[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE PRODUCTION AND CIRCULATION
OF COINS AND CURRENCY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON MONETARY
POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JUNE 11, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-83
______
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Monetary Policy and Trade
JOHN CAMPBELL, California, Chairman
BILL HUIZENGA, Michigan, Vice WM. LACY CLAY, Missouri, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma GARY C. PETERS, Michigan
STEVAN PEARCE, New Mexico BILL FOSTER, Illinois
BILL POSEY, Florida JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee JAMES A. HIMES, Connecticut
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina KYRSTEN SINEMA, Arizona
TOM COTTON, Arkansas DENNY HECK, Washington
LUKE MESSER, Indiana
C O N T E N T S
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Page
Hearing held on:
June 11, 2014................................................ 1
Appendix:
June 11, 2014................................................ 25
WITNESSES
Wednesday, June 11, 2014
Felix, Larry R., Director, Bureau of Engraving and Printing, U.S.
Department of the Treasury..................................... 4
Mills, Andrew, Director, Circulating Coin, The Royal Mint, United
Kingdom........................................................ 9
Peterson, Richard A., Deputy Director, United States Mint, U.S.
Department of the Treasury..................................... 6
St. James, Lorelei, Director, Physical Infrastructure Issues,
U.S. Government Accountability Office.......................... 7
APPENDIX
Prepared statements:
Fitzpatrick, Hon. Michael.................................... 26
Felix, Larry R............................................... 27
Mills, Andrew................................................ 35
Peterson, Richard A.......................................... 193
St. James, Lorelei........................................... 201
Additional Material Submitted for the Record
Campbell, Hon. John:
Written statement of former U.S. Representatives Jim Kolbe
and Tim Penny, Honorary Co-Chairmen of the Dollar Coin
Alliance................................................... 215
Written statement of Louise L. Roseman, Director, Division of
Reserve Bank Operations and Payment Systems, Board of
Governors of the Federal Reserve System.................... 217
Peterson, Richard A.:
Written responses to questions submitted by Representative
Fitzpatrick................................................ 226
St. James, Lorelei:
Written responses to questions submitted by Representative
Fitzpatrick................................................ 227
Written response to a question posed during the hearing by
Representative Clay........................................ 231
THE PRODUCTION AND CIRCULATION
OF COINS AND CURRENCY
----------
Wednesday, June 11, 2014
U.S. House of Representatives,
Subcommittee on Monetary
Policy and Trade,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 11:31 a.m., in
room 2128, Rayburn House Office Building, Hon. John Campbell
[chairman of the subcommittee] presiding.
Members present: Representatives Campbell, Lucas, Pearce,
Stutzman, Mulvaney, Pittenger, Cotton; Clay and Heck.
Also present: Representative Stivers.
Chairman Campbell. The subcommittee will come to order.
Good morning, everyone. Welcome to the Monetary Policy and
Trade Subcommittee Hearing entitled, ``The Production and
Circulation of Coins and Currency.'' I will now recognize
myself for 5 minutes for an opening statement.
We would all like to have more coins and currency. And we
probably generally take it for granted. But it doesn't happen
by itself.
The purpose of this hearing--which is something I think
this subcommittee should be doing periodically--is just to
examine our physical coins and physical currency that we have.
And whether there is anything we should be looking at to change
or do differently relative to said currency because confidence
in the security of our money is one of the strengths of this
country.
We have had the benefit of a fairly stable exchange rate
and interest-free loans on more than $1 trillion in money in
circulation. But a good half of the physical currency in the
form of $100 bills stays overseas.
But it is good to think about this. There is a lot of
discussion. I am sure this will be a topic that a penny--I am
trying to think if I have one in my pocket right now. I
actually don't.
Oh, the ranking member has a penny. There we are. Oh look
at that, he has a bunch of pennies.
One of the things we will be discussing is that this penny
actually costs more than a penny to make. And some of our
friends in Canada and in the United Kingdom have changed the
makeup of their coins so that they don't cost more than the
nominal value of the coin to make. So that is one of the things
we will be discussing today.
But we will be looking at paper currency as well, as to the
security of said paper currency, the volume of it that has been
made. And we need to also realize that in today's world, a lot
of currency is digital. And I don't mean bit coins.
At this time, we will leave bitcoins and dogecoins and
litecoins and all the rest of them for another hearing. But I
simply mean using the kind of currency that instead of looking
like this, looks something like this, and shows up on your
phone or in your credit card rather than with physical
currency.
So this hearing will be to analyze these things, look at
these things, and hear from our distinguished panel of
witnesses. Let me just briefly say who they are.
We have Larry Felix, Director of the Bureau of Engraving
and Printing with the U.S. Department of the Treasury. We have
Mr. Richard Peterson, who is the Deputy Director of the United
States Mint in the U.S. Department of the Treasury. We have
Lorelei St. James, who is Director of Physical Infrastructure
Issues at the U.S. Government Accountability Office or GAO. And
we have Andrew Mills, who is the Director of Circulating Coin
at the Royal Mint in the United Kingdom.
So we have a panel of experts that we will be hearing from
relative to coins and currency. And we look forward to their
testimony.
And with that, I will recognize the gentleman from
Missouri, the ranking member of the subcommittee, Mr. Clay, for
5 minutes.
Mr. Clay. Thank you, Chairman Campbell, for holding this
hearing regarding the production and circulation of coins and
currency.
The Federal Reserve Cash Product Office (CPO) is charged
with supplying adequate amounts of coin and currency. The CPO
acts through the district Federal Reserve Bank to distribute
and store coins and currency.
Last fall, the GAO found that the Fed manages coin and
currency inventory that is aimed to ensure adequacy of supply.
GAO suggested a number of methods that the Fed could take to
improve its management. And I look forward to hearing from GAO
regarding this issue.
Also, with the growth, as you mentioned, Mr. Chairman, in
increasing diversity of payment methods such as debit cards and
online payments, I would like to know, what is the future for
coins and paper money? And are we moving to a totally plastic
payment system?
Since the mid-2000s, the per unit cost of production and
distribution of the penny and the nickel has exceeded each of
the coin's per unit face value. In the U.S. Mint's most recent
annual report for Fiscal Year 2013, the cost of production and
distribution of the penny was $1.08, and the cost of the nickel
production was $0.094.
The U.S. Mint lost $55 million on minting and issuing the
penny and $40.5 million on the nickel. And I would like to
know, what is the cost of production and distribution of the
remaining coins such as the $0.50 coin?
Currently, Representative Stivers has introduced
legislation that would mandate a change in the metallic
composition of U.S. coins to plated steel to ease the cost of
production. And I would like to know what is the position of
the panelists regarding this legislation?
So again, thank you, Mr. Chairman. And we will keep on
display my pocket full of coins just to have as a reference.
Chairman Campbell. Thank you. And you had better count
those coins because it might be pretty easy for me to take
them.
The gentleman from North Carolina is recognized for 3
minutes for an opening statement.
Mr. Pittenger. Thank you, Mr. Chairman.
Thank you for calling this hearing. And I thank each of the
witnesses for being here today.
I do think it is of interest to each of us to know that you
know what effects this will have in terms of any possible
disruptive change in the process, the fears, are they overblown
by the public, how it could be handled, and really how fast
this change could be made in a seamless fashion.
Could it be done so with the new and existing coins? And
what would be the problems of co-circulation?
And one other question I would have is, can you make a
penny for less than a penny?
But I really appreciate your being here, and your thoughts
today would be most welcome. Thank you.
I yield back.
