Save the penny or leave the penny?

Consider the lowly farthing: a quarter of a British penny, or 1/960 of a pound sterling. For centuries, this tiny denomination of coin circulated in Britain for day-to-day purchases.

In the 13th century, when it was first minted as a separate coin (and not just a silver penny cut into quarters), a farthing could buy a chicken or a pound of beef.

But by the 1950s, the coin could barely buy a gumball, and Britons had had enough.

In the May 4, 1953, edition of the Times of London, a letter from reader Leigh Vance appeared:

"Recently a bus conductor refused the eight farthings I offered him in exchange for a twopenny ticket. On another occasion the newspaper vendor to whom I gave six farthings in exchange for an evening paper became as abusive as if I had tried to slip him counterfeit coin."

He went on, "Either the farthing has a place in our coinage and is acceptable anywhere, or it is redundant and should be abolished."

Three years after the letter appeared, the last farthing was minted, and the coin was demonetized on Jan. 1, 1961. (Because it's so close in size and weight to the current British penny, the farthing sometimes still occasionally shows up in change in the penny's place.)

Canada's farthing

So what about our own farthing, the Canadian penny? Could you blame a bus driver for refusing to allow you to put a couple hundred of them into the fare box?

A growing number of economists and bankers are urging the Canadian government to give up the penny, as the U.K. gave up the farthing and, later, the halfpenny.

In April 2010, the standing Senate committee on national finance announced it wouldlook atthe costs and benefits of the penny, including whether it should recommendeliminating it.

"By some estimates, the production and use of the penny represents hundreds of millions of dollars every year in direct costs to taxpayers and lost productivity," Senator Irving Gerstein saidin a statement, adding "there would be costs associated with eliminating the penny, as well."

On Dec. 14, 2010, the Senate committee recommended that the federal governmentremove the penny from circulation and that guidelines be established for rounding off purchase prices for cash-only transactions. It also recommended that production of the penny cease as soon as practicable, with 12 months notice.

Both Australia and New Zealand removed their one- and two-cent coins in the early 1990s. New Zealand went a step further in 2006 and demonetized the five-cent piece, and Australia appears ready to follow suit.

At the time of Vance's letter, the British farthing was legal tender up to one shilling 12 pence or 1/20 of a pound. Legally, you could pass as many as 48 farthings, although Vance's letter suggests you were unlikely to succeed.

In Canada, the Currency Act says: "A payment in coins is a legal tender for no more than twenty-five cents if the denomination is one cent." No one is legally obligated to accept more than 25 pennies at a time.

In 1953, it was estimated that there were 600 million farthings in existence about 12 for every Briton at the time.

By comparison, the Desjardins Group estimates that there were 20 billion Canadian pennies 600 for every one of us in pockets, jars, fountains and piggy banks in 2007.

According to a Royal Canadian Mint survey released in October 2007, 63 per cent of small retailers said they were in favour of getting rid of the penny, citing efficiency as their prime motivation.

By comparison, 42 per cent of consumers said they would support abolishing the penny, while 33 per cent said they would oppose the move. One-quarter of respondents said they were neutral.

Consumers who said Canada should get rid of the penny said they considered the coins an annoyance as well as dirty, smelly and germ ridden. People who wanted to keep the coin said prices would go up without the penny and said it's a part of our heritage.

Near the end of its circulation, it cost the Royal Mint a halfpenny to produce a farthing. Issuing a Canadian penny costs somewhere between 0.8 cents and a nickel, depending on whose numbers you believe.

But how does the farthing compare with the Canadian penny in terms of real money?

According to the website MeasuringWorth.com which adjusts amounts of money from one year to another based on inflation, buying power and other economic factors one farthing in 1960, the last year it was legal tender, was worth somewhere between two and five pence in 2010 money, or three to eight cents Canadian.

Inflation and the penny

Since Canada adopted the dollar as its currency in 1858, it has never issued a coin with a denomination lower than one cent.

Adjusted for inflation, one cent in 1870 (the earliest date such data is available) had the same purchasing power as 27 cents in 2005.

If 19th-century Canadians got along fine without half- or quarter-cent coins, do we need pennies or even nickels now?

In February 2007, the Desjardins Groupreleased a statement saying the federal government should consider withdrawing the penny and, later, the nickel from circulation.

The Royal Canadian Mint produces about 816 million pennies annually. Desjardins argues that this huge production is needed because consumers receive pennies in change, but don't return them to circulation. They either hoard them or throw them away.

Desjardins suggests removing the penny and rounding cash transactions to the nearest five cents, a method called Swedish rounding.

Since the rounding is symmetrical, sellers would not be able to gain money by always rounding up, Desjardins says. It would be similar to the situation now, in which transactions are symmetrically rounded to the nearest cent. Over time, neither the buyer nor the seller benefits from the rounding.

Small change in Europe

But what about the world's newest currency, the euro? It's close in value to the U.S., Canadian, Australian and New Zealand dollars, and its coins go all the way down to one cent.

Didn't the economists at the European Union consider inflation and the cost of producing all that small change when setting the value of the euro and its coins?

In fact, two EU countries, Finland and the Netherlands, don't use the two lowest-value coins. They use Swedish rounding and mint only small runs of one-cent and two-cent euro coins for collectors.

The Finns and Dutch notwithstanding, there was a reason for including the small coins in the introduction of the euro, says Randall Hansen, a political science professor at the University of Toronto.

"There was a great fear across Europe that businesses would use the introduction of the euro as an excuse to round up their prices and that the result of that would be general inflation," Hansen said.

The rounding up of prices when merchants switched from the old currency to the euro seemed more likely if the one-cent and two-cent coins didn't exist, Hansen said.

However, the euro was a brand new currency. In theory, the EU could have set its value higher and adjusted the exchange rates from the old currencies accordingly.

If the euro had been set at, say, five U.S. dollars, a one-cent euro coin would have been worth a nickel and maybe the Finns and Dutch would keep using them.

But there were larger considerations than the small change in European pockets when it came to setting the value of the euro. The European Union wanted to create a currency that would compete on the global market with the U.S. dollar.

"It made a lot of sense for the value of the euro to be broadly proximate to that of the dollar," Hansen said.

The euro was introduced at a value of $1.18 US. It fell to a low of 82 cents US in October 2000, then bounced to a high of $1.59 US in July 2008.

"If you had a currency whose nominal value was five times that, you wouldn't have that obvious comparability with the U.S. dollar," Hansen said.

"That was much more important to policy makers than whether the Finnish or the Dutch were happy with small coins," he said.