Conversion to $1 Coin: US Government

Conversion to $1 Coin: Private Industry

Conversion to $1 Coin: Consumers

Special Interest Groups

Other Issues

Efficiency of US Currency

A recent article in the WSJ, “The Buck Stops Here: $1 Coins to Be Curtailed” by Jeffrey Sparshott, reports that the US Mint is suspending production of $1 coins, due to lack of demand. The issue of replacing the US $1 bill with a $1 coin has been debated for quite some time. When I was in graduate school 20 years ago, one of my professors was commissioned to perform a cost-benefit analysis of replacing the $1 bill with a $1 coin, and I worked as a research assistant on the project. I spent my summer that year contacting various representatives in the economy who would be affected by the conversion and collecting information from them on the costs and benefits. I learned some very interesting things.

Conversion to $1 Coin: US Government

The US Government Accountability Office (GAO) issued a report in March 2011 titled “U.S. COINS: Replacing the $1 Note with a $1 Coin Would Provide a Financial Benefit to the Government.” 

Background Information

The following background information is taken from the GAO Report cited above.

The Logistics of the Production and Circulation of Currency in the US Economy

[T]he Federal Reserve orders notes from BEP [Bureau of Engraving and Printing] and the 12 regional Federal Reserve banks order coins from the Mint. The Federal Reserve circulates the notes through the Federal Reserve banks and the Mint distributes coins directly to those banks. The Federal Reserve banks distribute notes and coins to commercial banks to meet the demand of retailers and the public. When notes and coins are returned by commercial banks as deposits to the Federal Reserve banks, each note is processed to determine its quality and authenticity. During processing, worn and counterfeit notes are removed from circulation and the rest are wrapped for storage or re-circulation.

The Historical Production and Circulation of $1 Coins

Currently, there are five different $1 coin designs in circulation—the Eisenhower coin, the Susan B. Anthony coin, the Sacagawea coin, the Presidential $1 coin series, and the Native American $1 coin series. Table 1 shows production figures for the four $1 coin designs produced since 1979.

The four recent $1 coin designs are the same size and weight and have the same electromagnetic properties. The Susan B. Anthony $1 coin is silver in color, while the Sacagawea, Presidential, and Native American $1 coins are golden in color. The golden color was introduced in 2000 so that the public could better distinguish the $1 coins from the quarter, which the Susan B. Anthony $1 coin resembles and with which it is often confused.

Other Countries That Have Replaced Notes with Coins

Costs and Benefits to US Government of Conversion

The most significant factors contributing to costs or benefits to the government associated with conversion from a $1 bill to a $1 note are detailed in the following table, which I created form data contained in the GAO Report:

Further explanation regarding specific GAO assumptions are:

[2] Lifespan

Ten years ago, a $1 note lasted about 1.5 years on average. Because of improvements in the processing of paper notes, the life of the $1 note has grown considerably—to as high as 40 months on average, according to a BEP analysis. This longer note life reduces the differential between the lives of the note and the coin, which is expected to have an average life of at least 30 years…

[6] Seigniorage

Seigniorage is traditionally defined as the difference between the face value of coins and their cost of production. In addition, the face value of notes issued, net of their production costs, creates an analogous net value for the federal government. In this report, we use the term “seigniorage” to refer to the value created from the issuance of both coins and notes. Seigniorage reduces the government’s need to raise other revenues, thus reducing the amount of money that the government needs to borrow. When the government has to borrow less, it pays less in interest over time.

[7] Circulation

[W]e assumed that coins would circulate more slowly than notes and, therefore, more than one coin would be needed to satisfy the demand for one note. Based on our study of experience in Canada and the UK, we used a 1.5- to-1 replacement ratio for our base case. Canada produced 1.6 coins for each note during the transition; once the transition was complete, production was very low or even nil in some years. Because underproduction is a greater risk to the economy than overproduction, we adjusted the ratio downward by only a small amount.

