oversight

National Coinage Proposals: Limited Public Demand for New Dollar Coin or Elimination of Pennies

Published by the Government Accountability Office on 1990-05-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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               .I   to the Chtik-~~~; Subcommittee
            on tinkumer .Afftirs and’ Coinage,
            Cotmrrmitfeeon Banking, Fikmce, and
            Urm Afftirs, House of
            Fkp;resefit&tives
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          ,.
B-239690

May 23,199O

The Honorable Richard H. Lehman
Chairman, Subcommittee on Consumer
  Affairs and Coinage
Committee on Banking, Finance, and
  Urban Affairs
House of Representatives

Dear Mr. Chairman:

In response to your request, we reviewed the proposed changes to the U.S. currency and
coinage system set forth by H.R. 1068, H.R. 3761, and S. 814.

This report provides information and analysis to answer specific questions you had
regarding the feasibility and effects of replacing the dollar bill with a dollar coin and
possibly eliminating the penny and half dollar.

As arranged with the Subcommittee, we are sending copies of this report to other interested
congressional committees; the Secretary of the Treasury; the Directors of the Office of
Management and Budget, the U.S. Mint, and the Bureau of Engraving and Printing; the
Chairman of the Board of Governors of the Federal Reserve System; and other interested
parties.

The major contributors to this report are listed in appendix VI. Please contact me on 275-
8676 if you have any questions concerning this report.

Sincerely yours,




L. Nye Stevens
Director, Government Business
   Operations Issues
Executive Summ~


                   Australia, Canada, Japan, and the major countries of Western Europe all
Purpose            now use a coin for retail transactions at the level for which Americans
                   use the paper dollar. While most of these countries have substituted a
                   coin for their paper dollar equivalents in the past 20 years, the Ameri-
                   can attempt to put the Susan B. Anthony dollar coin into circulation in
                   1979 was a failure. In considering legislative proposals to mandate a
                   new dollar coin and to phase out the penny and half dollar, the House
                   Banking Subcommittee on Consumer Affairs and Coinage asked GAO to
                   evaluate the potential costs and benefits of the currency revision pro-
                   posals to the government in light of the Susan B. Anthony and other
                   countries’ experiences. (See pp. 11 and 21.)


                   Two units of the Treasury Department produce Federal Reserve notes
Background         and coins, both driven by demand for the various denominations con-
                   veyed through the banking system. About 45 percent of the seven billion
                   notes to be printed for the Federal Reserve System by the Treasury’s
                   Bureau of Engraving and Printing this year are l-dollar notes. The aver-
                   age l-dollar note costs about 2.6 cents to produce and lasts about 1.4
                   years in circulation before becoming too worn and having to be replaced.

                   Coins produced by the U.S. Mint are much more durable than bills and
                   last about 30 years in circulation. The penny is the highest volume coin
                   produced by the Mint, accounting for 12.8 billion, or 71 percent, of the
                   18 billion coins the Mint plans to produce in 1990. The Mint produced 41
                   million 50-cent. coins in 1989, most of them to satisfy demand from
                   casinos.

                   To evaluate potential government savings of replacing the dollar bill
                   with a dollar coin, GAO adopted a computer model used by the Federal
                   Reserve System and incorporated GAO'S assumptions and data on vari-
                   ous economic and cost factors. To evaluate acceptability issues, GAO held
                   focus groups with public and private sector individuals who handle cash
                   and interviewed numerous trade and public interest associations, Mint
                   contractors, vending industry, armored car carriers, and others. GAO also
                   discussed the proposals with Treasury, Mint, Bureau of Engraving a.nd
                   Printing, and Federal Reserve officials and reviewed pertinent data they
                   had on the issues. (See pp. 8 to 13.)


                        estimates that the government could realize annual budgetary sav-
Results in Brief   GAO
                   ings of about $318 million [in present value dollars) if it replaced the
                   dollar bill with dollar coins and if the dollar coins were widely accepted


                   Page2                                   GAO/GGD-9@88NationalCoinageProposals
                           Executive Summary




                           and used. The savings would accrue primarily by reducing production
                           and processing costs and the need to borrow from the public to finance
                           the debt. However, on the basis of the Susan B. Anthony experience,
                           lessons learned from foreign governments that have converted their dol-
                           lar equivalent notes to coins, and the results of public surveys, GAO
                           believes widespread use would be unlikely unless Congress and the
                           Administration jointly reach, and agree to sustain, an agreement to elim-
                           inate the dollar note in the face of a negative public reaction.

                           There is no comparable economic argument for eliminating either the
                           penny or the half dollar coin. Both are profitable to the government in
                           that their face value exceeds their production and distribution costs.
                           Demand for the penny remains high. While retail trade associations and
                           the public recognize some nuisance aspects of the penny, the problems
                           inherent in rounding off retail transactions to the nearest 5 cents were
                           troubling to many. The European countries that have eliminated their
                           lowest denomination coins all did so because the production costs
                           exceeded their face value.



GAO’s Analysis

A Dollar Coin Could Save   Because of the dollar note’s limited durability compared to a coin, the
the Government Millions    government could reduce its production and processing costs by $41 mil-
                           lion annually, in present value terms, by replacing the note with a coin.
                           Although the production cost of a dollar coin would be about 6 cents
                           each, more than twice the 2.6 cent production cost of a dollar note, the
                           coin would last about 20 times longer in circulation and be less costly in
                           the long term.

                           A second major savings component would be the interest that Treasury
                           would not have to pay because of the seigniorage earned with a dollar
                           coin. Seigniorage, or t.he difference between a coin’s face value and its
                           production costs, would be 94 cents for each dollar coin produced. This
                           amount would increase the Treasury’s checking deposit at the Federal
                           Reserve, thereby reducing the need to borrow to finance the govern-
                           ment’s debt. The avoided borrowing would reduce annual interest costs
                           and the deficit by $461 million.

                           The savings from coin production and processing and the interest saved
                           from seigniorage would be offset by the initial outlays for the transition


                           Page 3                                  GAO/GGD90-88 National Coinage Proposals
                         Executive Summary




                         to coins, which would average about $593,000 annually, and reduced
                         Federal Reserve portfolio interest earnings from the elimination of the
                         dollar note, which would average about $177 million annually. The
                         reduced interest earnings would result because the difference between
                         the face value of notes and their production cost and a portion of the
                         Federal Reserve’s operating costs is currently used to purchase Trea-
                         sury securities, and earnings from these securities are returned to the
                         Treasury. Thus if notes are withdrawn, the Federal Reserve’s interest
                         earnings would also decrease. Further, the Mint would need an average
                         of $7 million annually for its increased production costs. The net effect
                         on the budget position of the United States, after considering the vari-
                         ous savings and offsets, would be an estimated net savings of $318 mil-
                         lion annually in present value dollars. (See pp. 14 to 17.)


Major Obstacles Would    Projected savings figures are dependent on wide acceptance of the dol-
Need to Be Overcome      lar coin and substitution of it for the dollar note in the economy. GAO’S
                         interviews with general public and specialized focus groups indicated
                         that public reaction would be skeptical. These groups uniformly
                         believed that if a dollar coin and a dollar note were both available, the
                         public would choose to use the note.

                         One of’ the major reasons for failure of the Susan B. Anthony coin
                         stemmed from public and congressional opposition to elimination of the
                         dollar note. In addition, the similarity of that coin to a quarter dollar
                         and the lack of an effective promotion effort contributed to its lack of
                         acceptance.

                         The primary obstacle to a new dollar coin would be the difficulty Con-
                         gress and the Administration would have reaching and sustaining an
                         agreement to impose the coin on the public by eliminating the dollar bill.
                         Less formidable obstacles would be difficulties in producing a coin read-
                         ily distinguishable from a quarter but still acceptable to the vending
                         industry, producing sufficient quantities to meet demand in a reasona-
                         bly short transition period, and obtaining funding for a sophisticated
                         public awareness campaign. (See pp. 17 to 21.)


Foreign Countries Have   GAO  contacted five European countries and Canada, which converted
Converted Successfully   low denomination currency to coinage in recent years. All reported pub-
                         lic opposition and noted that elimination of the paper equivalent was
                         essential because the public would not use a coin if it had a choice.



                         Page 4                                 GAO/GGD-90-88 National Coinage Proposals
                          Executive Summary




                          These countries, however, generally have parliamentary forms of gov-
                          ernment that make it easier to impose unpopular changes on the public
                          than does the separated and less disciplined American political system.
                          (See pp. 21 to 23.)

-~
No Compelling Reason to   Although the penny has fallen to about one-seventh of its original 1792
                          value due to inflation, and is considered by some to be a nuisance,
Eliminate Penny or Half   demand for it is strong. Consumers are skeptical that rounding would
Dollar                    not disadvantage them, particularly the poor, who are most dependent
                          on small retail transactions. In addition, pennies are still profitable for
                          the government, costing about seven-tenths of a cent to produce and
                          distribute.

                          Countries GAOidentified that have eliminated their low denomination
                          coins did so when production costs exceeded the coins’ face value. Other
                          countries chose to continue production of low denomination coins that
                          cost more than their face value, believing the public would not approve
                          of eliminating the coins.

                          Although demand for the half dollar is low and feelings about it are
                          muted, its face value exceeds production costs by 44 cents and produc-
                          tion of the half dollar reduces the Treasury’s need to borrow by almost
                          $2 million annually. (See pp. 28 to 34.)


                          GAOrecommends that Congress proceed with the proposed dollar coin
Recommendation            legislation only if it and the Administration can reach and sustain a joint
                          resolve to eliminate the dollar note and stand up to an expected negative
                          public reaction and if other conditions are met. (See p. 26.)

                                              ___I--
                          GAOdiscussed its conclusions and the results of its analysis with Trea-
Agency Comments           sury, Mint, Bureau of Engraving and Printing, and Federal Reserve offi-
                          cials. They generally agreed with GAO'Sfindings and commented that the
                          analysis presented a balanced and fair assessment of the issues. They
                          also said that economic benefits aside, public acceptance is the key to
                          success in the American system. {See pp, 27 and 35.)




                          Page 5                                  GAO/GGD-90-f@ National Coinage Proposals
Contents


Executive Sun-u-nary                                                                                 2

Chapter 1                                                                                            8
Introduction             Proposed Legislation                                                        8
                         U.S. Currency and Coin Production                                           8
                         Objectives, Scope, and Methodology                                         11

Chapter 2
A Dollar Coin Could      A Dollar Coin Could Save the Government Millions
                         Questionable Public and Private Sector Acceptability of a
Save the Government           Dollar Coin
Millions, but Major      The American Public Did Not Accept the Susan B.                            20
Obstacles Need to Be          Anthony Dollar Coin
                         Foreign Governments Have Had Successful Conversions                        21
Overcome                 Essential Ingredients for a Successful Conversion                          24
                         Conclusions                                                                26
                         Recommendation                                                             27
                         Views of the Agencies                                                      27

Chapter 3                                                                                           28
No Compelling Reason     Eliminating the Penny and/or Half Dollar Would Not Save                    28
                              the Treasury Money
to Eliminate the Penny   Few People Would Probably Miss the Half Dollar, but                        29
or Half Dollar                Some Might Prefer the Inconvenience of Handling
                              Pennies to Rounding
                         Foreign Experiences in Eliminating Low Denomination                        33
                              Coins Have Been Mixed
                         Conclusions                                                                34
                         Views of the Agencies                                                      35

Appendixes               Appendix I: Major Assumptions Used in Cost Model                           36
                         Appendix II: Trade Associations and Public Interest                        43
                             Groups Contacted
                         Appendix III: Vending Machine Operators and                                44
                             Manufacturers and Armored Car Carriers Contacted
                         Appendix IV: Objective, Scope, Methodology, and                           46
                             Limitations of Focus Groups
                         Appendix V: Definition of Seigniorage                                     49
                         Appendix VI: Major Contributors to This Report                            52




                         Page 6                                GAO/GGD-90-88 National Cdnage Proposals
              Contents




Tables        Table 2.1: Average Annual Government Present Value                          17
                  Savings With a Dollar Coin
              Table 2.2: Coins and Currency Used in Selected Countries                   21
              Table 2.3: Dollar Note Equivalent Conversions in Selected                  22
                  Countries
              Table 3.1: Low Denomination Coins Eliminated by                            33
                  Selected Countries
          A


Figures       Figure 1.1: Currency Production by Denomination, Fiscal                      9
                   Years 1980 to 1990
              Figure 1.2: Coin Production by Denomination, Fiscal                         10
                   Years 1980 to 1990




              Abbreviation

              BEP        Bureau of Engraving and Printing


              Page 7                                 GAO/GGD90-88 National Coinage Proposals
Chapter 1

Introduction


                       Legislation has been introduced in Congress that would significantly
                       change the currency and coins used in the U.S. economy. The legisla-
                       tion’s major provisions call for replacing the l-dollar note with a coin
                       and studying the advisability of eliminating the l- and 50-cent coins.
                       The Chairman, Subcommittee on Consumer Affairs and Coinage, House
                       Committee on Banking, Finance, and Urban Affairs, asked us to review
                       the feasibility, expected acceptance, and potential effects of the pro-
                       posed legislation, considering both the failure of the Susan B. Anthony
                       dollar coin to achieve wide circulation in our economy and the experi-
                       ence of foreign countries in converting from paper currency to compara-
                       ble coinage.


