United States General Accounting Office

GAO Testimony

Before the Subcommittee on Domestic and International

Monetary Policy, Committee on Banking and Financial

Services, House of Representatives

For Release

on Delivery

Expected at

10:00 a.m. EDT

Thursday,

June 26, 1997

COIN AND CURRENCY

PRODUCTION

Issues for Congressional

Consideration

Statement of Michael E. Motley

Associate Director, Government Business Operations

Issues, General Government Division

GAO/T-GGD-97-146

Statement 

Coin and Currency Production: Issues for

Congressional Consideration

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the results of our review that you

requested on issues related to decreasing the costs of producing the

nation’s money. My testimony today discusses the issues involved in the

following four areas: (1) the effects of decisions on the denominational

mix of coins and currency on capital investment plans and production

costs, (2) possible structural changes in the entities involved in producing

money, (3) additional contracting out of money production activities, and

(4) the planning of money production.

To address these four areas, we interviewed officials at the entities

involved in money production; reviewed the agencies’ strategic and capital

plans, and production and cost data; reviewed previous Department of the

Treasury studies on consolidating and reorganizing the agencies involved

in producing and distributing coins and currency; reviewed relevant laws,

legislative histories, and proposed legislation; and submitted

questionnaires to representatives of the other G-7 nations on how they

produced their money. We also reviewed past GAO and Federal Reserve

studies on the replacement of the 1-dollar note with a new coin. We did

not verify the information obtained from the various entities involved in

money production or from foreign countries. A more detailed explanation

of our objectives, scope, and methodology is contained in appendix I.

As I will discuss more fully, Mr. Chairman, my testimony today makes the

following points:

• Both the U.S. Mint and the Bureau of Engraving and Printing (BEP) have

significant capital investment plans that are based on the current

denominational mix of coins and currency. However, proposals have been

made to change the current denominational mix. Implementation of some

of those proposals could have a significant impact on the current capital

investment plans of the Mint and BEP.

• Treasury has considered whether merging BEP and the Mint and placing

BEP under the Federal Reserve System would produce cost savings.

However, in studies it conducted, Treasury concluded that cost savings

may be possible but that the overall disadvantages may outweigh the

advantages of such organizational changes. Federal Reserve officials also

identified concerns about placing BEP under the Federal Reserve System.

Neither the studies that were done nor Treasury officials we contacted

provided information explaining the basis for savings or costs associated

with organizational changes.

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• Although some other countries rely on the private sector for money

production to a greater extent than the U.S. does, Treasury has not

examined the possibility of further contracting out of money production

primarily because of security concerns. BEP is in the process of

attempting to obtain competition for currency paper. It is unclear whether

BEP will be successful.

• Strategic plans of the Mint and BEP do not consider the total cost to the

government of producing and distributing the current denominational mix

of coins and currency or of an alternative mix. Planning that considers

such changes and their governmentwide implications might provide

additional insights for Treasury and congressional decisionmaking.

Background Several different organizations have responsibilities related to money

production. For example, Congress decides what coins will be issued in

our country, while the Secretary of the Treasury determines what currency

denominations will be issued. Within Treasury, the U.S. Mint, established

in 1792, manufactures the nation’s coins in Philadelphia and Denver, and

BEP has been printing the nation’s currency since 1869. BEP also

produces nearly half of the postage stamps needed by the U.S. Postal

Service. The Federal Reserve System distributes coins and currency to

depository institutions, identifies counterfeit currency, and replaces

currency unfit for circulation.

Money production and related activities involve substantial resources. For

example, in fiscal year 1996, the Mint employed about 2,200 persons and

spent $278 million on producing circulating coins, and BEP employed

2,900 persons and spent $365 million on currency production at its plants

in Washington, D.C., and Fort Worth, Texas. Also in calendar year 1996,

the Federal Reserve spent $190 million to process coins and currency, and

$403 million1

 in new currency expenses. During the past 5 years, the Mint

produced coins with a total value of $3.9 billion, and BEP produced

currency with a face value of about $680 billion. A more complete

description of the entities involved, the processes used in production, and

some perspective on the public’s use of coin and currency are contained in

appendix II.

1

Federal Reserve expenditures of $403 million on new currency include the BEP’s $365 million cost to

print currency. The difference between the $403 million and the $365 million is because BEP operates

on a fiscal year basis and the Federal Reserve operates on a calendar year basis and the Federal

Reserve’s costs also include transportation costs and other minor new currency-related expenses.

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Coin and Currency Production: Issues for

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Changing the

Denominational Mix

of Money Could Affect

Production and

Capital Costs

The Federal Reserve does not expect the demand for coins and currency

to be significantly reduced in the near future, despite earlier predictions by

some that electronic money would replace traditional payment methods.

To meet the expected demand for coins and currency at the current

denominational mix, both the Mint and the BEP have significant capital

investments planned to replace aging equipment and upgrade facilities and

to add capacity in the next several years. However, legislation has been

introduced in Congress to replace the 1-dollar note with a 1-dollar coin. In

addition, last year, this Subcommittee held a hearing on the future of the

penny and considered proposed legislation to authorize a circulating

commemorative quarter. Implementing proposals to change the

denominational mix could have an impact on the capital investments

currently planned by the Mint and BEP.

