In Defence of the Tarnished Penny

The poor, imperilled penny.

No one seems to like it. Ezra Klein laments on its cost per unit produced, while Steve Dubner over at Freakonomics redirects us to an amusing anti-penny rant.

And the criticisms are well received. It costs around 1.7 cents to make a penny. And the opportunity cost of using the mint for that (as opposed to, well, coinage that could actually pay for itself) makes the penny a more expensive prospect still.

But that can't be the whole story.

Assuming the anti-penny rant is correct–and the non-recouped production losses amount to $70 million/year–how much of that is offset by the penny's benefits? That is to say, the penny has to have some pluses. What are they, and how much are they worth?

The way I see it, the penny lowers transaction costs. "How is this," you might ask, "when lugging them around is so detestable?" Simple. The effect of the penny on transaction costs has less to do with using them as having them available in the first place. In a world without pennies, purchasing anything with hard currency would impose a 1-to-4-cent transaction fee for any price not divisible by five. If my gallon of milk and a soda came to $3.37, I'd always have to pay a three-cent surcharge. It's not like I could get pennies back as change in compensation for the difference. And I certainly wouldn't have the leave-a-penny-take-a-penny to fall back on.

All of that seems insignificant at the level of the single purchase, but the aggregate effect would become noticeable over a long enough time horizon. Consumers wouldn't carry much cash (there'd be a built-in penalty for doing so). And suppliers would try to accommodate that (making debit/credit more available, quoting prices in post-tax increments divisible by five). It seems to me like the end result would be a costly drain on efficiency. Prices would become stickier than ever (retailers would pour tremendous resources into setting them just right, and wouldn't be too keen on changing them). And the price discovery mechanism would be inhibited by losing single-cent granulation.

Now, all of this might not bollocks efficiency too much–perhaps not on the order of $70 million a year. But it would have an effect. And I think that's worth considering. Losing the penny wouldn't cost us nothing, so let's not be too quick in assuming what we'd save.