oversight

A New Dollar Coin Has Budgetary Savings Potential But Questionable Acceptability

Published by the Government Accountability Office on 1990-06-20.

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

                   United States General Accounting    Office
                   Testimony
GAO


For Release        A New Dollar Coin
on Delivery        Has Budgetary Savings Potential
Expectedat
1:30 p.m. EDT      But Questionable   Acceptability
Wednesday
June 20, 1990




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

                   Before the
                   Ccxnnittee on Banking,   Housing,   and Urban Affairs
                   United States Senate




                                                                                                 I
                                                                                                 i
 GAO/T-GGD-90-50                                                       GAO   Fom   I60   w/87)   1
             A NEW DOLLAR COIN HAS BUDGETARY SAVINGS                           POTENTIAL
                       BUT QUESTIONABLE ACCEPTABILITY
                                 SUMMARY OF STATEMENT BY
                                      L. NYE STEVENS
                             DIRECTOR, GOVERNMENT BUSINESS
                                    OPERATIONS ISSUES
                               GENERAL GOVERNMENT DIVISION
                             U.S. GENERAL ACCOUNTING OFFICE


Australia,         Canada,        Japan,     and the major          countries        of western
Europe      use a coin          for retail        transactions         at the level          for which
Americans        use     the paper dollar.              While most of these               countries
have substituted              the 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 and Senate               banking
committees         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,  but only     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 3, Anthony            experience,       lessons
learned    from foreign      governments,       and the results       of public
surveys,     GAO believes      that   widespread     acceptance      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     decision     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           5 cents.
Mr.         Chairman               and Members                   of     the      Subcommittee:


We are             pleased               to        be here         today         to         discuss              the     results                of     our
review             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            5 cents;

      and

--phasing                 out           the        half-dollar                coin.



The         Senate          bill              is    unique         in     that         it         does         not      call        for         ceasing

production                  of          l-dollar             Federal           Reserve                   notes.          As I will
explain,                 we believe                   elimination                of         the         dollar          note        to      be crucial
to         the     success               of        a new 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,


                                                                                 1
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
completed            last       month.1               We concluded                      that         the      government                        could

save      over       $300       million              annually           if        it         replaced              the     dollar                note

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.



Our      work       centered             on four            areas:             potential                   government                     savings

from      the       proposed          legislation,                     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


lNationa1           Coinage          Proposals:    Limited   Public   Demand for                                                      New Dollar
Coin or          Elimination            of Pennies    (GAO/GGD-90-88,    May 23,                                                      1990).

                                                                        2
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

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,             Mint,

Bureau            of     Engraving               and     Printing,            and      Federal            Reserve            System

officials                and      obtained             and      reviewed           pertinent              data       they      had      on

the      subjects.



BACKGROUND



Two units                of     the       Department             of     the     Treasury               produce        American

currency               and     coins         in     quantities               driven          by public             demand         for    the

various            denominations.                        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


                                                                         3
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 replaced.



The U.S.              Mint         produces                   coins,              which          are      more          durable          than         paper

currency.                   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.



SIGNIFICANT                      BUDGETARY SAVINGS ARE POSSIBLE                                                   WITH A DOLLAR COIN



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


                                                                                     4
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           needed            to      enable             the         Mint          to

produce              2 billion                  coins           a year          for      5 years                   would          average              $593,000
a year              over         our      30 year              analysis               period.                 This         average               annual
outlay              over         30 years               would         total           $17.8        million,                  which              includes

$1.5         million              to      purchase                two       blanking              presses                 and      an annealing

furnace;               $300,000                 to      research               and      develop               the         coin;          $10 million
to         expand          the      Mint's              die-casting                   capacity;                 and        $6 million                      for      a

public              awareness               campaign.                    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


                                                                                 5
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.



Our     estimates                   are         based         on an assumption                              that             25 percent                 of     the
demand           for         l-dollar                 notes           would         be met            by 2-dollar                        notes          and the

remaining                   demand             met      by the              new dollar                coin,             with         no effects                    on

other       denominations                             of    coins             or    notes.                 We based                this          assumption

on the           experience                     Canada            has        had        with         its        dollar             coin          and on

discussions                      with          Federal            Reserve               officials.



Our     savings                  estimate               does          not      include               the        costs           of       disposing                 of

the     Susan               B. Anthony                  coins           because             we viewed                       such     a decision                    as

not     necessarily                           related            to     the        proposed                new dollar                    coin.            The

Mint       estimated                     it     would            cost         $8 million                   to     melt          down           the

inventory                   of     Anthony              dollars               and       recover             the         metal            for         future
use.        If         such         a decision                    were         made,           Treasury                 would            also         have         to
deduct           $415            million              of     seigniorage                    previously                       recognized                 on the

Anthony           coins             from             the    seigniorage                     recognized                       on future

production                   of     other             denominations.


