The fight against the penny
While China's industrial growth makes pennies more expensive, Rep. Kolbe wants to do away with the coin altogether.
By Christian Zappone, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - As the soaring price of zinc going into pennies pushes the cost of production above the coin's value, one congressman is rekindling plans to eliminate it. Representative Jim Kolbe, R-Arizona, told CNNMoney.com he plans to reintroduce legislation to eliminate the penny in the coming weeks.

"Most people still think the penny has no purpose and we should get rid of it," said Rep. Kolbe, who introduced legislation in Congress in 2001 that required the rounding of cash transactions to the nearest 5 cents.

Rep. Jim Kolbe, R- Arizona
Rep. Jim Kolbe, R- Arizona
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Although the Legal Tender Modernization Act did not pass, getting rid of the penny has taken on urgency for Rep. Kolbe, as the average price for zinc has shot up from 35 cents a pound in 2002 to 63 cents a pound in 2005 -- driven in large part by increased demand from China.

The issue "used to be an oddball thing that Kolbe had an obsession about," the congressman said of himself. "Now it will become a necessity. We'll be compelled to change."

Over half of the U.S. Mint's coin production comes in the form of pennies, which are made of 97.5 percent zinc. Since the Mint doesn't stockpile its inventory of materials, it is sensitive to fluctuations in zinc's price.

The cost of producing the coin has risen from .97 cent per penny in 2005 to 1.4 cent per penny. At that rate, the Mint would spend some $44 million producing pennies this year, nearly $14 million more than in 2005.

"When the price goes to 1.5 cents per cent then everybody will figure it out," said Kolbe. "Then everyone will hoard their pennies because the metal will be worth more than the coin." Kolbe, who is set to retire from Congress after this term, joked he should go into the business of buying people's pennies to sell them for their value.

Not everyone shares Kolbe's view, however.

"Kolbe is a good member of Congress but wrong on this issue," said Mark Weller, Executive Director of the pro-penny organization, Americans for Common Cents. "When he did this in 2001, he received no support. Not one co-sponsor. I think we'll see a similar response this time."

"Americans overwhelmingly want the penny," said Weller. "They also hate rounding."

Kolbe's 2001 legislation proposed that cash transactions ending in 1, 2, 6, or 7 cents should be rounded down to the nearest 5 cents, while transactions ending in 3, 4, 8, or 9 cents would round up. Credit and debit card transactions could still be valued to the nearest cent.

Americans for Common Cents (ACC) is an interest group that counts among its supporters coin and numismatic hobby groups, charitable organizations - and companies involved in zinc production.

The organization was formed in 1990 to counter earlier "rounding" legislation in Washington, it briefly went dormant afterwards and re-opened when Congress held hearings on the future of money in the age of electronic banking in the mid-1990s.

If Weller is dismissive of Kolbe's initiative, it should be noted ACC itself has been talking to Congress "about the dramatic increase in metals prices." Weller concedes lawmakers are aware of metals pricing in currency and concedes that if prices remain high for 18 months there could be more discussion of changing the make up of coins.

Although ACC has ties to zinc companies, Kolbe represents Arizona, the largest copper producing state in the nation. Copper is the main material of the nickel coin which, after the elimination of the penny, would benefit by becoming the lowest denomination of currency in circulation.

Is it even possible to eliminate the penny?

There is, however, some evidence that eliminating the smallest denomination of a nation's currency can be done without too much upheaval.

Australia eliminated its one and two cent pieces in 1992 after a surge in the country's consumer price index twenty years before eliminated their usefulness.

The change affected only cash transactions -- interest is earned and bills are paid to the cent.

At the time of the transition, according to Michael Skully, Professor of Banking at Monash University in Melbourne, the Australian government kept a close watch for profiteering associated with the elimination of the penny, while the nation's major retailers rounded totals down. The elimination of 1 and 2 cent pieces did not "disproportionately hurt the poor" as ACC asserts it would if rounding was imposed in the United States.

"I certainly don't recall any riots in the street when it happened," said Skully.

What's next?

Due in part to China's growing demand, according to George Vary, executive director of the American Zinc Association, the cost of zinc has doubled on the London Metal's Exchange in the past year.

"Until several years ago, China was a net exporter of zinc," said Vary. In 2001, that country exported a net total of 522,000 metric tons. In 2003, as China's demand for materials surged with its emergence as a global manufacturing giant, it imported a net total of 388,000 tons.

Industry analysts predict zinc prices could ease in 2007 based on improved supply and smelting capacity worldwide. As for China, Lloyd Giles at London-based metals analysis group CRU Group thinks the country could soon be a net exporter again, once its improved smelting capacity allows it to process more zinc supplied both domestically and internationally.

As for the chances for Kolbe's legislation to pass, Josh Kurtz, politics editor at Washington, DC-based Roll Call said, "It's a noble effort, doomed to defeat. Congress is pretty reluctant to tinker with the nation's monetary system."

And in terms of cost savings, why should they? After all, the national debt stands at $8.3 trillion. The prospect of reaping $13 million in saving in pennies seems like mere pocket change.

But if the cost of zinc does keep rising, the change could really add up.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.