by Richard Giedroyc
March 12, 2013 – Inflation is like death and taxes – it never goes away. Diminishing purchasing power caused by inflation, increasing manufacturing costs, and the metal content of a coin exceeding its face value are all reasons why in recent years there has been a wave of countries dropping their lowest denomination circulating coins.
The other side of the proverbial coin is that the lowest denomination paper bank notes are being increasingly replaced with metal coins since the coins will last significantly longer in circulation.
The list of countries dropping low value coins is long, and is getting longer. Russia and Poland are two of the countries now weighing what to do with low denomination coins that are seldom found in circulation, cost too much to produce, and create avoidable storage and handling expenses for banks.
Russia no longer strikes 1- and 5-kopek coins, however neither denomination has been demonetized. The Bank of Russia is asking why the second step in this process hasn’t taken place, but it is up to Parliament, not the central bank, to make this decision. At the time this article is being written the bank is recommending the coins be demonetized, but it does not appear Parliament is ready to take any such action.
There are an estimated seven billion 1-kopek (worth about 0.03 cents US or about 0.01 cents EU) and an additional six billion 5-kopek coins currently in circulation.
According to a January 25 Wall Street Journal article, “Shops in affluent Moscow rarely accept 1-kopek ad 5-kopek coins. They can’t be used in vending machines and shoppers often throw them away. The bank stopped minting them, but officially they are still in circulation and banks are obliged to accept them.”
While the Bank of Russia tries to address this situation it has other coinage problems on the horizon. Russia still issues coins in denominations of 10 and 50 kopeks as well as 1, 5, and 10 rubles. Only the 5- and 10-ruble coins continue to be struck for less than is their face value.
Poland continues to strike its 1-grosz and 2-grosze coins, however once again their purchasing power has degenerated to nil. The Polish central bank has drawn up legislation needing the approval of the Sejm or Parliament that would end production of these coins while rounding prices for goods and services accordingly. This has met with opposition from groups that argue this will encourage inflation, a notion the Bank of Poland has dismissed, citing surveys in other countries where similar scenarios have already taken place.
Nevertheless, while the Polish central bank lobbies Parliament to do away with the two lowest coin denominations, there is an organized opposition that is also lobbying Parliament. Should the central bank get what it wants it is anticipated the changes would take place in 2015.
Regarding what would happen to the existing coins, considering the coins are worth triple their face value in scrap metal there is hope the public would take care of this rather than redeem the coins at banks.
Marcin Kaszuba, head of the Polish central bank’s communication department, was quoted by the Wall Street Journal on January 21 as saying, “There is a threefold margin, so I am sure some people will seek a business opportunity here.”
Perhaps, but Poland could find unanticipated hidden costs as did Canada when it recently began to redeem its now obsolete 1-cent coins. The same Wall Street Journal article quotes the deputy head of the bank’s money issuance department, Barbara Jaroszek, as saying: “It’s not so simple to gather one [metric] ton of pennies … so I don’t think we will have a national movement of turning them in for scrap, but indeed metals’ value is three times that of the coin.”