Americans for Common Cents (ACC) conducts research and provides information to Congress and the Executive Branch on the value and benefits of the penny.

December 4, 2018

Lombra Testimony Before the Senate Banking Committee

Statement of
Raymond E. Lombra
Professor of Economics
Pennsylvania State University
Americans for Common Cents
Before the
Senate Banking Committee
June 20, 1990
1:30 P.M.
Mr. Chairman and Members of the Committee:

I am pleased to be here today on behalf of the Americans for Common Cents to discuss some aspects of proposed legislation, such as S. 814, which would significantly change the U.S. coinage system. In particular, I would like to review those aspects of an April 1990 Gallup survey that bear on the questions before you today and summarize a study I have completed on the economic effects of eliminating the penny and instituting a price rounding scheme for cash transactions.

The conclusions drawn from this review are easily summarized:

    • There is little public demand for or interest in a new dollar coin.

Eliminating the penny would impose a significant and regressive rounding “tax” on the American public. The public appears to recognize this possibility and strongly opposes elimination of the penny.

The effect of the rounding “tax” on prices would in turn increase government outlays indexed (formally or informally) to prices by at least $1.5 billion over a five year period.

Public Attitudes Toward the Creation of a New One Dollar Coin

The Americans for Common Cents does not have a formal position on the possible introduction of a dollar coin. However, in response to a request by the staff of the Senate Banking Committee, questions about the dollar coin were included in the April 1990 Gallup survey designed to measure public attitudes towards various reforms of the coinage system. The survey found that only about one-third of the adult public would favor legislation that would call for the creation of a new one dollar coin and less than half of those respondents favoring the new coin would approve of abolishing the dollar bill. Taken together, and expressed as a portion of the entire group surveyed, these figures mean that only 15% would favor both the creation of a new dollar coin and abolishing the one dollar bill.

No Logical Linkage Between Penny and Dollar Coin

In the various pieces of legislation that have been produced to date, it is assumed, at least implicitly, that there is some type of linkage between the possible introduction of a dollar coin and the elimination of the penny. Simply put, we see no logical connection between these two initiatives and believe the costs and benefits of each proposal should be evaluated separately. This contention is strongly supported by the recent Canadian experience wherein a dollar coin was introduced in 1987 and, at the same time, a conscious decision was made to keep the Canadian penny.

The linkage we would like to emphasize is that which appears to exist between various aspects of the cash transaction process and the need for one cent coins. Along these lines, let me summarize the results of a study I have completed of the economic effects associated with eliminating the penny and introducing a price rounding scheme for cash transactions.

The Major Economic Effects Associated with Eliminating the Penny

    • A careful statistical analysis based on the information available on the distribution of prices in the United States strongly suggests that, on balance, prices will be rounded up.

This rounding “tax” will have a significant adverse effect on consumers. A conservative estimate places the tax in the $600 million per year range.

Federal Reserve surveys show that those with incomes under $10,000, non-whites 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 the rounding “tax” will be regressive, affecting the poor and other disadvantaged groups disproportionately.

Although the direct inflationary impact of eliminating the penny and rounding prices is likely to be small, the effect in dollar terms on Federal government outlays linked to the Consumer Price Index (such as Social Security benefits, government pensions, etc.) could cumulate to a considerable sum. Utilizing the conservative price rounding estimate mentioned above and Congressional Budget Office projections, it appears that elimination of the penny could raise Federal government outlays by about $1.5 billion by 1995.

The major alleged benefit associated with eliminating the penny- namely recovering the productivity lost when retail clerks make change- is an illusion. Simply put, cash register clerks would not suddenly be free to stock shelves of clean stores if the penny were no longer in circulation. Moreover, rounding creates additional complexity at the cash register- that is, the cash or charge and round or not round character of each transaction – that will, if anything, increase the time associated with settling transactions, thereby aggravating any productivity loss rather than reducing it.

The Government’s profit from penny production- that is seigniorage- will continue for the foreseeable future. More specifically, the cost of producing pennies has ranged from 0.6 – 0.7 of a cent in recent years and these costs have increased by far less than the overall inflation rate. These facts, along with the desire of the President and the Federal Reserve to lower the inflation rate over the decade of the 1990s, suggests it is unlikely that the production costs of the penny will exceed one cent anytime soon.

Gallup Results Show Public Concern

    • More than 60% of those adults surveyed said they would oppose legislation that would call for discontinuation of the penny and price rounding.

About three-quarters of those surveyed were concerned that merchants would increase their prices.

Perhaps reflecting the expected regressive effect of the rounding “tax,” opposition to the legislation was proportionately larger among those adults surveyed with annual incomes under $30,000.

Concluding Thoughts I cannot identify any net economic benefits associated with the proposed legislation regarding the penny. Moreover, the Government’s experience with the metric system, the nine digit zip code, the bicentennial $2 bill and the Anthony dollar coin, along with the recent Gallup survey results, suggests to me that the public must be convinced that there is a pressing need to change anything that has become embroidered into the fabric of society. Simply put, the case for eliminating the penny is very weak. We concur with the General Accounting Office recommendation that the cent be retained. We are pleased to submit the economic study and the poll for the record.