced and was completely removed from circulation in 2002.  1 Deutsche Mark bought 1.95 Euros at the time.

The human mind has a limit when it comes to intuitively understanding very big or very small numbers.  The fact that an average house in Toronto today can cost half a million dollars is a staggering amount to get your head around.  In 1908 houses sold for about $1,000; a much easier number to understand.  A basket of groceries may have cost $5.  The Toronto Globe cost 3 cents in 1867.  Today a newspaper at the stand can cost 250 cents.

Of course we wouldn’t really be having this debate about the penny if we had real monetary reform which would involve getting the government out of the business of printing money and allow a return to private banks issuing private currency as they did as late as 1944.  A return to a common standard like the gold standard would be nice instead of having faith in the government declaring that valueless pieces of paper have value.  Ultimately Parliament should pass an amendment to the Constitution to restrict Parliament from passing laws respecting the economy, but this is just wishful thinking.

Fiat money is fiat money and whether we pay our debts in pennies or paper notes is academic but at some point in our future the Canadian government will have to redenominate our currency.  I say why not do it now and save the penny in the process?

(Originally aired on Just Right show #182 January 6th, 2011.  To download the show visit //www.justrightmedia.org))