U.S. Coins: Alternative Scenarios Suggest Different Benefits and Losses from Replacing the $1 Note with a $1 Coin
Published: 2012-02-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In March 2011, GAO reported that replacing the $1 note with a $1 coin would provide a net benefit to the government of about $5.5 billion over 30 years, or an average of about $184 million per year. This benefit, which GAO estimated using an economic model based on a set of assumptions, was entirely attributable to seigniorage, a term defined as the difference between the cost of producing coins or notes and their face value. Seigniorage reduces government borrowing and interest costs, resulting in a financial benefit to the government. As GAO noted, the estimated net benefit could increase or decrease with changes in the assumptions.
GAO was asked to provide additional details on its 2011 analysis. Accordingly, GAO (1) updated its analysis to account for recent changes in note processing, among other things, and based on this update determined (2) the specific benefit or loss to the government for each of the first 10 years of its 30-year analysis; (3) the net benefit or loss to the government over 10 years if the interest savings due to seigniorage are excluded from the analysis; and (4) the net benefit or loss to the government over 10 years if it is assumed that each note will be replaced by 1 coin, rather than 1.5 coins, as GAO assumed in its 30-year analysis.
GAO used the economic model it developed for its 2011 report, updated certain factors, and varied the assumptions for seigniorage and the replacement ratio of coins to notes as requested.
section_title: What GAO Found
paragraphs: According to GAOs updated analysis, replacing the $1 note with a $1 coin would provide a net benefit to the government of approximately $4.4 billion over 30 years, or an average of about $146 million per year. The overall net benefit was due solely to increased seigniorage and not to reduced production costs. This estimate differs from GAOs 2011 estimate because it considers recent efficiency improvements in note processing that have extended the expected life of the $1 note and other updated information. GAOs estimate covered 30 years to be consistent with previous GAO analyses and because that period roughly coincides with the life expectancy of the $1 coin.
Using the same model and assumptions used for its 30-year analysis, GAO found that replacing the $1 note with a $1 coin would provide a net loss to the government of about $531 million in the first 10 years, or an average of about $53 million per year. The cost of producing a large number of coins necessary for the transition would result in a net loss in 6 of the first 7 years. In the eighth year, and for the remaining 2 years, this situation is reversed: the interest savings outweigh the production costs and the net benefits would be positive. Overall, the net loss over 10 years compared with the net benefit GAO estimated over 30 years would occur because of large costs in the first few years to produce the initial supply of $1 coins.
If the interest savings due to increased seigniorage are excluded from the analysis, the government would incur a total net loss of about $1.8 billion over 10 years, or an average of $179 million per year. With no interest savings to offset the costs of coin production, net losses would be incurred in 9 of the 10 years. As in the preceding scenario, these production costs are greatest in the first 4 years, when a large number of coins need to be produced for the transition. Although this scenario suggests there are no net benefits of switching to a $1 coin, GAO believes that excluding the interest savings related to seigniorage omits a monetary benefit to the government.
If it is assumed that each $1 note will be replaced by 1, rather than 1.5, $1 coins, the government would incur a total net loss of about $582 million over 10 years, or an average of about $58 million per year. The costs of producing coins for the transition dominate in the first 3 years, followed by benefits in the fourth year due to the overproduction of coins during the transition. In this scenario, net losses continue to accrue through year 10. Net losses in this scenario are smaller than in the preceding scenario because fewer coins are produced and coin production costs are lower, but the one-to-one replacement does not provide increased seigniorage. Moreover, this lower replacement ratio is not consistent with the experiences of other countries that have switched from notes to coins and is likely to produce too few coins to meet demand, which could be disruptive to the economy.
In commenting on a draft of this report, the Federal Reserve and Treasury Department noted that GAOs 30-year estimate does not consider the cost to the private sector or environmental impacts. GAO agrees that such costs and impacts are important considerations, but GAO identified no quantitative estimates that could be evaluated or modeled.

