	Potential Benefits from Replacing the $1 Note with the $1 Coin

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. 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. 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. 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. 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. Moreover, changes to the inputs and assumptions used in our analysis  could significantly change the estimated 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. 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. 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. Our  2012 estimate assumes that the $1 coin would be widely accepted and  used by the public. 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. Experiences of Other Countries

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. For example,  Canada replaced its $1 and $2 notes with coins in 1987 and 1996,  respectively. 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. 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. We continue to believe that the  government would receive a financial benefit from making the  replacement. First, the  costs are immediate and certain while the benefits are further in the future  and more uncertain. 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.
Why GAO Did This Study

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 GAOs 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.

What GAO Found

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. GAOs estimate takes into account processing and production changes that occurred in 2011, including the Federal Reserves 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 GAOs 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.

What GAO Recommends

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.