Thursday, February 14, 2013

Penny Wise, World Foolish: Pennies Never Cost A Cent

All the attention focused on how costly it is to make pennies is worth less than any piece of copper.

Since last year the most popular reason, the go-to justification for scrapping the penny was that making one costs more than what it's worth. Simple economics, or even simple logic shows that is completely false.

Government officials and media often reported that because it cost 1.6 cents to make a penny Canada was losing money with every one it minted, however that's not how printing or coining money works.

Making a penny at the cost of 1.6 cents did not cut into government revenue nor did it cost taxpayers anything, it only reduced the amount of money in circulation, just as printing a large dollar bill increases the amount of money in circulation.

In Canada it only costs 19 cents for the Canadian Mint to make a new polymer $100 bill, according to the logic of many penny critics that would mean with each new bill Canada is making $99.81 in profit or getting a return of 52,531%. In that fantastical world we could all quit our jobs and bask in the glow of our overheated printing presses, but alas printing money only increases inflation, while minting pennies only decreased it.

It could be argued that the amount of pennies needed for circulation created too much deflation, however considering the many thousandfold larger return of printing paper or polymer bills, the total 35 billion pennies ever minted would be far less influential to the exchange rate than the 1.5 billion bills currently in circulation.

The Canadian penny is gone, and so too might follow the American equivalent. Though there are reasons for it to be scrapped, the manufacturing cost wasn't, isn't, and never will be, one of them.

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