A recent statement by US Treasury Secretary Henry Paulson has renewed the debate about the existence of the penny. In an interview, he said that the penny is worth less than any other currency and that he’d like to get rid of it. So today I’ll discuss the pros and cons of keeping the penny.

Supporters of the penny suggest that getting rid of it would mean higher prices, as retailers round up to the nearest nickel. Since it’s common for items to be sold for prices ending in .99, rounding to the nearest nickel would cause prices to go up (to the nearest dollar). This argument is countered with arguments that sales tax and multiple item purchases would reduce this effect. This only holds true if totals are rounded, not individual prices. The reason why retailers use .99 pricing is it makes things seem (marginally) less expensive. Does something at $1999.99 seem less expensive than something at $2000.00? Subconsciously, at least, it does. To continue this line of thinking, retailers might make .95 the new .99, meaning that something currently offered at $1.99 would be sold at $1.95. In that sense, consumers might actually see prices decrease, at least in the short term after the elimination of the penny. Of course, $2.05 could be the new $1.99 as well.

Two items come to mind when I consider pricing in nickel versus penny increments, stocks/options and my experiences during the introduction of the Euro.

Prior to 2000, stocks on the New York Stock Exchange were traded in fractional amounts equal to the nearest 1/8 of a dollar. For the history behind that, see this article. The main trouble with using 1/8 versus 1/100 (i.e. a penny) was the spread between bid and ask prices. If a stock had a bid price of $10, for example, the next higher price that it could trade at was 10-1/8 or $10.125. So even if there were people willing to buy and sell the stock at $10.01, they weren’t able to because of the 12.5 cent increments required between trades. You could argue that if the transaction occurred at $10, the buyer got a better deal and at 10-1/8 the seller got a better deal and the net effect of using an 1/8 based system canceled out. What this system really did was reduce the liquidity of the market because buyers and sellers had to take large steps between the different possible purchase prices. The transition to decimal trading reduced the spreads down to a penny and increased liquidity for the market. So in that case finer granularity was a good thing. Options are generally still traded to the nearest nickel, though some are using pennies in a pilot program.

My experiences during the introduction of the Euro go against the argument that retailers will lower their prices with the elimination of the penny to offer the psychological benefit currently seen when using .99 in pricing. I was living in Germany when the Euro was being introduced. At the time, the Deutschmark was trading at roughly 2:1 i.e. two Marks for every Euro. While it wasn’t the case everywhere, there were many instances where people saw an instant doubling of prices as a result of the transition. The main area was purchasing food from a menu. Many restaurants, street vendors, etc didn’t reprice their items but rather just started charging in Euros what they had charged in Marks. It saved them from having to reprint their menus and advertising. So a cup of coffee listed on a menu as 1- went from costing 1 Mark to 1 Euro overnight. As I said, this wasn’t the case everywhere, but it did happen often enough that prices in general went up. Back then I could live in Germany very inexpensively compared to what you could do today. I’m talking about relative prices there and not taking into account the falling dollar which would make things seem even more expensive there to Americans today.

Another argument for removing the penny is that it would save transaction time. In addition to the time it takes cashiers to count change, it would also save on consumers digging through their pockets to find a needed penny. While this argument is valid, if you want reduced transaction times, you would have to eliminate all cash and also checks. One person writing a check probably takes more time than 10 people using pennies.

Another point of debate is whether the elimination of the penny means an elimination of the cent. Could stores, banks, etc still advertise and use pricing down to the nearest 1/100 of a dollar? This would be similar to the way gas stations today offer gas at something less than a penny, such as 3.19 - 9/10 . As I said above regarding stock transactions, greater granularity generally means better prices for consumers.

A final argument against having pennies is the widely touted statistic that it costs more than 1 cent to make a penny. This is mainly caused by the recent rise in copper and zinc prices. As a result, cheaper metal compositions for the penny have been discussed. If you were going to eliminate the penny on this basis, the nickel would have to go too, since it costs more than 5 cents to manufacturer. Although the government is losing money on these coins, you have to remember that pennies are used many, many times before they are removed from circulation. The average penny lasts 25 years, so even at a cost of more than a cent, it probably is used for hundreds of dollars worth of transactions over its lifetime.

One last though on the subject of pennies. I remember reading about a study where researchers placed some loose change on the ground. The assortment included pennies and non-penny coins. The majority of the monitored people passing by bent down and picked up the silver change but left the pennies. Is that an indication of perceived worth of a penny’s value? I liked the commentary in this recent article. The author was discussing the concept of thinking of everything in terms of its dollar per hour equivalent. He said that as a result, he always picks up pennies because for the 2 seconds to pick up 1 penny, he’s basically making $18 an hour. My only comment would be that I only earn about $9 an hour picking up pennies because for each 2 seconds I spend going for one, I only pick up the 50% of them that are face up

My take on pennies is that we should keep them, if only for selfish reasons. The added granularity gives greater insight into prices and subsequent budgeting for expenses. So there’s my upside to having pennies. The generally discussed downsides don’t affect me much because my finances are largely cashless. On those rare instances where I do use cash, I spend pennies from previous transactions or add any new ones to my coin jar.