ELIMINATING THE PENNY 441

have to pass regulations concerning prici ng or rounding ... It would be

hard to reconcile such government interv ention in pricing with our

economic principles. [Letter, 18 Decembe r 1998]

CONCLUSIONS

The 1996 GAO study of the economic effects of removing the penny from circula-

tion concludes: "In analyzing these factors, we found no clear path that would lead

either to a substantial benefit to the Federal government or a clearly ex pressed pre-

ferred course of action by the Amer ican public" [1996, 11]. In this more comprehen-

sive study, I also could not identi fy any net benefits associated with pri ce rounding

and the removal of the penny. Admitte dly, the calculations of the degree of r ounding

and the quantitative effects on the e conomy and Americans, although done carefully

and conservatively, are subject to some unknown degree of error. To my way of think-

ing, such uncertainty reinforces the analy tical arguments presented. Unless it can be

demonstrated that the adverse effe cts will be negligible, then the bene fits of remov-

ing the penny must be sufficient ly large to outweigh a reasonable est imate of the

adverse effects. I find the potent ial adverse effects considerable.

As the government's experience wit h the metric system, the bicentennial $ 2 bill,

and various attempts to overhaul healt h care so poignantly demonstrate, the publ ic

must be convinced of a pressing need for and clear net benefits associated wit h chang-

ing anything that has become embroidered into the social and economic fabric of soci-

ety. The evidentiary requirement for removing the penny from circulation does not

yet appear to meet this standard. Of course, if and when seigniorage turns neg ative,

inflation reduces the real value of a penny substantially further, and, more g enerally,

the benefits of elimination (what mig ht be called "convenience") rise relative to the

costs, then removal will be more attr active. In the meantime, with the "decimali za-

tion" of equity prices leading to a substantial narrowing of spreads and accompanyi ng

reductions in trading costs to inves tors, it is clear that a penny here and a penny

there, be it at the convenience store, supermarket or stock market, add up to a sub-

stantial sum that can either help consu mers (decimalization) or tax them (el iminat-

ing the penny).

NOTES

The author wishes to thank the editors and refere es of this Journal for helpful suggestions.

1. I also conducted simulations that allowed for sales taxes on a random proportion of the items com-

posing each transaction. The results reported ab ove were not materially affected. This is reas onable:

first, the sales tax is itself routinely rounded up; second, in most jurisdictions food is exempt from

sales taxes [Federation of Tax Administrat ors, February 2000]; hence, the majority of the item s in a

convenience store would not be taxable. As one r eferee has noted, however, if the distributi on of

prices shown in Table 1 was flatter, or the "averag e" consumer purchased 4-5 goods per cash transac-

tion, the proportion of cash transactions rounded up wou ld decline.

2. The same point has been vividly illust rated by the recent move on the New York and other stock

exchanges involving pricing stocks in cents instead of fractions of a dollar. Pricing in fractions is, in

effect, a kind of rounding scheme. The early ev idence [Henry, 2000; Chakravarty and Wood, 2000a,

2000b] suggests the change is resulting in a substantial drop in trading costs for investors .

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