- Category: Penny Policy
Domestic and International Monetary Policy Subcommittee of the Banking and Financial Services Committee -- U.S. House of Representatives, July 16, 1996
Mr. Chairman and Members of the Committee, my name is Mark W. Weller and I am Executive Director of Americans for Common Cents. I am pleased to submit testimony today concerning the one-cent coin and its importance to the American economy and culture.
By way of background, Americans for Common Cents was established in 1990 to conduct research and educate Congress on the need to retain the penny. Our organization is broad-based, comprised and endorsed by many of the nation's leading coin and numismatic organizations, in addition to companies involved in the mining of metals and the manufacturing of the penny.
My message this morning is a simple one. As the Committee examines coinage changes, you should proceed cautiously. Our current involvement with the penny has led us to four conclusions which I want to share with you. The Subcommittee should not initiate proposals for coinage alteration because:
- Public Support for the Penny is High. Today we are releasing a poll which shows that 73 percent of Americans favor keeping the penny in circulation. This poll, conducted last week by Opinion Research of Princeton, NJ, confirms a September 1995 poll which found 76 percent of Americans support the penny.
- Penny Elimination Will Adversely Affect Consumers. Removal of the penny will create the aggravation and confusion of rounding in each cash transaction. People will perceive that they are being cheated since there is no guarantee that rounding transactions to the nearest nickel will "even out" for every individual. Removal of the penny will inevitably raise consumer prices. The effect of this "rounding tax" in dollar terms on the government and private sector could be permanent and significant, initially amounting to over $3 billion over five years.
- The Penny Produces a Profit for the Treasury. The penny costs only .7 cents to make, so the Treasury makes .3 cents on each penny minted according to the most recent information available from the U.S. Mint. This profit (known as seignorage) amounts to over $40 million each year. Penny production is a model for reinventing government since private sector companies manufacture a finished blank and the Mint simply stamps the coin. Government revenue generated by the penny and private sector involvement will continue for the foreseeable future.
- There is No Compelling Need for Coin Alteration. Faith in the strength of the economy and the nation is tied to perceptions about the currency system, and public acceptance is an important criterion for evaluating proposed currency and coinage changes. Unless Americans believe there is a problem with our currency and coin system, the changes will be rejected. The penny has become embroidered into the social and commercial fabric of our society. Any benefits associated with price rounding and the cessation of penny production are outweighed by the public policy and economic costs.
Taken together, the findings outlined above, and discussed in more detail below, suggest that the adverse public policy and economic effects associated with elimination of the penny are considerable. We strongly disagree that the United States currency system needs to be altered. Quite frankly, we believe any attempt to change our coinage system will meet strong public resistance and fail.
PUBLIC SUPPORT FOR THE PENNY IS HIGH
Public support for the penny is strong and increasing. As noted, a July 16, 1996, poll conducted by Opinion Research Corporation of Princeton, New Jersey, found that 73 percent of American adults favor keeping the penny in circulation. According to a similar poll in September 1995, 76 percent of Americans support the penny.
We are aware that the General Accounting Office has suggested that support for the penny, while still strong, is declining. The GAO findings from the University of Maryland poll are not consistent with our public opinion polling experience of the last six years.
A 1992 CNN/Time survey conducted by Yankelovich found 74 percent of Americans support keeping the penny in circulation. An earlier poll, in 1990, conducted by Gallup found 62 percent of Americans support the penny.
Thus, polls conducted by Americans for Common Cents and independent polls such as those done by USA Today and CNN/Time have never shown the level of public support for the penny below 60 percent. Our new national poll released today confirms the high level of support for the penny and suggests that the University of Maryland findings, especially as they relate to American's support of price rounding, are an anomaly.
- Americans Not Only Support the Penny, But Also Feel Strongly About Their Opinion. The Gallup organization asked those surveyed how strongly they felt about their opinion. Those who support the penny are more likely than respondents who favor discontinuation to say they feel strongly about the issue. Approximately two-thirds (68%) of those who support the penny say they feel strongly about it and 27 percent of this group feel not too strongly. This compares to only 41 percent who favor discontinuation who say they feel strongly about their opinion and 56 percent of those opposed, not too strongly.
- Support for the Penny is Higher Among Lower Income Groups. According to the Gallup survey, almost 90 percent of those with an annual income of $15,000 or less favor retention of the penny. Support for the coin also is highest among the elderly and those aged 18 to 24, often groups with incomes lower than the population at large. The Opinion Research poll from September 1995 showed support for the penny above 70 percent for all income groups. However, support for the one-cent coin rises to 88 percent for those earning less than $15,000 and rises to 80 percent for those earning $15,000 to $25,000. These demographic findings, which have been similar in all our polling, should come as no surprise.
