Money

Changing Small Change Could Save Uncle Sam Big Bucks

The U.S. Mint makes money in more ways than one. Besides turning out billions of coins every year, it also turns a profit in the millions. That’s because the new coins’ total face value exceeds the total cost of producing and distributing them. It’s a governmental perk known as seigniorage.

That’s the good news.

The bad news is, Uncle Sam is losing big money on two of the coins he mints, the cent and nickel. And he’s missing a chance to cut his costs significantly – and improve his bottom line – by abandoning dollar bills in favor of small dollar coins.

The potential savings are substantial: If he implemented the necessary changes, he could save $250 million – a quarter of a billion dollars – every year.

Recently, there were signs that the government might be nearing a solution to the cent and nickel problem. But both coins are still being minted despite the negative cash flow that they generate – losses of $55 million on cents and $49.5 million on nickels in the last fiscal year alone. And, perversely, $1 coins aren’t being made for use by the general public in place of dollar bills – despite their potential for saving U.S. taxpayers close to $150 million every year.

Many who saw the movie “Dave” in 1993 remember how hard the stand-in U.S. president, played by Kevin Kline, fought to cut $650 million from the federal budget in order to fund a program to shelter homeless kids. If he had been faced with the same situation now confronting President Barack Obama and current members of Congress, does anyone really doubt what Dave would have done?

I’m betting President Dave would have killed the cent and paper dollar, changed the composition of the nickel and pushed very hard for dollar coins. That would have gone a long way toward giving him what he needed to pay for those homeless shelters.

***

For Fiscal Year 2013, the U.S. Mint reported a net profit of $95.8 million. But it also reported losses on cents and nickels totaling $104.5 million. In other words, its losses on those two coins cut its overall profit on everything else it makes by more than 50 percent.

The problem has plagued the Mint for the better part of a decade. From 2006 through Sept. 30, 2013, it lost a total of $573.5 million making pennies and nickels. During that period and right up to the present, the base metals used in these two coins have cost substantially more than they did in the years preceding 2006 – so much so that for the last eight years, the coins have been worth more as metal than as money.

The current cent is made of copper-plated zinc, while the nickel – despite its name – is made from an alloy with three times more copper than nickel. Zinc, copper and nickel have all become costlier during the new millennium, largely due to greatly increased demand from China and India.

The metals’ prices actually dipped somewhat in 2013. But, even so, it still cost the U.S. Mint 1.83 cents for each and every one-cent piece it produced and 9.41 cents for every nickel. Those sums might seem paltry at a time when the national debt is in the trillions, but they loom very large when multiplied by the  massive number of coins being made. The Mint issued more than 7 billion 2013 Lincoln cents and more than 1.2 billion Jefferson nickels.

Surveys have suggested that most Americans don’t want to see the penny killed – partly for sentimental reasons and partly because they fear that if this happened, the prices of consumer goods would then be rounded up to the nearest nickel, contributing to inflation. One such survey, in 2012, found that two-thirds of the respondents wanted the cent retained. That finding is open to question, though, since the survey was conducted by a Washington advocacy group, Americans for Common Cents, with close ties to the zinc industry. And zinc providers stand to lose contracts worth millions of dollars if pennies are discontinued.

Many of the respondents who said the Mint should continue making cents, even at a loss, probably haven’t put their money where their mouths are: Millions of Americans go out of their way to avoid using pennies when paying for purchases. And sentiment aside, harsh economic reality leaves no apparent alternative but to discontinue the cent and cut the government’s losses before they get any bigger.

President Obama has left no doubt where he stands. Asked by a reporter in February 2013 why the United States hasn’t followed the lead of many other nations and dropped the cent, the President responded: “Any time we’re spending money on something people don’t actually use, that’s an example of things we should probably change.”

The President was even more emphatic in a subsequent “Fireside Chat” with random Americans. Obama described the penny as “a good metaphor for some of the larger problems that we’ve got,” adding that the government has “problems getting rid of things that don’t work so that we can then invest in the things that do.” He put the onus squarely on Congress, which would have to pass a bill to authorize the cent’s elimination. “The penny,” he said, “is an example of something that I need legislation for.”