Chairman Campbell. The gentleman yields back. The gentleman
from Washington, Mr. Heck, is recognized for 2 minutes.
Mr. Heck. Thank you, sir. I won't take the 2 full minutes.
Insofar as this is my first opportunity to attend the
Subcommittee on Monetary Policy and Trade as its newest member,
I did want to take this chance to just express how gratified
and pleased I am after wanting to be on this committee for such
a long period of time.
And to acknowledge that no small part of the reason was
because of the reputation that both the chairman and the
ranking member have for the way in which they provide
leadership of this subcommittee. I am very gratified to be
here. Thank you very much, sirs.
Chairman Campbell. Thank you. That is very kind. We both
appreciate it, and we don't deserve it, so okay.
We asked the Federal Reserve to come testify today. They
said they couldn't. But they have sent us a statement which,
without objection, we will enter into the record.
And then, we also have a statement from the Dollar Coin
Alliance which, without objection, we will also enter into the
record.
Okay. Opening statements having been completed, we will now
move to our witnesses.
Just as a reminder, Mr. Felix is Director of the Bureau of
Engraving and Printing. And you were named Director in January
of 2006, so, you have been there for a little while. And you
are responsible for overall operations of the Bureau of
Engraving and Printing, and production of U.S. currency and
other government-secured documents.
Mr. Felix, thank you so much for being with us this
morning. You are recognized for 5 minutes.
STATEMENT OF LARRY R. FELIX, DIRECTOR, BUREAU OF ENGRAVING AND
PRINTING, U.S. DEPARTMENT OF THE TREASURY
Mr. Felix. Good morning. Thank you, Chairman Campbell,
Ranking Member Clay, and distinguished members of the
subcommittee, for holding this hearing and for inviting me to
testify today on behalf of the Bureau of Engraving and
Printing, and to talk about some of the initiatives.
The BEP is the security printer for the United States
Government, and we provide technical assistance and advice to
other Federal agencies in the design and production of security
documents which, because of their inherent value or other
characteristics, require counterfeit deterrence.
The BEP also reviews cash destruction and unfit currency
operations at all of the Federal Reserve Banks. And as a free
service to the public, we process claims for redemptions of
mutilated paper currency. The mission of the BEP is to develop
and produce United States currency that is trusted worldwide.
BEP has two facilities operating in Washington, D.C., and
Fort Worth, Texas. And each facility is capable of producing
all denominations. On average, the BEP produces approximately 7
billion notes per year. The BEP also produces security
documents on behalf of other Federal agencies.
We work collaboratively through the Advanced Counterfeit
Deterrence Committee, the ACD, which consists of the Board of
Governors at the Federal Reserve System, the U.S. Secret
Service, and the U.S. Treasury to improve counterfeit-deterrent
features in our banknotes. But the primary reason for
redesigning our notes is to continue to deter counterfeiting.
Since the mid-1990s--the U.S. Government has introduced its
first major redesign of notes in over 60 years. And the
redesign, those designs really occurred because of the
emergence of a new category of counterfeiters who are using and
leveraging digital technology in order to replicate notes.
October 8th of last year marked the introduction of the new
$100 note. And that in effect marks the completion of our most
recent design series.
I want to talk a little bit about meaningful access. A
complaint was filed in the U.S. District Court in Washington,
D.C., against the Treasury Department, alleging that United
States currency violates Section 504 of the Rehabilitation Act
because blind and visually impaired individuals aren't able to
denominate the United States currency.
And so, an October 2008 court order decision directed that
steps be taken to provide meaningful access to United States
currency in our next redesign of notes. And we are beginning to
plan for our next redesign of notes.
The BEP has been actively engaged in identifying meaningful
access solutions to fully comply with the court's order, and
while at the same time giving appropriate considerations to the
interest of domestic and international users of currency,
looking at the interests of the business community, and the
cash handling and the cash-intensive industries.
The BEP proposed recommendations to the Secretary of the
Treasury, who by statute has the sole authority for approving
United States currency designs. The recommendations that we
provided were: first, to pursue the development of a raised
tactical feature for every note that we are legally, lawfully
allowed to alter; second, to continue the use of large high-
contrast numerals; and third, to introduce a Currency Reader
Program. In 2011, the Secretary approved that three-prong
strategy.
A key component of that three-prong strategy is to
establish a nationwide currency redistribution program. The
Currency Reader Program is designed as an effective method to
enable people with visual impairments to denominate their
currency.
The Currency Reader Program is expected to be a useful
option for many, many years to come because: first, when we do
introduce a tactually enhanced note, we will be doing it one
denomination at a time; second, per congressional directions,
we can't alter the $1 Federal Reserve note; and third, because
we will be introducing it at a time when we expect both notes
to co-circulate.
We plan to launch this currency redesign program, pilot it
this summer. And we will roll it out in 2015.
Since the court order has come about, we have also been
leveraging existing technologies that are available, and the
BEP has introduced a new reader, a mobile app for the blind and
visually impaired using--it is free to anyone who wants to
download it.
The BEP anticipates that it will also start working on
selecting a tactical feature by January of 2015. And that is a
priority for this organization.
The ACD has indicated that the next note to be redesigned
will be the $10 note. And it should have the new tactical
feature and the enhanced security features. The $10 note was
selected because it is a transactional note and it is also a
low-volume note in terms of production. So we will be able to
test and determine how the tactical feature works in
circulation.
However, if there is a threat to another denomination, we
will change that. But as it stands right now, the next note
will be a $10 redesign.
Chairman Campbell. If you could wrap up your testimony, Mr.
Felix, your time has expired.
Mr. Felix. Mr. Chairman, that concludes my remarks about
initiatives at the BEP. I will be happy to answer your
questions.
[The statement of Director Felix can be found on page 27 of
the appendix.]
Chairman Campbell. Thanks. I am sure you will be getting
some questions.
Mr. Peterson was named Deputy Director of the United States
Mint on January 25, 2011. And before becoming its top
executive, he served as the Mint's Associate Director of
Manufacturing for 2 years.
Thank you so much for being here. Did you bring any
samples? But please, you are recognized for 5 minutes for your
testimony.
STATEMENT OF RICHARD A. PETERSON, DEPUTY DIRECTOR, UNITED
STATES MINT, U.S. DEPARTMENT OF THE TREASURY
Mr. Peterson. Chairman Campbell, Ranking Member Clay, and
members of the subcommittee, I appreciate the opportunity to
appear before you again today to discuss the United States Mint
and coin production.
The United States Mint is a vibrant team of 1,700 dedicated
men and women. We operate two fiscally separate programs: a
circulating coin program; and a numismatic program that
includes collectable coins and our precious metal bullion
coins.
I last testified before you in November 2012. And I
committed then that the Mint would continue to drive costs out
of our manufacturing operations. I am pleased to report our
results for fiscal 2013.
We shipped 10.7 billion coins to the Federal Reserve, an
increase of nearly 18 percent from the 9.1 billion shipped in
2012. The general and administrative costs (G&A) of our
circulating coin operations decreased another $4.7 million--7.6
percent--to $56.9 million.
Since 2009, we have reduced the G&A costs of our
circulating program by over 42 percent. Now that is real money.
That is $41 million of annual G&A expenses that have been
eliminated.
In short, our costs are down, and our production is up.
These productivity improvements resulted in a $350 million
transfer of seigniorage to the Treasury General Fund.
In December of 2012, we provided our first report to
Congress detailing the analysis and testing of possible
alternative metals for our coinage. Since then, we have tested
in much greater detail several promising alternatives. There
are several key points to share at this time.
