U.S. Coins: Replacing the $1 Note with a $1 Coin Would Provide a Financial Benefit to the Government
Published: 2011-03-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since coins are more durable than notes and do not need replacement as often, many nations have replaced lower-denomination notes with coins to obtain a financial benefit. GAO has estimated the annual net benefit to the U.S. government of replacing the $1 note with a $1 coin four times over the past 20 years, most recently in April 2000. Asked to update its estimate, GAO (1) estimated the net benefit to the government of replacing the $1 note with a $1 coin and (2) examined other effects stakeholders suggested such a replacement could have. To perform its work, GAO constructed an economic model and interviewed officials from the Federal Reserve, the Treasury Department, the U.S. Secret Service, outside experts, and officials from Canada and the United Kingdom. To determine the effects on stakeholders, GAO interviewed officials from industries and organizations that might be affected by changes to currency.
section_title: What GAO Found
paragraphs: According to GAO's analysis, replacing the $1 note with a $1 coin could save the government approximately $5.5 billion over 30 years. This would amount to an average yearly discounted net benefit--that is, the present value of future net benefits--of about $184 million. However, GAO's analysis, which assumes a 4-year transition period beginning in 2011, indicates that the benefit would vary over the 30 years. The government would incur a net loss in the first 4 years and then realize a net benefit in the remaining years. The early net loss is due in part to the up-front costs to the U.S. Mint of increasing its coin production during the transition. GAO's current estimate is lower than its 2000 estimate, which indicated an annual net benefit to the government of $522 million. This is because some information has changed over time and GAO incorporated some different assumptions in its economic model. For example, the lifespan of the note has increased over the past decade, and GAO assumed a lower ratio of coins to notes needed for replacement. GAO has noted in past reports that efforts to increase the circulation and public acceptance of the $1 coin have not succeeded, in part, because the $1 note has remained in circulation. Other countries that have replaced a low-denomination note with a coin, such as Canada and the United Kingdom, stopped producing the note. Officials from both countries told GAO that this step was essential to the success of their transition and that, with no alternative to the note, public resistance dissipated within a few years. Stakeholders representing a variety of cash-intensive entities in the private sector identified potential shorter- and longer-term effects of a replacement. For example, some stakeholders said that they would initially incur costs to modify equipment and add storage and that later their costs to process and transport coins would go up. Others, however, such as some transit agencies, have already made the transition and would not incur such initial costs. As in the past, GAO's analysis indicates that replacing the $1 note with a $1 coin would provide a financial benefit to the government if production of the $1 note ceased. GAO previously recommended replacement of the $1 note and continues to support this recommendation. The Federal Reserve and Treasury reviewed a draft of this report and both noted the importance of societal effects in deciding on such a replacement and offered technical comments.

section_title: Letter
paragraphs: Over the past 40 years, many countries have replaced lower-denomination  notes with coins as a means of providing a financial benefit to their  governments. We have reported four times over the past 20 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. Most recently, in  2000, we estimated a net benefit to the government of about $522 million  annually. Because this last estimate was a decade old, you asked us to  update it and describe some potential effects of replacing the $1 note with  a $1 coin. To accomplish these objectives, we addressed the following  questions: (1) What is the estimated net benefit, if any, to the government  of replacing the $1 note with a $1 coin? (2) What other effects did  stakeholders suggest such a replacement could have?
To estimate the net benefit to the government of replacing the $1 note with  a $1 coin, we constructed an economic model with data from the Board of  Governors of the Federal Reserve System (Federal Reserve), the Bureau of  Engraving and Printing (BEP), and the United States Mint (Mint). We  analyzed past GAO and Federal Reserve reports that previously estimated  the net benefit to the government of such a replacement. We interviewed  officials from two bureaus of the Department of the Treasury (Treasury)— BEP and the Mint—the Federal Reserve, and the Department of Homeland  Security’s U.S. Secret Service to develop the structure, inputs, and  assumptions for the model. In addition, we interviewed government  officials in Canada and the United Kingdom (UK) to obtain information  about their experiences replacing notes with coins and used this  information to develop some of the model assumptions. To determine the  effects such a replacement could have, we identified industries and  organizations that might be affected by changes to currency. We  interviewed private entities involved in the production of materials for and  processing of notes and coins; 15 associations and companies that  represent five major industries that often deal in cash—banking and  financial institutions; grocery and convenience stores; and vending,  transit, and retail businesses. We conducted this performance audit from  June 2010 to March 2011 in accordance with generally accepted  government auditing standards. These 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.  Appendix I contains more detailed information on our scope and  methodology.
subsections: section_title: Background
paragraphs: To promote efficient commercial exchange and economic growth, national  governments and central banks issue money, including paper notes and  coins in various denominations. The federal government experiences a  financial gain when it issues notes or coins because both forms of  currency usually cost less to produce than their face values. As long as  there is a public demand, when the government puts coins into circulation,  it creates a value known as “seigniorage.” Seigniorage is traditionally  defined as the difference between the face value of coins and their cost of  production. In addition, the face value of notes issued, net of their  production costs, creates an analogous net value for the federal  government. In this report, we use the term “seigniorage” to refer to the  value created from the issuance of both coins and notes. Seigniorage  reduces the government’s need to raise other revenues, thus reducing the  amount of money that the government needs to borrow. When the  government has to borrow less, it pays less in interest over time. Although  the interest avoided is a benefit to the government, the public effectively  finances this benefit by choosing to hold more cash on which it does not  earn interest.
