Would removing penny from Canada’s payment system have an impact on economy?

I came across this fascinating speech from  Pierre Duguay, Deputy Governor of the Bank of Canada.

The Canadian penny has a value of one cent and one hundred cents are required to make one Canadian dollar. There is a ongoing debate in Canada of abolishing the penny as its production is seen as costly compared to its worth.

The Canadian penny is comprised of 94% steel, 1.5% nickel and 4.5& copper. A completed penny weighs 2.35 grams.

So there was a hearing at Canada Senate on the issue. In this hearing Duguay presented views of Bank of Canada. As BoC is a inflation targeting central bank, its main aim is to see whether abolition would impact price stability?

The findings, which have been made available to other researchers, show that any impact on inflation would be insignificant and more likely non-existent. A common concern is that retailers, who often post prices ending in 9 cents, may round prices up to an even number, absent the penny, and that this would be inflationary. This concern is unwarranted for a number of reasons.

First, even if the elimination of the penny did result in a rounding up of prices to the nearest multiple of 5 cents, which is unlikely, that would be a one-time price increase and not a change in trend inflation.

Second, this one-time price increase of one or two cents would be so small, relative to the prices of the items that make up the basket of goods and services priced by the total consumer price index (CPI) that it would not register on that index since the CPI is rounded to the nearest 0.1 per cent.

Third, it is very unlikely that prices would be rounded up, since such rounding would not carry through to the cash register after sales taxes are applied, and retailers would lose the perceived marketing benefit of posting a price that ends in 9 cents.
 
In the absence of a penny, rounding would only need come into play in cash transactions and would apply to the total bill after tax, and not to each individual item purchased. If applied symmetrically, rounding down of cash purchases ending in 1,2, 6, and 7 cents would offset the rounding up of those ending in 3,4 8, and 9 cents.

Amazing insights. What thoughts. He further adds that similar abolition in NZ and Australia had limited impact:

In New Zealand, for example, the choice of rounding up or down on cash transactions was left to retailers after the country eliminated its one- and two-cent coins in 1989. Many larger retailers opted to round down; a few small retailers opted to round up. Ultimately, there was no noticeable effect on inflation in New Zealand.

Indeed, that has been the international experience that we have seen. In both Australia and New Zealand, the elimination of small coins (one-cent and two-cent coins) has had no noticeable effect on inflation.

Inflation, however, does have an influence on the value of the penny. Since the coin was first produced by the Royal Canadian Mint in 1908, the penny has lost 95 per cent of its purchasing power. In other words, the penny then had the same purchasing power as 20 cents would today. Indeed, in 1908, you could buy your daily newspaper for two cents, and a loaf of bread cost five cents.

Immediately was wondering what would happen if we do away with small denomination coins (called paisas) in India? For instance 25 paisa, 50 paisa etc.

As it is we hardly see these small denomination coins except for Mumbai. Anywhere you go getting a change is a big problem. So you have alternate systems like shopkeepers issuing credit coupons or giving toffees/chewing gums/candies as change. So, may be it will help both retailers and consumers.

However, one major area where it will hit is products sold in small sachets. Most companies now have these products for 1 Rupee etc for low income consumers. So, there could be some impact there. But as we hardly see 25 paisa/50 paisa/1 rupee coins in the country, may be it is time for a change in strategy.

 I don’t know it will be interesting to read a study on the same.

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5 Responses to “Would removing penny from Canada’s payment system have an impact on economy?”

  1. CANADA IMMIGRATION | HOW TO IMMIGRATION CANADA GUIDE Says:

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  2. Daryl Zer0 Says:

    Elimination of the penny will be a tax no matter how you look at it. We are better off producing pennies every FEW years instead of every year. Businesses will round up. It only makes sense (and cents).

    If the average cost to Canadians is $4 to produce pennies, the average cost will be more to us if the penny is eliminated and businesses round up. The only one who will profit will be the Government. The government would want this because they can vote themselves a bigger raise for doing a poorer job. It doesn’t affect politicians because they are upper class and don’t have to worry about pennies.

    The extra cost to produce a penny is good to keep the dollar lower. The last thing Canada needs is something else to increase the value of the dollar after the rapid devaluation of the US dollar.

    An elimination of the penny will destroy small business as they will round up while large business rounds down to drive small business out. Then large business will start to round up.

    Keeping the penny helps put necessary downward pressure on the dollar.

    If it cost too much to produce a penny EVERY year, just change production of the penny to EVERY OTHER year or EVERY FEW years. But elimination of the penny will be a tax felt by the poor who HAVE TO watch their pennies and not felt by the rich politicians who DON’T HAVE TO WATCH THEIR PENNIES. It only makes sense (and sense).

    Besides, the penny is part of our heritage. And we don’t get rid of architectural heritage sites.

  3. france Says:

    That is the best read I’ve had all day!

  4. Sanfter Tourismus Says:

    Nachhaltigkeit…

    Would removing penny from Canada’s payment system have an impact on economy? « Mostly Economics…

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    Empresa de criação de sites, aplicativos web, lojas virtuais, manutenção de sites, otimização de site e muitos outros serviços web. A empresa foi constituída para atender desde o pequeno e médio empreendedor como as grandes empresas, ONG, Instituiçõe…

    […]Would removing penny from Canada’s payment system have an impact on economy? « Mostly Economics[…]…

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