Demand for Coins and

Currency Is Expected to

Continue

The demand for coins and currency is not expected to diminish in the near

future, despite some past predictions to the contrary. According to a 1995

telephone survey commissioned by the Federal Reserve, coin and

currency transactions accounted for 20 percent of adult expenditures,

compared with two-thirds accounted for by checks and 12 percent by

credit cards and debit cards. The Congressional Budget Office (CBO)

estimated in 1996 that cash payments represent about $1 trillion, or

20 percent, of annual consumer expenditures.2

A 1997 Federal Reserve study3 indicated that the retail payment system in

the United States remains heavily dependent on currency and paper

checks, despite predictions in the 1970s that electronic payments

(e-money) would replace more traditional payment methods. E-money

consists mainly of prepaid stored value cards, smart cards, and on-line

payments made through computer networks. The Federal Reserve’s study

concluded that e-money seems unlikely to fundamentally change the

nature of the current payment system in the near future. The CBO study

came to a similar conclusion, saying that while trials and pilot programs

are under way in the United States, markets for e-money payment systems

would emerge slowly. According to CBO, the low cost and ease of making

telephone calls to authorize purchases or withdrawals for credit and debit

cards in the United States reduce the need for, and the advantages of,

smart cards as used in other countries.

2

Emerging Electronic Methods for Making Retail Payments, Congressional Budget Office, June 1996.

3

Report to the Congress on the Application of the Electronic Fund Transfer Act to Electronic

Stored-Value Products, Board of Governors of the Federal Reserve System, March 1997.

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Coin and Currency Production: Issues for

Congressional Consideration

The Mint and BEP Have

Significant Capital

Investment Plans

The Mint According to the Mint, much of the equipment that it uses to produce

coins is aging and will soon need to be replaced. About 80 percent of the

Mint’s coin presses are used primarily to make pennies and have an

average age of 20 years. Mint officials said that last year the Mint’s

equipment ran for 3 shifts per day, 5 days per week, in producing a record

20 billion coins. They said the equipment suffered at this high level of

output because the Mint rarely had time to take machines off-line to

perform maintenance.

The Mint plans to make about $176 million in capital investments over the

next 5 years to replace deteriorated equipment and upgrade facilities.

According to the Mint, this funding would allow the Mint to continue

producing at the 20 billion coins per year level with no overtime. The

Mint’s current plans show continued production of the penny, which, over

the last 5 years, accounted for about 71 percent of its circulating coin

production. Further, the Mint’s capital investment plan does not reflect the

goal in its strategic plan of producing 24 billion coins per year by 2002—a

20 percent increase in output over the current production of 20 billion

coins. According to Mint officials, they plan to update the capital

investment plan in a few years. The Mint’s goal of producing 24 billion

coins annually assumes continued production of the current mix of coins.

The Mint’s current $176 million capital investment plan also does not

include other capital investments that could materialize. For example, it

does not include an estimated $73 million in capital investments that

would be required to produce a new 1-dollar coin if Congress authorizes

its production. It also does not include the costs of acquiring a proposed

new headquarters facility, which have not yet been estimated.

BEP BEP has not developed a capital investment plan extending beyond 1999.

Although BEP has a capital investment plan for fiscal years 1997 through

1999 showing planned expenditures of $251 million for the Fort Worth, TX,

and Washington, D.C. plants, BEP’s Chief Financial Officer said BEP is

likely to spend significantly less than $251 million because all capital

expenditures for the current D.C. facility, except for essential maintenance

expenditures, have been put on hold, pending a decision on whether BEP

will build a replacement facility for the current Washington, D.C., facility.

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BEP officials said that they did not know when this decision will be made

and that it was at least partly dependent on whether the 1-dollar note is

phased out. Preliminary estimates of the cost of a new D.C. facility range

from about $158 million to $250 million.

While BEP could produce all remaining denomination notes at the Fort

Worth facility if the 1-dollar note were discontinued, BEP officials said this

would not be desirable in view of the possibility of a catastrophe occurring

at Fort Worth. BEP officials would like to continue having a facility in the

Washington, D.C., area as a backup facility. We asked Treasury and

Federal Reserve officials if there were alternatives to having a backup

facility. The officials noted several alternatives, including (1) stockpiling

currency, (2) reducing the Federal Reserve’s destruction rate for unfit

notes in an emergency, (3) introducing reciprocal printing agreements

with other countries, and (4) making arrangements with the private sector.

They said currently none of these strategies are employed and each has

both advantages and disadvantages, as discussed below.

• Stockpile currency: This strategy could reduce the need for BEP to have

two facilities by providing time needed to rebuild production capacity in

the event of a catastrophe. The Federal Reserve currently has a target of

storing a 2-month supply of currency. According to Federal Reserve

officials, most of the major industrialized countries store a 1-year supply.

Storing additional currency would require the Federal Reserve to acquire

additional vault space.

• Reduce the rate of destruction of soiled notes: This strategy would also

have the advantage of providing the time needed to rebuild production

capacity. A disadvantage would be that more soiled money would remain

in circulation and that consumers might experience problems using

vending or automated teller machines.

• Reciprocal printing agreements with foreign countries: This alternative

could reduce the need for BEP to have two facilities by providing a

back-up printing capability. Other countries have shown interest in

reciprocal agreements with the United States. This strategy, however,

raises security concerns because the Secret Service, which has

responsibility for investigating counterfeiting, has no investigative

authority outside of the United States.

• Arrangements with the private sector: This strategy could also reduce the

need for a second BEP facility. According to an American Banknote

Corporation official we interviewed, his company would have the capacity

to produce up to 100 million notes per month. A disadvantage to this

strategy is that it raises security concerns associated with producing

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money with non-government personnel and facilities. Also, variations in

note quality produced by different manufacturers could make counterfeits

harder to detect.

Eliminating the Penny and

1-Dollar Note Could Affect

Mint and BEP Capital

Investment Plans

As shown in table III.1, the Mint produced about 61 billion pennies over

the past 5 years, which accounted for about 71 percent of all circulating

coins produced by the Mint. During this same period, BEP produced about

21 billion 1-dollar notes, which accounted for about 47 percent of BEP’s

total note production, as shown in table III.2. During this 5-year period, the

Mint coined a total of $3.9 billion in coins, and BEP printed a total face

value of $679.8 billion in paper currency, for a total production of

$683.8 billion.