First, the overarching mission of our circulating coin
program is to facilitate commerce by minting and issuing
circulating coins in quantities that the Secretary of the
Treasury determines are necessary to meet the needs of the
Nation. As our 2013 results show, the Mint is meeting that
mission with a denomination portfolio that generates positive
seigniorage.
Second, cash is and will remain an important method for
settling financial transactions. In a 2011 survey, the Federal
Reserve Bank of Boston concluded that 65 percent of all
transactions under $10, and 45 percent of all transactions
under $25, were completed with cash.
Third, our report in 2012 concluded that no alternative
metal compositions would lower the cost of the penny. And it is
highly unlikely that the cost of minting the penny will ever
again fall below one-cent.
Fourth, when other countries have made changes to their
coinage and currency lineups, a key to the success of the
effectiveness of the change was the communications plan that
explained the change.
Finally, change in the metallic composition of our coins
will affect a variety of stakeholders in different ways. The
Mint is actively seeking feedback from the vending, parking
meter, coin-operated laundry, amusement, public transportation,
banking, and supermarket industries. Our next report to
Congress is due this December, and we are committed to
providing decision-makers with accurate and timely information.
Our bullion program set a record for the number of ounces
sold in 2013. Gold ounces were up 55 percent to 1.2 million
ounces. And silver ounces were up 31 percent to 44.6 million
ounces.
Our American Eagle Bullion Coins remain the coin of choice
for investors around the world. We are pleased that our
suppliers have invested in capacity enhancements and that we
are able to meet demand without restrictions or allocations.
The United States Mint's commemorative coin program honors
people, places, events, and institutions of significance in
American history and culture. We have two important and high-
profile commemorative coin programs in 2014: the Civil Rights
Act of 1964 Commemorative Coin Program; and the Baseball Hall
of Fame Commemorative Coin Program. The baseball program
features curved coins, the first ever produced by the United
States Mint.
The Mint is actively engaged in regular outreach efforts
and public awareness events for both programs that include
Members of Congress, including John Lewis and full Financial
Services Committee Ranking Member Maxine Waters, as well as
several Baseball Hall of Fame members.
Mr. Chairman, the United States Mint is a cost-effective,
open, transparent organization that is meeting its core mission
to produce circulating, precious metal bullion and numismatic
coins. I thank you for your interest in our activities. And I
am pleased to answer any questions that you may have.
[The prepared statement of Deputy Director Peterson can be
found on page 193 of the appendix.]
Chairman Campbell. Thank you, Mr. Peterson.
Next, Lorelei St. James is a senior executive at the U.S.
GAO, serving as Director of the GAO's Physical Infrastructure
Issue area. In this capacity, Ms. St. James has a wide-ranging
portfolio covering issues such as the United States Postal
Service, coin and currency--which is why you are here today--VA
construction, and maritime infrastructure issues.
There is a little controversy in a few of those areas, but
we are not going to talk about those today. We are only going
to talk about coins and currency. Thank you so much for being
here. You are recognized for 5 minutes.
STATEMENT OF LORELEI ST. JAMES, DIRECTOR, PHYSICAL
INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Ms. St. James. Thank you. Chairman Campbell, Ranking Member
Clay, and members of the subcommittee, I am pleased to be here
today to discuss the Federal Reserve's management of the
Nation's coin inventory.
At the end of Fiscal Year 2012, coins worth over $40
billion were in circulation. And in 2013, the U.S. Mint
produced over 10 billion coins.
My statement today is based on a report that we issued in
October 2013. This report reviewed the Federal Reserve's
management of the coin inventory and includes recommendations
to improve how the inventory is managed.
Within the Federal Reserve, the Cash Product Office, or
CPO, manages the Nation's coin inventory, distributes existing
inventories of coins, and orders new coins from the U.S. Mint
based on a forecasted demand.
In 2009, CPO centralized coin management across the 12
Reserve Banks. Prior to this action, each Reserve Bank managed
its own inventory, which sometimes resulted in either too many
coins or not enough. This centralized system in part
contributed to the 43 percent decrease in coin inventory levels
from 2008 through 2012.
Also in 2009, the CPO established national upper and lower
inventory targets, which CPO uses to monitor inventory levels.
For example, if inventory levels are above the upper target,
CPO knows to order fewer coins. And if the levels are below the
lower target, CPO may order more. From 2009 to 2012, we found
that in most cases, inventory targets were met.
CPO also manages the inventory on a daily basis,
determining when to order new coins or move coins from one
location to another or both. If there is an insufficient supply
of coins to meet demand in a given location, and transferring
coins from another location, known as an interbank transfer,
would not be cost-effective, CPO orders new coins each month
from the U.S. Mint based on a rolling forecast.
In our review, we found that coin inventory costs totaled
about $62 million in 2012, and that these costs had
dramatically increased by 69 percent since 2008. We found CPO
had not done a systematic review to determine why these costs
had increased or if they can be reduced. And we recommended
that the Federal Reserve direct the CPO to assess these costs.
We also reviewed if CPO was following the key inventory
practices we identified for coin management. We found it was
substantially following collaboration and risk management, but
only partially following key practices in three other areas.
For example, in examining its forecasting model we found it
was consistently under-ordering new coins when compared to
actual demand, indicating that the forecast may be biased and
that the model should be updated to reflect actual demand.
In system optimization, we found that CPO has multiple
sources of information, but didn't use this information to
optimize inventory management. We recommended that the Federal
Reserve direct CPO to establish coin inventory goals and
metrics and assess the accuracy of its forecast.
We also discussed potential changes in the demand for
currency with Federal Reserve officials. According to them,
studies we reviewed, and government banking officials in
Austria, Australia, and Canada, any change in the demand for
currency will likely be a gradual decline as electronic means
of payment increase.
For example, in the United States, the use of debit cards
has increased more than any other payment type, about 7.7
percent per year from 2009 to 2012. In 2010, CPO began to
develop a long-term strategic framework to be done in phases to
consider potential changes in currency demand over the next 5
to 10 years. At the time of our review, CPO had not established
a date that the third phase of this effort would be completed.
In summary, we recommended that the Federal Reserve take
additional actions to better manage the Nation's coin
inventory, and they agreed with our recommendations.
Mr. Chairman, this concludes my statement. I would be happy
to answer any questions you have. Thank you.
[The prepared statement of Director St. James can be found
on page 201 of the appendix.]
Chairman Campbell. Thank you very much.
Finally, Mr. Andrew Mills is the Director of Circulating
Coin at the Royal Mint, University of East Anglia and Cardiff
in the United Kingdom. You have been in that position since
2009. And did you bring three shillings and twopence? Oh, you
don't do that anymore. All right.
Mr. Mills. Since 1971.
Chairman Campbell. Yes, I thank you so much for being here.
You are recognized for 5 minutes.
STATEMENT OF ANDREW MILLS, DIRECTOR, CIRCULATING COIN, THE
ROYAL MINT, UNITED KINGDOM
Mr. Mills. Thank you. I would like to thank Chairman
Campbell and the esteemed members of this subcommittee for
inviting the Royal Mint to give testimony on our work to
control the cost to produce circulating coins.
Current business-as-usual demand for UK circulating coin is
approximately one billion pieces a year. We have a total
capacity to make four billion pieces.
The remaining capacity is used to supply struck coin and
blanks to overseas central banks and mints around the world. We
also supply tooling, metal recovery services, and consultancy
to these customers, which is why we describe ourselves as the
world's leading export mint.
Over the years, the Royal Mint has developed a number of
capabilities that enable us to control the cost of producing
circulating coin for our customers. Our armor plating
technology replaces expensive solid alloy coins with a mild
steel core electroplated with either nickel, brass or copper.
