Proceedings of the Standing Senate Committee on
National Finance
Issue 18 - Evidence - October 6, 2010
OTTAWA, Wednesday, October 6, 2010
The Standing Senate Committee on National Finance met this day at 6:45 p.m. to examine the costs and benefits of Canada's one-cent coin to Canadian taxpayers and the overall Canadian economy.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this is our sixth meeting dealing with the costs and benefits of the one-cent coin.
[English]
Over the previous five meetings, the committee has heard from government officials, academics, as well as representatives of the business community, of consumer associations and of charitable organizations. As honourable senators know, New Zealand tackled this same issue that we are looking at more than 20 years ago, ultimately eliminating their 1-cent and 2-cent coins, and more recently their 5-cent coin. To help us learn from their experience, we are pleased to welcome today, via video conference — tomorrow where he is — Alan Boaden, Head of Currency for the Reserve Bank of New Zealand.
Mr. Boaden, are you speaking to us from Auckland?
Alan Boaden, Head of Currency, Reserve Bank of New Zealand: I am in Wellington, Mr. Chair. I trust you can hear me clearly.
The Chair: We can hear you beautifully. We will ask you to make your introductory remarks. You understand the subject matter we are looking into. If you can hear us fine, then we will have a dialogue once you have completed your introductory remarks. You have the floor.
Mr. Boaden: Good evening, Mr. Chair and honourable senators. It is an honour for me to speak to you this evening to describe New Zealand's experience with the withdrawal of the 1-cent, 2-cent and, most recently, the 5-cent coins. I will describe our actions, our reasons for taking these actions and the outcomes, particularly with respect to prices.
First let me explain the powers and responsibilities of the Reserve Bank of New Zealand, RBNZ, with respect to currency.
The Reserve Bank Act of 1989 gave the Reserve Bank of New Zealand the sole right to issue both banknotes and coins in New Zealand. RBNZ has the authority to determine the denominations, design and composition of all coins and banknotes. It may, with the consent of the finance minister, withdraw any banknote or coin.
As honourable senators are probably aware, we purchase our 10-cent, 20-cent and 50-cent coins from the Royal Canadian Mint. We purchase $1 and $2 coins from the British Royal Mint and polymer banknotes from Note Printing Australia.
Let me now directly address the withdrawal of the low-value coins, taking the 1-cent and 2-cent coins first.
RBNZ stopped issuing 1-cent and 2-cent coins in March 1989. It demonetized the two coins about a year later, on April 30, 1990. Under New Zealand law, this meant that shops and other businesses were no longer obliged to accept them as payment for goods and services. However, RBNZ itself always pays the face value for any demonetized currency that people return to it.
The decision to withdraw the 1-cent and 2-cent coins from circulation followed two comprehensive reviews of New Zealand currency carried out by Dr. Payne of Thomas De La Rue and Company in 1986 and Mr. Searle, a consultant to the treasury in 1987. Both reports conclusively recommended that due to the effects of inflation, the 1-cent and 2- cent coins had lost their value and no longer retained any effective purchasing power. The report prepared by Dr. Payne incorporated a mathematically designed currency management chart, now known widely around the world as D-Metric analysis. This was used to determine the effective coin range and note range for the New Zealand currency.
As indicated, the 1-cent and 2-cent coins had fallen substantially in value by 1990. In addition to this, the unit cost of issuing the 1-cent and 2-cent had become greater than their face value. It therefore became a relatively straightforward exercise for RBNZ officials to forward a paper to the finance minister recommending the withdrawal and subsequent demonetizing of these coins. This was approved by the Cabinet Policy Committee on August 9, 1988 and confirmed by the full cabinet on August 15 of the same year.
With respect to the impact on prices, at the time the withdrawal of 1-cent and 2-cent coins was being considered, there was some concern that this move could have inflationary effects. It was believed that many prices could be rounded up to the nearest 5 cents, thereby increasing costs to the public. In view of this, Statistics New Zealand was approached to calculate the likely effects on the consumer price index, CPI, of withdrawing the two coins from circulation.
RBNZ asked them to analyze two options: a pricing policy of always rounding up to the nearest higher 5 cents; and a pricing policy of rounding up or down to the closest 5-cent or 10-cent unit. For example, $1.91 becomes $1.90 and $1.98 becomes $2.00.
The Statistics New Zealand informed RBNZ that with the first option, this would result in a one-off additional quarterly increase of 0.3 per cent in the quarter following the date we announced the withdrawal of the 1-cent and 2- cent coins. With the second option, they calculated that there would be no effect on the CPI.
No thorough study was done afterwards on the inflationary effects of the withdrawal of the 1-cent and 2-cent coins. This was probably due in part to the relatively low inflationary impact estimated by Statistics New Zealand. Also, during 1989, the government increased the goods and services tax from 10 per cent to 12.5 per cent, which obviously had a more significant impact on prices at the time.
I would also point out that a survey carried out by the independent organization Consumer NZ found that prices actually fell slightly when the 1-cent and 2-cent coins were withdrawn. They attributed this to competition in the retail sector and to prices such as $1.99 and $4.99, for example, at places such as McDonald's, being rounded down to $1.95 and $4.95.
A RBNZ report at the time recorded the following:
The proposal to withdraw the one and two cent coins from circulation was a relatively clear cut exercise which received little to no negative feedback from the public. It is interesting to note that in a recent currency survey carried out, one of the main concerns of the public with respect to circulating coins, related to the five cent coin, with many perceiving it to be a `nuisance' and `of little value.' Suffice to say the one and two cent coins are now well forgotten.
I will talk about the withdrawal of the 5-cent coin, although I know that is not being considered by the committee at present, but it will also have lessons of relevance.
In July 2006, RBNZ issued new, smaller, lighter 10-cent, 20-cent and 50-cent coins, struck, as I noted earlier, by the Royal Canadian Mint, and started withdrawing the corresponding old cupro-nickel coins. The 5-cent cupro-nickel coin was withdrawn and not replaced. It was demonetized three months later with effect from November 1, 2006.
The main reason for withdrawing the 5-cent coin was that, over the years, inflation had reduced its value so much that it was just regarded as a nuisance and of no real value by most people. A 5-cent coin was worth less in 2006 than half of what a cent was worth in 1967 when New Zealand switched to decimal currency, and no need was seen at that time for a half-cent coin. In addition, New Zealanders use Electronic Funds Transfer at Point of Sale, EFTPOS, much more often than cash. Removing the 5-cent coin would only affect cash transactions and only the total when buying more than one item.