Our prior report on the 1-dollar note showed that eliminating this note

could generate substantial operating cost savings and our testimony on the

penny showed that eliminating this coin could also result in savings. Last

year, we testified before this Subcommittee that the production and

distribution of the penny is no longer profitable to the government.4

 After

considering both the Mint’s profit from producing pennies and the Federal

Reserve System’s cost of distributing them, we estimated that the net cost

to the government was about $9 million in fiscal year 1994.5

 We testified in

1995 that $456 million per year could be saved if a new 1-dollar coin

replaced the 1-dollar note.6

 These estimates did not include the long-term

capital investments that could be avoided by not producing the penny or

1-dollar note.7

Changing the denominational mix of coin and currency in the near future

could significantly affect the capital investments the Mint and BEP would

have to make in the next decade. Eliminating the penny could save the

Mint about $2 million in planned capital improvements over the next 5

4

Future of the Penny: Options for Congressional Consideration (GAO/T-GGD-96-153, July 16, 1996).

5

The Mint has disagreed with our methodology for estimating the cost to the government of producing

and distributing the penny. The Mint maintains the penny is still profitable, based on the difference

between the face value of pennies produced and their production costs, or the seigniorage. We based

our methodology on the interest avoided from the seigniorage, not the gross seigniorage. We did this to

be consistent with our past analyses of a dollar coin and because only the interest savings is

considered by budgetary rules established in 1968 by the President’s Commission on Budget Concepts.

6

A Dollar Coin Could Save Millions (GAO/T-GGD-95-203, July 13, 1995).

7

In our 1990 analysis of the dollar coin, we assumed the Mint would need about $18 million in start-up

costs, including capital equipment. The Mint now estimates that about $92 million in start-up costs,

including $73 million in capital investments, would be needed for a new 1-dollar coin to replace the

1-dollar note.

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years and perhaps even larger amounts as the Mint’s aging presses exceed

their useful lives and become increasingly unreliable. Eliminating the

1-dollar note could substantially reduce, and possibly eliminate, the need

for a Washington, D.C., production plant. The amount of the savings would

vary depending on what decisions are made by BEP and Treasury

regarding whether a backup facility is needed to supplement the Fort

Worth plant for currency production and whether BEP continues to

produce postage stamps. While no firm estimates have been made, BEP

officials said a new facility could range between $158 million and

$250 million. According to the Mint, a new dollar coin could require an

additional $73 million in capital investment.

As we have reported in the past, decisions on whether to eliminate the

penny and 1-dollar note should include consideration of a variety of

factors in addition to the government’s cost savings, such as public

acceptance, the needs of commerce, impact on the economy, impact on

private sector and government workers producing the pennies and the

dollar notes, and the experiences other countries have had.

Other Congressional

Decisions on

Denominations Could Also

Affect Capital Investment

Plans

Recent congressional proposals have been made to produce a circulating

commemorative quarter and replacing the Susan B. Anthony dollar with

another coin. The Mint is no longer producing Susan B. Anthony dollar

coins and remaining inventories are decreasing. At the current withdrawal

rate, the Mint and the Federal Reserve have a 36-month supply of Anthony

dollars. Currently, the Susan B. Anthony coin is the only dollar coin

authorized by law. A new dollar coin would require action by Congress

and, according to the Mint, 30 months time to develop and begin

manufacturing. If a decision is not made to replace the Anthony dollar

with a new coin before the Anthony dollar is depleted and a new coin is

ready for production, the Mint would be required to resume production of

Anthony dollars to meet the Federal Reserve’s demand. Although the coin

has not had widespread public acceptance, due in part to its close

resemblance to the quarter, it is used in certain vending machines and

transit systems and some businesses depend on it.

Congress is also considering a proposal to authorize circulating

commemorative quarters, which would be issued at face value with a

distinctive design. Last year, Congress required the Treasury to report by

June 1, 1997, on the feasibility of a circulating quarter program to

commemorate each of the 50 states. The May 30, 1997, report contained

the results of a public opinion survey indicating that 51 percent of

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respondents would favor a 50-state circulating commemorative coin

program, 38 percent had no opinion, and 11 percent would be opposed.

The report said that the seigniorage8

 generated from this program could be

from $2.6 billion to $5.1 billion over a 10-year period. According to the

report, this would require an additional $13 million in capital investments

at the Philadelphia Mint and possibly an additional $22 million at the

Denver Mint.

Available Information

Does Not

Demonstrate

Significant Benefits

From Organizational

Changes

Treasury has considered consolidating BEP and the Mint and placing BEP

under the Federal Reserve. However, it has not moved forward with either

idea. Studies have been done, but none have quantified whether the

savings would outweigh the costs. Furthermore, both Federal Reserve and

Treasury officials identified difficulties that would need to be overcome

before organizational changes would be successful, and some of the

savings that were identified as possible from structural changes could

possibly be achieved by other means. None of the foreign countries we

contacted had merged coin and currency production into the same

organization. However, five of the six countries placed currency

production under their central banks.

Consolidation of the Mint

and BEP

A Treasury-commissioned study in 1987 and studies recently done for the

National Performance Review (NPR) have identified possible

administrative cost savings from consolidating the Mint and BEP. In 1987,

the Assistant Secretary for Management, the Treasurer, and the Treasury

Inspector General conducted a study to determine whether the

consolidation of the Mint and BEP would increase operating efficiencies.

The report concluded that consolidation was feasible only for a limited

number of administrative functions, which comprised no more than 5

percent of the total workforce of both bureaus. The functions included

executive management, management analysis, procurement, human

resource management, and information resources management. Treasury

officials told us they believed the savings from consolidation would not

significantly exceed implementation costs. However, the study did not

address the implementation costs. A 1995 Treasury-commissioned NPR

study, which included the merger of BEP and the Mint, identified savings

of $4.8 million over a 5-year period through consolidating administrative

functions and reducing personnel. It noted that an expanded distribution

of fixed costs could occur as they could be allocated across both coins and

currency. Another advantage indicated in the study was that space

8

Seigniorage is the difference between the face value of coins and their cost of production.

