Bank of Canada study proposed eliminating penny

Lose the Loose Change?
Bank Study Proposed
Dropping Canada's Penny

By Tara Perkins
The Globe and Mail, Toronto
Tuesday, July 3, 2007

http://www.theglobeandmail.com/servlet/story/LAC.20070703.RPENNIES03/TPS...

Canada should have ditched pennies by 2005, a Bank of Canada study suggests.

Some economists have publicly been calling on the government to get rid of pennies, saying they are more hassle and expense than they are worth. A report this year by Desjardins Group economists suggested the one-cent coins are costing Canadian society at least $130 million annually.

In response, the Department of Finance said there is still a significant demand for pennies as a means of payment.

But an internal department document obtained under an Access to Information request noted that the "production of pennies has increased in recent years as fewer pennies are recirculated, and more are hoarded." Economists, such as those at Desjardins, have argued that Canadians are tossing pennies in jars, rather than using them.

The Royal Canadian Mint produced 1.4 billion pennies last year, representing 63 per cent of total circulating coin production.

The Bank of Canada study, marked "draft," was written in 2005 and released as part of the Access to Information request for records from the Department of Finance. The study looked at Canada's currency system through the lens of two economic models, and appears to have been done in part to examine the question of when a $5 coin should be introduced.

The first model, called "D-metric," was developed in 1981 by researchers in Britain and is based on the empirical relationship between the average day's net pay and a currency's denomination structure. Since it was developed, a number of countries have used it to adjust the denomination structure of their currency, the central bank study said.

It estimated that the average day's net pay in Canada would surpass $100 for the first time in 2005. At that point, D-Metric recommends that the five-cent coin become the lowest denomination and the $500 note be introduced, the study said.

"Today's purchasing power of the five-cent coin is equivalent to the purchasing power of the penny in 1972," the study noted.

"Evidence of Canadians' transaction preferences lessens the present need for a new high-value note. However this option should be considered in the near future," it said.

(The model recommends introducing the $5 coin when the average day's net pay is $150, which is years away.)

The D-Metric model ignores some factors, such as cultural preferences, other methods of payment (debit and credit), and average transaction size.

So the bank study also looked at the Boeschoten model, which considers some of those issues. It found that both models "provide relatively similar predictions concerning when a $5 coin should be introduced."

A decision to ditch the penny would be up to the Finance Minister. The Finance Department says it examines coinage issues on a regular basis in conjunction with the Royal Canadian Mint

As of last summer, the Finance Department had not directly consulted retailers or the public on the penny. A Royal Canadian Mint survey conducted a decade ago found that 35 per cent of Canadians were in favour of eliminating the penny and 26 per cent wanted to keep it.

Australia stopped making one- and two-cent coins in 1990. New Zealand stopped making them three years before that. France, Norway, and Britain are among the other countries that have eliminated low-denomination coins.

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