[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF MONEY: DOLLARS AND SENSE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY
AND TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
NOVEMBER 29, 2012
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-162
U.S. GOVERNMENT PRINTING OFFICE
79-692 WASHINGTON : 2012
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
KEVIN McCARTHY, California BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico DAVID SCOTT, Georgia
BILL POSEY, Florida AL GREEN, Texas
MICHAEL G. FITZPATRICK, EMANUEL CLEAVER, Missouri
Pennsylvania GWEN MOORE, Wisconsin
LYNN A. WESTMORELAND, Georgia KEITH ELLISON, Minnesota
BLAINE LUETKEMEYER, Missouri ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan JOE DONNELLY, Indiana
SEAN P. DUFFY, Wisconsin ANDRE CARSON, Indiana
NAN A. S. HAYWORTH, New York JAMES A. HIMES, Connecticut
JAMES B. RENACCI, Ohio GARY C. PETERS, Michigan
ROBERT HURT, Virginia JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
FRANK C. GUINTA, New Hampshire
James H. Clinger, Staff Director and Chief Counsel
Subcommittee on Domestic Monetary Policy and Technology
RON PAUL, Texas, Chairman
WALTER B. JONES, North Carolina, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
FRANK D. LUCAS, Oklahoma CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri AL GREEN, Texas
BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
DAVID SCHWEIKERT, Arizona
C O N T E N T S
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Page
Hearing held on:
November 29, 2012............................................ 1
Appendix:
November 29, 2012............................................ 35
WITNESSES
Thursday, November 29, 2012
Diehl, Hon. Philip N., former Director, United States Mint....... 22
Lepine, Beverley, Chief Operating Officer, Royal Canadian Mint... 5
Miller, James C. III, former Director, Office of Management and
Budget......................................................... 20
Peterson, Richard A., Acting Director, United States Mint........ 2
St. James, Lorelei, Director, Physical Infrastructure Team, U.S.
Government Accountability Office............................... 3
Weller, Mark, Executive Director, Americans for Common Cents..... 23
APPENDIX
Prepared statements:
Diehl, Hon. Philip N......................................... 36
Lepine, Beverley............................................. 41
Miller, James C. III......................................... 49
Peterson, Richard A.......................................... 52
St. James, Lorelei........................................... 58
Weller, Mark................................................. 71
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Written statement of Thomas A. Schatz, President, Citizens
Against Government Waste................................... 80
Schweikert, Hon. David:
Written responses to questions submitted to Lorelei St. James 85
THE FUTURE OF MONEY:
DOLLARS AND SENSE
----------
Thursday, November 29, 2012
U.S. House of Representatives,
Subcommittee on Domestic Monetary
Policy and Technology,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2220, Rayburn House Office Building, Hon. David Schweikert
[member of the subcommittee] presiding.
Members present: Representatives Schweikert, Leutkemeyer,
Huizenga; Clay, Maloney, and Green.
Also present: Representative Stivers.
Mr. Schweikert [presiding]. This hearing will come to
order. I ask for unanimous consent that Mr. Stivers of Ohio, as
a member of the Financial Services Committee, be permitted to
sit with members of the Subcommittee on Domestic Monetary
Policy and Technology for the purposes of delivering a
statement, hearing testimony, and questioning witnesses today.
Hearing no objection, it is so ordered.
We have an agreement already of a limitation of 10 minutes
on each side for opening statements. Without objection, the
Members' opening statements will be made a part of the record.
Let me just start with some opening comments, because in
many ways I am much more interested in hearing your comments,
some education for us, than hearing me go through a 5-minute
hyperbole.
This is one of those issues that on the face should be
almost blatantly simple. Out of the things we deal with here in
Washington, trying to find a way to save money for this country
shouldn't be political theater. I am, in many ways, on a
personal level, almost heartbroken. I accept that we have
industries out there that make their living making paper for
currency, people who have sort of unique sole source contracts
and they use the political process to defend those. But to
engage in some of the levels of political theater have bordered
on just absurd. I really want this to be one of those where
let's deal with the truth, let's deal with the math. What was
it--the 2012 GAO study had $4.4 billion savings over 30 years.
And if we actually take a look at what happened in Canada, they
blew past their projections of savings. As both of us even on a
bipartisan basis are trying to find ways to keep this
government marginally solvent, this is maybe just one of those
little grains of sand that we need to step up and embrace if it
drives us in the right direction.
I now recognize Mr. Clay for an opening statement.
Mr. Clay. Thank you so much, Chairman Schweikert. Let me
also thank you for conducting this hearing which is entitled,
``The Future of Money.'' This hearing will look into the cost
of replacing the dollar bill with a $1 coin, which I am looking
forward to hearing the testimony on. It is always good to have
you here, but I also wanted to mention the current chairman of
this subcommittee, Ron Paul, and I wanted to thank him for his
long-term service to this Nation. And of course, this is one of
the key issues in which he has always been interested.
Hopefully, I will get to see him before we have finished our
work here in the Congress.
I will stop there so that we can take testimony, and again,
thank you for conducting the hearing.
Mr. Schweikert. Mr. Clay, you actually--maybe that is my
failing--for all of you who have never had the chance to really
get to know Congressman Paul, he truly is one of the nicest
individuals you can ever make acquaintance of. I was a little
nervous when they first put me on this subcommittee, but it
turned out to be one of my great joys.
I know Congressman Stivers is on his way up.
Do we break a little bit of protocol, let Mr. Peterson
start, and then maybe we will have another opening statement?
Okay. We are going to play this somewhat on the fly.
Mr. Peterson, you are recognized for 5 minutes for a
summary of your testimony.
STATEMENT OF RICHARD A. PETERSON, ACTING DIRECTOR, UNITED
STATES MINT
Mr. Peterson. Good afternoon, Mr. Chairman, Ranking Member
Clay, and members of the subcommittee. I am pleased to testify
this afternoon on behalf of the United States Mint and its
vibrant team of 1,800 men and women located in 6 facilities
across the Nation. I especially look forward to the discussion
about the production of both $1 coins and $1 notes, as well as
the metal composition of our circulating coins.
First, with regard to the ongoing production of dollar
coins and Federal Reserve $1 notes simultaneously, I want to
stress that the United States Mint continuously looks for ways
to manufacture efficiently without compromising quality. I also
want to stress that we have fulfilled our statutory requirement
to aggressively promote the use of $1 coins.
However, in spite of our thorough and creative efforts, the
Federal Reserve Bank still had significant inventories of
dollar coins in 2011, and as a result, production of the dollar
coins for circulation was suspended last December. We still
offer $1 coins, however, through several numismatic products.
Even with the reduction in seigniorage from the suspension
of Presidential $1 coins, we believe that we will continue to
realize positive seigniorage for the circulating program
overall since we expect production of the one-quarter dollar
coin to continue to rebound in Fiscal Year 2013.
On the issue of the metallic composition of our circulating
coins, the Mint made significant progress this year on a
research and development program to examine possible metallic
alternatives for our Nation's coins. To do so, we established
and staffed a separate and secure research and development
laboratory within the United States Mint at Philadelphia.
At this point, what I can say is that we have conducted two
sets of trial strikes on a variety of metallic compositions and
evaluated them for such things as hardness, ductility,
corrosion, wear resistance, electromagnetic signature, the
availability of raw materials, and, of course, cost.
In December, the Mint will provide its first biennial
report to Congress under the provisions of the Coin
Modernization Oversight and Continuity Act of 2010. This report
will provide the results of our research and development
efforts over the last 18 months.
We recognize that there are many stakeholders' challenges
and other issues associated with adopting alternative metals,
and we will continue to engage these parties throughout the
process.
Mr. Chairman, this concludes my oral testimony. My entire
written statement has been submitted for the record. I am happy
to answer your questions or questions of other members of the
subcommittee.
Thank you very much.
[The prepared statement of Acting Director Peterson can be
found on page 52 of the appendix.]
Mr. Schweikert. Thank you, Mr. Peterson.
Ms. St. James?
STATEMENT OF LORELEI ST. JAMES, DIRECTOR, PHYSICAL
INFRASTRUCTURE TEAM, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Ms. St. James. Mr. Schweikert, Ranking Member Clay, and
members of the subcommittee, I am pleased to be here today as
you examine the potential savings from replacing the $1 note
with the $1 coin. GAO has reported 6 times over the last 22
years that this replacement would provide millions of dollars
in net financial benefits to the government every year.
Today, I would like to share with you our latest findings,
experiences from other countries that have gone through such
replacements, and public and private sector considerations in
moving forward if the dollar note is replaced with the dollar
coin.
This year, we reported that transitioning to the dollar
coin would potentially offer $4.4 billion in net benefits to
the government over 30 years. This amount consists solely of
increased seigniorage, and not lower production costs, as you
might expect. Seigniorage is the financial gain to the Federal
Government when it issues notes or coins because both forms of
currency usually cost less to produce than their face value.
This financial transfer from the public to the government
reduces the government's need to raise revenue through
borrowing. With less borrowing, the government pays less in
interest, hence the financial benefit.
Before I discuss the experiences of other countries, I want
to mention two items that are important to know about our
estimates. First, our estimates are based on several
assumptions, and when assumptions are changed, the estimates
change.
Second, we assume that it would take 1\1/2\ coins to
replace each note. This ratio has the largest impact on
determining the net financial benefits to the government.
That said, let me discuss the experiences of other
countries. Over the last 48 years, many countries have replaced
notes with coins to save money. For example, Canada replaced
its $1 note and $2 note with coins in 1987 and 1996 and
reported saving millions of dollars because of seigniorage and
lower coin production costs.
Canada and the United Kingdom experienced public resistance
when they transitioned but took actions that overcame it within
a few years. For example, in Canada, the Royal Canadian Mint
conducted a public relations campaign to inform the public that
the conversion would save money. In 2011, Canadian officials
told us that the $1 and $2 coins were the most popular coins in
circulation and were heavily used by businesses and the public.
Canada and the United Kingdom used the transition period to
implement the conversion and to gradually phase out the
currency being replaced.
The United Kingdom issued the 1 pound coin in early 1983
and continued to issue the 1 pound note until 1984. Canada used
a 2-year transition period for its $1 coin.
Let me turn to my last topic on considerations moving
forward. In the past, we recommended that Congress proceed with
replacing the $1 note with the coin only if the note was
eliminated and negative public reaction to the replacement was
effectively managed through outreach and public education.
In 2011, we reported that some private businesses had
already made changes to accommodate the coin. Officials
representing the vending industry said many of its members had
already modified their vending machines for dollar coins, and
many of the larger transit agencies had already modified their
equipment as a result of the Presidential Coin Act of 2005.
Retail sales, banking and currency, and transportation
officials, however, cited additional costs for modifying
vending machines and cash register drawers, and increased costs
for transportation and storage. They stated that the transition
could be done, but that it would take 1 to 2 years to make the
transition.