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requirements could be reduced by combining like functions, such as

testing labs.

The 1995 study also noted several disadvantages of merging the two

organizations. Specifically, it concluded that savings would not

significantly exceed implementation costs. The study, however, did not

identify these costs. Another disadvantage cited by the report was that

BEP and the Mint are in substantially different lines of business, with no

technology overlap. Additionally, the study noted two obstacles to the

consolidation. The first was that legislation would be required, and the

second was that bargaining with the Mint’s union and BEP’s 18 unions

would be required.

Treasury and Federal Reserve officials we interviewed said that the

production processes of BEP and the Mint were dissimilar and that the

production plants were located in different cities. While they said a merger

could produce some administrative savings, most commented that they did

not believe that the savings associated with the merger would justify the

costs. However, they had no analytical basis for their opinions.

We also contacted representatives of Canada, Germany, France, Italy,

Japan, and the United Kingdom to ask them how they had organized

money production. None of the countries reported that they had coin and

currency production merged within the same organization.

Placing BEP Under the

Federal Reserve

Treasury has not studied the possibility of placing the Mint under the

Federal Reserve, but a 1995 NPR study considered the possibility of

bringing the BEP under the Federal Reserve. The study indicated that,

under the reorganization, the Federal Reserve would have more control

and direct oversight of BEP, and BEP would gain the same procurement

and personnel flexibility that benefits the Federal Reserve, saving

$34 million over a 5-year period. However, the study did not provide any

analysis or explanation of how the $34 million savings were estimated.

Treasury officials in the office that directed the study were not able to

provide any additional information on the savings estimates.

It would be possible to exempt BEP from existing procurement and

personnel regulations while retaining BEP under the Treasury

Department. The Mint already has a waiver from federal procurement

regulations and is attempting to seek such a waiver from personnel

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regulations by seeking authority to become a Performance Based

Organization.

Officials at the Federal Reserve told us that they had reservations about

moving BEP to the Federal Reserve. Federal Reserve officials said that the

Federal Reserve has no unionized employees and may not be prepared to

inherit BEP’s 18 unions. A Federal Reserve official also said that placing

BEP under the Federal Reserve, with its fully funded retirement system,

could lead to an unfunded pension liability unless Congress made

provisions to appropriate funds to cover the retirement costs of the BEP

employees that would be transferred to the Federal Reserve’s pension

system.

For additional perspective, we also contacted representatives of Canada,

Germany, France, Italy, Japan, and the United Kingdom to ask them how

their money production agencies were organized. In all the countries, coin

production is under the executive branch of government, while currency

production, except in Japan, is under the central bank. In Japan, both

currency and coin production are under the executive branch of

government.

Options May Exist for

Further Contracting

Out of Money

Production

Both the Mint and BEP rely on contracting out for most of the materials

used in money production, as well as for several support activities.

Although some of the foreign countries we contacted rely on the private

sector for basic money production to a greater extent than we do in this

country, Treasury, the Mint, and BEP have not explored the possibility of

contracting out additional money production activities. Officials within

Treasury have a number of concerns about greater use of the private

sector. These concerns include security as well as the appropriateness of

contracting out for basic money production, which they view as an

inherently governmental function. Treasury contractors we contacted

disagree with Treasury’s views. However, since the advantages and

disadvantages of further contracting out have not been thoroughly studied,

it is not clear whether savings would be achieved or whether the concerns

raised by Treasury are valid or could be mitigated. The BEP has begun

recent efforts to obtain competition for supplying currency paper. It

remains to be seen if BEP’s recent efforts will be successful.

Some Countries Rely on

the Private Sector for

Basic Money Production

We sent questionnaires to representatives from Canada, Germany, France,

Italy, Japan, and the United Kingdom asking if they contracted out the

production of money. Canada and Germany replied that currency

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production is done by private companies, while the government produces

coins.9

 France, Italy, and Japan said that both coins and currency are

produced by the government. In France, currency production is done by

the Bank of France, and in Italy, by the Bank of Italy. The United Kingdom

said that currency is produced by the Bank of England, a publicly-owned

corporation that is not a government department, and coins are produced

by the government mint. Japan said that it uses a private company to

perform some of the minting process for small denomination coins.

Canada said it contracts out the production of bank notes to two private

companies. According to the Bank of Canada, the advantages of having

private companies produce notes are that the government is not required

to make large capital investments and using two private producers

provides competition. Officials said that the disadvantages of this

arrangement are that research and development efforts are more costly

and difficult. Canadian coins are produced by the Royal Canadian Mint,

which contracts out for supplies of blanks for the 1-dollar and 1-cent

coins. The Canadian Mint obtains nickel strip for the other coin

denominations from private suppliers.

The Mint Contracts Out

Many Services and

Materials and Is Reluctant

to Contract Out Additional

Blanks

The Mint has contracted out certain support activities related to basic coin

production. It has contracted out for the transportation of finished coins

from Mint facilities to the Federal Reserve Banks; the manufacture of

commemorative and bullion coin packaging materials and precious metal

(e.g., gold, platinum, and silver) coin blanks; manufacture and assembly of

numismatic jewelry; telemarketing services to assist in marketing

commemorative programs; Philadelphia Mint retail sales; janitorial

services; and executive and employee development programs. The Mint

also uses advertising agencies to develop marketing strategies, creative

mailings, and print advertisements for its commemorative and bullion

programs. Mint officials said that they are also exploring the possibility of

privatizing retail operations at the Denver facility, but are not considering

other contracting opportunities.

The Mint has also contracted out some activities directly related to coin

production. In fact, in fiscal year 1996, $79 million, or about 69 percent, of

the $115 million the Mint spent on contracting was for suppliers of penny

blanks and clad strip-metal that is blanked and stamped for higher

9

In Germany, the federal government is currently the sole shareholder in one of the two private

printers.

