Coins and Currency: How the Costs and Earnings Associated with Producing Coins and Currency Are Budgeted and Accounted For
Published: 2004-04-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The government produces billions of coins and currency notes each year. Coins are made by the U.S. Mint and issued by the Treasury Department. Currency notes are made by the Bureau of Engraving and Printing and issued by the Federal Reserve System (Fed). The Fed buys coins from the Mint at face value but pays the Bureau only the costs of printing currency. Coins on the books of the Fed are assets that are issued by the Mint, and notes are liabilities of the Federal Reserve Banks. In recent years congressional hearings have highlighted the confusion over differences in the budgetary and accounting treatment of coins and currency. In addition, the Treasury Inspector General and others have reported problems with Mint and Bureau operations. GAO was asked to review (1) how the costs and earnings from coins and currency are budgeted and accounted for and (2) whether any operational problems at the Mint and Bureau need further action.
section_title: What GAO Found
paragraphs: The earnings from issuing both coins and currency reduce government borrowing costs; however, how these earnings are budgeted and accounted for differs. Production costs of coins and currency are generally treated the same in the budget and accounting statements. The difference between the face value of coins and the costs of minting them results in earnings, called seigniorage, which is shown in the budget as a reduction in needed borrowing for the government, after the deficit or surplus for the year is calculated. The budgetary impact of seigniorage is interest avoided from the borrowing it displaces and is not visible because it is neither quantified nor shown in the budget. The government also generates earnings by issuing currency, but it is handled differently. The difference between the face value of currency issued and its production cost goes to the Fed. The Fed buys collateral, usually Treasury securities, to back up the currency issued. The interest collected on those Treasury securities is used to pay for Fed costs, and the remainder is returned to Treasury. The budgetary impact of issuing currency comes from the interest returned by the Fed, which is shown as a budgetary receipt and counted in the calculation of the deficit or surplus. Production costs of both coins and currency are shown as costs of operations in Treasury's financial statements. According to the Federal Accounting Standards Advisory Board, seigniorage should be shown as a source of financing in Treasury's statement of changes in net position, whereas interest returned by the Fed for currency is shown as revenue in Treasury's statement of custodial activity. Treasury has not been reporting seigniorage this way but made the correction beginning with its fiscal year 2003 financial statements. Both the Mint and the Bureau have had operational problems in recent years in contracting and acquiring property and equipment. The Mint has also had problems with forecasting demand, monitoring costs, and reporting to Congress. The Mint and Bureau have generally taken or started to take actions to address the problems. The Mint has clarified its first quarterly report for 2004 to include more information on how retained funds will be used. However, the Mint is still not explicitly stating whether the retained amounts are in excess of the estimated operating costs for the following year and, if so, it is not explaining how the retained earnings will be used, as required by law.

section_title: Letter
paragraphs: The government produces billions of coins and currency notes each year.  Coins are manufactured by the U.S. Mint, a bureau within the Department  of the Treasury, and issued by the Department of the Treasury. Currency  notes are produced by the Bureau of Engraving and Printing (BEP),  another bureau of the Department of the Treasury, and issued by the  Federal Reserve banks, which are part of the Federal Reserve System  (Fed), an independent government entity. Both coins and currency are  physically distributed to depository institutions by the Fed. In recent years,  the Department of the Treasury Inspector General and others have  reported problems with Mint and BEP operations, and congressional  hearings have highlighted the confusion over the differences in the  budgetary and accounting treatment of coins and currency. Because of  these issues, we agreed to review (1) how the costs  and earnings from  producing coins and currency are budgeted and accounted for and (2)  whether there are any operational problems at the Mint and BEP needing  further action.
To address these questions, we obtained and reviewed legislation,  budgetary guidance, and financial reports for the Mint, BEP, Treasury, and  the Fed concerning how funds for the production and issuance of coins and  currency are obtained and used. To determine if there are operational  problems at the Mint and BEP needing further action, we agreed with your  offices to review areas that had been previously identified as having  operational problems. These areas included forecasting demand for coins  and currency, monitoring production costs, contracting for goods and  services, acquiring property and equipment, and reporting operational  plans and results to Congress. We obtained and reviewed recent Inspector  General, GAO, congressional, and other reports in these areas. Because we  did not have the resources to extensively evaluate each issue, we identified  a few key measures that are commonly used to evaluate an organization’s  performance for each of these areas. We obtained information on each  measure from the Mint and BEP and determined how the agencies had  addressed or planned to address the problems we identified. We reviewed  documentation; interviewed Mint, BEP, and Fed officials; and interviewed  current and past congressional staff who worked in Mint and BEP  oversight. We performed our work in Washington, D.C., from September  2002 through March 2004 in accordance with generally accepted  government auditing standards. Our detailed scope and methodology are  contained in appendix I.
subsections: section_title: Background
paragraphs: The federal government has issued coins since its inception, but currency  was originally issued by private banks that were chartered by the states.  The federal government’s issuance of currency began during the Civil War.  Federal Reserve notes, which constitute virtually all U.S. currency we now  use, were first issued in 1914, when the nation’s central bank, the Fed, was  established. Coins and federal currency other than Federal Reserve notes  were distributed by the Treasury Department until 1920, when this function  was transferred to the Fed. The Mint produces coins to meet public  demand, and the BEP produces currency that the Fed orders. A more  complete history of money and banking in the United States is discussed in  appendix II.
subsections: section_title: Evolving Role of the Department of the Treasury
paragraphs: The Constitution gave Congress the power to coin money and regulate its  value and prohibited states from coining money, issuing bills of credit, or  making anything but gold and silver coin a tender in payment of debts.   The Mint was established in 1792 and delivered coins in 1793. The Mint was  originally part of the Department of State and became part of the  Department of the Treasury in 1873.
In 1846, the government separated its finances from commercial banks.  Government monies were to be deposited in the main Treasury or in one of  nine Subtreasuries—branches of the main Treasury—located throughout  the United States. By 1863, when the national banking system was  established, the government relied more on national banks than on the  Subtreasuries, but the Subtreasuries and the main Department of the  Treasury in Washington, D.C., were the only channels used to distribute  coins and Treasury currency. Congress gave responsibility for designing  U.S. currency to the Department of the Treasury and established the Secret  Service as a Treasury bureau to guard against counterfeiting. In 1920, the  Secretary of the Treasury was authorized to delegate the duties of  distributing currency and coin that had been handled by the Treasury and  the Subtreasuries to the Fed.
