U.S. Coins: Benefits and Considerations for Replacing the $1 Note with a $1 Coin
Published: 2012-11-29T00:00:00

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 countries have replaced lower-denomination notes with coins to obtain a financial benefit, among other reasons. Six times over the past 22 years, GAO has reported that replacing the $1 note with a $1 coin would provide a net benefit to the federal government of hundreds of millions of dollars annually.
This testimony provides information on what GAOs most recent work in 2011 and 2012 found regarding (1) the net benefit to the government of replacing the $1 note with a $1 coin, (2) stakeholder views on considerations for the private sector and the public in making such a replacement, and (3) the experiences of other countries in replacing small-denomination notes with coins. This testimony is based on previous GAO reports. To perform that work, GAO constructed an economic model to assess the net benefit to the government. GAO also interviewed officials from the Federal Reserve and Treasury Department, currency experts, officials from Canada and the United Kingdom, and representatives of U.S. industries that could be affected by currency changes.
section_title: What GAO Found
paragraphs: GAO reported in February 2012 that replacing $1 notes with $1 coins could potentially provide $4.4 billion in net benefits to the federal government over 30 years. The overall net benefit was due solely to increased seigniorage and not to reduced production costs. Seigniorage is the difference between the cost of producing coins or notes and their face value; it reduces government borrowing and interest costs, resulting in a financial benefit to the government. GAOs estimate takes into account processing and production changes that occurred in 2011, including the Federal Reserves use of new equipment to determine the quality and authenticity of notes, which has increased the expected life of the note thereby reducing the costs of circulating a note over 30 years. (The $1 note is expected to last 4.7 years and the $1 coin 30 years.) Like all estimates, there are uncertainties surrounding GAOs estimate, especially since the costs of the replacement occur in the first several years and can be estimated with more certainty than the benefits, which are less certain because they occur further in the future. Moreover, changes to the inputs and assumptions GAO used in the estimate could significantly increase or decrease the results. For example, if the public relies more heavily on electronic payments in the future, the demand for cash could be lower than GAO estimated and, as a result, the net benefit would be lower.
In March 2011, GAO identified potential shorter- and longer-term costs to the private sector that could result from the replacement of the $1 note with a $1 coin. Industry stakeholders indicated that they would initially incur costs to modify equipment and add storage and that later their costs to process and transport coins would increase. However, others, such as some transit agencies, have already made the transition to accept $1 coins and would not incur such costs. In addition, for such a replacement to be successful, the $1 coin would have to be widely accepted and used by the public. Nationwide opinion polls over the last decade have indicated lack of public acceptance of the $1 coin. Efforts to increase the circulation and public acceptance of the $1 coins have not succeeded, in part, because the $1 note has remained in circulation.
Over the last 48 years, many countries, including Canada and the United Kingdom, have replaced low denomination notes with coins because of expected cost savings, among other reasons. The Canadian government, for example, saved $450 million (Canadian) over 5 years by converting to the $1 coin. Canada and the United Kingdom found that stopping production of the note combined with stakeholder outreach and public education were important to overcome public resistance, which dissipated within a few years after transitioning to the low denomination coins.
section_title: What GAO Recommends
paragraphs: GAO has recommended in prior work that Congress replace the $1 note with a $1 coin. GAO continues to believe that replacing the $1 note with a coin is likely to provide a financial benefit to the federal government if the note is eliminated and negative public reaction is effectively managed through stakeholder outreach and public education.

section_title: Letter
paragraphs: I am pleased to be here today to participate in your hearing that examines  the potential savings from replacing the $1 note with the $1 coin. GAO  has reported six times over the last 22 years that replacing the $1 note  with the $1 coin would result in net financial benefits to the government of  hundreds of millions of dollars annually.