This single layer, or mono-plate, at typically 25 microns,
allows for a lifetime in circulation in excess of 20 years. In
contrast, multilayer plating has a thin outer layer of only 6
to 9 microns that can wear through in as little as 5 years in
circulation, exposing the underlying copper layer.
Our new award winning Integrated Secure Identification
Systems (iSIS) technology for the first time brings a machine-
readable high-security feature to our cost-effective armor
plated coins that up until now was only available in bank
notes. iSIS coins can be read at over 4,000 coins a minute, and
provides a definitive binary authentication. It is either a
genuine coin or it is a counterfeit.
Unlike today's electromagnetic sensing that has a wide
acceptance window and varies over time, the high security iSIS
additive is co-dispositive in the armor placing layer, and is
therefore constantly exposed to be read as the coins wear in
circulation.
I will now summarize the cost controls that we have
implemented on behalf of Her Majesty's Treasury since
decimalization in 1971. To give a perspective of the scale of
the cost savings, I have calculated the metal saving of each of
these changes since they were made using London Metal Exchange
prices on the 31st of March 2014.
The current exchange rate is on the order of $1.65 to 1
pound sterling. There have been four types of programs that
have controlled the cost of U.K. circulation coins. The first,
demonetization, the decimal half penny, ceased production in
1984, and in the last year of full issuance, 191 million were
manufactured, at a metal cost of 1.4 million pounds. This cost
then became nonrecurring.
Secondly, the conversion of solid alloy coins to armor
plated coins. In 1992, the 1p and 2p coins were converted from
bronze to armor copper plated steel. The metal cost savings
since this change has been 281 million pounds.
To provide a sense of the scale difference between U.S.
demands and that of the United Kingdom, and comparing the U.S.
$0.01 to the U.K. 1p, since 1992 we have made 13 billion 1p
coins and the U.S. Mint has made 190 billion one-cent coins.
In 2009, Her Majesty's Treasury announced that the 5p and
10p would be converted from copper nickel to armor nickel
plated steel. And this change has saved 21 million pounds in
metal costs.
Reduction in coin sizes has also occurred. In 1992, the
copper nickel 5p and 10p were reduced in size. These changes
saved 135 million pounds in metal costs. And in 1997, a smaller
50p was introduced, saving 29 million pounds.
Finally, the proactive replacement program. The 2012 Autumn
Statement announced the active withdrawal of the copper nickel
5p and 10p coins for circulation. In the first year of
operation, it delivered 15 million pounds of benefit to Her
Majesty's Treasury, and indeed the U.K. taxpayer.
The U.K. coinage model ensures that new coins are not
struck when surface coins are held by the cash industry
members. Surface and deficit cash industry members trade coins
between one another on a weekly basis.
Overall costs are also optimized by using an annual
forecasting process agreed in the market between UK Payments,
an industry body that represents retail banks and cash handling
companies, the Royal Mint, and Her Majesty's Treasury.
For these changes to take place, I cannot emphasize enough
how important stakeholder engagement is from early on in the
process. We have regular dialogue with stakeholders that
represent different facets of the coin acceptance industry,
including vending, parking, amusements and retail.
We also have close working relationships with major coin
mechanism and sorting companies that provide equipment in the
United Kingdom. And this is in addition to concert with
institutions such as the Royal National Institute for the
Blind.
In closing, the Royal Mint has significant expertise and
experience in this field. And iSIS provides a novel, high-
security feature in lower-cost plated coins. We will be
delighted to work with stakeholders here in the United States.
Thank you once again for inviting me to give this
testimony, and I welcome any questions that you may have.
[The prepared statement of Director Mills can be found on
page 35 of the appendix.]
Chairman Campbell. Thank you. Thank you all very much for
your testimony. I will now recognize myself for 5 minutes for
the first series of questions. And my first questions will be
to you, Mr. Mills.
You just described a lot of changes over a period of time
from eliminating a coin, the halfpenny, to changing the
composition and even the size of various coins. And you
mentioned stakeholders, vending, parking, et cetera. And all
the savings to the Treasury, and up here, we are certainly
interested in saving money to our Treasury.
But there is the question--what kind of disruption did this
cause? How difficult was it for the private sector to
accommodate all of those various changes in coin type,
composition, and size?
Mr. Mills. Yes. Thank you very much, Mr. Chairman.
Our aim in any of these changes is to provide as little
disruption as possible, be that for people within the industry
or the general public. And I think a good measure is our most
recent change, which was the introduction of the nickel plated
steel 5p and 10p coins.
We engaged with stakeholders very thoroughly. A major
stakeholder is the Automatic Vending Association in the United
Kingdom, which represents much of the vending industry. And it
was on their advice that indeed we took 2 years to introduce
these new coins from the point of the announcement in September
2009 to their final introduction in January 2012.
Chairman Campbell. Was that to give them time to--
Mr. Mills. Absolutely. It was absolutely to minimize the
impact on their members in terms of making sure that the
software changes that were necessary could be carried out with
incurring very little or no additional cost.
Chairman Campbell. How do you and how does everyone deal
with it if you have two different coins in circulation at the
same time that are of completely different size or composition
but they have the same nominal value?
Mr. Mills. Yes, thank you. The change to the 5p and 10p, in
fact as far as the general public is concerned, they would
really tell very little difference. They are the same diameter
and look, for all intents and purposes, identical to one
another, apart from the fact that one is magnetic because it is
based on 94 percent, 96 percent steel, and the other one is
non-ferrous so it is non-magnetic.
One of the big learnings from engaging with the vending
industry is that they prefer co-circulation to occur for the
shortest possible time. So the fewer coins their machines
accept and have to recognize, the better that is for them and
their members. That is why we introduced the proactive
replacement program to actively withdraw the copper nickel 5p
and 10ps to the benefit of the vending industry.
Chairman Campbell. All right. Thank you.
Mr. Peterson, Mr. Mills described a whole bunch of
composition which is way over my very limited chemical and
metallurgy knowledge. Is there stuff they are doing in the U.K.
that we are not but we ought to be or should be thinking about
doing?
Mr. Peterson. Sir, could you repeat the last part of that
question?
Chairman Campbell. As far as some of the composition things
that Mr. Mills talked about in the U.K., are we doing those
things here? Or should we? Or have we decided not to?
Mr. Peterson. Absolutely. In 2011, the United States Mint
began an active research and development program to explore
alternative metals for our coinage.
And really, on the metallurgy piece, there are four metals
on the periodic table of the elements that are in play. These
are zinc and iron in the form of steel, lead, and aluminum.
We are not going to make our coins out of lead, and
aluminum is a very difficult metal to work with. So really, we
are down to zinc and steel that are in play.
Chairman Campbell. Okay. Thank you.
Ms. St. James, when you look at the millennial generation,
they use physical currency less than Mr. Clay and I do. And
particularly coins. Is the Federal Reserve--are they
anticipating, are they looking at all this sort of thing in
terms of what impact that has on physical currency?
Ms. St. James. In their strategic plan that they have, that
they started in 2010, they are looking at and trying to better
monitor trends.
And as I discussed in my written statement, with the
countries that we talk to, Australia to Austria and Canada,
they believe that there will be a gradual decline in currency,
but there will still be what is called the unbanked. There will
still be a portion of society who will always use coins.
So one of the reasons why we made the recommendations to
the Fed was for them to have more data to better monitor what
was happening and so they could see those changes in demand
with more fidelity than they do right now.
Chairman Campbell. Thank you.
I had questions for Mr. Felix, but I will have to get to
them in the second round.