“According to GAO’s analysis, replacing the $1 note with a $1 coin could save the government approximately $5.5 billion over 30 years.” The vast majority of these government savings are associated with the difference in seigniorage between notes and coins. Specifically, while seigniorage per coin per year is only slightly greater than seigniorage per note per year (see line [6] in the table above), the total number of coins in circulation will be significantly greater than the total number of notes in circulation (see line [7]), thereby yielding significantly greater seigniorage associated with conversion to a coin (see line [8]).

There is another benefit not included in the GAO study that will accrue to the US government, if it were to simultaneously (i) issue a one dollar coin AND (ii) pull the one dollar bill from circulation. During my research project, I studied the experiences of Canada, the United Kingdom, and Australia in converting their one-dollar-equivalent coins into bills. In all three of these cases, the notes were pulled from circulation, where the population was given a fixed amount of time (perhaps a year or two) for them to reclaim notes as legal tender. In all three cases, after the reclamation deadline had passed, there were still significant portions of notes in circulation that had not been reclaimed, as I recall, from 25% to 40%, depending on the country. Unclaimed bills were either lost, mutilated, out of the country, or purposely unclaimed (e.g., kept as collectors’ items). Especially given the US currency’s status as the world reserve currency, and therefore its wide, global circulation, should the US dollar bill be pulled from circulation, a nontrivial portion of bills would undoubtedly remain unclaimed. The unclaimed bills would yield a one-time windfall to the US government. Such a windfall was not included in the GAO analysis.

Conversion to $1 Coin: Private Industry

Those in favor of the conversion, namely industries that process large numbers of coins during the regular course of business, such as vending machine operators and public transportation authorities, are represented by The Coin Coalition. This is the organization that sponsored the study I worked on as a graduate student. I could not find much information on the Internet detailing arguments made by those favoring conversion to a $1 coin. Accordingly, most of the following information I present comes from the information I gathered during my research for the Coin Coalition’s study.

During the course of my research I collected information from the following industries that I specifically recall:

• Public Transit (Chicago Transit Authority)
• Vending Machines (soda, food, etc.)
• Gaming Machines (arcade games, slot machines, etc.)
• Pay Telephones
• Laundry Machines
• Parking Meters (While talking to various industry representatives, I found a parking meter company in Kansas that still accepted pennies.)

I also had access to an analysis prepared by Walgreen’s that estimated the savings to the company nationally associated with conversion from a $1 bill to a $1 coin and with removal of the penny from circulation.

Finally, as I noted above, I also studied the experiences of Canada, the United Kingdom, and Australia in converting their one-dollar-equivalent coins into bills.

The big issues that came up during my research were the following:

Benefits

1. Lower Labor Costs: In all US industries, labor costs end up being one of the largest costs borne by businesses. To the extent that converting from a note to a coin saves on labor, it will lower companies’ costs of doing business. Conversion from a dollar note to a coin will save on labor costs for the following reasons:

• Processing Costs

The costs of processing dollar bills are substantially higher than the costs of processing coins, on the order of 30 times greater as reported in the GAO Report. Coins can be thrown into a machine that will count and sort them. Bills, on the other hand, have to be manually compiled.

I remember the guy I talked to at the Chicago Transit Authority saying that people must have saved their oldest, most mangled bills to use to pay bus fares. He said that the bills came out of the buses’ money receivers all crumpled up, so people had to manually unfold them and stack them. Moreover, a grotesquely high percentage of the bills the Transit Authority received were unfit for further circulation, so they had to be sent back to the government to be replaced.

• Collection Costs

One of the largest costs associated with vending machines of any sort is the cost of having a worker physically travel to the location of the machine to collect the money generated from sales. With a dollar coin instead of a bill, labor costs associated with emptying machines would be lower in two respects. First, with dollar coins, the boxes would fill up less quickly (one dollar coin takes up less space than four quarters) and thus have to be emptied less often. Second, dollar coins can be re-circulated within the machines and used to make change, whereas bills cannot be used to make change.

• Maintenance Costs

The quality of bill feeders in vending machines have definitely improved over the last 20 years, so bills do not jam vending machines as much as they used to. However, problems requiring machine maintenance or repair are still more likely to be caused by the use of bills than coins.

