Who needs a digital currency when you have a Coin Task Force?

Well, anyone interested in money or technology or the future will have been following the evolution of Central Bank Digital Currency (CBDC) in China, where the largest state-owned banks have begun testing the “electronic wallet” component of the digital yuan. The tests are being conducted in cities including Shenzhen, which borders Hong Kong. Meanwhile, in America, there’s a Coin Task Force. And it’s been busy urging patriots to return their spare change to circulation by using it for retail transactions because there’s shortage. According to NPR, “Banks and laundromats are scrambling. Arcades and gumball machine operators are bracing for the worst”. Other sectors are adopting a more European approach (where rounding is common) and some stores are rounding their prices to even dollars or (as is common in London) just giving up on cash completely. But why? Where have the coins gone? The shops have none left and customers can’t be bothered to search down the back of the furniture to find them. Banks, lacking the usual coin deposits from the public, requested coins from the Mint which was unable to produce enough coins (and, in fact, fell short of its usual levels)  and… there’s a coin shortage.

America’s coin shortage isn’t a problem, it’s an opportunity to take a step forward. Click To Tweet

In developed economies, this sort of thing doesn’t matter. In Australia, for example, tens of millions of coins may never even go into circulation because their Mint has seen “virtually no demand” for coins in 2020 as physical retail closed down. Same in the UK. Even if there was a coin shortage, most people would never notice since pandemic-accelerated cashlessness is pervasive. Everything I want to buy, I can buy with Apple Pay. I never take a wallet out of the house with me, let alone coins.

Problems are opportunities

with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

Frankly, the continued use of pennies and even nickels baffles me. There’s something that economists call “the big problem of small change”. If you’re interested, there’s a very good book about this, which is called “The Big Problem of Small Change”. In essence, the problem is it’s hard to make a living out of producing small change, so no-one does it, so therefore the government has to do it and bear the cost in the interests of the economy.  But should they continue to do this in a world of contactless card and QR codes? The US Mint lost 0.99 cents on each penny it sold in 2019 but continued to produce more pennies than any other coin in circulation!

The Cato Institute says that the case for producing these pointless coins is weak and they they are only minted because lobbyists harness nostalgia and “junk arguments” about rounding.  If you are interested in the subject of rounding, there is a very good paper on rounding written by Robert Whaples called “Time to Eliminate the Penny from the U.S. Coinage System: New Evidence” that was published in the Eastern Economic Journal way back in 2007. This confirms the European experience that dumping low-value coins and rounding prices is economically neuter. Rounding is not that complicated! Whaples wrote that a detailed study of convenience stores found the final digit of purchases, which usually involves multiple products and sales tax, was pretty much random so that “if you round it to the nearest nickel, the customer wouldn’t get gouged”. Sometime you’d round up, sometimes you’d round down. It balances out.

(Here is how they do it in Belgium where total amount payable in cash has been rounded up or down to the nearest five cents since December 2019: if the total amount payable in cash ends in one or two cents, it is rounded down to zero,  if it ends in three, four, six or seven cents then it is rounded to five cents and if it ends in eight or nine cents then it is rounded up to one euro. As far as I know, Belgian civil society has not collapsed and shops are operating normally under the circumstances.)

Pennies and nickels are scrap metal and a private coin industry would not be able to waste taxpayer cash on subsidising miners to keep producing them. And if you think I’m exaggerating by calling coins “scrap” then you should, as the man says, follow the money. Which in this case goes to China. I remember reading a fascinating news story about this a few years ago, which really set me thinking. The story concerned two Chinese people who were arrested in Denmark after they tried to exchange a hoard of scrap Danish coins that were mistaken for counterfeits. I thought it was a pretty unusual incident and I mentally filed it away to use as a conference anecdote, but then I spotted another similar case in which two Chinese tourists were arrested in France for suspected forgery after trying to pay a hotel bill in coins. The police found 3,700 one-euro coins in their room! The men said they had got the money from scrapyard dealers in China, who often find forgotten euros in cars sent from Europe. This tallied with the Danish story. Sufficiently large amounts of coins from Europe end up as scrap that it makes for a worthwhile enterprise (in China) to collect up these coins and ship them back here to use! Not all the coins coming from China are real though. I remember when the Italian police discovered half a million counterfeit euro coins in a container. Hardly surprising, because if container-loads of coins are coming out of China, then it’s inevitable that this trade will attract counterfeiters. And this gave me an idea.