I do have with me a $20 billion Zimbabwe note, which I
always carry around to prove that it is really not about the
paper. It is what stands behind the paper that is the most
important.
But with that, my time has expired, and I will yield 5
minutes to the ranking member, the gentleman from Missouri, Mr.
Clay.
Mr. Clay. Thank you, Mr. Chairman. Perhaps I can borrow $10
billion from the $20 billion.
Chairman Campbell. I actually have--this is $20 billion. I
have a $10 trillion note as well.
Mr. Clay. Mr. Felix, a White Paper was issued by the BEP in
2013 which reported that reinjured notes with tactile features
designed to provide meaningful access to the blind and visually
impaired won't be available for circulation for another 6
years. Can you talk about the process associated with designing
and issuing the new notes? And help us understand why it will
take 6 years?
Mr. Felix. Thank you, sir.
The reality is that we design currency to deter
counterfeiting. And so, the longer lead time for our currency
design is to get the overt and covert features in the currency
as we introduce the new currency design. And as we introduce
the new currency design, we also intend to apply the tactile
feature, as the court had given us the opportunity to introduce
it at the new design.
So the longest lead time in that is not so much tactile
features, but acquiring classified central bank features and
being able to deploy them into the bank notes, as well as the
security features that people can just look at and determine
whether or not it is authentic or not.
Mr. Clay. And now, there is an app that the blind can use
that will tell you the denomination of the note?
Mr. Felix. Yes. There are several options. We have
introduced a downloadable app on the Apple iPhone that you can
use.
Right now, in conjunction with the Department of Education,
they have introduced one Apple/Android. And of course, we will
also be distributing a portable currency reader for anyone who
is eligible. And they can also get that through a collaboration
with the Library of Congress.
Mr. Clay. Thank you for your response.
Mr. Peterson, how viable is plated steel as an option for
replacing the current composition of U.S. coinage?
Mr. Peterson. Mr. Clay, as I mentioned, zinc and steel are
currently in play and we are analyzing several different
compounds of steel. And we are doing a very detailed test
regimen on this.
We have made millions of plated steel trial coins. We
understand the striking pressure, the tonnage that we need to
use on our presses, and how long the dyes will last.
We take these coins and tumble them in a tumbling chamber
to simulate a lifetime of corrosion and wear. We add a little
saline solution to simulate perspiration so that we have a good
feel as to how long these coins will be viable for in the long
term.
And we know that our friends in Britain use plated steel.
Our friends in Canada use plated steel. Steel is a viable
option.
Mr. Clay. Are you concerned that Canadian ownership of the
plated steel patent would add additional cost to the production
of plated steel coins?
Mr. Peterson. I wish we had gotten the patent, but we
didn't. But our price quotes with the Royal Canadian Mint are
fair, and I am not concerned that we are going to have an issue
with that patent.
Mr. Clay. Thank you for that response.
Ms. St. James, what are the next steps the Federal Reserve
should be taking to better manage coin inventory?
Ms. St. James. We were quite surprised when we looked at
cost, that between 2008 and 2012, the cost of the management of
the coin inventory had increased by 69 percent. So we naturally
asked them, why has it increased so much? And they said direct
costs and support costs have gone up.
But beyond knowing that is what made up the 69 percent,
they didn't really have specific answers for why those costs
had increased. And they had not looked at them. So we
recommended that they really do a good analysis of where they
could reduce those costs.
Mr. Clay. Thank you for that response.
Mr. Mills, what steps has the Royal Mint taken to reduce
coin production costs? Can you talk about that 20-year lifespan
of the coin?
Mr. Mills. Yes, certainly.
There are several types of plating technology available for
Circulating Coin. And the only one that has a license fee is
the Canadian technology. So our armor technology is not only
license-free, but we would say also has better duration in
circulation.
We apply a single layer of 25 microns in nickel-plated
coins. Our independent testing in fact carried out here at the
Fraunhofer Institute in the United States shows that on
average, coins wear at a micron a year. So with 25 microns, you
should get at least 25 years life.
With the outer layer of multiple plating technology, you
only get 6 microns to 9 microns. That means you are going to be
paying a license fee, and potentially replacing your coins
every 6 to 9 years.
Mr. Clay. Thank you. And I yield back.
Chairman Campbell. The gentleman's time has expired. Thank
you.
And now, we will recognize the chairman of the House
Committee on Agriculture, the gentleman from Oklahoma, Mr.
Lucas, for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman. And I would note to all
my colleagues that the things you work with not only just
represent a medium exchange, a store of value, but as we
discussed before in this subcommittee, a very important
statement about our society.
In the case of paper money, the artistic nature, the
scientific nature in the United States for 150 years--coinage,
of course, 2,500 years of recorded history is documented in
those things.
So it is not just a subject matter of immediately what is
in your pocket change. But it is a statement that will be left
for millenniums to come. That said, for a moment I would like
to visit with the panel about just a variety of small issues.
Ms. St. James, in the examination of the circulating cash
situation and the way the Federal Reserve handles that, I have
read somewhere, and maybe you can confirm or deny this, but the
50-cent piece literally--do we have more coming back into the
banks than we have going out?
And Mr. Peterson, could you touch on this for a moment
about the nature of the 50-cent piece? Is it an example of a
coin that in effect doesn't circulate at all anymore once you
get past the numismatic community?
Mr. Peterson. The 50-cent piece is not ordered by the
Federal Reserve. So, the United States Mint hasn't made them
since 2006.
Mr. Lucas. For general circulation. So that answers the
question.
Mr. Felix, what percentage of your printed currency that
you deliver to the Federal Reserve is $100 bills,
approximately?
Mr. Felix. So the order change--
Mr. Lucas. And I know it varies from--
Mr. Felix. Right.
Mr. Lucas. --cycle to cycle. Just round numbers.
Mr. Felix. The vast majority of notes in terms of value is
circulated outside our borders. Over 50 percent are in $100
bills. So it is about--of the $1.2 trillion in circulation,
more than half in value are hundreds. But we typically we
produce about 1.5 billion a year in hundreds.
Mr. Lucas. And of your overall production you mentioned--
Mr. Felix. --around seven.
Mr. Lucas. Exactly. And of your overall production, you
mentioned the fact that by law you were not authorized to
change the design on the $1 bill. What percentage of your
average annual run, round numbers, are ones?
Mr. Felix. We do about a billion as well.
Mr. Lucas. Okay.
Mr. Peterson, since we have not for a number of years had
orders from the Fed for circulating 50-cent pieces, for a
moment what percentage of, in round numbers, of your overall
coin production are 1-cent pieces and 5-cent pieces, those two
lower denominations on the--
Mr. Peterson. In 2013, we manufactured 10.7 billion coins,
with 6.6 billion of those, about 60 to 65 percent, pennies, and
1.1 billion nickels. So it's very concentrated toward the
pennies and nickels.
Mr. Lucas. So in both cases, at Engraving and Printing and
at the Mint, a substantial portion of your production is the
lower denomination, whether it is $1 bills in paper or currency
or the 1-cent and 5-cent pieces in coin.
Mr. Peterson. Correct.
Mr. Lucas. By the way, on a slightly different note, Mr.
Peterson, one of your predecessors began the process of an
inventory of the various things within the Mint's possessions.
And while your institution is not quite as old as Mr.
Mills' institution, which predates you by hundreds of years,
nonetheless you are one of the oldest institutions of the
Federal Government.
And not only the good work you do on the day-to-day basis
in the numismatic programs, but the historic property and the
historic record, is a voice of great interest to the numismatic
community.
