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It seems to me that the penny is no longer meaningful in our monetary system, even though retailers continue to use prices that require pennies. Should we get rid of the penny?

For those of us who are carting around pockets and purses full of Lincolns, recent discussions about eliminating the pesky penny have offered hope to lighten the burden.

But going penniless may not be that simple. Jonathan Eaton, CAS professor of economics and chairman of the economics department, says that even though some economists, most notably Alan Blinder, professor of economics at Princeton University and former governor of the Federal Reserve System, have advocated abolition of the penny, in the end it may not make cents -- oops, sense.

"The argument is that it costs money to mint the penny, and most people find the coin a nuisance," says Eaton. "But a counterargument to its abolition is that purchases would have to be rounded up to the nearest multiple of five."

Since the vast majority of store prices end in eight or nine, clerks would more often round up than down, which would cost the consumer a pretty penny. Yale Professor of Economics Raymond Lombra, who also has worked for the Federal Reserve, estimated in the May/June 2001 issue of The Penn Stater that consumers would pay up to $600 million per year in a "rounding tax" if the United States ditched pennies.

However, Eaton points out that $600 million a year translates into less than $6 per person each year and that it's not a "social loss, but a transfer to sellers."

Eaton suggests that without the penny, "consumers might have an incentive to purchase goods in combinations that yield prices that would be rounded down rather than up." But "given the tiny amount of savings that might be realized from this, the incentive would be small."

So it looks as if a penny saved may truly be a penny earned.

11 May 2001
Boston University
Office of University Relations