                       Two broad coinage revision bills-H.R. 1068 and S. 814-have been
Proposed Legislation   introduced in Congress. The bills are similar in many respects but have
                       some significant differences. The House bill, H.R. 1068, calls for
                       (1) introduction of a new dollar coin within 18 months after the bill’s
                       enactment that would be the same size as the Susan B. Anthony dollar
                       coin, gold in color, have a minimum go-percent copper content, and
                       carry a design symbolizing Christopher Columbus; (2) ceasing produc-
                       tion of l-dollar notes within 18 months after the dollar coin is intro-
                       duced; and (3) a study by the Secretary of the Treasury to determine the
                       advisability of phasing out production of the l-cent and 50-cent coins
                       and of rounding final cash sales to the nearest 5 cents. The Senate bill, S.
                       814, is similar to H.R. 1068 but does not provide for ceasing production
                       of the 1-dollar notes.

                       A third bill, H.R. 3761, deals exclusively with l-cent coins. It provides
                       that 180 days after its enactment (1) l-cent coins would be legal tender
                       to a maximum of 25 cents only if used in quantities divisible by 5; and
                       (2) total cash sales, after discounts and sales taxes are computed, are to
                       be rounded to the nearest amount divisible by 5. The bill would exempt
                       from the rounding requirement transactions of 2 cents or less, or those
                       for which payment is made by check or negotiable instrument, electronic
                       fund transfer, money order, or credit card.


                       The Bureau of Engraving and Printing (BEP) prints Federal Reserve
U.S. Currency and      notes in its Washington, D.C., facilities. A second currency plant, under
Coin Production        construction in Fort Worth, Texas, is scheduled to open in 1991. The
                       US. Mint manufactures all of the coins used in commerce at its Philadel-
                       phia and Denver facilities. These coins are generally distributed by the



                       Page 8                                  GAO/GGD90-88 National Coinage Proposals
                                                      Chapter 1
                                                      Introduction




                                                      Federal Reserve System. Both BEPand the Mint are units of the Depart-
                                                      ment of the Treasury. The Federal Reserve System serves as the
                                                      Nation’s central bank and supervises the issue and retirement of Federal
                                                      Reserve notes, which constitute the bulk of currency and coins in circu-
                                                      lation, through its 12 Federal Reserve Banks. According to BEPand the
                                                      Mint, production of notes and coins in various denominations is driven
                                                      totally by demand.

                                                      For at least the past 10 years, BEPhas printed more l-dollar notes than
                                                      any other denomination. In fiscal year 1990, BEPplans to print 3.2 billion
                                                      l-dollar notes, accounting for 45 percent of the total planned printing of
                                                      7.0 billion notes of all denominations. Figure 1.1 shows currency produc-
                                                      tion by BEPfor the past 10 years, as well as planned production for fiscal
                                                      year 1990.



Figure 1.1: Currency       Production     by Denomination,     Fiscal Years 1980 to 1990


8   Billions of Notes




    1960       196f        1962
                                  n--a-B
                                   1963       1964     1965      1966    1967    1966      1969   1999


    I         $5Oand$lOO




                                                      Page 9                                             GAO/GGD90-88 National Wige   Proposals
                                                    Chapter 1
                                                    Introduction




                                                    Similarly, the l-cent coin (informally known as the penny), has been the
                                                    highest volume coin in production by the U.S. Mint for the past 10 years.
                                                    The Mint plans to produce 12.8 billion l-cent coins in fiscal year 1990,
                                                    representing 71 percent of the total planned 18.0 billion coins to be
                                                    produced.

                                                    The 50-cent coin (informally known as the half dollar), on the other
                                                    hand, is currently the lowest volume coin minted. In fiscal year 1990,
                                                    the Mint plans to produce only about 41 million 50-cent coins, or 0.2
                                                    percent of total Mint production. The Mint’s actual coin production by
                                                    denomination for fiscal years 1980 to 1989, as well as planned fiscal
                                                    year 1990 production, is shown in figure 1.2.



Figure 1.2: Coin Production      by Denomination,     Fiscal Years 1980 to 1990
Billions ot cobs




 4

 2

 0
              aava--BaaI
      1960         1981   1962    1993     1964       1985      1966      1987      1989      1989      19sa




                                                    Note, We did not include production of the Susan 6 Anthony dollar coin because it was produced in
                                                    such low quantities. Actual production of the Anthony dollar was 199 million in fiscal year 1980,8 million
                                                    In fiscal year 1981, and 1 mlHion in fiscal year 1982.




                                                    Page 10                                                    GAO/GGBSO-88 National Coinage Proposals
                         Chapter 1
                         Introduction




                         According to the Treasury Department, on December 3 1, 1989, there
                         were $18.1 billion of coins and $242.3 billion of currency, including 4.9
                         billion l-dollar notes, in circulation in our economy. The Mint estimates
                         that there were 136.7 billion l-cent coins in circulation in 1989, but it
                         had no estimate of the number of 50-cent coins in circulation.

                         As requested by the Chairman, Subcommittee on Consumer Affairs and
Objectives, Scope, and   Coinage, House Committee on Banking, Finance, and Urban Affairs, our
Methodology              objectives were to study and report on (1) the potential savings and
                         other impacts of the proposed legislation on the US. Mint, the Bureau of
                         Engraving and Printing, and the Federal Reserve System; (2) the
                         expected acceptability of the proposals to the private sector and the
                         public; (3) the reasons the Susan B. Anthony dollar coin failed; and
                         (4) the experiences of foreign governments with similar changes in their
                         currencies.

                         To evaluate the potential savings and other impacts on the federal gov-
                         ernment, we projected the estimated costs of producing and processing
                         dollar notes and dollar coins over a 30-year period, using a computer
                         model that we obtained from the Federal Reserve System’s Board of
                         Governors. We used a 30-year period because we wanted to determine
                         the long-range effects of changing our currency and coins, which we
                         assumed would take place during the first 5 years of our 30 year analy-
                         sis period. We obtained historical and projected currency and coin pro-
                         duction and processing cost information from, and interviewed officials
                         of, the U.S. Mint, the Bureau of Engraving and Printing, the Department
                         of the Treasury, and the Federal Reserve System. We evaluated this
                         information and used what we considered the most reasonable assump-
                         tions and data in the model. Our major assumptions for the model are
                         listed in appendix I.

                         We also estimated the cost impact of eliminating the l- and 50-cent
                         coins. We confined our estimate of these changes to a single year. We did
                         not project the impact over a 30-year period as we did for the dollar
                         note and coin model, because the costs and savings resulting from elimi-
                         nating both coins would be constant each year, whereas the dollar
                         changes would not. For example, the dollar model reflects start-up costs
                         for the first year and a 5 year transition period-factors not applicable
                         to the elimination of coins.




                         Page 11                                GAO/GGD-90-88 National Coinage Proposals
Chapter I
Introduction.




Additionally, we toured BEP’S currency production facility in Washing-
ton, D.C.; the U.S. Mint, coin minting operations in Denver and Philadel-
phia; and the cash processing operations of the Federal Reserve Bank in
Baltimore.

To evaluate the expected acceptability of the legislative proposals to the
private sector and the public, we interviewed eight trade and three pub-
lic interest associations (see app. II); held 12 focus group discussions
with the general public and individuals dealing in cash transactions as a
part of their jobs; interviewed state sales tax officials in Maryland and
Virginia; reviewed previous studies completed by the Federal Reserve
System and the Treasury Department on similar proposals; and inter-
viewed officials at the Mint, BEP, the Treasury Department! the Federal
Reserve System, and selected foreign governments. We also interviewed
officials from the two private sector firms that produce 1-cent blanks
for the Mint, the firm that produces material used by the Mint for the
higher denomination coins, a major seller of cash register machines, and
 16 vending machine operators and manufacturers and armored car car-
riers (see app. III). Further, we interviewed officials of the ITS. Army in
Europe and the Army and Air Force Exchange Service to determine the
effects of the partial elimination in 1980 of the use of the l-cent coin in
many European military support facilities.

We retained the services of Westat, Inc., a national survey research firm,
to assist us in selecting and interviewing the trade and public interest
associations and in holding the focus group discussions. More detailed
information on the objectives, scope, and methodology of the focus
groups, as well as a description of the limitations of focus group results,
are presented in appendix IV.

We judgmentally selected the trade and public interest associations,
state sales tax authorities, vending machine operators and manufactur-
ers, and armored car carriers we interviewed. They do not represent a
scientific sampling, and our results are not projectable to the Nation at
large. However, we selected associations that in our judgment represent
the major users of currency and coins in sales transactions. Because of
practical cost and timing constraints, we selected state sales tax authori-
ties, vending machine operators, and armored car carriers that were
located in the Washington, D.C., area. Despite the lack of projectability
of our information from these sources, when coupled with the informa-
tion we obtained from previous studies on similar proposals, we believe
our work on expected acceptability is instructive in identifying key



Page 12                                 GAO/GGD-90-88 National Coinage Proposals
Chapter 1
Mmduction




issues and concerns the private sector and public would have with the
proposed legislation.

To evaluate the reasons for the failure of the Susan B. Anthony dollar
coin, we reviewed congressional hearings and interviewed present and
former Mint? BEP, Treasury, and Federal Reserve System officials. In
addition, we asked selected questions on the Susan B. Anthony experi-
ence in interviews with the trade association and vending machine oper-
ators and manufacturers and in the focus groups we held.

To obtain information on the foreign experiences in converting from a
dollar equivalent note to a coin and eliminating the cent equivalent, we
visited and interviewed monetary officials in five countries and sent
questionnaires and interviewed embassy officials in three other coun-
tries. The countries we visited were Canada, France, the Netherlands,
the United Kingdom, and West Germany. The countries surveyed by
questionnaire and embassy interviews were Norway, Spain, and Swit-
zerland. With the exception of Switzerland, these countries were identi-
fied by the Coin Coalition, an interest group promoting the dollar coin
proposal, as countries that had converted their dollar note equivalents
to coins in recent years. We added Switzerland because of its general
recognition as a country with a stable currency.

At the request of the Subcommittee, we did not obtain written comments
on this report but discussed our conclusions and the results of our work
with Treasury, Mint, BEP,and Federal Reserve officials on May 21,199O.
We incorporated their informal comments into this report where
appropriate.

We did our work from January through May 1990 in accordance with
generally accepted government auditing standards.




Page 13                                GAO/GGD90-88 National Coinage Proposals
Chapter 2

A Dolla coin Could Save the Government
Millions, but Major ObstaclesNeed to
Be Overcome
                              The government could save over $318 million annually in present value
                              dollars if it replaced l-dollar notes with dollar coins, However, such sav-
                              ings could be realized only if the coin is widely accepted and used. The
                              Susan B. Anthony dollar coin, introduced in 1979, was never accepted
                              by the American people, but its introduction was not managed well. For-
                              eign countries, on the other hand, have successfully replaced currency
                              with coins. Lessons they learned, as well as our experience with the
                              Susan B. Anthony dollar, provide valuable insight into what it would
                              take to successfully convert to a dollar coin.

                              The foremost ingredient for success-the elimination of the l-dollar
                              note-is probably also the foremost obstacle to success, Overcoming this
                              obstacle will require the Administration and Congress to jointly resolve
                              to remain firm in a decision to eliminate the l-dollar note and to be will-
                              ing to withstand expected negative public reaction. Other obstacles-
                              the need for a good coin design, a public awareness campaign, and a
                              short transition period-could    be more easily overcome.


A Dollar Coin Could           is sizable. If the l-dollar notes were replaced by dollar coins, the govern-
Save the Government           ment could reduce its budgetary costs by $318 million a year in present
Millions                      value dollars.