Two Treasury bureaus, BEP and the Mint, produce notes and coins,  respectively, and the Federal Reserve places them in circulation through  banks in response to public demand. Under current law, the Federal  Reserve determines the amount of $1 notes necessary for commerce. For  the circulation of $1 coins, the Secretary of the Treasury decides what is  necessary to meet the needs of the United States. In practice, according  to officials from the Mint and the Federal Reserve, the Federal Reserve  makes this determination by producing a short-term forecast of demand  for notes and coins. Based on this forecast, the Federal Reserve orders  notes from BEP and the 12 regional Federal Reserve banks order coins  from the Mint. The Federal Reserve circulates the notes through the  Federal Reserve banks and the Mint distributes coins directly to those  banks. The Federal Reserve banks distribute notes and coins to  commercial banks to meet the demand of retailers and the public. When  notes and coins are returned by commercial banks as deposits to the  Federal Reserve banks, each note is processed to determine its quality and  authenticity. During processing, worn and counterfeit notes are removed  from circulation and the rest are wrapped for storage or re-circulation.  While the Federal Reserve re-circulates coins received from banks, it does  not have a comparable program to test the authenticity or fitness of coins.  The Federal Reserve contracts with private entities such as armored  carriers to count, sort, and transport notes and coins for circulation or  storage. Figure 1 shows the production and circulation of notes and coins.
Currently, there are five different $1 coin designs in circulation—the  Eisenhower coin, the Susan B. Anthony coin, the Sacagawea coin, the  Presidential $1 coin series, and the Native American $1 coin series. Table  1 shows production figures for the four $1 coin designs produced since  1979.
The four recent $1 coin designs are the same size and weight and have the  same electromagnetic properties. The Susan B. Anthony $1 coin is silver in  color, while the Sacagawea, Presidential, and Native American $1 coins  are golden in color. The golden color was introduced in 2000 so that the  public could better distinguish the $1 coins from the quarter, which the  Susan B. Anthony $1 coin resembles and with which it is often confused.
The number of $1 coins shipped from the Mint to Federal Reserve banks  peaked at over 1 billion in 2000, when the Sacagawea coin was first  minted, and immediately declined to about 100 million coins in 2001. The  number of $1 coins shipped averaged less than 50 million annually from  2002 through 2006, until the Presidential coin series was initiated in 2007.  (See fig. 2.) About 1.1 billion $1 coins are held in storage by the Federal  Reserve banks because, according to senior Federal Reserve officials, of  the limited public demand.
In recent years, Congress sought to increase the circulation of the $1 coin,  but circulation has remained limited. To remove barriers to circulation,  the Presidential $1 Coin Act of 2005, among other things (1) mandated the  use of $1 coins by federal agencies, the United States Postal Service, all  transit agencies receiving federal funds, and all entities operating  businesses, including vending machines, on U.S. government premises; (2)  required the Mint to promote $1 coins to the public; and (3) required the  Secretary of the Treasury, in consultation with the Federal Reserve, to  review the co-circulation of the different $1 coin designs and make  recommendations to Congress on improving the circulation of $1 coins.  Even with efforts taken to implement the legislation, the Federal Reserve  banks had an inventory of about 1.1 billion $1 coins as of December 2010,  which is sufficient inventory to cover the current level of public demand  for the coin for over 13 years.
Other countries have introduced coins of similar value into circulation by  replacing the corresponding notes, eventually leaving the public with no  alternative to the coin of that value. Among the rationales for replacing  notes with coins cited by foreign government officials and experts are the  cost savings to governments derived from lower production costs and the  decline over time of the purchasing power of currency due to inflation. In  1985, for example, the Canadian House of Commons estimated that the  conversion to a $1 coin would save the government $175 million  (Canadian) in total over 20 years because it would no longer have to  regularly replace worn out $1 notes. Canadian officials later determined  that the Canadian government saved $450 million (Canadian) between  1987 and 1991.
Over the last 47 years, Australia, Canada, France, Japan, the Netherlands,  New Zealand, Norway, Russia, Spain, and the UK, among others, have  replaced lower-denomination notes with coins. Most of these  replacements occurred in the 1980s. (Table 2 indicates when selected  countries replaced notes with coins.)
In past work we reported that the annual net benefit to the government of  replacing the $1 note with a $1 coin would be about $318 million (1990),  $395 million (1993), $456 million (1995), and $522 million (2000). Based  on the experiences of other countries and the potential financial net  benefit to the government, we have twice recommended that Congress  provide for the elimination of the $1 note to ensure the success of $1 coin  initiatives.
section_title: Replacing the $1 Note with a $1 Coin Could Save the Government Approximately $5.5 Billion in Interest Expense over 30 Years
subsections: section_title: Replacing $1 Notes with $1 Coins Would Increase the Net Benefit to the Government over 30 Years
paragraphs: We estimate that replacing the $1 note with a $1 coin would provide a net  benefit to the government of approximately $5.5 billion over 30 years,  amounting to an average yearly discounted net benefit of about $184  million. However, this benefit would not be achieved evenly over the 30  years. In fact, as shown in figure 3, the federal government would incur a  net loss during the first 4 years. Yearly net benefits begin to accrue in the  fifth year of our analysis, and in the tenth year (2020), the initial start-up  costs are paid back and overall net benefits begin to accrue. The early net  loss represents the up-front cost of producing a large number of coins  during the transition from notes to coins, together with the limited interest  expense the government would avoid in the first few years after  replacement began. While the estimated benefits in earlier GAO analyses  were due to both seigniorage and reduced costs of coins (as compared to  notes) over 30 years, our current net benefit estimate is solely due to  seigniorage. In fact, the cost of producing coins for a full replacement is  never fully recovered during the 30-year analysis, likely due to the longer  note life and relatively higher cost of coin production today than was the  case when our earlier studies were conducted. Moreover, our estimate,  like all estimates, is uncertain, particularly in the later years, and thus the  benefits could be greater or smaller than estimated. As a result, we have  considered several alternative scenarios that are discussed later in this  report and in appendix II.
