Economists say ditch the nickel

With talk of eliminating the penny picking up, some economists are saying the government should go further and eliminate the nickel as well.

In December, the Senate Standing Committee on National Finance recommended the one-cent piece be eliminated. With an Angus Reid poll showing 55 per cent of adult Canadians support getting rid of the coin, the penny’s days seem numbered.

Economists say Canada needs to adandon the nickel as well as the penny.

But this doesn't go far enough say two leading economists, Jean-Pierre Aubry, an economist with Desjardins Group in Ottawa and John Palmer, the so-called godfather of the ban-the-penny movement.

“It makes sense to round to the nearest decimal,” says Palmer.

“You’ll have to do it anyways,” says Aubry adding that the nickel has joined the penny as being almost worthless.

Canada is behind other countries and should have eliminated the penny in the 1980s, according to a study by Aubry and the Desjardins Group in 2008. The study recommends getting rid of the penny as soon as possible, and then removing the nickel a few years after.

Both the penny and nickel have lost much of their value, wth prices increasing by 20 times since the coins were introduced in 1908.

Aubry adds that handling small coins costs the economy hundreds of millions of dollars each year.

The fear of inflation

Getting rid of coins is dealing with the symptom and not the problem, says David Howden, an economist at the Madrid campus of St. Louis University in MIssouri.

He says the real issue is that inflation is too high and suggests that keeping the coins around will encourage the Bank of Canada to keep inflation lower.

“If there is a problem where prices rise and old denominations are not so useful, we should not shoot the messenger,” he says.If the nickel were removed, all cash purchases would be rounded to the nearest decimal ... this would also give the government a chance to fix other problems with the coinage system.

He argues that removing coins from circulation won’t actually cause inflation, as some have suggested.

Aubry says a lot of people still believe that if coins are eliminated, businesses will round up prices and cause inflation. But he says this hasn't happened in countries like Australia, New Zealand and Sweden, which have already eliminated smaller denominations. 

“This should have been out of public debate 15 years ago,” he says.

Both the Senate finance committee and the Desjardins Group study recommend the government set clear guidelines for how to round prices.

Palmer says stores wouldn’t even need to change their displayed prices, and could simply round purchases at the check-out.

Palmer also points out that only transactions involving cash would be rounded and anyone paying with credit card or debit would pay the exact price.

A five-year gap

While both Palmer and Aubry admit the two coins could be eliminated at the same time, they say a period of about five years in between would be best. New Zealand waited almost 20 years, getting rid of its five-cent piece in 2006.

Once Canadians see there’s no problem with removing the penny, taking the nickel out of circulation will be easier, Aubry says.

A nickel in 1914 is equivalent to 96 cents in 2010.

If the nickel were removed, all cash purchases would be rounded to the nearest decimal. Both Palmer and Aubry say this would also give the government a chance to fix other problems with the coinage system. This includes replacing the quarter with a 20-cent coin and possibly adding a 50-cent coin, both of which could be smaller and lighter than current coins.

This change wouldn’t be without costs, however. Kim Lockie, president of the Canadian Automatic Merchandising Association, suggested in his testimony before the Senate committee in September that the nickel be removed at the same time as the penny. But, he added, it would represent a cost for vending machine owners.

“It will cost our industry a fair bit, and we do not receive any help from anywhere,” he told the committee.

He said the cost would be entirely from having to change machines over to the new coins. However, he said this change is inevitable, and it would be cheaper to do it all at the same time.

This is not the first time Canada has talked about removing lower currency. A private member's bill to remove the penny was put forward in 2008.

Currently, the Finance Department has no plans to move ahead on the penny or nickel issue, but both Palmer and Aubry say there is enough political will to see changes made soon.

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