I don't know whether you can answer this question today or
not, but I would ask if you are aware of that effort to create
that master inventory of all your assets, some of us would
define as treasures. And if you are not up to where at a
particular moment I would appreciate a response in writing
later about just what the status of that treasure catalogue is,
as some people would describe.
Mr. Peterson. Absolutely. The Mint is one of the oldest
institutions in the United States, 222 years old, a venerable
institution. And we do have many heritage assets at each one of
our facilities.
After the prior testimony we hired a curator and we have
catalogued our heritage assets, and we are ready to share that
information.
Mr. Lucas. That is a very important thing because that is
of great interest to a good many good people around the country
and around the world. And as you describe them, heritage
assets, some of them literally go back to the very beginning.
That said, I would just note to my friends at Engraving and
Printing and at the Mint, if we continue on the monetary
policies we have with a regimented inflation factor built in,
at some point we have to assess the viability of those lower
denominations. We don't make half-cent coins anymore, as the
Mint did for 60-some years.
I believe the original statute actually allowed for a
denomination referred to as mills/1,000 for the dollar. We have
never used that. At some point, we may have to assess in a
practical way what we make and why we make it and how that
impacts commerce.
And with that, Mr. Chairman, I yield back.
Chairman Campbell. And I thank the gentleman for yielding.
And now, we will go to the gentleman from South Carolina,
Mr. Mulvaney, who is recognized for 5 minutes.
Mr. Mulvaney. Thanks very much, Mr. Chairman.
I want to continue there on what Mr. Lucas was talking
about because we hear a lot of discussion about getting rid of
the lower denomination coins. We have done that in the past.
And I just wonder if commerce isn't changing to where
smaller denominations are actually going to become more and
more relevant as we go through. I think immediately of online
transactions. I am not willing to pay $0.99 to buy a song, but
I might pay 1/20th of a penny to listen to it one time.
Is there a way for currency to do that? Is there a way for
hard currency to deal in smaller and smaller denominations?
Let's ignore--for instance, the larger and larger
denominations, but start talking about smaller and smaller. Is
there a way to do that with hard currency? Mr. Peterson?
Mr. Peterson. As I mentioned in my opening statement, many,
many transactions still occur in cash around the country. Cash
enjoys the advantage. It is one of the lowest cost ways to
conduct a transaction and it is confidential, and so the
American public will probably want to continue to use cash for
some percentage of their transactions.
Our job at the Bureau of Engraving and Printing and the
Mint is to facilitate commerce with the trusted coins and
currency. And we know that millions of transactions happen
every single day using cash. And it will continue to be like
that.
Mr. Mulvaney. Okay. I am not sure if that answers the
question about smaller and smaller denominations.
Let me ask then--let me talk about what the reason I asked
the question is: I would be curious to know your thoughts on
the crypto-currencies, on bitcoins specifically so the other
currencies that are out there.
I am sitting here reading a blog, I guess, Mr. Peterson,
from your former boss, Edmund Moy, who just recently wrote
something on bitcoin. And he closed the article by saying that
bitcoin and the ideas behind it will be a disrupter to the
traditional notions of currency. But in the end, currency will
be better for it.
Have you all given any thought--and I will throw this open
to the group, as to where your various organizations and
institutions are on the role that online currencies, that
crypto-currencies play in this particular role, in the
functioning of commerce?
Mr. Mills, I would be curious to know what the Europeans
think about it as well. But, Mr. Felix, you look like you--
Mr. Felix. I was going to say that is really a province for
the Federal Reserve, the central bank--
Mr. Mulvaney. Okay.
Mr. Felix. --and they do tend to look at some of those
things more than the operational organizations of the United
States Government.
Mr. Mulvaney. All right. But it would impact you directly
though, right? Is it competition? Is it a complement? How do
you--has the BEP taken a look at it? Do they have an official
position on it? Or they just haven't done that yet?
I am just curious. I am not trying to bait anybody. I know
it is such a new topic that a lot of folks might not have a
position on it yet.
Printing and Engraving does not. Does the Mint? No?
Mr. Peterson. At the Mint, our focus is on producing United
States coins. And the other alternative vehicles--
Mr. Mulvaney. Doesn't factor in?
Mr. Peterson. No.
Mr. Mulvaney. Mr. Mills, has the British government taken a
position on it?
Mr. Mills. Again, we at the Royal Mint act as agents for
Her Majesty's Treasury. We don't set policy.
Mr. Peterson. Okay.
Mr. Mills. So pretty much as Mr. Felix said then, that is
not within my knowledge or my ability to answer, I am afraid.
Mr. Mulvaney. All right.
Ms. St. James, I have asked everybody else. Maybe this is
the wrong--apparently the wrong group to ask this question.
Ms. St. James. They are correct in that it is the Federal
Reserve here in the States--
Mr. Mulvaney. Okay.
Ms. St. James. --the Federal Reserve policy to make that
decision. And they are looking at electronic payments and the
increase in those electronic payments. Interestingly, the
electronic payments have seemingly impacted checking more than
the demand for currency.
Mr. Mulvaney. Let me ask--Mr. Peterson, let me close with
this, see if I can keep it germane to why you all are here
today.
Is there a way--is it possible for traditional hard
currencies to deal with transactions at a small fraction of a
penny?
Mr. Peterson. I am sure in an electronic world, there might
be. But practically, for the United States Mint to make coins
that are less than a penny, I don't see that as part of our
future.
Mr. Mulvaney. And that would be the same for the British
government, Mr. Mills, do you think?
Mr. Mills. Again, not wishing to sound boring, I would have
to defer to my colleagues in Her Majesty's Treasury or the Bank
of England.
Mr. Mulvaney. Listen, I have been to a lot of meetings.
This is by far not the most boring I have been to. I can assure
you of that.
So thank you, Mr. Chairman. And thank you to the panel.
Chairman Campbell. Thank you.
And just arriving--you are--okay. The gentleman from Ohio,
Mr. Stivers?
Mr. Stivers. Perfect timing.
Chairman Campbell. Perfect timing is recognized for 5
minutes.
Mr. Stivers. Thank you, Mr. Chairman. I really appreciate
you holding this hearing on important issues. And I have a few
questions related to coins.
The first question is for Director Peterson. Can you assure
us that the Treasury has not and will not make changes to our
circulating coins that would increase the cost to produce them?
Mr. Peterson. Congressman, Congress controls what the
composition of our coins is, what the diameter is, and what the
weight is. And so we will continue to make the coins that are
authorized for us to make today, the penny, nickel, dime,
quarter, and half-dollar coins.
Mr. Stivers. Great. And can you update us so you can maybe
refresh my memory? As I recall, 2\1/2\, 3 years ago, Congress
mandated the U.S. Mint to do a study on what was in coins, how
coins were produced. You produced an initial report on or about
the deadline of 2013, the end of 2013, as I recall.
Mr. Peterson. In December of 2012, yes.
Mr. Stivers. December 2012, I'm sorry. And then you said
you needed more time. And then I saw another report and I met
with you subsequently and you said you needed a little more
time. Can you update us on the status of those efforts?
Mr. Peterson. Absolutely. I mentioned before that we are
analyzing multiple formulations of zinc and steel. Both appear
to yield some cost savings. And we are putting the finishing
touches on what those cost savings would be so that we can
provide the right information in our next report to Congress,
which will be in December of this year.
Mr. Stivers. So we will be a full 2 years after the initial
required timeframe for Congress. And will we have any final
results by then, when we are 2 years late?