To arrive at our estimate, we developed a model to examine the effects of  replacing the $1 note with a $1 coin. We assumed that the replacement  would be implemented starting in 2011, and during that year the Mint  would invest in new 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 dollar notes, and that  during the transition, production of the paper note would stop. Our model  assumptions cover 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 span of coins and notes. The cessation of  production of $1 notes in our analysis might suggest a possible shortage of  dollar currency during the transition. However, because of the existing $1  coins that the Federal Reserve banks hold and the rapid ramp up of  production during the first 2 years of the transition, the outstanding dollar  currency—both notes and coins—during the years of the transition equals  or exceeds the demand we estimate for each of those years.
The assumption that contributed the most to the net benefit we estimated  was the replacement ratio of coins to notes. Following the example of  other countries that have replaced a note with a coin of equal value, we  assumed that, because of differences in how people use these two forms  of money, the public would need more than one coin for each note that  had been in circulation. It is common for people to take coins out of their  pockets and store them at the end of each day rather than retain them in  their wallets as they do notes, for use the next day. These factors cause  coins to circulate with less frequency than notes. Thus, for any given  denomination of currency, a larger number of coins would need to be  maintained in circulation to meet the public’s demand for cash than would  be needed if that denomination were provided in notes.
We previously reported that when Canada replaced its $1 note and the UK  replaced its £1 note with a coin, both countries used a 1.6-to-1 replacement  ratio. However, in both cases, once the transition was complete, coin  production was very low or even nil in some years. Therefore, we  determined that a 1.5-to-1 replacement rate would be appropriate for our  analysis—low enough to avoid an excess of $1 coins without creating an  undue risk of producing too few. Our analysis thus assumes that the  number of $1 coins issued is 50 percent greater than the number of $1  notes that were in circulation. This assumption of increased production  results in substantially increased seigniorage and accounts for our  estimate of a net benefit to the government over the 30-year period of the  analysis.
section_title: Our Current Estimate of the Yearly Net Benefit of Replacing the $1 Note with a $1 Coin Is Lower than Previous Estimates for a Variety of Reasons
paragraphs: In 2000, we estimated that the yearly net benefit to the government of  replacing the $1 note with a $1 coin would be roughly $522 million per  year, after the replacement was complete. Our current estimate of an  average yearly discounted net benefit to the government of about $184  million is lower than our previous estimate because of differences in the  structure of our analysis and in our assumptions about the replacement  ratio of coins to notes and the lifespan of the note.
Structure of the analysis. Our 2000 analysis estimated an annual level of  net benefit to the government assuming that the transition to coins had  already been completed. Hence, that analysis did not fully address the  initial production costs of replacing all outstanding notes with coins. For  the current analysis, we determined that the Mint would need to make  various investments to produce substantially more new coins in relatively  few years. We therefore assumed that the minting and distribution of new  coins would substantially increase during a 4-year transition period and  the production of $1 notes would cease.  We included these increased coin  production costs in the 30-year analysis.
Lower replacement ratio. For our 2000 model, we assumed that, to meet  society’s needs, two $1 coins would be needed to replace each $1 note that  had been in circulation. We arrived at that 2-to-1 replacement ratio based  on the experience of other countries that had replaced their lowest- denomination note with a coin of the same denomination. Some of these  countries used replacement ratios as high as 4 to 1. As we noted above,  however, based on the experience of Canada and the UK, in our current  model we used a replacement ratio of 1.5 to 1 because a higher ratio did  not appear to be needed. Because a lower replacement ratio entails a  reduced level of seigniorage, the net benefit to the government of  switching to a $1 coin is lower in our current analysis than in our 2000  analysis. To examine the extent to which this assumption lowered our  estimate, we ran our current model using the same 2-to-1 replacement  ratio that we used in 2000 but maintained all other elements of our current  model unchanged. This higher replacement ratio had the most impact on  the estimated net benefit of the various sensitivity analyses we conducted.  The average yearly discounted net benefit to the government would have  been about $297 million, and the total net benefit over 30 years would have  been about $8.9 billion if this higher replacement ratio had been used.
