Thursday, April 5, 2012

Howden: Will the Nickel Be the Next to Go in Canada?

The Canadian Royal Mint has announced it will stop producing the Canadian penny. David Howden, a Canadian economists who is presently Professor of Economics at University of St. Louis, Madrid Spain, asks, "Will the Nickel be Next?" He answers that it is entirely possible if the Bank of Canada does not stop inflating.

Howden explains why the penny is no longer worth minting:
Let’s not shoot the messenger here. It’s not that copper has gone up in value and as a result it is not fit for the task any longer. It’s that the value of 1¢ has gone down so much that it is no longer fit for copper. We can easily blame this all on some innocent bystander and sweep the problem under the carpet. But the fact of the matter remains: We pushed the poor penny as far as it would go and it finally broke. We kept issuing money until the poor penny was bound to be redundant. A rising copper price confirms this fact, but didn’t cause it.
When a central bank increases the money supply, people find they possess an excess supply of money. They mitigate this excess supply by spending the cash they do not want to hold. This increased spending drives up the demand for goods, which results in higher prices. Some of the goods for which the prices are higher are metals used to mint coins.

Canada's central bank has inflated the money supply so much over the years that the purchasing power of money has dropped to such an extent that the face value of the penny is worth less than the metal that is in every penny. This is already true, by the way for the old pre-1982 U.S. copper penny and the current U.S. nickel.

It does not have to be this way. Howden ends his essay with a rousing call to arms for his fellow Canadians:
The death of the penny may have been a long time coming, but let it not be in vain. Send a signal to the Bank of Canada that we don’t want to see the same fate befall other denominations. The penny is dead. Long live the nickel!

No comments:

Post a Comment