                              We used a computer model to estimate savings over a 30-year period
                              from replacing the l-dollar note with a dollar coin. The cost factors and
                              assumptions we used in the model are discussed in appendix I. The
                              model has three components of savings-production       costs, processing
                              costs, and the overall budgetary impact of the conversion,


Prod .uction and Processing   In 1989, the Federal Reserve System paid the Bureau of Engraving and
                              Printing about $75 million to print 2.9 billion l-dollar notes. The printing
cost Savings                  of so many l-dollar notes is due primarily to the note’s average circula-
                              tion life of about 1.4 years, the lowest of all the currency used in
                              America. A coin, however, would last about 30 years. Although the pro-
                              duction cost of a dollar coin, which would be $.06 each, is more than
                              twice that of a dollar note, which is currently $.026 each, the durability
                              of the coin makes it less costly in the long term.

                              We estimated that over a 30-year period, the Federal Reserve would
                              save $12 million a year in present value dollars if a dollar coin replaced
                              the l-dollar note and if the 2-dollar notes gained in popularity. As


                              Page 14                                  GAO/GGD-90-88 National Coinage Proposals
                         Chapter 2
                         A Dollar C&m Could Save the Govenunent
                         Millions, but Major Obstacles Need to
                         Be Overcome




                         explained in appendix I, we assumed that 25 percent of the demand for
                         l-dollar notes would be replaced by demand for 2-dollar notes, primarily
                         on the basis of Canada’s experience in a similar conversion.

                         Similarly, the Federal Reserve’s cost of processing notes-GJ4.38 per
                         1,000 notes-is higher than its cost to process coins-which      is about
                         $.27 per 1,000 coins. The primary reason for such a difference is that
                         paper currency requires much more processing than coins. For example,
                         when the Federal Reserve receives currency from a financial institution,
                         it must verify the number of bags deposited and the number of currency
                         bundles in each bag. The Federal Reserve Bank then separates the bun-
                         dles so that the individual notes can be run through a machine that veri-
                         fies the denomination of notes, evaluates the note quality, checks for
                         counterfeit notes, and destroys those unfit for circulation. If a note is in
                         such inferior condition that the machine cannot evaluate its quality, it
                         must be destroyed manually. Notes judged fit for reintroduction into cir-
                         culation are rebundled, counted, bagged, and paid out to a requesting
                         institution.

                         Coin processing at the Federal Reserve Banks, on the other hand, is min-
                         imal, The Federal Reserve Banks accept coins from financial institutions
                         only in bags that are weighed to verify quantities, but the bags are
                         never opened by the Federal Reserve Banks. Financial institutions, or
                         armored car carriers, bear the burden and costs of wrapping, counting,
                         and verifying the coins. Additionally, Federal Reserve officials said that
                         a lower percentage of coins are processed because merchants retain for
                         recirculation a higher percentage of coins than notes.

                         We estimated that the Federal Reserve would save about $29 million a
                         year in processing costs, in present value dollars, if the dollar coin and
                         a-dollar note replaced the l-dollar note.


Budgetary Impact of      In addition to currency production and processing savings, the govern-
Converting to a Dollar   ment will also reduce overall budgetary costs by replacing the l-dollar
                         note with a coin. As explained below, we estimated that overall budget-
Coin                     ary savings, on a present value basis, will average $318 million a year,
                         after considering the savings in production and processing costs, debt
                         interest avoided through profits made on coin production, the initial
                         start-up costs associated with introducing a new dollar coin, additional
                         operational costs for the Mint, and the loss in Federal Reserve portfolio
                         earnings made on its holding of government securities purchased by
                         issuing dollar notes.


                         Page 15                                  GAO/GGD-90-88 National Coinage Proposals
    Chapter 2
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    When the Mint produces coins, it recognizes as a profit the difference
    between the coins’ production costs and their face value. The concept of
    the government’s recognition of such profit is called “seigniorage” (see
    app. V). We estimated that seigniorage would average $1.6 billion a
    year, in present value dollars, from the production of dollar coins over
    the 30-year period. The cumulative seigniorage would average $23.1 bil-
    lion annually. Seigniorage itself has no impact on the size of the current
    budget deficit but does reduce the amount of money thatmust be bor-
    rowed from the public to finance future deficits. Thus, in this instance,
    Treasury would avoid the need to borrow $23.1 billion a year, on aver-
    age, to finance the Nation’s debt. We estimated that this would equate,
    on an average present value basis, to a $461 million a year reduction in
    interest costs and future budget outlays and deficits.

    Although seigniorage would be recognized from a dollar coin, the Trea-
    sury would lose some offsetting interest from the elimination of l-dollar
    notes. Generally, the difference between the face value of notes and the
    cost of printing them and an allocation of the Federal Reserve’s operat-
    ing costs is used by the Federal Reserve to purchase Treasury securities,
    which make up the Federal Reserve’s portfolio. The Federal Reserve’s
    holdings of Treasury securities are what backs up the Federal Reserve
    notes, which are obligations of the system. The earnings from these
    securities are returned to the Treasury. Thus if the notes are withdrawn
    from circulation, the Federal Reserve’s portfolio earnings and interest
    on it would decrease accordingly. We estimated that by eliminating the
    dollar note, Treasury would lose about $177 million annually, in present
    value dollars, from reduced Federal Reserve portfolio earnings.

    Also, the Mint would require additional appropriations for the coins’
    production, We assumed that the Mint would produce about 2 billion
    coins annually for the first 5 years, then would produce coins at a level
    that would meet currency growth. We estimated the Mint would require
    an average additional $7 million annually, in present value dollars, in
    appropriated funds for dollar coin production over the 30-year period.
    We also estimated that an additional outlay of $17.8 million would be
    needed to

. purchase two blanking presses and an annealing furnace ($1.5 million);
l research and develop the new coin ($300,000);
l expand the Mint’s die-casting capacity ($10 million); and
l pay for a public awareness campaign ($6 million).




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                                           A Dollar Coin Could Save the Government
                                           Millions, but Major Obstacles Need to
                                           Be Overcome




                                           Over our 30 year analysis period, the $17,8 million in start-up costs
                                           would average $593,000 annually in present value dollars. Overall
                                           annual savings, in present value dollars, from the conversion to a dollar
                                           coin are shown in table 2.1.

Table 2.1: Average Annual Government
Present Value Savings With a Dollar Coin   Dollars    in mlllions
                                                                                                                             Average      annual savings
                                           Savings      components:
                                           Reduced       currency      production      and processing     costs                   $41.4
                                           Interest    expense       avoided    through     seigniorage                           461.1
                                              Subtotal                                                                                            $502.5
                                           Less additional           costs:
                                           Start-up    costs                                                                           0.6
                                           Increased      Mint production         costs                                                6.6
                                           Loss in Federal          Reserve    portfolio   earnings                               177.1
                                           -Subtotal                                                                                                184.3
                                           Net annual budgetary                savings                                                            $318.2
                                           Note All values are in present value 1990 dollars averaged over 30 years



