Thursday, May 4, 2023
Thursday, May 4, 2023
The lowest denomination coins – cents, pennies, whatever – are a headache, for issuers and, increasingly the public. They have low or zero purchasing power, little utility, the public by and large doesn’t like them. And as they don’t circulate, they require frequent replenishment. The only beneficiaries of such coins appear to be the mints producing them.
These factors aside, the rising costs of production increasingly mean that the face value of the coins are outstripped by their production costs – resulting in negative seigniorage.
On this basis, why do countries keep on minting and issuing them?
Several countries have dispensed with their lowest denomination coin in recent years. They include, in the last decade or so, the Bahamas, Canada, Chile, India, Japan, Moldova, Ukraine and the UAE, among others. Within the eurozone, six countries no longer issue them, and as many again are considering dropping them. Plans are afoot in the European Commission, meanwhile, to do away with them across the entire monetary zone.
One country that remains wedded to its pennies, however, is the US, and as the latest reports shows, the problem of the costs of production outstripping the face value gets worse by the year. The cost of producing the penny is now nearly three time its face value. For the nickel, it’s over twice.
One obvious solution is to switch to lower cost plated materials. According to the US Mint’s latest biennial report to Congress, alternatives have been identified to reduce the costs of the higher denominations and return more money in seigniorage to the Treasury.
However, the only identified alternative for the penny (which switched to copper-plated zinc in 1982) is in the hands of one supplier, which causes issues with resilience of supply, and the cost of production would still be higher than the face value. The challenge of the US Mint, and so many others around the world, creates a number of underlying risks that are worth reflecting on.
There is an argument that dropping low value coins would be a Trojan horse, or the thin end of the wedge, leading in time to the abolition of all coins.
And one cannot ignore the emotional and historical connection that some people have with coins – even the lowest value ones. In the UK, for example, which is one of the countries moving the quickest to alternative payments, proposals to drop the 1 and 2 pence coins a few years ago met with fierce resistance and were dropped. In the US, public opinion polls have traditionally shown a bias towards keeping the penny. In the eurozone, public opinion overall is now in favour of eliminating the 1 and 2 euro cents, but in some countries such as France there is still a preference to keep them.
However, it is worth considering a few alternative thoughts, which apply to all countries, not just the US.
Profitability justifies investment: while circulating coins only generate 19.2% of the US Mint’s total revenue, they generate 58% of the seigniorage returned to the US Treasury. Despite this apparently profitable performance, to knowingly run a loss-making product is unhealthy for any organisation, even a publicly run one delivering an overall societal ‘good’, and risks starting conversations about viability and purpose.
Performance creates credibility and trust: circulating coins need to work for society and be profitable, and to anchor the Mint’s reputation as a world class organisation capable and credible to produce other products. Being the producer of the circulating currency gives the US Mint its identity and credibility to go on to produce collector coins, medals, bullion and other investment products, which deliver the other 80.2% of revenue and 42% of seigniorage.
Instability is disruptive: the two loss making coins, the penny and the nickel, represent 44.5% and 11.9% respectively of circulating coin volume. If very high volume, low value (or even loss making coins) are demonetised, the loss of volume creates major organisational and financial challenges. One of the factors undoubtedly keeping the European Commission from demonetising the 1 and 2 euro cent coins is the impact on the European mints.
Focus on sustainability: environmental sustainability is increasingly under the spotlight. Choosing to produce and issue low value coins that don’t circulate but require high value scarce resources is bad for the environment and gives ammunition to those that promote a digital future.
As long as banknotes exist, settlement and payment coins will be needed.
But in the meantime, the presence of coins which people don’t value actually has a detrimental business and manufacturing effect – particularly in this new age of environmental consciousness and sustainability.