	Our Updated Estimate Shows That Replacing the $1 Note with a $1 Coin Could Provide a Net Benefit of $4.4 Billion to the Government over 30 Years

The federal government realizes a financial gain when it issues notes or  coins because both forms of currency usually cost less to produce than  their face value. Replacing the $1 note with a $1 coin would provide a net benefit to the  government of approximately $4.4 billion over 30 years, amounting to an  average yearly discounted net benefit of about $146 million. This benefit  would occur because, based on differences in how notes and coins are  used in the economy, more coins than notes would have to be circulated  to meet demand, and therefore more seigniorage would be created. Our assumptions cover a range of factors including 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   the expected rate of growth in the demand for  are required in circulation,currency over 30 years, the costs of producing and processing both coins  and notes, and the differential life spans of coins and notes. Our analyses  are projected 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, the annual benefit would vary over the 30 years— the government would incur a net loss in 6 of the first 7 years and then  realize a net benefit in the remaining years. 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. Because of the far lower coin production  costs, the net benefit to the government would temporarily spike in that  year. We also found our net benefit estimate was due solely to increased  seigniorage and not to reduced production costs. Changes to the inputs and the assumptions used in the estimate  could increase or decrease the estimated net benefit. 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, or an average of about $184 million per year, because it takes into  account two key actions that occurred since our 2011 report. Replacing the $1 Note with a $1 Coin Would Result in a $531 Million Net Loss over the First 10 Years

For example, officials from the Bureau of Printing and Engraving pointed out that  replacing the $1 note with a $1 coin would also have environmental impacts relating to  obtaining raw materials and carbon dioxide emissions, among others. Without Counting Seigniorage, Switching to a $1 Coin Would Result in a Net Loss

Under a scenario that does not consider interest savings due to  seigniorage, a net loss of approximately $1.8 billion would accrue during  the 10-year period for an average cost of $179 million per year. In particular,  large costs would be incurred in each of the first 4 years because of the  large number of coins that would need to be produced for the transition,  as was the case in the scenario discussed above. Thus, in this  scenario, we found that even with the longer life of the $1 coin, the cost of  producing coins for the growing economy after the transition would  exceed the cost of producing $1 notes in each of those years that would  have been incurred without the replacement. While this scenario suggests  that there would be no net benefits from switching to a $1 coin, we  believe that not including the interest savings related to seigniorage omits  a monetary benefit to the government. In total, across the 10 years the total net loss of  switching to $1 coins would be $582 million, or just over $58 million per  year. As shown in figure 4, net losses would be incurred in 9 of 10 years  of this scenario. The costs of producing coins for the transition are highest  in the first 3 years, followed by benefits in the fourth year because of the  overproduction of coins during the transition. In this scenario, net losses  would continue through year 10. As is clear from the findings in this report, not accounting for the benefits  related to increased seigniorage can substantially affect the estimate. The Federal  Reserve noted that it believes our 30-year estimate may overstate the net  financial benefit to the government because it (1) does not adequately  address the costs to the private sector, state and local government, and  the Federal Reserve and (2) does not consider potential increases in the  cost of raw material for coins or possible future changes in discount rates. However, we found no  quantitative estimates of the costs to the private sector or environmental  impacts that could be evaluated or modeled.
Why GAO Did This Study

In March 2011, GAO reported that replacing the $1 note with a $1 coin would provide a net benefit to the government of about $5.5 billion over 30 years, or an average of about $184 million per year. This benefit, which GAO estimated using an economic model based on a set of assumptions, was entirely attributable to seigniorage, a term defined as the difference between the cost of producing coins or notes and their face value. Seigniorage reduces government borrowing and interest costs, resulting in a financial benefit to the government. As GAO noted, the estimated net benefit could increase or decrease with changes in the assumptions.
GAO was asked to provide additional details on its 2011 analysis. Accordingly, GAO (1) updated its analysis to account for recent changes in note processing, among other things, and based on this update determined (2) the specific benefit or loss to the government for each of the first 10 years of its 30-year analysis; (3) the net benefit or loss to the government over 10 years if the interest savings due to seigniorage are excluded from the analysis; and (4) the net benefit or loss to the government over 10 years if it is assumed that each note will be replaced by 1 coin, rather than 1.5 coins, as GAO assumed in its 30-year analysis.
GAO used the economic model it developed for its 2011 report, updated certain factors, and varied the assumptions for seigniorage and the replacement ratio of coins to notes as requested.

What GAO Found

According to GAOs updated analysis, replacing the $1 note with a $1 coin would provide a net benefit to the government of approximately $4.4 billion over 30 years, or an average of about $146 million per year. The overall net benefit was due solely to increased seigniorage and not to reduced production costs. This estimate differs from GAOs 2011 estimate because it considers recent efficiency improvements in note processing that have extended the expected life of the $1 note and other updated information. GAOs estimate covered 30 years to be consistent with previous GAO analyses and because that period roughly coincides with the life expectancy of the $1 coin.
Using the same model and assumptions used for its 30-year analysis, GAO found that replacing the $1 note with a $1 coin would provide a net loss to the government of about $531 million in the first 10 years, or an average of about $53 million per year. The cost of producing a large number of coins necessary for the transition would result in a net loss in 6 of the first 7 years. In the eighth year, and for the remaining 2 years, this situation is reversed: the interest savings outweigh the production costs and the net benefits would be positive. Overall, the net loss over 10 years compared with the net benefit GAO estimated over 30 years would occur because of large costs in the first few years to produce the initial supply of $1 coins.
If the interest savings due to increased seigniorage are excluded from the analysis, the government would incur a total net loss of about $1.8 billion over 10 years, or an average of $179 million per year. With no interest savings to offset the costs of coin production, net losses would be incurred in 9 of the 10 years. As in the preceding scenario, these production costs are greatest in the first 4 years, when a large number of coins need to be produced for the transition. Although this scenario suggests there are no net benefits of switching to a $1 coin, GAO believes that excluding the interest savings related to seigniorage omits a monetary benefit to the government.
If it is assumed that each $1 note will be replaced by 1, rather than 1.5, $1 coins, the government would incur a total net loss of about $582 million over 10 years, or an average of about $58 million per year. The costs of producing coins for the transition dominate in the first 3 years, followed by benefits in the fourth year due to the overproduction of coins during the transition. In this scenario, net losses continue to accrue through year 10. Net losses in this scenario are smaller than in the preceding scenario because fewer coins are produced and coin production costs are lower, but the one-to-one replacement does not provide increased seigniorage. Moreover, this lower replacement ratio is not consistent with the experiences of other countries that have switched from notes to coins and is likely to produce too few coins to meet demand, which could be disruptive to the economy.
In commenting on a draft of this report, the Federal Reserve and Treasury Department noted that GAOs 30-year estimate does not consider the cost to the private sector or environmental impacts. GAO agrees that such costs and impacts are important considerations, but GAO identified no quantitative estimates that could be evaluated or modeled.