                                           To evaluate the acceptability of a dollar coin to replace the l-dollar note,
Ol1cxtinnnhl~
~~~““I”ILc*rUIb         Pllhli,
                        I liL”LL   c       we interviewed trade and public interest associations (see app. II), vend-
and Private Sector                         ing machine operators and manufacturers and armored car carriers (see
Acceptability of a                         app. III), and held focus groups with the general public and people who
                                           handle money as a part of their jobs. We also reviewed a recent Gallup
 Iollar Coin                               Survey on this issue. For the most part, it does not appear the public or
                                           the private sector is particularly interested in having a new dollar coin.

                                           General public focus group participants on the whole did not accept the
                                           idea of a new dollar coin. They felt that savings to the government
                                           would not be substantial enough to offset the inconvenience, confusion,
                                           and total costs to the public for a new dollar coin. They expressed skep-
                                           ticism that any savings to the government would be used for worthwhile
                                           causes. The general pubhc focus group participants cited more negative
                                           than positive impacts. As positive effects, they thought a dollar coin
                                           would be easier for the visually impaired to detect, would have greater
                                           physical durability, and would be more convenient to use in vending
                                           machines. The negative effects included more bulk to transport; slower
                                           cash transactions; possible loss if the coin resembled a 25-cent coin;
                                           higher prices at vending machines where prices would be raised to the




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A Dollar Coin Could Save the Government
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dollar; and additional costs passed on to consumers from the private sec-
tor’s costs of retooling vending and laundromat machines.

Focus group participants who handled money as a part of their jobs
offered some positive aspects of a new dollar coin, including a reduction
in counterfeiting in the short term, easier handling than for deteriorated
or newly printed paper currency, and convenience for use in small cash
transactions. They saw as negative impacts the costs to retrofit vending
and coin counting machines; slower cash transactions; transportation
problems due to more bulk; and accommodation problems in cash regis-
ters with high volumes of coins, drop safes, and pneumatic bank tubes.

The money handlers, however, were more inclined to accept a new dol-
lar coin than the general public participants. For example, convenience
store, taxicab driver, restaurant, and soft drink vendor associations
favored the dollar coin because of increased sales; faster cash register
transactions (presumably because a coin is easier to take out of a regis-
ter than a note); the elimination of bill changer machines, which are dif-
ficult to maintain; fewer security concerns; and bigger tips. They noted
that a dollar coin could reduce counterfeiting in the short term and
increase convenience for vending and other automated machine use.
However, the money handlers also noted disadvantages of a dollar coin,
such as short-term costs to retool and retrofit vending machines, public
ill will directed at the retailer, more use of credit for purchases,
increased transportation costs, and accommodation problems in cash
registers if many coins are needed,

The American Bankers Association said that banks would incur
increased transportation, storage, sorting, wrapping, processing, and
administrative costs. This association thought that the costs of con-
verting to a dollar coin would outweigh its benefits to both consumers
and the banking industry. Armored car carriers also reported that coins
are more expensive to transport than currency and that the carriers
would incur increased transportation costs with a dollar coin.

The commuter transit association said that as a positive impact, a dollar
coin could serve as a token in transit fare machines and that commuters
could use the coin as fare when they did not have exact change. How-
ever, this association, as well as the two consumer associations inter-
viewed, also mentioned negative impacts. For example, they said fare
machines would have to be retrofitted; fares might increase, which
would have disproportionate effects on low-income groups and those
dependent on public transportation; and the coin would be bulky and


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    A LloUar Coin Could Save the Government
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    Be Overcome




    add weight to wallets and pockets. The consumer associations offered no
    positive impacts of a dollar coin.

    Despite their mixed reactions to a dollar coin, nearly all the general pub-
    lic and private sector respondents indicated that the dollar note would
    have to be eliminated if the government expects to have a successful
    dollar coin+ They uniformly believed that if a dollar note and dollar coin
    were both available, the public would choose to use the note.

    Because our interviews with trade and public interest associations and
    our focus groups with the general public and money handlers were not
    designed to provide statistically representative samples, we are unable
    to generalize from our results. Nevertheless, we believe the results we
    obtained from these sources are instructive regarding some of the
    impressions that affected consumers and businesses would have with
    the proposed dollar coin. The extent to which similar responses occurred
    across many of the interviews and focus group reinforces our belief.

    Further, the results of our focus groups and interviews were confirmed
    by an April 1990 Gallup Survey commissioned by several zinc produc-
    ers, who were primarily interested in public attitudes towards the dis-
    continuance of the l-cent coin (which is comprised of 97 percent zinc).’
    Regarding public attitudes toward the creation of a new dollar coin, the
    survey found the following:

. One-third (34 percent) of the adult population would favor legislation
  that calls for the creation of a new dollar coin, while 6 in 10 (59 percent)
  would oppose such legislation.
l Among the minority of respondents who favored the creation of a dollar
  coin, 4 in 10 favored abolishing the l-dollar note, while 52 percent
  opposed its replacement.
. Expressed as a proportion of the total population, 15 percent would
  favor creation of a new dollar coin and abolishing the l-dollar note,
  while 18 percent would favor a new coin but would oppose abolishing
  the l-dollar note.




    ‘We reviewed the methodology of the Gallup Survey and found it to be appropriate. Specifically, its
    results are projectable to plus or minus 5 points at the 96 percent confidence level to the total popula-
    tion of adults aged 18 and over living in telephone households in the continental United States,



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                      A Dollar Coin Could Save the Government
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                      According to Treasury officials, the Susan B. Anthony dollar coin was
The American Public   introduced in 1979 to save coin production costs, replace the larger
Did Not Accept the    Eisenhower dollar coin, and commemorate a great American woman. In
Susan B. Anthony      1978 Treasury Department officials said the Susan B. Anthony dollar
                      coin would initially displace a portion of l-dollar notes, increase the
Dollar Coin           demand for 2-dollar notes, and eventually displace all l-dollar notes.
                      The legislation, however, did not call for the elimination of the l-dollar
                      note, and the public continued to use it. The Mint stopped producing the
                      Susan B. Anthony dollar coin in 1982. Today, almost one-half of the 857
                      million produced remain in storage at the Mint and the Federal Reserve
                      Banks.

                      We reviewed congressional hearings, interviewed former and present
                      Mint and Treasury officials, and discussed the Susan B. Anthony experi-
                      ence with focus group and interview participants to determine why the
                      coin failed to circulate. We concluded that the government did not effec-
                      tively manage the coin’s introduction.

                      One of the major causes was the failure to eliminate the l-dollar note.
                      While the coin was first introduced to co-circulate with the l-dollar note,
                      Federal Reserve, Treasury, and Mint officials recognized the coin would
                      not be accepted by the public until the note was eliminated. However,
                      officials were initially reluctant to come forth and advocate that the dol-
                      lar note be eliminated, knowing that such a proposal would not be popu-
                      lar with the public. In 1979, when Treasury let its intention of
                      eliminating the dollar note be known, the then Chairman of the House
                      Banking Committee’s Subcommittee on Consumer Affairs introduced a
                      bill-along with 96 co-sponsors -to prevent the elimination of the
                      l-dollar note.

                      Additionally, the Susan B. Anthony coin too closely resembled the
                      25-cent coin, In 1979 hearings after the coin was introduced, Treasury
                      officials said that the public was confusing the dollar coin with the
                      25-cent piece and, as a result, was not using it. That view was echoed by
                      the private sector and general public respondents in our interviews and
                      focus groups. They said the Susan B. Anthony failed because it looked
                      too much like the 25-cent coin.

                      Further, neither the Treasury Department, the Federal Reserve, or the
                      Mint effectively promoted the coin’s benefits to the general public or to
                      the industries most affected, such as the vending or banking industries.
                      The Department of the Treasury and the Federal Reserve System each
                      spent $300,000 to market the coin. The Federal Reserve contracted with


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                                          A Dollar Coin Could Save the Government
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                                          Be Overcome




                                          a public relations firm to prepare videotapes describing the merits of the
                                          coin and distribute them to television stations. Additionally, the firm
                                          arranged for the Mint Director and other agency officials to appear on
                                          local and national press conferences. The Federal Reserve developed
                                          educational materials for banks. The Mint distributed almost half a mil-
                                          lion information kits to banks, major retailers, financial and retail
                                          associations, the vending industry, and the media.

                                          However, none of the agencies involved made a public acceptability
                                          study before carrying out these activities. One marketing strategy study
                                          contracted by the Federal Reserve was not completed until after the coin
                                          was introduced. While Mint officials said that at least $1 million should
                                          have been spent on the Susan B. Anthony awareness program, there is
                                          no indication that even $1 million would have been effective since the
                                          acceptability issues were not known.


                                          According to Treasury and the Coin Coalition (a lobbying organization
Foreign Governments                       advocating the dollar coin in the United States), Canada, Japan, Austra-
Have Had Successful                       lia, and many western countries in Europe have introduced high denomi-
Conversions                               nation coins and phased out the note of the same value.

                                          We contacted seven European countries and Canada to gain some insight
                                          into their experiences converting low denomination currency to coins.
                                          As shown in table 2.2, all of these eight countries had coins valued (in
                                          U.S. dollars in March 1990) at $36 or higher. Also, their lowest valued
                                          currency (in U.S. dollars in March 1990) was $1.69 or higher.

Table 2.2: Coins and Currency   Used in
Selected Countries                                                              Coins                                        Currency
                                                                  Number       Lowest         Highest           Number        Lowest      Highest
                                          Canada                           6       $01            $.%!i                  6       51.69    $847.17
                                          France                           8         .Oi          1.74    -_____I-       5       3.48        86.96
                                          The Netherlands                  6         .03          2.60                   7       2.60      520.83
                                                                                                               ~--.I________-.
                                          Norway                           5        .02
                                                                                      ~--         1.51                   4--     7.54       150.83
                                          Spain                            8        .01           4.56     ~____.        5       4.56       91.16
                                                                                                            ~-~
                                          Switzerland                      8         .Ol          331                    6       6.62      661.60
                                                                                                                                 --____
                                          The United
                                          Kingdom                          7        .02___-       1.62                   4       8.09       80.91
                                          West Germany                     8        .01          293~~~                  7       2 93      585.89

                                          Note, Values are rounded lo the nearest hundredth of U S dollars as of March 1990.




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                                    A Dollar Coin Could Save the Government
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                                    Six of the eight countries have converted low denomination currency to
                                    coins in recent years. Two countries-Switzerland     and West Germany-
                                    reported they have had no conversions in recent years. As shown in
                                    table 2.2, however, both Switzerland and West Germany have coins that
                                    are worth about 3 U.S. dollars. Table 2.3 lists these conversions and the
                                    value of the notes replaced (in U.S. dollars as of March 1990).

Table 2.3: Dollar Note Equivalent                 --
Conversions in Selected Countries                                                                          Note       U.S. value
                                                                                       Year
                                                                                    ___.~             replaced     (March 1990)
                                                       -.-        --
                                    Canada                                               1987           1 Doliar            $85
                                    France                                         m-    -__            5 Franc              I37
                                                      __._   _-        __-
                                                                                         1975          10 Franc             1.74
                                    The Netherlands
                                                              --~_____                   1988         5 Guilder             2.60
                                    Norway                                               1964          5 Kroner              .75
                                                                                         1984         10 Kroner             1 .51
                                    Spain                                                1982       100 Peseta               .91
                                                                                         1986       200 Peseta              1.82
                                                                             __~         1988       500 Peseta              4.56
                                    The United   Kingdom                                 1983‘         1 Pound              1.62



                                    Officials in these countries gave several reasons for converting from
                                    notes to coins. All of the countries said they did so to save currency
                                    production costs of short-lived notes. With the exception of Spain, they
                                    said that another reason was that coins were easier to use in vending
                                    machines. Most of the six countries said that conversions were made
                                    because notes were often dirty and in poor condition and that coins
                                    saved currency maintenance and processing costs. France and the
                                    United Kingdom also said that conversions were natural progressions
                                    due to inflation.

                                    All of these countries faced public resistance to the changes. The offi-