RBNZ was issuing about 30 million 5-cent coins a year, about 7.5 for each person in the country, at a cost of over $1 million, yet they were not circulating. The shops gave them to the public as change, and then they were stored in jars at home, lost or thrown away.
A survey commissioned by RBNZ in early 2004 indicated that the general public and retailers were of the same view. Of those surveyed, 68 per cent of the general public favoured dropping the 5-cent coin, 28 per cent favoured keeping it and 4 per cent were undecided.
The main reason cited for withdrawal was that the coin had no value and was a nuisance. Indeed, those surveyed had difficulty remembering what they did with 5-cent coins, saying that they just get lost, pile up or sit in drawers. A minority said that they threw them away.
Among the small retailers, 70 per cent were in favour of discarding the 5-cent coin, while 30 per cent were against it. Among large retailers, 40 per cent were in favour, 19 per cent were opposed and 41 per cent were neutral. Those retailers in favour of withdrawal said that 5-cent coins were a hassle to deal with, and without them, there would be less work and cost in sorting their takings.
With respect to the impact on prices, RBNZ's economics department undertook some analysis of the potential impact of the removal of the 5-cent coin. This work concluded that the effect on prices faced by most households would be negligible. Statistics New Zealand checked this analysis and confirmed that it was sound.
RBNZ was confident that competition would restrain price increases. Some prices might rise, others fall and others stay the same, as many do on a regular basis normally. The overall impact on prices and inflation was likely to be negligible.
It is important to note that items in New Zealand shops, particularly supermarkets, are still priced in 1-cent intervals, and rounding is only applied to the total value of all items purchased, and, even then, only for cash transactions. The surveys of small and large retailers found that if the 5-cent coin was removed, for total prices ending in 5 cents, as many retailers would round down as would round up.
The increased use of EFTPOS makes the use of rounding less important. Electronic transfers are used for 85 per cent to 90 per cent of transactions at many supermarkets. These payments are made to the exact cent of the total price of goods. In 1987, by contrast, 60 per cent to 70 per cent of transactions were made in cash and the other 30 per cent to 40 per cent were mainly made by cheque. Credit cards and debit cards were not wisely used in New Zealand then.
The New Zealand Retailers Association recommended to its members that for cash transactions, prices ending in 1 cent to 5 cents be rounded down and prices ending in 6 cents to 9 cents be rounded up. RBNZ supported that recommendation. However, each business was free to make its own commercial decision on the matter of rounding. They needed to take account of competition and the potential loss of customer goodwill if prices ending in 5 cents or less were rounded up. The retailers association also pointed out that where rounding was used, then the policy should be clearly displayed at the point of sale so that customers would be appropriately informed.
A small study conducted after the withdrawal of the 5-cent coin examined price changes of about 50 retail items as recorded by Statistics New Zealand in the months preceding and following July 31, 2006. The study found that in each month, some prices rose and others fell, but there was no obvious difference between the two time periods.
Also, there were very few public complaints about prices rising. If there had been significant price increases, then it is very likely that the news media would have given this considerable publicity.
To summarize, Reserve Bank of New Zealand withdrew 1-cent and 2-cent coins in 1989-90 and 5-cent coins in 2006. On each occasion, the general public and retailers supported the changes; there were no discernible effects on inflation; and there were savings for RBNZ and thus the taxpayer.
That concludes my account of New Zealand's experience. I will do my best now to answer any questions you may have.
The Chair: Mr. Boaden, thank you very much. That was very clear and well presented. We appreciate you detailing the 5-cent coin even though that is not under direct consideration at this time, but we do have such a creature here in Canada as well.
We had a suggestion from one of our witnesses that we should eliminate the 5-cent coin, but then he also suggested that we should introduce the 20-cent coin, like you have, as opposed to the 25-cent coin. When you eliminated the 5- cent coin, did you already have in circulation the 20-cent coin?
Mr. Boaden: Yes, we did. We had 10-cent, 20-cent and 50-cent coins. We have never had a quarter in New Zealand.
The Chair: You do not know what you are missing. Thank you very much. I will now go to honourable senators who are anxious to participate in the discussion, starting with the deputy chair of the committee, Senator Gerstein from Toronto.
Senator Gerstein: Thank you for your excellent presentation, Mr. Boaden. It was most comprehensive.
You mentioned in your opening remarks that New Zealand buys its 10-cent, 20-cent and 50-cent coins from the Royal Canadian Mint. Indeed, the Royal Canadian Mint does a great deal of international business and is widely recognized for its high standards, high-quality products and the technology that goes into producing them. I wanted to ensure that you are satisfied with what you are receiving and perhaps to be assured that you are not doing a study to eliminate any of those coins.
Mr. Boaden: Yes, the Royal Canadian Mint makes very good coins. The coins produced by the mint have at least met and probably exceeded our expectations. Some sceptics thought there could be difficulties with plated steel coins in vending machines, but they have worked just fine.
For example, Coca-Cola, the largest operator of vending machines in New Zealand, advised me a few months after we introduced the new coins that they were just as good as the nickel coins.
We have been very happy with the quality of the coins struck by the Royal Canadian Mint.
Senator Gerstein: Thank you. I have two questions for clarification of some things you have said.
You mentioned that although New Zealand businesses are no longer required to accept the 1-cent, 2-cent and 5-cent coins, citizens can still return these coins to the central bank and receive their face value. Do citizens have to go directly to the central bank, or can they take their discontinued coins to a chartered bank who then returns them to the central bank?
Mr. Boaden: After we demonetized the 5-cent coin in 2006, banks continued to accept them and the other withdrawn coins for almost a year later because quite a significant number of people were still going to the bank with jars of coins. After a while, it petered out to a low trickle, and most banks decided it was too costly and had to ship the coins down from Auckland to Wellington.
It just depends on the customer. Some banks will continue to take them, but others will determine they cost too much, and, if you want value for them, then you need to get them to Wellington somehow yourself.
Senator Gerstein: Your experience was that within a year, it had basically petered out and most of the coins had been returned, correct?