In summary, we have found that the government would receive
a financial benefit from replacing the note with the coin, but
it is not without challenges, one being public opposition.
However, many other countries have managed such replacements
with success, and some U.S. companies have already made changes
to accommodate the dollar coin.
This concludes my statement. I would be happy to answer any
questions at this time.
[The prepared statement of Director St. James can be found
on page 58 of the appendix.]
Mr. Schweikert. Thank you, Ms. St. James.
Ms. Lepine, thank you for being here. I have actually been
particularly looking forward to your testimony. And I will beg
of you, as you begin your testimony, to describe your position
with the Canadian Mint.
STATEMENT OF BEVERLEY LEPINE, CHIEF OPERATING OFFICER, ROYAL
CANADIAN MINT
Ms. Lepine. Thank you very much, Mr. Chairman. I am chief
operating officer of the Royal Canadian Mint, and I have been
with the organization for 25 years.
Mr. Schweikert. Thank you.
Ms. Lepine. Good afternoon, and I want to thank the
chairman and the respected members of this subcommittee for
inviting the Royal Canadian Mint to speak on Canada's
experience with replacing the $1 bank note with the circulation
coin as well as with the introduction of innovative Multi-Ply
Plated Steel material, which has dramatically improved the
cost-effectiveness of circulation coins in Canada and around
the world while also improving their reliability and security.
After twice successfully replacing a low denomination bank
note with a circulation coin--first, with the $1 coin in 1987;
and second, with the $2 coin in 1996--we have continued to
maximize the benefits to users of our circulation coins through
innovations such as: our Multi-Ply Plated Steel technology, the
most economical, durable, and secure coins on the market, now
used on all Canadian circulating denominations and over 70
other denominations in 30 countries around the world; our alloy
recovery program, which replaces older alloys with Multi-Ply
Plated Steel coins, reducing the number of coin compositions in
the Canadian marketplace; our coin recycling program, which
puts coins back into circulation in a more efficient and
environmentally friendly way; our high-speed circulation coin
coloring process first introduced in 2004 on a design
commemorating our veterans; and our virtual image and laser
mark security features ideally suited to high value circulation
coins. Our DNA anti-counterfeiting technology currently used on
our new $1 and $2 coins works like a fingerprint to ensure the
authenticity of every new coin. Our Mint chip project is
testing a digital currency solution with all the features of
cash, and our coin forecasting and distribution systems manage
Canadian coin distribution across the country for financial
institutions without incurring any coin shortages or building
excess inventories.
Our strong focus on innovation helps the Mint compete for
the profits we need to fund our operations without taxpayer
support. But its most important outcome is our enhanced ability
to meet changing customer needs while making our coinage system
more robust, efficient, and reliable.
Primarily a cost saving measure when it was announced in
1985, several businesses and special interest groups supported
a $1 coin for the many advantages it offered in areas such as
transit and vending. Public opinion surveys confirmed wide
customer acceptance of this new coin, and instead of a
requirement of 250 million coins over the first 3 years, almost
600 million coins had to be produced to adequately meet the
marketplace demand.
Mass adoption of the $1 coin occurred 2 years later in 1989
after the last dollar note was printed. In hindsight, we found
that the phased approach was not, after all, necessary, and
with that lesson learned, we introduced the $2 circulation coin
in conjunction with the end of the $2 bank note production.
Lasting 25 years or more instead of 1 year for a bank note,
the $1 coin has saved the Canadian Government $175 million over
its first 20 years. In the United States, we usually say it is
10 times that number.
The Multi-Ply Plated Steel version introduced this year,
along with the $2 Multi-Ply Plated Steel coin offering equal or
better durability at less cost, will produce a combined
additional $15 million annual savings to the Canadian
Government.
Our successful introduction of this technology depended on
communicating early and often to all our stakeholders,
particularly the vending industry, and collaborating closely
with them. To quote the president of the Canadian Automatic
Merchandising Association (CAMA), ``While no one in our
industry wants to see a change that will cost us money, we do
applaud the effort of our government to find cost savings. Our
relationship with the Mint is strong, and we value them as a
partner in our industry.''
Central banks and treasuries have much to gain from
emulating the $250 million savings Canada has so far realized
through Multi-Ply Plated Steel, and we now count customers on
every continent, including an Asian jurisdiction whose current
order is the largest foreign circulation contract in our
history.
The Mint, along with its many strategic partners, is
committed to advancing the science of coin and engineering and
manufacturing for the benefit of all of its customers and
stakeholders while meeting its duty to support Canadian
commerce by producing and distributing Canada's circulation
coinage cost effectively and profitably. We have more than met
this goal with the combined profits of the last 5 years
eclipsing those of the previous 25 years. We achieved record
revenues of $3.2 billion in 2011, netted profits of over $43
million, and paid a record dividend of $10 million to our
exclusive shareholder, the Government of Canada. We will
continue to reinvest our profits in researching and developing
coin technologies which meet the ever-changing needs of the
marketplace, and we are committed to providing commonsense
answers to the challenge of issuing coinage in today's world.
Thank you again for inviting me to appear before your
committee, and it will be my pleasure to answer your questions.
[The prepared statement of Ms. Lepine can be found on page
41 of the appendix.]
Mr. Schweikert. Thank you for coming south, Ms. Lepine. I
now recognize Congressman Stivers.
Mr. Stivers. Thank you, Mr. Chairman. I apologize that I
wasn't here in time to give an opening statement. I would like
to ask your consent to be able to read that statement before I
ask questions.
Mr. Schweikert. Why don't you make an opening statement and
then just roll right into questions.
Mr. Stivers. Thank you. I just wanted to make sure that was
okay. Thank you, Mr. Chairman. I appreciate you, and I
appreciate Chairman Bachus allowing this important hearing
today.
In these times of fiscal strain, we can save millions of
dollars by simply changing the composition of our coins from an
alloy to multi-ply American steel. Since 2006, the cost of
minting 1-cent and 5-cent coins has exceeded their face value.
In fact, a penny costs about 2.4 cents to mint and a nickel
costs 11.1 cents to mint, and last year the Mint produced, I
believe, 4.3 billion pennies and 914 million nickels. I will
follow up with Mr. Peterson to make sure my math is correct on
that.
But focusing on the content alone ignores some other
issues, and I think we do need to look at issues like the
overhead costs at the Mint. And I really appreciate Mr.
Peterson's being here today. I think he has experience in
manufacturing, experience in coins. That said, I am not sure he
is the perfect witness for both pieces of the testimony. He is
a great witness for my bill on coins, but on the transition to
the coin from the dollar bill, I think this committee asked
Rosie Rios--who oversees both the Mint and the Bureau of
Engraving--to testify. And so I wish she would have been here,
but I am glad you are here, Mr. Peterson, and I do want the
folks at Treasury to understand that these coinage issues
aren't going to go away and this committee is committed to
focusing on this issue, and, in fact, there is a constitutional
requirement for Congress to deal with coinage issues and
regulate our currency.
In a study in April of 2012, Navigant Consulting estimated
that we could save between $182 million and $207 million
annually by moving to a plated multi-ply steel composition for
our coins the way Canada did, as Ms. Lepine discussed. They
could easily co-circulate with our current coins, which
hopefully would be something that we would be able to work
through with the vending machine industry. I know that is going
to be an issue, and I want to talk to Ms. Lepine about how that
worked in Canada, and Mr. Peterson about how we can do that.
But as Congress considers various alternatives to what to do on
currency and how to make the coinage as efficient as we can, I
hope we will look at the Royal Canadian Mint's example of using
multi-ply steel, a cheaper raw material that is actually more
durable. And I want to talk to Ms. Lepine about that in a
second, because it will save taxpayers' money.
But I do think there are other issues that I want to get to
over time, including how we can reduce the overhead at the U.S.
Mint, and I may ask Mr. Peterson some questions about that. If
it is okay, I would like to start some questions.
Ms. Lepine, do you want to talk about the cost of multi-ply
steel versus the alloys that you are using in Canada?
Ms. Lepine. With pleasure. The Mint introduced Multi-Ply
Plated Steel for its 5, 10, 25, and 50-cent denominations in
2000. This was really driven based on a look at costs where we
believe the costs are 55 percent of the alloyed costs, and it
really is changing to a material that has a steel core, so 94
percent of the coin, on average, is steel with only 6 percent
more expensive nickel and copper.
The second part related, I think, to costs is metal and
price volatility. So we recognize that there is metal
sensitivities, particularly if you look at the markets over the
last 6 or 7 years. By going to steel, we have reduced that
sensitivity and enabled central banks around the world,
treasuries around the world to be able to maintain their
budgets for coinage.
In addition to the cost issue on Multi-Ply Plated Steel,
the other benefits are related to the security around Multi-Ply
Plated Steel, which offers a more unique and definite
electromagnetic signature which aids in vending and/or cost
processing machines, and the ability to tailor that signal in
terms of meeting the needs of a given country.
Mr. Stivers. Can you talk about, because the vending
machine industry is something that will come up I think in this
process, what the Royal Canadian Mint did to work with the
vending machine industry to ensure that the transition was as
easy as possible for them? Obviously, they have some capital
replacement that happens naturally. Did you work the cycle into
their capital replacement cycle, extend the notice? Tell me how
that worked to help allay their concerns.
Ms. Lepine. If we look at our most recent change in 2012
which put the $1 and the $2, our final high denomination coins
into Multi-Ply Plated Steel, we started working with the
vending industry in about 2008. So the issue here is to let the
stakeholders know, give them an opportunity to be able to work
with you at developing what the specification partially might
be. So we also allowed 6 months towards the end of that period
to let them calibrate the machines and in fact made changes
with the vending industry that would ensure that we didn't have
overlap over our high denomination coins or the 50-cent coin in
our next denomination.
Absolutely critical in doing that, there is no doubt there
are always costs to changing software and their machines, but
we know for a fact that in Canada about 90 percent of the
machines are already at the upper end of the software
capability so it really isn't that complicated of an issue to
change the software.
Mr. Stivers. And for a period of time, and I think even
currently, Canada has had both multi-ply steel and alloyed
coins in circulation at the same time. Did that present any
issues and how were those issues addressed with maybe any
vending machine folks or just folks in the general population?
Ms. Lepine. Vending machines are very capable at reading
more than one composition in terms of the material on the coins
that may be in the marketplace at any point in time, and so
there were no difficulties in reading both an alloyed coin and
a Multi-Ply Plated Steel coin in terms of the, I will call it
windows of ability, for the software to read those. That was
not an issue for us at all.
Mr. Stivers. And for the consumer, the look and feel of
these coins can essentially look and feel the same as they do
today but the core is different, is that correct?
Ms. Lepine. That is correct. It is a steel core with a
layer of nickel, copper-nickel on top of the steel core.
Mr. Stivers. And today, the Royal Canadian Mint is working
with several countries on a similar conversion. Can you talk
about that and maybe why those countries have gone that route?