                                    cials indicated that, for a successful conversion, the government must
                                    expect public resistance and be strong in its determination to eliminate
                                    the note. The United Kingdom officials said that as long as notes still
                                    circulate, the public will resist coins and exert pressure on the govern-
                                    ment to rescind its decision. French officials said the public accepted the
                                    lo-Franc coin only when the note was demonetized. Spanish officials
                                    also noted that the public is generally averse to change and will always
                                    prefer notes to coins. Norway said the public heavily criticized its deci-
                                    sion, but the government gave no serious consideration to reversing it.




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The Netherlands reported little initial resistance to the changes. Cana-
dian officials said the public was evenly split among like, dislike, and
indifference.

We asked the six countries an open-ended question as to what lessons
had been learned from their experiences in converting to coins. They
offered the following lessons (number of countries indicating lessons
learned in parentheses):

Notes must be eliminated. (6)
Have a public awareness campaign. (5)
Government must expect public resistance and be strong in its determi-
nation to convert. (4)
Ensure sufficient coins are available. (4)
Coins must have a distinct appearance. (4)
Consult beforehand with consumers and private organizations. (3)
Have vending machines available to use coins. (2)
Inform the public that the reason for converting is cost savings, not
inflation. (2)
Coins must not be too large or too small. (2)
Coins should represent a national symbol. (1)
Consider coins of neighboring countries. (1)

Mint, BEP,and Treasury officials said they believed foreign experiences
may not be valid indicators of the prospects the United States would
have in mandating a dollar coin in view of (1) the parliamentary form of
government characteristic of these countries, which makes it easier to
impose unpopular changes on the public; (2) the central banking systems
most of these countries have, which increases the amount of control the
government has over the banks; and (3) the smaller scale on which these
countries produce currency and coins. Mint, BEP,and Treasury officials
all agreed that because of these basic differences it would be much
harder for the United States to have success in substituting a dollar coin
for a note.




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                        A Dollar Coin Could Save the Government
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                        The experience of the Susan B. Anthony failure and lessons learned by
Essential Ingredients   countries in converting from notes to coins provide insight into what it
for a Successful        would take to successfully convert to a dollar coin in the 1990s. For
Conversion              example, it appears that the following factors should be addressed.

                        The dollar note would have to be eliminated: For the dollar coin to suc-
                        cessfully circulate, the note would have to be eliminated. Mint and Trea-
                        sury Department officials said the current U.S. mix of currency and
                        coins, which is driven by consumer preferences, works well. They also
                        said that in the American political context with open channels for the
                        public to communicate its views in the short term, they do not think
                        Congress will allow the dollar note to be eliminated. The 1979 experi-
                        ence, coupled with strong congressional opposition to the prospect of
                        eliminating the dollar note, bolsters this view.

                        A reasonable transition period is needed: The period of co-circulation of
                        the l-dollar note and coin should be minimized. Although the proposed
                        legislation calls for a 3 year transition period, Mint officials said they
                        would need 30 months just to develop the coin. We used 5 years in our
                        model for a transition period, primarily because Mint officials said they
                        could produce a maximum of 2 billion dollar coins a year. At this rate, it
                        would take 5 years to meet the 10 billion coin demand from the elimi-
                        nated l-dollar notes and currency growth. BEPofficials said the transi-
                        tion period should proceed gradually, over a &year period at least.
                        Realizing there are practical constraints, it would seem that a protracted
                        transition period could cause a loss of momentum to a conversion pro-
                        gram and could ultimately lead to failure.

                        The coin must be well designed: A circulating coin must be commercially
                        functional as well as acceptable to the public. The Susan B. Anthony
                        coin too closely resembled the 25-cent coin. It appears that the proposed
                        coin may also be confused with the 25-cent coin, For example, we
                        showed the new Canadian dollar coin-which        is gold-colored, has 11
                        sides, and is about the same size and weight as the Susan B. Anthony
                        dollar coin-to our focus group, trade association, and public interest
                        group participants and asked if such a coin would be more distinguisha-
                        ble from the 25-cent coin than the Susan B. Anthony dollar coin. Gener-
                        ally, all respondents reacted well to the coin’s gold color but did not
                        think the color alone was enough to avoid confusion with the 25-cent
                        coin.

                        General public focus group participants said they would still confuse
                        such a coin with the 25-cent coin as long as the sizes were similar. They


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A Dollar Coin Could Save the Government
Mlllions, but MaJor Obstacles Need to
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suggested increasing the proposed dollar coin’s size to halfway between
the size of the 25-cent coin and the 50-cent coin, with distinctive edges
or a hole in the middle. Representatives of public interest groups also
noted that, to avoid confusion with the 25-cent coin, the proposed dollar
should be bigger. Respondents representing the visually impaired said
that the gold color would not help the visually impaired as much as
would a larger sized coin.

Additionally, money handler focus group participants said the Canadian
coin’s gold color was an improvement over the Susan B. Anthony dollar
coin, but the coin’s size was still too similar to the 25-cent coin. Repre-
sentatives of trade associations also favored the Canadian coin’s gold
color, but said the proposed dollar would have a greater chance at suc-
cess if it were larger. However, they were not unanimous as to the pre-
ferred size of the new coin, Vending equipment operators, for example,
said they would prefer the new dollar coin to be the size of the Susan B.
Anthony dollar coin to minimize retooling costs.

Moreover, size, shape, and alloy content alterations may increase the
vending industry’s costs to retool machines to make them accept the dol-
lar coin and thus mitigate the industry’s support for a dollar coin. For
example, the National Automatic Merchandising Association said that
about 50 percent of the vending machines in America can handle the
Susan B. Anthony dollar coin. Most of these machines were acquired in
the 1980s. The association said that changes in the size or metallic con-
tent of the proposed dollar coin could require completely new coin mech-
anisms, which would be vigorously opposed by the vending industry.
Other vendors that we contacted, however, disputed this assertion and
said their machines could not accept the Susan B. Anthony dollar coin.
Some indicated that they purposely modified the coin slots on their
machines so that only 25-cent or smaller sized coins could be inserted,
because the Susan B. Anthony dollar coins jammed their machines when
deposited.

BEP,Mint, and Treasury officials said that the public may not like a
Christopher Columbus design on the coin since he was not an American.
BEPofficials suggested that George Washington be put on the coin. Some
of our general public focus group participants indicated a belief that the
Anthony coin was never meant to circulate widely, because, they said,
the coin was a one-time commemorative of Susan B. Anthony. A similar
confusion could result from commemorating Columbus on the new dollar
coin.



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              A Doilar Coin Could Save the Government
              MUions, but Major Obstacles Need tn
              Be Overcome




              An adequate public awareness program is needed: While public accepta-
              bility is questionable, the government can lessen public resistance
              through an adequately funded public awareness campaign. It would be
              essential for such a campaign to be thoroughly grounded on an under-
              standing of public attitudes and a core of persuasive themes. The Trea-
              sury Department requested funds for its fiscal year 1990 budget to
              make a public acceptability study for the proposed coin, a request that
              was denied by the Office of Management and Budget. Treasury Depart-
              ment officials said they did not think Congress would now authorize
              additional funds for Treasury to make a public acceptability study.

              The Administration and Congress must support the coin: If Congress
              authorizes the new dollar coin, it and the Administration have to be firm
              in their resolve to make the change and be prepared to handle public
              resistance. In some countries that have made conversions, a “champion”
              of the coin was designated to address the public’s concerns. However,
              Mint and Treasury Department officials said that their agencies have
              not lived down the Susan B. Anthony experience, which has made them
              reluctant to try again. Additionally, Treasury Department officials said
              the legislation may be perceived to benefit only the special interests of
              certain sectors of the economy, such as the copper suppliers and the
              vending industry.


              If successfully introduced and accepted, a dollar coin could save the
Conclusions   government over $41 million annually in present value dollars to pro-
              duce and process currency. Under our assumptions, the budgetary
              impact of all savings, including seigniorage, would be about $318 million
              a year. However, if the coin is not widely accepted and used, the govern-
              ment will not realize these savings. Also, some of the government sav-
              ings will come at the expense of additional costs being borne by the
              private sector, such as additional coin processing and transportation
              costs.

              The Susan B. Anthony experience is not conclusive proof that a dollar
              coin cannot be successful. It does show, however, that if a coin’s intro-
              duction is not effectively managed, the coin will not be accepted. The
              primary obstacle to the coin’s success would be the difficulty Congress
              and the Administration would have to reach an agreement to impose the
              coin on the public by eliminating the l-dollar note and maintain a
              resolve not to reverse the decision, even if public reaction is negative,
              which we expect it will be. The other obstacles-designing a coin readily
              distinguishable from the 25-cent coin but still acceptable to the vending


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                        A D&ar Coin Could Save the Goverument
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                        Be Overcome




                        industry and making the transition in a relatively short period of time
                        without imposing undue burdens on the Mint and sEP--also need to be
                        addressed but appear less formidable.


                        We recommend that Congress proceed with the proposed dollar coin leg-
Recommendation          islation only if (1) it and the Administration can reach and sustain a
                        joint resolve to eliminate the dollar note and stand up to an expected
                        negative public reaction, (2) it funds a sophisticated and sustained pub-
                        lic awareness campaign, (3) the Mint is able to produce a coin readily
                        distinguishable from the 25-cent coin but still acceptable to the vending
                        industry, and (4) the Mint can produce sufficient quantities of the coin
                        to meet all demand within 5 years of the coin’s introduction.


                        Treasury, Mint, HEP,and Federal Reserve officials commented on our
Views of the Agencies   conclusions and the results of our analysis of the dollar coin proposal on
                        May 21, 1990. Federal Reserve officials said our analysis was balanced
                        and fairly presented the issues+ The Mint and BEPDirectors said they
                        found our analysis to be an accurate assessment of the potential benefits
                        and difficulties of substituting a dollar coin for the current l-dollar bill.
                        They said that economic benefits aside, it is public acceptance that is the
                        key to success in our system. Treasury officials also said that they gen-
                        erally agreed with our findings but would reserve commenting on our
                        specific projected savings estimates until they had the opportunity to
                        review our report in depth.




                        Page 27                                 GAO/GGD-90-98 National Coinage Proposals
Chapter 3

No Compelling Reasonto Eliminak the Penny
or Half Dollau.

                        Although the penny has lost most of its purchasing power to inflation
                        over the years’ and is considered by some a “nuisance,” demand for it is
                        strong. Rounding cash transactions to the closest five cents may not be
                        palatable to some, at least initially. Further, the Mint can still produce
                        pennies at a profit. Some foreign governments have eliminated their
                        lowest denomination coins, but in the cases we reviewed the production
                        costs of such coins exceeded their face value. While demand for the 50-
                        cent coin is very limited compared to other coins minted today, it too is
                        profitable to the government.


                        The face value-the amount that the Federal Reserve credits to the
Eliminating the Penny   Treasury when coins are put into circulation-of    both the penny and
and/or Half Dollar      the half dollar exceeds their production costs. As explained in appendix
Would Not Save the      V, the difference between face value and cost of production-called
                        seigniorage-is treated as a reduction in the amount of borrowing the
Treasury Money          Treasury must do to finance the national debt.

                        According to the Mint, in fiscal year 1989, 12.8 billion pennies were pro-
                        duced at a cost of $84.8 million, or a unit cost of $0.007. An additional
                        $1.2 million expense was incurred by the Mint to transport the l-cent
                        coins to the Federal Reserve banks. If the penny were eliminated, the
                        Mint’s production and transportation costs of $86.0 million would be
                        avoided, but the Treasury would also forego the $ I28 million credit
                        (12.8 billion x $0.01) from the Federal Reserve, for an annual net loss of
                        $42.4 million to the Treasury. At the fiscal year 1989 average borrowing
                        rate of 8.5 percent, the $42,4 million reduction in government borrowing
                        resulted in interest savings of $3.6 million.

                        Although the total seigniorage for the half dollar is less than the penny,
                        due to its relatively low volume of production,X the seigniorage is still
                        positive. Only 41 million half dollars were produced in fiscal year 1989,
                        at a cost of $2.4 million, or a unit cost of $0.06. Transportation costs to
                        Federal Reserve banks totalled $50,640. If the half dollar was elimi-
                        nated, the Treasury would avoid the $2.4 million production and trans-
                        portation costs but would forego the $20.5 million Federal Reserve

                        ‘The l-cent coin (often “penny” in the vernacular) was first authorized by Congress in 1792, We
                        computed the difference in the consumer price index from 1800, the closest year to 1792 that data
                        were available, to 1989.4 l-cent coin in 1989 was worth about one-seventh of its 1800 value (1890
                        index of 100.0; 1989 index of 728.0).

                        ‘Mint officials said that the largest consumers of 50.cent coins were casinos. In 1989, according to the
                        Mmt, 58 percent of all 50-cent coins produced were shipped to the three Federal Reserve Banks ser-
                        vicing the Las Vegas, Reno, Lake Tahoe. and Atlantic City casinos.



                        Page 28                                                GAO/GGD-90-88 National Coinage Proposals
                             chapter 3
                             No Compelling Reason to Eliminate the
                             Penny or Half Dollar




                             credit (41 million x $0.50) for a net loss of $18.1 million. At the 8.5
                             percent borrowing rate, the seigniorage on the half dollars would save
                             an additional $1.5 million in interest paid by the Treasury.


                             Treasury and Mint officials said that they were opposed to eliminating
Few People Would             the l- and 50-cent coins because the current mix of coins used in our
Probably Miss the Half       economy was working well and the public was not demanding any
Dollar, but Some Might       changes. Federal Reserve and BEPofficials said that although the 50-cent
                             coin is rarely used, they did not understand the rationale for eliminating
Prefer the                   either the I- or 50-cent coins.