The responsibilities of the Federal Reserve, as the central bank of the  United States, fall into four general areas: conducting the nation’s monetary  policy; supervising and regulating banking institutions; fostering the  stability of the financial system; and providing certain financial services to  the U.S. government and to financial institutions, including playing a major  role in operating the nation’s payments system. The Fed’s operations are  carried out by 12 Federal Reserve district banks that are overseen by the  Board of Governors. Federal Reserve notes in circulation are recorded as  liabilities of the Federal Reserve district banks that issue them, and they  are the banks’ largest liabilities. Treasury securities are the largest assets of  the Federal Reserve district banks. The Fed forecasts the amount of  currency that will be needed to meet demand each year and submits an  order to BEP for new Federal Reserve notes. On the basis of the new  currency order, BEP establishes a billing rate to be paid by the Fed for the  cost of manufacturing Federal Reserve notes. The Fed pays BEP the costs  of developing and printing the currency. The Fed, through its district banks,  distributes Federal Reserve notes to depository institutions to meet  demand throughout the United States and the world.
The Fed has a more limited role with coins than it does with currency.  Unlike Federal Reserve notes, coins are not liabilities of the Federal  Reserve banks. The Mint determines its annual coin production and  monitors Fed coin inventories to identify trends in coin demand. The Fed  buys coins from the Mint for face value. Upon receiving coin orders from  the Fed, the Mint distributes coins to the Federal Reserve banks from its  Philadelphia and Denver production facilities, and the Federal Reserve  banks distribute coins to satisfy depository institutions demand. In  addition to the Federal Reserve banks and their branches, the Fed also  contracts with about 175 coin terminals to distribute coins to the banking  system. The terminals are generally operated by armored carrier  companies, which may be paid by depository institutions and retailers to  wrap coins and perform other services.
The primary mission of the Mint is to produce circulating coins in  Philadelphia and Denver for trade and commerce. The Mint also produces  and sells numismatic (collectors) coins and medals and gold and silver  bullion coins and operates the government’s primary gold bullion storage  facility in Fort Knox, Kentucky. BEP, which was established in 1862,  operates facilities in Washington, D.C., and Ft. Worth, Texas, where it  designs and prints the nation’s currency, some postage stamps, and other  security documents such as military identification cards. The agencies  involved in issuing and producing coins and currency are summarized in  table 1.
In 2002, the Mint sold about 15 billion coins with a face value of $1.4 billion  that it produced at a cost of $436 million; BEP produced 7 billion notes with  a face value of $103.5 billion at a cost of $384 million. The Fed spent about  $30 million to process coins and $342 million to process currency in 2002.  The number and dollar value of coins and currency issued for the last 5  years are shown in table 2.
The penny represents more than half of the Mint’s yearly production of  coins, as shown in figure 1. Figure 2 shows that BEP generally produces  more $1 notes than other denominations; however, in 1999, more $20 notes  were produced than $1 notes as precautionary inventory for the century  date change.
section_title: Budgeting and Accounting for the Costs of Production and Earnings from Coins and Currency Are Different
paragraphs: The Mint’s circulating coinage operations and BEP’s currency operations  are financed solely by payments from the Fed. Coins and Federal Reserve  notes are treated differently in the budget, reflecting the entities that issue  them. The Fed has never been included in the federal budget due to  judgments that fiscal and monetary policy should be kept separate. The  federal budget, by definition, proposes future amounts of revenues and  outlays. Because the Mint, a part of Treasury, is included in the budget, the  recognition of the earnings from coins—the difference between production  costs and face value, called seigniorage—is shown in the federal budget as  a reduction in needed borrowing for the government, after the deficit or  surplus for the year is calculated. Earnings from Federal Reserve notes are  realized by the nonbudgetary Fed. The Federal Reserve district banks use  receipts from the issue of Federal Reserve notes to buy Treasury securities  on the open market. The securities serve as collateral for the Federal  Reserve notes issued by the banks. The Fed transfers to the Treasury its  interest earnings on those securities, net of its operating expenses,  including payments to BEP for producing Federal Reserve notes. The  transferred interest earnings are shown as a miscellaneous receipt in the  federal budget under “deposit of earnings, Federal Reserve System,” and  are counted in the federal budget’s annual calculation of the deficit or  surplus.
Production costs of both coins and Federal Reserve notes are accounted  for as increases in the net cost of operations in Treasury’s consolidated  financial statements. Federal accounting standards provide that  seigniorage be accounted for as a source of financing in Treasury’s  statement of changes in net position, whereas interest earned by the Fed  for its open market operations is accounted for as revenue received on  Treasury’s statement of custodial activity. Treasury has not been reporting  seigniorage correctly in its consolidated financial statements but corrected  its misclassification beginning in fiscal year 2003.
subsections: section_title: Budgeting for Coin and Currency Production Costs
paragraphs: The costs of producing coins by the Mint and currency by BEP are treated  the same in the federal budget. Both the Mint and BEP have revolving  funds that receive collections from the Fed. The Fed pays Treasury the full  face value of coins that it buys, and Treasury then allocates the payments to  the Mint. When Congress established the Mint’s Public Enterprise Fund in  1996, the Senate Appropriations Committee noted that the production of  coins was driven by demand and that the variability of annual  appropriations placed a burden on production operations, so the Mint was  allowed to operate without annual appropriations. All Mint revenues are  deposited into its Public Enterprise Fund, including receipts from the Fed  from the sale of circulating coins at face value, and all expenses for making  coins are paid out of the Public Enterprise Fund. However, only the  revenue sufficient to cover the Mint’s costs of producing coins is included  as a collection from the Fed in the federal budget, not the full face value of  the coins. At least once a year, any amount that is determined by the Mint to  be in excess of the amount required by the Public Enterprise Fund is to be  transferred to Treasury’s general fund.
The Fed pays BEP the production costs of Federal Reserve notes rather  than the full face value. All BEP receipts are deposited into the Bureau of  Engraving and Printing Fund and are used to pay for BEP’s operating and  capital equipment costs. BEP was authorized to establish reimbursement  prices from customer agencies at a level intended to cover the costs of  services provided and to provide funding for the acquisition of capital  equipment and future working capital. Similar to the Mint, BEP operates  without annual appropriations. At the beginning of each year, BEP  establishes a billing rate for currency production, based on the annual Fed  currency order, past costs, expected increases, capital needs and working  capital needs.
Although the expected costs of Mint and BEP operations and collections  from the Fed are both included in the Treasury budget submission, as a  practical matter, the inclusion of the expected outlays and collections in  the budget is only a notification to Congress that collections deposited in  the revolving funds will be expended to produce the coins and currency in  the amounts estimated. If outlays during the year are higher than what is in  the budget, the Mint and BEP must notify Treasury and request an  apportionment from the Office of Management and Budget (OMB), but  congressional approval of the request is not necessary. An apportionment is  a plan, approved by OMB, to spend resources provided by law.
section_title: Budgeting for Coin and Currency Earnings
paragraphs: The profit earned from making coins, or seigniorage, is shown in the budget  as a means of financing the government’s borrowings and is not counted as  revenue in calculating the deficit or surplus for the annual budget.  Seigniorage reduces the government’s requirement to borrow money from  the public to finance the debt. Although the profit earned from making  coins adds to the government’s cash balance, it does not involve a payment  from the public, which is considered a receipt.
