Troubling Myths

Myth #1:  Elimination of penny means higher prices. 

This claim is based on a flawed study that found a majority of prices would be rounded up rather than rounded down to the nearest nickel. This study, however, did not take into account factors that randomize the direction of rounding, such as sales tax and the purchase of multiple items. It also did not consider pricing strategy. For example, a business owner might choose to round a 99-cent item down to 95 cents to keep the price less than $1.

When these factors are included, there is no net change in prices, on average. Indeed, a recent study by Robert Whaples, chairman of the Economics Department at Wake Forest University, confirmed that rounding is neutral.

The Department of Defense stopped using pennies at overseas bases more than 30 years ago, implementing a rounding system whereby cash transactions ending in 3, 4, 8, or 9 cents are rounded up, and those ending in 1, 2, 6, or 7 cents are rounded down. The Army and Air Force Exchange Service believes that the rounding system has benefitted neither the consumer nor the the store.

Additionally, many other countries (e.g., Canada, UK, Australia, New Zealand) have eliminated one-cent currency with no ill effects for consumers. This link shows how Canada handled its rounding.

Myth #2: People will be stuck with useless pennies.

Pennies will not become obsolete overnight. While no more new pennies will be made, the coin will still be valid currency. In time, pennies will be phased out as their numbers in circulation slowly diminish.

Myth #3:  Charitable causes will be adversely affected.

Once the considerable number of circulating pennies is exhausted, charities that historically collected them will instead collect nickels. After the elimination of similar one-cent pieces in other countries, there have been no major announcements of charities reporting lower donation amounts.

Myth #4: The poor will pay the most.

Whaples’ research included comparisons between purchases made in both wealthy and poorer neighborhoods. He found that in more than 200,000 transactions, regardless of socioeconomic status, both consumer and store broke even.

Myth #5: The penny produces a profit. 

This argument is no longer made, as all sides agree that it now costs more than a penny to make a penny. Even if this were not the case, it is a silly argument. In theory, the Treasury could obtain an infinite "profit" by printing a trillion $100 bills. They do not, however, because printing bills and minting coins increases the supply of money and causes inflation, thus decreasing the value of all money in circulation. This "profit," therefore, is really just a hidden tax.