Mr. Boaden: Yes. I would say that almost all the coins we recovered came back in three or four months after we made the change. We still get two or three people coming to the front desk at RBNZ each day with a few coins, but that is a just a trickle in comparison to the flood that initially came forward.
Senator Gerstein: You mentioned that the government left it up to retailers to decide how to round off their prices. Basically, it was a voluntary situation, and you mentioned that particularly with the 5-cent coin. Was it also a voluntary situation with the 1-cent and 2-cent coins as to how the rounding off took place?
Mr. Boaden: That was before I worked in the currency department. My recollection, and from speaking to other people, is that it was voluntary. We relied on market forces and competitive pressures. Certainly, in most environments, a retailer does not want the customer walking out of the shop feeling they have had a bad deal. Those forces meant that almost all retailers were fair in their behaviour.
Senator Gerstein: Did you experience any negative consequences that you had not anticipated? On the flip side of the coin, if I may, also were there any positive consequences that you had not anticipated when the decision was made to eliminate these coins?
Mr. Boaden: I am not sure that there were any bad consequences that we did not anticipate, but there were a couple of surprises. When we withdrew the 5-cent coin, some shops started quite quickly to not accept them. We assumed that shops would continue to accept them until just before November when they were demonetized. However, shopkeepers did not want to get caught with them, even though with hindsight they could have taken them to the bank. A number of shops reacted straight away and said that they do not take 5-cent coins. If you withdraw the 1-cent coin in Canada, you might find some shopkeepers will do the same.
We were not initially sure what the legal situation was because the coins were, after all, legal tender. However, under New Zealand law, any retailer or business can display their terms of trade. If their terms of trade are that they do not take 5-cent coins or 1-cent coins, then the customer is free to do business on those terms or not. If you withdraw the 1-cent coin, you might find some shops saying no to them straight away. That was one surprise.
We were also surprised at how well the change was received by the vending industry in many examples. I understand the 1-cent coins are not used in vending machines in Canada, so it would not be an issue. However, in some cases, it forced modernization of machinery, and we received more positive feedback from that sector than we thought we would.
Senator Gerstein: You obviously had a detailed process of how you phased these coins out. In hindsight, would you have done anything differently?
Mr. Boaden: With the withdrawal of the 5-cent coin and the introduction of new 10-cent, 20-cent and 50-cent coins, we found that it significantly affected patterns of behaviour. We found we were issuing many more 20-cent coins, and even now we are not quite sure why. We think that possibly vending machines changed the coins they used. Normally, it is the lowest denomination coin that issues most frequently, but we found we were issuing more 20-cent coins than 10-cent coins. Therefore, we had to go to our good friends at the Royal Canadian Mint and ask them to strike more 20- cent coins; they very helpfully obliged.
You can find surprising changes in the patterns of use. That was one of the surprises. I am not sure what we could have done in advance because these things are hard to predict, but one thing we would have done differently is strike some more 20-cent coins.
Senator Gerstein: Thank you, Mr. Boaden, for your testimony.
Senator Marshall: Thank you, Mr. Boaden, for speaking with us this evening. I found your opening remarks informative. One of my questions has been posed by Senator Gerstein, but I do have two others.
During your opening remarks, you indicated that the main reason the coins were discontinued was because they had lost their value. However, I had the impression that around the same time, the GST was increased from 10 per cent to 12.5 per cent. Was cost savings a secondary consideration? Was this looked at as a possible cost savings to the government?
Mr. Boaden: Yes. The 1-cent and 2-cent coins were both costing more than their face value, so we were losing money every time we issued one. If that was allowed to continue, over time no doubt, the costs of production would have increased further.
A country can get into a situation where people buy the coins simply to melt them down for their metal value. That probably would have happened before too long, if we had allowed it. We definitely saw cost savings, also in the case of the 5-cent coin. The metals at that time were copper and nickel, as you know in Canada, which rose sharply in price, and those coins were also starting to cost as much or a little more than their face value.
Senator Marshall: You mentioned the 5-cent coin, and the chair and deputy chair both made reference to it as well. We are looking only at the penny, but there has been some discussion during our meetings about discontinuing the 5- cent coin. I would be interested in that myself.
Do you have any comments on that? Do you think we would be too ambitious if we were to discontinue both the 1- cent and the 5-cent coins at the same time?
Mr. Boaden: That is a call for you people to make. I think it would be a brave move. I think if you were to withdraw the 1-cent coin initially, people would become accustomed to it and hopefully see that it has no discernible effect on inflation, as was the case in New Zealand. The withdrawing of the 5-cent coin at some future date would be managed more easily. That would be my approach. Sometimes it pays to be bold, but I cannot really give you too much advice on that.
Senator Marshall: However, New Zealand did remove the 1-cent and 2-cent coins at the same time.
Mr. Boaden: Yes.
Senator Neufeld: Senator Gerstein asked two of my questions. I should probably know this, but do you have coins other than the 10-cent, 20-cent and 50-cent coins?
Mr. Boaden: We have a $1 coin, a $2 coin and a $5 banknote.
Senator Neufeld: Has there been discussion about changing the $5 banknote to a coin?
Mr. Boaden: No public discussion has taken place. A number of factors would have to be considered, in my view, if we did that. We would need to look at public preferences, whether people like notes and coins; the relative costs; and the risk of counterfeits. In some instances overseas, high-value coins have become the targets of counterfeits. I never tell other countries what they should do, but in New Zealand's case, I would be a little wary of moving to a $5 coin.
Senator Massicotte: Thank you for being here with us tonight. The principle motivation for the change was the lost value; in other words, they were not significant enough for people to cater to the 1-cent and 5-cent coins. Then you considered the effect on inflation, concluded that it would not be significant and eliminated those coins.
What about the costs? What was your 5-cent coin made of, and what did it cost to produce it?
Mr. Boaden: The cost of producing it was less than 5 cents leading up to the changeover. However, because of the rise in copper and nickel prices — it was made of 75 per cent copper and 25 per cent nickel — the cost would have exceeded 5 cents had we continued to produce it.
Senator Massicotte: People saw no value and did not use it. Consequently, the coins were not circulating. Therefore, you were losing money on the production of the coins.
Mr. Boaden: Yes. It was all wasted money in many ways because the coins were being given to customers as change and then going into jars at home. There seemed to be no need for the coins.
