Since the Canadian government announced that the Royal Canadian Mint will stop striking “pennies” in the Fall of 2012 and that cash transactions will be rounded to the nearest five-cent increment. Non-cash transactions will not be rounded.

As part of the transition to the centless society, Canada will withdraw these coins from the market using redemption programs to allow citizens to return the coins for compensation. The Canadian government has also committed to working with charities to use this as an opportunity to raise money for their causes.

Since the announcement, there has been a lot of chatter from around the world regarding the elimination of the lowest denomination coin from various countries, including here in the United States. While other countries have eliminated their lowest denomination coin, Canada is the largest economy who have made this move.

Canada’s proximity to the United States has generated a lot of discussion about the United States doing the same. Those arguing for the elimination of the cent begin with that it costs the U.S. Mint 2.11-cents to produce one coin, losing 1.11-cents per coin. Similarly, Canada began their discussion with that it costs the Royal Canadian Mint 1.6-cents to produce their one-cent coin.

If Canada can drop their penny, then why can’t we do that in the United States?

In 1986, Canada stopped producing one-dollar currency notes and went to exclusively coins. Nearly ten years later, Canada began to produce two-dollar coins eliminating the two-dollar paper note from circulation. If Canada can drop their lowest paper currency denominations, why can’t the U.S. do the same?

Those of us who use the argument that other countries no longer use paper currency as their basic unit of currency are told (paraphrasing) “we are the United States, we don’t have to do what others are doing.” Now those same people who want the U.S. Mint to stop striking cents are pointing to Canada using a similar argument and bristle when given the same response to their argument.

Every study by even the most partisan group shows that the government will “save money” by eliminating the one-cent coin, change the composition of the nickel, and produce the dollar coin rather than paper. The differences in the studies are what they call opportunity costs—the cost borne through the changes and processing by the businesses, banks, and citizens affected by the changes.

The concept of the government “saving money” is wrong. Production of money does not cost taxpayers any money. The high production costs of the cent and nickel does reduce the amount of seigniorage the government earns when the coins are sold to the Federal Reserve.

Ending the production of specific denominations is not new to U.S. coinage. The last change occurred in 1933 when the gold was no longer used for coinage eliminating the quarter eagle, half-eagle, eagle, and double eagle coins. At times in the past, the U.S. Mint also produced half-cent, 2-cent nickel, 3-cent, 20-cent, and dollar gold coins. All were seen as a good idea at the time but fell out of favor for many reasons and were discontinued.

At some point, the decision criteria must be baselined in order to come up with a fair analysis in order to determine the best policy. To start that analysis, let the policy basis be on the least amount the government could do in order to maximize seigniorage while treating all markets fairly. Based on those guidelines, eliminate the one-cent coin, but also eliminate the half-dollar and the one-dollar paper note. Even if the five-cent coin does not undergo a composition change, all studies show that the government will earn more in seigniorage than any other option.

Based on other studies, this policy will have an economic impact on the markets outside of the government and the Federal Reserve. But that is for the markets to work out on their own and not for the government to dictate.

It is also a policy recommendation that will make everyone upset on all sides of the issue, meaning that it wreaks of compromise—which should not be a dirty word when making serious policy decisions.

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