2. Increased Sales: Dollar coins could provide consumers greater access to vending machines in two respects. First, to the extent that the machines reject dollar bills and thereby prevent consumers from carrying out their desired machine purchases, dollar coins will enable more purchases. Second, to the extent that consumers forego machine purchases because they only have larger bills and do not want a pocketful of quarters in change, machines that provide change in dollar coins enable more purchases. 

Costs

1. Greater Weight: One of the largest costs to both businesses associated with conversion to a dollar coin would be dealing with the added weight of coins over bills. The main costs associated with the added weight of coins over bills would be borne in the process of transporting coins.

2. Cost of Retrofitting: Twenty years ago, there was the issue of having to retrofit machines to accept dollar coins. However, since dollar coins have been in circulation for a while, most machines are currently fitted to accept them. In particular, according to the GAO Report:

…since transit agencies that receive federal funds were required under the Presidential $1 Coin Act of 2005 to accept and distribute $1 coins, many of the larger transit agencies have already modified their equipment to accept these coins, according to industry officials…

In cases where machines have not already been retrofitted to accept dollar coins, the same argument used before still applies: Many of the costs of retrofitting machines could be mitigated by phasing in new, retooled machines as the old machines wear out and need to be replaced anyway.

3. Cost of New Equipment: Those against the use of $1 coins (from speech by Rep. Thomas M. Davis cited below) argue:

The costs of changing to a 1 dollar coin would be significant to many in the private sector including but not limited to the small town banks which would have to retool their coin counting, wrapping and sorting equipment--costs which would inevitably be passed on to their customers.

4. Increased Theft: An argument can be made that with a dollar coin there might be more vandalism and/or burglary of machines, since the value of money stored in coin boxes would greater if the boxes are filled with dollars rather than quarters.

It turns out that the decreases in labor costs associated with conversion from a dollar note to a coin are large and more significant than any of the other costs and benefits to private industry associated with conversion from a dollar bill to a coin. That is, private industry would be expected to accrue large net cost savings, if the US were to convert to a dollar coin (and also pull the dollar bill from circulation).

Conversion to $1 Coin: Consumers

Benefits

1. Lower Taxes: The savings to government associated with conversion would lead to lower taxes on consumers. 

2. Lower Prices: The lower costs of doing business associated with conversion would lead to lower consumer prices.

3. Greater Access to Vending Machines: As mentioned in the section on Benefits to Business conversion to a $1 coin would provide consumers with easier and/or more convenient access to purchases made from vending machines.

Costs

Arguments against conversion from a $1 note to a $1 coin from the standpoint of consumers can be summarized by the points made in a February 24, 1995 speech introducing the Save the Greenback Act by Rep. Thomas M. Davis gave several arguments

1. $1 coins are much heavier than $1 notes which will impose a burden on consumers.

2. National polls have shown that “the American people overwhelmingly rejected any attempt to do away with the dollar bill and have expressed their displeasure for replacing it with a coin.”

3. National polls have shown that people expect prices to rise if the dollar bill is replaced by a coin. Note: Discussions about conversions from a dollar bill to a dollar coin often also include discussions about eliminating the penny from circulation. I believe this argument holds more weight when referring to the elimination of the penny, as compared with the conversion from a dollar bill to a dollar coin.

4. “The failure of the Susan B. Anthony dollar demonstrated that introduction of a dollar coin does not save the federal government money.” Note: the failure of the public to adopt the Susan B. Anthony dollar has been attributed to the fact that the government did not also pull the dollar bill from circulation. Given a choice, people tend to go with the status quo. As iterated in the GAO Report:

…we have noted in those reports that past $1 coin initiatives—such as changes to the color of the $1 coin and new coin designs—have not led to widespread public acceptance and use, in part because the $1 note was not simultaneously eliminated. This point was reiterated by Canadian and UK officials we spoke with, who said that the only way to transition from note to coin is to stop producing the note. While observing that the public was resistant at first, they said that, with no alternative to the note, public dissatisfaction dissipated within a few years.