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denomination coins. The Mint has two suppliers for copper-plated zinc

penny blanks and has two suppliers of clad strip.

When we asked whether blanks could be contracted out for coins other

than the penny, Mint officials said that none of the Mint’s clad strip

suppliers have the necessary equipment to produce blanks for 5-cent

through 50-cent denominations. Further, Mint officials said that

contracting out 5-cent through 50-cent coin blanks would present more of

a security risk than penny blanks, since the blanks could be used in

vending machines. Mint officials said its suppliers would have to construct

or obtain separate, secure facilities dedicated solely to producing coin

blanks, the cost of which would be passed on to the Mint. However,

officials from two strip suppliers we contacted did not agree. Officials

from the contractors told us they could institute additional security

measures and could produce a total of between 2.3 billion and 2.8 billion

one-dollar coin blanks a year with a total capital investment of about

$300,000. We did not independently verify these companies’ ability to

produce these blanks or whether cost savings could be achieved by

contracting out the blanks, nor did we examine the security issue.

BEP Contracts Out Many

Services and Materials,

Has Relied on a

Sole-Source Currency

Paper Supplier, and Has

Not Fully Explored Further

Contracting

In fiscal year 1997, BEP said that it plans to contract out supplies and

services totalling $128 million specifically related to currency production,

including $65 million for purchasing currency paper. Since 1879, the

Bureau has used a single source, Crane & Co., of Dalton, MA., for its

currency paper. The Treasury Inspector General has completed numerous

audits of BEP’s distinctive currency paper supplier, and has questioned

how the contractor has calculated profit. BEP and the contractor

eventually reached a settlement for the costs questioned by the Inspector

General for $12.7 million in 1995. The Treasury Inspector General is

currently continuing to audit the contract.

In 1996, Treasury studied the feasibility of obtaining competition for the

supplying of currency paper. The study noted that other paper companies

have chosen not to compete with Crane because of the high capital

start-up costs that would be required and the limited market. On May 2,

1997, BEP sought potential offerors for that business. Before issuing the

solicitation, BEP made a draft solicitation available to interested parties.

The draft solicitation contained a contractor acquired government

property provision that would have provided financial assistance to

offerors for acquiring the necessary equipment to manufacture distinctive

currency paper. The provision, which was to be considered in the price

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evaluation when BEP evaluated offerors’ proposals, was eliminated from

the final solicitation. In the solicitation issued by BEP in May 1997, the

provision was replaced by another provision allowing offerors to propose

innovative acquisition and financing arrangements. This solicitation does

not specifically mention how this replacement provision will be evaluated.

It is uncertain what effect this will have on potential offerors. The

solicitation was extended on June 19, 1997, to allow offerors until

October 24, 1997, to submit their proposals.

The 1997 Emergency Supplemental Appropriations Act, P.L. 105-18, signed

into law on June 12, 1997, requires us to analyze “the optimum

circumstances for government procurement of distinctive currency paper”

and report our findings to the House and Senate Committees on

Appropriations no later than August 1, 1998. The act also prohibits BEP

from awarding a contract under the solicitation until our review is

completed.

Aside from exploring the possibility of obtaining more than one supplier of

paper, neither Treasury nor BEP has fully explored the potential for

contracting out additional activities associated with currency production.

According to the Treasury Department, currency production is an

inherently governmental function, since a secure and reliable source for

the production of U.S. currency is of paramount importance to the nation’s

economy and system of commerce. Treasury officials also said that the

production of currency by a private contractor is not desirable from a

national security perspective. The Treasurer said that the government does

not want to privatize money production for security and appearance

reasons. In addition, Secret Service officials said that contracting out the

production of 1-dollar notes, for example, would be a problem because

having more than one producer creates more variations from the original

currency, making counterfeit detection more difficult. The BEP Director

said that some agency functions such as currency engraving could not be

privatized because of limited availability in the private sector.

We did not independently evaluate whether cost savings would be

achieved by further contracting out currency production or whether

further contracting out would be desirable from a public policy standpoint.

These issues would obviously have to be addressed before decisions on

further contracting out of basic money production could be made.

Page 13 GAO/T-GGD-97-146
Statement 

Coin and Currency Production: Issues for

Congressional Consideration

Planning for Money

Production

Neither the Mint, BEP, nor the Treasury have overall goals to reduce

production and distribution costs across denominations or across

agencies. This issue is not new and was reported by Treasury in a 1987

study.10 The study found that planning for future coin and currency needs

is done independently by the Mint and BEP. It stated that in view of

technological changes, including electronic money, coins and currency

should be treated as a single money system by a single planning entity. The

study recommended that a permanent planning capability be created in

the Office of the Treasurer to focus on strategic planning related to the

future structure of coin and currency for consideration by Congress and

the Secretary of the Treasury. Further, because of the time required to

establish a permanent planning staff, the study recommended that

interbureau working groups should be established until a permanent staff

could be arranged. Treasury officials told us that they established the

interbureau working groups but did not establish the permanent planning

staff in the Office of the Treasurer because they believed that it was

unnecessary.

However, a decade later, Treasury’s planning for the production of money

does not consider governmentwide costs or address the mix of coins and

currency. As we have reported in the past, while the Mint produces

pennies at a small unit profit, after considering the Federal Reserve’s costs

to distribute pennies, the government as a whole loses money on the

penny. Similarly, a 1-dollar coin would be much less costly for the

government than the 1-dollar note, as we have reported in the past.

Both the Mint and BEP view their roles as that of meeting public demand

for coins and currency and do not believe they have a role in determining

the denominational mix of the nation’s coins and currency. Both the Mint

and BEP’s performance measures neglect those costs of coins and

currency borne by other entities, such as the Federal Reserve. In these

respects, both the Mint and BEP have strategic plans that reflect

compartmentalized views of the costs to produce and distribute money.

