In 1901, in its mail order catalogue, the T. Eaton Company advertised children’s sleds for 25 cents, canned sardines (complete with revolutionary metal keys to roll up the tin lids) for 5 cents, and packets of assorted flower seeds for 1.5 cents apiece. Pennies counted. Without inflation, pennies would still count, would probably buy more than they bought a century ago. Instead, they are worthless and now destined for currency oblivion. Most Canadians appear indifferent to the penny’s imminent demise.
One dissident economist argues passionately that we should not abandon the penny so casually. Yes, it costs more to produce than it is worth, David Howden says. As long as it exists, though, it will serve as a metallic brake on inflation – precisely (though naturally more humbly) as gold once did. Call the penny the poor man’s gold standard. “Instead of putting the valueless and worthless penny out of its misery,” he says, “we should rally behind it. The penny is dead! Long live the penny!”
Mr. Howden teaches economics at the Madrid campus of St. Louis University, a Jesuit university based in Missouri. He graduated from Wilfrid Laurier University in Waterloo in 2004 and got his PhD from Rey Juan Carlos University in Madrid last year. In a blog posted last week, he warns that the elimination of the penny involves much more than simply emptying our pockets of “a weighted, dingy coin.” In the long run, he says, the end of the penny will hasten the end of the nickel, the end of the quarter – and, eventually perhaps, the end of the loonie and the toonie.
“The penny functions in much the same way as the old gold standard,” Mr. Howden says. “[In inflation], pennies are increasingly more costly to mint. As the Bank of Canada inflates the money supply, the cost of minting a penny grows. In a way, this simple [rise in cost] acts as a brake on the Bank’s inflationary ways. The Bank of Canada finds itself restrained by a tool of its own creation – the simple penny.”
Gold coins worked to restrain inflation by making the supply of gold depend on the profitability of producing it – thus keeping the purchasing power of money independent of political parties and limiting the power of government to inflate. Mr. Howden quotes the Austrian economist Ludwig von Mises: “This [independence] is not a defect of the gold standard; it is its main excellence.”
In a comparable way, Mr. Howden says, the end of the penny would eliminate a remnant of restraint on the Bank of Canada. “Eliminating a result does not do away with the cause,” he says. “Ridding ourselves of the penny will not save us from the costs of our monetary system. It will impose additional costs [because] inflation will be increasingly less restrained.”
The Bank of Canada has pursued an inflationary path since its inception in 1935, he says – using its arbitrary powers to inflate at will: “It has increased the money supply at an average annual rate of 8.6 per cent for the last 30 years. [Yet] the supply of goods has increased by only 5.6 per cent a year. This excess money supply has increased the prices that Canadians pay.”
The bank has also excessively expanded credit, he says, through the commercial banks’ reserve ratio, which determines the percentage of deposits that banks must hold as reserves. This reserve is now zero per cent: “Effectively, this means that every dollar deposited in a Canadian bank will breed an infinite amount of potential credit creation.”
The Bank of Canada’s own inflation calculator on its website allows anyone to test Mr. Howden’s pennywise assertions.
The calculator shows that goods and services that would have cost 0.01 cent in 1914 now cost 0.19 cent – an increase of 1,800 per cent. The average annual decline in the purchasing power of the penny in this period: 3.13 per cent.
The goods and services that would have cost 0.01 cents in 1935 (when the Bank of Canada took over) now cost 0.16 cent. The average, annual decline in purchasing power: 3.7 per cent.
In contrast, how did the penny fare in the 20 years before the arrival of the Bank of Canada? The goods and services that cost 0.01 cent in 1914 would have still cost 0.01 cent in 1924 – and, remarkably after one world war and one Great Depression, 0.01 cent in 1934. Penny smart, indeed.