In our prior reports, we recommended that Congress proceed with  replacing the $1 note with the $1 coin. We continue to believe that  replacing the note with a coin is likely to provide a financial benefit to the  government if the note is eliminated and negative public reaction is  effectively managed through stakeholder outreach and public education.  However, we realize that replacing the $1 note with the $1 coin is  controversial. We have previously reported on public opposition to using  the $1 coin and the challenges that private businesses such as vending  machine owners would face if such a transition were undertaken. Several  foreign countries have already transitioned from small note  denominations to coins, for a number of reasons, including the greater  durability of coins and inflationary pressures.
My statement today addresses (1) our most recent estimates of the net  financial benefit from replacing the $1 note with a $1 coin, (2) the long- standing public and private sector considerations of such a replacement,  and (3) the experiences of other countries with replacing currency. This  statement is based primarily on our most recent reports issued in March  2011 and February 2012. For our March 2011 report, to estimate the net  financial benefit to the government, we constructed an economic model  with data from the Federal Reserve, and the Department of the  Treasury’s (Treasury Department) Bureau of Engraving and Printing and  the United States Mint (Mint). We interviewed government officials from  Canada and the United Kingdom to obtain information about their  experiences with replacing notes with coins and used the information to  develop some of the assumptions used in our model. To determine the  effects such a replacement would have on the public and on private  business, we identified and interviewed officials from industries and  organizations that could be affected by currency changes. For our  February 2012 report, we updated our model to reflect actions taken by  the Federal Reserve and the Treasury Department. In its most basic form,  the model measures the difference between the status quo scenario–– where $1 coins are available, but $1 notes predominate––and an  alternative replacement scenario in which the $1 note is replaced with the  $1 coin, the $1 notes are phased out, and $1 coins are produced and  issued into circulation at a rate to match the way the public uses coins.  Although we recognize that such a replacement would have benefits and  costs for the public and for private businesses, the model was designed  to estimate the net benefit and costs solely to the federal government and  did not quantify the effects on the public or on private business. More  detailed information on our objectives, scope, and methodology for this   We conducted the work on  work can be found in the issued reports.which this statement is based in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Potential Benefits from Replacing the $1 Note with the $1 Coin
paragraphs: In February 2012, we reported that the increased seigniorage resulting  from replacing $1 notes with $1 coins could potentially offer $4.4 billion in  net benefits to the government over 30 years. We determined that  seigniorage was the sole source of the net benefits and not lower  production costs due to switching to the coin, which lasts much longer  than a note. Seigniorage is the financial gain the federal government  realizes when it issues notes or coins because both forms of currency  usually cost less to produce than their face value. This gain equals the  difference between the face value of currency and its costs of production,  which reflects a financial transfer to the federal government because it  reduces the government’s need to raise revenues through borrowing.  With less borrowing, the government pays less interest over time,  resulting in a financial benefit.
The replacement scenario of our 2012 estimate assumed the production  of $1 notes would stop immediately followed by a 4-year transition period  during which worn and unfit $1 notes would gradually be removed from  circulation. Based on information provided by the Mint, we also assumed  that the Mint would convert existing equipment to increase its production  capability for $1 coins during the first year and that it would take 4 years  for the Mint to produce enough coins to replace the currently outstanding  $1 notes. Our assumptions covered a range of factors, but key among  these was a replacement ratio of 1.5 coins to 1 note to take into  consideration the fact that coins circulate with less frequency than notes  and therefore a larger number are required in circulation. Other key  assumptions included 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 spans of coins and notes. We projected  our analyses over 30 years to be consistent with previous GAO analyses  and because that period roughly coincides with the life expectancy of the  $1 coin.
As shown in figure 1, we found that the net benefit accruing each year  varied considerably over the 30 years. More specifically, across the first  10 years of our 30-year analysis, replacing the $1 note with a $1 coin  would result in a $531 million net loss or approximately $53 million per  year in net loss to the government. The early net loss would be due in  part to the up-front costs to the Mint of increasing its coin production  during the transition, together with the limited interest expense the  government would avoid in the first few years after replacement began.