It is going to get to the same point that I have been getting
at all day.
Ms. Lepine. In fact, New Zealand in 2006 converted all of
their coins or three of their denomination coins to Multi-Ply
Plated Steel and did an extensive review working with the
vending industry, which we also helped them with in ensuring
that their vending industry in their country would have a
chance to calibrate and be able to understand and modify their
machines.
The other part of work that we do with central banks around
the world, and we have completed some and we have some under
way now, is working with the central bank to look at what the
countries around their borders may be using, looking at the
purchasing power of those countries around the border, looking
at any of their trade relationships or vacation volumes of
flows of coin and making sure that we take the multi-ply and
design that middle copper layer which is probably the most key
layer in this for EMS purposes, that we design that layer to
try and mitigate any overlaps on coinage around the country.
And in fact, in some cases the work with the central bank can
be a year or longer as they develop the specification for the
coin to convert their coins to Multi-Ply Plated Steel.
Mr. Stivers. Great, and I hate to use all your time. I am
out of time. I was going to ask Mr. Peterson some questions,
but I will yield back and hope there is a second round.
Mr. Schweikert. Thank you, Mr. Stivers.
Mr. Clay.
Mr. Clay. Thank you so much. Mr. Peterson, in discussing
the Coin Modernization and Taxpayer Savings Act at a hearing in
2008, a former Mint Director, Edmund Moy, said that steel may
not be the panacea, it doesn't make sense to reduce the cost of
materials used in the penny if they are offset by higher
manufacturing costs.
Mr. Peterson, do you believe that changing the composition
of the penny and the nickel to plated steel would save the
taxpayer money?
Mr. Peterson. Ranking Member Clay, in 2010, Congress passed
and the President signed into law a bill that allowed us to go
conduct research and development on alternative coin
compositions. We don't do this very often. The last time we did
this on a comprehensive basis was 1965, and back then we hired
a third-party consultant to assist us. We did the same over the
last 2 years. If you look, if you remember your high school
chemistry class and the periodic table of elements on the wall,
there are 80 metals on the periodic table. Many of them are
radioactive, many of them are more expensive than we are going
to be able to use on our coins. And you rapidly distill that
down to four elements: aluminum; iron in the form of steel;
zinc; and lead. We are not going to make our coins out of lead,
so we have aluminum, steel, and zinc.
The Mint has done, over the last 2 years, a very nice job
in establishing momentum on conducting research and
development. We established within the Philadelphia Mint the
research and development laboratory, we conducted two sets of
trial strikes on 29 different coin compositions of aluminum,
steel, and zinc, some of which were the plated steel
compositions, and our report to Congress is due within the next
several weeks. We look forward to getting that up to Congress,
and I just want to leave you with the message that the men and
women at the United States Mint have done the Nation proud with
the research and development effort that we have taken on over
the last 2 years.
Mr. Clay. Thank you for that response.
Let me ask Ms. St. James, benefits of the $1 coin were not
realized until after 10 years in response to your February 2012
analysis of the benefits and losses from replacing the $1 note
with a $1 coin, the Federal Reserve raised concerns with the
fact that the U.S. Government would face losses up to $31
million, and $1.8 billion over the first 10 years of the
program.
The Federal Reserve went on to say that they are concerned
that the 30-year savings projections may overstate the net
financial benefit, perhaps substantially.
In your view, how would you expect the U.S. Mint to pay for
a $1.8 billion loss in the first decade?
Ms. St. James. First of all, the model that we use looks at
the net benefits between two different scenarios, one is
today's scenario, in which the dollar note predominates, and
then we have the other scenario in which the coin would
predominate, and we looked at it over 30 years. And looking at
it in a 10-year timeframe, we estimated that the Mint would
need, conservatively, about 4 years to ramp up production
because we would need more coins to replace--1\1/2\ more coins
to replace $1 notes.
So you would have to have the Mint go from producing, I
believe, about 3 billion coins, around that amount today, to
about 13 billion coins to meet demand.
So looking at it in a 10-year timeframe, the benefits of
switching to the coin, are they are front-loaded with the cost
and back-loaded with the benefits?
Mr. Clay. With the savings?
Ms. St. James. Right. So the savings only comes in after
that 10-year period.
Mr. Clay. All right, thank you for that response. Quickly,
Ms. Lepine, what factors should Congress consider in order to
ensure public acceptance of any changes to the composition of
circulating coinage? And in your experience, do weight, size,
color or other factors matter?
Ms. Lepine. Certainly, I think market research--you want to
conduct focus groups, which the Canadian Government did in
terms of understanding what the Canadian public and the
business community needs. We wanted to make sure that the coins
were very visible for the visually impaired and ensure that a
new coin could be easily used by that group.
Promoting the message of cost reduction was really the key
message that the Canadian Government followed, and it was
obviously well-received, as I think was mentioned. The Canadian
$1 had its 25th anniversary this year and a public poll done by
the CBC said that it is an icon for Canada just like the RCMP
or the beaver, et cetera.
Making sure the coin, people understand that saving and
visually get to see the coin, understand the coin's visual
characteristics is very important.
Mr. Clay. Thank you.
Mr. Schweikert. Thank you, Mr. Clay.
Mr. Luetkmeyer?
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Ms. Lepine, I am just kind of curious, in the last 2 years,
I have had 2 interns from Australia. I had one a year ago, and
I had one this past year. And when we got done with their
internship, we had a little pizza party for them and we sat
there and asked them what is the thing that is kind of
interesting or different or something that struck you about our
country. And each one of them said, you guys have pennies. We
don't have pennies in Australia. We just round to the nearest
nickel. And I noticed that you have done the same thing in
Canada, have you not?
Ms. Lepine. Correct.
Mr. Luetkemeyer. What are the effects of that?
Ms. Lepine. The decision on our 1-cent coin just to
clarify, is a decision by our Department of Finance. And that
decision was very much based on public opinion which, close to
the time when this decision was done, was running anywhere from
44 to 67 percent in terms of positive reaction and/or neutral
reaction to the penny.
The second part is obviously looking at the savings that
came from the penny, which were about $11 million per year.
I think what is important about the penny decision for us
is it was an evolutionary process in terms of coinage
introduction.
First, Canada introduced Multi-Ply Plated Steel coinage,
which reduced the cost of our coinage, meaning that all of our
denominations had positive seigniorage. It was the penny that
had gone into negative seigniorage in the 2008-2009 period, and
that message was very important for the Canadian public in
terms of understanding that there was a negative aspect to
producing that penny, and therefore it would be not a bad idea
to eliminate that denomination.
In terms of impact on the Mint itself, we have been
recycling since 2004, and as a result of those recycling
operations, in partnership with Coinstar, over 50 percent of
our production volume, or the demand in the country for coin,
was actually met through recycling. So interestingly, for us,
we had already started to reduce overheads and manage the issue
of having coinage, pennies recirculating and coming back in
through a recycling mechanism.
Mr. Luetkemeyer. Was it accepted by the public?
Ms. Lepine. Very much so.
Mr. Luetkemeyer. How have the businesses reacted? Just
round it up or round it down, is that what they did?
Ms. Lepine. In fact, the decision was made in May. And back
again to thinking about stakeholder reaction, the Department of
Finance listened to some of the big coin processing, coin heavy
retailers, so think of fast food, and the result of that was,
although we stopped production in May, the decision was made by
our Department of Finance to delay the actual end of
distribution instead of September to the month of February so
that retailers weren't having to deal with this change and the
training associated with it and the rounding with it over this
Christmas period.
Mr. Luetkemeyer. Did you see a net increase or net decrease
in level of taxation as a result of the coin or was it neutral?
Ms. Lepine. In the first place, the coin is still in
distribution right now, so I think the Department of Finance,
which I would want answering that particular question, but the
coin will actually only stop distributing on February 4th.
Mr. Luetkemeyer. Thank you. And with that, I will yield the
balance of my time to the gentleman from Ohio.
Mr. Stivers. Thank you for yielding the balance of your
time. I have a question for Mr. Peterson. You alluded to the
report that is coming out in a couple of weeks. Is there any
chance you could give us a Reader's Digest version? Sneak
preview? Anything?
Mr. Peterson. The report will be up here on or about
December 13th. I will say that this committee has previously
heard testimony that if the metal for the penny were free, we
would still exceed 1 cent. On the nickel, I will say that we
looked at the 29 different compositions that I mentioned, and
there were several promising alternatives. We look forward to
continuing the R&D in the coming months and years and have an
active plan for 2013.
Mr. Stivers. Thank you for that. Can you give us an insight
into, of the penny, what percent of the current, and my math
says 2.4 cents, what percent of that cost is raw material
versus overhead at the Mint?
Mr. Peterson. Our numbers for 2012 are at the auditors
right now but they are going to come in very close to 2 cents
for a total cost to make the penny in 2012. And we have lowered
our costs of manufacturing in the circulating business since
2009. It cost us $230 million to run our circulating business
then, it cost us $180 million this year in 2012. We have cut
the cost in real dollars by 20 percent over the last 3 years.
And so on the cost of the penny, the metal right now is very
close to a penny: 47 percent of the cost is metal; mint
production costs are 35 percent; and then the general and
administrative allocation is 16 percent.
Mr. Stivers. Thank you. I yield back because there is no
time left.
Mr. Schweikert. So in other words, you are not really
yielding back anything. Thank you, Mr. Stivers.
I want to do two things before I actually--one thing before
I start to ask questions. If anyone feels trapped over on that
side and you want to scurry across, because I have had the
occasion where I got trapped over there. So if anyone needs to
move one more time, I accept that this is a big crowd in a
small room. Okay. If not, then we are going to move on.
Mr. Peterson, help me understand, because I want to make
sure that I have my understanding of it. If we were to go to
the clad multi-layer type coin do we have to get a license from
Canada? Is this a patented process? Do we have to contract or
have we developed something that we hold rights to?
Mr. Peterson. I believe Canada's process is patented. We
need to go investigate a supply chain for the plated
technology. Steel, if we were to have authorization to convert
to steel, it needs to be plated with some kind of coating.
Electroplating in a large industrial environment is a complex
and capital intensive process. The United States Mint does not
have that capability internally today. To develop that
capability would require several hundred million dollars. And
imagine, if you will, what electroplating really is. Imagine a
football field, a building that size filled about 4 or 5 feet
deep with sulfuric acid and then electric current is passed
through the acid to have the plating material deposited onto
the steel. We are not going to build one of those in Denver or
downtown Denver or downtown Philadelphia. So we would need to
go find a site to if we wanted to vertically integrate and if
this business case panned out, we would have to go find a site
and develop that on our own.
Mr. Schweikert. From your understanding of the Canadian
process, they hold copyrights, patents to the mechanics?
Mr. Peterson. I believe they do.
Mr. Schweikert. Ms. Lepine, is this something you have been
selling rights to, your intellectual property?