***

In January of this year, the Mint revealed that it has been conducting trial strikes of nickels made of copper-plated zinc – the same composition used in the cent since 1982. With cents, the copper plating is meant to create the illusion that the coins haven’t changed since the days when “red cents” were really “coppers” –  when, in reality, they’re now overwhelmingly zinc. But “red nickels” would look entirely different from the ones we know today, even if their design remained the same. In effect, they’d have the appearance of oversized cents.

It might take a while for people to get used to such coins. But that’s a minor concern. The overriding factor in tests and talks involving potential new nickels is economics, not aesthetics. Five-cent pieces made of copper-plated zinc would presumably be much cheaper to produce than current nickels – cheap enough to yield profits instead of losses. The Mint didn’t furnish an estimate of their cost, but with zinc cents costing 1.83 cents apiece, it seems safe to say that zinc nickels could be made for well under five cents each. At 4.06 grams, the test-strike nickels are roughly 1.6 times heavier than zinc cents. They weigh about 20 percent less than current nickels, which tip the scales at 5 grams.

If the tests are deemed successful, prospects will be good for saving the nickel. But the outlook for the cent is far more ominous. Deputy Mint Director Richard Peterson has reported that no alternative composition considered for the penny would bring its combined production and distribution costs below the break-even point of one cent.

It would be sad to see the penny go. But the prospect of slicing more than $50 million a year from the federal government’s budget would greatly ease any lingering grief – especially if the Mint could rescue the nickel from drowning in red ink and even make it a source of significant profit.

In its Economic Action Plan for 2012, the Canadian government announced that it would phase out the penny from Canada’s coinage system. The decision to do so was based on the excessive and rising cost of the coin’s production relative to its face value, the increasing accumulation of idle pennies in Canadian households, environment considerations and the significant handling costs the penny imposes on retailers, financial institutions and the country’s economy in general.

Canadians have shed few tears over the loss of their one-cent piece, which the Royal Canadian Mint stopped making in May 2012. They’ve drawn ample solace from their government’s estimate that the cent’s demise is saving Canadian taxpayers $11 million a year. And there’s no indication that prices of goods in Canada are consistently being rounded up, not down, to the nearest nickel. The government has furnished merchants with charts showing which way given prices should be rounded and is monitoring compliance. Beyond that, merchants value customers’ loyalty and wouldn’t want to jeopardize that by overcharging them. And, in any case, the amount of money involved wouldn’t be nearly enough to have a meaningful impact on the inflation rate.

***

“Mini-dollar” U.S. coins aren’t completely dead; they’re on life support. The Mint is continuing to make them for sale to collectors at a premium. But that isn’t what Congress had in mind back in 2005, when it authorized a series of small $1 coins – sized between the quarter and half dollar – honoring U.S. presidents in the order that they served. It wanted the coins to replace dollar bills in Americans’ pockets and purses and, in the process, to put healthy savings in the pocket of Uncle Sam.

A 2012 government study showed that Uncle Sam could realize savings totaling $4.4 billion over the next 30 years by weaning consumers away from dollar bills and getting them to use dollar coins. That’s because the coins – while somewhat more expensive to produce – would circulate far longer and require much less frequent replacement. That estimate, by the Government Accountability Office, averages out to about $150 million each year. But two things would have to happen for that kind of windfall to be achieved: The government would have to stop printing and issuing dollar bills, and the American people would have to accept and use dollar coins.

Congress and the U.S. Treasury have shown no appetite for halting the production of $1 bills, fearing an angry public backlash Thus, there’s no way to know whether consumers would use dollar coins if they had no other choice. But comparable coins have won wide acceptance in Britain, Australia, Canada and elsewhere since the 1980s following the withdrawal of equivalent paper money.

