Limited Public Demand for New Dollar Coin or Elimination of Penny

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

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

                  United States General Accounting Office

For Release       Limited Public           Demand
on Delivery       For New Dollar           Coin or
Expected    at
2:00 p.m. EDT     Elimination         of   Penny
May 23, 1990

                  Statement    of
                  T . Nye Stevens,      Director
                  Government     Business     Operations      Issues
                  General    Government      Division

                  Before  the
                  Subcommittee          on Consumer Affairs      and Coinage
                  Committee         on Banking,    Finance,   and Urban Affairs
                  House       of   Representatives

GAO/T-GGD-90-43                                                        GAO Form 160 (12/87)
                           OR ELIMINATION OF PENNY
                           SUMMARYOF STATEMENT BY
                               L. NYE STEVENS
                              OPERATIONS ISSUES
                         GENERAL GOVERNMENTDIVISION
                       U.S. GENERAL ACCOUNTING OFFICE

Australia,       Canada, Japan, and the countries            of western Europe
all now use a coin for retail             transactions     at the level     for
which Americans use a paper dollar.                 While most of these
countries      have substituted       a coin for their      paper dollar
equivalents       in the past 20 years,         the U.S. attempt      to put the
Susan B. Anthony dollar           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 costs and benefits          of the currency     revision
proposals      to the government       in light     of the Susan B. Anthony
dollar     and other countries’        experiences.
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 30 years compared to an
average life      of 1.4 years for the note.         GAO estimates     that the
government      could realize      a net annual budgetary     savings    of $318
million     (in present    value terms) if it replaced        the dollar    bill
with a more durable        dollar     coin, and if the coin were widely
accepted     and used.     The savings would result       from reducing
production      and processing      costs as well as reducing      the need to
borrow to finance       the debt.
However, based on the Susan B. Anthony experience,             lessons
learned   from foreign       governments,   and the results  of public
surveys,    GAO believes      that widespread   acceptance  and use of the
coin will    not be achieved       unless Congress and the Administration
jointly   resolve    not only to eliminate      the dollar  note, but also
are firm in their       resolve    to make the change and be prepared     to
handle public     resistance.
GAO found no comparable         economic argument for eliminating           either
the penny or the half dollar.           Both are profitable       to the
government     in that their     value exceeds their       production     and
distribution       costs.   Demand for the penny remains high,            and the
public     is skeptical    about the effects,     particularly       on the poor,
of rounding      retail   cash transactions     to the nearest       five cents.
Mr. Chairman                   and Members of                      the   Subcommittee:

We are          pleased              to be here              today        to discuss                 the      results              of our
review,              requested              by this          Subcommittee,                   of      the      feasibility,
expected              acceptance,                   and     potential           effects             on the           government               of
proposed              legislation                   that     would       significantly                      change           the     currency
and coins              used          in our economy.

Three         bills          have been introduced                             in Congress--H.R.                        1068,         H.R.
3761,         and S. 814--                   which          collectively                call         for
--replacing                  the         l-dollar           note      with      a new dollar                   coin,          which

      would          be the          same size              as the       Susan B. Anthony                        coin,          but        gold
      in     color          with      a design              symbolizing            Christopher                   Columbus;
--phasing              out         the      penny          and rounding            off         cash         sales,           but     not
      sales          paid      by check              or credit           card,          to     the         nearest           five         cents;
--phasing              out         the      half      dollar          coin.