The expanded lifespan of the note. Ten years ago, a $1 note lasted  about 1.5 years on average. Because of improvements in the processing of  paper notes, the life of the $1 note has grown considerably—to as high as  40 months on average, according to a BEP analysis. This longer note life  reduces the differential between the lives of the note and the coin, which  is expected to have an average life of at least 30 years, according to senior  Federal Reserve officials. To ascertain the extent to which the current  longer life of a paper note led to a lower estimated net benefit to the  government in our current analysis, we ran our model using the same 1.5- year average note life we used in the 2000 model, but retained all other  elements of our current model. We found that if we had used the shorter  note life in our current analysis, we would have estimated that the  discounted net benefit to the government of a replacement would have  been about $7.7 billion over the entire 30 years and the average yearly  discounted net benefit would have been just over $256 million.
section_title: Our Current Estimate Would Vary with Changes in Other Assumptions
paragraphs: Besides analyzing how differences in assumptions from our 2000 report  affected our current estimate (our base case analysis) we analyzed  alternative scenarios using the same model as we did for our base case  analysis but altered certain assumptions. We compared our base case  analysis to two alternative scenarios that relate to possible changes in how  society uses money. In the first case, we assumed that the growing use of  electronic payment mechanisms would erode society’s use of cash over  the period of our analysis. In the second case, we assumed that, rather  than transferring all demand for the $1 note to the $1 coin, the public  would prefer, and therefore demand, increased circulation of the $2 note  as production of the $1 note ceased.
Reduced growth in demand for cash. In our base case, we assumed that  the demand for cash would continue to grow with the growth in economic  activity, as it has over many years. Even in the last several years, as the use  of electronic means of payment has grown substantially, according to the  Federal Reserve, the demand for cash has continued to grow with the  gross domestic product. However, further changes in the way Americans  pay for goods at retail could lead to greater reliance on electronic payment  methods. For example, some U.S. companies are planning to develop ways  to make payments with a cell phone, a method that is already in use in  some countries. If Americans come to rely more heavily on electronic  payments, the demand for cash could grow more slowly in the future than  we assume in our base case. For example, one possibility is that if the  government replaces the $1 note with a $1 coin, electronic payments may  increase as the public chooses to avoid the $1 coin. In this scenario, we  assumed that the public would respond to the replacement of $1 notes  with $1 coins by increasing its use of electronic payments, thereby  reducing its demand for $1 currency by 20 percent. In this scenario, we  found that the net benefit to the government would be nearly $4.5 billion  over 30 years and the average annual discounted net benefit would be  nearly $149 million.
Replacement-induced demand for the $2 note. If the $1 coin replaced  the $1 note, the use of the $2 note could increase because people and  businesses might limit how many coins they kept in their pockets and cash  trays, and using the $2 note would help them do this. In Canada, demand  for the $2 bill did increase when the $1 note was replaced with the $1 coin.  However, Canada already had a readily circulating $2 note at the time,  whereas the United States does not; therefore, we did not assume an  increase in demand for the $2 note in our base case. In an alternative  scenario, we assumed that 25 percent of the demand for cash that had  been met with $1 notes would transfer to $2 notes and the remainder to $1  coins. Thus, the government would increase its production of $2 notes  accordingly. This scenario reduced the net benefit of the replacement  because fewer new coins were produced and less seigniorage was  generated. We found that the discounted net benefit to the government of  replacement in this scenario would be slightly lower than our base case— about $5 billion over 30 years, for an average annual discounted net  benefit of about $168 million.
section_title: The Model’s Method of Estimating Net Benefit Differs from the Congressional Budget Office’s Method of Estimating How a Replacement Would Affect the Federal Budget
paragraphs: Our estimate of the discounted net benefit to the government of replacing  the $1 note with a $1 coin differs from the method that the Congressional  Budget Office (CBO) would use to calculate the impact on the budget of  the same replacement. In the mid-1990s, CBO made such an estimate and  noted that its findings for government savings were lower than our  estimates at that time because of key differences in the two analyses. Most  important, budget scorekeeping conventions do not factor in gains in  seigniorage in calculating budget deficits. Thus, the interest expense  avoided in future years by reducing borrowing needs, which accounts for  our estimate of net benefit to the government, would not be part of a CBO  budget scoring analysis. Additionally, CBO’s time horizon for analyzing the  budget impact is up to 10 years—a much shorter time horizon than we use  in our current analysis.
section_title: Replacement Could Increase Coin Counterfeiting Risk and Raise the Government’s Deterrence Costs If Countermeasures Are Considered Necessary
paragraphs: Replacing the $1 note with a $1 coin could increase the risk of  counterfeiting of the coin, which could increase the government’s costs to  deter counterfeiting if the risk were deemed large enough to warrant  countermeasures. We did not include such costs in our estimate because  counterfeiting of U.S. coins is currently minimal, both domestically and  internationally, according to the U.S. Secret Service. Moreover,  counterfeit $1 notes accounted for less than 1 percent of all counterfeit  U.S. notes detected in fiscal year 2009 (about 24,000 out of about 3  million). Nevertheless, senior officials at the Federal Reserve and Mint told  us the increased circulation of $1 coins could increase the risk of  counterfeiting, and senior Secret Service officials told us that  counterfeiting of coins is an ongoing problem in the UK. A report by the  UK’s Royal Mint indicated a counterfeit rate of about 3 percent for £1  coins.
In Canada, however, counterfeiting is minimal. Canadian officials told us  that the total face value of the counterfeit Canadian $1 and $2 coins  detected since the coins were introduced in 1987 and 1996, respectively, is  about $10,000 (Canadian). Whether replacing the $1 note with a $1 coin in  the United States would increase the risk of counterfeiting, as it apparently  did in the UK, or whether it would remain low, as it has done in Canada, is  unknown.