Senator Callbeck: Thank you, Mr. Boaden, for your excellent presentation. My questions have been pretty well covered, but I have one that you have not answered. When you eliminated the 5-cent coin in 2006, did you do anything differently than when you eliminated the 1-cent and 2-cent coins?
Mr. Boaden: It was a different exercise because we were withdrawing the 10-cent, 20-cent and 50-cent coins as well. However, we did it much more quickly when we did the 5-cent coin. When we withdrew the 1-cent and 2-cent coins, we stopped issuing them in March 1989, and one year later we declared them no longer legal tender.
People had plenty of time to become used to the idea, and businesses had plenty of time to change any of their systems. That worked fine. However, because we were changing other coins in 2006, retailers were concerned not to have about 10 different coins — two of each type — so we were forced to do it more quickly. That worked out all right. That was the only difference, really.
The Chair: Mr. Boaden, the 5-cent coin was demonetarized after three months. Was that because of what you learned when you eliminated the 1-cent and 2-cent coins? After three months, the return of coins was quite slow.
Mr. Boaden: The main reason was that it would be something of a nightmare for retailers to have two different types of 20-cent coins, 50-cent coins and so on. We consulted closely with the New Zealand Retailers Association. The more consultation you can have with people who will be affected by this change, the better it will be. We had a great deal of cooperation from the bankers and retailers associations. The retailers wanted those coins changed as quickly as possible because often coins are measured by weight, which means that the coins have to be continually separated for banks to measure them.
The Chair: Did I hear you say that after your thorough studies and your recommendation to withdraw the coins — I do not remember whether that was the 1-cent and 2-cent coins or the 5-cent coins — you recommended a rounding off, but it was not implemented?
Mr. Boaden: Yes. We recommended a rounding policy that one to 5 cents be rounded down to zero and that 6 cents to 9 cents be rounded up, but there was no compulsion. Any shopkeeper could do whatever they chose to do. Most retailers followed the practice that we suggested. The supermarkets that I go to had signs at the checkout facility saying that this was the policy.
The Chair: Therefore, it was a particular store's policy. You left it entirely to the commercial marketplace to determine policy on rounding, but you had made a recommendation.
Mr. Boaden: That is right.
The Chair: At any time, did you make a recommendation to the finance minister that it should be regulated, legislated or imposed?
Mr. Boaden: No, we did not do that. We were confident that market forces or competitive pressures would oblige most retailers to be reasonable, particularly in urban centres and towns where customers have options to shop elsewhere. Retailers are anxious to retain the goodwill of customers. The retail sector in New Zealand is very competitive — as I am sure it is in Canada. The last thing any retailer wants is to have a customer walk out feeling they have not been treated fairly.
Senator Ringuette: There is a cost for retailers to change their cash register systems. Has your government or your bank provided any incentive to help retailers with these transition costs?
Mr. Boaden: No, they have not. The costs for retailers should not have been too great. There was the inconvenience of handling two sets of coins, but your retailers will not face that issue. Most retailers simply put any old coins in a separate drawer underneath the till and just handled new coins. Most retailers returned the old coins very quickly to the banks. As a customer, I received only new coins from the shops after about one week from the start.
The vending machine industry was the one most affected in our case. If you are only withdrawing the 1-cent coin, or even the 1-cent and 5-cent coins, the cost to retailers should not be too great.
The Chair: You commented earlier that it was your understanding that the vending industry had already eliminated the use of the 1-cent coin in Canada.
Mr. Boaden: That was my understanding.
The Chair: That is my understanding as well from a witness we heard last week. I wanted to clarify that point for the record. However, it is not the case with respect to the 5-cent coin.
Mr. Boaden: That is true.
Senator Gerstein: I wish to go back to a question I asked earlier. A number of questions from committee members have touched on it.
We had two witnesses who appeared before us and made a strong point about clarity, saying that without it, there will be chaos. In other words, they felt that unless we were clear that 1 cent and 2 cents would be rounded down to zero and that 3 cents and 4 cents would be rounded up to 5 cents, there would be problems.
We are hearing that the New Zealand experience was entirely voluntary, and that, in fact, prices fell — I do not know if you were surprised — because the majority of retailers rounded down to zero.
You are saying that, whether it was 3 cents or 4 cents, retailers were rounding it down and prices fell. Do I understand that correctly?
Mr. Boaden: No. I might have created a slightly misleading impression. Generally speaking, 1 cent and 2 cents were rounded down and 3 cents and 4 cents were rounded up. Many items that were priced at $1.99 and $2.99, for example, were rounded down to $1.95 and $2.95. That is where the price savings came when we withdrew the 1-cent and 2-cent coins.
I think that happened to a degree when we withdrew the 5-cent coin. Some prices came down to $1.90 but to a smaller extent. By the time we withdrew the 5-cent coin, electronic transactions had became so common that there was no need to change prices. Many prices are still in 1-cent intervals. If people pay by credit or debit card, they pay exactly $58.23 or whatever the price is.
Senator Gerstein: I appreciate that clarification. However, I am taking from what you said that your experience was that there was no confusion and prices fell.
Mr. Boaden: When we withdrew the 1-cent and 2-cent coins, that was the result. When we withdrew the 5-cent coin, it did not rise or fall; prices stayed about the same.
Senator Gerstein: Thank you very much for that clarification, Mr. Boaden.
The Chair: You indicated that prices in New Zealand shops are still priced in 1-cent coin intervals and that rounding off is only applied to the total value of all items purchased, and, even then, that is done only for cash transactions. Is that by practice, or is that legislated through some regulation?
Mr. Boaden: It is by practice rather than legislation.
Senator Massicotte: To understand that point, you say "by practice." Is that because of the retailers' concern about the reaction of the consumers if they are deemed to be pricing up every time, and therefore it would be an abuse of pricing power?
Mr. Boaden: That would be one effect, but they did not have to change their systems; they just carried on as they were before.
Senator Massicotte: That is what motivated this practice, do you think?
Mr. Boaden: Yes, and I think it just seems fair. If something costing $1.98 was rounded up to $2.00 and if a person made an electronic transaction, the customer would feel that was not right; they came to pay $1.98, and that is what they should pay.
Senator Massicotte: That is a good point.
The Chair: If they bought something that was priced at $1.98 and it was rounded up and another item was $1.96 and it was rounded — but you do not get individual rounding; you only get a rounding with the final cost.