This estimate differs from our 2011 estimate, which found that  replacement would result in a net benefit of about $5.5 billion over 30  years (an average of about $184 million per year) because the 2012  estimate takes into account two key actions that occurred since our 2011  report, specifically:  In April 2011, the Federal Reserve began using new equipment to  process notes, which has increased the expected life of the $1 note to  an average of 56 months (or 4.7 years), according to the Federal  Reserve, compared with the 40 months we used in our 2011  analysis.over 30 years and thus reduces the expected net benefits of replacing  the $1 note with a $1 coin.
The longer note life reduces the costs of circulating a note  In December 2011, the Treasury Department announced that it would  take steps to eliminate the overproduction of dollar coins by relying on  the approximately 1.4 billion $1 coins stored with the Federal Reserve  as of September 30, 2011, to meet the relatively small transactional  demand for dollar coins. This new policy would reduce the cost  associated with producing $1 coins that we estimated in the status  quo scenario and, therefore, would reduce the net benefit, which is  the difference in the estimated costs between the status quo scenario  and the replacement scenario.
However, like all estimates, there are uncertainties involved in developing  these analyses. In particular, while the up-front costs to the Mint of  increasing its coin production during the transition is reasonably certain–– in large part because it is closer in time––the longer-term benefits,  particularly those occurring in the later years, involve greater uncertainty  because of unforeseen circumstances that could occur farther into the  future. Nonetheless, looking at a longer time period allows for trends to be  seen.
Moreover, changes to the inputs and assumptions used in our analysis  could significantly change the estimated net benefit. For example, in  2011, we compared our status quo scenario to an alternative scenario in  which the growing use of electronic payments—such as making  payments with a cell phone—results in a lower demand for cash and  lower net benefit. If Americans come to rely more heavily on electronic  payments, the demand for cash could grow more slowly than we  assumed or even decrease. By reducing the public’s demand for $1  currency by 20 percent in this alternative scenario, we found that the net  benefit to the government would decrease to about $3.4 billion over 30  years.
In another scenario, we reported in 2012 that if interest savings because  of seigniorage were not considered, a net loss of approximately $1.8  billion would accrue during the first 10 years for an average cost of $179  million per year—or $2.8 billion net loss over 30 years. While this  scenario suggests that there would be no net benefits from switching to a  $1 coin, we believe that the interest savings related to seigniorage, which  is a result of issuing currency, cannot be set aside because the interest  savings reflects a monetary benefit to the government.
Our estimates of the discounted net benefit to the government of  replacing the $1 note with a $1 coin differ 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.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 recent analyses.
section_title: Considerations Moving Forward
paragraphs: Two factors merit consideration moving forward. The first factor is the  effect of a currency change on the private sector. Our 2011 and 2012  reports considered only the fiscal effect on the government. Because we  found no quantitative estimates that could be evaluated or modeled, our  estimate did not consider factors such as the broader societal impact of  replacing the $1 note with a $1 coin or attempt to quantify the costs to the  private sector. Based on our interviews with stakeholders representing a  variety of cash-intensive industries, we believe that the costs and benefits  to the private sector should be carefully weighed since some costs could  be substantial. In 2011 we reported that stakeholders identified potential  shorter- and longer-term costs that would likely result from the  replacement. Specifically, shorter-term costs would be those costs  involved in adapting to the transition such as modifying vending  machines, cash-register drawers, and night-depository equipment to  accept $1 coins. Such costs would also include the need to purchase or  adapt the processing equipment that businesses may need, such as coin- counting and coin-wrapping machines. Longer-term costs would be those  costs that would permanently increase the cost of doing business, such  as the increased transportation and storage costs for the heavier and  more voluminous coins as compared to notes, and processing costs.  These costs would likely be passed on to the customer and the public at  large through, for example, higher prices or fees. Most stakeholders we  interviewed said, however, that they could not easily quantify the  magnitude of these costs, and the majority indicated that they would need  1 to 2 years to make the transition from $1 notes to $1 coins.
In contrast to the stakeholders who said that a replacement would mean  higher costs for their businesses, stakeholders from the vending machine  industry and public transit said that the changeover might have only a  minimal impact on them. For example, 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 $1 coins. In addition, according to transit  industry officials, the impact on the transit industry would be minimal  since transit agencies that receive federal funds were required under the  Presidential $1 Coin Act of 2005 to accept and distribute $1 coins.