As casual thought might suggest, the poor and the elderly make more small cash purchases and "count their pennies." Elimination of the penny would fall disproportionately on those groups and they seem to know it. Unfortunately, the available data suggests that those least able to shoulder the effects of penny elimination will have to bear a disproportionate share of the overall effect.
EFFECT ON CONSUMER
- In Practice, Price Rounding Cannot Be Done Fairly. If there is one principal that economists generally agree on it is that the behavior of firms (employment, production, advertising, pricing decisions) is guided by a straight forward objective -- the desire to maximize profits. There is no obvious incentive for firms to price in a way that will lead to rounding down. In fact, Raymond Lombra, Ph.D., Professor of Economics at Penn State University, told the House Banking Committee in 1990 that we can be certain pricing schemes will be designed to take advantage of single item cash purchases in a way that leads to net rounding up. Such considerations suggest that there will be no tendency for the rounding "tax" to disappear over time.
- Rounding Will Cause Confusion in Making Purchases. Approximately six in ten Americans (59%) think eliminating the penny would cause confusion when purchasing items, according to Gallup. Sixty-one percent of seniors share this view. The Opinion Research poll released today demonstrates that 79 percent are very concerned or somewhat concerned about rounding and price increases. It is difficult to understand the GAO finding that Americans prefer final purchases be rounded to the nearest nickel. The Gallup and Opinion Research Corporation polling demonstrate that Americans strongly object to rounding. Imagine the inconvenience to shoppers at the cash register. Consumers, expecting merchants to round down rather than up, might also feel cheated.
- Rounding Will Lead to Price Increases. Proposals to move to the nickel as the lowest denomination coin create public anxiety about high inflation. Over three-quarters of Americans (77%) are concerned merchants would raise prices without the penny. And they're probably right. The Lombra analysis finds that rounding cash sales up or down to the nearest nickel would cost consumers over $600 million annually. Lombra made the most conservative assumption possible based on a net of only one cent of rounding per day for adults 18 years of age and older who, based on Federal Reserve surveys, make nearly $500 worth of cash transactions per month. His estimate does not include transactions by the population below 18 -- a group that makes even a larger proportion of expenditures in cash.
The claim that rounding will have no noticeable effect on the typical consumer is predicated on the notion that there is an equal 10 percent probability of purchase prices ending in any particular digit. In fact, what little evidence there is suggests the equal probability assumption is false. Some retail food pricing studies and restaurant studies demonstrate that prices ending in odd digits are much more common than those ending in even digits, and that prices ending in "9" are most often observed.
Proponents of penny elimination suggest that time currently is wasted handling pennies when making change. The not so subtle assumption is that time would be saved if the penny were removed from circulation. However, the time it takes to make a transaction may increase, not decrease, without the penny.
Every cash register operator, bank teller and change-maker would need to be trained to explain the intricacies of rounding to consumers. Following employee training, the actual implementation of a rounding system and adjusting to each individual transaction would be time consuming and unavoidable. Rounding will have a large economic toll requiring public education programs, retraining of employees, and reprogramming computer cash registers and other automated equipment.
The U.S. economy is the largest and most diverse in the world. Billions of transactions are conducted daily, and 95 percent of all transactions less than $10 are handled in cash. Altering the coinage system would delay consumer transactions and would make Americans feel they are being charged higher prices.
Although rounding might only have a minimal effect on the Consumer Price Index (CPI), in dollar terms even a seemingly small effect could mount over time to a considerable sum given that virtually all government outlays (ie., social security and welfare benefits) and many private sector costs (ie., wages) are indexed to the CPI. Lombra calculated that the effect in dollar terms on the government and private sector could be significant, perhaps totalling over $3 billion after five years.
Some proponents of penny elimination may say the coin's demise would not even be noticed, but most Americans disagree and the Lombra economic analysis justifies this skepticism. Focus groups organized by the General Accounting Office for their 1990 report found citizens concerned that merchants might increase their prices in order to compensate for any losses from a rounding system. While those on fixed incomes are understandably worried about rising prices, all adults share concerns for financial security.
Increased prices due to rounding ultimately would fall disproportionately on those least able to afford it, the poor and the elderly, because they make more small cash purchases. Federal Reserve surveys confirm that those with incomes under $10,000, nonwhites and Hispanics, and those adults with less than 12 years of education pay for more than half of their total purchases in cash. Since only cash transactions will be subject to rounding, it follows that cessation of penny production would be regressive in that the poor will bear a larger share of the aggregate burden than will other segments of society.
GOVERNMENT PROFITS FROM THE PENNY
The importance of preserving the penny goes well beyond public acceptance and the problems attendant with price rounding. Of significance, the penny makes a profit for the government. It only costs .7 cents to make; consequently, the U.S. Mint receives a .3 cent positive "seignorage" on each penny produced. This reduces funds the government must borrow to finance the deficit. In the last 13 years, these profits from the penny have earned the Treasury $450 million.