Mr. Boaden: Yes, that is right.
Senator Ringuette: In Canada, we have many citizens who do not have bank accounts. Therefore, they do not have that fantastic plastic — the debit or the credit card. Do you have legislation that obliges the banking institutions to provide bank accounts to citizens? The U.K. has that legislation.
Mr. Boaden: No, we do not; banks are not obliged to provide everyone with a bank account.
The Chair: Mr. Boaden, thank you very much. This has been very helpful. Your presentation and your replies to our various questions have been clear and succinct. It is quite an interesting exercise when one gets into all of the different aspects of it. You have helped bring a different light to a number of these points, and for that, we thank you.
Mr. Boaden: It has been a pleasure and an honour for me to participate in this. If I may, I would like to thank Adam Thompson who gave me advice and helped me prepare for the hearing today.
The Chair: Thank you, and it is very nice for you to do that. We all wanted to come down to Wellington to see you, but Adam Thompson said that we could not do that.
Senator Neufeld: He gave us some advice, too.
The Chair: Thank you again, Mr. Boaden.
Mr. Boaden: Good night.
The Chair: Honourable senators, I am very pleased to welcome, for our second session this evening, two witnesses to help us talk about the perspective of coin collectors. We are dealing with the issue of the possibility of elimination of the 1-cent coin. We are very pleased to have your perspective and are looking forward to hearing from each of you.
From The Royal Canadian Numismatic Association, RCNA, we have Mr. Stephen Woodland, Area Director for Ontario-East, originally from Sussex, New Brunswick, which is just excellent — Kings County, I know it well.
From the Canadian Coin News, Mr. Bret Evans, Managing Editor and Associate Publisher, who also wishes he was from New Brunswick.
Gentlemen, thank you both very much for being here. I am sorry we had to bring you out on a rainy evening. We have your written remarks, but we will give you an opportunity to go through those.
Stephen Woodland, Area Director, Ontario-East, The Royal Canadian Numismatic Association: Honourable senators, thank you very much, and good evening.
On behalf of the association president, Mr. Daniel Gosling, and the members of The Royal Canadian Numismatic Association, thank you for the opportunity and privilege to appear before you this evening to present our views on the proposal to eliminate the 1-cent denomination from Canada's circulation coinage.
The Royal Canadian Numismatic Association, RCNA, is a national organization comprised of numismatists, collectors and dealers who study, collect, buy, sell and trade coins, banknotes, metals and tokens. As stated in our constitution and bylaws, the RCNA is a non-profit educational organization devoted to research and the dissemination of numismatic information for the benefit of Canada, the Canadian people and others throughout the world who are interested in the science of numismatics.
As a group that appreciates money primarily for reasons other than its economic value, our comments will not address issues such as the purchasing power of the 1-cent coin or its use by people in cash transactions, as these points have already been dealt with before the committee by eminent representatives from government, business, academia and the private sector.
While the members of RCNA understand and may support eliminating the 1-cent coin based on a purely economic analysis, as collectors, we are attached to our coins for emotional reasons rather than fiscal considerations. We like to study them, to examine their colour and their designs, to determine how they were made, to look for errors and varieties; but most of all, we enjoy displaying them and sharing our knowledge and our passion for these beautiful works of art in metal.
With this perspective in mind, we offer several suggestions and recommendations for retaining the 1-cent coin in circulation, some of which even have the potential for a positive economic return.
As collectors we would like to see Canada, through the Royal Canadian Mint, continue to strike 1-cent coins, if not for circulation, at least to continue the production of numismatic sets and rolls for the collector market, similar to what is done currently for the 50-cent coin.
Numismatic interest in the 1-cent series remains, as is demonstrated by the authoring and publication of several books on this subject in recent years. The 1-cent coin has been a traditional entry point for young collectors, providing a readily accessible and inexpensive way to start a collection. With time, this has evolved whereby the entry point is now the 25- cent coin. This change is primarily due to the variety of intriguing commemorative designs that the mint has included on circulating coins of this denomination, such as the Canada 125 series of 1992, the Millennium series of 1999 and 2000, and the recent Olympic-Paralympic series, as well as several colourized coins.
We would recommend varying the reverse design of the 1-cent coin to provide motivation for young collectors to return to this denomination as a starting point for collecting, thereby increasing collector interest and demand for the coin.
Recent proof of this is the United States' 1-cent coin, which had four different reverse designs in 2009 to celebrate the coin's centennial. That was followed by a new reverse design in 2010. As a result, collectors in the U.S. are flocking to the Lincoln cent as never before. Since 1980, Canada's 1-cent coin has undergone dynamic changes in size, weight and composition, changes that are driven by many factors but primarily to keep the cost of the material, production and distribution of the 1-cent coin affordable.
To achieve this, the mint has become a world leader in the production of high-quality, low-cost multi-ply plated steel coins by innovating and enhancing its processes and technologies.
From the collector perspective, the impact has been positive. First, the cost reductions have kept the coin in circulation so that we numismatists can continue to collect it. Second, as the 1-cent coin evolved from a copper coin to the current multi-ply plated steel, sharp-eyed collectors have discovered many attractive varieties and errors that have increased interest and demand for the piece. We encourage the Royal Canadian Mint to continue to innovate and advance its minting technologies so that the 1-cent coin continues in circulation and remains available for collectors.
In closing, should Canada decide to cease production of the 1-cent coin as a circulation issue, the RCNA recommends continuation of the current practice whereby the 1-cent denomination is not demonetized. Canada has never demonetized a coin or banknote, and all coins issued since the first ones in 1870 remain legal tender today. Knowing that a coin or a note has not been demonetized is a strong motivating factor for collectors, and it encourages hoarders to return them into circulation, which as the committee has heard, is both economically and environmentally advantageous.
On behalf of the Royal Canadian Numismatic Association, thank you again for your invitation to appear this evening. I look forward to the question period.
Bret Evans, Managing Editor and Associate Publisher, Canadian Coin News: Let me preface this by saying that although I have known Mr. Woodland for a number of years, and I am on the board of RCNA, we did not compare notes. You will hear a similar presentation from me because we both represent a similar constituency.