Ms. Lepine. The R&D that obviously went into the
development of Multi-Ply Plated Steel and then the construction
of a facility in our Winnipeg operation, which is expanding,
almost doubling right now under construction in Winnipeg.
Obviously, that R&D is under patent, patent pending in some
cases depending on the technology, and we do license. So for
us, that R&D would have to be recovered. However, I look at
what the 5-cent coin costs are and they are a bit under 3
cents. We believe that the opportunities for that cost in
whatever manner is quite appropriate.
Mr. Schweikert. Any special deals for your good friends to
the south?
Ms. Lepine. I would like to add that we have licensed that
multi-ply process to Jardens, Inc., which is, of course, a U.S.
corporation, and they have been significant partners over many
years in terms of helping us meet the marketplace demand with
30 countries wanting multi-ply steel, 10 of them who wanted in
their high denominations already sold and done. The demand for
multi-ply steel has been very high. In fact as we look at our
foreign business, almost 95 to 97 percent of the business in
the last 2 years has been plated material and not alloyed coins
from the countries around the world.
Mr. Schweikert. Ms. St. James, one of those little things,
as we sort of go through this process and being someone who has
been trying to make sure they are doing the right thing, one
time I get a report that says, okay, a U.S. dollar, a paper
dollar survives 18 to 24 months. Then I come across a report
that is a little bit older that I think said as short as 13
months. And then, I have seen some other reports bounce around
where the Fed was using a much longer model. Am I safe
continuing that sort of 18 to 24 months, which seems to be the
mean in reports and data I come across?
Ms. St. James. When we looked at it in 2011 and then again
in 2012, in 2012 we were told that the lifespan of a note was
40 months. And then in 2012, we were informed by the Fed that
they had changed the technology in how they read the notes when
they are processing them, and that the lifespan had increased
to 56 months. So, in other words, when the dollars come in, for
example, if the dollar is facedown in 2011, it would have
pulled that note out and it would have had to have been
replaced, and the technology they have now allows more dollars
to remain in circulation. So the average life has increased.
We have been looking at those lifespans since we have been
interested in this topic, and we don't feel that change is
within scope.
Mr. Schweikert. Okay, and I think with that I am actually
out of time. Congressman Huizenga, are you ready to ask a
question?
Mr. Huizenga. I am not.
I was at a hearing downstairs, Mr. Chairman.
Mr. Schweikert. And please, forgive us. It is just sort of
the nature of this time of year.
Mr. Stivers, did you want to continue?
Mr. Stivers. I would love to, if I am allowed to.
Thank you.
Mr. Peterson, can you tell us what the output of the Mint
has been over the last say 10 years of coins? Are you staying
pretty constant with the number of pennies and nickels you are
making? Are you reducing them?
Mr. Peterson. Circulating production at the Mint over the
last several years has been quite a volatile experience. I
first joined the Mint 4 years ago, and our production in 2008
was 9.9 billion circulating coins. In 2009 and 2010, in
response to the soft economy, people would go into their coin
jars and piggy banks and turn in those coins to pay for basics
such as groceries and gasoline. And the Federal Reserve vaults
were filled up in 2009 and 2010 and our production volumes in
those years were 5.2 billion coins and 5.4 billion coins
respectively in 2009 and 2010. In 2011, we saw an increase to
7.4 billion coins, and in Fiscal Year 2012, our unaudited
results are at 9.1 billion coins. And of that, and it has been
pretty consistent, pennies and nickels have comprised between
60 to 70 percent of that circulating volume.
Mr. Stivers. And you talked about how you have two
facilities, you have a facility in Philadelphia and you have a
facility in Denver, both in downtown as I recall. How old are
those facilities?
Mr. Peterson. The Denver facility was built in 1904--
Mr. Stivers. I am sorry, how old is the manufacturing
machinery and capacity, the stuff you use typically? I don't
care how old the plant is but how old is the stuff inside it
that you use to make coins?
Mr. Peterson. Our peak production year was back in 1999,
and we made some 23 billion coins in that fiscal year in
response to Y2K and the Sacagawea golden dollar, and we really
ramped up our production capacity between Denver and
Philadelphia then. So most of the capital equipment in those
two buildings was sourced in the 1997, 1998, 1999 timeframe.
Mr. Stivers. Great, and you said you increased the
efficiency of the Mint over the last 2 years, or was it 4
years, by 20 or 30 percent?
Mr. Peterson. Absolutely. Our production volumes are up and
our costs are down. It is the very definition of productivity.
Mr. Stivers. So do you see future productivity gains
outside of materials costs that you can do to reduce overhead?
And I guess the ultimate question is, do we need two
facilities? Maybe we do, and maybe we don't. I guess I will
just ask you that question as well.
Mr. Peterson. Absolutely, we see continued cost
improvements possible. We have been on our Lean Six Sigma Five
S journey, and we have a good manufacturing team that knows how
to do this. Our plant manager in Denver came to us from General
Motors, our plant manager in Philadelphia came to us from Ford
Motor, and I came from General Electric. We get this stuff. And
we are going to continue driving overhead costs down.
Mr. Stivers. I appreciate your commitment to that as well.
I did think it was really interesting--Mr. Schweikert's
question about licensing the Canadian technology instead of
doing your own R&D. Obviously, you have to do a cost-benefit
analysis to see what makes the most sense, but if our friends
up north would give us a great deal on their technology, that
would be great.
So I will encourage you to talk to them and I will yield
back the balance of my time. I have asked a lot of questions.
Mr. Schweikert. Thank you, Mr. Stivers. Love the holiday
tie.
Mr. Stivers. Thank you. Merry Christmas, happy holidays.
Mr. Huizenga. Mr. Chairman, can I just interject, for some
of us, those of us from Michigan, it would be our neighbors to
the east and not just to the north. So thank you.
Mr. Schweikert. And there goes my geography. Mr. Huizenga,
if you are from the Scottsdale area, there are neighbors all
around us.
Mr. Clay?
Mr. Clay. Okay. Mr. Peterson, the Federal Reserve has
raised concerns that increased production of the $1 coin could
result in an increased risk of counterfeiting. Given that the
$1 coin, unlike the $1 note, does not have effective, machine-
readable, publicly usable counterfeit deterrent features, is
this a concern you are familiar with?
Mr. Peterson. I understand the question, sir. The dollar
coin does have anti-counterfeit devices built into it. It has--
I am not at liberty to go into those right now and probably
shouldn't in this forum. But there are devices that are built
into the dollar coin. We could go further and perhaps look at
some additional technologies to make them even more secure.
Mr. Clay. All right. Ms. St. James, how many years would it
take before the government would earn enough from issuing
dollar coins to break even?
Ms. St. James. Break even?
Mr. Clay. Yes.
Ms. St. James. We have shown that if you look at 30 years,
there is certainly a benefit, and if you work your way through
the transition period, depending upon the assumptions that you
have, is that once we work through the transition period and
the amount of coins necessary is out there, then you would
begin to break even and that was usually in a 10-year period or
more.
Mr. Clay. What is your response to the Federal Reserve's
position that you may have substantially overstated the
financial benefits of eliminating the dollar bill in favor of
the dollar coin?
Ms. St. James. The response that we got from the Federal
Reserve in terms of both our 2011 and 2012 reports was that, in
fact, we did not include cost to the private industry in there.
And the model that we developed is only measuring the benefit
or loss to the Federal Government. So their overstatement of
seigniorage for us, we believe seigniorage is a valid measure
and a valid benefit to the government, and I believe Canada
recognizes seigniorage as well. So I can only state that we
feel it is valid.
Mr. Clay. Something a little different in my line of
questioning, to be able to convert from the paper dollar to the
coinage I think will take a cultural change in this country.
When you think about it, most men don't want a lot of coins in
their pocket, in their suit, it may make our suit sag or
something. A lot of my constituents like to have the paper
money. Maybe Ms. Lepine can help us on how Canada got
accustomed, the consumers became accustomed to actually having
more coins in their pocket, how women put more coins in their
purse, I guess it is not too difficult to do, but how did they
adjust?
Ms. Lepine. I don't want to get into a discussion about the
suit pockets; however, certainly in Canada the savings, the
seigniorage savings on the $1 coin when it was issued was $450
million and on the $2 coin, remembering that you probably
combine them because you don't have an active working $2 note
and coin in the United States, was $695 million. So the savings
message was very, very important in Canada. And if you look at
what the polls, the recent poll is saying about our $1 and $2
coin, the loonie, as it was named, and the toonie, which is the
$2, became and are icons in Canadian society. And so, they are
actively used.
We have had a steady volume of coins of the 1 and the 2
since their introduction, and we only produce to demand for
trade and commerce. We do not build inventories across the
country. We run online forecasting systems such that I can tell
you if a casino opens, if a new toll road opens, I know how
much coin I am going to need and I know where I need to put it
in the country. So, in fact, if I take just the demand that the
market is looking for on $1 and $2 coins, Canadians are
actively using them. We don't get complaints in terms of the $1
and $2 coin usage at all.
Mr. Clay. Thank you for your response.
Mr. Schweikert. Thank you, Mr. Clay. Interesting questions.
Mr. Huizenga?
Mr. Huizenga. Thank you, Mr. Chairman. Actually, that
follows right into what I was going to be saying, and Michigan
does have a unique relationship with our neighbors to the east.
In all fairness, they are to the north as well, but once you go
up to Sault Ste. Marie--I have a special working relationship
with Canada in that I married one. Not a country, I mean a
person from the country, I should say. Sorry, honey, if you are
watching on C-SPAN. But I know my lovely bride is from the
Toronto area. And when we started dating and I started crossing
the border on a more regular basis, I said, what in the heck is
this coin, the loonie, and I couldn't figure out why they would
give it quite the moniker and was in the picture when the $2
coin, the toonie replaced the $2 paper bill. And through that
family experience, I can tell my colleagues, it is absolutely
considered ``the thing'' and I don't know anyone who would go
back to the paper dollar and $2 bills. You get $5 bills and up
in those denominations. We have enough of a both formal and
informal trade back and forth with Canada that if you go into
many places in the State of Michigan, Canadian coins are
commonly accepted. And it used to be everybody would try and
figure out how they could cheat the system and how many
``Canadian quarters'' they could use to pay for an American
dollar whatever when it was 65 cents. Now that we are basically
on parity, you will see Canadian coins being, $1 and $2 coins
being exchanged in a number of places as well.
So I have never quite understood the reluctance from a
personal basis that we have had, other than some of the obvious
challenges we are going to have with our vending machines and
some of those things. And I was hoping that you would--you have
to refresh my memory, but the loonie has been around how long?
And then, the toonie came in around the mid-1990s, is that
correct?
Ms. Lepine. 1987 for the loon and 1996 for the toon for the
toonie.