Regrettably, President Obama – who’s so right about the need to kill the cent – has come down on the wrong side of the dollar debate. In December 2011, almost at the midpoint of the presidential $1 coin series, the Obama Administration pulled the plug on dollar coins meant for circulation. In announcing the decision, Vice President Joe Biden noted that relatively few Americans were spending and accepting the coins and that more than a billion pieces were languishing in storage.

At first blush, these seem like valid reasons for scaling back the rest of the program, as well as a series of Native American $1 coins authorized by Congress at the same time as the presidential dollars. But given the likelihood that mini-dollar coins would have yielded substantial savings – and possibly even a windfall – if they had been given a fair chance, it seems short-sighted to throw in the towel so meekly. As numerous other nations have shown, governments truly committed to such changes can make them succeed if they’re willing to endure – and sometimes ignore – the initial public outcry that follows the removal of popular paper money.

Beyond production savings, getting dollar coins to circulate routinely would cut the considerable costs now being incurred for storing the billion-plus dollars already coined. At the same time, these now-dormant dollars would expedite the transition from paper dollars by serving as a ready-for-use coin supply.

Similar indirect savings would result from the cent’s elimination, since that would free up enormous production capacity. Despite many Americans’ indifference to the coin, pennies currently constitute 75 percent of the coinage struck by the Mint. If cents were killed, the workspace, equipment and labor now being used in their production could be diverted to other work that generated profits, not losses. Striking coins for foreign countries is one good possibility. A number of government mints, notably the British Royal Mint, have cultivated such business and thereby augmented their income.

***

The fight for dollar coins is far from over. Persuaded by the expected economic benefits, some members of Congress and government officials continue to back the idea. But a new approach would probably be needed, since the presidential program is scheduled to end by 2016.

One of the more frivolous arguments for retaining paper dollars and rejecting dollar coins is that this would threaten the livelihood of the nation’s exotic dancers, who derive much of their income from dollar bills tucked into their skimpy costumes by grateful male patrons.

When asked about this by a reporter, Arizona Sen. John McCain, a strong advocate of $1 coins, had a ready response. “Then I hope they could obtain larger denominations,” he wryly replied.

Opponents of dollar coins question whether the estimates of big savings are realistic. Supporters of the status quo also ask whether killing the cent, and perhaps the nickel as well, would save enough money to justify such an assault on a treasured tradition.

But trimming the federal budget by $50 million a year by eliminating cents is surely not a penny-ante matter. Converting the five-cent piece from a loss leader to a profit center can’t be dismissed as nickel-and-dime economy. And an extra $150 million every year would look very nice on the nation’s balance sheet if estimates prove correct on the potential savings from dollar coins – assuming that the government were to do an about face, resume full-scale production of such coins and stop printing dollar bills.

Think how many more hungry, homebound Americans could be served by the Meals-on-Wheels program, which recently was forced to cut back operations because its federal subsidy was reduced. Or how many other worthy – and much needed – projects could be financed. President Dave would have welcomed all this, and if he was in the White House – the real one – today, he’d be fighting tooth and nail for the money-saving coin and currency changes that would help make these programs possible.

The future of U.S. coinage will weigh very heavily on Mint officials’ minds during the coming months. Under legislation passed in 2010, the Mint must submit a report every two years updating Congress on alternative compositions that might be considered for use in the nation’s coins and providing recommendations based on its research. The next such report is due in mid-December of this year.

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Gerald Key

How many times must we go over the fault line on the dollar coin. Merchants don’t circulate them because they do not have a place for them in their registers! And a lot of people are like me, keep filling a jug with coins because of carrying them around becomes a burden. Another coin to take a lightweight bill out of my wallet doesn’t make sense. Look for a cheaper alloy to mint some of our coins out of to save money.

Adam F. Kohler

The reason the public does not use $1 dollar coins is because retailers won’t eliminate the penny or dime from their cashers drawer. When either is no longer minted and the supply begins to dwindle, you might see an increase and acceptance of the coin. I used to work in retail and my store manager told me to stop getting dimes from the bank because they are too difficult to count.. Recently I gave a $1 coin to a cashier who immediate put the bronze colored coin under the coin drawer and said I hope I don’t forget to count this later.

