Coin Composition Changes in 2011 Budget

A few comments as well as a thread on Coin Network have brought to my attention a section of President Obama's Proposed 2011 Budget that might have significant implications for circulating coins.

Page 100 of the Terminations, Reductions, and Savings section would provide broad authority to the Department of the Treasury to make changes to circulating coin weights and compositions. The report specifically authorizes changes for five denominations: the cent, nickel, dime, quarter, and half dollar.

The Budget justifies the proposal by citing the significant fluctuations in the prices of copper and zinc, which have contributed to volatile and negative margins on the two denominations, and costs which have exceeded face value by over $100 million in prior years.

The 2011 Budget states that the use of "alternative coinage materials" could save $150 million annually after a period of development and capital adjustments. Specific alternate compositions and weights are not mentioned. The guidance from the Budget is included below:

The Budget enables the Department of the Treasury to explore, analyze, and approve new, less expensive materials for all circulating coins based on factors that will result in the highest quality of coin production at the most cost-effective price. Such factors may include physical, chemical, metallurgical and technical characteristics; material, fabrication, minting, and distribution costs; materials availability and sources of raw materials; durability; effects on sorting, handling, packaging and vending machines; and resistance to counterfeiting.

A few observations--

Even if the composition of the penny is changed to a cheaper material, the cost of producing the denomination will most likely still exceed one cent. Based on the US Mint's 2009 Annual Report, the cost of producing the penny was 1.62 cents. According to the latest data from Coinflation, the metal value of the current 97.5% zinc and 2.5% copper composition if 0.0054569 cents. This means that even if the material used to produce the cent was free, production would still cost more than one cent.

In the most recent fiscal year, the production and distribution of the cent and nickel generated a loss of $22 million for the US Mint. The losses from producing the two denominations were more than offset by the seigniorage earned from other circulating coins. In total, the US Mint shipped $777.6 million of circulating coins to the Federal Reserve Banks and earned $427.8 million in seigniorage.

If coin compositions are changed to primarily steel, a potential issue might be the fate of disposing of retired or mutilated coins struck in the new composition. In a very timely blog post, Dave Harper tells about a recent conversion with a blank supplier. The supplier stated that there is no easy way to dispose of coated steel planchets, making them little more than "trash for a landfill." The US Mint has taken numerous occasions to promote their dollar coins as 100% recyclable, so it would be a bit of an embarrassment if a newly introduced composition was 0% recyclable.

At this point, the 2011 Budget is only a proposal, and this section may very well be dropped or changed. It will be interesting to see if one reader's bold prediction comes closer to reality.