section_title: Letter
paragraphs: Over the past 40 years, many countries have replaced lower- denomination notes with coins as a means to provide a financial benefit to  their governments. We have reported five times over the past 22 years  that replacing the $1 note with a $1 coin would provide a net benefit to the  federal government of hundreds of millions of dollars annually. Most  recently, in March 2011, we reported that such a replacement would  result in a net benefit of about $5.5 billion over 30 years, or an average of  about $184 million per year. We found that this benefit was entirely  attributable to an increase in seigniorage, which is the difference between  the cost of producing coins or notes and their face value. To determine  the estimated net benefit, we developed a model based on a set of  assumptions and noted that changing these assumptions could increase  or decrease the estimated net benefit. You asked us to provide additional  details on our 2011 analysis and to conduct additional analyses changing  two assumptions. To answer your request, we first updated our 2011  estimate because of recent changes by the Federal Reserve and  Department of Treasury in note processing and $1 coin production, the  results of which are provided below. We then used this updated 30-year  estimate to address your request that we provide  the specific benefit or loss to the government for each of the first 10  years for our 30-year analysis;  the net benefit or loss to the government over 10 years if the interest  savings due to seigniorage is excluded from the analysis; and  the net benefit or loss to the government over 10 years if the  replacement ratio is 1 coin to 1 note, rather than 1.5 coins for 1 note,  as we assumed in our 30-year analysis.
To identify the benefit or loss of replacing the $1 note with a $1 coin, we  updated the economic model developed for our 2011 report, and varied  the assumptions for seigniorage and the replacement ratio of coins to  notes as requested. Briefly, our model estimated net benefit or net loss to  the government by subtracting the benefit of a status quo scenario from a  replacement scenario. In the updated status quo scenario, notes remain  the dominant form of currency at the $1 denomination, the United States  Mint (the Mint) ceases production of $1 coins, the currently stored coins  are gradually released into circulation to meet transactional demand, and  production of $1 coins resumes after the stored coins are released.the replacement scenario, we 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; the $1 coins in  storage would immediately be released into circulation; and the Mint  would produce a large number of $1 coins during the first 4 years of the  transition. Using the updated economic model, we then varied the  assumptions for seigniorage and the replacement ratio of coins to notes  to determine the net benefits or losses over the first 10 years, as  requested. We conducted this performance audit from November 2011  through February 2012 in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Our Updated Estimate Shows That Replacing the $1 Note with a $1 Coin Could Provide a Net Benefit of $4.4 Billion to the Government over 30 Years
paragraphs: 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 government’s need to raise  revenues through borrowing, and with less borrowing, the government  pays less interest over time, resulting in a financial benefit.
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  would occur because, based on differences in how notes and coins are  used in the economy, more coins than notes would have to be circulated  to meet demand, and therefore more seigniorage would be created. This  estimate assumes a 4-year transition period beginning in 2012, during  which the production of $1 notes would stop immediately. On the basis of  information provided by the Mint, we assumed that during the first year  the Mint would convert existing equipment to increase its production  capability for $1 coins. We also assumed that it would take 4 years for the  Mint to produce enough coins to replace the currently outstanding $1  notes. Our assumptions cover a range of factors including a replacement  ratio of 1.5 coins to 1 note to take into consideration the fact that coins  circulate with less frequency than notes and therefore a larger number   the expected rate of growth in the demand for  are required in circulation,currency over 30 years, the costs of producing and processing both coins  and notes, and the differential life spans of coins and notes. Our analyses  are projected over 30 years to be consistent with previous GAO analyses  and because that period roughly coincides with the life expectancy of the  $1 coin.
As shown in figure 1, the annual benefit would vary over the 30 years— the 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 would be  due in part to the up-front costs to the 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. The large net benefit in 2016 would occur because we assume  that the Mint’s production at maximum capacity during the 4-year  transition period would lead to some overproduction and thus production  would drop dramatically in 2016. Because of the far lower coin production  costs, the net benefit to the government would temporarily spike in that  year. We also found our net benefit estimate was due solely to increased  seigniorage and not to reduced production costs. Like all estimates, this  one is uncertain, particularly in the later years, and thus the benefit could  be greater or smaller than estimated. Furthermore, inputs to our analysis,  such as the costs to produce $1 notes and $1 coins, will change over  time. Changes to the inputs and the assumptions used in the estimate  could increase or decrease the estimated net benefit.