Both Canada and the UK created validation programs to maintain the  integrity and quality of circulating coins after introducing the $1 coin and  £1 coins, respectively. In both countries, when coins are returned from  circulation as bank deposits, they are tested for authenticity, and heavily  worn, bent, or otherwise unfit coins are identified and removed from  circulation. Canada created its validation program when it introduced its  $1 coin, while the UK created its program in response to a sharp increase  in the counterfeiting of £1 coins. According to Canadian officials, the  validation program was introduced to enable better management of  Canada’s coin inventories. The program provides information on the  number of coins in circulation and allows for removing unfit coins from  circulation, as well as for detecting counterfeit coins. The Federal Reserve  banks circulate coins they receive from commercial banks, but do not  have a comparable validation program. Coin processing companies run the  coins through counting machines that, according to a processing company  we interviewed, verify the denomination and genuineness of each coin.  This process removes coins that the machines detect as unfit but does not  represent a systematic application of criteria and standards of operation  such as could be applied through a validation program managed by the  Federal Reserve.
section_title: Public Acceptance of the $1 Coin Requires Production of the $1 Note to Cease
paragraphs: Our estimate of the net benefit to the government of replacing the $1 note  with a $1 coin assumes that the $1 coin would be widely accepted and  used by the public. In past work, we reported that the coin was not widely  accepted and used. In 2002, we conducted a nationwide public opinion  survey and found that the public was not using the $1 coin because people  were familiar with the $1 note, the $1 coin was not widely available, and  people did not want to carry around more coins. In addition, 64 percent  of the respondents to that survey were opposed to eliminating the $1 note.  However, when respondents were told that such a replacement would  save the government about half a billion dollars a year (our 2000 estimate),  the proportion who said they opposed elimination of the note dropped to  37 percent. Two more recent national survey results suggest that  opposition to eliminating the $1 note persists. For example, according to a  Gallup poll conducted in 2006, 79 percent of respondents were opposed to  replacing $1 notes with $1 coins, and their opposition decreased only  slightly, to 64 percent, when they were asked to assume that a replacement  would result in half a billion dollars in government savings each year.
Efforts by the Mint to increase public acceptance and use of the $1 coin as  it co-circulates with the $1 note have shown moderate success. To  increase public acceptance and circulation of the $1 coin, the Presidential  $1 Coin Act of 2005 requires the Mint to promote $1 coins to the public.  In response to the legislation, in 2008, the Mint conducted a pilot program  in Austin, Texas; Portland, Oregon; Grand Rapids, Michigan; and  Charlotte, North Carolina, to increase public acceptance of the $1 coin.  Enlisting the support of national and local retailers, the Mint carried out  advertising and public relations campaigns in which it promoted the $1  coin as recyclable, lasting for decades, and saving the nation money. As  figure 4 shows, data collected as part of the pilot program show modest  increases in the public’s use of $1 coins in three of the four target markets  as measured in public opinion surveys. Pilot program data also show that  nationwide usage of the $1 coin declined during the period that the pilot  study was conducted.
In past reports, we have noted that Congress and the executive branch  would have to lead rather than follow public opinion for a transition from  the $1 note to the $1 coin to succeed. Furthermore, we have noted in  those reports that past $1 coin initiatives—such as changes to the color of  the $1 coin and new coin designs—have not led to widespread public  acceptance and use, in part because the $1 note was not simultaneously  eliminated. This point was reiterated by Canadian and UK officials we  spoke with, who said that the only way to transition from note to coin is to  stop producing the note. While observing that the public was resistant at  first, they said that, with no alternative to the note, public dissatisfaction  dissipated within a few years.
section_title: Stakeholders Identified Near- and Long-Term Challenges to the Private Sector Should the $1 Coin Replace the Note
paragraphs: Stakeholders representing a variety of retail and manufacturing industries  and organizations that would be affected by a replacement identified two  kinds of associated challenges and costs: (1) those that would result in the  near term from the transition and (2) those that would result in the longer  term from structural changes to the cost of doing business. Most  stakeholders we interviewed said, however, that they could not easily  quantify the magnitude of these costs, and the majority noted that they  would need 1 to 2 years to make the transition from $1 notes to $1 coins.  Most stakeholders identified some likely benefits from replacing the $1  note with a $1 coin, including a financial benefit to the government.
According to 13 of the 15 stakeholders we spoke with, replacing the $1  note with a $1 coin would involve various up-front, short-term costs during  the transition period. Depending on the nature of their businesses, these  stakeholders identified transition costs relating to their equipment,  armored transportation, vault storage, and staff training. For example, all  nine of the stakeholders we interviewed involved in retail sales, banking,  and currency transport and processing identified equipment-related  actions they would need to take, such as    modifying vending and self-checkout machines, cash register drawers, and    upgrading armored trucks to carry the additional weight;    acquiring hand trucks for moving coins within a business; and    obtaining processing equipment such as coin counting and wrapping  machines.
In addition, to accommodate higher volumes of $1 coins, five of the nine  retail, banking, and armored carriers we interviewed said they would  likely need to increase vault storage capacity. Some of the transitional  costs and challenges may be more formidable than others. For example,  increasing storage and transport capacity could entail additional  investment, while modifying cash register drawers may involve primarily  retooling the drawers.
Ten of the 15 stakeholders we spoke with also identified three areas in  which the replacement of $1 notes with $1 coins might entail longer-term  or ongoing costs: transportation, processing, and labor. For example, since  coins are heavier than notes, 7 of 15 stakeholders said that their costs  would likely increase because of higher transportation costs incurred by  armored carriers from making additional trips or using more fuel with the  heavier cargo. Moreover, two stakeholders noted that making additional  trips to transport coins could increase security risks for staff. In addition,  replacing the $1 note with a $1 coin might increase the number and types  of personnel needed to physically handle coins and process them. Some  stakeholders anticipated that any additional costs associated with $1 coins  would be passed on to customers.
