Kiss the Penny Goodbye

2003 Canadian Penny

In a cost-benefit analysis released on Wednesday, the Finance Department examined the financial impact of withdrawing the penny from circulation. It is expected to begin on February 4 of next year.

The redemption period for withdrawn pennies is expected to be six years. Because it costs the Royal Canadian Mint 1.6 cents for every penny it produces, the Canadian government is expected to save $11 million annually in production costs. After melting down the coins, it expects to earn $42.5 million in revenue by recycling the nickel and copper.

This revenue will be offset by costs which include $53 million to redeem the coins at face value and $27 million incurred by the Mint for handling and administration. The finance department expects the net savings over the six-year period to be about $4 million per year.

The demise of the penny in Canada is a consequence of central bank inflation, or the counterfeiting of money. It is perpetrated by the Bank of Canada. As new money is conjured from nothing, it diminishes the purchasing power of existing dollars. The result is higher prices.

To illustrate how this process works, consider an episode of “Storage Wars.” If each person attending the auction has exactly $100 to bid, and there can be only one winner, the sale price of the mystery unit will be no more than $100. Let’s imagine that this particular episode is “Storage Wars: Christmas Edition” and Santa Claus comes along and hands out an extra $900 to all of the bidders. Now that each person in attendance has $1000 in their wallet, the price of the mystery storage container could be as high as, you guessed it, $1000. That being said, because everyone received a simultaneous and proportionally equal increase in their personal supply of money, this act of Christmas kindness by Santa has no effect upon the outcome of the auction. As far as that storage container was concerned, he may as well have not handed out any money at all!

What makes the insidious process of inflation outright theft is the fact that newly printed money is not distributed simultaneously and proportionally. Instead, it goes to politicians and banksters and other crony special-interest groups who spend it before it has lost its purchasing power. This occurs at the expense of the rest of us.

Penny candy has gone the way of the dodo bird. So, too, will the penny.

Interestingly, in its analysis, the finance department anticipated that a refusal to redeem the penny at face value may have caused Canadians to question the intrinsic value of Canadian currency.

“A non-regulatory alternative option would include refusing to pay for the returned pennies,” says the notice.

“This option has been rejected because, without a government commitment to cover the redemption costs, Canadians might lose confidence in the value of the penny, and other circulating currency.

“This could threaten the integrity of the coinage system as the intrinsic value of Canadian currency is based on a high level of confidence in the currency system.”

A basket of goods and services costing $100 in 1914 costs $2003.28 in 2012. Redeemed at face value or not, there shouldn’t be much confidence left in our currency system.

Buy gold. Pay cash. Take delivery.

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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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