The use of seigniorage by governments to raise revenues goes back  hundreds of years in world history. In the Middle Ages, for example,  authenticated coinage made payment of debts convenient. Because of their  convenience, coins commonly had a substantial premium—more than  enough to cover the costs of minting—to pay for the authentication. Kings  could turn this premium into personal profit, and to maximize the earnings,  they recalled coinage every few years even if the coins were not worn.
The Federal Reserve banks’ issuance of currency is treated differently in  the federal budget. The Fed is not subject to the appropriations process  and, aside from the recording of transfers of Fed earnings from its open  market operations, its operations are excluded from the federal budget.  This special budgetary status stems from the desire to protect the flexibility  and independence of the central bank. On a weekly basis, the Fed transfers  its interest earnings on government securities, net of its expenses such as  payments to BEP for Federal Reserve note production, to the Treasury.  Because the Fed is not included in the federal budget, these payments from  the Fed to Treasury are treated as budgetary receipts, as if they were from  the public, when the annual deficit or surplus in the budget is calculated.
Interest paid by Treasury on all government securities is included in the  Treasury budget as an outlay.
A report from the House Banking and Currency Committee in September  1913, during its consideration of the bill that eventually established the  Federal Reserve, gave two reasons why the government should share in the  earnings that the Federal Reserve banks would make. First, the federal  government gave the Fed the sole and exclusive function of note issuance,  from which all other banks were prohibited. Second, the government’s  deposit of public funds with the Fed was larger than that of any other  depositor. The committee anticipated that after the national bank notes  that were in existence at that time had been replaced with Federal Reserve  notes, the function of issuing currency would result in large earnings for  the Fed that it could not earn were it to share this privilege with other  banks. The committee believed the public was entitled to these earnings.
In summary, although the production of money by the government through  both coins and currency generates earnings and saves interest costs, the  recognition of the interest is different and less visible for coins. For coins,  an increase in the cash available to Treasury because of seigniorage  reduces borrowing and the interest that would have otherwise been paid.  However, the interest avoided from the borrowing displaced by seigniorage  is neither quantified nor shown in the budget. For currency, interest  earnings generated from Fed open market operations are actually paid to  the Fed, and earnings in excess of Fed expenses are then returned to the  Treasury and recorded as a receipt in the budget.
In 2002, the Mint transferred $1 billion in seigniorage from coins and the  Fed transferred about $24.5 billion in excess earnings, derived largely from  holdings of U.S. government securities, which are attributable, in part, to  the value of currency in circulation. Seigniorage transferred from Mint  operations and interest earnings returned from open market operations for  the last 5 years are shown in table 3.
section_title: Accounting for Coin and Currency Production Costs
paragraphs: For the consolidated financial statements of the Department of the  Treasury, the Mint’s coin production costs and BEP’s currency production  costs are both accounted for as costs in the “net cost of operations” in  Treasury’s Consolidated Statement of Changes in Net Position and as a  decrease in the net position (equity) in the Consolidated Balance Sheet.
section_title: Accounting for Earnings Made on Coins and Currency
paragraphs: Seigniorage on coins should be shown as “other source of financing” in  Treasury’s Consolidated Statement of Changes in Net Position, as provided  for in the Federal Accounting Standards Advisory Board (FASAB).   However, Treasury has been accounting for seigniorage as a reduction in  the net cost of operations in its Consolidated Statement of Changes in Net  Position. Although Treasury’s net cost of operations has included  seigniorage as a reduction in costs, seigniorage had not been separately  labeled in the statement. During our review, Treasury officials corrected  the financial reporting treatment of seigniorage beginning with the fiscal  year 2003 statements and reclassified the fiscal year 2002 statements. The  effect of the reclassification of the 2002 statements was an increase in the  net cost of operations by about $1 billion. However, there was no effect on  the reported net position.
The earnings from interest on government securities the Fed returns to  Treasury are reported as “deposit of earnings, Federal Reserve System,” on  the Statement of Custodial Activity for Treasury’s financial statements.
section_title: Operational Problems Identified at the Mint and BEP
paragraphs: As agreed with your offices, we looked at the following areas of Mint and  BEP operations: forecasting public demand for coins and currency,  monitoring production costs, contracting for goods and services, acquiring  plant and equipment, and reporting operational plans and results to  Congress. These areas had been previously identified by the Treasury  Inspector General or others as having problems. We did not have the  resources to extensively evaluate each area. Therefore, for each area, we  applied commonly used performance indicators as measures that  addressed such issues as cost/efficiency, quality/effectiveness, customer  satisfaction, and financial reporting. We also reviewed previous reports  conducted by the Treasury Inspector General, GAO, and others and  followed up with the agencies to see what action had been taken since the  reports were issued.
In recent years, both the Mint and BEP have had some problems in  contracting for and acquiring property and equipment. In addition, the Mint  has had problems with forecasting demand, monitoring costs, and  reporting plans and results to Congress. The Mint and BEP have generally  taken action or have begun to address the problems identified. In addition,  in commenting on a draft of this report, the Treasury Department said that  the Mint began reporting on how seigniorage not transferred to Treasury  will be used in the first quarterly report to Congress in fiscal year 2004.
subsections: section_title: Forecasting Demand
paragraphs: To gauge whether the Mint and BEP have had any operational problems in  forecasting demand for coins and currency, we determined (1) whether  there have been any shortages in coins and currency in the last 3 years and  (2) whether the agencies used validated models to forecast demand. We  also reviewed a Treasury Inspector General report on addressing demand  for the dollar coin.
The Mint was not able to fill some orders for pennies, dimes, and nickels it  received from the Fed from August 1999 to February 2000. Fed officials  said that during 1999, the Fed experienced exceptional demand for all  denominations of coins. In several regions, the demand for pennies (and  later in the year, for all other denominations) at times exceeded the Fed’s  ability to meet orders. The average number of coins flowing out of reserve  banks during 1999 was nearly 30 percent higher than it was in 1998. That  number, in turn, was about 27 percent higher than 1997. The Fed said the  strong economy and the public’s interest in collecting state quarters were  likely contributing factors to the higher coin demand. The Mint said the  shortages were caused by an unanticipated increase in coin demand  beginning in 1999; the requirement to produce the 50 state quarters  beginning in 1999; and the Fed not consolidating all of its coin orders  during this period, which resulted in some Fed branches ordering coins  when other Fed branches had a surplus of coins.
The Mint has recently added additional capacity to produce coins and has  worked with the Fed to consolidate its coin orders. The Mint and Fed have  also implemented new statistical long-range and short-range forecasting  models. There have been no shortages of currency or coins during the last 3  years.