Mr. Huizenga. Okay. I actually have some memory left of
that. And what was the conversion going to a $2 coin, which for
those of you who haven't seen it, is substantially bigger and
actually has almost two strikes to it. I am assuming it is some
kind of blank that was inserted into another silver part with a
copper-looking centerpiece to it, so it is some construction to
that $2 coin. But how did that conversion to a $2 coin that
clearly was a different size and all of those things, how did
that go?
Ms. Lepine. The $2 is a bimetallic coin, meaning there is a
double strike of the ring and the center core. So at the time,
the look at the coin denomination was to have the $2
psychologically slightly bigger than the $1, but it is a much
lighter coin in terms of--or thinner coin in terms of the next
one up.
Again, publicity was done, obviously a lot of awareness
with the Canadian public. And the same message of savings, I
just said it was $695 million in terms of straight seigniorage
savings, and it is about $34 million a year, and the volume has
stayed constant. So Canadians had already been used to the
first message on the $1 coin. On the $2 coin, that message was
repeated and was in the same vein and once again, very well-
accepted.
Mr. Huizenga. So just to recap, within a period of 9 years,
you had introduced two separate coin denominations, a $1 and a
$2 coin, and you saw those savings quickly?
Ms. Lepine. Correct. And in the case of the $2 coin, it was
because of our learnings on the $1 coin, we did an immediate
withdrawal of the $2 note on the $2 coin.
Mr. Huizenga. So, there was very little phase-in? It just
happened?
Ms. Lepine. Correct.
Mr. Huizenga. Okay. Thank you.
Mr. Schweikert. Mr. Luetkemeyer?
Mr. Luetkemeyer. I pass.
Mr. Schweikert. In that case, it is my turn, because there
are a couple of other things I want to understand. Ms. Lepine,
my understanding is the Canadian experience, what you had
modeled, you had actually much more aggressive, much faster
adoption and much faster savings than your original modeling.
Is my understanding correct?
Ms. Lepine. Correct. When we launched the $1 coin in 1987,
the feeling was that the demand would be about 250 million
pieces. What actually happened is over a period of 2\1/2\
years, the demand was 600 million pieces, so far bigger
acceptance and volume rate going into the marketplace.
Certainly, that acceptance happened even closer as we got to
the 1989 date when the $1 note was actually withdrawn from
circulation. So if you look at the movement of volume, the mass
adoption of the $1 coin improved as we got closer to the date
that the $1 note was dropped.
Mr. Schweikert. And your instinct, why did, in many ways,
you blow there through your projections and do so much better?
Ms. Lepine. I guess I will use the word ``change'' and not
in the sense of we are talking about coin. And I commend this
committee for the perseverance in looking at this issue. Change
is never easy. It isn't easy for us, it isn't easy for
organizations, and it isn't easy for the consumer. And so, I
think it was just we touched on something that in the $1 coin,
the vending industry was struggling, particularly the transit,
with paper notes going in and getting jammed. So the industry
was very, very motivated to see a coin coming in for the $1
coin.
The Canadian public, we talked about this a lot, we talked
about the savings a lot, and it was a matter of getting over
that issue of change, and as we got closer to the $1 note and
as the $1 note was removed, obviously at that point in time,
the ability to adapt to that change, it is the dollar coin that
is now the vehicle for trade and commerce and the Canadian
public were prepared for that.
Mr. Schweikert. Was there anything unique you did in the
way you told the story of the savings, any brilliant insight in
how you communicated with the Canadian public?
Ms. Lepine. I would love to say that there was great
brilliant insight and the history is probably known on the $1
coin. When the $1 coin concept was conceived, and ready to go,
dies were shipped to Winnipeg and were lost. And it was not a
loon that was supposed to be the design on the $1 coin, it was
supposed to be a voyager. The dies have never been found. There
was a major snowstorm. Nobody has ever known.
As a result of that, the Canadian Government immediately
made the decision to bring the loon design up. The loon design
caught on and was called a loonie, and I have to say if you
look at the pickup from that moment in time, it became a name,
it became a symbol, and it just grew from there. We won an
award for the damage control in terms of dealing with that
issue, and I hate to even mention it, because I wouldn't want
to have to repeat it.
Mr. Schweikert. If you were sitting up here and had to go
on to the next question after that, where do you start? I am
trying to figure out what would be a loonie for the United
States besides myself? Okay, come on, guys, that was almost
funny.
Ms. St. James, did you ever do, in your modeling, a test
that said okay, here is our model for the United States, but if
we build the model, if we had the Canadian experience, how fast
you get to even cost, if you had the same very aggressive
adoption and substantially larger production. Or my
understanding, wasn't there something similar also in
Australia, New Zealand, other countries who also have done
this?
Ms. St. James. We didn't necessarily look at that
transition period from Canada, but in determining the--short of
that transition period for the Mint, the sooner you would have
benefits in seigniorage.
Mr. Schweikert. Ms. St. James, in your model, what was the
shortest and what was the longest to break even?
Ms. St. James. I would say that the shortest was probably,
again, based on 4-year transition, would still be around--
Mr. Schweikert. But did you ever model something where you
had a faster transition?
Ms. St. James. No. No.
Mr. Schweikert. Okay. When is the next cycle? Are you
obligated to continue to analyze this or update your data?
Ms. St. James. We would be happy to entertain a request to
do that again.
Mr. Schweikert. We may have to talk offline because I want
to know what the cost of such a thing is. I hate asking for
data when I feel like I am adding cost on the taxpayers. But it
would be interesting in what would happen if we had a similar
adoption from our friends to the north, or to the east, and
what that cost curve would end up looking like.
Ms. St. James. I am sure we could use the model we have and
shorten that timeframe and get back to you.
Mr. Schweikert. Forgive me, I am going to go over a couple
of seconds here.
Mr. Peterson, as efficient as the Mint seems to have become
the last few years, and we appreciate the diligence there, and
I am delighted you are using Six Sigma and the production
focus, if that production time was squeezed down because there
was much more aggressive adoption and transition, could you
handle it?
Mr. Peterson. Currently in the Federal Reserve vaults,
there are approximately 1.4 billion dollar coins. Our capacity
in Denver and Philadelphia is a billion coins per year apiece
right now. We could probably--add that together, there is 2
billion. We could probably do some overtime and get to 2.2
billion right now. If we got the green light tomorrow, we would
need to go investigate and purchase some additional capital
equipment to the tune of about $8 million to $10 million. It
takes time to get that in place and set up. But we could be
manufacturing double the capacity of dollar coins within a few
years.
Mr. Schweikert. I am going to annoy my brethren here. How
many quarters do we have in storage?
Mr. Peterson. Quarters in storage right now, they are down
from the peak that we saw in 2009 and 2010. The Federal Reserve
inventory numbers right now are about 1.7 billion.
Mr. Schweikert. So holding 1 billion is not something
extraordinary? We actually do that in other denominations of
coinage.
Mr. Peterson. Yes.
Mr. Schweikert. Okay. I have always wanted to ask that.
Gentlemen, anyone with any additional questions they would like
to ask? Mr. Stivers?
Mr. Stivers. Just one additional question. I have already
asked a lot. But this is for Mr. Peterson. Mr. Weller, who is
going to testify in the second panel, in his written testimony
claims that the Mint's accounting inflates the cost of the
penny by unfairly double-charging for portions of the penny's
fabrication. I guess I wanted to give you, while you were
sitting on the panel, a chance to respond to that, since his
testimony will be after yours. I figured I would let you know.
I don't know if you saw that in his testimony and if you have
any response to it.
Mr. Peterson. I did. A few years ago, we saw the penny and
the nickel were not bearing any of the general administrative
expenses of the Mint. Circulating coins, the penny and the
nickel, make up 75 percent of the circulating coins that we
manufacture and they were not bearing any of the overhead. We
saw that. We developed a new overhead allocation model in 2009.
We fully communicated that through Treasury, the Office of
Management and Budget, this committee, and other Members here
on the Hill, and we implemented that change in 2011.
Mr. Stivers. I just wanted to give you a chance to respond
to that.
Mr. Schweikert. Okay, Mr. Stivers, thank you. For this
first panel, thank you. We truly appreciate your coming down
and sharing with us.
I guess we are going to move on to the second panel.
[brief recess].
Mr. Luetkemeyer [presiding]. Okay, are we ready to go?
Let's reconvene. We thank the second panel for being here, and
you will each be recognized for a 5-minute summary of your
testimony.We will begin with you, Mr. Miller.
STATEMENTS OF JAMES C. MILLER III, FORMER DIRECTOR, OFFICE OF
MANAGEMENT AND BUDGET
Mr. Miller. Thank you, Mr. Chairman. I thank you for
inviting me. I would like to submit a short statement for the
record.
Mr. Luetkemeyer. Without objection, it is so ordered.
Mr. Miller. This is a matter I have followed for over a
decade, and I must say I think the proposal to replace all
dollar bills with dollar coins doesn't make any more sense
today than it did 10 years ago. The fact is, Americans like
having available both coins and bills and they reject the
forced replacement of the dollar bill with dollar coins.
We know this from numerous polls. We also know this because
consumers view dollar coins as a novelty, not as something they
use every day, as some $1.4 billion now languish in Federal
Reserve Bank vaults. So why does this dollar coin replacement
proposal keep coming back? Because proponents allege it would
save money.
Now, let's look at that. According to the GAO's most recent
report summarized in Ms. St. James' testimony, production costs
of converting to the dollar coin would far exceed the
production costs of the dollar bill. So where would the claimed
savings come from? According to GAO testimony, and it is
accurate, by the way, solely from seigniorage.
Now, seigniorage is a fancy term for the difference between
the nominal value of the coin and the government's cost of
producing it. If production costs are higher for coins than for
bills, then the government's interest gained from seigniorage
would be less for coins, right? That would be true if the
government issued the same number of coins as bills. But what
we know from experience is that to maintain commerce, you need
three coins to replace every two bills, given the lower
circulation rate of coins due to their inconvenience. People
drop them out of their pockets, they fall into the cushions of
sofas, they fall under the seats of cars, et cetera.
This 3-to-2 ratio would increase seigniorage interest
savings a lot more than the increase in the cost of producing
the coins. That is what is responsible, solely responsible, for
the so-called savings to government, as GAO has attested, and
not until a decade has passed would there be any such savings,
as if we would be massively using dollar coins 10 years from
now, given the escalation in the use of debit cards and credit
cards and electronic payments, et cetera. But where does that
increased seigniorage money come from? It comes from the
private sector businesses and consumers. It surely doesn't come
from the tooth fairy.
So we have a change in the monetary medium of exchange
imposed by government where dollar bills are withdrawn from
circulation and replaced by dollar coins and the gain to
government is wholly due to increased costs to the private
sector. This, by almost anyone's definition, is a tax.
Now, I realize that GAO takes issue with calling it a tax
because it is ``voluntary.'' But our system of income taxes in
this country is often characterized as ``voluntary,'' but no
one would argue that what they are coerced to pay voluntarily
are not taxes. When money flows from the private sector to the
government, that is a tax. When the Federal Government, which
has a monopoly on the medium of exchange, mandates the use of a
particular means of exchange, clearly in its favor, that too is
a tax. And in terms of the use of resources, the compulsory
dollar coin proposal is clearly inferior since production costs
of dollar coins are higher than for dollar bills.