Mr. Peterson. Yes. Our next report is in December. And we
will fully flesh out all the various costs to produce both the
zinc and the steel coins. We are also beginning to look at a
stainless steel alternative and other alternatives that are
various ratios of copper, zinc, and nickel.
Mr. Stivers. Thank you. Are you familiar with the Navigant
Study from 2 years ago? It said that the United States could
save over $2 billion over a decade if just the nickel, dime,
and quarter were made of plated steel. And you just referred to
stainless steel.
I would just remind the entire audience that stainless
steel costs almost 3 times what plated steel costs. And Canada
made the switch to plated steel over 10 years ago.
Do you guys at the Mint think the Navigant Study was
correct? And do you think there would be more savings if we
included the penny in that since it is our largest circulating
denomination?
Mr. Peterson. Our report 2 years ago showed that there were
no alternative metals that would lower the cost of the penny.
And so the penny is not part of that, and there would be no
benefit to shift to steel.
On the nickel, dime, and quarter, there are cost savings
possible with steel coins. And I testified previously that
obviously our friends in Great Britain use plated steel. Our
friends in Canada use plated steel. Steel is a viable option
for United States coinage.
Mr. Stivers. Thank you. And I appreciate you commenting on
plated steel because your report as of 2012 when I looked at
the price and we did some work, and I have met with you since,
it sure looked like you were not using plated steel, not using
cold rolled steel. It looked like you were using a stainless
steel price. And if you looked at the cold rolled steel price,
you would see a substantial savings on the penny.
I would ask you to just go back and look at that. I want to
ask you in a formal setting, I know I have asked you in my
office, but I would ask you again to go back and take a look at
that again.
So, Canada and the United Kingdom and several other
countries have already made the switch to lower-cost coins over
the last 20 years, in fact the U.K. first and then Canada. Why
has the United States been lagging in that, Mr. Peterson?
Mr. Peterson. We were just given authority to go conduct
research and development in December of 2010. We ramped up that
effort in 2011 when we established a secure research and
development laboratory at our Mint facility in Philadelphia. We
analyzed 27 different alternative compositions in 2011 and
2012.
We put out our first report in 2012, saying that there was
a smaller number, four or five possible alternatives, that we
needed to conduct further in-depth research on to confirm the
actual cost of making the coins out of those materials. And
that is what we are doing right now and what we will report out
on in December.
Mr. Stivers. Thank you. I would just urge you, and I have
just a few seconds left, to move as fast as you can on that,
because what we will need to do if we are going to allow the
vending coin industry time to put this in their capital
replacement costs, is to make an announced change and then
phase that in over time, because those folks deserve an
opportunity to have it phased in.
That is what Canada did. If we phase it in, it will work so
much better, because their capital replacement cost is an
average of 100 percent replaced every 5 years.
So the sooner we can announce the change and then continue
to work toward it, the better it will be. And I think that
industry would like to work with you. And they deserve the
ability to have that phased in over a reasonable timeframe.
Mr. Peterson. Agreed.
Mr. Stivers. Thank you, Mr. Chairman. I yield back my
nonexistent time. Thank you for your indulgence.
Chairman Campbell. Thank you.
I think Mr. Clay and I have a couple more questions, so we
will do sort of a second round. There are only two of us in the
round. And then, we will let you all go back to what you
actually do all day.
Okay. I yield myself 5 minutes.
Let me go now to Mr. Felix and understand, so we, Congress,
said you can't alter the dollar note?
Mr. Felix. That is correct. It was done--I think it was
done when Mr. Colby chaired the Appropriations Committee. There
was language in there that says we cannot make any changes at
all to the $1 note.
And I think it is in part--this is when we were beginning
our redesign of all notes. And it is in legislation that is
continued on to this day.
Chairman Campbell. But you would want to? I would presume
that counterfeiting is less of a problem with the dollar. If
you are going to counterfeit, make big money.
So left to your own devices, you would like to change the
dollar note?
Mr. Felix. We are perfectly comfortable because the
counterfeiter didn't get that big return, if you will, on
counterfeiting a one.
Chairman Campbell. Are there counterfeit dollar notes out
there? Have there been? Or is it just kind of a--
Mr. Felix. You are talking about ones?
Chairman Campbell. Just yes, on a one, I'm sorry, yes.
Mr. Felix. Very few.
Chairman Campbell. Okay.
Mr. Felix. Very few.
Chairman Campbell. And fives, tens? Because you are
changing the ten, you said.
Mr. Felix. Right. Typically the biggest issue with the
fives is actually people would erase--they would take the five
and bleach it out and print 100 on it. And the reason for that
is they will go to places that use the marker. And it will give
an indication of real currency because it is real currency
paper.
And that is one of the reasons why we made a preemptive
change in the five. And so we have in the watermark of the
five, the number five in it.
Chairman Campbell. Okay. So this is a $100 bill, which is
your latest iteration. Is that correct?
Mr. Felix. Yes, sir. That is correct.
Chairman Campbell. Of bill of any denomination this is the
latest iteration. So this is what you will be transitioning,
20s, 50s, 10s too?
Mr. Felix. That represents the last of our--what we call
our next-gen series. We begin to embark--we will be starting
with the ten, as I said in my testimony. And it will be
completely different. It may in fact have a higher order of
technology in the bank notes. So that actually represents the
closing of the next-gen series.
Chairman Campbell. The next-gen?
Mr. Felix. The end of that series, yes.
Chairman Campbell. The end of that series?
Mr. Felix. The end--
Chairman Campbell. So the ten will be a new series--
Mr. Felix. That is correct.
Chairman Campbell. --from this one? Okay.
So the dollar, single dollar, that you are not changing,
does it cost less to make those than it cost to make these or
the new ten because it doesn't have all this anticounterfeit
stuff?
Mr. Felix. It cost us typically about $0.04 to make a $1
note because it doesn't have those security features.
Chairman Campbell. Right.
Mr. Felix. What we have just introduced, a new technology
enhancement, the BEP, where it will yield even 15 percent more
savings because we are producing--we currently produce them in
32 notes per sheet. And starting this year, we will be
producing them at 50 notes per sheet for an incredible yield.
And so, the price will go down below that even further.
Chairman Campbell. Okay. But--
Mr. Felix. But it does not have--
Chairman Campbell. So, it cost $0.04 to make that. What
does it cost to make this?
Mr. Felix. About $0.12.
Chairman Campbell. Okay. A lot more. Okay. Got you. All
right. Thank you.
Ms. St. James, you talked about how the Federal Reserve--
that it costs 67 percent more than it did a few years ago to do
what?
Ms. St. James. Their cost to manage the coin inventory went
up by 69 percent between 2008 and 2012.
Chairman Campbell. So, not to make it. We are talking about
to manage the coin inventory?
Ms. St. James. To manage the coin inventory.
Chairman Campbell. Why? What did they spend--is there more
or less physical money in circulation than there was then over
that period?
Ms. St. James. Part of the problem is that they were
monitoring a cost figure that included currency management
costs plus coin management costs. They never took a separate
look at what it cost to manage coins.
But overall, currency, both note and coins, that cost
increased by 23 percent, and when we took out the coin
inventory costs, that is the 69 percent increase from 2008 to
2012.
Chairman Campbell. Okay. This is something we will have to
look into some more.
We did ask the Federal Reserve to be here. They declined,
saying that there was an FMOC meeting within 2 weeks and that
they couldn't show up because of an FMOC meeting in 2 weeks.
Although clearly what we are discussing has nothing to do
with monetary policy in the broad sense of M1 and M2 monetary
policy. But they declined to be here for this hearing. There
are a lot of questions I would like to ask them on the basis of
that.