These proposals                      have earned                   the   support             of certain               metal
production                  interests,               and have attracted                        interest              both      because             of
the        prospect            of budgetary                  savings          and because                   Australia,               Canada,
Japan         and the major                      countries            of western               Europe          have all
converted              their          low denomination                       currency              to coins.                 My statement
today         will      be brief                 and will           summarize            our        report           that      we
delivered              to      the        Subcommittee                today.            We concluded                  that          the
government              could             save      over       $300      million             annually           if      it     replaced
the        dollar       bill         with          a coin       but      only      if        the     coin       was widely
accepted          and used.              Based on the                  Susan B. Anthony                  experience,               on

lessons          learned          from      foreign         governments                that     have made
equivalent             conversions,              and on public                  surveys,           we think           these
savings          are      unlikely          to occur           unless         Congress          and the
Administration                 jointly          resolve          not     only        to eliminate              the     dollar

note      but     also        stand      up to a negative                     public          reaction         that       should
be fully          anticipated.                  We found          no compelling                 reason         to     eliminate
either          the    penny       or half           dollar.

My comments               today       and our         report          are     based       on work         we began            in
January          and just          completed.               Our work            centered           on four          areas:
potential             government            savings         from        the     proposed           legislation,                           1
expected          acceptability                 of    the      proposals             to the       private           sector         and

public,          reasons          the    Anthony          coin        failed,         and experiences                  of
foreign          governments             with        similar          currency          changes.

We adapted             a computer           model        used         by the       Federal            Reserve         System         to
estimate          savings,            incorporating               our       own assumptions                 and data            on
various          economic          and cost           factors.              To evaluate               public        and
private          sector        acceptability,                  we interviewed                  numerous           trade      and
public         interest           associations,                held      12 focus             group      discussions
with      the     general          public        and individuals                   who handle             cash as a part
of     their      jobs,        and interviewed                   selected          state        sales       tax                           i/
officials,             Mint     contractors,                a major           cash      register          manufacturer,
various         vending         machine          operators             and      manufacturers,                 and several

armored         car        carriers,            We contracted             with       a national                survey
research            firm         to assist        us in conducting                 the        focus          groups.

To obtain             information              on foreign            experiences              with      similar
conversions,                we interviewed               monetary         officials              in Canada,
France,         the        Netherlands,            the     United        Kingdom,             and West Germany.
Additionally,                we interviewed                embassy        officials             of      Norway,           Spain,
and Switzerland.

We discussed                all      four      areas     of   interest           with         Treasury,              @ lint,
Bureau        of Engraving                  and Printing,             and Federal              Reserve           System
officials,             and obtained               and reviewed            pertinent             data          they      had     on
the      subjects.


Two units            of     the      Department          of   the      Treasury          produce              American
currency         and coins              in quantities                driven      by public             demand for               the
various        denominations                   as conveyed            by the      banking             system.
Treasury's            Bureau           of Engraving           and Printing               produces              paper
currency         as demanded                  by the     Federal         Reserve         System.               About       45
percent        of     the         7 billion        notes      printed         this       year         will      be l-
dollar        notes.         A dollar           note     costs        about      2.6 cents             to produce               and
lasts        about         1.4     years       in circulation             before         it     has to be

The U.S.           Mint        produces            coins,         which       are more durable                   than     paper
currency           and last            about         30 years             in circulation.                  The penny            is
the      highest          volume          coin       produced,             accounting           for     12.8       billion           (or
71 percent)               of    the       18 billion              coins       the    Mint       will       produce           this
year.        Only         41 million               half       dollars         will      be produced              this     year,

primarily           for        use     in casinos.

According           to the            Treasury            and Mint,           the    total        amount         of currency
and coin           in circulation                    on December              31,    1989,        was $261.4             billion-
-including           4.9        billion            l-dollar          notes         and 136.7           billion          pennies.


We estimated               that        over        a 30-year             period,        annual         budgetary             savings
from      issuing          a dollar              coin      would         be $318 million                in present
value       terms,             This       figure          nets      two major           savings         components
offset       by certain                additional                costs.