Moreover, as GAO points out, its analysis does not consider
the cost to the private sector from adjusting from dollar bills
to dollar coins, nor does it consider the environmental cost
associated with the increased use of dollar coins, which could
be considerable.
Finally, as Ms. St. James points out in her statement, the
cost of the coins are up-front and certain, fairly certain,
whereas the savings would come only in later years and are not
nearly as certain.
I was Budget Director and I can tell you this: Anybody who
was Budget Director, Secretary of the Treasury, anybody
involved in forecasting what government is going to do,
revenues and expenses the next year out, you can be fairly
certain; the next year out, you will be pretty good; the next
year out, you are not so sure. Ten years out, or 30 years out?
Great uncertainty is attendant with that.
In summary, the proposal to replace dollar bills with
dollar coins is a loser. It requires more real resources
measured by production costs and it can claim lower costs to
government only by taxing the private sector and calling this a
savings. It is just a matter of arithmetic. And it would be
certain to increase the deficit and the debt in the next few
years, hundreds of millions of dollars increase, increase in
the debt and increase in the deficit. And it would realize
savings to the government only many years from now, if at all.
Finally, there is a disutility factor. Are you really
prepared to force users, voters, to use a means of exchange
they clearly reject out of hand? According to a survey by Frank
Luntz, members of the public think they should be the ones
deciding whether to use dollar coins or dollar bills. Some like
one, and some like the other. But they think they ought to be
the one deciding. Moreover, three out of four Americans think
all this business about replacing the dollar bill is at best a
budget gimmick.
Mr. Chairman, thank you for your attention. I would be glad
to respond to any question you or your colleagues may have.
[The prepared statement of Mr. Miller can be found on page
49 of the appendix.]
Mr. Luetkemeyer. Thank you, Mr. Miller.
Mr. Diehl?
STATEMENT OF THE HONORABLE PHILIP N. DIEHL, FORMER DIRECTOR,
UNITED STATES MINT
Mr. Diehl. Thank you, Mr. Chairman, for the opportunity to
testify today. For background, I was the Director of the United
States Mint from 1994 to the year 2000, during the time the
Sacagawea dollar was launched.
Since 1990, GAO has issued 7 reports on this matter, all
reaching the same conclusion: Replacing the dollar note with a
dollar coin will save American taxpayers billions of dollars,
with estimated savings between $4.4 billion and $15.7 billion
over 30 years.
Based on my experience, I can say that claims that the
public will never accept a dollar coin are false. When the
Sacagawea dollar was launched in 2000, public demand was so
strong that the Mint shipped more coins in its first year than
it did in the entire 20-year history of the Susan B. Anthony.
In other words, our experience was very similar to the
experience that Ms. Lepine described with the launch of the
toonie.
Opponents will also cite research as we heard which they
claim shows the public opposes substituting a dollar coin for a
dollar note. What they don't reveal, however, is that if
respondents are first informed that this will mean millions in
savings, two-thirds of them support it.
Opponents also question how long it will take to
manufacture the 9 billion coins needed to add to those already
in circulation. I have doubts about these objections. During my
last year as Director, we produced 28 billion coins, with
additional capacity to produce another 2 billion. I understand
the Mint will produce around 9 billion coins this year. So,
there appears to be significant unused capacity to produce more
dollar coins.
Today's conventional wisdom is that the Sacagawea dollar
was a failure, but it certainly wasn't at the time. As I said,
demand was much stronger than we anticipated. In fact, we had
to increase production and develop a direct shipment program to
reduce delays through the FRB. But demand for the new dollar
coin ultimately flagged due to resistance within the government
and the banking sector, which I will describe momentarily, and
competition from the dollar note. Frankly, you will never
overcome this resistance without removing the dollar note.
For many years, the dollar coin has faced a significant
obstacle, the FRB's strong preference for the dollar note. I
discovered this myself when we launched the Sacagawea dollar in
2000. The FRB is the sole channel through which the Mint
distributes coins to banks and ultimately to businesses and
consumers. If the FRB doesn't order a coin, it doesn't get into
the hands of the public.
We did an extensive survey of banks and the FRB to prepare
for launching the Sacagawea dollar. They confronted us with a
dilemma. They would not order the Sacagawea dollar unless we
first demonstrated there was demand for it, and market research
wasn't sufficient. This presented us with a Catch-22 since we
couldn't prove there was public demand unless we could get the
coin into the market.
We solved this dilemma by shipping the coins directly to
thousands of Wal-Mart stores all over the country. In just a
few weeks, Wal-Mart distributed 100 million Sacagawea coins as
change in routine retail transactions. Lines formed outside the
stores before they opened in order to get the coins. In fact,
Wal-Mart wanted another 100 million to distribute over the next
several weeks. But when the banks started receiving calls from
customers asking for the coins, they insisted on receiving
shipments immediately and we accommodated them.
As GAO has reported, and as Ms. Lepine described, both
notes and coins make a profit, and this profit is called
``seigniorage.'' But the profit from coins and notes is
accounted for differently and this difference is important to
the FRB's preference for notes.
The bottom line is that the Mint earns the profits for
dollar coins, and the FRB earns the profits from dollar notes.
In 2011, the FRB's note seigniorage was estimated at nearly
$200 billion. In other words, eliminating the dollar note
denies the FRB an important source of its profits that would be
lost as a result of this legislation. However, this loss would
be offset by a much larger benefit for the taxpayer.
I was surprised, as some of you may have been, by the
dramatic reduction in GAO's savings estimate reported in its
2012 report. A significant part of this reduction is related to
the FRB's remarkable increase in the estimated lifespan of the
dollar note. For the past 20 years or so, the FRB cited a
lifespan of between 13 and 18 months. Then over the past 2
years, they increased the note's lifespan three- to fourfold to
56 months. It is hard for me to imagine what accounts for the
dollar note's sudden immunity to wear and tear in circulation,
but frankly for me it strains credulity.
Now, I would like to speak to a few points we heard
earlier. Mr. Miller says, in his written testimony, that the
taxpayer benefits from this legislation are actually taxes
imposed on consumers. For me, this is not evidently true and it
is difficult to see how this conclusion is reached since there
is very little support in the testimony. But let's say, for the
sake of argument, it is a tax. In that case, the profits from
the note are also a tax on consumers, are they not? Why ignore
these taxes in the analysis?
Also, he says that between the tax benefits and the tax on
consumers, there is no net savings here. But if there is no net
savings, how can there be a net tax? And if there is no net
tax, his next argument that the tax is regressive is invalid as
well.
Thank you, Mr. Chairman, for the opportunity to testify.
[The prepared statement of Mr. Diehl can be found on page
36 of the appendix.]
Mr. Luetkemeyer. Thank you, Mr. Diehl.
Mr. Weller?
STATEMENT OF MARK WELLER, EXECUTIVE DIRECTOR, AMERICANS FOR
COMMON CENTS
Mr. Weller. Mr. Chairman, members of the subcommittee, my
name is Mark Weller. I am a partner at S&R Denton and executive
director of Americans for Common Cents. Thank you for inviting
our organization to appear before the committee today. I am
excited to talk to you about the one cent coin, the metal
content of our coins, and the role that the penny plays in our
economy and culture. Americans for Common Cents was formed in
1990 to conduct research and provide information to the
Executive Branch and Congress about the value of the U.S.
penny.
There are three points I would like to make today. First,
ACC does not have a preference regarding which metals are used
to create our coins. Our focus is directly looking at the
broader fact that consumers benefit with a low denomination
coin. The penny is important for our economy. Working families
benefit from the penny, and America's many charities thrive on
it.
Second, steel is a coin material that saves money and it
has been used successfully in Canada and other countries. We
are excited to see what the Treasury Department recommends to
this committee next month when they produce their report, not
just on the content of the penny, but on our other circulating
coins.
Third, a focus on metal content alone ignores the Mint's
substantial overhead as well as cost accounting changes that
inflate the cost of the penny and the nickel. Metal content is
just one component in the rising costs of our circulating
coins. In fact, metal actually has become less of a factor
since the prices have lowered from their highs of 2006. And
last year, the Mint reallocated the costs of the penny looking
at the number of coins produced rather than their traditional
accounting that looked at Mint labor costs.
So these findings together suggest that Congress is on the
right track in looking for ways to make our coins less
expensively. However, in addition to coin composition, there
needs to be an additional focus on Mint overhead and those
costs and how they are allocated.
Let me just take a minute to specifically address one of
the topics of this hearing, H.R. 3693, Congressman Stivers'
Cents and Sensibility Act, that is going to require the pennies
to be made from steel; and H.R. 3694, the STEEL Nickel Act to
require nickels to be made out of steel and resemble the
current 5-cent coin.
Multi-ply plated steel compositions have been successfully
used by the Royal Canadian Mint, as we heard from Ms. Lepine
this afternoon, to manufacture circulating coins in Canada as
well as a number of other countries for over a decade. And as
Congressman Stivers mentioned in his opening statement, a
February 2012 Navigant Consulting study looked at the raw
material cost savings the U.S. Mint could achieve if we
substituted the compositions currently in use with steel coin
compositions that have been successfully used in Canada.
There are two findings in this Navigant report. First, they
found that the adoption of a multi-ply plated steel technology
for the nickel, the dime, and the quarter would reduce the per
unit raw material costs by over 85 percent. Second, applied to
the historic Mint production levels for these denominations,
the raw material cost savings alone by making this change to
the multi-plated steel would run between $183 and $207 million.
So based on these findings, Congress and the Mint should
consider changing the composition of the vending coins to
multi-ply plated steel.
The metal we use in our coins is just part of the picture.
While metal prices have stabilized since 2006, the reported
costs of the penny and nickel have increased dramatically. Why
is this so? The Mint has spread costs over a smaller number of
circulating coins, and an accounting change by the Mint in 2011
exacerbated the Mint's cost allocation for the penny. This
accounting change unfairly doubled charges, the costs for the
penny fabrication process, since the Mint receives a finished,
ready-to-strike blank from a private sector firm, and only a
small fraction of the overall penny operations are performed by
the Mint.
So here is the key point: Metal prices have decreased from
their highs of 6 years ago and the penny production and
transport costs have remained relatively constant, but low coin
demand and the allocation of Mint costs across a smaller number
of circulating coins have negatively impacted the penny's
reported unit production cost.
In summary, as the Mint and Congress explore options to
make our coins more cost-effective, several factors should be
paramount. First, steel is a coin material that saves money and
has been used successfully in Canada and other countries.
