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Raymond E. Lombra
Pennsylvania State University
With the introduction of the new dollar coin in early 2000, and reported "short-
ages" of pennies during 1999 and 2000, questions have again been raised about the
desirability of considering a further restructuring of the coinage system in the United
States. More specifically, some members of Congress and others have called for elimi-
nation of the penny. It is ironic, indeed, that arguments calling for eliminating the
penny and rounding prices are occurring as we are in the process of moving away
from the rounding implicit in quoting stocks in fractions (eighths and sixteenths for
example) and toward decimal trading in the expectation that this will yield substan-
tial savings for investors.
The purpose of this paper is to examine the major economic consequences of re-
moving the penny from circulation. The major findings are easily summarized:
• Removing the penny from circulation will have significant adverse direct effects
on consumers. The resulting need to round prices will generate a rounding tax of
no less than $600 million a year. Moreover, the "rounding tax" is likely to be
regressive, affecting the poor and other disadvantaged groups disproportionately.
• The inflationary impact of rounding will probably be small. However, even a small
effect will cumulate over time to a considerable sum. Utilizing the results of simu-
lations of the degree of rounding likely to occur, and Congressional Budget Office
estimates of the effects of higher prices on Federal government outlays, show
that removing the penny would raise government outlays by about $950 million
in 2005 and by $2 billion in 2010.
• Rounding could also have significant negative effects on firms, given the narrow
profit margins in convenience stores and supermarkets, the possible adverse ef-
fects on theft deterrence, the costs of training cashiers and associated productiv-
ity losses, and the high costs associated with non-cash mediated transactions.
Such considerations point toward changes in the structure of prices designed to
take advantage of rounding and thereby raise prices overall.
Raymond E. Lombra: 116 Sparks Building, Pennsylvania State University, University Park, PA
16802. E-mail: RL3@PSU.edu
Eastern Economic Journal, Vol. 27, No. 4, Fall 2001
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