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We can all think of examples of state failure. The most obvious include the inability to protect citizens from criminals, failure to provide drinkable water, and incapacity to cope with a public health crisis like COVID-19. I would argue that the ongoing existence of the penny within a nation's borders is another example of state failure.
The poster child for this particular example of state failure is the U.S. and its Lincoln penny. Many (though not all) developed nations have already rid themselves of their lowest denomination coin. (Well-run New Zealand has managed to cancel two of them, the penny in 1989 and the nickel in 2006!) My own country, Canada, was a disappointing failure on this front. But in 2012 we worked up our resolve and put an end to our orange one-cent discs.
In this post I'm going to explore why this particular example of state failure continues to plague the U.S.
But first, let me make the argument for why pennies constitute a failure of the state.
Any government that still provides pennies is hurting its citizens
Most examples of state failure occur when the government doesn't provide a service or poorly provides one. In the case of the penny, the U.S. Mint, is ably providing us with a service, pennies. But this particular service is a frivolous one, sort of like offering free high fives or back slaps.
Actually, it's worse than silly. Pennies impose a tiny burden on each given individual. But when summed up across the entire population, each of those tiny burdens becomes a huge societal inconvenience.
Let's take a moment to explore the penny supply chain. The U.S. Mint allocates a large chunk of its manpower and resources to producing pennies, as if these precious little discs were some sort of vital national service. Of the 4.9 billion coins the Mint has produced in 2020, 55% have been pennies.
Fresh pennies then get transported to banks. Stores dutifully buy the tiny discs from banks so that they can give them out as change to customers. But pennies are of too little value to be of any use to us shoppers. We mostly throw them in the garbage or forget them in jars. The conscientious among us redeposit them into the system using Coinstar machines or at the bank. This penny charade goes on and on and on, every hour of the day.
It's a costly charade. The U.S. Mint expends 1.6 cents for each penny it produces. But that's only a small part of the waste. Large quantities of time and resources are expended by all of us—banks, shops, transport companies, consumers—in moving pennies, storing them, counting them, sorting them, and moving them again.
Get rid of the penny and this whole charade ends. Everyone can stop pretending they are providing and/or enjoying an important public service.
So why hasn't the U.S. managed to exorcise itself of the penny? There are two theories. The most popular one is corporate capture. I'll explore that one first. My own personal theory, which I'll get into after, is American monetary populism. This populism gets in the way of the most basic of monetary reforms. (The two theories aren't mutually exclusive.)
The corporate capture theory of the penny
If you explore the oral history of the penny, you quickly learn about the penny lobby. Tennessee-based Jarden Zinc Products (recently rebranded as ARTAZN) is one of the largest producers of coin blanks in the world. Jarden is owned by One Rock Capital Partners, a private equity firm. Its main customer is the U.S. Mint, which buys and converts Jarden's zinc blanks into pennies.
We can dig into the U.S. Mint's financial statements get a good idea how much Jarden earns from the penny. In 2019 the U.S. Mint's costs of goods sold for pennies came out to around $124.9 million (2018: $145.7 million). I get that from the Mint's 2019 Annual Report (see screenshot below with yellow highlights). As the sole supplier of one-cent blanks to the Mint, Jarden Zinc Products gets most (if not all) of this $124 million stream of income. That's a big contract!
|Source: US Mint 2019 Annual Report|
Jarden has spent decades lobbying Congress to keep the penny in circulation. Below are its annual lobbying expenses going back to 2006, which I get from OpenSecrets. As you can see, Jarden paid its lobbyist, one Mark Weller, $120,000 in 2019. So far it has paid him $50,000 in
|Data from OpenSecrets|
Below I've screenshotted a list of all the issues that Mark Weller has addressed in the first quarter of 2020 on behalf of Jarden. Most glaringly, he lobbied the Senate, Treasury, and House of Representatives on "issues related to the one cent coin." This issue consistently appears in each quarterly lobbying report going back to as early as 2009.
Another interesting item on Jarden's list of issues is the Payment Choice Act of 2019, which if passed would oblige retailers to always accept cash. No doubt Jarden is a big supporter of this particular bit of legislation; millions of retailers and banks would be forced to continue stocking one-cent coins, and that would mean more profit for Jarden shareholders.
|Lobbying activity for Jarden Zinc in the first quarter of 2020. Data from OpenSecrets.|
Nor is Jarden the only corporate culprit.
Coinstar, the company which provides Americans with ubiquitous coin-cashing machines, also benefits from the penny. Earlier this year Coinstar lobbied the government on both the Payment Choice Act of 2019 and the Cash Always Should be Honored Act, or CASH Act, which would make it unlawful for any physical retail establishment to refuse to accept cash as payment. Coinstar also regularly lobbies law makers on "issues related to minting and coinage." I'm going to assume this has something to do with keeping the penny and nickel in circulation, and perhaps converting the paper dollar into a coin. (Note that Coinstar's corporate name was changed to Outerwall in 2013).
Below is a chart showing how much Outerwall (i.e. Coinstar) has paid to its lobbyist going back to 2014.
|Coinstar is owned by Outerwall Inc. Data is from Opensecrets|
So according to the corporate capture theory, companies like Jarden Zinc Products and Coinstar have managed to twist the legislative process to serve their own agenda.