Thank you for the opportunity to make this presentation. It is a subject I have been following for more than 20 years, which is how long I have been doing this job as editor of Canadian Coin News. The very first or second article I wrote was about the 1-cent coin and the proposal to eliminate it. Canadian Coin News is a periodical serving the interests of Canadian numismatists. Those are collectors of coins, paper money and related material. As such, our readers are among the keenest observers of Canadian coins and circulating money, including, of course, the cent.
It is my perception that it would be an understatement to say that collectors like the coin. For many years, it was a traditional entry into the world of coin collecting, and I still recall putting together a date set of coins from the family penny jar as a child. Even today, collectors enjoy looking for the newest dates and hunting for scarce combinations of dates, mint marks and compositions. I am sure from a collecting viewpoint, most will regret the loss of the circulating cent. They value it as a collectible. At the same time, that economy exists because, many of my readers have told me, both through letters and in person, they see little value in it as money. In everyday use, most cannot be bothered to concern themselves with the coin that has virtually no purchasing power in day-to-day business. Therefore, they see little value in it as money.
I see no conflict here because collectors understand that circulating money exists primarily to allow people and businesses to buy and sell. That means any coin, including the cent, must be viable and must be seen to be of value by average Canadians. The only reason to produce a coin at a loss is because it is in demand. Right now, there is a demand for 1-cent coins because we need them to make change. Implementing rounding off in cash transactions would eliminate that need and that demand.
Another option would be to attempt to reduce the cost by changing the composition of the coin to something less expensive. The Royal Canadian Mint, for several decades, has done an admirable job of altering the weight and composition of the cent and could possibly come up with an alternate composition again. However, I suspect it would be difficult to come up with a format that would not appear cheap to Canadians, and, even so, it would not address the simple fact that the coin has no purchasing power. As much as I personally love the coin, I see no long-term future for the cent in day-to-day commerce.
However, I stress that the coin should not lose its legal-tender status, even if the currency act must be altered to implement Swedish rounding. Canada has never demonetized circulating money, and that means old large cents from Queen Victoria and even $1 bills could still be spent. That would give the coin legitimacy in the eyes of collectors and allow the Royal Canadian Mint still to include it in collector sets. It may even be possible to produce coins in rolls and sell them to collectors. They would then pay the shipping, as they do with 50-cent pieces. One option would be to declare that the coin is legal tender only in rolls of fifty coins or in units of five, while withdrawing them as they enter the banking system. We did that with the $1 and $2 notes. That would retain the coins' status as money, while eventually removing them from circulation, and it would protect Canadians from any financial loss.
I do not believe it would be fair to expect banks to redeem 1-cent coins because they are private businesses not government institutions, and they would want to pass the cost on to consumers.
Once again, I thank you for the opportunity to speak on this subject. I would be pleased to answer any questions.
The Chair: Thank you very much, each of you. That is a very interesting perspective.
I have a point of clarification, Mr. Evans. What is "Swedish rounding"?
Mr. Evans: That would be rounding to the nearest five. Therefore, a transaction of $1.01 would be $1; a transaction of $1.02 would be $1; and a transaction of $1.03 would be $1.05.
The Chair: You indicated that even old large cents from Queen Victoria's day and the $1 bill could be spent, but retailers are not likely to accept those.
Mr. Evans: It is not likely. I did not want to get into the subtleties of the definition of legal tender and its application in day-to-day use, but the coins do retain legal-tender status, which means they have to be presented to pay a debt. However, merchants are also given the legal right to refuse to accept anything they consider suspect. That is why a store will refuse to accept a $100 bill, even though it is legal tender.
In the case of 1-cent pieces, at this time, they are only legal tender up to 40 1-cent pieces. If you walked into a store and tried to buy something that cost 55 cents and plunked 55 1-cent coins on the counter, the merchant could refuse to accept it because it was not an offer of legal tender. They would be within the framework of the act, as I understand it.
The Chair: Mr. Woodland, you talked about the 50-cent piece, and the mint still produces that 50-cent piece. We do not see many in circulation. Is it the Royal Canadian Mint that decides to make these for collectors and in packages, or does the mint have to receive an order from the government, from the Department of Finance Canada, to go ahead and produce those?
Mr. Woodland: I cannot speak on behalf of the mint as to how it determines how many of each coin is produced. I do know it produces circulation coins that we see in our pockets to meet the demands of commerce. How they determine that precisely, I do not know. That would have to come from the mint. I do know how they produce the 50- cent coin. They are available in bulk, in rolls and in boxes of rolls from the Winnipeg facility for purchase in bulk. Primarily, they are purchased by the collector market. Dealers will purchase a box of 50 rolls and then break those rolls up and sell the coins individually to collectors who are prepared to pay a small premium to the dealer for this; or they will sell individual rolls as well.
Senator Marshall: I have a question for both Mr. Evans and Mr. Woodland.
Mr. Evans, you referenced the article you wrote in 1990. You spoke about the future of the 1-cent coin. Can you remember what you said? Can you summarize it for us?
Mr. Evans: I did not editorialize in that particular case. That was early on. A university professor at the University of Western Ontario strongly advocated the abolishment of this coin. My article was primarily an interview with him on why he thought this should be done and, if I recall, an attempt to get some contrary opinion, which basically amounted to the fact that people love it.
People are still largely suspicious about any change in their money. In the case of the 1-cent coin, I know people who are convinced that if it were abolished, they would somehow lose.
The Chair: That is just the beginning of a slippery slope.
Mr. Evans: They say such things as big businesses have these computers, and they will figure out exactly what prices to charge.
I am cynical of that because no one knows what I will buy when I walk into a store.
Senator Marshall: That was 20 years ago. Have you written anything on that same topic since 1990?
Mr. Evans: I have addressed the issue a number of times in editorials. I wrote a piece trying to support the 1-cent coin, which appeared in Costco Connection magazine. Of course, I reported on the Desjardins Group's study, which was alluded to earlier, and I also reported on the Royal Canadian Mint's consumer study.
Senator Marshall: Most of the witnesses that have appeared before the committee are in support of discontinuing the penny.
Mr. Woodland, you are talking about the collection of coins. Would you have any idea as to the volume? As background material provided to the committee, we were given information on the number of pennies that are produced each year and the cost of producing the pennies. What volume would be required if the mint were to keep producing pennies for collectors?
Mr. Woodland: I would just like to point out that my father was a native of St. John's.