I don’t know if the US Coin Task Force has been thinking out of the box, but may I suggest that they make a virtue out of necessity. Since the Chinese counterfeiters can presumably produce these coins at a lower cost than collecting them as scrap metal (otherwise they wouldn’t make them, they’d just collect them), why doesn’t the US mint just stop producing coins above face value and sending them for scrap and instead let the Chinese counterfeits circulate in their place? Think about it. It costs the US Mint two cents to make a penny that no-one cares is real or not. So why bother? If the Chinese can produce one for half a cent, ship it to the US in a container and make a profit of 0.2 cents on it, then let them and let the US Mint do something more useful instead: $1 coins. There is no $1 note in Canada, no £1 note in the UK, no €1 note in Europe. There are already more $100 bills in circulation than $1 bills, so let the $1 bill die a long overdue death and replace it with the more cost-effective $1 coin instead. A decade ago, the GAO calculated that the replacement of dollar bills with dollar coins would save an estimated $5.5 billion in costs over a generation. It’s time.

[This is an edited version of an article that first appeared on Forbes, 24th August 2020.]

The campaign against extreme cash is gaining momentum

I’m veery much in favour of getting rid of “extreme cash”. What I mean by this is cash at the extremes of the value range: the small coins and the big notes. In the UK, this means getting rid of the coppers and the largest banknote. So… hurrah! I read that the UK government is considering phasing out 1p and 2p coins, as well as £50 notes, in a bid to tackle tax evasion, money laundering and waste.

Since I’ve been going on about this for more than two decades I’m delighted to see that the government is finally coming around to my way of thinking. I read some newspaper reports that the government is to begin consultations on the subject, but I haven’t heard from them yet and I can’t imagine who else they might consider asking, so I stand ready to answer the nation’s call when as soon as it comes.

The issue of coins is a no-brainer. Back in 2014, I asked whether it is in the interests of the economy as a whole to continue to produce these small coins, saying that “I have no idea why the Royal Mint are messing about wasting our money on making 1p and 2p coins that nobody uses any more. It’s about time we recognised low-value coins for what they are. Scrap metal”. Five years ago I pointed out that in many countries, merchants and consumers alike had simply given up using small coins (such as the one- and two-cent euro coins) whether the mints produced them or not. When Nigel Lawson abolished the old halfpenny in 1984 it had a purchasing power close to the current 2p and there was no contactless. So I fully expect to see the 1p and 2p vanish, and if the government caves to the metals lobby to perpetuate them, which case I will be outraged.

I think the consultation around the £50 note will be more interesting, since there is “a perception among some that £50 notes are used for money laundering, hidden economy activity, and tax evasion”. I’ll say there is. Of the £ billions of notes and coins “in circulation” in the UK, which were in 2016 growing at 5.7% in a year when the economy grew by about 1.8% and the use of cash in retail transactions (retail spending grew 5.2%) was overtaken by the use of electronic payments, a fifth is in the form of £50 notes, which you never see in polite society. As I have discussed exhaustively and on many occasions, only about a quarter of the Bank of England’s notes are used for transactional purposes so these £50 notes must be disproportionately concentrated in the non-transactional (i.e., largely criminal) uses. As everywhere else, high-value banknotes are a major cause for concern. So why not make crime, terrorism, drug dealing, money laundering and bribing corrupt politicians marginally less convenient and marginally more expensive by getting rid of high-value banknotes? It is not only deranged digital money deviants like me who think this is right path to take, by the way. This kind of thinking is beginning to percolate up to the higher echelons of the financial establishment. Mario Draghi, European Central Bank president, told the European Parliament that “we are determined not to make seigniorage a comfort for criminals”. By which he means that the stack of £50 notes underneath the Mafia boss’ pillow are earning interest for the British government. The government is, in a very real sense, living off of the proceeds of crime.

Now, I’m not so stupid that I think that getting rid of the £50 will stop crime! If the government drops the £50, then the criminals will carry on using the $100, €200 and the worst offender, the Swiss Franc. Sooner or later the law-abiding nations of the world will have to institute sanctions against the Swiss. When I last went to Switzerland and I never saw a CHF note or coin: I used cards everywhere, and as far as I could see so did everyone else. Yet Switzerland has a CHF1,000. That’s right: a banknote worth $1,000. And you can spend it, too. Mind you, the Swiss have been cracking down: since 2016, you have had to show ID (how they verify the ID is beyond me) for cash transactions of $100,000 or more (Charles Goodhart, a former Bank of England policy maker, said this limit was so high that it could only be described as a joke).

Am I taking crazy pills? The Bank of England, the Swiss National Bank, the European Central Bank and the Federal Reserve should not be competing to be the currency of choice for Mexican drug lords, Albanian people traffickers and Syrian terrorist groups. So yes, let’s ditch the £50 but let’s also spearhead an international campaign to add morality to the cash issue and reduce the maximum value of the circulating medium of exchange to EUR 50, USD 50 and CHF 50. If the central banks won’t do it, then we should prosecute their governors for conspiracy to support money laundering.