Special Interest Groups

Given the large cost savings associated with conversion to a $1 coin, I’ve always suspected that the reason the conversion has never been achieved probably has to do with politics. Sure enough, I just found an article dated in April 2011, “Coalition Again Attempts to Put Dollar Bill Out of Business” by Janie Lorber, which states:

In 2006, then-Rep. Jim Kolbe (R) of Arizona, the country’s largest supplier of copper, introduced a bill that would have done away with the dollar, but it lay dormant in a Financial Services subcommittee. Kolbe, who introduced similar legislation at least five times throughout his career, said the main roadblock was American resistance to change.

“Americans are very conservative when it comes to their currency,” he told Roll Call. “Members of Congress like to shy away from anything controversial that they can. They want to avoid giving constituents something to call and yell about.”

Kolbe and many other coin supporters said politics has also been a major obstacle. Prominent Massachusetts Democrats such as Financial Services ranking member Barney Frank and the late Sen. Edward Kennedy have been ardent defenders of Crane & Co., which manufactures the cotton-based paper used in U.S. currency. The company, known to the public for its fine stationery, is based in the western Massachusetts district of 10-term Democratic Rep. John Olver. “Clearly they had an interest in maintaining the use of the paper,” Kolbe said. “Crane was the only company that could qualify as the producer.

…

One-dollar bills represent nearly half of Crane’s currency business, and replacing the $1 note altogether would mean the loss of hundreds of jobs, the company said.

Other Issues

Two other issues were mention in the GAO Report as possibly affecting the benefits and/or costs associated with conversion from a $1 bill to a $1 coin.

1. Changes in Velocity of Money: pulling $1 bill might increase use of $2 bills. As noted in the GAO Report:

If the $1 coin replaced the $1 note, the use of the $2 note could increase because people and businesses might limit how many coins they kept in their pockets and cash trays, and using the $2 note would help them do this. In Canada, demand for the $2 bill did increase when the $1 note was replaced with the $1 coin. However, Canada already had a readily circulating $2 note at the time, whereas the United States does not…

2. Decreased Use of Cash for Transaction: The US has seen an increasing use over time of electronic forms of payment to conduct transactions.In particular, the incidence of use of debit cards for retail consumer purchases and the use of credit cards for online purchases have been increasing over time.; With the advent of the “digital wallet”, that is, the use of electronic forms of payment via mobile phones, the trends towards increasing incidence of electronic payments can only be expected to continue. To the extent that electronic forms of payment decrease the use of cash, estimates of the benefits and costs associated with conversion to a dollar coin could be overstated.

Efficiency of US Currency

In a discussion I had with a different professor of mine in graduate school, we were discussing the efficiency of the US currency system. My professor noted that our system is based on base 10 – that is, coins are denominated in $0.01, $0.05, $0.10, and $0.25, and bills are denominated in $1, $5, $10, $50, and $100. However, this is not the most efficient system if one is concerned with using the fewest coins and bills possible to achieve any particular dollar value. He said that the most efficient system would be based on base 3, that is, coins would be denominated in $0.01, $0.03, $0.09, $0.027, and $0.81, and, correspondingly, notes would be denominated in $1, $3, $9, $27, and $81.

The following table provides the numbers of coins needed in each of the currency systems to achieve values ranging from one cent through 25 cents. For example, for a total value in coins of $0.03, you need three pennies in base 10 currency but only one three-cent piece in base 3 currency. In the total columns, equivalent total coin counts needed to achieve a given value are highlighted in green, larger counts in orange, and smaller counts in yellow.

The differences in coin counts needed in each of the currency systems to achieve values ranging from one cent through one dollar are illustrated in the following graph. Coin counts to achieve values in base 3 currency are designated by yellow bars. The additional number of coins need to achieve that same value in base 10 currency is designated by the black bars. If more coins are needed in base 10 currency than in base 3 currency, then the black bars appear in the top portion of the graph.Conversely, if fewer coins are needed in base 10 currency than in base 3 currency, then the black bars appear in the bottom portion of the graph.

For the 100 values ranging from $0.01 to $1.00, there are 20 cases in which the coin counts are the same for both base 3 and base 10 currency systems. In 26 cases more coins are needed in the base 3 system, while in 54 cases more coins are need in the base 10 system. The same counts would apply when dealing with notes.