Dollar Bill Cheaper|
December 19, 2013
Which is more economical for the U.S. government to produce and keep in circulation, a $1 note or a $1 coin?
It seems it depends on who you ask.
The Government Accountability Office reported in 2012 that replacing $1 notes with $1 coins could save the government $146 million a year.
But a Federal Reserve Board staff working paper released Dec. 12 determined that “the $1 Federal Reserve Note is currently the more efficient payment instrument compared with the $1 coin.”
In fact, the study concludes that it would cost the government $6.9 billion over 30 years to switch from a $1 note to a $1 coin, even though it’s estimated almost twice as many notes as coins would be needed. That’s because it costs about 33 cents to produce a $1 coin, compared to 5 cents to produce a $1 bill.
Seigniorage – the face value of the coin minus it’s production costs – would cover most of those costs. The study estimates that over 30 years the net loss to the government from a transition to all $1 coins is about $1.2 billion.
The report notes that given current production costs, if a $1 note life is less than 4.75 years the $1 coin would be more efficient, but if the note life is greater than 4.75 years, the note would be more efficient. The current life of a $1 note is 5.9 years, making it the more efficient instrument to produce.
The Federal Reserve study resulted in four key findings about a complete currency to coin transition:
• Less payment system efficiency. Using $1 coins instead of $1 notes for transactions is inherently inefficient requiring a replacement of one $1 note with more than one $1 coin to make up for the difference in the way coins and notes are used by the public.
• Less cost-effective. Replacing $1 notes with $1 coins is not cost effective, primarily because the higher cost to produce coins compared with notes is not offset by the longer life of the coin.
• Higher costs under all projected scenarios. Circulating only $1 coins costs more under every scenario devised by the study.
• Increased costs to the private sector. Circulating only $1 coins could result in increased costs to the private sector, perhaps in the hundreds of millions of dollars per year, and would more than offset any seigniorage revenue to the government reported in earlier GAO studies.
Taking umbrage with the study is the Dollar Coin Alliance, which supports a conversion to $1 coins. It contends that multiple reports show that “currency modernization” would save the government about $13 billion.
“The Fed earns billions in profits each year from paper currency, only a portion of which they return to Treasury,” said Shawn Smeallie, executive director of the Dollar Coin Alliance. “The $13 billion in estimated savings earned from the dollar coin would all go from the Mint to the taxpayer. It’s no surprise the Fed is fighting currency modernization when you understand their motives behind this report.”
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