Thursday, July 14, 2011

A thought for your pennies

The Senate finance committee recommended that the federal government remove the penny from circulation.  It now costs more to produce the penny - about 1.5 cents each - than the coin's actual face value.  Since they have so little value, Canadians hoard pennies instead of spending them - an average of 600 coins per person across the country are floating around.  At first glance, this seems to be a sensible move, but have you ever thought about how our penny came to be worthless in the first place?

In a free economy, productivity increases steadily as people invent better ways of producing everything.  The philosophy of individual freedom born in the enlightenment led to discoveries in science and these were converted into practical applications by the businessmen of the industrial revolution. For decades, energy became more accessible, the cost of food became more affordable, housing quality improved, transportation expanded, health care became more obtainable and the ability of humans to shape their environment in better ways improved the quality of life more than in all preceding history combined.  A penny was made of copper and held an objective value that bought more and more goods and services for citizens of the freest countries.  “See a penny, pick it up, and all day long you’ll have good luck” made sense to people.

Why is a penny no longer considered worth keeping?  Look back to the 1930’s when disastrous government policies led to a rapidly rising government debt.  The government wanted to devalue the currency to pay back its foreign debts - effectively cheating the investors who had loaned the money.  The Bank of Canada was created by an act of parliament in 1934 and in 1938 was made a crown corporation, wholly owned by the government.  Since then, successive governments have borrowed and spent money in a vain effort to implement socialism to create their desired economic outcomes. 

Look at the graph of the value of a dollar from 1914 (as far back as the records of Statistics Canada show it) until 2009.  The start of this period begins with the currency debasement (inflation) of World War 1 but was followed by a period when the purchasing power of money rose over a 15-year period.  Since the creation of the Bank of Canada, the Canadian dollar has lost purchasing power every single calendar year except 1953.  The total effect is that an item with a price of 4.5 cents in 1934 now costs one dollar.  The converse of this is that a dollar has lost 95.5% of its value.

These days, as evident notably in the 1930’s and 1970’s, governments of all levels have borrowed money to bail out failing companies, pay for make-work projects and expand social programs.  Now, as then, these efforts are destined to fail as they pour resources into inefficient and even wasteful central planning that has never worked and cannot compete with the free market.  To make central planning work requires omniscience, and it should be clear to the casual observer that our politicians and bureaucrats are a far cry from that level of capability.  Year after year, decade after decade, government interference in the economy has proven to be needlessly wasteful and slows the rate of progress.  Just try placing the words “government” and “productivity” or “innovation” in the same sentence and see how many great results spring to mind.

Observe the current shining example of Premier McGuinty’s effort to implement his version of “green” power that is causing skyrocketing prices for energy (and consequently everything else) while lowering the standard of living for millions of Ontarians.  What incredible conceit it takes to think his ideas can produce power better than the combined cooperative efforts of all citizens of Ontario and Canada. To save us from our apparent ignorance, he is borrowing tens of billions in our name and torturing the energy market towards the shape he wishes it to take.  Vast and enduring inefficiencies are being entrenched in our electrical infrastructure – pain that will be felt for decades.  The fearful alternative is apparently the end of the world as we know it: death by plant fertilizer, also known as carbon dioxide.  It is destructive actions such as this that debase our currency and have led to the almost complete loss of value of the Canadian dollar, never mind the poor penny.

In tin-pot dictatorships the currency is regularly destroyed by political interference in the economy.  We may not be in as bad a condition as Zimbabwe with its recent issue of $100 Trillion dollar bills (that’s a number one followed by fourteen zeros), but we are afflicted by the same problem – people believing they know best how to run your life and using the weapon of state power to do just that.

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