Inconvenience of
Handling Pennies to          Representatives of the trade associations we interviewed generally
                             favored elimination of the penny and half dollar but expressed concern
Rounding                     that rounding and its potential negative impacts-bookkeeping
                             problems and the creation of public ill will stemming from the percep-
                             tion that businesses would use rounding to their own advantage-would
                             be a serious deterrent to accepting the legislation. The public interest
                             group associations were generally indifferent to the elimination of the
                             penny and in favor of eliminating the half dollar. However, they
                             expressed concern about the differential impact on the poor (because of
                             their disproportionate participation in small cash transactions) from
                             price increases and rounding-up losses

                             In general, the associations thought that eliminating the penny might
                             speed up transactions at cash registers but pointed out that charities
                             may suffer a loss in donations from pennies now used in gumball
                             machines and wishing wells. Many negative impacts were mentioned
                             resulting from the rounding rules associated with elimination of the l-
                             cent coin, including

                         l inconsistencies in bookkeeping and resolving cash register balances;
                         l problems when cashing checks written to fractions of a dollar;
                         l retraining employees;
                         l significant public education programs;
                         l temporary unloading of cents on retailers;
                         l consumers’ belief that they were being “ripped off”;
                         l bigger effect on poorer consumers, who generally make frequent smaller
                           purchases, and those retailers whose average transaction amount is low;
                           and
                         . need to reprogram computer cash registers and other automated
                           equipment.



                             Page 29                                 GAO/GGD90-88 National Coinage Proposals
Chapter 3
No Compelling Reason to Eliminate the
Penny or Half Dollar




The focus groups we held with the general public and money handlers
indicated that both groups were indifferent to eliminating the half dol-
lar, primarily due to its scarce appearance, limited use in vending
machines, and large size. About one-half of the general public respon-
dents favored the elimination of the penny primarily because of its lim-
ited buying power and inconvenience; the other half opposed its
elimination and thought that rounding rules would be complicated and
had the potential to cause inflation. A few general public respondents
also were against eliminating the penny because it is part of America’s
heritage. Most money handler respondents favored elimination of the
penny. Many cited concerns over accounting discrepancies and other
negative impacts resulting from rounding.

Overall, general public participant reaction to the rounding rule was also
negative. Most believed that businesses would increase their prices and
expressed concern for the poor, who could not afford losses from round-
ing up. Business group participants were concerned that rounding would
result in bookkeeping problems, tedious verbal explanations of rounding
to consumers, short-term costs involved in cash register adjustments or
purchase of software to accommodate automatic rounding, and rounding
losses particularly for banks when cashing checks that round up.

Since our interviews with trade and special interest associations and our
focus groups with money handlers and the general public were not
designed to provide statistically representative samples, we are not able
to generalize from our results. However, we believe the results we
obtained from the association interviews and focus groups are instruc-
tive regarding some of the impressions that consumers and businesses
would have with the proposed legislation. The extent to which similar
responses kept occurring across many of the interviews and focus
groups reinforces that belief.

For these reasons, we do not know what is more acceptable to the major-
ity of Americans-retaining    the penny and living with its attendant
inconveniences or eliminating it and adjusting to rounding. It does seem
clear, however, that the 50-cent coin would not be missed by the major-
ity of Americans and that there could be much negative public reaction
to rounding to the nearest 5 cents, at least initially. We are unable to
determine how long such negative reaction might last.

An April 1990 Gallup Survey on public attitudes toward the discontinu-
ation of the penny, commissioned by zinc producers who were interested
in preserving the coin because of its 97 percent zinc content, showed


Page 30                                 GAO/GGD90-83 National Coinage ~ropos&
    Chapter 3
    No Compelling Reason to Eliminate the
    Penny or Half Dollar




    that rounding may not be acceptable to the public. Regarding the penny
    (no questions were asked on the 5O-cent coin), the survey found the
    following:

. Three in five (62 percent) adults surveyed said they would oppose legis-
  lation that would call for the discontinuation of the penny and that
  would require merchants to implement a rounding system. One in four
  (26 percent) would favor such legislation.
. When asked how strongly they felt about this issue, those who opposed
  the legislation were more likely than those who favored it to say they
  feel very strongly about it.
l Three in four (77 percent) were concerned that merchants might
  increase their prices to compensate for any losses from a rounding sys-
  tem. However, when asked a follow-up question as to how concerned
  they were that this might happen, fewer (54 percent) said they were
  very concerned.
. About two in five (43 percent) agreed that eliminating the penny would
  not be a problem, since most people try to avoid using it.
9 The majority of adults surveyed said that eliminating the penny will
  have an effect on the economy, though fewer than one in five (18 per-
  cent) believed this will contribute to inflation a great deal.

    While we were doing our work in Europe on foreign countries’ exper-
    iences with converting from dollar equivalent notes to coins and elimi-
    nating penny equivalents, we learned that in 1980 the U.S. Army in
    Europe asked the American military facilities in Europe to eliminate the
    penny because of the expense of transporting the coins there. All but
    three facilities-the  Post Office, the commercial bank, and the Finance
    Office-agreed to the change. These three facilities were bound by regu-
    lations that would not allow them to round prices. The commissaries and
    Army and Air Force Exchange Service facilities welcomed the coin’s
    elimination and said that they were not adversely affected by it. Offi-
    cials said that while a few complaints were received initially, as custom-
    ers have become familiar with the rounding policy, complaints have
    decreased and today are rarely received. However, officials said that the
    facilities often round down to minimize complaints. Also, while the facil-
    ities do not give pennies as change, they will accept pennies if people
    want to pay with them.

     Although the Coin Coalition said a reason to eliminate the penny was to
     make room in cash register drawers for the proposed dollar coin, the
     focus group participants who deal in cash transactions as a part of their
    jobs did not confirm this as a need. We interviewed officials of the NCR


    Page 31                                 GAO/GGD-90-88 National Coimxge Proposals
Chapter 3
No Compelling Reason to Eliminate the
Penny or Half Dollar




Corporation, the major source of cash registers in the United States, and
asked them if the majority of cash registers in use today could accept a
dollar coin without eliminating the compartment for pennies. They said
that although they were not aware of any surveys done on this subject,
their corporation did not sell any cash registers with fewer than five
coin compartments, which could be used for the I-, 5-, lo- and 25-cent
coins, leaving another compartment for a possible dollar coin. They
added that many merchants use the fifth compartment for rolled coins,
but this was not advisable due to the weight this imposed on open cash
register drawers. NCR’s newer products have a separate compartment
for rolled coins that is in the back of the drawer to minimize the weight
load.

The NCR officials added that probably many imported, lower cost cash
registers sold in the United States only had four coin compartments.
These machines are used primarily by small retailers who want a cash
register that uses less counter space. Although NCR officials did not
know how many of such machines were in use today, they said that
these machines generally had about a 5-year life. Therefore, if
merchants had sufficient lead time to plan converting to a five-coin sys-
tem, officials said that the impact would be minimal. These officials also
said that the cost to convert the more sophisticated cash registers in use
today, which have an &year life, to automatically round to the nearest 5
cents would probably convince most users to buy new equipment.

We also asked sales tax authorities in Maryland and Virginia if the
rounding rule would pose problems in collecting sales taxes in these
states. Maryland said that rounding to the closest 5 cents would not
affect the collection of sales taxes. Maryland would continue to collect
the actual tax due, before rounding. A Maryland sales tax official
thought that merchants would “lose” sometimes and “win” sometimes
and that winning and losing would even out in the long term. He also
indicated that merchants might try to set prices so that rounding would
benefit them. He also said that forces of a competitive marketplace
would tend to negate this practice.

Virginia officials said rounding would not impose any significant
problems to the collection of sales taxes but should be applied to all
forms of payment, including checks and credit cards. They reasoned
that people who do not have access to checking accounts or credit cards,
most likely poor people, would pay the rounded amount, whereas people
who do have access to checks or credit cards would pay the unrounded



Page 32                                 GAO/GGD+MMM National Coinage Proposals
                                     Chapter 3
                                     No Compelltng Reason to Eliminate the
                                     Penny or Half Dollar




                                     amount. They also noted that converting cash registers to compute the
                                     rounded price would be a burden on merchants.


                                     Of the seven foreign countries that provided data to us on eliminating
Foreign Experiences in               their low denomination coins (Norway did not answer our questions on
Eliminating Low                      this matter), four indicated that they had eliminated their low denomi-
                                     nation coins. Table 3.1 shows the four countries that eliminated their
Denomination Coins                   low denomination coins
Have Been Mixed
Table 3.1: Low Denomination  Coins
Eliminated by Selected Countries                                                                             Equivalent
                                                                                                             U.S. value
                                                                                      Coin            Year       (March
                                     Country      ______~~     ~~ __-          eliminated     eliminated       -~ 1990)
                                     France                                      1 centime
                                                                                       -.__
                                                                                                     1975       $0.0018
                                     The Netherlands                                 1 cent          1982        0.006
                                                       ____   __-
                                     Spain
                                     __-                                      50 centimos            I 983       0.005
                                     The United   Kingdom                       l/2 penny            1983        0 01



                                     Officials from these countries said they eliminated the coins because
                                     they (1) were expensive to produce (France, the Netherlands, Spain, and
                                     the United Kingdom); (2) did not circulate (France and the United King-
                                     dom); and (3) had very limited buying power (the Netherlands and the
                                     United Kingdom).

                                     Officials from Canada, Switzerland, and West Germany said that they
                                     have not eliminated their low denomination coins for a variety of rea-
                                     sons. Canadian officials said that since no one is pushing the issue, no
                                     decision to eliminate the cent has been made. They said that there would
                                     be no political benefit in eliminating the coin, but the political risk would
                                     be substantial. The Canadian officials added that because the govern-
                                     ment is currently in the process of imposing a national value-added tax
                                     to all purchases, eliminating the cent at this time would be perceived by
                                     consumers as a government initiative to increase prices further.

                                     Swiss officials said that their 1-centime coin, although still produced, is
                                     rarely seen in circulation. They said that the major reason for keeping
                                     the coin is that the country’s coinage system is legally based on the
                                     1-centime unit.




                                     Page 33                                  GAO/GGD90-58 National Coinage Proposals
              Chapter 3
              No Compelling Reason to Eliminate   the
              Penny or Half Dollar




              West German officials said that they did not feel the public would
              approve of eliminating the l-pfennig coin because most prices would be
              rounded up, causing people to think that inflation was increasing. They
              added that the country could probably close two of its four mints if the
              pfennig was eliminated.

              In two of the three countries that have not eliminated their low denomi-
              nation coin equivalent, the production cost exceeds the face value.
              Canada said the cent costs about l-1/2 to 2 cents (Canadian) to produce.
              West Germany said that the production cost of a I-pfennig coin is 2-l/2
              pfennigs. Three of the four countries that did eliminate their low denom-
              ination coins-France, the Netherlands, and the United Kingdom-said
              that the production cost of the cent equivalents was higher than the face
              value at the time of eliminating the coins. The fourth country that elimi-
              nated the cent equivalent, Spain, did not respond to this question.


              While some Americans would no doubt welcome the elimination of the
Conclusions   penny because of its low purchasing power and inconvenience, Ameri-
              cans generally seem to tolerate the coin, as evidenced by the more than
               12 billion pennies demanded this year. The possible benefits of speeding
              up cash transactions and reduced handling costs of the coins for banks
              and merchants has to be weighed against the possible negative impacts
              of rounding, such as bookkeeping problems, reprogramming automatic
              cash registers, a potential that prices would increase with a dispropor-
              tionate effect on the poor, and a loss in donations for charities.

              Further, the countries we identified that have eliminated their low
              denomination coins did so when the production cost exceeded the face
              value of the coin. This is not the ease in our country. In fact, eliminating
              the penny at today’s cost levels would increase the Treasury’s cost of
              borrowing and increase the deficit by almost $4 million a year. Some
              countries have chosen to continue production of low denomination coins
              costing more than their face value, believing the public would not
              approve of eliminating the coins.

              Although demand in the United States for the half dollar is low and it
              would not be missed by the majority of Americans, we see no compelling
              reason to eliminate it. It does reduce Treasury’s cost of borrowing and
              the deficit by almost $2 million a year and apparently is of use to some
              of the public.




              Page 34                                   GAO/GGD-9088 National Coinage Proposds
                        Chapter 3
                        No Compelling Reason to Eliminate the
                        Penny or Half Dollar




                        In commenting on the results of our analysis of the penny and half dol-
Views of the Agencies   lar proposals on May 21, 1990, Federal Reserve officials said our analy-
                        sis was fair and balanced. Treasury officials and the Director of the U.S.
                        Mint also agreed with our conclusions and analysis.




                        Page 35                                 GAO/GGD-90-88 National Coinage Proposals
Appendix I

Major Assumptions Used in Cost Model


                      We used a computer model to estimate government savings from replac-
                      ing the l-dollar note with a dollar coin over a 30-year period. We
                      adapted a model used by the Federal Reserve Board of Governors,
                      which divides the government’s costs into three components-produc-
                      tion costs, processing costs, and the budgetary impact of the proposed
                      legislation.


                      We made certain assumptions in using the model to compute all three
General Assumptions   components. The bases for our assumptions follow.

                      Transition period: The proposed legislation calls for introducing the coin
                       18 months after the legislation is passed, and ceasing production of the
                       l-dollar note 18 months after the coin is introduced. Foreign govern-