This estimate differs from our 2011 estimate, which found that  replacement would result in a net benefit of about $5.5 billion over 30  years, or an average of about $184 million per year, because it takes into  account two key actions that occurred since our 2011 report.
In April 2011, the Federal Reserve began using new equipment to  process notes, which has increased the expected life of the $1 note to  an average of 56 months, according to the Federal Reserve,  compared with the 40 months we used in our 2011 analysis. The  longer note life reduces the costs of the status quo scenario and thus  reduces the expected net benefits of replacing the $1 note with a $1  coin.
In December 2011, the Treasury Department announced that it would  take steps to eliminate the overproduction of dollar coins by relying on  the approximately 1.4 billion $1 coins stored with the Federal Reserve  as of September 30, 2011, to meet the relatively small transactional  demand for dollar coins. This new policy will reduce the cost of  producing $1 coins that we estimated in the status quo scenario and  thus reduces the expected net benefits of replacing the $1 note with a  $1 coin.
In addition, our updated analysis used a start date of 2012 rather than  2011 and used the Congressional Budget Office’s most recent estimates  for future government borrowing costs, which are lower than the figures  used in our 2011 analysis. The reduced borrowing costs reduced the net  benefits of switching to a $1 coin.
section_title: Replacing the $1 Note with a $1 Coin Would Result in a $531 Million Net Loss over the First 10 Years
paragraphs: For example, officials from the Bureau of Printing and Engraving pointed out that  replacing the $1 note with a $1 coin would also have environmental impacts relating to  obtaining raw materials and carbon dioxide emissions, among others. benefits of reduced interest expense due to increased seigniorage would  occur more heavily in later years.
section_title: Without Counting Seigniorage, Switching to a $1 Coin Would Result in a Net Loss
paragraphs: Under a scenario that does not consider interest savings due to  seigniorage, a net loss of approximately $1.8 billion would accrue during  the 10-year period for an average cost of $179 million per year. As shown  in figure 3, net losses would be incurred in 9 of the 10 years. In particular,  large costs would be incurred in each of the first 4 years because of the  large number of coins that would need to be produced for the transition,  as was the case in the scenario discussed above. As in the previous  analysis, in year 5, there would be a temporary net benefit because coins  would be overproduced during the previous 4 years and coin production  would fall to zero in that year—and the cost is therefore less than the cost  of producing $1 notes that would have been incurred had the transition  not taken place. After year 5, net losses would continue to be incurred  because, although the life of a $1 coin is longer than the life of a $1 note,  coins cost more than notes to produce. All of the scenarios assume that  additional currency would need to be produced not only to replace worn  out or lost currency, but also to support a growing economy. Thus, in this  scenario, we found that even with the longer life of the $1 coin, the cost of  producing coins for the growing economy after the transition would  exceed the cost of producing $1 notes in each of those years that would  have been incurred without the replacement. While this scenario suggests  that there would be no net benefits from switching to a $1 coin, we  believe that not including the interest savings related to seigniorage omits  a monetary benefit to the government.
section_title: Switching to a $1 Coin Would Result in a Net Loss if Coins Replaced Notes on a 1-to-1 Basis
paragraphs: Under this scenario, we include the net benefits of interest savings related  to seigniorage, but assume that a single $1 coin would be produced to  replace each $1 note. In total, across the 10 years the total net loss of  switching to $1 coins would be $582 million, or just over $58 million per  year. As shown in figure 4, net losses would be incurred in 9 of 10 years  of this scenario. The costs of producing coins for the transition are highest  in the first 3 years, followed by benefits in the fourth year because of the  overproduction of coins during the transition. In this scenario, net losses  would continue through year 10.
