A recent piece from the OC Register explored a proposal to discontinue the production of pennies:
Consumers may find themselves at a disadvantage if the U.S. moves forward with a plan to halt penny production by next year. While the U.S. Treasury could save millions by retiring the 233-year-old coin, critics argue that this decision could lead to increased prices for low-income consumers.
Bill Maurer, the dean of the School of Social Sciences at UC Irvine, contends that eliminating the penny will disproportionately affect those without access to bank cards or digital payment methods. He highlighted two congressional initiatives—the “Common Cents Act,” put forth by a bipartisan coalition including U.S. Rep. Robert Garcia, and the “Make Sense Not Cents Act.” Both bills propose ceasing penny production within a year of passage, allowing the coin to remain legal tender but requiring businesses to round cash transactions to the nearest nickel—a practice that raises concerns for Maurer and others.
However, I see two significant flaws in the assertions made in the article. First, the notion that pennies serve a vital role in our economy is highly questionable. Second, the assumption that removing the penny will lead to higher prices seems unfounded—if anything, the opposite may be plausible.
Let’s consider the Consumer Price Index (CPI), which is currently approximately 38 times higher than it was in 1900. Back then, the smallest coin minted by the U.S. government was the penny, just as it is today. In today’s dollars, Americans in 1900 effectively opted not to produce any coins with a value below 38 cents. This raises the pertinent question: Do we truly need pennies? In fact, the utility of nickels and dimes is also becoming increasingly dubious. Our economy thrived without such low-denomination coins over a century ago.
Even in the mid-1960s—when I was a mere ten years old—pennies were so undervalued that children were ridiculed for picking them up off the ground. Fast forward to today, and the CPI is tenfold what it was back then.
This weakens the argument for the penny’s efficiency in our monetary system. But what of the equity argument? Would the elimination of the penny result in retailers rounding prices up, such as changing a sneaker’s price from $29.99 to $30? I am skeptical. It seems more likely that prices would be rounded down to $29.95 instead.
Yet, even if I am mistaken, and retailers do round up from $29.99 to $30, the net effect on consumers’ prices would not increase and might even decrease. To grasp why, we must delve into the dynamics of highly competitive markets.
In industries where businesses typically price their goods just below a round figure—think clothing stores, grocery chains, and gas stations—competition is fierce. Long-term economic profits in such sectors tend to align with the standard rates seen in other competitive markets. Any change in costs, whether an increase or decrease, will eventually be reflected in consumer pricing, albeit not immediately.
Handling small coins is a logistical headache for retailers. Removing pennies from circulation would marginally decrease transaction costs (though admittedly, the impact would be minimal). Even if some items’ prices were rounded up from $29.99 to $30, the overall price level would likely be marginally lower than if pennies remained, as the cost savings from reduced coin handling would eventually trickle down to customers.
This argument mirrors a point I made in a previous post, where I demonstrated that regulations meant to prevent price gouging can inadvertently lead to higher consumer prices in the long run.
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