First,       we estimated                   that        the      government          would        reduce         its     currency
production           and processing                       costs      by $41.4           million         annually,
primarily           due to the               coin's           longer        life     and more convenient
processing           by the            Federal            Reserve          system.         A    second        major       savings
component           would         be the           interest          avoided         from       reduced          borrowing           to
finance       the     Nation's               debt         that     would       result          from     the      seigniorage
earned       with     a dollar               coin.            Seigniorage,              or the         difference
between       a coin's               face     value           and its        production            cost,         would        be 94

cents       for     each dollar               coin      produced,                 and result          in an average
interest          cost      avoidance            of     $461.1           million           annually.                  It    is
important           to bear           in mind          that         seigniorage,             while         it         does not
reduce       the     size        of    the      current          deficit,              does reduce               the        amount              of
borrowing           needed         to finance             the        deficit.              Therefore,                 the       reduced
borrowing           resulting            from        seigniorage                  in the     current             year           would
reduce       deficits            in    future          years.

The total           $502.5         million           annual          savings           in coin        production                  and
processing           and interest                avoided             from         seigniorage             would,            however,
be partially              offset         by three             other         components.               First,               we
estimated          that      initial           outlays           for        additional             Mint         equipment,                  a
coin      research          and development                    program,               and a public               awareness

campaign          would      average           $593,000              a year         over     our      30-year               analysis
period.           Second,          we estimated                that         the     Mint     would         need an
additional           $6.6     million            of     appropriations                     annually             for        increased
coin      production            costs.           Finally,               we estimated               that         the        Federal
Reserve       would         lose       an average              of       $177.1        million         annually                  from
interest          now earned            on Treasury                  securities             held      as a result                  of
issuing       l-dollar             notes.             (Generally,               the      difference              between           the
face      value      of notes           and the          cost           of printing             them and an
allocation           of    the        Fed's     operating                costs         is used        to purchase
Treasury          securities.                 The interest                earned          on such securities                           is
credited          back     to Treasury.)                      The net           effect       of subtracting                       these
three      additional            estimated              costs,           averaging           $184.3         million
annually,          from      the       estimated              $502.5        million          in gross             savings,

would       be an estimated                          overall           annual        net      budgetary             savings          to
the      government            of        $318.2            million.

MAJOR OBSTACLES TO A DOLLAR                                     COIN

These savings                to         the     government,                  however,          would         be dependent                  on
wide      acceptance               of     the         dollar          coin      and        substitution              of     it      for      the
dollar       note.           Our interviews                       with        trade         and    public           interest
associations                and focus                 groups          with      the        general        public           and people
who handle            cash as part                     of      their         jobs     indicated              that     public
reaction          would        be skeptical.                          Some, such as armored                          car         carriers
and the         banking            industry,                thought           that         some of        the       government
savings         would        come at                 the    expense           of additional                  costs         being          borne
by the       private           sector,                particularly                  coin     processing              and
transportation                 costs.                 A universal               belief         among those                 we
interviewed              was that               if     a dollar              coin     and a dollar                  note         were both
available,            people             would         choose           to use the             note.

A dollar          coin       could            be imposed               on the         American           public,            but      this
would      require           that         the         Congress           and the Administration                             reach          and
sustain         an agreement                   to eliminate                   the     dollar         bill.           We think              this
is     unlikely          in view              of what           happened             with      the Anthony                coin       and
Treasury's            lack         of     enthusiasm                  to champion              another          dollar            coin

that     receives            its        primary             support           from       special         interests.                  We
also     note        that     a Gallup                 Survey          last      month         showed that                only       15
percent         of    the American                     population              would         favor       abolishing                the

dollar       bill        and replacing                    it    with      a coin.           This      is consistent
with     the        results             of our        focus       groups,          although         these         results
cannot       be quantified                      nor      can    they      be generalized                  to a larger

Less     formidable                 obstacles             include         possible          difficulties               of

producing            a coin             readily          distinguishable                  from     a quarter           but

still       acceptable                  to the        vending          industry,           the   Mint's           ability          to
produce        sufficient                  dollar         coins        to meet demand over                       a reasonably

short       transition                  period,          and obtaining              funding         for      a
sophisticated                 public            awareness             campaign.