I cannot give you a specific figure because we have not done any investigation in that area. However, I would suggest as a starting point a figure similar to the number of 50-cent pieces that are currently produced but not put into circulation. That seems to satisfy that collector niche. It might be a few more because a roll of 1-cent coins is much cheaper than a roll of 50-cent coins. Also, the younger market would be able to buy 1-cent coins as opposed to 50-cent coins. Perhaps slightly more would be a comparable volume.
Senator Marshall: I do not have it with me, but we were provided that information. Thank you very much.
Senator Ringuette: What would be the value of the coin collector market in Canada? What is the economic impact of coin collecting in Canada?
Mr. Woodland: I can state that certainly recent auctions of numismatic items, which include coins, banknotes and the other areas of numismatics that I have mentioned, have topped $1 million or $2 million each time, and there are four to six auctions every year across the country. That is strictly the major auction market.
To find a more detailed figure for dealer sales, we would have to talk to the Canadian Association of Numismatic Dealers, CAND, and ask for results there. Also there is the barter market between collectors themselves, which would, I am sure, get into the millions of dollars. As a rough order of magnitude — perhaps Mr. Evans can help me out — I would say $30 million to $50 million a year.
Mr. Evans: That is as good a number as any.
Senator Ringuette: That is impressive. I recognize your request for the production of the 1-cent coin, at least for the collector market.
What would you say would be the volume of coin collectors outside of Canada collecting Canadian coins? How large would that market be? I know I am asking a lot here.
Mr. Woodland: That is an extremely difficult question to answer. I can say that the U.S. market for Canadian coins is probably as strong, if not stronger, than the Canadian market, simply because of the volume of high-end collectors in the United States. The beautiful, attractive, expensive coins often find their way into the pockets of our neighbours to the south. They also have a great affinity for Newfoundland coinage that is no longer being produced, which is very attractive and has a strong following, probably stronger in the U.S. than here in Canada. Certainly it would be the same volume as I mentioned earlier, if not double that.
Senator Ringuette: On a yearly basis, for Canadian coins, for the collector market in Canada and in the U.S., we are looking at roughly $100 million?
Mr. Woodland: That would be a reasonable estimate, I would think, yes.
Senator Runciman: Thank you, gentlemen, for being here this evening. I want to compliment you both on the way that the word "numismatic" rolls off your tongues.
Mr. Woodland: It took a few years.
Senator Runciman: I can believe it.
In your submissions, you both make a distinction between numismatists and collectors. What is the difference there?
Mr. Woodland: A collector is someone who collects coins and builds a grouping of pieces that is attractive to them for their own specific reasons. We talk about theme collecting, collecting coins and banknotes based on a specific theme. I have a friend who collects coins that have nothing but pictures of the sun on them. Other collectors like to collect date sets, all the coins between two certain dates. The varieties are limitless. A collector gathers for a personal reason.
A numismatist is a person who studies coins and understands the science of how coins are produced at the mint. Numismatists look at the science and engineering behind the production of coins. They study the history of a piece, who engraved it, the artwork behind it, where it was distributed, how many were made and how many different dyes were used to produce the coin. They look at the distribution of the coins. They study how coins wear and become damaged and tarnished. It is both the science and the art, the imagery on the piece. A numismatist is someone who academically studies and does research and may not collect at all.
Senator Runciman: Are there organizations comparable to yours that represent collectors?
Mr. Woodland: We represent both the collector community and the academic or research community, yes.
Mr. Evans: Numismatics involves more than just coins. Numismatics can involve a much broader field, including paper money and metals. Other than that, Mr. Woodland has hit the nail on the head.
Also, we use the terms interchangeably, or at least I do, just for editorial purposes.
Senator Runciman: You both recommended against demonetizing, which New Zealand did. What is your knowledge on other jurisdictions that went in that direction versus what you are recommending? What would be the downside, if any, of not accepting your recommendation?
Mr. Evans: I feel at a disadvantage here, by the way, as a first-generation Canadian with no relatives from other parts of Canada, but I will do my best.
I will go back to my heritage, which is Great Britain. Britain has demonetized a number of times within the past generation, initially switching from pounds, shillings and pence to a decimal system, and then resizing and formatting their decimal currency to a smaller and more affordable size. They have chosen to demonetize. Another case is Europe, where tons of money has been demonetized through the implementation of the euro.
I wish I could tell you that in those cases hordes of collectors marched on capital buildings waving signs, but that is not what collectors do. Demonetizing reduces the value of all that old money to melt. Unless they happen to be scarce dates or have some intrinsic collector value, all those old coins are now worth whatever the metal they are made of is worth at the refinery.
I guess that is fine, but they have had to jump through many hoops to ensure that individual citizens do not lose out on this. I could be wrong, but I believe that in New Zealand people can still take their old coins in to the Reserve Bank of New Zealand.
Senator Runciman: I wonder why other governments have moved in that direction. For us to accept what you are advising us to accept, is there a clear disadvantage to any government that is abolishing any level of currency?
Mr. Evans: I cannot speak to why any government would do it.
Mr. Woodland: I cannot speak for any government either. However, the collector market has a stigma associated with demonetized currency, and it is an emotional one. From the collector perspective, we would like, as has been the case with all Canadian government-issued coins and banknotes, the penny to remain as valid, legal tender.
Senator Runciman: I appreciate that you are not in a position to answer that. I am curious as to why other governments have gone in that direction. There must be some justification from their perspective.
Mr. Evans: I think it is good housekeeping from a bureaucratic perspective. That may be the sole answer.
Senator Massicotte: You used the word "demonetize." What does that mean? In New Zealand, the central bank always respected the value of the money. Is that demonetized, or to you does "demonetize" mean to take it out of circulation?
Mr. Evans: "Demonetize" means that it is no longer money.
Senator Massicotte: In other words, the central bank would no longer respect the value of the coin.
Mr. Evans: That is right. There are banknotes that were issued by Canadian banks in the early 1930s that are still money. You cannot spend them; they have to go through a procedure to be redeemed. "Demonetize" would mean to declare them no longer money.
The Government of Canada could put a mechanism in place to allow Canadians to
bring in their hoards of $20 or $30 worth of
1-cent coins and get their $20 to $30 back.
Senator Massicotte: I want to understand your position. You said that you were against it. If Canada does the same as New Zealand has done, and the central bank respects any currency, you would not be against that. If the government did that, that would satisfy your concern?