In contrast to the stakeholders who, as noted above, said that a  replacement would mean higher short- and long-term costs for their  businesses, two stakeholders we interviewed said that it might have only a  minimal impact, particularly if the metal content of the $1 coin remained  the same. According to officials from the National Automatic  Merchandising Association, an organization representing the food and  refreshment vending industry, many of its members have already modified  their vending machines to accept all forms of payment, including coins,  notes, and electronic transactions. Further, according to an association  official, increased use of the $1 coin could be beneficial for the vending  industry because it may reduce rejected sales due to old or damaged  notes. He further noted that while the acceptance rate of notes has  improved dramatically in vending, wider use of a $1 coin could improve  consumer satisfaction. In addition, since transit agencies that receive  federal funds were required under the Presidential $1 Coin Act of 2005 to  accept and distribute $1 coins, many of the larger transit agencies have  already modified their equipment to accept these coins, according to  industry officials. For example, industry officials stated that New York  City’s Metropolitan Transportation Authority, which operates buses,  subways, commuter trains, bridges, and tunnels in New York City and the  surrounding area, is the largest user of $1 coins, with over 1,200 ticket  vending machines that accept or dispense them.
section_title: Concluding Observation
paragraphs: As in the past, our analysis indicates that replacing the $1 note with a $1  coin would provide a financial benefit to the government if production of  the $1 note ceased. However, the public continues to favor the $1 note  over the $1 coin. In Canada and the UK, the public also preferred low- denomination notes to coins, but the governments nevertheless switched  from notes to coins to achieve financial benefits. While the public initially  resisted these transitions, opposition dissipated over time with no  alternative to the note.
We have previously recommended to the Congress replacement of the $1  note with a $1 coin and, in view of the ongoing significant estimated  federal financial benefit, continue to support this prior recommendation.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Federal Reserve, Treasury, and  the Department of Homeland Security for their review and comment. The  Federal Reserve and Treasury provided written comments, which are  reproduced in appendix III and appendix IV, respectively, and technical  comments, which we incorporated into the report as appropriate. The  Department of Homeland Security had no comments.  Both the Federal  Reserve and Treasury maintained that an assessment of the benefits and  costs to the U.S. economy––that included the net benefits to the  government as we reported as well as the benefits and costs to the private  sector––is important in any evaluation of whether to replace the $1 note  with a $1 coin. We agree that the benefits and costs to the private sector  are important considerations.  However, we found no quantitative  estimates that could be evaluated or modeled.  As a result, we addressed  the potential effect on the private sector through interviews with  industries and organizations that might be affected by changes to  currency.  We obtained their views on the benefits and costs that might  result from the replacement.
In addition, the Federal Reserve commented that if seignorage is not  considered, the replacement of the $1 note with a $1 coin would result in a  net cost to the government over 30 years, rather than a net benefit, as we  reported.  We agree with this statement––and point out in the report that  the entire benefit of replacing the $1 note with a $1 coin would result from  the seignorage.  However, we believe that seignorage cannot be set aside  since it is a result of issuing currency. The Federal Reserve also noted that  the discounted net cost or benefit resulting from such a replacement  would be influenced by assumptions about the length and cost of the  initial transition and suggested that the report include sensitivity analyses  that varied these assumptions. We included analyses that varied a number  of assumptions and showed how our estimate would change.  We did not  include analyses that varied the length and cost of the transition because,  at our request, the Mint provided us several scenarios of varying transition  time periods and associated costs, which we assessed and used in our  model.
We are sending copies of this report to interested congressional  committees, the Secretaries of the Treasury and the Department of  Homeland Security, and the Chairman of the Federal Reserve. In addition,  this report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staffs have any questions or would like to discuss this work,  please contact me at (202) 512-2834 or wised@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Individuals making key contributions to this  report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: We addressed the following questions: (1) What is the estimated net  benefit, if any, to the government of replacing the $1 note with a $1 coin?  (2) What other effects did stakeholders suggest such a replacement could  have?
To estimate the net benefit to the government of replacing the $1 note with  a $1 coin, we constructed an economic model, which we based on our  analyses of past reports of GAO and the Board of Governors of the Federal  Reserve System (Federal Reserve) that used an economic model to  develop such an estimate, together with information obtained from  reviews of agency documents and interviews with experts in government  and academia. More specifically, we interviewed officials from the Federal  Reserve, two bureaus of the Department of the Treasury (Treasury)—the  Bureau of Engraving and Printing (BEP) and the United States Mint  (Mint)—and the Department of Homeland Security’s U.S. Secret Service to  develop the structure, inputs, and assumptions for the model. Based on  our document reviews and these interviews, we determined that the data  used as inputs to our model for the production of notes and coins were  sufficiently reliable for our analysis. We also interviewed officials from  Canada and the United Kingdom (UK), both of which have replaced notes  with coins, to gain information useful in determining certain key  assumptions in our model. These included officials from the Bank of  Canada, the Canadian Department of Finance, the Royal Canadian Mint,  and the Royal Canadian Mounted Police’s National Anti-Counterfeiting  Bureau, as well as officials from the Royal Bank of England, the Royal  Mint, and the Serious Organized Crime Agency. In addition, we  interviewed four experts at federal agencies or academic institutions to  obtain their views on our economic model. More detailed information on  the structure, assumptions, and inputs of the economic model are found in  appendix II.
