One of the policy ideas that was floated in the wake of last week’s UK Spring Statement was the possibility of scrapping the lowest denomination coins (the 1p and 2p piece). According to research cited by the Treasury last week, “surveys suggest that six in ten 1p and 2p coins are used in a transaction once before they leave the cash cycle. They are either saved, or in 8% of cases are thrown away” (see chart). Since the Royal Mint has to produce and issue additional coins to replace those falling out of circulation, and because “the cost of industry processing and distributing low denomination coins is the same as for high denomination coins” this not unreasonably raises the question of whether we need the lowest denomination coins.
I have to confess that I have long wondered the same thing
given that over the years I have collected large quantities of pennies in jars,
which weigh a lot but have little monetary value. Moreover, the amounts in coin
which vendors are legally obliged to accept in the UK are very low.
For example, the legally acceptable maximum payment in 1p and 2p coins is a
mere 20p (it can be more, depending on the discretion of the payee). For 5p and
10p coins, that limit rises to £5. That is a very arbitrary amount: I can
legally only use 20 x 1p coins in one transaction whereas I can use 100 x 5p
coins (which are also irritatingly small). I also recall that the one
time many years ago when I wanted to cash in my pile of bronze and took it down
to the automatic machine at my local supermarket, the nominal value of the
coins was something like £42 but I paid a £2 commission fee, corresponding to
almost 5% (and yes, I know I should have taken it to a bank).
So it should be clear that I am not a fan of coinage that clutters up space for little return. And the UK has form when it comes to taking small denomination coins out of circulation. Way back in 1960 the farthing was removed from circulation. For those unfamiliar with UK coinage, the farthing was equivalent to a quarter of a pre-decimal penny – around one-tenth of a modern penny. In 1983, the halfpenny was taken out of circulation and I do not recall any great wailing and gnashing of teeth at the time. Moreover, since 1984 the price level as measured by the CPI has increased by a factor of 2.5, and one penny today is worth less than 0.4p in 1984 prices. In other words, the real value of the penny today is less than the halfpenny in 1984.
One of the arguments which is increasingly used in favour of demonetising the smallest unit is that its face value is often less than the cost of production. In the US, for example, it cost 1.5 cents to mint each penny in 2016, and although the US continues to issue the penny, the Bank of Jamaica recently announced it would phase out the one cent coin on the grounds that it is too expensive to make. The Royal Mint in the UK has not revealed how much it costs to strike a penny in the UK, but so far as we know it is less than its face value.
But the penny has a strong hold on the UK public imagination and last week’s suggestion was met with such a howl of outrage that the government was forced to back down. It has been around for a thousand years in various guises although it was not until 1714 that it began its transformation from a little-used small silver coin to the bronze item that has become such a staple part of the UK coinage system. Some people are concerned that abolishing the penny would encourage retailers to round up prices – and there may be some truth to that – but a better argument against abolition is that low income households are bigger users of cash and they would likely be hit disproportionately hard by its abolition. Indeed, it is notable that the Treasury’s call for evidence was based on the notion that we are increasingly moving towards electronic cash – but whilst that may be true for most, it is not so for all. The charity sector was also quick to argue that the collection bucket is a useful place to get rid of low denomination coins.
But as much as I value tradition and have no desire to impoverish the less well-off, the arguments in favour of keeping the penny are not strong enough to save it in my view. Inflation has eroded its usefulness – as anyone who has tried to spend a penny in recent years can testify. It ought to go the way of the threepenny bit, the sixpence and the half crown – not to mention the pound note. In any case, there is still the 2p – why keep the penny when you can have two of them in one coin?
So it should be clear that I am not a fan of coinage that clutters up space for little return. And the UK has form when it comes to taking small denomination coins out of circulation. Way back in 1960 the farthing was removed from circulation. For those unfamiliar with UK coinage, the farthing was equivalent to a quarter of a pre-decimal penny – around one-tenth of a modern penny. In 1983, the halfpenny was taken out of circulation and I do not recall any great wailing and gnashing of teeth at the time. Moreover, since 1984 the price level as measured by the CPI has increased by a factor of 2.5, and one penny today is worth less than 0.4p in 1984 prices. In other words, the real value of the penny today is less than the halfpenny in 1984.
One of the arguments which is increasingly used in favour of demonetising the smallest unit is that its face value is often less than the cost of production. In the US, for example, it cost 1.5 cents to mint each penny in 2016, and although the US continues to issue the penny, the Bank of Jamaica recently announced it would phase out the one cent coin on the grounds that it is too expensive to make. The Royal Mint in the UK has not revealed how much it costs to strike a penny in the UK, but so far as we know it is less than its face value.
But the penny has a strong hold on the UK public imagination and last week’s suggestion was met with such a howl of outrage that the government was forced to back down. It has been around for a thousand years in various guises although it was not until 1714 that it began its transformation from a little-used small silver coin to the bronze item that has become such a staple part of the UK coinage system. Some people are concerned that abolishing the penny would encourage retailers to round up prices – and there may be some truth to that – but a better argument against abolition is that low income households are bigger users of cash and they would likely be hit disproportionately hard by its abolition. Indeed, it is notable that the Treasury’s call for evidence was based on the notion that we are increasingly moving towards electronic cash – but whilst that may be true for most, it is not so for all. The charity sector was also quick to argue that the collection bucket is a useful place to get rid of low denomination coins.
But as much as I value tradition and have no desire to impoverish the less well-off, the arguments in favour of keeping the penny are not strong enough to save it in my view. Inflation has eroded its usefulness – as anyone who has tried to spend a penny in recent years can testify. It ought to go the way of the threepenny bit, the sixpence and the half crown – not to mention the pound note. In any case, there is still the 2p – why keep the penny when you can have two of them in one coin?
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