JULY 24, 2012, MT. PROSPECT, IL— Recent discussions in the U.S. among those who control, study and analyze currency issues related to the "cost of money" have centered on the production cost challenges of minting coins. High manufacturing and commodity base metals' costs in the world market are some of the reasons why the expense to manufacture coins such as pennies and nickels now exceeds their face value.
When this situation arises – production costs exceed face value – it's called negative seigniorage, which represents a net loss to the U.S. Treasury. With over four billion pennies and over nine hundred ninety million nickels being newly minted in 2011 for circulation, the negative seigniorage to the Treasury is quite significant, but finding a solution to the coin minting challenge is no simple matter.
Below, Cummins Allison, the leading innovator and provider of coin, check and currency handling solutions, examines three solutions to combat negative seigniorage; taking a look at the pros and cons of each approach.
The Cashless Society: A Reality Check
Some pundits are convinced that the world is moving steadily towards a cash-free society. However, currency, both coins and banknotes, will always be important to people and societies for a variety of reasons. Money is perceived as more tangible and controllable and until a broad and secure infrastructure is created, it's impractical to rely exclusively on electronic networks, plastic cards or other devices to complete small everyday transactions (leaving a small tip or paying a babysitter).
Sweden is one country claiming to progress rapidly towards a cashless society, with physical cash down to just three percent of the nation's economy. However, Swedish authorities admit that it will be several years, at least, before "Sweden can finally rid itself of cash" and the Central Bank of Sweden is not taking an official position and still planning to issue new banknotes.
By comparison only seven percent of U.S. transactions are handled in cash, but even cashless transactions come with a cost attached for processing and they require power, computers, networks and data lines that are up and running. In many ways cash transactions are simpler and more direct. While physical money is on the decline in developed countries, we're still a long way from a truly cashless society.
Eliminating the Penny: Not as Simple as it Sounds
"Killing" the one cent coin has been widely discussed in the U.S. and is a solution that has been implemented worldwide in recent years. Over the past three decades, well over a dozen countries ‒ including the UK, Australia, New Zealand, Norway and Switzerland ‒ have ended production of lower value coins, thereby saving the private sector an estimated $150 million in counting, storage and transportation costs.
Proponents of eliminating the penny contend that they waste time and resources of businesses and banks, while also contributing to negative seigniorage. In fact, between FY 2006 and 2010, the US Treasury lost more than $127 million per year on production of the penny.
However, it's important to consider how retooling our nation's currency by killing the penny could affect the economy. This includes potential inflation and higher prices for goods, due to a rounding up of prices; greater production of nickels, which also have negative seigniorage; and the unforeseen consequences on the balance between coins and banknotes.
Using Different Materials, Structure and Designs
Using different materials may be the most practical solution to reduce production costs and avoid negative seigniorage. Currently, the copper-plated one-cent coin is made of 2.5 percent copper and 97.5 percent zinc. Nickels require 25 percent nickel, with the balance in copper. Copper, zinc and nickel prices have risen substantially. Canada mints most of its coinage, with the exception of one- and two-dollar coins, using over 90 percent steel and varying combinations of copper and nickel plating. This is something the U.S. is considering as an alternative, along with other materials such as resins.
However, any change in materials would have to ensure that the coins are as secure as possible to deter counterfeiting. Even the carefully researched and implemented European Union Euro has been violated and Italian law enforcement agencies have discovered several counterfeit "mint" operations.
The U.S. government must also consider the impact that changing the material for coins will have on coin-based operations, such as vending machines, toll collections stations, etc. If the physical properties (weight, size) of coins are changed, the cost to these business owners to modify, retrofit or replace coin acceptance mechanisms would likely be enormous. Similarly, other cash-based businesses such as banks, retail stores, supermarkets, restaurants, gaming casinos and others would need to invest in modifying or replacing their coin counting and authentication equipment.
There are no easy solutions to resolve the challenge of negative seigniorage in minting of low denomination coins. Any potential solution must be thoroughly studied, analyzed, tested and vetted by numerous stakeholders before final decisions are made and implemented. If and when the U.S. Treasury and U.S. Mint do decide to implement changes in coin production and distribution, the changes are likely to occur gradually over time to allow all stakeholders to adjust.
For a more detailed look at the aforementioned approaches, download the Cummins Allison fraud Detection Market Insight Report at www.cumminsallison.com/currency/counterfeit_detection.htm
About Cummins Allison
Cummins Allison is a global leader in developing technologies which count, sort and authenticate currency. The U.S.-based company has a 125 year heritage of leadership in technology and product innovation and currently serves the majority of financial institutions worldwide, as well as leading organizations in retail, casinos, law enforcement and government. The company holds more than 350 U.S. patents and has ongoing research and development (R&D) investments double the industry average. Cummins Allison is headquartered near Chicago, IL with R&D centers near San Diego, CA and Philadelphia, PA and wholly owned subsidiaries in Canada, the United Kingdom, Ireland, Germany and France. The company also has an extensive sales and service network with more than 50 offices in North America and is represented in over 70 countries. For more information, visit www.cumminsallison.com.
Carol Moore, Vice President Marketing
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