Dragonheart

Instead of screwing with our money how about eliminating all foreign aid, just for a start. Then get the US out of the UN. Want more saving go back to our Constitution and stop giving away taxpayers money to every “good cause” that these idiots can come up with. It is not and was never was the intention of our founding fathers for the Federal Government to provide health, education and welfare to the people.

McGannahan Skyjellyfetti

Stop giving apartheid Israel 8 and a half million dollars every day.

peter

I have not seen any comments on the Canadian plastic $5 bill. I got one a couple of weeks ago and thought it was a good idea. They should last a lot longer than our paper bills. Perhaps that would be a solution to our $1 bill.

Jane Paire

People don’t like the dollar coin because it does not have “In God We Trust” on it, stamp it in all those extra coins and people may be more accepting. Also, I’m old enough to remember that we used to have a coin that was worth less than a cent. I don’t remember the denomination or the name but it was made of some very light metal with a hole in the center so it was very light in weight, something like that could be used for the penny or the nickel.

Michael

Our coinage is junk and it seems this article is in favor of making it even more worthless. Remember when our coinage had intrinsic value? I do. Just another sign of the times.

Ivan Berry

The dollar is already fiat. It ain’t worth the paper it’s printed upon. Once a dollar could pay for a day’s labor. Candy was called penny candy. In 1913 we created the Federal Reserve. In 1960 you could buy a gallon of gas for two silver dimes. You still can. The dollar has lost so much purchasing power that it is close to worth what a nickel was like back then. If the penny is only worth about a 30th or so of a 1960 penny, what degree of inflation could be caused with rounding? Oh, yeh you can say my numbers are not exact, but they are somewhere in the ball park. I just don’t have the figures handy. Besides, different groups vary the numbers, but let us say for illustration that the Dollar is the new nickle. What would that make the nickel? I know in the early… Read more »

Leigh

Follow Canada’s lead – the US needs to get rid of the US penny, replace the US paper dollar bill with a dollar coin, and replace the US paper two dollar bill with a two dollar coin.
Also from Canada:
Payments made by other than cash – that is – charged, or paid by check, are not rounded at all.
Cash payments are rounded up or down according to the normal method for rounding.
Some businesses even round everything down.

Ron

Our out of control federal government is spending over $200 Million every hour of every day.

Tackle that.

Disruptive Element

They have tried to foist the dollar coin on us-twice now. They can’t get rid of them. Think of the millions all that rounding will provide to someone after eliminating the penny. My dollar may be in steady decline but it feels better to have a dollar bill rather than carrying around coins.

Brad

Obama is wrong about what the problem is.When you “save” the government money,all they do is find some wasteful pork project to fund.In essence as long as we allow the government to operate irresponsibly,there will be no “savings”.Voters need to wise up if we are going to save this country.It may be too laye already.

George

We have a lot bigger financial woes than pennies and nickels. Let’s not repeat the problem, trying to save a penny while spending a buck, or the distraction of pennies while trillions are wasted.

As to the article at hand. Compromise, start now with cheaper metals for nickels, and mint pennies every other year…or some such alternative. I still value a penny, and will stoop to pick one up.

Larry Buller

So it costs a bit to make a dollar bill.

How about all the cost to replace jeans who’s pockets have failed because of the extra weight of dollar coins.

My wife and I go to the movies, pay $15 senior rate, give them a 20 and get 5 dollar coins back. I get popcorn and a soda, It cost $11 so I hand over another 20 and get a fiver and another 4 dollar coins. that’s 9 dollar coins for this one transaction alone.