Second, the metal content is just one component in the rising
cost of our circulating coins and a focus on metal content
alone ignores the Mint's substantial overhead as well as cost
accounting changes that inflate the reported costs of the penny
and the nickel. And, third, we need to ensure that the Mint and
congressional discussions about alternative metals don't become
a pretext for an ill-considered decision to remove the penny
from circulation. The alternative to the penny, which is
rounding transactions to the nickel, is bad for consumers and
it is bad for the economy. It will hurt those who can least
afford it because they make more cash purchases than others.
Americans overwhelmingly want to keep the penny. No one has
explained how we would replace the millions of dollars that are
raised by charities and charity drives every year if we didn't
have the penny around. In these uncertain economic times, the
last thing consumers need is price rounding and inflation and
reduced charitable assistance. But with the changes outlined
above, I think we can retain the penny and achieve the other
cost benefits for our circulating coins.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Weller can be found on page
71 of the appendix.]
Mr. Luetkemeyer. Thank you, Mr. Weller.
Let me begin with you, Mr. Weller. You probably heard my
questions awhile ago to Ms. Lepine with regards to doing away
with the penny altogether, and you made some comments within
your testimony here with regards to that. Can you expound on
that?
I guess, number one, how many other countries in the world
do not have pennies that have similar monetary structures as we
do? I guess the second question is you made the comment that it
impacts the poor, and if you round it up, it looks to me like
half the time you are going to win, and half the time you are
going to lose, regardless of what you do. Can you expound on
why it is going to impact somebody in a negative way?
Mr. Weller. Sure, I would be happy to. Thank you. There are
a couple of responses. There are some countries that have been
mentioned, New Zealand and Australia. I think you mentioned
Australia. Our economy is 16 times larger than Australia's, so
I think it is difficult to make those comparisons on what that
would mean. We have the largest economy in the world with
millions of transactions that are taking place.
Britain still has a one pence coin--it is about 1\1/2\ the
value of the penny--in existence. And the European Union, when
they were created, Mr. Chairman, had a number of coin options
they could look at and they felt it was important to have both
a one- and a two-cent Euro coin. Why? Because they were
concerned about inflationary impacts and the impacts of
rounding.
I think it was interesting in Ms. Lepine's testimony that
when she was talking about their experience with the Canadian
penny, they have actually stopped production but they are
continuing to circulate that coin and they have delayed any
change until February of next year because the merchants were
concerned about rounding and the public reaction to rounding
over the holiday shopping season.
So I think the answer is that unlike Canada, we have
consistently seen that over 60 to 70 percent of the American
public wants to keep the coin. Americans abhor the idea of
rounding, and over 77 percent think merchants would use that
opportunity to raise prices, and they are probably right.
The misconception is that rounding is going to work out and
even out and be done fairly, and the fact is if there is one
proposition that economists can agree on, it is that merchants
have an incentive to make a profit. So if you talk to retail
grocers and convenience stores and others, they work on very
small margins and that cent up or down, one way or another,
really does make a difference.
The poor, just to finish, and I am taking probably more of
your time, are affected the most because they rely
predominantly on cash transactions. They don't have credit
cards. They don't have checking accounts. They are using cash
and payday lenders. So you are not only having an a broad
impact on the economy, but you are affecting those who can
least afford it.
Mr. Luetkemeyer. Okay. Have you checked New Zealand and
Australia on their doing away with the penny? What were the
problems that they had with that? Did they see inflationary
effects with smaller purchases?
Mr. Weller. We have not spoken to them specifically on what
the inflation impact is. I think there is a real impact on
inflation and a perceived impact. The studies we have seen
showed that there would be a very small actual impact on
inflation. However, there are a number of programs that are
tied to the CPI, Social Security and other wage programs, and
so even a small change in inflation has a dramatic impact on
the cost.
But more so, I think, as The Wall Street Journal
editorialized in 2006, doing away with the penny would be
waving a white flag to the forces of inflation. We are not a
South American country that devalues its pesos. I think it is a
real tribute to our economy that we have had a low denomination
coin as long as we have, and I think it sends all the wrong
signals that we are doing away with the penny, rounding to the
nickel, for these perceived cost issues when the nickel is
costing 11 cents, and the logical conclusion is you do away
with the penny and the nickel and then you have your dime as
the lowest denomination, and that doesn't really make much
sense.
Mr. Luetkemeyer. Interesting. My local utility company at
home rounds it to the nearest dollar. I don't have any pennies,
I don't have any quarters or anything. It is always rounded to
the nearest dollar.
Along this line, Mr. Miller, would you like to just give an
opinion on this?
Mr. Miller. I don't have any comments on that, no, sir. I
do have--
Mr. Luetkemeyer. Mr. Diehl?
Mr. Diehl. I really don't have an opinion on this either.
Mr. Luetkemeyer. One way or another? Okay. I know we are
talking about the different make-ups of the coins themselves.
Have we looked at other countries with regards to how they do
their metal coins, other than Canada? Have any of you done any
studies or looked at other countries? Mr. Weller?
Mr. Weller. We have looked at other countries. I think as
was pointed out in the first panel that you have a limited
option of coin materials that produce a cost savings. But
certainly those countries that we are looking at, copper and
nickel that were really higher cost coins, were all looking at
ways to try to make their coins less expensively. I know that
the multi-ply steel not only has been used in Canada, but we
are seeing that in, I think, about 20 or 30 other countries,
which would indicate that is an option which has been popular.
But I think there are other technologies out there that the
Mint is examining that can produce similar cost savings and
aren't necessarily just that steel approach.
Mr. Luetkemeyer. Very good. Thank you for your testimony. I
recognize the gentlelady from New York.
Mrs. Maloney. Thank you, and first of all, I would like to
welcome Mr. Diehl, the former Director of the U.S. Mint, and
also Mr. Miller, and thank you for your former service to our
country.
I was on this committee when we came out with the dollar
coin, and one of the reasons we did it is that we had a dollar
coin, the Sacagawea coin. It wasn't popular; no one wanted it.
So we thought if we had an innovative, creative dollar coin
series, the collectors would want it and it would move forward.
Well, that didn't happen. Then what happened is that people
didn't want them, so they went out of circulation back to the
Fed and the Fed had to spend all this money to store them.
I just know one factor that I didn't like about the dollar
coin was that it was the exact same size as the quarter, so I
was constantly moving fast and handing out dollars like they
were quarters. And a number of people tell me they don't like
the fact that the size is the same as the quarter. They confuse
them when they are working fast. And also the weight of it, of
carrying around dollars that are in coins, is heavier than
carrying the paper. But the whole thing about we stopped the
dollar coin because they were just going to the Fed.
Now, if the people don't want it and they don't want to use
it, and I hear complaints that it is the same size as the
quarter, they don't want to put it in their pocketbooks because
they hand the dollar out as a quarter, the collectors don't
want it, why in the world are we even talking about changing it
if it has failed? We tried to make this the most exciting
dollar coin series with all kinds of creative things. The
people didn't want them and the collectors didn't want them,
and it ended up costing taxpayers more money to sit there and
store them.
I know that the weight is something to me, someone who
leaves at 6 o'clock in the morning, you get back late. I carry
a lot of paper dollar bills with me and use them. If I turn
them into quarters, or rather dollar bills, it is added weight
you are carrying around. And it seems like the cost is
basically the same. So why bother to change it? I will ask Mr.
Diehl first, and then Mr. Miller.
Mr. Diehl. Let me address several things because you have
raised a number of issues. We learned the lesson from the Susan
B. Anthony dollar that you have to produce a dollar coin that
is easily distinguishable from the quarter because the Susan B.
Anthony was the same color, and like the quarter, it had a
smooth edge.
So the Sacagawea coin was produced as a gold colored coin
with a reeded edge so that it was easy to tell the difference,
and, excuse me, but it is not the same size as the quarter. It
is larger than a quarter. And once you get used to handling it,
it is easy for me to reach into my pocket and actually pick out
the Sacagawea coin from a quarter. And it is really a matter of
just sort of getting used to it.
Now, in terms of whether or not the Sacagawea dollar was a
success, I addressed this in my testimony. It was a hugely
popular coin when we launched it. But we knew from the very
beginning, and in fact, we knew from before we launched the
Susan B. Anthony because of market research that was done in
1978 and 1979 by the Treasury Department that a dollar coin
would never successfully circulate unless you remove the dollar
bill. We have never bitten the bullet to remove the dollar
bill, as every other western economy has done. If we do that, I
am absolutely convinced we will have the same success as the
Canadians have had with removing their dollar note and
substituting a dollar coin.
They found that the seigniorage profits from that
substitution were 10 times what the original estimates were.
That doesn't surprise me, because I think the natural result--
Mrs. Maloney. What year was it when they found that out in
Canada?
Mr. Diehl. That was in 1986, and then they had so much
success, they subsequently introduced a $2 coin to replace the
$2 note in 1997 and they reaped similar kinds of benefits. I
don't see any reason why the passage of time would make any
difference in that regard.
Mrs. Maloney. I would say that there is a difference, Mr.
Diehl, because we are really moving to an electronic system in
banking. We are moving to paying everything electronically,
debit cards, charge cards, all kinds of different cards. They
now have phone cards, they have meal cards, they have prepaid
cards. We are moving to cards over the traditional notes that
we had.
And I would say also when the American public, and I guess
elected officials listen more to the American public than
appointed officials because we have to answer to them, elected
officials hear from our constituents that they like the dollar
bill, and they don't want it changed. And Sacagawea, when it
came out, it was sort of exciting, we have this new dollar
coin. But then that was also stockpiled at the Federal Reserve
because people were not using it. It didn't stay in the
currency. It wasn't being collected. And it really got to a
point where it was costing us money keeping all that material
there.
And I would venture to say the fact that we are moving to
really a card situation, particularly with younger people, my
daughters don't carry money, they don't carry a phone,
everything is on a card. And I think that might be a change
that will affect the finances of it quite dramatically.
Your comment on that, moving to the prepaid cards?
Mr. Luetkemeyer. Very quickly, if you can respond to that?
We need to move on.
Mr. Diehl. That change will have the same effect on
currency as it will on coins, and as a result, there will be a
net wash between the two. The big advantage of a coin is while,
in fact, it is more expensive to produce, it has a much longer
lifespan, a 30-year lifespan, and Ms. Lepine spoke to that in
her testimony on the first panel.
Mrs. Maloney. Versus a paper dollar is what, 5 years?
Mr. Diehl. It depends on when you asked. The estimates have
ranged between 13 months and 56 months over the last several
years.
Mrs. Maloney. Thank you for your testimony. Thank you for
your service.
Mr. Luetkemeyer. Thank you. The gentleman from Ohio.
Mr. Stivers. Thank you so much, and thank you all for your
testimony. Most of the second panel is about the dollar, and I
appreciate Mr. Weller's comments about the penny. I did
appreciate your points about the overhead at the Mint. You may
have heard Mr. Peterson earlier respond to your statement about
the accounting changes at the U.S. Mint which changed the cost,
listed cost and overhead which is assigned to the penny and the
nickel.