                      ments that have made similar changes in their currency system recom-
                      mend a transition period ranging from a few months to 3 years.
                      However, Mint officials said the Mint, with expanded die-casting capac-
                      ity, could produce a maximum of 2 billion dollar coins a year. We esti-
                      mated that 7.5 billion coins would be needed initially to replace the l-
                      dollar notes that would be in circulation at the outset of our 30-year
                      analysis (see replacement ratio assumption for the computation of total
                      demand). Bureau of Engraving and Printing officials said that the tran-
                      sition period should be as gradual as possible to minimize disruptions to
                      their operations. Mint officials also said that the Mint would need 30
                      months to research and develop the new dollar coin. Taking the foreign
                      experience and practical limitations into account, we assumed a 5 year
                      transition period and that coin production would begin in January 199 1,

                      Inflation rate: We assumed a 4 percent inflation rate for the 30-year
                      period. We based our estimate on a January 1990 Congressional Budget
                      Office publication, The Economic and Budget Outlook: Fiscal Years
                       1991-1995, which estimates that the Gross h’ational Product deflator
                      will rise 4 percent annually from 199i to 1995. The Congressional
                      Budget Office makes no economic assumptions for years after 1995. We
                      believe 4 percent is a reasonable estimate for expected inflation
                      throughout the analysis period.

                      Discount rate: We used 4.61 percent as the discount rate for the 30-year
                      period. To arrive at this rate, we averaged the yields on outstanding
                      Treasury obligations that have remaining maturities comparable to the
                      period of analysis (30 years), excluding those maturing before 1991 and
                      those with a coupon interest rate less than 4.25 percent. This resulted in



                      Page 36                                GAO/WD-9088   National Coinage Proposals
                        Appendix I
                        Major Assumptions Used in Cost   Model




                        an 8.61 percent rate. To account for inflation, we subtracted the 4 per-
                        cent inflation rate from the 8.61 percent cost of borrowing. The result-
                        ing real discount rate, 4.61 percent, was applied to all costs in our
                        analysis. We did two alternative simulations using rates of 2.61 and 6.61
                        to determine the sensitivity of the discount rate of 4.61 in our analysis.
                        Overall results were not materially different under these rates.

                        Kumber of l-dollar notes in circulation at the beginning of the model: We
                        began our model with 5 billion l-dollar notes in circulation. According to
                        the March 1990 Treasury Bulletin, there were about 4.8 billion l-dollar
                        notes in circulation on December 31, 1989. At a 5 percent annual growth
                        (see currency growth assumption), about 5 billion notes would be in cir-
                        culation in January 1991.

                        Number of higher denomination notes in circulation at the beginning of
                        the model: We began our model with 8 billion higher denomination notes
                        (5, lo-, 20-, 50- and IOO-dollar notes) in circulation. According to the
                        March 1990 Treasury Bulletin, there were about 7.6 billion of such notes
                        in circulation on December 31, 1989. At a 5 percent annual growth (see
                        currency growth assumption), about 8 billion higher denomination notes
                        would be in circulation in January 1991.


                        To compute production cost savings, we estimated the government’s
Production Cost Model   production costs for l-dollar notes assuming no changes. This savings
Assumptions             was the product of the number of l-dollar notes that would have been
                        produced times current unit production cost. From this, we subtracted
                        the expected production costs of a dollar coin.

                        Currency circulation growth: We used a 5 percent annual currency cir-
                        culation growth rate, based on the average yearly growth for the
                        amount of currency in circulation from 1983 to 1989. We assumed this
                        rate would remain constant throughout the 30-year period. Federal
                        Reserve officials agreed that a 5 percent growth rate would be a reason-
                        able assumption for our analysis period.

                        Number of 2-dollar notes in circulation at the beginning of the model: We
                        began our model with 625 million 2-dollar notes in circulation, This
                        number is based on a 25 percent switchover rate from l-dollar notes to
                        2-dollar notes (see switchover rate assumption).

                        Circulation life of l- and S-dollar notes: We used 1.4 years as the aver-
                        age life of l- and 2-dollar notes, which represents the actual average life


                        Page 37                                  GAO/GGD-9088 National Coinage Proposals
Appendix I
Major Assumptions Used in Cost Model




of l-dollar notes from 1985 to 1989. We determined the actual life by
dividing the number of l-dollar notes destroyed annually by the Federal
Reserve from 1985 to 1989 into the number of l-dollar notes in circula-
tion during each of those years and averaging the annual life for the 5-
year period. As S-dollar notes do not currently circulate, we did not con-
sider their actual circulation life of 83 years to be appropriate. Instead,
since the 2-dollar note would become the lowest denomination note in
circulation, we assumed the S-dollar note would have the same life as
l-dollar notes do now-l.4     years.

Unit production cost of currency: We used the actual $26 per 1,000
notes (regardless of denomination) unit cost that the Federal Reserve
has paid the Bureau of Engraving and Printing for currency production
from 1985 to 1989.

Circulation life of higher denomination notes: We used 2.1 years as the
average life of higher denomination notes, which has been their average
life from 1985 to 1989. We did not use the same method to calculate the
life of higher denomination notes as we did for l-dollar notes because,
according to Federal Reserve officials, higher denomination notes last
longer than l-dollar notes. Dividing the number of higher denomination
notes destroyed in 1 year into the number of higher denomination notes
in circulation in that same year would have underestimated the actual
number of higher denomination notes in circulation. Therefore, we
divided the number of higher denomination notes destroyed by the Fed-
eral Reserve annually from 1985 to 1989 into the average outstanding
quantity of higher denomination notes in circulation during the 2 years
previous to the year of destruction.

Life of the proposed coin: We used 30 years as the life of the proposed
dollar coin. According to experts at the U.S. Mint and the foreign gov-
ernments we contacted-Canada,      France, the Netherlands, Norway,
Spain, Switzerland, the United Kingdom, and West Germany-coins gen-
erally last from 20 to 50 years.

Switchover rate from l-dollar to 2-dollar notes: Although the 2-dollar
note has not been popular in America, we assumed the government
would promote its use and the public’s views on this note would change
if the I-dollar note was not available. Federal Reserve and Bureau of
Engraving and Printing officials agreed with our reasoning. It would
also seem logical that merchants, who would no longer have a dollar
note, would be willing to use the cash register compartment now
reserved for the l-dollar note for the 2-dollar note. We used 25 percent


Page 38                                GAO/GGD-90-88 National Coinage Proposals
Appendix I
Ma&r Assumptions Used iu Cost Model




as the value of l-dollar note demand that would be absorbed by 2-dollar
notes. In Canada, demand for the 2-dollar note, which was already more
popular than in America, increased about 20 percent after the l-dollar
note was eliminated. Our switchover rate applies to value rather than
volume of notes. For example, for the 5 billion l-dollar notes in circula-
tion at the beginning of our analysis period, a 25-percent switchover
would mean that 25 percent of the $5 billion value, or $1.25 billion,
would be absorbed by 2-dollar notes. This equates to 625 million S-dollar
notes.

Replacement rate of dollar coins to l-dollar notes: We used a 2 to 1
replacement ratio by which l-dollar notes would be replaced by l-dollar
coins. We based this assumption on the experiences of the six foreign
countries that replaced a dollar note equivalent with a coin (see table
2.2). These countries experienced replacement rates ranging from 1.6 to
1 to 4 to 1. Assuming that 25 percent of the 5 billion l-dollar note
demand at the outset of our analysis period was absorbed by 2-dollar
notes, 3.75 billion l-dollar notes would have to be replaced. A 2 to 1
replacement factor equates to 7.5 billion l-dollar coins. A 5 percent
annual currency growth rate would have to be added to the 7.5 billion
coins in the remaining years of our analysis period. In our model, the
additional coins needed over the transition period for currency growth
equals about 2.5 billion coins.

Increase in the unit production cost of currency without l-dollar notes
and a 25-percent switchover to 2-dollar notes: We used a $7.47 unit cost
increase per 1,000 notes printed as the amount by which the 3ureau of
Engraving and Printing’s currency production costs would increase if all
l-dollar notes were eliminated and if 2-dollar note production would
absorb 25 percent of their production value. We obtained this estimate
from Bureau of Engraving and Printing officials, who said that since
there would be an overall decrease of 2.4 billion notes printed over the
transition period, overhead and other program support costs would
have to be absorbed by the remaining notes printed. We evaluated this
computation by projecting the current unit overhead costs to the
reduced number of notes to be produced. Since our estimate was less
than 8 percent higher than the Bureau’s estimate, we believe the $7.47
estimate to appear reasonable.

Unit production cost of the proposed dollar coin: We used $60.00 as the
average unit cost for 1,000 dollar coins, or $.06 per coin. U.S. Mint offi-
cials said it might not be technically possible to mint a coin with 90 per-
cent copper that is gold in color, as specified in the proposed legislation.


Page 39                                  GAO/GGD-90-88 National Coinage Proposals
                        Appendix I
                        Major Assumptions Used iu Cost Model




                        However, they said it would definitely be possible to mint a coin with 80
                        percent of copper that was gold in color. The Mint officials estimated
                        that such a coin could be produced for $.06 each. According to Mint offi-
                        cials, the new coin would probably be made from clad materials (three
                        layers of metal bonded together) with a similar size and weight as the
                        Susan B. Anthony coin. Their estimate appeared reasonable in view of
                        the $.035 production cost of the Susan B. Anthony coin in 1979 and the
                        $.06 unit production cost of 50-cent coins in 1989.


                        To compute overall government processing savings from replacing the
Processing Cost Model   l-dollar note with a coin, we estimated the government’s processing
Assurnptions            costs for l-dollar notes and subtracted our estimated processing costs of
                        a dollar coin.

                        Percent of currency in circulation processed by the Federal Reserve Sys-
                        tem: We used the annual average percent of the currency in circulation
                        the Federal Reserve System processed from 1985 to 1989, which is 156
                        percent. To calculate this, we divided the number of notes processed
                        each year from 1985 to 1989 by the number of notes in circulation dur-
                        ing each of those years.

                        Percent of coins in circulation processed by the Federal Reserve System:
                        We used the annual average percent of circulating 25-cent coins
                        processed each year by the Federal Reserve from 1986 to 1988, which is
                        72 percent. Federal Reserve officials said since the proposed dollar coin
                        will most likely circulate like the 25-cent coin, it would be reasonable to
                        assume that 1-dollar coins would be processed with the same frequency.
                        To calculate this figure, we divided the number of 25-cent coins
                        processed each year from 1986 to 1988 by the number of 25-cent coins
                        in circulation during each of those years.

                        Unit processing cost for currency: We used the Federal Reserve’s actual
                        average processing cost of $4.38 per 1,000 notes for 1985 to 1989. To
                        calculate this, we divided the number of notes processed each year from
                        1985 to 1989 into the processing costs for each of those years.

                        IJnit processing cost for coins: We used the Federal Reserve’s actual
                        average processing cost of $.27 per 1,000 coins from 1985 to 1989.




                        Page 40                                GAO/GGD-90-88 National Coiige   Proposals
                       Appendix I
                       Major Assumptions Used in Cost Model




                       In addition to the currency production cost and processing costs, we also
Budgetary Impact of    estimated other effects of the proposed legislation on the government.
Proposed Legislation   We first computed seigniorage made from the coins, by subtracting the
                       production and transportation costs from the face value of the coins
                       produced each year. We then calculated the amount of interest Treasury
                       would avoid each year from the seigniorage, by multiplying the yearly
                       seigniorage by Treasury’s cost of borrowing. Third, we calculated the
                       overall budgetary impact to the government, by estimating initial start-
                       up costs for the dollar coin, additional operating costs for the Mint,
                       losses in Federal Reserve portfolio earnings that would no longer be
                       earned on l-dollar notes, and reduced Federal Reserve currency produc-
                       tion and processing costs.

                       Coin transportation costs: We used $1.27 per 1,000 coins shipped as the
                       transportation cost for the proposed dollar coin. We assumed that 100
                       percent of the coins produced each year would be shipped to Federal
                       Reserve Banks. We based this on discussions with Mint officials, who
                       said that the dollar coin should not cost more to transport than the 50-
                       cent coin does currently, which is $1.27 per 1,000 coins shipped.

                       Start-up costs: Mint officials said that to produce 2 billion coins a year,
                       the Mint would need (1) $1.5 million to buy two blanking presses and an
                       annealing furnace, (2) $300,000 to research and develop the new coin,
                       and (3) $7 to $10 million to expand die-casting capacity. Additionally,
                       they said $4 to $6 million would be needed for a public awareness pro-
                       gram. Therefore, total start-up cost estimates ranged from $12.8 million
                       to $17.8 million. We used the highest estimate of $17.8 million.

                       Percent of proposed coin’s cost that is for metal: We estimated that 80
                       percent of the proposed coin’s cost would be for metal. We calculated
                       the percent of each circulating coin’s cost that was metal from 1986 to
                       1989, since data for previous years were not available. The average per-
                       cent for the 4-year period was 77 percent for all coins, We rounded that
                       figure to 80 percent.

                       Mint operating costs: To produce the additional coins, the Mint would
                       require additional appropriations. However, as the metal for coins and
                       the metal fabrication costs are financed through a revolving fund,
                       increases in metal costs would not affect the Mint’s appropriated
                       budget. To estimate increases in the Mint’s operating budget, which is
                       funded by appropriations, we multiplied the percent of the coin’s cost
                       that is not metal-20 percent-times the annual production costs.



                       Page 41                                 GAO/GGD-90-88 National Coinage Proposals
Appendix I
Major Assumptions Used in Cost Model




Federal Reserve portfolio earnings and rate: Currently, the Treasury
receives the Federal Reserve’s earnings on assets associated with the
outstanding l-dollar Federal Reserve notes. Generally, the difference
between the face value of the notes and the cost of printing and an allo-
cation of Federal Reserve operating costs is used by the Federal Reserve
to purchase Treasury securities, which make up the Federal Reserve’s
portfolio. The Federal Reserve credits Treasury with the earnings
received from those investments. If notes are withdrawn from circula-
tion, the portfolio and its earnings are reduced accordingly+ We esti-
mated the average Federal Reserve portfolio earning rate to be 4.61
percent, the same rate we used for the model’s discount rate. We multi-
plied this rate by the decreased value of l-dollar notes in circulation to
calculate the loss in portfolio earnings.

Treasury interest rate: We also used 4.61 percent as the rate of interest
on Treasury obligations over the 30-year period. To calculate this figure,
we averaged the yields on outstanding Treasury obligations that have
remaining maturities comparable to the period of analysis, excluding
those maturing before 1991 and those with a coupon interest less than
4.25 percent. This resulted in an 8.61 percent rate. To account for infla-
tion, we subtracted the 4 percent inflation rate as determined previ-
ously. We multiplied the result, 4.61 percent, by the amount of
seigniorage on the l-dollar coin to determine the amount of interest
