While politicians, political commentators, and opinion-yellers are knocking heads and locking horns in Washington, D.C. in an attempt to determine how to spur the economy while cutting the budget deficit, there is an old debate about currency that refuses to die. For the most part, the public isn’t excited about the idea of eliminating paper currency and replacing it with coins. In the long run, however, it would save the government, and in theory the taxpayers, significant money. The Government Accountability Office estimates replacing dollar bills with dollar coins would save $5.5 billion over the course of the next thirty years.
The United States Mint already produces dollar coins. You don’t see them too often. People generally prefer holding money in a wallet rather than carrying a pocket of loose change, and the coin never caught on. The Mint markets the dollar coins as collectible items rather than tools for spending. Other countries, such as the United Kingdom and Canada, have been successful in implementing the replacement of coins for bills of the lowest denomination, but only because those governments stopped circulating paper money. The GAO report takes a look at what effect that might have in the United States.
While over the cost of the next several decades, the cost savings are substantial, there are problems with the first few years of implementation. It would cost more for the government to increase production of dollar coins. The first four years of this period would see a loss rather than a benefit. Some of the costs during this transition time include increasing production of dollar coins in current minting facilities, adding support for dollar coins to other existing facilities, public outreach informing consumers and citizens of the pending change, and adapting the Bureau of Engraving and Printing to print more high-denomination bills. That may not be a welcome message in today’s economic environment, but long-term benefits should always outweigh the short-term setbacks. In practice, those making decisions like these are politicians up for re-election during that four year period.
The government’s assumptions and values used in this study are fascinating. Here are a few:
- Because coins circulate more slowly than bills, 1.5 coins will be needed for every 1 bill (note).
- Dollar bills have a lifespan of 40 months while coins have a lifespan of 34 years.
- A dollar bill costs 2.7 cents to produce while a dollar coin costs 15 cents each.
- There are 9.5 billion dollar bills in circulation today.
- There are 3 billion dollar coins in circulation today, with an additional billion in Federal Reserve vaults (not quite a collectible item).
My first question when reading about the study was whether the government considered the increasing trend of turning away for cash payments altogether, in favor of card-based, mobile, and Internet transactions. This was taken to account in an “alternative assumptions” case, and results in a net savings of $4.5 billion over thirty years rather than the $5.5 billion potentially saved in the base case.
Attached to the GAO’s report are comments in response from the Federal Reserve Board of Governors and the Department of the Treasury. Both comments take a critical look at the GAO’s report. The Federal Reserve notes that the cost savings is exclusively from seigniorage, the profit the government makes between the cost of producing currency and the additive value of that currency to the money supply. The Treasury Department notes that new procedures soon to be implemented for producing dollar bills, to be implemented soon, would drastically increase the life of circulating paper, so the savings benefit would be significantly reduced. Also noted in response is the need to consider environmental and societal impact.
Many private businesses will have problems implementing coin-only acceptance of the dollar. Even items as basic as cashier’s drawers and vending machines need to be adapted. The production of coins and bills has changed significantly over the course of this country, but not much in the twentieth century except for the occasionally disappearance and reappearance of the dollar coin, in addition to changes in the metallic composition of coins. I would like to see the dollar bill disappear, but I don’t think it’s going to happen any time soon.