Although the Treasury Department is responsible for overseeing the

strategic planning efforts of the Mint and BEP, it has not ensured that

strategic plans address the denominational mix of money or

governmentwide costs to furnish money to the economy.

10The U.S. Mint and the Bureau of Engraving and Printing: a Study to Assess the Feasibility of

Consolidation, Department of the Treasury, January 1987.

Page 14 GAO/T-GGD-97-146
Statement 

Coin and Currency Production: Issues for

Congressional Consideration

Conclusions Congress will soon be faced with several decisions concerning money

production. These decisions are likely to have long-term and wide-ranging

effects on such issues as operating costs and capital investments of the

Mint and BEP, public reaction, the needs of commerce, and the impact on

the current Treasury and Treasury contractors’ workforces. Among the

issues Congress may want to pursue with Treasury as it deliberates on the

nation’s coins and currency are the following:

• The impact that changes to the denominational mix of coins and currency

could have on capital investment needs of the Mint and BEP;

• Whether consolidating any administrative functions of the Mint and BEP

or further exempting them from procurement and personnel regulations

would produce cost savings and be otherwise advantageous;

• Whether the Mint and BEP should explore additional contracting out

opportunities related to money production; and

• Whether it would be useful for Treasury, the Mint, and BEP to address in

their strategic plans possible changes to the denominational mix of coins

and currency and the issue of governmentwide money production and

distribution costs.

Mr. Chairman, this concludes my statement. I would be happy to answer

any questions you or other Subcommittee members may have.

Page 15 GAO/T-GGD-97-146
Appendix I 

Objectives, Scope, and Methodology

Our objective was to identify potential issues related to reducing costs in

producing coins and currency for the nation’s economy. We were

specifically asked to consider our past work on the dollar coin and penny.

We identified the following four issues: the denominational mix of coins

and currency, changes to the organizational structures of the Mint and

BEP, additional contracting out opportunities, and planning for the future

of money production.

To meet our objectives, we interviewed officials from the Treasury, Mint,

BEP, and Federal Reserve and reviewed Mint and BEP strategic plans,

budgets, performance measures, capital investment plans, production and

cost data, reports on the agency revolving funds, and Treasury studies on

consolidating the Mint and BEP and on circulating commemorative coins.

We obtained information about the condition of money production

facilities and equipment by reviewing information on their age and

condition and by touring the Denver Mint and the BEP production

facilities in Washington, D.C., and Fort Worth. To obtain information about

BEP’s production of postage stamps, we interviewed BEP and Postal

Service officials and reviewed agency production agreements.

To study the effects of decisions on the denominational mix of coins and

currency on capital and production costs, we reviewed the capital

investment plans of the Mint and BEP, prior GAO reports on a dollar coin

and the penny, and recent congressional proposals to change the mix of

coins and currency.

We also interviewed Secret Service officials regarding their

anticounterfeiting efforts. To obtain the views of BEP’s work force on

management initiatives, we interviewed officials from the Bureau’s major

labor unions. We also reviewed historical information about the creation

of the agencies involved in money production and distribution.

To obtain information about options for contracting Mint and BEP

operations, we interviewed agency officials and obtained information from

the Mint and BEP on the operations they have privatized, contacted

private metal and coin blank suppliers (Olin Brass and PMX Industries)

and a currency printer (American Banknote Corp.), and reviewed

Treasury’s May 1997 solicitation for additional currency suppliers.

We obtained information about the future of electronic money by

interviewing officials from the Office of the Comptroller of the Currency,

Page 16 GAO/T-GGD-97-146
Appendix I 

Objectives, Scope, and Methodology

the Federal Reserve, Treasury, Mint, and BEP, and by reviewing CBO and

Federal Reserve studies.

We reviewed relevant laws, legislative histories, and proposed legislation

to obtain information about the congressional role in money production.

To obtain information about the organization of money producing

agencies in other countries, we prepared and submitted questionnaires to

representatives of the other G-7 nations (Canada, France, Germany, Italy,

Japan, and the United Kingdom).

We did not verify the information obtained from the agencies or the G-7

nations.

We did our work in Washington, D.C., Denver, and Fort Worth, in

accordance with generally accepted government auditing practices from

January through June 1997.

Page 17 GAO/T-GGD-97-146
Appendix II 

Description of the Entities Involved in

Money Production, Production Processes

Used, and the Public’s Use of Coins and

Currency

Several government entities are involved in money production, including

the U.S. Mint, BEP, the Secret Service, the Treasury Department, the

Federal Reserve System, and the Congress.

U.S. Mint The Mint was established in 1792 to issue coins as a standard monetary

system for the newly formed country. Before 1792, money from other

countries was used in the colonies. In addition to producing circulating

coins, starting in 1892, the Mint also began issuing noncirculating coins

commemorating certain events, organizations, and individuals. In 1937, the

Mint also assumed responsibility for protecting the nation’s supply of gold

and silver.

The Mint’s primary mission is to manufacture an adequate number of coins

for the nation to conduct its trade and commerce. The Mint’s circulating

and commemorative coin production facilities are located in Philadelphia

and Denver. The Mint also has facilities in San Francisco and West Point,

NY, that manufacture commemorative coins. The Mint’s gold reserves are

stored primarily in Fort Knox, KY. As of February 1997, the Mint had about

2,200 employees at its five regional facilities and Washington, D.C.,

headquarters.