Thank you very much. My time has expired. I yield to the
ranking member of the subcommittee, Mr. Clay, for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman.
Ms. St. James, the Federal Reserve's 2013 annual report
found that Reserve Banks hold roughly 1.4 billion $1 coins,
which accounts for more than 40 years of supply at current
levels of demand. Given this, to what extent can the increase
in coin management costs be attributed to managing dollar coin
inventories associated with the dramatic increase in dollar
coins as part of the Presidential $1 Coin Program?
Ms. St. James. The cost increase that we referred to does
not include the dollar coin. It only includes pennies, nickels,
dimes, and quarters.
Mr. Clay. How much do you anticipate the Federal Reserve
will have to spend just to manage the dollar coin inventories
over the next 40 years?
Ms. St. James. We don't have that cost at the--
Mr. Clay. Could you supply this committee with an estimate
or the cost--
Ms. St. James. Yes.
Mr. Clay. --of what you think it would be?
Ms. St. James. Certainly.
Mr. Clay. Thank you.
Mr. Peterson, can you discuss how you have been able to
increase production efficiency to bring down per unit costs of
producing the penny and the nickel in recent years? Do you
anticipate achieving further such efficiencies in future years?
Mr. Peterson. Absolutely. I have testified before that our
plant manager in Denver came to us from General Motors. Our
plant manager in Philadelphia came to us from Ford Motor
Company. I spent 11 years with General Electric.
We know how to take costs out of our manufacturing
operations. The short answer is, we don't swing for the fences.
We try and hit singles every day. And those little wins add up
over time.
We have renegotiated contracts to get costs out year-over-
year on some of our recurring contracts. We have invested in
capital equipment for the HVAC systems, the water treatment
systems, the lighting systems, and they reduce our utility
costs year-over-year.
We have shifted our manufacturing operations in Denver and
Philadelphia to two-shift operations, and they run Monday
through Thursday. And we turn down the furnaces on Friday,
Saturday and Sunday so that we can reduce our utility expenses.
There is an inherent seasonality to coin demand. In the
build-up to Memorial Day, coin demand goes up in March, April,
and May, and then again in October and November before the
holidays. And the coins flow back into the Federal Reserve in
January and February and over the summer.
And so, we have smoothed production. We look at what the
12-month forecast is and we staff up for those levels. And we
make the same number every month. And if there is a peak, we
add temporary workers to make that peak demand.
Those kinds of cost reductions are what we are doing every
single day. And we are going to continue those.
And the 42 percent cost reductions I mentioned in my
opening statement in G&A expenses over the last 3\1/2\ years,
are among our proudest accomplishments at the United States
Mint.
Mr. Clay. Thank you so much for your response.
Mr. Chairman, I have no other question. I yield back.
Chairman Campbell. Thank you.
Our final set of questions will be a second round from the
gentleman from Ohio, Mr. Stivers. You are recognized for 5
minutes.
Mr. Stivers. Thank you, Mr. Chairman. I really appreciate
that. My first question is for Ms. St. James.
The GAO--the ranking member was just talking about the
costs with Director Peterson of how we produce coins. And I
would like to note that they have very extensive real estate in
downtown Denver and in Pennsylvania, the very old, aging plants
and aging equipment.
And the way I understand it, Mr. Peterson just basically
said they fire their furnaces for 4 days and then turn them way
down for 3 days, and then they start over and do a 4-day week
again the next week. Could we save money by modernizing our
equipment, our plants, and our production techniques?
Ms. St. James. I think that is probably a question better
directed to the Mint.
Mr. Stivers. Director Peterson?
Mr. Peterson. So yes, our Denver Mint was built in 1904,
our San Francisco Mint in 1937, and the West Point Mint in
1938. And our newest Mint was Philadelphia in 1968.
I did serve in the Navy and I know we get to retire our
aircraft carriers after 50 years. And so, what we want to do in
those facilities is look at our capital expenditures, look at
what the buildings need, look at what equipment needs to go
inside the buildings.
And again, in the manufacturing cost reduction mode, we
want to preserve flexibility in the manufacturing operations so
that we can move products from one site to another back and
forth. We don't know what the future will hold as to what
materials we make our coins out of and what denominations we
will be asked to make.
And so preserving and expanding the manufacturing--
Mr. Stivers. And all three of those facilities are in
downtowns, aren't they, in pretty expensive real estate?
Mr. Peterson. West Point is on the outskirts of the campus
of the military academy on the Hudson River.
Mr. Stivers. If you were able to sell the real estate and
recoup the profits to build newer facilities in places that
might be a little less expensive real estate, and buy more
modern equipment--I guess my question is, have you done an
analysis of that in any of your plants?
Because if your newest plant is 50 years old and your
oldest plant is 106 years old--
Mr. Peterson. One hundred ten.
Mr. Stivers. I'm sorry, 110 years old. I didn't want to
short them. Have you done that analysis?
Mr. Peterson. No, we have not done an analysis to go out
and look at what the real estate markets are. I will say that
these sites are heritage assets that Mr. Lucas asked about
earlier in the hearing. They are on the register of historic
places in the cities in which they exist.
Mr. Stivers. And I am sure they are very historic and
beautiful. But in the end, we have an obligation to taxpayers
to make our coins as efficiently as we can.
My next question is for Mr. Mills. Having gone through the
process of taking a lot of costs out of your coins and now
being a mint that makes coins for how many nations?
Mr. Mills. In total, we say we supply around 60 other
nations, depending on the year.
Mr. Stivers. So you have been able to make coins for 60
other nations and continue to do research and development, buy
new equipment because you have the flow-through. Of course
today, I think the United States only makes coins for one
country.
Tell me about your experience of how you have been able to
take so much cost out of your coins.
Mr. Mills. Yes. Thank you, sir.
As I said in my testimony, I guess it is in some
fundamental areas. One has been changing the metal composition,
and by and large that has been changing from solid alloys,
which are obviously relatively expensive if you look at the
price of the nickel at the moment. It is trading, I checked
this morning, at about $18,000 a ton versus steel in Europe is
trading at about $900 a ton.
So with a nickel plated coin, you are talking about taking
over 95 percent of cost--
Mr. Stivers. And do you buy your steel at $900 a ton?
Mr. Mills. That is the sort of price in Europe at the
moment.
Mr. Stivers. So the study in 2012 that the U.S. Mint did
claimed steel was $2,100 a ton. Clearly, that is not the same
composition steel that you buy.
Mr. Mills. I don't know the exact--I don't know anything
about the specification of steel--
Mr. Stivers. In the whole world, steel was trading at $900
a ton at that point too. So it has been pretty flat. And I
don't mean to cut you off, but I only have 27 seconds left.
If the United States were to enter into an agreement with
the Royal Mint and ask you to make the penny for us, would you
have any idea what you could make it for?
Mr. Mills. Looking at the work we have done, I think it
would be very difficult to have a U.S. penny that would be in
positive seigniorage.
Mr. Stivers. But could you make it for less than $0.02?
Mr. Mills. I would have to look at it more closely. I think
it is a tough job.
Mr. Stivers. Thank you. My time has expired again. That
keeps happening to me.
Chairman Campbell. Thank you--
Mr. Stivers. Thank you, Mr. Chairman.
Chairman Campbell. --Mr. Stivers.
I do have to say I miss the halfpenny and the shilling. Of
course, my taxes aren't paying for them.
I would like to thank our witnesses for their testimony
today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, thank you all. This hearing is adjourned.
[Whereupon, at 12:45 p.m., the hearing was adjourned.]
A P P E N D I X
June 11, 2014
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