Mr. Evans: I would want to ensure that the average Canadian is not stuck paying $17 in service charges for $20 in quarters.
Senator Runciman: Obviously the witnesses cannot respond to this. I am curious why other governments have moved in that direction and if there is a downside to the government doing what they are recommending in terms of demonetization.
The Chair: We just heard from the Reserve Bank of New Zealand. They indicated that even though the 1-cent coin was demonetized — that is, it is no longer legal tender, and the shops did not have to accept it after one year — the central bank still accepted it and gave the face value of any of those coins that were brought in to them.
Mr. Evans: I am unsure about how that would work for the average citizen. Perhaps in New Zealand it would not be as big a hardship to find a central bank location. I am not sure about a Canadian living in a remote part of Canada that does not have easy access to Ottawa. Would there be something in place so that they would not have to drive from 100 or 200 miles north of Edmonton to a government office in Edmonton to redeem their money?
The Chair: Your solution is to not demonetize?
Mr. Evans: My proposal is to alter the 1 cent's legal-tender status so that people would have to spend it in increments of five or as rolls, and to recall them as they re-enter the banking system, to require the banks to treat them as they would any mal-formed or damaged coin and return them to the Royal Canadian Mint for destruction through the coin distribution system. Within a matter of a few years, there would be virtually no 1-cent coins left except in the hands of collectors, who would not part with them because they paid more than 1 cent for them.
Senator Massicotte: I want to ensure that I understand your position. You are saying that demonetization does not bother you as long as the legal tender is respected through an efficient distribution system, such as chartered banks and the Bank of Canada; is that correct?
Mr. Evans: I think we are stumbling over the exact definition of "demonetize."
Senator Massicotte: You do not mind the removal of the coins from circulation as long as their value is respected.
Mr. Evans: No, but it is important that Canadians can still get a penny for a penny, to use incorrect terminology across the board — a cent for a cent, in other words. I get in trouble with many of my readers for using colloquial terms rather than precise ones.
Senator Callbeck: Do you have any idea how many Canadians are involved in collecting coins? What is the price of collector coins based on?
Mr. Woodland: As to the number of collectors, The Royal Canadian Numismatic Association has just under 2,000 members paid up as of this year. That in no way represents all collectors across the country. Many people collect who are not members of an association. To give you a figure would be a pure guess out of the air, but 30,000 would not be unreasonable. As well, collections vary in size, and not all collectors collect Canadian currency.
The value of collector coins is determined by supply, demand and the condition and rarity of the piece. In the case of coins, just because a coin dates from the days of Queen Victoria does not necessarily make it a valuable coin.
An excellent example is that Roman coins, which are 2,000 years old, can be purchased for a few dollars because there is a huge supply available, whereas a 1921 50-cent piece in reasonably good condition could cost $100,000.
Mr. Evans: The value of coins is not a constant; it fluctuates with the market. The most famous Canadian coin to collectors is the 1911 silver dollar, which was never issued, but three test pieces, called patterns, were made in various metals, only one of which is not in a museum. It is the only one in the world that collectors can buy. I have seen the price of that coin move up and down by hundreds of thousands of dollars over a period of time simply depending on who is selling, who is buying and what the demand is. In the 1980s, a gentleman paid close to $500,000 for it. I do not know what he sold it for, but he had to wait almost 15 years to get that, and then it changed hands several times, the last time for $1 million in a public auction. If that particular owner now decides to sell it, he might only get $700,000 if no one is prepared to step up.
For it to realize its full value, because it is a tangible asset usually sold at auction, there has to be two people who want it badly enough — and two people with deep pockets. Otherwise, bargains can be had. When we talk about the price, it is kind of an open-ended question.
Mr. Woodland: As a collector of Canadian coins, the best resource for determining the market value of Canadian coins is Mr. Evans' publication Canadian Coin News, which has the trends column in it. For $4.25 you can purchase a copy of the publication that has several pages listing the current market values of all Canadian coins in a variety of conditions that will give you an excellent idea of what a reasonable seller and a reasonable buyer would agree on as a price for a particular coin.
The Chair: Mr. Woodland and Mr. Evans, thank you for taking us into the wonderful world of the numismatist and collectors. That is an interesting perspective on this study that we have looked at from a business point of view, the possible elimination of the 1-cent coin from a consumer and vending machines point of view.
As we indicated, earlier tonight we had a witness from New Zealand telling us about his experience and what he would recommend having gone through this twice with the 1-cent coin and 2-cent coin and now with the 5-cent coin.
We are now into your perspective, which is different, and we appreciate you taking the time to be here with us this evening to provide us with your perspective.
Mr. Evans: It was my honour.
Mr. Woodland: It was a privilege. Thank you very much.
The Chair: Colleagues, before I adjourn, we have received a table from the Department of Finance based on earlier evidence. Everyone should have one of these. This shows you the volume and the cost of pennies to the government over various years.
Senator Gerstein has some documents that he wants to submit.
Senator Gerstein: Mr. Chair, with your permission and the permission of the committee, during the summer, several articles appeared in newspapers across the country. I pulled those. I have had them translated and have tabled them with the clerk. If it is the wish of the committee, they could be circulated. They are just items that I seemed to find here and there.
The Chair: Thank you. I do not see any reason why not. You are making it easier for us to find these documents. If there are any other articles colleagues have seen that you would like to bring to our attention, you should do the same thing.
We will give all of this material and all of the transcripts from our various meetings to the Library of Parliament and our researchers and ask them to draw this together. We will look at it following the Thanksgiving break. We will then look at a draft document, so if there are any points you want to ensure are in the report that we intend to generate, make sure you make a note of those so that when we sit down to look at the draft you can get your points in there. We can be thinking about that over the next week or so.
Is there anything further to be brought before this meeting this evening?
Senator Ringuette: Was any research done on the Quebec pricing laws?
The Chair: Are you referring to the consumer protection legislation?
Senator Ringuette: Yes, the consumer protection legislation that was brought before us. At the least, we need to know that impact.
The Chair: Some points were outstanding from the point of view of the Ministry of Finance. We have written a letter to them asking for clarification, and some research has been done and is being translated. That will be circulated before the end of the week, as soon as the translation is completed.
Senator Ringuette: Thank you.
(The committee adjourned.)