Replacing the $1 Note with a $1 Coin Could Save the Government Approximately $5.5 Billion in Interest Expense over 30 Years

		Replacing $1 Notes with $1 Coins Would Increase the Net Benefit to the Government over 30 Years

We estimate that replacing the $1 note with a $1 coin would provide a net  benefit to the government of approximately $5.5 billion over 30 years,  amounting to an average yearly discounted net benefit of about $184  million. However, this benefit would not be achieved evenly over the 30  years. Our Current Estimate of the Yearly Net Benefit of Replacing the $1 Note with a $1 Coin Is Lower than Previous Estimates for a Variety of Reasons

In 2000, we estimated that the yearly net benefit to the government of  replacing the $1 note with a $1 coin would be roughly $522 million per  year, after the replacement was complete. Lower replacement ratio. We did not include such costs in our estimate because  counterfeiting of U.S. coins is currently minimal, both domestically and  internationally, according to the U.S. Secret Service. Furthermore, we have noted in  those reports that past $1 coin initiatives—such as changes to the color of  the $1 coin and new coin designs—have not led to widespread public  acceptance and use, in part because the $1 note was not simultaneously  eliminated. Stakeholders Identified Near- and Long-Term Challenges to the Private Sector Should the $1 Coin Replace the Note

Stakeholders representing a variety of retail and manufacturing industries  and organizations that would be affected by a replacement identified two  kinds of associated challenges and costs: (1) those that would result in the  near term from the transition and (2) those that would result in the longer  term from structural changes to the cost of doing business. Some of the transitional  costs and challenges may be more formidable than others. Concluding Observation

As in the past, our analysis indicates that replacing the $1 note with a $1  coin would provide a financial benefit to the government if production of  the $1 note ceased. While the public initially  resisted these transitions, opposition dissipated over time with no  alternative to the note. Both the Federal  Reserve and Treasury maintained that an assessment of the benefits and  costs to the U.S. economy––that included the net benefits to the  government as we reported as well as the benefits and costs to the private  sector––is important in any evaluation of whether to replace the $1 note  with a $1 coin. (2) What other effects did stakeholders suggest such a replacement could  have? To estimate the net benefit to the government of replacing the $1 note with  a $1 coin, we constructed an economic model, which we based on our  analyses of past reports of GAO and the Board of Governors of the Federal  Reserve System (Federal Reserve) that used an economic model to  develop such an estimate, together with information obtained from  reviews of agency documents and interviews with experts in government  and academia. We also interviewed officials from  Canada and the United Kingdom (UK), both of which have replaced notes  with coins, to gain information useful in determining certain key  assumptions in our model. To determine the various effects replacement could have on stakeholders,  we identified industries and organizations that might be affected by  changes to notes and coins. For our replacement scenario, we assume a 4-year transition period during  which  the production of $1 notes stops immediately;   no $1 notes are withdrawn from circulation, but due to their short life,  they would naturally fall out of circulation within a few years; the 1 billion coins currently stored with the Federal Reserve are released  into circulation in the first year;   1 billion $1 coins that were inactive and held by the public enter active  circulation in the first year; and the Mint expands its production of $1 coins during the first 4 years.
Why GAO Did This Study

Since coins are more durable than notes and do not need replacement as often, many nations have replaced lower-denomination notes with coins to obtain a financial benefit. GAO has estimated the annual net benefit to the U.S. government of replacing the $1 note with a $1 coin four times over the past 20 years, most recently in April 2000. Asked to update its estimate, GAO (1) estimated the net benefit to the government of replacing the $1 note with a $1 coin and (2) examined other effects stakeholders suggested such a replacement could have. To perform its work, GAO constructed an economic model and interviewed officials from the Federal Reserve, the Treasury Department, the U.S. Secret Service, outside experts, and officials from Canada and the United Kingdom. To determine the effects on stakeholders, GAO interviewed officials from industries and organizations that might be affected by changes to currency.

What GAO Found

According to GAO's analysis, replacing the $1 note with a $1 coin could save the government approximately $5.5 billion over 30 years. This would amount to an average yearly discounted net benefit--that is, the present value of future net benefits--of about $184 million. However, GAO's analysis, which assumes a 4-year transition period beginning in 2011, indicates that the benefit would vary over the 30 years. The government would incur a net loss in the first 4 years and then realize a net benefit in the remaining years. The early net loss is due in part to the up-front costs to the U.S. Mint of increasing its coin production during the transition. GAO's current estimate is lower than its 2000 estimate, which indicated an annual net benefit to the government of $522 million. This is because some information has changed over time and GAO incorporated some different assumptions in its economic model. For example, the lifespan of the note has increased over the past decade, and GAO assumed a lower ratio of coins to notes needed for replacement. GAO has noted in past reports that efforts to increase the circulation and public acceptance of the $1 coin have not succeeded, in part, because the $1 note has remained in circulation. Other countries that have replaced a low-denomination note with a coin, such as Canada and the United Kingdom, stopped producing the note. Officials from both countries told GAO that this step was essential to the success of their transition and that, with no alternative to the note, public resistance dissipated within a few years. Stakeholders representing a variety of cash-intensive entities in the private sector identified potential shorter- and longer-term effects of a replacement. For example, some stakeholders said that they would initially incur costs to modify equipment and add storage and that later their costs to process and transport coins would go up. Others, however, such as some transit agencies, have already made the transition and would not incur such initial costs. As in the past, GAO's analysis indicates that replacing the $1 note with a $1 coin would provide a financial benefit to the government if production of the $1 note ceased. GAO previously recommended replacement of the $1 note and continues to support this recommendation. The Federal Reserve and Treasury reviewed a draft of this report and both noted the importance of societal effects in deciding on such a replacement and offered technical comments.