The second factor that merits consideration is public acceptance. Our  2012 estimate assumes that the $1 coin would be widely accepted and  used by the public. In 2002, we conducted a nationwide public opinion  survey, and we 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 more coins. 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 from 64  percent to 37 percent. Yet, 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. We have noted in past reports that efforts to increase  the circulation and public acceptance of the $1 coins—such as changes  to the color of the $1 coin and new coin designs—have not succeeded, in  part, because the $1 note has remained in circulation.
section_title: Experiences of Other Countries
paragraphs: Over the last 48 years, Australia, Canada, France, Japan, the  Netherlands, New Zealand, Norway, Russia, Spain, and the United  Kingdom, among others, have replaced lower-denomination notes with  coins. The rationales for replacing notes with coins cited by foreign  government officials and experts include the cost savings to governments  derived from lower production costs and the decline over time of the  purchasing power of currency because of inflation. For example,  Canada replaced its $1 and $2 notes with coins in 1987 and 1996,  respectively. Canadian officials determined that the conversion to the $1  coin saved the Canadian government $450 million (Canadian) between  1987 and 1991 because it no longer had to regularly replace worn out $1  notes. However, Canadian $1 notes did not last as long as $1 notes in the  United States currently do.
Stopping production of the note and actions to overcome public  resistance have been important in Canada and the United Kingdom as  the governments transitioned from a note to a coin. While observing that  the public was resistant at first, Canadian and United Kingdom officials  said that with the combination of stakeholder outreach, public relations  efforts, and ending production and issuance of the notes, public  dissatisfaction dissipated within a few years. Canada undertook several  efforts to prepare the public and businesses for the transition to the coin.  For example, the Royal Canadian Mint reached out to stakeholders in the  retail business community to ensure that they were aware of the scope of  the change and surveyed public opinion about using coins instead of  notes and the perceived impact on consumer transactions. The Canadian  Mint also proactively worked with large coin usage industries, such as  vending and parking enterprises, to facilitate conversion of their  equipment, and conducted a public relations campaign to advise the  public of the cost savings that would result from the switch. According to  Canadian officials, the $1 and $2 coins were the most popular coins in  circulation and were heavily used by businesses and the public. In our  analysis of replacing the $1 note with a $1 coin, we assumed that the  U.S. government would conduct a public awareness campaign to inform  the public during the first year of the transition and assigned a value of  approximately $7.8 million for that effort.
In addition, some countries have used a transition period to gradually  introduce new coins or currency. For example, the United Kingdom  issued the £1 coin in April 1983 and continued to simultaneously issue  the £1 note until December 1984. Similarly, Canada issued the $1 coin in  1987 and ceased issuing the $1 note in 1989.
section_title: Concluding Observations
paragraphs: In our prior reports, we recommended that Congress proceed with  replacing the $1 note with the $1 coin. We continue to believe that the  government would receive a financial benefit from making the  replacement. However, this finding comes with several caveats. First, the  costs are immediate and certain while the benefits are further in the future  and more uncertain. The uncertainty comes, in part, from the uncertainty  surrounding key assumptions like the future demand for cash. Second,  the benefits derive from seigniorage, a transfer from the public, and not a  cost-saving change in production. Third, these are benefits to the  government and not necessarily to the public at large. In fact, public  opinion has consistently been opposed to the $1 coin. Keeping those  caveats in mind, many other countries have successfully replaced low  denomination notes with coins, even when initially faced with public  opposition.
Chairman Paul, Ranking Member Clay, and members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to answer any questions at this time.
section_title: GAO Contact and Staff Acknowledgements
paragraphs: For further information on this testimony, please contact Lorelei St.  James, at (202) 512-2834 or stjamesl@gao.gov. In addition, contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement. Individuals making key  contributions to this testimony include Teresa Spisak (Assistant Director),  Lindsay Bach, Amy Abramowitz, Patrick Dudley, and David Hooper.
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