Statistical models are used for predicting future demand for both coins and  currency. The models have been validated by a process in which past coin  and currency demand data are tested with the model to see how well the  model forecasts compare with the actual demand that occurred. For coins,  both the Fed and Mint now use statistical models to estimate future coin  demand and combine the results to predict demand. Fed and Mint officials  said there are limits to statistical models, and there is always some risk the  models will not be accurate for coin demand, given the volatility in coin use  and demand. Because the new statistical models have been in use for a  short time period, their accuracy in predicting changes in demand has not  been fully tested.
In March 2002, the Treasury Inspector General (IG) recommended that the  Mint suspend production of the new dollar coin during the balance of fiscal  year 2002 because even though the Mint had about 42 months of inventory  of dollar coins, it was still planning to produce 40 million new coins. Mint  officials said they based their production plans primarily on demand for the  new dollar coin the previous year. However, once they realized demand had  declined considerably, they decided to suspend production, even before the  IG provided the Mint with a copy of its findings.
section_title: Monitoring Production Costs
paragraphs: We used three performance indicators to evaluate whether the agencies  effectively monitor production costs: (1) Can the Mint and BEP track  production costs by plant, denomination, and cost element and compare  actual costs with standard costs? (2) Did nonmaterials costs increase  more than the rate of inflation for the last 5 years? and (3) Did the agencies  use productivity measures for equipment efficiency and labor productivity?  We also reviewed a Treasury IG report on the Mint’s cost accounting  system.
Both the Mint and BEP have implemented cost accounting systems that  track production costs by location, denomination, and cost element and  compare actual costs with targeted costs. From fiscal year 1998 through  2002, the Mint’s production cost per thousand coins, excluding metal costs,  increased 31 percent after adjusting for inflation, and BEP’s cost to  produce a thousand notes, excluding paper and ink costs, increased 4  percent after adjusting for inflation. BEP said the primary reason for its  increased cost was a 25 percent decrease in note volume during that  period, and fixed costs had to be allocated to a lower number of notes in  fiscal year 2002. The Mint said its increased cost per thousand coins was  due to higher depreciation costs and a change in the mix of coins produced  from fiscal year 1998 through 2002. Mint officials provided documentation  showing that during this period, new machinery and equipment were  bought to replace old equipment and to increase coin production capacity.  The Mint said that depreciation costs also increased because it found the  expected life of coin manufacturing equipment was shorter than what had  been estimated. According to Mint data, depreciation expenses were $9.5  million in 1998 and $19.8 million in 2002. The Mint also provided data that  showed a 17.5 percent increase in the number of full-time staff from 1998  through 2002, and that the mix of coins changed during that period. More  quarters were produced in 2002, and they are more costly to produce than  other coins that were produced in 1998. The Mint data also showed that  while the number of full-time staff rose 17.5 percent from 1998 through  2002, the number of coin equivalents produced per employee changed only  slightly (a 1 percent decrease).
Both the Mint and BEP have procedures and automated tools for assessing  equipment efficiency and labor productivity. For example, the Mint collects  data on each press for the number of coins produced and the number of  coins scrapped. These data, along with standard production numbers and  the amount of time the machine is operating, are used to compute an  efficiency measure. The Mint measures labor productivity by collecting  data on the number of coins produced per shift. It also uses data from  maintenance logbooks and an online maintenance system to monitor  failure rates and downtime of presses. BEP tracks machine efficiency, the  amount of ink needed to produce notes, and the number of notes that have  to be destroyed because of spoilage. In addition, BEP collects data on the  number of currency sheets produced by each shift.
The Treasury IG reported in September 2000 that the Mint’s newly installed  automated information system was not able to provide all the data needed  for its performance reporting requirements, including the average unit cost  of producing 1,000 coins. The Mint generally agreed with the IG’s  recommendations to better define its performance measures, refine its cost  allocations, and improve controls over data collection and reporting.  However, it said that some of the findings were to be expected because the  Mint had just implemented the new information system and a temporary  degradation of reporting capabilities was common after the  implementation of a complex system. Subsequent to the report, the Mint  showed us that it had completed actions to correct some of the deficiencies  noted by the IG and told us that the Mint is in the process of implementing  activity-based costing. Mint officials said they anticipated that activity- based costing will be operational next year.
section_title: Contracting for Goods and Services
paragraphs: To evaluate contracting at the Mint and BEP, we used three performance  indicators:  (1) Was competition used in the 10 largest procurements during  the last 3 years? (2) Did the agencies document that prices paid were fair  and reasonable for those procurements? and (3) Were reviews made in the  last 5 years to determine if it would be advantageous to outsource some  operations?  We also reviewed a Treasury assessment of the Mint’s  procurement system and our 1998 report on BEP’s procurement of  currency paper.
Although the Mint and BEP are both part of the Treasury Department, the  Mint has more flexibility in adhering to government procurement rules than  BEP has. When Congress established the Mint’s Public Enterprise Fund in  1995, the Mint was exempted from the provisions of federal law governing  procurement or public contracts for goods and services necessary for  carrying out Mint programs and operations. According to a House  Appropriations Committee report issued in connection with the 1995  legislation, the Mint was one of the federal government’s last true  production operations. The committee thought that Mint operations should  use more basic business practices.
The Mint and BEP used competition for a majority of the 10 largest  contracts at each agency. At the Mint, 6 contracts were open to  competition, 2 contracts were competed between two metals suppliers,  and 2 sole-source contracts had a justification for not using competition.  BEP issued 7 contracts open to competition; 2 sole-source contracts that  had justification for not using competition; and 1 contract issued  noncompetitively under the Javits Wagner-O’Day Act, which requires  agencies to purchase selected products and services from nonprofit  organizations employing individuals who are blind or have other  disabilities.
Government contracting officers are responsible for ensuring that the  government obtains fair and reasonable prices. This is done by either cost  or price analysis. Cost analysis is an evaluation of the separate cost  elements and proposed profit contained in an offerer’s proposal. Price  analysis is the process of examining and evaluating a prospective price  without performing cost analysis. An example of price analysis is  comparing one offer with other offers. Of the 10 Mint contracts we  reviewed, 8 contained documentation that prices or costs had been  analyzed, and 2 had little or no documentation describing how prices or  costs were analyzed. When we asked the Mint about the lack of supporting  documentation that the prices paid were fair and reasonable, Mint officials  said that the contracting officers were knowledgeable about the prices paid  in previous years on similar purchases for 1 of the 2 contracts, had  reviewed catalog prices issued for equipment in the other contract, and  were comfortable that the prices paid on the 2 contracts were fair.  However, this information was not included in the contract files. Mint  officials provided new guidance dated September 2002 regarding  contracting matters, including price analysis. The 2 contracts with  inadequate documentation of cost and price analysis were awarded before  the new guidance was issued. All of the 10 BEP contracts contained  documentation describing how price or cost analysis was conducted.
