GAO report claims savings from replacing $1 note with
- Published: Mar 17, 2011, 8 PM
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 dollar stopped.
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 retail businesses.
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. ¦
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