Even though             Treasury,                 Mint,        and Federal           Reserve         officials
believed        the         Anthony             dollar         coin      would      not     successfully               co-
circulate            with         the     dollar          note,        no one came forth                   initially            to
advocate        that          the        note       be eliminated,               knowing         that        such a
proposal        would             not     be popular              with     the     public.           In 1979,               when
Treasury        let         its      intention             of eliminating                  the   note        be known,             the

then     Chairman             of     this         Subcommittee             introduced            a bill--along                 with

96 cosponsors--                   to prevent              the     elimination              of the         l-dollar           note,
Treasury        heeded             this       message.
 In addition,                the      Susan B. Anthony                         coin      failed               because           it        looked
 too much like                   a quarter           and lacked                    an effective                  promotion

We concluded                that         the     Susan B. Anthony                       experience                   is     not
conclusive               proof        that       a dollar               coin         cannot        be successful                          but

does        show        a dollar          coin       will         not        succeed          if        its      introduction                    is

not      properly           managed.              Elements                  that      we consider                   essential

--the          dollar       note       must be eliminated                             and Congress                   and the
      Administration                  alike       have        to be firm                in their                resolve              to make
      the      change       and be prepared                       to handle             public                resistance;
--a      reasonably              short         transition                period         must be allowed;
--the          coin     must       be clearly               distinguishable                        from         other           coins           and
      acceptable            to     the       vending          industry;                and
--a      sophisticated                 public         awareness                    program         is         needed       to        lessen
      public          resistance             to change.


Australia,              Canada,          Japan,         and the major                    western                countries                  in
Europe         now use a coin                  for      cash        transactions                    at        the      level          for
which       Americans              use the paper                  dollar.               We contacted                      six        of     these
countries.                Officials            from         all     six        said      their            conversion                  had
faced       public         opposition                and noted                that     elimination                    of the              paper

equivalent              was essential.                      They said              that         the government                 must
expect         public         resistance               and be strong                     in     its      determination               to

convert.               However,          these         countries                differ          from       the     United     Ft&fes
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in     that      they        characteristically                          have      parliamentary                   foxme of
government,                 making       it        easier         to      impose         unpopular..ihanga‘j
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central          banking          systems            which             gives     the government  more con&l
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over       the    banks;          and produce                 currency             and coins on a tst@!er~kcale
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than       the    United          States.              Treasury,                Mint,         and       Bureau       officials

agreed         that         because           of    these         differences,                  it     would      be much harder

for     the      United         States             to successfully                     substitute              a dollar         coin
for     the      note.

NO COMPELLING REASON TO ELIMINATE                                              PENNY OR HALF DOLLAR

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,                     demand for                  it     is     strong.               Consumers        believe
that      rounding            to the           nearest            five         cents      would          cause      merchants              to
raise         prices         and would              disadvantage                 consumers,               particularly               the
poor r who are most                    dependent                  on small             cash          transactions.              The
possible          benefits            claimed           from            rounding,             such as faster                  cash
transactions                 and lower              handling             charges          for         banks      and merchants,
have      to be weighed                against              its         disadvantages,                   such as bookkeeping
problems,             the     cost     of reprogramming                          automatic               cash registers,                  and
a loss         of donations               to charities.                         Further,              because       pennies          cost
about         seven-tenths             of a cent                  to produce              and so many are minted

each year,          their         production            reduces      Treasury's           need to borrow             by
almost       $4 million            annually.

Countries          we contacted                that     did    eliminate         their     low denomination
coins       did    so when unit                production          costs       exceeded      the    coins'         face
values.           Other     countries             chose       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 for            the half         dollar      is    relatively         much lower            and
public       feelings         about       it     are muted,          its    production         reduces
Treasury's          need to borrow                    by almost      $2 million           annually.

Mr. Chairman,              that     concludes            my prepared           remarks.        My colleagues
and I would          be pleased                to respond          to questions.