In December 2001, Treasury’s Office of Procurement reported on an  Acquisition Management Assistance Review that it had made of the Mint.  Treasury reported that the Mint did not always perform adequate research  to help identify other sources in the competitive selection process and did  not always ensure that the proper sole-source justifications were prepared  and placed in files for simplified acquisitions. The report also noted that  some Mint procurement files lacked evidence of cost or price analysis. In  response to the Treasury report, the Mint said it had developed new  procedures to conduct market research and hired additional procurement  staff, including a cost/price analyst. In subsequent communications with  the Mint, Treasury confirmed that the Mint had addressed these problems.  Treasury officials in the Office of Procurement said that they planned to  review BEP’s acquisition system in the future; however, due to a loss of  staff who were transferred to the Department of Homeland Security, they  did not know specifically when the BEP review would be scheduled.
In August 1998 we reported that because of statutory restrictions and the  unique market for currency paper, there was no competitive market in  which a number of responsible sources could compete for BEP’s currency  paper requirements. BEP said that for the most recent paper contract, it  took steps to obtain more competition, such as offering multiyear contracts  instead of contract options and allowing offerers more time to gear up for  production; nevertheless, only one proposal was received for the most  recent solicitation.
The Mint and BEP both conducted reviews from 1999 to 2003 to determine  if it would be advantageous to outsource selected operations. The Mint  provided data showing that 13 areas were identified for review and, as of  February 9, 2004, 4 Mint reviews were in progress, 5 were on hold or  canceled, 3 had not been started, and 1 was completed. The completed  review resulted in 2 custodial positions at the West Point Mint being  outsourced. The reviews in progress involve Mint-wide human resource,  accounting, and finance functions, and coin blanking/annealing/upsetting  and forklift operations at the Philadelphia and Denver Mints. BEP provided  data showing that 16 areas were identified for public-private competition  review from 1999 to 2003 and, as of February 12, 2004, 13 studies were  completed and 3 were in progress. Of the 13 completed studies, 11 resulted  in 115 full-time equivalent (FTE) positions going to private-sector sources  and 2 resulted in 40 FTE positions remaining in-house. Operations that  went to private-sector sources included tour operations, personnel  administrative support, law enforcement support services, and pest  control. The reviews not yet completed involve ink production and  custodial services.
section_title: Acquiring Property and Equipment
paragraphs: We used two performance indicators to evaluate the Mint’s and BEP’s  acquisition of property and equipment: (1) Did the agencies have a  systematic process to determine when equipment should be replaced and if  property is no longer needed? and 2) For all property and equipment  purchases made over the last 7 years that individually cost more than   $1 million, was the final amount of property or equipment acquired the  same amount as originally planned?  We also reviewed two Treasury IG  reports concerning the acquisition of property and equipment at the Mint  and BEP.
Both the Mint and BEP have systems in place to monitor the efficiency of  machines and detect machine problems and to determine if property is no  longer needed. Each quarter, plant managers at the Mint production  facilities review and report on excess personal property to Mint  headquarters. They report on excess, damaged, and obsolete equipment  that has not been disposed of, as well as assets that are being used and not  performing up to specifications. The Mint’s Office of Management Services  prepares a monthly space utilization report to track vacancy statistics for  each floor of the Mint headquarters. BEP prepares an annual status report  on the utilization and disposal of excess personal property. BEP also  performs annual reviews and semiannual updates to identify use and needs  of all capital assets used in currency production, production support,  facilities, information technology, and security. BEP also has a policy to  annually update a master space plan and a 5-year space utilization plan. In  addition, the Treasury Department reviews major Mint and BEP capital  projects. A major project is generally the acquisition of land, structures, or  equipment that have an estimated life of 2 or more years, require an  investment of $1 million or more each year, or have a total life-cycle cost of  $10 million or more. For these projects, the Mint and BEP are required to  submit to Treasury’s Capital Investment Review Board a description of the  project, an explanation of how the project meets organizational objectives,  a description of how performance will be measured, an explanation of  project costs, and a description of what alternatives were considered.
The Mint made eight acquisitions of property and equipment that cost more  than $1 million each in the period we reviewed. For seven of the eight, the  Mint acquired the same amount of property and equipment that it had  originally planned to acquire. In one acquisition, the amount of equipment  ultimately acquired was only 3 percent more than originally planned. Mint  officials said the increase was due to an accelerated requirement for  equipment needed to produce the new dollar coin, and they had not taken  the time to revise the requisition. BEP made seven acquisitions of property  and equipment that cost over $1 million each during this period. For five of  the seven, BEP acquired the same amount of property and equipment that  it originally planned to acquire. In one, BEP had planned to acquire four  offset presses but actually acquired five, and in another it had planned to  upgrade two currency inspection systems but actually made six upgrades.  BEP said that the additional presses and additional upgrades were added  because the Fed’s needs for the new currency with anti-counterfeiting  features increased while the procurements were under way, and BEP  exercised options to meet that demand. In addition, BEP noted that the  currency inspection upgrades were set up as a pilot project to minimize  risks, and that additional upgrades were ordered after the successful  completion of the pilot project. Fed officials said they encouraged BEP to  improve its automated currency inspection system capacity, and BEP  acquired an additional press to satisfy production requirements.
In March 2002, the Treasury IG reported that the Mint leased about 257,000  more square feet of space for its headquarters in Washington, D.C., than it  had originally requested. The IG recommended that the Mint Director  analyze space needs for headquarters to identify excess space and develop  a plan to use the space. The IG also recommended that the Mint Director  improve record keeping for space acquisitions; make more use of  competition; train staff in procurement; and develop a policy to use the  expertise of other agencies, such as the General Services Administration,  when making future space acquisitions. Mint officials showed us a revised  space needs analysis and revised procedures. The Mint also said that it had  leased out space it did not need. The space analysis showed that of the  381,647 square feet of space the Mint has leased in the two headquarters  buildings, 139,910 square feet, or 36.7 percent, has been subleased to other  agencies. The Mint also provided a report showing that as of February 1,  2004, 14,217 square feet of the total square feet in the two headquarters  buildings, or 3.7 percent, was vacant. The leases and subleases showed  that the Mint was recouping its leasing costs in its charges to the other  tenants. In addition, the General Services Administration (GSA) provided  data showing that a 2002 GSA lease rate for space in one of the buildings  occupied by the Mint was $4.39 per square foot higher than the 1999 lease  rate that the Mint had negotiated for space in the same building. Mint  officials said they did not develop a policy to use other agencies in future  space acquisitions because the Mint would not be leasing additional space.