To determine the various effects replacement could have on stakeholders,  we identified industries and organizations that might be affected by  changes to notes and coins.  Through a literature review and interviews  with agency officials, we identified private companies involved in the  production of materials for $1 notes and $1 coins. Because these entities  would be affected by any increase or decrease in production, we  interviewed the entities that produce the paper and ink for the $1 note  (Crane Paper and SICPA Securink Corporation) and process metal for  coins (Olin Brass and PMX Industries). Furthermore, through a review of  literature and congressional testimonies, as well as interviews with agency  officials, experts, and Canadian government officials, we identified other  industries and interest groups that are intensive users of currency and  might be affected by the replacement of the $1 note with the $1 coin.  These entities included banks and financial institutions; grocery stores;  convenience stores; fast food establishments; vending machine companies,  including those that make the note and coin acceptors used in vending  machines; armored carriers that process and transport currency; transit  agencies; retailers, including companies that make cash register drawers;  coin laundry establishments; and consumer and public advocacy groups.  To ensure broad representation among these groups, we interviewed  officials from the following organizations:    American Public Transit Association,    National Association of Convenience Stores,    National Armored Car Association,    National Automatic Merchandising Association,    National Cash Register Company,    National Federation of the Blind,    $1 Coin Coalition.
Finally, to better understand the production, processing, and circulation of  currency, we visited the BEP production facility in Washington, D.C.; the  Mint production facility in Philadelphia, Pennsylvania; and an armored  carrier note and coin processing facility in Baltimore, Maryland.
We conducted this performance audit from June 2010 to March 2011 in  accordance with generally accepted government auditing standards. These  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.
section_title: Appendix II: Design of GAO’s Economic Model and Detailed Results for the Base Case and Alternative Assumptions
paragraphs: This appendix summarizes information about the model we developed to  estimate the net benefit to the government of replacing the $1 note with a  $1 coin. Specifically, this appendix (1) describes the design of the model,  including the assumptions used in it and their sources, and (2) presents  detailed results of the model’s analysis for our base case, in which we  compare a replacement scenario with the status quo, and for two  alternative scenarios.
subsections: section_title: Design of the Model
paragraphs: To estimate the net benefit to the government of replacing the $1 note with  a $1 coin, we created a model that analyzes the benefits and costs to the  government of issuing currency—including both notes and coins—under  different scenarios and assumptions over 30 years. The government  derives a benefit from issuing coins, known as seigniorage—a term we  also apply to notes to mean, for both, the difference between the face  value of currency and its production costs. Seigniorage reduces the  government’s need to borrow, allowing it to avoid interest on debt that it  would otherwise incur.
subsections: section_title: Base Case
paragraphs: To estimate the net benefit to the government of replacing the $1 note with  a $1 coin, we designed our model to calculate the difference between the  baseline and a replacement scenario. Specifically, because the government  receives a net benefit from issuing both notes and coins, we calculated the  net benefits under the status quo, in which most demand for $1 currency is  provided by notes (as is currently the case), and a replacement scenario,  in which notes cease to be produced and are replaced by $1 coins. The  difference between the net benefits under these two scenarios is the net  benefit to the government.
For the status quo, we assume that notes remain the dominant form of  currency at the $1 denomination. The Mint continues to produce $1 coins  at current levels, but not all of them enter circulation.
Currently, about 1 billion of the approximately 4 billion $1 coins that the  Mint has produced since it started minting the Susan B. Anthony $1 coin in  1979 are stored with the Federal Reserve. We do not count these coins as  contributing toward the net benefit to the government because these coins  are not being held by the public, and therefore, governmentwide, there has  not been a financial gain.
We assume that the remaining 3 billion $1 coins are held by the public. We  also assume that some of these remaining $1 coins are lost or not in active  circulation.
Based on current projections, which incorporate the legislative  requirements for producing Presidential and Native American $1 coins, we  assume that the Mint will continue to manufacture more coins than the  public demands until it completes its production of Presidential $1 coins,  currently scheduled through part of 2016. In our baseline scenario we  assume that production of the $1 coin essentially ceases after 2016. BEP  officials commented that it is unrealistic to assume the Mint will cease $1  coin production after 2016. However, we have no basis on which to make  an assumption about the level of $1 coin production after the completion  of the Presidential series. As such, we assume that coins stop being  produced after the series is complete. The small level of demand for $1  coins will be able to be satisfied by coins on hand at Federal Reserve  banks for many years after that time.
For our replacement scenario, we assume a 4-year transition period during  which  the production of $1 notes stops immediately;   no $1 notes are withdrawn from circulation, but due to their short life,  they would naturally fall out of circulation within a few years; the 1 billion coins currently stored with the Federal Reserve are released  into circulation in the first year;   1 billion $1 coins that were inactive and held by the public enter active  circulation in the first year; and the Mint expands its production of $1 coins during the first 4 years.
During the transition period, we assume the Mint’s coin production and  the government’s associated costs both increase.
In the first year, the Mint not only increases its production to its current  maximum capacity, but also modifies other coin production lines to  produce more $1 coins.
By the second year, the Mint is able to produce at a new maximum  capacity and does so throughout the 4-year transition period until it has  produced enough $1 coins to replace all $1 notes in circulation.
These efforts by the Mint to expand its production of $1 coins increase its  costs during the transition period.