saved by the Treasury.

Federal Reserve currency production and processing costs: This repre-
sents the total difference between what the Federal Reserve Svstem
would have paid for printing and processing l-dollar notes and what it
would pay to process dollar coins rather than notes. The bases for these
costs are described in the production and processing cost factors earlier
in this appendix.




Page 42                                GAO/GGD-SO-88 National coinage Proposals
Appendix II

TiradeAssociations and Public Interest
Groups Contacted

                         American Bankers Association
Trade Associations       Washington, DC.

                         Food Marketing Institute
                         Washington, DC.

                         International Taxicab Association
                         Kensington, Maryland

                         National Association of Convenience Stores
                         Alexandria, Virginia

                         National Automatic Merchandising Association
                         Chicago, Illinois

                         National Restaurant Association
                         Washington, D.C.

                         National Soft Drink Association
                         Washington, D.C.

                         Petroleum Marketers Association of America
                         Washington, D.C.


                         Association for Commuter Transportation
Public Interest Groups   Washington  ,
                                       D,C.
                         National Consumers League
                         Washington, D.C.

                         National Federation of the Blind
                         Baltimore, Maryland




                         Page 43                              GAO/GGD9088 National coinage Proposals
Appendix III

Vending Machine Operators and Manufactureri
and Armored Car Carriers Contacted

                                Allied Vending
Vending Machine                 Beltsville, Maryland
Operators
                                Bell Atlantic Telephone Coin Organization
                                Silver Spring, Maryland

                                Coca-Cola Bottlers of D.C.
                                Alexandria, Virginia

                                D.C. Vending Company, Inc.
                                Washington, D.C.

                                Eastern Vending Corporation
                                Linden, New Jersey

                                National Trading Sales Association
                                Landover, Maryland

                                Pepsi Company Bottlers
                                Cheverly, Maryland

                                United Vending Services Company, Inc.
                                Washington, D.C.

                                Vending Services, Inc.
                                Rockville, Maryland


                                A & A Coin Machine Company
Vending Machine                 Timonium, Maryland
Manufacturers
                                Coin Acceptors Incorporated
                                St. Louis, Missouri

                                Mars Electronic International
                                Westchester, Pennsylvania


                                Brinks Inc. Armored Car Service
Amnored        Car   Carriers   Philadelphia , Pennsylvania

                                Federal Armored Express
                                Baltimore, Maryland


                                Page 44                               GAO/GCXMO-SS National Coinage Proposals
Appendix ILI
Vending Machine Operators and
Manufacturers and Armored Car
Carriers Contacted




Loomis Armored Inc.
Beltsville, Maryland

Wells Fargo Armored Service Corporation
Springfield, Virginia




Page 46                             GAO/GGLHO-S8 National coinage Proposals
Appendix IV

Objeetive, Scope,Methodology, and LimitationS
of Focus Groups

               We contracted with Westat, Inc., a national survey research firm, to
Objective      assist us in conducting focus groups with members of the general public
               and individuals who handle c-&h as part of their work. Focus groups
               involve a planned, tape-recorded discussion designed to obtain informa-
               tion about individuals’ perceptions and opinions related to a specific
               issue. Focus groups allow researchers to obtain access to information
               from members of society who are not formally organized and repre-
               sented. The discussions generally involve a small group of participants
               (usually 8 to 10) who have similar characteristics and are knowledgea-
               ble about the specific issue. Discussions are done informally but are
               guided by a moderator who encourages participants to share their
               thoughts and experiences on specific topics.

               Our objective in holding the focus groups with the general public and
               people who handle cash as part of their jobs was to obtain their views,
               insights, and feelings to assist us in evaluating the acceptability and
               impact of the proposed changes to the U.S. coinage and currency system.
               The focus groups held with money handlers concentrated on the accept-
               ability and impact of the proposals on the handling of cash at their
               work. The general public focus groups addressed the acceptability of the
               proposals to consumers. For both sets of groups, we were specifically
               interested in the range of potential concerns and support that might be
               raised.


               We selected four cities for the focus groups: Frederick, Maryland; Kan-
Scope          sas City, Missouri; Scottsdale, Arizona; and Rye Brook, New York. Fred-
               erick is a small city north of Washington, D.C. The Kansas City area
               includes both urban and suburban areas. Scottsdale, a suburb of Phoe-
               nix, has many retired people in its population, Rye Brook is a suburb of
               New York City.

               Westat selected a total of 12 groups from the four cities. Nine or 10 par-
               ticipants were in each focus group. Westat moderators traveled to each
               city to conduct the focus groups, which were monitored by at least one
               GAO representative. Six of the focus groups were comprised of individu-
               als who handled cash transactions as part of their jobs. These partici-
               pants were selected to ensure variety in age, income, gender, and type of
               business. The other six groups were made up of the general public,
               including a range of people with different ages, incomes, education, and
               gender, to represent a cross-section of the general public in the selected
               cities. Additionally, retired individuals and teenagers were represented



               Page 46                                GAO/GGD-90-88 National Coinage Proposals
                       Appendix IV
                       Objective, Scope, Methodology, and
                       Limitations of Focus Groups




                       in the general public focus groups, while visually impaired representa-
                       tives were included in both the general public and the money handler
                       groups.


                       A focus group guide was developed to assist the moderator in leading
Methodology            the discussions. The guide helped the moderator to address each of the
                       provisions of the legislation (eliminating the I-cent coin, rounding, elimi-
                       nating the 50-cent coin, introducing the new dollar coin, and eliminating
                       the dollar note). The focus groups began with the moderator describing
                       the purpose of our study and an explanation of how focus groups work.
                       The participants were then presented with a brief summary of the pro-
                       posed legislation and the estimated savings to the government. For each
                       provision, participants were asked open-ended questions about how
                       they would accept the proposed changes to the U.S. coinage and cur-
                       rency system, their likely reactions, and the possible impacts. Money
                       handlers were also asked how their businesses would react to the
                       changes and about the impacts on the operation of the business. Partici-
                       pants were also asked questions on their experience with the Susan B.
                       Anthony dollar coin,

                       To help group participants provide more informed answers, several vis-
                       ual aids were used, including (1) the Canadian dollar coin, which is simi-
                       lar to the proposed 1J.S.coin, the Susan B. Anthony coin, and other
                       coins, so participants could judge similarity or differences among the
                       coins; (2) a chart to aid moderators in explaining the rounding rule; and
                       (3) a picture of a typical cash drawer layout before and after the pro-
                       posed currency changes.

                       All focus group discussions were led by a senior Westat social science
                       researcher, while an assistant moderator took notes. Also, each focus
                       group session was tape recorded to assist in subsequent analysis and
                       report writing.


                       Focus groups are not designed to (1) demonstrate the extent of a prob-
Limitations of Focus   lem or to generalize results to a larger population, (2) develop a consen-
Groups                 sus to arrive at an agreed-upon plan or make decisions about what
                       actions to take, or (3) provide statistically representative samples or
                       reliable quantitative estimates. Instead, they are intended to generate
                       information that can provide reasons that support people’s attitudes
                       toward specific topics and offer insights into the range of concerns and
                       support for an issue.


                       Page 47                                  GAO/GGD-90438 National Coinage Proposals
Appendix KV
Objective, Scope, Methodology, and
Limitations of Focus Groups




The projectability of the information produced by our focus groups is
limited for several reasons. First, they represent the responses of 117
people, which is insufficient for projectability. Second, while the compo-
sition of the groups was designed to assure some representation of men
and women, different ages, retired persons, visually impaired individu-
als, different industries, and different regions of the United States, the
groups were not a random sample. Third, participants were asked ques-
tions about what would happen in the future if the proposed legislation
was enacted. Responses to such questions are, of necessity, speculative.
However, the “speculations” of many group participants showed a com-
mon response, and the degree of consistency in participants’ recurring
themes provided some (though immeasurable) degree of validation,
Fourth, no participants were able to give even a rough estimate of quan-
titative impacts, such as cost savings or added costs, or increase or
decrease in check-out time at cash registers.

Because of these limitations, we used several methodologies, including
focus groups, to support our conclusions in chapters 2 and 3.




Page 48                                GAO/GGD-90-88 National Coinage Proposals
Appendix V

Definition of Seigniorage


                The Department of the Treasury defines seigniorage as the difference
                between the face value of a coin and the coin’s cost of production. A
                coin’s cost of production includes the metals contained in the coin, the
                Mint’s manufacturing expenses, metal wastage from production, and the
                cost of distributing coins.

                The definition of seigniorage has changed over the years as the concept
                of money has evolved. The term originated in the Middle Ages when the
                sovereigns or kings (seigneurs) made a charge for minting coins. In early
                times, when the face value of coins equalled their metallic content, sei-
                gniorage was the fee charged by mints for stamping the government’s or
                an individual’s gold or silver into coins. Over time, precious metals such
                as gold or silver were no longer used in coins. Even though these
                “debased” coins did not themselves contain precious metals, they were
                presumed to be freely convertible into gold or silver. Seigniorage came to
                be known as the difference between the face value of a coin and its true
                metallic content. As long as the coins remained accepted by the public,
                there were no runs on the treasury to convert coins into precious metals.
                Governments were able to use seigniorage to fund their operations.

                Today’s money has been even further debased. Currency is no longer
                convertible into precious metal and our circulating coins contain no pre-
                cious metal, Coins today are really tokens but widely acceptable in
                exchange for goods and services and settling debts. However, the con-
                cept of a government to recognize or take seigniorage has continued.
                Today, seigniorage is the difference between the face value of a coin and
                its cost of production.

                Before 1968, seigniorage was treated as a revenue in the administrative
                budget, excluded from the consolidated cash budget, and treated as a
                means of financing. In 1968, the President’s Commission on Budget Con-
                cepts recommended that seigniorage be treated solely as a means of
                financing. That recommendation was adopted. As a result, today sei-
                gniorage itself has no impact on the size of the current budget deficit,
                but it does reduce the amount of money that must be borrowed from the
                public to finance the deficit. Thus, the amount of interest it saves does
                reduce future budget outlays and deficits,

                The recognition of seigniorage comes in three steps. First, as coins come
                off the Mint’s stamping lines and are turned over to in-house cashiers,
                gross seigniorage is recognized as the difference between the face value
                of the coins produced and the cost of the metal from which the coins



                Page 49                                GAO/GGDSO-88 National Coinage Proposals
Appendix V
Definition of Seigniorage




were stamped. Second, on a monthly basis, the Mint reduces gross sei-
gniorage by the costs of coinage operations and related overhead.
Finally, the cost of transporting coins and the cost of any production
wastage is deducted, and the difference is net seigniorage. Net seignior-
age ultimately is accounted for as an off-budget receipt from the govern-
ment’s authority to issue money, to be used for financing budget
deficits. Although the Treasury recognizes seigniorage at the time coins
are manufactured, it does not actually obtain value for newly manufac-
tured coins until they are deposited with the Federal Reserve banks.

Although seigniorage seems to be the creation of something out of noth-
ing (because an off-budget receipt is recognized even though no cash is
received from the public), it is an accepted practice of governments.

As a further explanation, the metal used in today’s coins-even though
not precious or intrinsically valuable-is treated as a Treasury asset
(not expensed as coins are produced). Seigniorage increases the value of
the metal assets up to the face value of the coins, less the costs of pro-
duction (which are expensed). Once the coins are deposited with the
Federal Reserve, they are exchanged for another government asset,
namely a checking deposit balance. Finally, that balance is ultimately
exchanged for goods and services used by the government at a level rep-
resented by the face value of the coins.

For example, imagine that the Treasury produces 1,000 dollar coins
having a monetary value of $1,000 and a manufacturing cost of $60, of
which $48 is for metal and $12 is for labor and other Mint costs. The
Treasury’s accounting entries associated with the manufacturing of the
coins would be as follows:

(Dr.) Metal on Hand                                     $48
      (Cr.) Coinage Metal Fund
      (to pay for metal)                                             $48
(Dr.) Mint Operating Expenses                           $12
      (Cr.) General Account at Federal Reserve
      (the Treasury’s checking account)                             $12




Page SO                                GAO/GGIHM-88 National Coinage Proposals
    Appendix V
    Definition of Seiiorage




    After the coins were produced, Treasury would make the following
    accounting entry:

    (Dr.) Coins on Hand                                 $1,000
          (Cr.) Metal on Hand                                           $48
          (Cr.) Seigniorage                                            $952

    When the coins are deposited with the Federal Reserve banks, the Fed-
    eral Reserve’s accounting entry would be:

    (Dr.) Coins on Hand                                 $1,000
          (Cr.) Deposits-U.S.   Treasury General
          Account                                                    $1,000

    Corresponding Treasury accounting entries would be:

    (Dr.) General Account at Federal Reserve            $1,000
          (Cr.) Coins on Hand                                        $1,000

    (Dr.) Coinage Metal Fund (to replenish the
    fund)                                                   $48
          (Cr.) General Account at Federal Reserve                       $48

    As a result of manufacturing the coins and depositing them with the
    Federal Reserve, the Treasury would realize the following net
    consequences:

l   an increase in its checking account at the Federal Reserve of $940
    ($1,000 - $12 - $48)
l   a budgetary expenditure for Mint expenses of $12, and
l   seigniorage of $952.

    Further, assuming Treasury’s cost of borrowing was 8.6 percent, Trea-
    sury would realize interest savings of $80.84 ($940 times 8.6 percent) in
    the subsequent year, due to the amount of borrowing that was displaced
    by seigniorage.




    Page S1                                GAO/GGD-90423 National Coinage F?oposab
Appendix VI

 Major Contributors to This Report


                      John S. Baldwin, Senior Evaluator
General Government    Lori Rectanus. Evaluator
Division,             Maria Dickerson, Evaluator
                      Harry L. Reed, Senior Social Science Analyst
Washington, D.C.

                      Paula I,. Mathews, Galuator
European Office,      Michael J. Courts? Evaluator
Frankfurt, Germany

                      Richard S. Krashcvski, Economist
Office of the Chief
Economist,
Washington, D.C.




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