In 1996, the Mint spent about $278 million to produce circulating coins, or

about 46 percent of its total $601 million operating costs. The Mint sells

circulating coins at face value to the Federal Reserve and earns

seigniorage, the difference between the coins’ face value and their cost of

production.11

BEP BEP prints the nation’s paper currency. Before 1861, state-chartered,

private banks issued paper money, and the federal government only

produced coins. The privately issued notes were easily counterfeited. In

1861, Congress authorized the U.S. Treasury to issue the first U.S.

government paper money in the form of non-interest bearing Treasury

notes called “demand notes,” because of a shortage of coins and the need

to finance the Civil War. Demand notes were replaced by U.S. notes in

1862, when Congress authorized the Secretary of the Treasury to have

notes engraved and printed by private bank note companies. The actual

printing of currency notes by Treasury employees began in 1863. In 1869,

11Seigniorage is deposited into the Mint’s revolving fund, which was established in 1995. Under P.L.

104-52, the Mint is required to deposit excess funds from its revolving fund to the Treasury’s General

Fund at least annually. In 1996, the Mint transferred about $587 million to the Treasury’s General Fund.

Page 18 GAO/T-GGD-97-146
Appendix II 

Description of the Entities Involved in

Money Production, Production Processes

Used, and the Public’s Use of Coins and

Currency

Congress recognized BEP in legislation as the entity producing currency

notes.

Currently, BEP designs and prints all of the nation’s paper currency in

Washington, D.C., and Fort Worth, TX, and produces some U.S. postage

stamps in Washington, D.C. BEP began printing postage stamps for the

Postal Service in 1894. It produced all of the nation’s postage stamps until

1978, when the Postal Service began contracting out stamp production to

determine if costs could be lowered through competitive bidding by

private contractors. Private-sector capacity to produce postage stamps has

grown since 1978, and BEP now produces less than half of the stamps that

the Postal Service requires. In 1996, BEP spent $365 million on currency

note production, or about 81 percent of its $450 million in total operating

costs; $77 million on stamp production; and $8 million on other activities,

such as the production of security documents.

U.S. Secret Service The U.S. Secret Service, another Treasury agency, was created in 1865 to

suppress counterfeit currency. By the end of the Civil War, one-third of all

paper currency in circulation was counterfeit. According to the Treasury

Department, by 1875 counterfeiting was sharply reduced. The current

mission of the Secret Service includes protecting the President and Vice

President, their families, and visiting foreign dignitaries, and enforcing

laws relating to U.S. money and securities as well as those relating to

electronic funds transfer and credit card fraud. The Secret Service works

with BEP in assessing the security of the Bureau’s money production

facilities and with currency redesign. For the first 6 months of fiscal year

1997, the Secret Service spent about 11 percent of its time on

anticounterfeiting efforts.

Department of the

Treasury

The Department of the Treasury was established in 1789 and performs

four basic functions: formulating and recommending the nation’s

economic, financial, tax, and fiscal policies; serving as a financial agent for

the U.S. government; enforcing laws under the jurisdiction of the Secret

Service and other Treasury agencies; and overseeing the production of

coins and currency.

The Mint and BEP report to the Secretary of the Treasury through the U.S.

Treasurer and the Assistant Treasury Secretary for Management and Chief

Financial Officer. The Office of the Treasurer of the United States was

established in 1777 and was originally charged with the receipt and

Page 19 GAO/T-GGD-97-146
Appendix II 

Description of the Entities Involved in

Money Production, Production Processes

Used, and the Public’s Use of Coins and

Currency

custody of government funds, but these functions have been assumed by

different Treasury bureaus. The Treasurer is also consulted on policy

issues affecting the Mint and BEP, is a member of Treasury’s Advanced

Counterfeit Deterrence Committee, acts as a spokesperson to the public

for Mint and BEP issues such as currency redesign, and promotes the sales

of U.S. savings bonds.

Federal Reserve System The Federal Reserve System was established in 1913 as the nation’s

central bank to establish a safe and flexible monetary and banking system.

In addition to setting monetary policy for the nation, the Federal Reserve,

which consists of a Board of Governors and 12 Federal Reserve Banks and

25 branches around the country, obtains new currency and coins from

BEP and the Mint and distribute them to the public through depository

institutions. The Federal Reserve Banks also identify counterfeits and

destroy currency that is unfit for circulation, provide wire and automated

clearinghouse transfers of funds and securities, and process domestic

checks.

In 1996, expenses related to coin and currency, including paying and

receiving, processing, and currency destruction, were estimated at

$190 million, or about 9 percent of the Federal Reserve’s nearly $2.2 billion

budget. The Federal Reserve also spent $403 million on new currency in

1996.12 If the cost of new currency is included in the Federal Reserve’s

budget, coin and currency costs would represent 23 percent of its total

annual costs.13

Congress Congress has treated coins and currency differently in the law. While

Congress has specified the denominations of coins that may be minted as

well as their size and metallic composition, it has authorized the Secretary

of the Treasury to decide which currency denominations to issue,

provided that they are at least $1 in value.

Production Processes The Mint and BEP produce coins and currency in the amounts ordered by

the Federal Reserve, which are driven by demand for various

12Of the $403 million in new currency expenses, $389 million was charged by the BEP for printing

currency. The remainder was for shipping new currency to Federal Reserve banks and other related

expenses.

13The Federal Reserve does not include the cost of printing new currency in its operating budget.

According to a Federal Reserve official, new currency costs are considered separately to avoid being

driven by Federal Reserve Bank operating budgets.

Page 20 GAO/T-GGD-97-146
Appendix II 

Description of the Entities Involved in

Money Production, Production Processes

Used, and the Public’s Use of Coins and

Currency

denominations conveyed through the banking system. The Mint, rather

than the Federal Reserve, estimates how many coins to produce, while the

Federal Reserve determines the level of currency production. The Mint

uses an economic model to make a projection, with input from the Federal

Reserve’s economic forecasts.

The Mint has two contractors that supply metal blanks for stamping of

pennies and two suppliers of clad strip metal, which is blanked and

stamped by the Mint for nickels, dimes, quarters, and half-dollars. Coins

are produced by means of a multistep process involving (1) punching out

round disks called blanks from metal strips, (2) heating the blanks in an

annealing furnace to soften them, (3) sorting out blanks that are the wrong

shape or size, (4) raising a rim around the edges of the blanks, and

(5) striking the blanks in a coining press with designs and inscriptions to

make them U.S. coins.