In June 1999, the Treasury IG reported that BEP had purchased four  intaglio currency presses and three overprinting and packaging machines  costing about $50 million that were unnecessary and subsequently had to  be placed into storage. The IG said that BEP had acquired the presses  before it completed a study of the use of the new presses and had not  analyzed the labor union opposition to the presses. After the audit was  completed, the IG noted that demand for currency increased, and the least  expensive option would be for BEP to install the presses in the Washington,  D.C., facility. The IG recommended that the BEP Director improve its  evaluations of equipment needs, perform pilot studies before making major  manufacturing operations changes, better protect the stored equipment,  and reconsider where to use the presses. In response to the report, BEP  established a capital investment committee to evaluate equipment  requirements and justify the need for future equipment; agreed to perform  pilot studies, when applicable; and installed the presses in the Washington,  D.C., facility. The IG concurred with BEP’s actions.
section_title: Reporting Plans and Results to Congress
paragraphs: We used two performance indicators to measure the adequacy of Mint and  BEP reporting to Congress: (1) Were congressional staff satisfied with the  reporting by Mint and BEP? and 2) Have the Mint and BEP submitted all  required reports for the last 5 years?  We also reviewed problems that were  identified in congressional hearings regarding the Mint’s reporting of the  advertising campaign for the new dollar coin and in the independent  auditors’ reports for the Mint’s 1998 to 2002 financial statements.
We interviewed six current and former congressional committee staff  involved with coin and currency matters on their satisfaction with  reporting done by the Mint and BEP. In general, staff were satisfied with  BEP’s reporting of budget and program information, but some said the Mint  had not provided timely information on significant programs and activities  in the past. An example cited was the Mint’s failure to give Congress  advance notice of closing the Philadelphia Mint in February 2002 for  repairs. However, the staff also stated that the Mint’s reporting had  improved in the last 2 years under the new Director of the Mint.
The Mint and BEP are both required to disclose the results of their  operations in a number of reports to Congress and have done so. For  example, they are required to estimate costs and revenues in the Treasury  budget submissions annually and to issue financial statements that are  subsequently audited. The Mint and BEP have historically prepared  financial statements that comply with generally accepted accounting  principles set forth by the Financial Accounting Standards Board, the body  that sets accounting standards for private sector entities. The Federal  Accounting Standards Advisory Board, which sets accounting standards  for federal entities, has stated that federal government corporations and  certain other federal entities, such as the Mint and BEP, can continue to  follow the Financial Accounting Standards Board guidance.
When Congress established the Mint’s Public Enterprise Fund in 1996 and  exempted the Mint from government procurement rules, the House  Appropriations Committee noted that Congress was not abdicating its  oversight of Mint operations. The committee report stated that the Mint  was required to submit quarterly reports on the implementation of the fund  and its impact on operations. The law stated that the Mint was required to  provide an annual report on the amounts it transferred to Treasury for  deposit as miscellaneous receipts, a statement of the amount in the fund  that exceeds the estimated operating costs for the following year, and an  explanation of the specific purposes for which amounts were being  retained. In explaining this requirement, the House report accompanying  the legislation did not refer to the following year and stated that the report  submitted to Congress shall include an explanation of the specific purposes  for which the excess amounts in the fund shall be used. Mint officials said  the annual reports required by the act have not been filed separately, but  the information is provided in the Mint’s annual reports on operations and  that any seigniorage collected that was not transferred to Treasury was  retained for future operational costs. In reviewing the annual Mint reports,  we noted they included the amount of seigniorage collected and the  amount that was transferred to Treasury, but they did not include  information on how retained amounts will specifically be used. Mint  officials agreed that the total amount of seigniorage collected could be  better reconciled with how seigniorage was used.
The annual Mint and BEP reports also include opinions on their financial  statements from their independent auditors and reports on their internal  controls and compliance with laws and regulations. The Mint and BEP both  issued annual reports containing financial statements for fiscal years 1998  through 2002, and both received unqualified (clean) audit opinions from  their independent auditors. The reports for all 5 years contained the  auditors’ reports on internal controls and compliance with laws and  regulations for the Mint and BEP. BEP audit reports had no reportable  conditions and no reported instances of noncompliance with laws and  regulations. The Mint, however, had one reportable condition of internal  controls in the 1998, 1999, and 2000 audit reports and three reportable  conditions in the 2001 and 2002 reports. Most of the reported problems at  the Mint dealt with various information system controls, such as  inadequate disaster recovery plans, inadequate access controls, unclear  definitions of business processes, and inadequate system documentation.  In addition, because of these internal control weaknesses, the independent  auditor reported that the Mint did not comply with Office of Management  and Budget (OMB) circulars on federal financial management in 1998, 2001,  and 2002. Mint officials said they have taken action to correct each of the  reported weaknesses and believe they were all mitigated by the end of  fiscal year 2003. The Mint provided copies of directives, procedures, risk  assessments, and other documentation of actions it has taken or started  that, if effectively implemented, should address the problems that have  been reported. The Mint also provided a copy of the independent auditor’s  report for the fiscal year 2003 audit that stated no material internal control  weaknesses were found.
As we reported in September 2002, the act that authorized the new dollar  coin required Treasury to report to Congress by March 31, 2001, on the  progress of the new dollar coin marketing program. The Mint submitted a  report to Congress on March 30, 2001. In reports accompanying the 2002  Treasury and general government appropriations bill, the Senate and House  Committees on Appropriations expressed concern that the Mint’s 2001  report to Congress did not adequately describe the nature and extent to  which the new dollar coin was being used. The House report directed the  Mint to submit a new report by March 31, 2002. In addition, the Senate  report accompanying the 2002 Treasury appropriations expressed concern  that the committee had not received information on the contracts and  agreements between the Mint and others mentioned in the Mint’s 2001  report. The Mint submitted its second report on March 29, 2002. We  reported that the 2002 report gave much more information on the  marketing efforts for the dollar coin and the barriers to increasing use of  the new coin that the 2001 report had failed to provide, but the 2002 report  did not address what would be done to overcome the barriers or how  efforts to overcome the barriers would affect circulation. Mint officials said  that they had contracted for a study of the barriers to the dollar coin and  expected the study to be done later this year. We reviewed the Mint’s  budget submission for fiscal year 2004 and saw that no expenditures were  planned for promoting the dollar coin that year, consistent with our prior  recommendation.
section_title: Conclusions
paragraphs: Although revenues associated with the issuance of coins and currency  reduce the amount of borrowing from the public to finance government  operations, the budgetary and accounting treatment of the revenues differs.  The issuance of coins results in an avoidance of government borrowing,  but the amount of borrowing displaced by coins and the interest avoided  through reduced borrowings are not quantified or visible in the federal  budget. In contrast, the issuance of currency results in the Fed holding  securities that would otherwise be held by the public. The amount of  interest paid to the Fed, and subsequently returned by the Fed to Treasury,  is quantified and visible in the budget. The net effect on the budget of the  treatment of costs and revenues associated with the issuance of either  coins or currency is basically the same.