Did you want to comment on his points earlier where he said
all it was is general and administrative expenses being
assigned to the penny and the nickel?
Mr. Weller. Yes. I think the response, Congressman, is
still that you have in the situation of the penny a ready-to-
strike blank that is produced for the Mint and all they do then
is mint Abe Lincoln's head on that that coin. If you look at
the Navigant report from earlier this year, and they looked at
some of these costs in more detail, the costs of taking the
metal, melting that down, rolling it, stamping it up, setting
it, delivering that finished blank was around a cent or 1.1
cents, and then we move from that to 2.4 by the Mint cost. And
I think that inflated cost, at least for the 2011 situation we
are discussing, is due to the fact that the Mint reallocated
their costs and looked at those GS&A costs based on the
percentage of coins produced. And since the penny is 60 to 70
percent of the Mint production, they were getting a large
portion of those overhead costs, when, in fact, that ready-to-
strike blank, in our view, does not really require all the
overhead that is being put on it.
So that when you saw that penny cost go from 1.5 to 1.7 to
1.9 and now to 2.4, and who knows what it is going to be if the
dollar coin costs are now distributed over a smaller number of
coins. I think that is what is causing this inflation we are
seeing.
Mr. Stivers. Sure. And as an example of what you are
talking about, the Royal Canadian Mint's production costs for
their coins are actually lower on a per unit basis than the
U.S. Mint. However, their volume is approximately one-tenth the
U.S. Mint's. Do you have any explanation for that, and then do
you have any recommendations or a prescription for increasing
the efficiency of the U.S. Mint?
Mr. Weller. Yes. I believe that the Royal Canadian Mint
doesn't allocate their costs on a per-unit basis, so that would
be one difference. I think Mr. Peterson did a nice job of
explaining how they have made some significant reductions over
time. I think what was interesting in Ms. Lepine's testimony
was just more broadly not looking specifically at one
denomination of the penny or the nickel, but the number of the
steps the RCM has taken to reduce their overall costs of
production. They instituted a $1 and $2 coin that extracted
savings. They moved their nickel, dime, and quarter to a multi-
ply steel and saved money. They moved their penny to a steel
coin. They changed the size of their coins. So all these steps
were a part of the whole effort I think that reduced their
costs and their production and helped in their efficiencies.
Mr. Stivers. Would you normally expect somebody with more
volume or less volume to have a lower unit cost?
Mr. Weller. You would assume that the higher volume would
produce the lower cost.
Mr. Stivers. It kind of defies logic.
Mr. Weller. Yes.
Mr. Stivers. Thank you for that. I really appreciate it. Do
you have any other prescriptions or advice for the U.S. Mint on
how they could do what needs to be done to make themselves more
efficient? And if you don't, that is fine.
Mr. Weller. I think I will probably pass on that. It is a
little outside of the mission of the Americans for Common
Cents.
Mr. Stivers. Sure. But you do talk about the overhead in
your testimony. I wanted to give you an opportunity to talk
about the--if you had any specific recommendations, I felt that
was only fair.
Mr. Weller. Thank you. I think the point would be that a
lot of this focus has been on metal content, and I simply
wanted to raise for the chairman and the members of the
committee that there is a second side to the coin, if you will,
which is there is an allocation of cost here that plays into
this certainly with the penny and the nickel.
I am sorry that Congresswoman Maloney left. Several years
ago, she submitted a question to the Mint that asked what would
happen to nickel production if you didn't have the penny, and
the Mint came back in response to that and said that their
nickel production would double. So this whole idea we are going
to save money if we eliminate the penny really doesn't pan out.
Navigant found out that there is actually an $11 million cost
to the Mint without the penny because you have fixed costs that
are applying to our other coins and then you have more nickels
that are also being produced at a loss.
So I wanted to just say that if you look at the RCM
experience, they made a number of changes across a number of
coins. I think the way to address this is holistically.
Mr. Stivers. Sure. And I think that makes a lot of sense,
and the report coming out of the U.S. Mint in December is
something we are all going to anxiously await.
It looks like my time is up. I appreciate the opportunity,
and I yield back.
Mr. Luetkemeyer. Thank you. We are going to also, if there
are no objections, enter into the record the testimony of
Thomas Schatz, president of Citizens Against Government Waste.
They have some comments to make on this issue as well.
I have one or two questions myself yet, and then we will
keep going here. Mrs. Maloney made the comment with regards to
a lot of transactions being done electronically, and I was
talking to someone in the financial services industry just
yesterday and they said that in 5 years, 50 percent of
transactions are going to be made on this thing right here.
Now, I don't know if that is true or not. I am the least tech
savvy person in this room, I will guarantee you.
But if that is the case, where do we go with our coinage
and our paper money? Is there going to be the need for it? Are
we really looking at long-term, long-range needs for these sort
of things? Can you gentlemen, each one of you, give an answer
to that? Where do you see it is going?
Mr. Miller. I would say if we do that, it is going to
really increase the cost of converting to coins, because then
we will have paid all the up-front costs and we don't get the
benefits. So I think it makes this proposal that is outstanding
really a much worse deal.
Mr. Luetkemeyer. You are talking about the proposal going
to the $1 coin, or going to the steel-plated coins?
Mr. Miller. No, I am talking about replacing the bills with
the $1 coin.
Mr. Luetkemeyer. Mr. Diehl?
Mr. Diehl. If estimates of the budgetary effects of
legislation over the next several years are relatively
accurate, but the further out you look, the more speculative
they become, then it is certainly speculative to say what the
future of money will be.
It has been 13 years since I was at the Mint and I
testified in front of this committee about the future of money,
the very same title of this hearing, where we discussed whether
coins and notes would be replaced by other forms of money. I
don't believe money is going to go away. There is a bigger
role, no doubt, for electronic forms of money. I think you are
absolutely right, there will be more transactions on cell
phones.
But it took me 5 minutes this afternoon to get in a taxicab
at my hotel because the people who were in the taxicab were
trying to pay using a cell phone and it wouldn't work. It was
the only taxicab available, and as a result, I was almost late
today. So count me as a bit of a skeptic that electronic forms
of money will replace coins anytime soon.
Mr. Luetkemeyer. Very good. Mr. Weller?
Mr. Weller. Certainly, the technology trends are moving in
that direction, Mr. Chairman. Who would have thought 10 years
ago that anybody going to a fast food restaurant would be using
plastic? But we have micro-transactions under $10 or $5 that
were predominantly the world of cash that are now debit and
credit. So I think you could see a continuing use of cash and
currency in the economy as the changes that you outlined occur.
That said, I think there is always a need for cash and
coin, predominantly in the lower-income populations who don't
have credit cards, they don't have checking accounts, and those
people are the ones who rely predominantly on cash and
currency. So we have to make sure we are not taking any steps
that are going to have a harmful effect on those populations.
Mr. Luetkemeyer. For the record, they said the same thing
about checks 30 or 40 years ago when they introduced credit
cards and debit cards. They said, well, the checks are all
going to go away. We are going to have a checkless society.
Now, the level of checks is about the same as it was 30 years
ago. However, there are still a lot more transactions being
done, but the level of checks is still relatively the same. So
it is interesting that comment was made and I was interested in
your thoughts on that.
With that, I will yield to the gentleman from Ohio, if he
has any further questions.
Mr. Stivers. I think we have kept these people busy a long
time. I am good. Thank you so much, Mr. Chairman.
Mr. Miller. Mr. Chairman, could I respond to do Mr. Diehl,
because he did point me out in his testimony.
Mr. Luetkemeyer. He did mention you, but I did not see him
physically point to you.
Mr. Miller. Mr. Diehl said that he didn't see how the
seigniorage interest was a tax on consumers and businesses. Let
me just give you another--I thought I explained it, but let me
give you another analogy.
I am sitting in my office surrounded by my associates at
OMB, and we are trying to put the budget to bed, and we are
trying to meet Gramm-Rudman-Hollings deficit reduction
requirements and we are about $20 billion short, and I say, I
have an idea. We will get Congress to pass a law that will
force everybody to pay all of their income tax on the first of
January. Then we will have that money through the whole year
where we can effectively earn interest on it by not borrowing
or not turning over debt that otherwise we would have to turn
over, et cetera. Isn't that a great idea?
It would certainly solve the $20 billion revenue shortfall.
But who would argue that it is not an inconvenience and a tax
on people to have to pay all of their income tax up front? So
it doesn't--it seems to me that might be a distinction without
a difference.
Also, the question of whether it is regressive, I cite a
study in my testimony, and I will be glad to share that study
with the committee. If Mr. Diehl has studies showing otherwise,
he should share that.
Mr. Diehl also said that people would support the coin if
they are told up front that it would save money. There was a
survey that was taken by Frank Luntz that I cited in my
testimony, where even though people were told that it would
save the government half a billion dollars a year, they still
opposed converting or forced conversion from coins to dollars.
Mr. Diehl said the coin would be successful only if you
withdrew the dollar bill. Yes, I agree. I agree. But why is
that? The government is a monopoly. If they withdraw from
consumers a choice, then the consumers would have to go with
the other thing. But suppose that you are a monopoly producer
of automobiles in the United States or any other country and
you have two models: one that we will call the Lion, it is
really a great model; and the other we will call a Dog. And the
Lion is a really good vehicle and the Dog is a bad vehicle, but
the Dog earns a whole lot more money than the Lion. So somebody
says, why don't we just withdraw the Lion? People don't have
any choice. They will have to buy the Dog. Well, that is true.
If they buy the Dog, the company will make more money. But that
is not good policy. And I don't think the Federal Government
should be taking away the choice from consumers whether they
hold their cash in coins or dollars, and the public agrees with
that position.
Mr. Luetkemeyer. So you are advocating the penny be called
the Fido. Mr. Diehl, would you like to respond? I will give you
30 seconds.
Mr. Diehl. Great. This bill would impose virtually no pain
on American taxpayers and minimum inconvenience. Congress is
considering cuts that represent enormous pain to virtually
every taxpayer in America, and I think it is sort of silly for
us to make such a big deal out of reaping the benefits that are
available that are difficult to argue with, because the GAO has
documented it 7 times. And we had testimony from Ms. Lepine
today that the benefits were 10 times what they expected in
Canada. I think it is an open-and-shut case.
Mr. Luetkemeyer. Very good. With that, we want to thank the
panel and the members of the former panel for their testimony
today. It has been enlightening and it has been lively.
Obviously, there are two distinct sides to this, and we will
continue to work on it. Thank you again for your enlightened
testimony and we appreciate your participation.
The Chair notes that some Members may have additional
questions for today's witnesses, which they may wish to submit
in writing. Without objection, the hearing record will remain
open for 30 days for Members to submit written questions to
these witnesses and to place their responses in the record.
With that, the hearing is adjourned.
[Whereupon, at 4:01 p.m., the hearing was adjourned.]
A P P E N D I X
November 29, 2012
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