Eliminating the US Penny: An Updated Economic Study Jordon Grimm

Introduction How is Money Made? Why does Currency Denomination Matter? Recent Legislation

Previous Literature Chen (1976) – Removal of demanded units of currency will be inflationary Lombra (2001) – US penny should remain in circulation Chande & Fisher (2003) – Canadian penny should be eliminated

Plan of Analysis Two Questions must be answered – 1. Does the penny need to be eliminated? – 2. If so, what happens after it is removed? If satisfactory answers for both questions are found, then the penny should be taken out of circulation.

Why Remove the Penny? Inflation  Diminishing value Negative Seigniorage for the US Mint

Seigniorage Table 1 (all monetary figures in $) Year Pennies minted (bi.) Material cost/unit Admin/Trans port to Fed/ Other Cost per unit Per-Unit Cost of productionTotal CostRevenuesProfit ,047,38,600127,730,00022,991, ,095,68076,512,0008,416, ,700,80062,960,0001,259, ,309,00071,300,0004,991, ,030,00077,000,000-30,030,000 (Source: US Mint Annual Reports)

Why Remove the Penny? International Comparison CountryCurrency Exchange Rate vs USD Smallest Denomination (Fraction of main unit) Smallest Denom. Per US Penny CanadaCan. Dollar1.1058Penny (1/100)1.105 Eurozone*Euro0.7938Cent (1/100)0.794 UKPound Sterling0.5427Penny (1/100)0.543 JapanYen114.73Yen (1/1)1.147 South KoreaWon Won (10/1)** BrazilReal Cent (1/20)*** IndiaRupee paise (1/4)1.833 MexicoPeso Cent (1/20)2.288 AustrailiaAus. Dollar Cent (1/20)0.27 (Source: Wikipedia – Currency) * Eurozone includes France, Germany, Italy, Spain ** 1 and 5 won coins extremely rare; prices are rounded to the nearest 10 won in S. Korea *** 1 cent removed from circulation November 2005

Why Keep the Penny? Inflationary Effect on Economy Impact on Charities Historical Significance Questions about cash transactions post- elimination

Post-Elimination Most popular plan: Rounding Scheme – Cash transactions only – After sales tax

Debate over Rounding Lombra (2001) : Rounding hurts consumers by potentially $600m/yr Chande & Fisher (2003) : When sales tax is considered, net effect of rounding approaches zero

Effect of Rounding

Case Study New Zealand – Removed 1- and 2-cent coinage in 1990 – No Evidence of Resulting Inflationary Effects – Many Firms Favored Consumers in Rounding

Conclusion Sufficient Arguments for Removing the Penny Rounding Scheme will have Little or No Negative Economic Impact Therefore, the Penny should be eliminated.