We have not had time to review the GAO analysis release this morning suggesting lower seignorage on the penny. Such a finding runs counter to years of Mint data on the cost of producing all denominations of coins.
However, it is important to remember that the production of the one-cent coin serves as a model for other government agencies seeking to reduce costs and operate more like the private sector. Private sector companies conduct all phases of the manufacturing process and produce a finished blank, which is shipped to Denver or Philadelphia for minting. This private sector involvement has kept production costs low.
Other countries have maintained production of lower denomination coins even when the cost of production exceeded the face value of the coin. Equivalent coins produced by the nations of Britain, Canada and Japan are produced at a cost that exceeds their face value, yet they remain part of the coinage system because they meet commercial need and consumer preference. Many of our coalition members endeavor to ensure that the cost of producing the penny for the Mint remains low.
NO COMPELLING REASON TO CHANGE OUR COINAGE SYSTEM
The current coinage mix should be maintained as long as it meets individual consumer preferences. There is no public outcry against the penny. There are occasional newspaper articles, but these are largely the result of efforts of one organization composed of those few who hope to benefit from the elimination of the coin.
In 1990, when asked by the House Banking Committee to conduct a similar study, the GAO found there was "no compelling reason to abolish the penny." The 1990 GAO Report was in response to a bill to eliminate the penny and implement a system of rounding prices to the nearest nickel.
If anything, the reasons to retain the penny are stronger now than they were in 1990. We have a clearer idea of the level of public support for the one-cent coin. The Lombra study -- using even a very conservative methodology -- identifies a high economic cost with eliminating penny production.
One of the alleged benefits frequently mentioned in conjunction with elimination of the penny is that retail firms lose worker productivity in conjunction with handling pennies when making change. The rationale is that cessation of the penny would improve the efficiency of the payments process by lowering the costs of making change. Conceptually, we reject the basic idea that workers are paid according to their productivity. It takes leaps in logic to link time "wasted" with pennies to a dollar equivalent productivity loss and then intuitively suggest the time wasted could have been used to clean, restock shelves, serve other customers, and so forth.
The more troubling problem arises with the assumption that removing the penny from circulation will eliminate the productivity loss. Such conjecture is illusory. In fact, there are many reasons to believe that the net time associated with consummating transactions will, if anything, increase under price rounding rather than decrease.
Every cash register operator, bank teller and change-maker would need to be trained to explain the intricacies of rounding to consumers. Following employee training, the actual implementation of a rounding system and adjusting to each individual transaction would be time consuming and unavoidable.
The Government's experience with the metric system, and the Anthony dollar suggests that the public must be convinced that there is a pressing need to change anything which has become embroidered into the social and commercial fabric of society. Despite careful examination of the various arguments supporting the elimination of the penny, we cannot identify any benefits associated with price rounding and the cessation of penny production.
Polling shows an overwhelming number of Americans reject the idea of currency alterations and believe we need to keep the penny. The level of support for the coin has increased over time based on our coalition's polling and other analyses by independent polling firms.
It produces a profit for the government, and its elimination would damage the economy. Countless citizens would be penalized by the resulting inflation and feel cheated by the government. Moreover, a system of rounding would be regressive and hurt those least able to afford it because they make more small cash purchases.
Several other considerations argue against unnecessary tinkering with the coinage system. Chief among them is the harmful effect removal of the penny will have on charitable causes. Penny drives run by charities gladly accept pennies. This exchange proves their value as money. Many charitable organizations such as the Ronald McDonald House, Muscular Dystrophy Association, and Salvation Army among others rely heavily on donations from the collection of pennies.
While anti-penny groups argue our coinage system is outdated, the public at large believes the penny is part of the nation's history and culture and should stay. The 1990 Gallup poll reveals that virtually everyone (92%) agrees to some extent that the penny is a venerated institution in this country. The penny was first authorized to be minted by the government in 1787, with Benjamin Franklin suggesting its original design. Paul Revere, a noted blacksmith, supplied some of the copper for the one cent coins minted during the 1790's. Over two centuries, the penny's design has symbolized the spirit of the nation, from Liberty to Lincoln.
Why would the Banking Committee want to add a $3 billion aggregate cost on consumers over 5 years? Why would the Banking Committee seek to take an action likely to be regressive, affecting the poor, elderly and disadvantaged groups disproportionately? Why would the Banking Committee seek to remove a vital source of revenue from charitable groups which rely on the penny for contributions? We feel these are legitimate questions for your Subcommittee to ask before government resources and creditability are devoted to an initiative that has little likelihood of succeeding and, more importantly, will cause considerable adverse effects.