In March 2011, the Government Accountability Office (GAO) had issued a report indicating that replacing $1 bills with $1 coins would provide a financial net benefit to the government of $5.5 billion over 30 years. This month, the GAO has issued a new report revising their estimated benefit to $4.4 billion over 30 years. They have also examined the potential benefit or cost under three alternative scenarios.
In the past 22 years, the GAO has now issued six reports on replacing the $1 bill with $1 coins, which have each estimated a financial benefit to the government over the longer term. During this time, the United States has introduced the Sacagawea Dollar, Presidential Dollar, and revamped the first series to become the Native American Dollar. The $1 coins from each series were allowed to co-circulate with $1 bills, rather than replacing them. This has served to impede the circulation and public acceptance of the $1 coins.
In 2002, the production of Sacagawea Dollars for circulation was suspended. In December 2011, the production of Presidential Dollars for circulation was also suspended. Henceforth, the production of Native American Dollars will most likely also be significantly reduced, since mintages for this series have been effectively driven by overall $1 coin production levels.
The newly issued GAO report (pdf link to full report) took into account several key changes that have occurred since the previous report. First, the expected life span of the $1 bill has increased from 40 months to an average of 56 months due to the use of new note processing equipment. Second, the Treasury Department has announced the suspension of production of Presidential $1 coins for circulation. Third, the estimates for future government borrowing costs have declined. Each of these developments has to served to reduce the expected benefits of replacing the $1 note with the $1 coin.
Taking into account these developments, the GAO’s primary analysis found net benefit to the government of $4.4 billion over the course of 30 years, representing an average yearly discounted net benefit of $146 million. A net loss would be realized for six out of the first seven years, with annual benefits occurring in all subsequent years. The net benefits occur due to the increased seigniorage driven by the greater number of coins than notes that would necessary within circulation to meet demand.
The GAO was asked to provide estimates of the specific benefit or loss to the government from replacing the $1 note with a $1 coin under alternative scenarios. These scenarios included a 10-year period under the same assumptions, a 10-year period with the interest savings due to seigniorage excluded, and a 10-year period with a lower replacement ratio of coins.
An evaluation of the replacement of the $1 note with the $1 coin over a 10-year period resulted in a net loss to the government of $531 million. Annual losses were estimated for six out of the first seven years, with annual benefits realized from the eighth year onwards.
In the scenario which excludes interest savings due to seigniorage, a net loss to the government of $1.8 billion is realized over a 10-year period. Annual losses were estimated for nine out of the ten years covered.
A final alternate scenario assumed that the replacement ratio of $1 notes to $1 coins would be 1-to-1. For the original analysis it had been assumed that each $1 note would be replaced by 1.5 $1 coins in circulation. Under this alternative scenario, the government would incur a net loss of $582 million over 10 years. Annual losses were estimated for nine out of the ten years covered.
Commenting on these alternative scenarios, the GAO indicated that their primary analysis was based on a 30-year period to coincide with the expected life span of the $1 coin. Large costs are necessary during the first few years to produce an initial supply of $1 coins, while the benefits are realized in later years. With regards to the second alternative scenario, the GAO commented that not including interest savings omits a monetary benefit to the government. For the third alternative scenario, the GAO cautioned that a 1-to-1 replacement ratio might result in a shortage of currency that could have significant negative consequences for the economy. The replacement ratio of 1.5 $1 coins for each $1 note was based on the experience of Canada and the United Kingdom.
Federal Reserve and Treasury Department Comments
The Broad of Governors of the Federal Reserve System commented on GAO’s primary analysis that estimated savings of $4.4 billion over 30 years by expressing concern that the benefits may be overstated, “perhaps substantially.” All of the savings generated are the result of increased seigniorage and not reduced production costs, and the costs to the private sector, state and local governments, and the Federal Reserve are not addressed. Additionally, potential changes in the costs of raw materials, changes in discount rates, and increased adoption of electronic payments are not addressed through a sensitivity analysis. The Federal Reserve also noted the increased risk of counterfeiting that may occur with a switch from the $1 note to the $1 coin.
The Federal Reserve comments concluded by stating, “We continue to believe that a fuller societal cost-benefit analysis and a sensitivity analysis that varies key assumptions that are subject to material uncertainty would provide policy-makers with a more complete basis for considering the future of the $1 note and $1 coin.”
Comments from the Treasury Department reiterated their stance that they have not taken a position on whether the $1 note should be replaced by the $1 coin. They also noted that the GAO has not considered the total costs associated with replacing the $1 bill with the $1 coin, such as transportation, production, environmental, and other costs. They stated, “In our view, policymakers should consider both the direct financial benefit to the Government and the cost impact on the private sector and the environment.”