Replacing the $1 Federal Reserve note with a $1 coin would provide an overall net benefit to the federal government but it would be “due solely to increased seigniorage and not to reduced production costs,” according to a Government Accountability Office report released Feb. 15.
That conclusion is reached in a GAO report titled U.S. Coins: Alternative Scenarios Suggest Different Benefits and Losses from Replacing the $1 Note with a $1 Coin, released Feb. 15.
But the report also indicated that “estimating whether the government would derive benefits from replacing the $1 note with a $1 coin requires an analysis with many assumptions.”
The report was requested by Sen. Scott P. Brown, R-Mass., ranking member of the Senate Subcommittee on Federal Financial Management, Government Information, Federal Services and International Security of the Senate Committee on Homeland Security and Governmental Affairs.
Brown had requested the GAO to provide “the specific benefit or loss to the government for each of the first 10 years” of its analysis and “the net benefit or loss to the government over 10 years if the interest savings due to seigniorage is excluded from the analysis; and the net benefit or loss to the government over 10 years if the replacement ratio is one coin to one note, rather than 1.5 coins to 1 note” as the GAO assumed in a report released in 2011.
On Sept. 23, 2011, Brown introduced S. 1624, the Currency Efficiency Act of 2011, which would prevent the minting of dollar coins when a major surplus exists. The legislation has one co-sponsor, Sen. John F. Kerry, D-Mass., and remains in the Senate Committee on Banking, Housing and Urban Affairs awaiting action.
In its updated 2012 analysis, the GAO indicates a net benefit of approximately $4.4 billion over 30 years, or an average of $146 million per year. The estimate of 30 years is roughly the life expectancy of the $1 coin.
If seigniorage is excluded
“However, if the interest savings due to increased seigniorage are excluded from the analysis, the government would incur a total net loss of about $1.8 billion over 10 years, or an average of $179 million per year. With no interest savings to offset the costs of coin production, net losses would be incurred in nine of the 10 years,” according to the report.
Seigniorage is the difference between the face value of the coins and their cost of production. Seigniorage “reduces government borrowing and interest costs, resulting in a financial benefit to the government,” according to the report.
Based on its updated analysis and including the interest savings due to increased seigniorage, the GAO report indicates that “replacing the $1 note with a $1 coin would provide a net loss to the government of about $531 million in the first 10 years, or an average of about $53 million per year. The cost of producing a large number of coins necessary for the transition would result in a net loss in six of the first seven years.” The report states the situation is reversed “in the eighth year, and for the remaining two years.”
“The interest savings outweigh the production costs and the net benefits would be positive. Overall, the net loss over 10 years compared with the net benefit GAO estimated over 30 years would occur because of large costs in the first few years to produce the initial supply of $1 coins,” according to the 2012 report.
The 2012 estimate is higher than a similar report released in 2011 when the GAO estimated a $5.5 billion net benefit over 30 years or an average of about $184 million per year. The updated analysis used a start date of 2012 rather than 2011 and used the Congressional Budget Office’s “most recent estimates for future government borrowing costs, which are lower than the figures used in our 2011 analysis. The reduced borrowing costs reduced the net benefits of switching to a $1 coin,” according to the report.
Two key actions
But two key actions since the release of the March 2011 GAO report are even more responsible for the higher estimate.
One of those actions is the “recent efficiency improvements in note processing [by the Federal Reserve] that have extended the expected life of the $1 note.” The longer note life of 56 months, compared with the 40 months reported in the 2011 analysis, “reduces the expected net benefits of replacing the $1 note with a $1 coin,” according to the latest GAO report.
The other action was the Dec. 13, 2011, decision by U.S. Treasury Secretary Timothy F. Geithner to suspend production of Presidential dollars for circulation and instead rely “on the approximately 1.4 billion $1 coins stored with the Federal Reserve as of Sept. 30, 2011, to meet the relatively small transactional demand for dollar coins. ... This new policy will reduce the cost of producing $1 coins that we estimated in the status quo scenario and thus reduces the expected net benefits of replacing the $1 note with a $1 coin.”
The report cautions that “a 1-to-1 replacement of coins to notes is that under this scenario, there would likely not be enough coins to meet demand. A shortage of currency could have significant negative consequences for the economy, such as hampering cash transactions.”
The 2012 GAO report indicated “other countries that have switched from notes to coins have found that, because people use notes and coins differently, the number of coins needed for a replacement is greater than the number of notes to be replaced.”
This is the fifth time in 22 years that the GAO has addressed the subject of replacing the $1 note with a dollar coin.
The report, GAO-12-307, is available to download from the GAO website at www.gao.gov. ■