The BEP’s Washington, D.C., currency production facility was built in 1914

(the annex was built in 1938) and is a multifloor manufacturing plant used

for both currency and postage stamps. The Fort Worth facility, built in

1991, is a single-floor, modern facility used solely for currency production.

BEP has one currency paper supplier. One contractor provides the Bureau

with most of the ink used for the production of currency. BEP also

produces some ink at its Washington, D.C., plant.

BEP produces currency using intaglio printing, which involves the

engraving of images below the surface of printing plates to provide a

raised image on the notes. Engraved designs are made into dies, which are

transferred to printing plates. The plates are used to print the currency on

high-speed presses. The backs of the notes are printed with green ink and

are allowed to dry for 24 to 48 hours before the faces are printed with

black ink.

After production, coins and currency are transported to the Federal

Reserve System for distribution to depository institutions.

Coin and Currency Usage

in the United States

According to the Federal Reserve, a 1995 telephone survey that it

commissioned indicated that cash (coin and currency) transactions

account for 20 percent of the expenditures of the average adult in the

United States, compared with roughly two-thirds accounted for by checks

and 12 percent by credit and debit cards. A 1995 Federal Reserve System

survey indicated that 67 percent of U.S. families have bank credit cards;

Page 21 GAO/T-GGD-97-146
Appendix II 

Description of the Entities Involved in

Money Production, Production Processes

Used, and the Public’s Use of Coins and

Currency

that 40 percent of families have an outstanding balance on a credit card;

and that 15.1 percent of families do not have checking accounts.14 A 1996

CBO report estimated that cash payments represented approximately $1

trillion of annual consumer expenditures, or about 20 percent of the total

consumer expenditures of $5 trillion.15

14In the survey, reported in “Family Finances in the U.S.: Recent Evidence from the Survey of

Consumer Finances,” Federal Reserve Bulletin, January 1997, families were defined as households,

which includes single people.

15Emerging Electronic Methods for Making Retail Payments, Congressional Budget Office, June 1996.

Page 22 GAO/T-GGD-97-146
Appendix III 

Mint and BEP Money Production

Table III.1: Mint Coinage Production, Fiscal Years 1992-1996

Numbers in millions

Denomination 1992

% of

total 1993

% of

total 1994

% of

total 1995

% of

total 1996

% of

total total

% of

total

1¢ 9,007 74.8 11,282 79.7 13,459 70.0 13,419 68.7 13,669 67.6 60,836 71.4

5¢ 903 7.5 655 4.6 1,450 7.5 1,623 8.3 1,740 8.6 6,371 7.5

10¢ 1,294 10.7 1,177 8.3 2,521 13.1 2,365 12.1 2,801 13.8 10,158 11.9

25¢ 806 6.7 1,009 7.1 1,752 9.1 2,070 10.6 1,955 9.7 7,592 8.9

50¢ 35 0.3 30 0.2 38 0.2 42 0.2 70 0.4 215 0.3

Total 12,045 100.0 14,153 100.0 19,220 100.0 19,519 100.0 20,235 100.0 85,172 100.0

Note: Some percentages do not total to 100 due to rounding.

Source: U.S. Mint.

Table III.2: BEP Note Production, Fiscal Years 1992-1996

Number in millions

Denomination 1992

% of

total 1993

% of

total 1994

% of

total 1995

% of

total 1996

% of

total total

% of

total

$1 4,090 48.4 3,577 44.5 4,563 48.9 4,787 48.1 4,167 44.1 21,184 46.8

$2 0 0.0 0 0.0 0 0.0 0 0.0 51 0.5 51 0.1

$5 787 9.3 877 10.9 1,005 10.8 1,069 10.7 1,158 12.3 4,896 10.8

$10 1,037 12.3 826 10.3 794 8.5 672 6.7 1,011 10.7 4,340 9.6

$20 1,760 20.8 2,170 27.0 2,253 24.1 2,553 25.6 1,363 14.4 10,099 22.3

$50 557 6.6 259 3.2 115 1.2 147 1.5 442 4.7 1,520 3.4

$100 218 2.6 323 4.0 605 6.5 730 7.3 1,251 13.2 3,127 6.9

Total 8,449 100.0 8,032 100.0 9,335 100.0 9,958 100.0 9,443 100.0 45,217 100.0

Note: Some percentages do not total to 100 due to rounding.

Source: BEP.

Page 23 GAO/T-GGD-97-146
Related GAO Products

Future of the Penny: Options for Congressional Consideration

(GAO/T-GGD-96-153, July 16, 1996).

Federal Reserve System: Current and Future Challenges Require

Systemwide Attention (GAO/GGD-96-128, June 17, 1996).

U.S. Mint: Commemorative Coins Could be More Profitable (GAO/GGD-96-113,

August 7, 1996).

A Dollar Coin Could Save Millions (GAO/T-GGD-95-203, July 13, 1995).

1-Dollar Coin: Reintroduction Could Save Millions if It Replaced the

1-Dollar Note (GAO/T-GGD-95-146, May 3, 1995).

1-Dollar Coin: Reintroduction Could Save Millions If Properly Managed

(GAO/GGD-93-56, Mar. 11, 1993).

A New Dollar Coin Has Budgetary Savings Potential But Questionable

Acceptability (GAO/T-GGD-90-50, June 20, 1990).

Limited Public Demand for New Dollar Coin or Elimination of Penny

(GAO/T-GGD-90-43, May 23, 1990).

National Coinage Proposals: Limited Public Demand for New Dollar Coin

or Elimination of Pennies (GAO/GGD-90-88, May 23, 1990).

(240242) Page 24 GAO/T-GGD-97-146
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