A financial benefit of approximately $5.5 billion over 30 years
would be reaped by the federal government if the $1 Federal Reserve
note were replaced with a dollar coin and production of the paper
That conclusion is reached in a Government Accountability Office
report U.S. Coins: Replacing the $1 Note with a $1 Coin Would Provide
a Financial Benefit to the Government, released March 4.
This is the fourth time in 20 years that the GAO has addressed the
subject of replacing the $1 note with a dollar coin and the second
time it has recommended that course of action to Congress.
The report was requested by Sen. Richard C. Shelby, R-Ala.; Sen.
Robert P. Casey Jr., R-Pa.; and Sen Tom Harkin, D-Iowa, because the
last analysis was done more than a decade ago.
Shelby is ranking member of the Senate Committee on Banking,
Housing and Urban Affairs.
The new GAO report notes that while the GAO recommends replacing
the paper $1 note with a dollar coin it also recognizes “the public
continues to favor the $1 note over the $1 coin.”
Dollar coins fail to succeed
The GAO report acknowledges that efforts to increase circulation
and public acceptance of a dollar coin have not succeeded. The report
attributes that failure to the continued production of $1 FRNs because
the notes provide an alternative to the $1 coin.
According to the report, officials in Canada and the United
Kingdom state that ending production of the dollar and £1 notes in
conjunction with the introduction of coin equivalents was essential to
the transition. The result in both nations was that “public resistance
[to using the coins] dissipated within a few years,” according to the report.
“In past reports, we have noted that Congress and the executive
branch would have to lead rather than follow public opinion for a
transition from the $1 note to the $1 coin to succeed,” according to
the report. “Furthermore, we have noted in those reports that past $1
coin initiatives — such as changes to the color of the $1 coin and new
coin designs — have not led to widespread public acceptance and use,
in part because the $1 note was not simultaneously eliminated.”
Five different dollar coin types currently are considered to be in
circulation — the Eisenhower dollar, produced from 1971 to 1978; the
Anthony dollar, produced from 1979 to 1981 and again in 1999); the
Sacagawea dollar, produced from 2000 to 2008; the Presidential dollars
(production began in 2007 and is ongoing); and the Native American
dollars (production began in 2009 and is ongoing).
According to the GAO report, as of December 2010 about 1.1 billion
$1 coins remain in storage by Federal Reserve banks because “of the
limited public demand.” That amount is “sufficient inventory to cover
the current level of public demand for the coin for over 13 years.”
The GAO report estimates an average yearly benefit of about $184
million, assuming a four-year transition period beginning in 2011,
with the benefits varying over 30 years. According to the report: “The
government would incur a net loss in the first four years and then
realize a net benefit in the remaining years. The early net loss is
due in part to the up-front costs to the U.S. Mint of increasing its
coin production during the transition.”
The benefit of the change would primarily come from seigniorage.
As defined in the report, seigniorage is the difference between the
face value of the coins and their cost of production. In addition, the
face value of the notes issued minus their production costs, creates
an analogous net value for the federal government, according to the report.
The report recognizes the GAO’s current estimate of benefit is
lower than its 2000 annual estimate of $522 million because the
lifespan of a $1 FRN “has increased over the past decade, and the GAO
assumed a lower ration of coins to notes needed for replacement.”
To arrive at their estimate of benefit the GAO assumed that
replacing the $1 FRN with a dollar coin would begin in 2011 and that
“during that time the Mint would invest in new equipment to increase
its production capability for $1 coins,” according to the report.
No shortages expected
GAO also assumed that during the four years of transition,
production of the $1 FRN would stop. No shortage of $1 coins or $1
FRNs is anticipated during the transition period, according to the report.
The GAO also examined the replacement ratio of coins to notes.
“Following the example of other countries that have replaced a
note with a coin of equal value, we assumed that, because of
differences in how people use these forms of money, the public would
need more than one coin for each note that had been in circulation,”
according to the report. “It is common for people to take coins out of
their pockets and store them at the end of each day rather than retain
them in their wallets as they do notes, for use the next day. These
factors cause coins to circulate with less frequency than notes. Thus
for any given denomination of currency, a larger number of coins would
need to be maintained in circulation to meet the public’s demand for
cash than would be needed if that denomination were provided in notes.”
The GAO looked at the replacement ratio that both Canada and the
United Kingdom used when those nations replaced their lowest paper
denomination with a coin. That replacement ratio was 1.6-to-1 but
“once the transition was complete, coin production was very low or
even nil in some years.”
Based on that information the GAO developed a 1.5-1 replacement
ratio that would be “low enough to avoid an excess of $1 coins without
creating an undue risk of producing too few.”
The GAO analysis “assumes that the number of $1 coins issued is 50
percent greater than the number of $1 notes that were in circulation.
That assumption of increased production results in substantially
increased seigniorage and accounts for our estimate of a net benefit
to the government over the 30-year-period of the analysis,” according
to the report.
The report was compiled with information provided by the Federal
Reserve Board, the Bureau of Engraving and Printing, and the United
States Mint, as well as gathered through interviews with officials
from the Federal Reserve, U.S. Treasury, the BEP, the Mint and the
Department of Homeland Security’s U.S. Secret Service. GAO analysts
also interviewed government officials in Canada and the United Kingdom
about their experiences in replacing paper notes with equivalent coins.
In addition, interviews were conducted with 15 associations and
companies representing five major industries that deal in cash that
might be affected by the recommended changes: banking and financial
institutions; grocery and convenience stores; and vending, transit and
The report, GAO-11-281, is available to download from the
Government Accountability Office Web site at www.gao.gov. The
report is listed by report number, title and the date it was released. ■