The Mint and BEP have generally taken action to address the operational  problems identified in the past few years by Treasury’s Inspector General  and others. The exception is the requirement that the Mint report each year  on the specific purposes for which seigniorage retained will be used.  Congress intended for the Mint to report this information when it  established the Mint’s Public Enterprise Fund in 1995 and did not receive  all of the required information until 2004. We believe the Mint should report  this information each year in its annual report to Congress on operations.
section_title: Recommendation for Executive Action
paragraphs: To comply with the purpose of the reporting requirement of the Public  Enterprise Fund, we recommend that the Secretary of the Treasury ensure  that the Director of the Mint identifies whether amounts are being retained  in excess of the estimated operating costs of the following year and, if so,  explains how they will be used in reports to Congress each year.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Secretary of the Treasury and to  the Chairman of the Federal Reserve Board for their review and comment.  We received written comments, reproduced in appendix III, from the  Acting Chief Financial Officer of the Department of the Treasury. We also  received technical comments from the Director of Reserve Bank  Operations and Payment Systems of the Federal Reserve, which we  incorporated, where appropriate.
The Treasury Department stated that the Mint generally agreed with the  information in the report related to the budgetary, accounting, and  reporting treatment for coins and currency and expressed appreciation for  the report’s discussion of its operational improvements. With respect to our  recommendation, the Mint started providing additional information in its  first quarter report for fiscal year 2004 on the Public Enterprise Fund. We  reviewed that report and agreed that it responded to our recommendation  to provide a more complete explanation of specific purposes for which  retained earnings will be used by the Mint. The Treasury official also stated  that the law only required a report on the amount of funds retained that  exceeded the following year’s estimated operating costs. We revised the  report to be more clear as to the law’s requirements and added the  legislative history that does not refer to the following year’s estimated  operating costs. We also revised our recommendation to reflect this. The  Treasury official also provided some clarifying language from BEP that we  included in this report.
We are sending copies of this report to the Chairmen and Ranking Minority  Members of the Senate Committee on Banking, Housing, and Urban Affairs  and the House Committee on Financial Services; the Chairman of the  Board of Governors of the Federal Reserve System; the Secretary of the  Treasury; the Directors of OMB, the Mint and BEP; and other interested  parties. We will also make copies available to others upon request. In  addition, the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
Major contributors to this report were John Baldwin, Christine Bonham,  Tonnye Conner-White, Brad Dubbs, Fred Lyles, Susan Michal-Smith, Jose  Oyola, Paula Rascona, and Kathleen Scholl. If you have any questions,  please contact me at (202) 512-2834 or at ungarb@gao.gov.
section_title: Objectives, Scope, and Methodology
paragraphs: To better understand how the nation’s coins and currency are produced  and issued, we reviewed (1) how the production costs of and earnings from  coin and currency are budgeted and accounted for and (2) whether there  are any operational problems at the Mint and BEP needing further action.
To determine how production costs and earnings from coin and currency  are budgeted and accounted for, we reviewed the history of coins and  currency in the United States and the agencies involved in producing and  distributing coins and currency; legislation and accompanying hearings and  reports concerning coins and currency; the U.S. budget for the last 5 years;  financial reports of the Fed; the consolidated financial statements of the  Department of the Treasury for the last 5 years; annual reports for the last 5  years issued by the Federal Reserve System (Fed), the Mint and the Bureau  of Engraving and Printing (BEP); accounting guidance issued by the  Financial Accounting Standards Board and the Federal Accounting  Standards Advisory Board; and budgeting guidance issued by the Office of  Management and Budget (OMB). We traced the transactional flows of the  budgetary and accounting treatment for coins and currency issuance  through the 2002 U.S. budget and Treasury’s consolidated financial  statements. We interviewed officials at the Fed, OMB, Treasury, BEP, and  the Mint.
To determine whether any operational problems at the Mint and BEP  warrant further action, we agreed with your staffs to concentrate our work  in the following operational areas: forecasting demand for coins and  currency, monitoring production costs, contracting for goods and services,  acquiring property and equipment, and reporting operational plans and  results to Congress. For each operational area, we obtained and reviewed  relevant GAO, Treasury Inspector General, Treasury Office of  Procurement, financial audit, and other reports to Congress. Because we  did not have the resources to extensively review all areas, we also selected  commonly used measures of performance and obtained information from  BEP and the Mint to determine how they performed for each measure. In  selecting the performance measures, we judgmentally selected indicators  that would generally address the cost/efficiency, quality/effectiveness,  customer satisfaction, and financial reporting. For example, in contracting,  we selected as performance measures the agencies’ use of competition for  major acquisitions and how they determined that the prices paid were fair  and reasonable. Because of resource constraints, we used judgmental  samples for some of the measures. For forecasting demand, we selected a  5-year period to determine if there were any coins or currency shortages.  We selected 5 years as the period to review for monitoring production  costs. For contracting, we looked at the 10 largest procurements made by  the Mint and BEP during the last 3 years. We looked at property and  equipment purchases made over the last 7 years that individually cost over  $1 million. For reporting to Congress, we selected reports issued in the last  5 years.
In determining how the Mint and BEP performed for the indicators, we  obtained and reviewed documents from the Mint, BEP, and the Fed  regarding coin and currency orders and deliveries, models used to forecast  demand, cost accounting reports, procurement solicitations, justifications  for sole-source contracts, cost and price analysis, lease agreements, annual  performance reports for the Mint and BEP, and audit reports of Mint and  BEP financial statements. We analyzed the documentation to determine  how the Mint and BEP performed for each of the measures and to  determine the possible causes. We discussed the performance of the Mint  and BEP measures with BEP, Mint, Fed, Treasury, and OMB officials.
We performed our work in accordance with generally accepted government  auditing standards from September 2002 through March 2004 in  Washington, D.C.
section_title: History of Money in the United States
paragraphs: Money came about to replace bartering in the buying and selling of goods  and services. Money serves as a convenient way to exchange goods and  services by creating a medium of exchange, establishing a common unit of  account, and creating a store of value that allows transactions to be  deferred into the future. Money is what people will accept to carry out  these functions.
