Over the past 40 years, many nations have replaced lower-denomination notes with coins as a means of providing a financial benefit to their governments. GAO has reported five times over the past 22 years that replacing the $1 note with a $1 coin would provide a net benefit to the government of hundreds of millions of dollars annually.
Over time, GAOs estimate has changed due to a variety of reasons, including the increased lifespan of the $1 note and different assumptions in its analyses.
The federal government realizes a financial gain when it issues notes or coins because both forms of currency usually cost less to produce than their face value. This gain, which is known as seigniorage, equals the difference between the face value of currency and its costs of production. Seigniorage reduces the governments need to raise revenues through borrowing, and with less borrowing, the government pays less interest over time, resulting in a financial benefit.
GAO updated its most recent March 2011 estimate due to changes by the Federal Reserve and Department of the Treasury (Treasury) in note processing and $1 coin production and found that replacing the $1 note with a $1 coin would provide a net benefit to the government of approximately $4.4 billion over 30 years, amounting to an average yearly discounted net benefit of about $146 million. This benefit occurs because, based on differences in how notes and coins are used in the economy, more coins than notes will have to be circulated to meet demand, and therefore more seignorage will be created. This estimate differs from what GAO reported in March 2011 because it takes into account the Treasurys decision in December 2011 to stop producing $1 coins for circulation immediately. To meet public demand for the coins, the Treasury intends to rely on the approximately 1.4 billion $1 coins currently stored with the Federal Reserve as of September 30, 2011. The current estimate also differs from the 2011 estimate because it uses a revised forecast that anticipates a lower government borrowing rate over the next 30 years and a longer life expectancy for the $1 note that results from efficiencies in the way the Federal Reserve processes notes, which began in April 2011.
GAOs current estimate assumes a 4-year transition period beginning in 2012 during which the production of $1 notes stops immediately and $1 coins are quickly produced to meet demand for this currency denomination. This replacement scenario is compared to a status quo scenario under which $1 notes remain the primary single dollar currency. The status quo scenario also incorporates the Treasurys December 2011 decision to rely on $1 coins in storage to meet public demand for $1 coins until that stock is nearly depleted, at which time production of $1 coins would resume. According to the Treasury, the coins in storage could meet current levels of circulating demand for more than a decade. As shown in the figure below, the annual net benefit from replacing the $1 note with a $1 coin would vary over the 30 yearsthe government would incur a net loss in 6 of the first 7 years and then realize a net benefit in the remaining years. The early net loss from replacing the $1 note is due in part to the up-front costs to the United States Mint of increasing its coin production during the transition, together with the limited interest expense the government would avoid in the first few years after replacement began. GAOs net benefit estimate is due solely to seigniorage and not to reduced production costs. In fact, the production costs of transitioning to a $1 coin are never recovered during the 30-year period. And like all estimates, it is uncertain, particularly in the later years, and thus the benefit could be greater or smaller than estimated.
Discounted Net Benefit to the Government of Replacing $1 Notes with $1 Coins over 30 Years, by Year
The December 2011 action by the Treasury to stop producing $1 coins for circulation and to meet public demand for the coin by using the $1 coins currently being stored will reduce government costs by preventing the overproduction of $1 coins. The overproduction results from the presidential $1 coin program, which requires four new presidential $1 coin designs, featuring images of past presidents in the order they served, to be issued each year. According to Federal Reserve officials, because the United States Mint delivers each new presidential coin design to banks in large quantities, banks have no choice but to order more coins than they ultimately need to fulfill the demand for new coins. As a result, unneeded coins are returned to the Federal Reserve, which held over 1.4 billion $1 coins in storage as of September 30, 2011. The Treasury estimates that stopping production of $1 coins for circulation while it draws down the coins in storage will save about $50 million per year over the next several years in coin production costs. However, GAO estimates that eliminating $1 notes and replacing them with a $1 coin will have larger net benefit over time.
Traditionally, seigniorage is defined as the difference between the face value of coins and their cost of production. As long as there is public demand, the government creates this net value when it puts coins into circulation. Similarly, when the Federal Reserve issues notes, it creates an analogous net value for the federal government, equal to the face value of the notes less their production costs.
In March 2011, GAO estimated that replacing the $1 note with a $1 coin would provide a net financial benefit to the government of about $5.5 billion over 30 years.
In April 2011, the Federal Reserve put in place new equipment to process notes that extended the life of the $1 note to approximately 56 months; GAO used an estimated note life of 40 months in its 2011 report. In December 2011, the Treasury Department decided to stop producing $1 coins for circulation, relying on coins currently stored at the Federal Reserve to meet the relatively small transactional demand for $1coins.