In this scenario, far fewer coins would be produced because of the low  replacement ratio, and thus the costs associated with their production  would be much less than in the previous scenarios. However, this  scenario also involves no gains to the government because of  seigniorage because only one coin would be produced to replace each  note that will fall out of circulation. In fact, the replacement case in this  scenario results in reduced seigniorage relative to the status quo because  the cost of producing a note is less than the cost of producing a coin, so  each $1 coin has less seigniorage associated with its issuance than the  $1 note it is replacing.
A caution concerning a 1-to-1 replacement of coins to notes is that under  this scenario, there would likely not be enough coins to meet demand. A  shortage of currency could have significant negative consequences for  the economy, such as hampering cash transactions. As we noted in our  2011 report, other countries that have switched from notes to coins have  found that, because people use notes and coins differently, the number of  coins needed for a replacement is greater than the number of notes to be  replaced. While the actual replacement ratio needed is not known ahead  of any transition, our 2011 analysis of the transition to a $1 coin in  Canada and the £1 coin in the United Kingdom led us to decide that a  1.5-to-1 ratio was a reasonable level.
section_title: Concluding Observations
paragraphs: Estimating whether the government would derive benefits from replacing  the $1 note with a $1 coin requires an analysis with many assumptions.  As is clear from the findings in this report, not accounting for the benefits  related to increased seigniorage can substantially affect the estimate.  While we identified and updated a few factors used in these analyses that  changed since our 2011 report, other factors could also change over time,  such as the cost of inputs for notes and coins or changes in the use of  cash by the public, among other things. As such, these analyses are  highly affected by changing conditions as well as by conceptual views on  certain key issues, such as seigniorage and replacement ratios.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Federal Reserve and the  Department of the Treasury for review and comment. Their written  comments are reprinted in appendixes I and II, respectively. The Federal  Reserve noted that it believes our 30-year estimate may overstate the net  financial benefit to the government because it (1) does not adequately  address the costs to the private sector, state and local government, and  the Federal Reserve and (2) does not consider potential increases in the  cost of raw material for coins or possible future changes in discount rates.  Similarly, the Treasury Department noted that our analysis should  consider the cost to the private sector and the impact on the environment.  We agree that the benefits and costs to the private sector and the impact  on the environment are important considerations. However, we found no  quantitative estimates of the costs to the private sector or environmental  impacts that could be evaluated or modeled. We did not assess potential  environmental impacts because these concerns were beyond the scope  of our analysis and we did not identify quantitative estimates of such  impacts. We included all relevant costs to the Federal Reserve that the  agency provided to us and found no data on the cost to state and local  governments. We used the best data available on coin production costs,  which accounts for the cost of raw materials, and we used the most  current discount rate. Furthermore, we recognize that our analyses are  highly affected by changing conditions, such as changes in the cost of  coins and notes, which may alter the total cost savings associated with  replacing the $1 note with a $1 coin.
In addition, the Federal Reserve noted an increased risk of counterfeiting  associated with replacing the $1 note with a $1 coin. We reported in 2011  that counterfeiting of U.S. coins is currently minimal, according to the U.S.  Secret Service.  The Federal Reserve also noted that we did not provide  a sensitivity analysis that varies key assumptions such as possible  increases in the public’s use of electronic payments. In 2011, we reported  the results of our sensitivity analyses, including one in which replacement  leads to a decrease in the demand for currency as people switch to  electronic payments. The Treasury also provided technical comments,  which we addressed as appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Treasury, and the Chairman of the  Federal Reserve. The report will also be available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or by e-mail at stjamesl@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. GAO staff that made key   contributions to this report include Teresa Spisak (Assistant Director),  Amy Abramowitz, Lindsay Bach, Patrick Dudley, Bess Eisenstadt, and  David Hooper.
section_title: Appendix I: Comments from the Board of Governors of the Federal Reserve System
section_title: Appendix II: Comments from the Department of the Treasury