It is the governments duty to make the currency. It is one of the few legitimate costs of doing business. Keep the dollar bill. I would rather pay a few million for the costs of currency than the billions wasted on stimulus programs and the like.

murray decker

OUR COINS ALREADY LOOK AND FEEL LIKE GARBAGE,OUR PAPER MONEY ALSO IS BACKED BY NOTHING.
IF OUR GOVERNMENT REPRESENTATIVES,WOULD STOP FEEDING THEIR OWN POCKETS,THIS WOULD NOT
BE AN ISSUE.CUT THE PORK,AND OUR MONEY WOULD MEAN SOMETHING.
WE ARE NOT LIKE OTHER GOVERNMENTS,WE ARE THE USA.
YOU ARE TALKING MILLIONS ,AND BILLIONS ARE WASTED AND NOTHING IS BEING DONE.
WHEN I SERVED IN KOREA ,I WAS PAID IN MONOPOLY MONEY,IS THAT WHERE WE ARE HEADED NEXT.

BobL.

The Mint is not supposed to make a “profit” from minting and distributing our money, if anything, it should be a non-profit operation since we support it through our taxes. Who is making a profit is the private banking cartel Federal Reserve “Corporation”, which charges us a fee for every dollar it creates. Our coinage, even the nickle is worth less than the metals they are made of. Nickles are still made of 75% copper and 25% nickle and comes closest to being worth face value. Since 1965, the dime and quarter, which formerly contained silver are all made of a thin copper-nickle alloy outer layer bonded to a copper core. The poor penny is next to worthless since it’s make-up was changed from 95% copper before 1982 to 97.5% zinc since 1982. If our dollar continues to be devalued through massive “printing” of more fiat money, the dollar will… Read more »

DavidE

So – no one is going to complain when your bill is $1.01 and you are going to pay a penalty of 4% to round it up to $1.05. Make them out of stainless steel – they’ll last longer. if you paid with a debit or credit card – would it still round it up? If a person still has the pennies and the nickels – would that get rounded up? would the government recall ALL pennies and make them valueless after say a 90 day period? What would happen to those coins already in circulation? You don’t think that will happen with government and taxes? No one wants a dollar coin – they didn’t want them when the Susan B. Anthony or Sacajawea came out. The problem with smaller is – there has to be a differentiation between the coins already in circulation – which was the original failure… Read more »

CAPT Mike

We should follow the lead of Canada and Europe and get rid of paper money in 1 and 2 dollar bills, keeping only $5 on up. Until we do that, full acceptance of $1 and $2 coins will not come. Claims that Americans do not like like or will not use $1 coins are meaningless unless we also retire the $1 and $2 bills. I think getting rid of pennies will also provide the additional cost savings to make the mint profitable. Also, I wouldn’t mind seeing the return of $500 and $1000 dollar bills, which were supposedly retired due to drug cartels.

Roland

The dollar coins have several benefits over dollar bills. They are easier than dollar bills to pay the fare on buses, for example, and for vending machines. The current U.S. dollar coins are similar in size to the larger value coins used in other countries, for example the 2 Euro coin. The smallest paper money denomination is 5 Euro, and several countries have dropped the 1 cent coin. It is possible. The Mint could help in a small way by allowing purchase for face value of the dollar coins minted through 2011. If they have more than a billion dollars of these coins stored, why not allow purchase for a dollar a coin? The Presidential coins issued from 2012 through now sell for a 10% premium when you buy a bag of 100 or a box of 250, but there is no reason to charge this extra amount for the… Read more »

Tom L.

I think trading in the paper dollar for a coin is a very wise idea. Our neighbors up north have absolutely no problems with it!!….They’re even smart enough to have the ‘TWO-NIE’ for $2.

And by the way, the USA could learn HUGE lessons from Canada when it comes to financial thriftiness. Do you know that in Canada you cannot pay your mortgage past the 1st day of the month without incurring a late fee?! How’s that for fiscal awareness?!?!

We can learn LOTS of lessons from Canada in the banking industry. Yet, Mr. Nobama refuses to take wise and prudent advice from our smarter, northern neighbors. He’d rather kill the possibility of hundreds (maybe, thousands) of new jobs by snubbing the Keystone Pipeline.

How about we trade Mr. Nobama for Justin Beiber? – At least we would have more money in our pockets.