GAO grapples with alternative scenarios involving $1 FRN
- Published: Mar 18, 2011, 8 PM
The growing use of electronic payment systems will have an impact on the amount of cash Americans will need in the future.
That is one of several factors considered as part of an analysis prepared by the Government Accountability Office and presented in a March 4 report, U.S. Coins: Replacing the $1 Note with a $1 Coin Would Provide a Financial Benefit to the Government.
The GAO report recommends stopping production of the $1 Federal Reserve notes and replacing the paper note with a $1 coin (see related article, Page 5).
As part of its analysis, the GAO considered how society uses money, both electronic payments and increased use of $2 FRNs, and the impact of society use habits on the projected future financial benefit to the government of replacing the paper note.
The basis of the GAO analysis was that the “demand for cash would continue to grow with the growth in economic activity as it has over many years. Even in the last several years, as the use of electronic means of payment has grown substantially, according to the Federal Reserve, the demand for cash has continued to grow with the gross domestic product. However, further changes in the way Americans pay for goods at retail could lead to greater reliance on electronic payment methods.”
The GAO report points to the plans by some U.S. companies “to develop ways to make payments with a cell phone, a method that is already in use in some countries. If Americans come to rely more heavily on electronic payments, the demand for cash could grow more slowly in the future than we assume in our base case.”
The report explains that if the $1 FRNs are replaced by a dollar coin, “electronic payments may increase as the public chooses to avoid the $1 coin. In this scenario, we assumed that the public would respond to the replacement of $1 notes with $1 coins by increasing its use of electronic payments, thereby reducing its demand for $1 currency by 20 percent.”
Using that scenario, the GAO calculated that the net benefits to the federal government “would be nearly $4.5 billion over 30 years” with the average annual benefit at $149 million.
$2 Federal Reserve notes
The other scenario — increased demand for the $2 Federal Reserve note — could happen “because people and businesses might limit how many coins they kept in their pockets and cash trays, and using the $2 note would help them do this,” according to the report.
The GAO report points out that demand for the Canadian $2 note increased in Canada when it replaced its $1 note with a dollar coin.
“However, Canada had already had a circulating $2 note at the time, whereas the United States does not; therefore, we did not assume an increase in demand for the $2 note in our base case. In an alternative scenario, we assumed that 25 percent of the demand for cash that had been met with $1 notes would transfer to $2 notes and the remainder to $1 coins. Thus, the government would increase production of $2 notes accordingly. This scenario reduced the net benefit of the replacement because fewer new coins were produced and less seigniorage was generated.”
The BEP last printed $2 FRNs (Series 2003A) in calendar year 2006 — 230,400,000 notes were produced during that year.
The GAO report also suggested that replacing the $1 FRNs with a dollar coin “could increase the risk of counterfeiting the coin, which could increase the government’s cost to deter counterfeiting if the risk were deemed large enough to warrant countermeasures.”
But the GAO report states that such costs were not included in its estimate “because counterfeiting of U.S. coins is currently minimal, both domestically and internationally, according to the U.S. Secret Service. Moreover, counterfeit $1 notes accounted for less than 1 percent of all counterfeit U.S. notes detected in fiscal year 2009 (about 24,000 out of about 3 million).”
However, according to the report, “senior officials at the Federal Reserve and Mint told us the increased circulation of $1 coins could increase the risk of counterfeiting, and senior Secret Service officials told us that counterfeiting of coins is an ongoing problem in the UK [United Kingdom]. A report by the UK’s Royal Mint indicated a counterfeit rate of about 3 percent for £1 coins.”
In Canada it’s a different story, according the GAO report, where “counterfeiting is minimal.”
“Canadian officials told us that the total face value of the counterfeit Canadian $1 and $2 coins detected since the coins were introduced in 1987 and 1996, respectively, is about $10,000 (Canadian),” according to the GAO report. “Whether replacing the $1 note with a $1 coin in the United States would increase the risk of counterfeiting, as it apparently did in the UK, or whether it would remain low, as it has done in Canada, is unknown.”
The report notes that both Canada and the United Kingdom have validation programs “to maintain the integrity and quality of circulating coins after introducing the $1 coin and £1 coin, respectively. In both countries, when coins are returned from circulation as bank deposits, they are tested for authenticity, and heavily worn, bent, or otherwise unfit coins are identified and removed from circulation.”
Canada created its validation system when it introduced its dollar coin and the United Kingdom created its program “in response to a sharp increase in the counterfeiting of the £1 coins.”
The GAO report indicates Federal Reserve banks do not have a comparable validation program for coins. ¦
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