Canada Eliminated the Penny; Is Cash Next?

In what may have been international news last week, the Royal Canadian Mint officially struck the penny from distribution. Of course, that doesn't make the penny obsolete; it remains legal tender. Cash transactions are rounded to the nearest nickel and non-cash purchases are still designated in one-cent increments. The Canadian penny will exist in perpetuity, or at least until the RCM can collect and melt the 35 billion pennies in circulation.

The argument exists that the American taxpayer would see a similar benefit if the American penny is eliminated. Between material and production costs, it costs the U.S Mint two pennies to make one penny, and if melted down to its raw materials, one penny is worth about two and a half pennies. Just like in Canada, American citizens find the penny mostly useless. Similarly, Britain's pound sterling relies on the penny for denominations of 1/100 of a pound; the cost to make 1p is 1.5 pence. Pennies are often left at cash registers or on the sidewalk, hoarded away by the hundreds, or exchanged for larger denominations. Wise but rare is the consumer who completely utilizes a coin purse.

As Abba sings: "There never seems to be a single penny left for me; That's too-ooo baddd!" In fact, money is a recurring muse for many musicians, ranging from classic rock (Pink Floyd's 'Money') to rap (Puffy's 'All About the Benjamins'). Yet these lyrics only speak to the physical representation of money, not its theoretical concept. As the world moves into international and alternative currencies, rappers may lose some street cred if they start rhyming about digital transactions and pennies.

So where is the penny -- and currency as a whole -- headed? Before we go further, let's review the dollar system with the graphic on the right. I'll note that the only significant difference between the American and Canadian dollar systems is Canada's two dollar coin, or 'toonie', another nuance of Canadian currency. And for a review of the current minting process, here's a video of the stamping process used to manufacture coins.

While technology that supports cash flow rapidly changes, the institution of money does not. Barter and item trading is the oldest means of exchanging goods, but by 2,000 B.C. receipts for items in storage began to serve as a means for representing items in trade. These receipts were irregular metal ingots, with the commodity and its value represented by the grade of the metal and any inscribed symbols. The items that represent exchangeable goods and services vary by culture. Native Africans relied on ivory, livestock, beads, and weapons, while Native Americans sold Manhattan to the Dutch for 60 guilders (about $24 USD), a currency for which they had no use. The first coins were pressed in the Kingdom of Lydia, sometime around the 12th Century B.C. Paper money first appeared in the 7th Century in China as a receipt for a sum of coins. Around the same time, economists and merchants in the Middle East began establishing credit, cheques, banking accounts, trusts and loans.

Of course the ideology behind all of this currency was that it was a bearer slip, and it could be redeemed at government reserves for an equal amount of gold and silver (or in earlier times, grain and livestock). There were significant disadvantages to this system, as governments could print more currency than what they had in stock, diminishing the return value. In the early 20^th Century, banks and reserves continued to keep a precious metal standard to back up banknotes, but eventually decided it could better manage financial crises with fiat money, or money that has no intrinsic value. Representative of the U.S.'s conservative attitude regarding currency, it was one of the last nations to eliminate its gold standard, which it did in 1971.

This brings us to recent attempts to revive the gold standard. From 1998 to 2009, Liberty Services, began creating Liberty Dollars, a private currency redeemable from the company for amounts of precious metals. Despite U.S Treasury officials declaring the tender legal, the assets of the company were seized and the creator was later arrested and convicted on several charges.

Many other alternative currencies exist today. The most widely used would be the bitcoin, a digital currency based on an open source protocol. No bank or central reserve can regulate this currency. This currency is accepted across international websites and is held in the owner's encrypted file wallet. They are transferred using bitcoin keys, a string of numbers and letters exceeding 30 characters. Websites from Wikileaks to Domino's have begun accepting bitcoins, which can be exchanged for $16--$25 USD, depending on rates. Since bitcoins can be divvied into 100,000,000 satoyoshis it can be broken to better meet purchase prices. This is essential since there is a hard cap on how many bitcoins will be created; by 2140, all 21 million bitcoins will have been generated and the value of a full bitcoin will be much higher. Its open source and peer-to-peer nature assure of its adaptability, but many remain skeptical of the bitcoin's real purchase power.

In the recent worldwide economic turmoil, many communities have attempted to insulate themselves from a volatile economy by creating local currency. Typically, the currency is exchanged at a one-to-one rate and the local currency is accepted a number of community businesses. This fosters local business and in instances where businesses agree to return the local currency as a depreciated rate, can be used to fund community projects. Recent examples include the Toronto dollar and the BerkShare.

Contrasting the recidivism back to the gold standard, some companies are attempting to eliminate physical money altogether. Square is known as the company who created the card swiper for smartphones, but their latest idea eliminates cards and cash altogether. Their app, called Square Wallet, allows users to pay just by saying their name. After creating a login and linking a financial account, the app recommend nearby merchants who accept the Square Wallet, and after saying your name and accessing the app, your photo will appear on the cash register. Transactions take seconds. Google and PayPal have launched similar services, but Square is considered the easiest to use. Square can also has options for tipping and withholding loyalty cards. In a similar vein, Twitpay has become a chance to conduct transactions simply by linking a PayPal with a Twitter account.

Will electronic transactions replace cash in our lifetimes? Seemingly not. In the 1950s credit cards were predicted to be the end of cash, but today 8 of 10 transactions still require the physical exchange of bills and coins. Cash's 2,700 years of existence is owed to its simple technology and high gratification. Anyone can possess cash--you don't need a bank account--and futurist Dr. Michio Kaku explains it as the Cave Man Principle: when technology (high tech) clashes with primitive desires (high touch), people are more content with a physical interaction.

A sentimental argument is used to keep the American penny in circulation as well: a 2012 poll found 67% of Americans favored keeping the penny despite its limited power. It probably helps that one of the country's most popular presidents, Abraham Lincoln, graces the obverse. Charities also depend on pennies for thousands of dollars of contributions. It would also increase the demand for nickels, which cost 11 cents to make, and thereby generate a bigger manufacturing deficit.

When the half-penny was eliminated from American currency, it had more purchasing power than a dime today. Yet the U.S. government in 1857 thought it was prudent move. If this were a private company looking to maximize profitability, I can guarantee the penny would have been discontinued upon its first proposal in 1989. Of course the mint could use a lesser grade metal (pennies are mostly zinc), but they seem resistant to that idea.

I personally feel we could get rid of the penny. It's not like rappers are singing about pennies, and especially if it can spare me from hearing Christopher Walken's autotuned "Pennies from Heaven." What do you think?

Resources

(Image credit: Wikipedia; The Awl; Reid Gold; World Changing; Tom McConnon; Coffee Shop Investor; USA Coinbook)

Wikipedia - Bitcoin; Alternative currency; Gold standard; Penny debate in the United States

The Next Web - The Future of Money...

The New Yorker - Penny Dreadful

World Future Society - The Future of Money in a Mobi-Digital World