Before the United States declared its independence from Great Britain in  1776, the United States followed the British monetary system. British  money, as a medium of exchange, was scarce, and the individual colonies  began to issue their own currency. Public warehouses in some of the  colonies issued certificates representing that a specified amount and  quality of commodities, such as tobacco, had been weighed and graded.  These certificates, as well as certificates for other commodities, circulated  from hand to hand. These bearer certificates were an early form of paper  money and avoided the need for each owner to sign over a note for the  payment of debts. The commodity backing the certificates became a  reserve currency that did not pass from hand to hand, but could be  delivered on demand if required. The colonies tried a variety of paper  money arrangements, but in many cases the paper money was a promise to  pay in coin at a future date or was backed by land. Also, foreign coins were  used. In 1764, the British completely banned paper money in the colonies  because some colonies had issued excessive quantities of paper money,  which caused inflation. The constitutional struggle between Britain and the  colonies over the right to issue paper money was a factor in provoking the  American Revolution. To finance the Revolutionary War, the Continental  Congress issued paper continental dollars, as well as some coins. The  continental dollar, as well as paper money issued by the colonies,  depreciated rapidly during the war.
Although under the Constitution the federal government has the exclusive  right to issue coins, most money used until the Civil War was in the form of  paper promissory notes, known as banknotes, issued by private banks that  were chartered by the states. Banknotes were generally issued in a bearer  form, promising to pay to the holder gold or silver on demand. Individuals  with surplus stocks of gold deposited, or lent, their commodity to banks,  which paid interest. Banks created both assets and liabilities by creating  and issuing bearer notes, or money, to borrowers, who in turn issued  interest-bearing notes back to the bank in the form of a loan agreement.
For the bank, the notes became a liability and the loan agreement an asset.  Generally, banks were allowed to create paper money on their physical  reserve of about 5 times greater than they actually possessed. Therefore,  the total amount of money in the system became much larger than the gold  used for monetary purposes.
The banknotes were supposed to be convertible, on demand, to gold or  silver. State bank examiners were to assure and certify that banks had  enough gold or silver on hand to redeem their outstanding currency.  However, this was not always done and many banknote holders found  themselves stuck with worthless paper. Each state-chartered bank could  issue currency with its own design. Because designs were not consistent  and there was no central control over the issuance of currency,  counterfeiters saw opportunities to deceive the public. By 1860, as much as  one-third of currency in circulation may have been counterfeit, leading to  the creation of the U.S. Secret Service.
Partly because of the counterfeit problem and partly to obtain financing,  four different laws were enacted during the Civil War: (1) an 1862 act  establishing Treasury notes, (2) an 1863 National Banking Act, (3) an 1864  National Banking Act, and (4) an 1865 act imposing a 10 percent tax on  state banknote issues. The 1862 act authorized the Treasury to issue  currency notes in such form as the Secretary directed; the notes were  printed in green ink and commonly referred to as greenbacks. Greenbacks  were not backed by gold or silver but by the federal government, which put  the U.S. on a fiat monetary standard.
The 1863 National Bank Act established a system of federally chartered  national banks, each of which was given the power to issue standardized  national banknotes secured by the deposit of United States bonds. It also  established the Comptroller of the Currency, whose job was to supervise  the new banking system through regulations and periodic bank  examinations. For each $90 of notes they issued, national banks were  required to purchase $100 in government bonds to be deposited for  safekeeping. In contrast to the banknotes issued by the private banks  supervised by the states, the national banknotes were uniform in design.
The 1864 National Banking Act required banks to hold reserves of gold or,  in some cases, deposits at other banks as a fraction of their liabilities.  Government bonds continued to be required to back note issues.
The 1865 act imposed a 10 percent tax on state-chartered banknotes and  assured that state banks could no longer deprive the federal government of  potential revenues from bond sales to federally chartered banks. However,  checking accounts were developed around this period, substantially  reducing the need for banknotes and allowing to a great extent the state- chartered banks to avoid the banknote tax.
By 1866, the U.S. currency supply consisted of legal tender money issued  by the federal government in the form of greenbacks and banknotes issued  by national banks and secured by U.S. government bonds. From the Civil  War to 1879, Congress made greenbacks and national banknotes  redeemable in gold and silver coin. The Coinage Act of 1873 set the terms  of convertibility and moved the U.S. from a bimetallic (gold and silver)  standard to a gold standard. Another type of paper currency, the silver  certificate, was authorized in 1878 when the country’s economy was  booming and the demand for silver coins in daily business surpassed the  supply. A silver certificate certified to the holder that there was a specified  amount of silver on deposit in the United States Treasury that would be  paid to the bearer of the bill on demand.
In 1913, the Federal Reserve Act established the Federal Reserve Board of  Governors, as well as Federal Reserve banks as the nation’s central bank  and gave the Fed authority to issue Federal Reserve notes as currency for  the United States. National banks became members and shareholders of  the Federal Reserve System. At that time, the law stipulated that Federal  Reserve notes were obligations of the United States and were redeemable  in gold on demand at the Treasury Department, or in gold or lawful money  at any Federal Reserve bank. Initially, Federal Reserve notes were not legal  tender in private debts. The Federal Reserve banks were required to  maintain reserves in gold of not less than 40 percent of Federal Reserve  notes in circulation. Today, each Federal Reserve bank must hold  collateral equal to at least 100 percent of the value of the currency it issues.  The reserve banks back up the notes primarily with Treasury securities.  Therefore, the Fed issues noninterest bearing obligations (currency) and  uses the proceeds to acquire interest-bearing assets.
Before the Federal Reserve Act was passed, currency in circulation could  not always accommodate changes in demand that arose from changes in  seasonal and cyclical factors and periods of financial crisis. For example, in  the economic panic of 1907, national banks were not able to issue more  currency because they were not able to obtain further bonds until the  government issued more bonds tied to the backing of the currency, but the  Treasury at the time had a surplus of currency and did not need to borrow  money. The Federal Reserve Act remedied this problem by mandating an  elastic currency that would expand and contract based on public demand.  As public demand changed, depository institutions would either order  currency from or deposit surplus currency with the Federal Reserve banks.
In 1920, Federal Reserve notes constituted about half of the currency in  circulation. The other half was made up of gold certificates and national  banknotes (which were retired in the 1930s), silver certificates (which  were retired in the 1960s), and U.S. notes (which were last produced in  1971). Since 1971, the Federal Reserve has been the sole note-issuing  authority in the United States.
During the 19th century, many countries introduced laws to regulate the  activities of commercial banks and restrict some of their freedoms due to  bank panics and failures. The appearance of government-issued banknotes  reflects these changes.
The National Emergency Banking Act of 1933 declared that Federal  Reserve notes were to be considered legal tender for all public and private  debts. The dollar was no longer tied to any commodity, such as gold. In  1934, the Gold Reserve Act stipulated that all gold coin be withdrawn from  circulation and formed into gold bars. The Coinage Act of 1965 restated  earlier legislation making all coins and currencies of the U.S., regardless of  when coined or issued, legal tender for all debts, public and private, public  charges, taxes, duties, and dues. The law was intended to eliminate silver  as a component of our coinage system. In 1971, the federal government  stopped supplying gold to foreign central banks, and in 1973 the U.S.  officially abandoned the gold standard.
section_title: Comments from the Department of the Treasury
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