In addition, we assume that the government incurs costs to publicize the  shift from $1 notes to $1 coins and that the variable costs of producing  higher-denomination notes increase after the BEP loses some degree of  economies of scale that it currently derives from producing $1 notes. For  example, if BEP is unable to purchase certain supplies such as ink and  paper in quantities as large as it does now, it may cause the vendors to  raise their prices.
After the 4-year transition period, we assume that the Mint reduces its  production of $1 coins to an amount sufficient to offset attrition and meet  the growth in demand for currency. As a result, the Mint’s coin production  costs decline.
To calculate our estimate, we relied on data from several sources,  including the Mint, BEP, and the Federal Reserve. We also interviewed  relevant officials from international governments and outside experts. All  assumptions used in the model are projections of future conditions,  hypothetical actions, or both. Therefore, some uncertainty is inevitable,  particularly for elements of the assumptions that occur farther in the  future. Moreover, some assumptions reflect our analysis of data. We  discussed our assumptions with relevant stakeholders and experts to  verify that our analysis is reasonable. Table 3 lists the values, sources, and  rationales for some key assumptions.
section_title: Detailed Results Using the Base Case and Alternative Assumptions
subsections: section_title: Results Using Base Case Assumptions
paragraphs: Compared to continuing the status quo, replacing the $1 note with a $1  coin would increase the government’s net benefit by approximately $5.5  billion over 30 years, or about $184 million annually, on average, in net  present value terms. This average masks significant variation over the 30- year period of our analysis. In the first few years, a replacement would  cause a net loss because the cost of producing so many coins would be  large. This early net loss represents the up-front cost of producing a large  number of coins during the transition from notes to coins together with  the limited interest expense the government would avoid in the first few  years after replacement began. While the estimated benefits in earlier GAO  analyses were due to both seigniorage and reduced costs of coins (as  compared to notes) over 30 years, our current net benefit estimate is  solely due to seigniorage.  In fact, the cost of producing coins for a full  replacement is never fully recovered during the 30-year analysis, likely due  to the longer note life and relatively higher cost of coin production today  than was the case when our earlier studies were conducted. Moreover, our  estimate, like all estimates, is uncertain, particularly in the later years, and  thus the benefits could be greater or smaller than estimated. (See fig. 3 in  the body of our report and table 4 at the end of this appendix.)
section_title: Results Using Alternative Assumptions
paragraphs: Under alternative assumptions, our estimate of the net benefit to the  government of a replacement would change. Table 4 shows how changes  in two assumptions—the demand for currency and the replacement ratio  of coins to notes—would affect our estimate. We conducted several  additional alternative analyses, and are presenting these two, which  provide the greatest range of benefits. In each of the alternative scenarios,  we changed one assumption and held all other values constant.
In the first alternative scenario, the replacement of notes with coins  causes a decrease in the demand for currency as people switch to  electronic means of payment. Specifically, the demand for currency grows  at a rate equal to 80 percent of the growth of demand for notes in the  baseline scenario. Using this assumption, our estimate of the net benefit to  the government decreases to $4.5 billion over 30 years, which is a decrease  of about $1 billion from our base case.
In the second alternative scenario, we changed the number of coins  needed to replace each note in circulation. Changing our estimate of the  replacement ratio of coins to notes from our current estimate of 1.5 to 1 to  our 2000 estimate of 2.0 to 1 increases the net benefit to the government to  about $8.9 billion over 30 years, or about $3.4 billion more than our base  case estimate.
Table 4 provides detailed results of our model’s analysis using our base  case and these two alternative assumptions.
section_title: Appendix III: Comments from the Board of Governors of the Federal Reserve System
section_title: Appendix IV: Comments from the Department of the Treasury
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Teresa Spisak (Assistant  Director), Amy Abramowitz, Lindsay Bach, Jenna Beveridge, Patrick  Dudley, Elizabeth Eisenstadt, and David Hooper made key contributions  to this report.
section_title: Related GAO Products
paragraphs: U.S. Coins: Public Views on Changing Coin Design. GAO-03-206.  Washington, D.C.: December 17, 2002.
New Dollar Coin: Marketing Campaign Raised Public Awareness but not  Widespread Use. GAO-02-896. Washington, D.C.: September 13, 2002.
Financial Impact of Issuing the New $1 Coin. GGD-00-111R. Washington,  D.C.: April 7, 2000.
New Dollar Coin: Public Perception of Advertising. GGD-00-92.  Washington, D.C.: April 7, 2000.
New Dollar Coin: Public Prefers Statue of Liberty over Sacagawea. GGD- 99-24. Washington, D.C.: January 22, 1999.
A Dollar Coin Could Save Millions. T-GGD-95-203. Washington, D.C.: July  13, 1995.  1-Dollar Coin: Reintroduction Could Save Millions If It Replaced the 1- Dollar Note. T-GGD-95-146. Washington, D.C.: May 3, 1995.
One-Dollar Coin: Reintroduction Could Save Millions if Properly  Managed. GGD-93-56. Washington, D.C.: March 11, 1993.
A New Dollar Coin Has Budgetary Savings Potential but Questionable  Acceptability. T-GGD-90-50. Washington, D.C.: June 20, 1990.
Limited Public Demand for New Dollar Coin or Elimination of Penny.  T-GGD-90-43. Washington, D.C.: May 23, 1990.
National Coinage Proposals: Limited Public Demand for New Dollar  Coin or Elimination of Pennies. GGD-90-88. Washington, D.C.: May 23,  1990.