I should point out that a counter-lobby exists. Citizens to Retire the Penny is an anti-penny group run by MIT physics professor Jeff Gore. Here is its website. But according to the corporate capture theory of the penny, heroes like Gore lack the resources and expertise to out-muscle a slick Washington lobbyist like Mark Weller. The set of groups who are harmed by the penny—banks, citizens, shops—are too diffuse to provide much of a push-back. And thus the final result is state failure. The U.S. citizenry is being mis-served by its penny-issuing government.
Just because I've shown numbers proving the existence of the penny lobby doesn't mean that the U.S.'s failure to remove the penny is necessarily a result of lobbying. We need more to complete the picture.
After all, we also have lobbyists up here in Canada. And we Canadians still managed to get rid of the penny. Australia, New Zealand, and Singapore also have lobbyists, but none of those fine countries have pennies anymore. To complete the story we need to be able to show that U.S. policy makers are more beholden to special interests than policy makers in other countries. And if so, that would explain why the U.S. is stuck with its orange burden, but the rest of us aren't. But I'm not an expert on differences in national lobbying, so I'll defer on this topic. Anyone have any good insights into this?
Now let's get to our second theory: monetary populism.
The monetary populist theory of the penny
I've spent about ten years writing about both the Canadian and U.S. monetary systems. And one of the consistent differences between the two countries is that Americans of all backgrounds have strong opinions about monetary issues. We Canadians generally don't express much interest on the topic of money and central banking.
I think it's great that Americans get so involved in these issues. Americans are critical and curious and want to know what their central bank, the Federal Reserve, is up to. Canadians' lack of engagement sometimes worries me. To ensure that institutions like the Bank of Canada are serving Canadians, we need to be constantly auditing and debating everything that they do.
Let me offer an anecdote. During the 2007-08 credit crisis I was indirectly involved in the Bank of Canada Act being updated. To help cope with the credit crisis, it was deemed that the Bank of Canada needed to be able to buy a wider range of securities than the law permitted it to. Even though Canada had a minority government at the time, the requisite legislation was quickly shepherded through various committees and then onto the floor of Parliament. Voila, with almost no fuss the Bank of Canada Act was updated and the Bank could buy more assets. I recall press coverage being minimal.
The same process in the U.S. would have attracted massive amounts of press coverage. Think tanks from all parts of the spectrum would have chimed in. The political sniping between Republicans and Democrats would have been loud and vigorous.
If Americans hold a wide range of views on monetary issues, many of these views are anti-establishment. I'm thinking the End the Fed movement in particular. (There is no equivalent End the Bank of Canada movement.) We Canadians tend to be more trusting of our monetary institutions and the elites that run them.
But American skepticism about monetary institutions often slides into knee-jerk conspiracy theories. And that's where I prefer wishy-washy Canadians and their lack of engagement. Whereas there are umpteen U.S. monetary conspiracy theories, there are almost no Canadian ones.
For instance, American monetary conspiracy theorists are currently wildly excited about the national coin shortage. Due to a number of reasons (which I go into here, and Will Luther explores here) there are not enough coins to meet public demand. This shortage is temporary and unplanned. But American monetary conspiracy theorists have reworked this incident into some sort of coordinated effort by the powers-that-be to force Americans onto a cashless digital dollar and ultimately, into subservience to a one world government.
Here is Twitter:
I’m sorry. In my opinion.. I’m not buying this garbage about a coin shortage. This is steps toward a cashless society and eventually wanting us to have a chip in our hand NWO. Wake up America!!!— Jeanette be me (@JeanetteMT1) July 15, 2020
And here is Facebook:
Or here. I could provide many more examples. The coin shortage conspiracy theory has gone viral.
And so now I can finish off my theory. A society with a broad range of opinions about the monetary system (many of which are erroneous conspiracies and lies) is going to be much harder to change than a society that is neutral or uninterested about the monetary system. In the U.S., a fix as simple and smart as removing the penny will inevitably be misinterpreted (often willfully so) by crowds of monetary populists. And so any wise bureaucrat or legislator who wants to remove the penny will have to expend huge amounts of extra time combating misinformation. So maybe they won't bother.
And thus the state has failed Americans, and they are stuck with the penny. But we trusting (and perhaps naive) Canadians have been saved.
PS: In writing this I forgot to mention my last theory for the U.S. penny. American monetary experts tend to be inward-looking. Foreign monetary experts tend to be much more outward-looking. That is, an American analyst will generally know a lot about the Federal Reserve, but not much about the rest of the world's monetary institutions. But a foreign expert will generally be much more bilingual with respect to monetary systems. As a Canadian, for instance, I'm forced to know a lot about both my own monetary institutions and a list of American ones. A Swede monetary analyst is likely to be trilingual: comfortable with the Riksbank (Sweden's central bank), the European Central Bank, and the U.S. Federal Reserve.
I worry that this inwardness leads to an incapacity on the part of the U.S. to learn from the successes of other monetary systems. The following nations have rid themselves of their lowest monetary unit: Canada, Australia, New Zealand, Switzerland, Singapore, Finland, Netherlands, Italy, Belgium, Ireland, Sweden, Norway, and more. That's a lot of playbooks to draw from. But many Americans won't know about this--they're too focused on themselves.
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