A discounted net value uses a rate, known as the discount rate, to convert the value of payments or receipts expected in future years to todays value, taking into account that the further into the future an amount is paid or received, the smaller its value is today. Applying a discount rate establishes a consistent basis for comparing alternative investments that will have differing patterns of costs and benefits over many years.
Presidential $1 Coin Act of 2005, Pub. L. No. 109-145 (2005), codified at 31 U.S.C. § 5112(p)(3)(D).
Twelve regional Federal Reserve banks order coins from the United States Mint, which distributes coins directly to those banks. The Federal Reserve banks distribute coins as well as notes to commercial banks to meet the demand of retailers and the public. Some coins and notes are returned by commercial banks as deposits to the Federal Reserve banks, where they are processed for storage or recirculation. According to Federal Reserve officials, each new presidential coin design is delivered in units of 1,000.
To reduce the costs associated with the $1 note and $1 coins in the long term, Congress may wish to consider
Currency Optimization, Innovation, and National Savings Act, H.R. 2977, 112th Cong. (2011). Other legislation has been proposed that would postpone the minting of new $1 coins until the inventory of stored $1 coins has been reduced (Currency Efficiency Act of 2011, S. 1624, 112th Cong. (2011).
The information contained in this analysis is based on findings from the product listed in the related GAO products section as well as additional work GAO conducted. GAO reviewed the Federal Reserves June 2011 report on the $1 coin and recent proposed legislation; and conducted interviews with senior officials from the Federal Reserve, the United States Mint, the Bureau of Engraving and Printing, and the Department of the Treasury. To estimate the net benefit to the government of replacing the $1 note with a $1 coin, GAO constructed an economic model with data from the Federal Reserve, the Bureau of Engraving and Printing, and the United States Mint. GAOs model assumptions covered a range of factors including the replacement ratio of coins to notes, the expected rate of growth in the demand for currency over 30 years, the costs of producing and processing both coins and notes, and the differential life spans of coins and notes. GAO arrived at its estimate of net benefit to the government by subtracting the benefit from a status quo scenario from the benefit of a replacement scenario. In the status quo scenario, notes remain the dominant form of currency at the $1 denomination, the United States Mint ceases production of $1 coins until the current stored coins are all released into circulation to meet public demand, and production of $1 coins resumes after the stored coins are depleted. In the replacement scenario, GAO assumed, among other things, that the production of $1 notes would stop immediately; no notes would be withdrawn from circulation, but because of their shorter life span, they would naturally fall out of circulation within a few years; and the United States Mint would expand its production of $1 coins during the first 4 years. In estimating the net benefit to the government of replacing the $1 note with a $1 coin, GAO considered only the financial effect of this change on the government and did not consider other factors, such as the relative environmental and societal costs and benefits due to data limitations. GAO conducted sensitivity analyses that decreased the demand for currency as people switch to electronic payments and changed the number of coins needed to replace each note.
Board of Governors of the Federal Reserve System, Annual Report to the Congress on the Presidential $1 Coin Program (June 2011).
GAO provided a draft of this report section to the Federal Reserve and Treasury for review and comment. The Federal Reserve provided written comments that noted it believes GAOs estimate overstates the net financial benefit to the government because it does not (1) adequately address the costs to the Federal Reserve to reinforce the floors of its bank vaults to accommodate the heavier weight of coins or (2) consider potential increases in raw material costs for coins or possible future changes in discount rates. GAO included all costs to the Federal Reserve that the agency provided data on. The Federal Reserve provided no estimate of the additional cost to accommodate heavier coins. GAO used the best data available on coin production costs, which accounts for the cost of raw materials, and discount rate. The Federal Reserve also noted an increased risk of counterfeiting $1 coins and the lack of a GAO sensitivity analysis that reflected further increases in electronic payments by the public. GAO reported in 2011 that counterfeiting of U.S. coins is currently minimal, according to the U.S. Secret Service. Furthermore, in 2011, GAO reported the results of a sensitivity analysis in which the replacement leads to a decrease in the demand for currency as people switch to electronic means of payment. GAO recognizes that changing conditions, such as how people use cash and the cost of materials in the future, may alter the total cost savings associated with the $1 coin. The Treasury provided e-mailed comments that pointed out that GAOs analysis does not account for the impact on or costs to the private sector; both Treasury and the Federal Reserve noted that the analysis should not include seigniorage. As GAO reported in 2011, it found no quantitative estimates of the cost of replacement to the private sector that could be evaluated or modeled. GAO believes that seigniorage cannot be set aside since it is a result of issuing currency. The Treasury also provided technical comments, which were incorporated as appropriate. All written comments are reprinted in appendix IV of the PDF version of this report.
Comments from the Federal Reserve System