                                                                                    6
MAJOR OBSTACLES TO SUCCESSFUL INTRODUCTION                                                               OF A DOLLAR COIN



The savings                 to      the       government                   would          be overwhelmingly                       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.



Among          those        who thought                   the           benefits            of    a dollar           coin         would

outweigh             the         problems           were           mass         transit,           convenience                 stores,           fast

food      restaurants,                       and    soft           drink           vending         machine           operators.

However,             grocery              stores,           gas           stations,              consumers,              banks,          and

armored             car     carriers               saw         little           benefit.                Our      focus       groups            showed

that       both           the      general          public               and       people         who handle               money         as part

of     their         jobs          were       against              the       dollar          coin,         but      the      money
handlers             were          less       opposed.                   The       general             public       thought             the     coin

would          be     inflationary                  because                prices           of    machine-purchased                       goods
would          be raised                to    the        dollar,             and      additional                 costs       of     retooling
vending             and         laundromat               machines               would        be passed              on to         consumers.



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

t0      use      the       note.



A dollar               coin        could         be        imposed              on the         American              public,              but        this
would          require             that        Congress                and       the        Administration                    reach             and

sustain            an agreement                      to     eliminate                  the     dollar            note.             We are

pessimistic                   this        can        be done              in     view         of     what        happened                with        the

Anthony            coin          and Treasury's                          lack         of     enthusiasm              to      change

coinage            in      the        absence              of     a public                 demand.            A Gallup              Survey            last

month          showed            that         only         15 percent                  of     the     American               population

would          favor          abolishing                   the      dollar             note        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                  universe.



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.



Mint          officials               said       research                 and         development                funding            of      $300,000
was      needed            to        resolve              technical              concerns              they         have       with         the

proposed               coin's           size         and         alloy          content.               The Mint              is     uncertain
that        technology               exists             to     produce                a 90-percent                       copper         coin           that

would        be gold           in        color          but       sufficiently                          durable           to     last        in

circulation.                   Further,                 the       Mint          and        the          vending           industry               would

have       to     reach       agreement                    on the             size         and          alloy       content             of       the        new
coin.           The      vending                industry           would              like         it      to     be the           same as the

Susan        B.    Anthony               coin         to      accommodate                     existing              machines               that          have

been       retrofitted                    to     accept           the         Anthony              coin,          but       the       public             would

like       a larger           coin,              sized         halfway               between               the      quarter             and        half

dollar.            While            the        Mint        said         it      would             take          18 to       30 months                  to

resolve           these       problems,                    research                 and       development                   programs               for
numismatic               coins            are        typically                done           in    6 months.



AMERICANS DID                  NOT ACCEPT THE ANTHONY DOLLAR,                                                      BUT ITS
INTRODUCTION                 WAS POORLY MANAGED



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         the         House        Subcommittee                          on Consumer                Affairs               and

Coinage           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
campaign.



Almost          one-half                  of        the        857 million               Susan             B,      Anthony             dollars

produced              from          1979            to        1982     remain           in     storage.                   We believe                       that          if

a new dollar                       coin            is     authorized             and          the     dollar               note          is         not

eliminated,                   or        is      initially                eliminated                  but         later          brought               back

because           of         a public                    outcry         from      its         elimination,                      the       dollar              coin

would          face          the        same consequences                          the         Anthony                  coin      did.



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                to     this          end         include:



--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.




                                                                                 10
OTHER COUNTRIES                          HAVE HAD SUCCESSFUL CONVERSIONS



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.                  Reasons                 given          for         converting                 from        paper         to     coin

included             saving             currency                 production                 and       processing                  costs,              easier

use      in    vending             machines,                     and         improving              the      appearance                   of

circulating                 currency.



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              States              in     that

they      characteristically                                    have      parliamentary                      forms           of    government,

making         it        easier              to     impose             unpopular              changes;                have        central

banking             systems,                 which         gives          the         government             more           control                 over         the

banks;         and        produce                 currency               and coins               on a smaller                     scale             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.




                                                                                    11
No COMPELLING                      REASON ~0 ELIMINATE                                     PENNY 0~ 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               5 cents                would          cause        merchants                    to

raise       prices            and         would             disadvantage                      consumers,                  particularly                      the

poor,       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                  borrowing                   costs        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             borrowing                     costs           by almost                    $2 million                 annually.




                                                                                     12
Mr.   Chairman,        that   concludes      my prepared            remarks.   My colleagues

and   I would     be    pleased    to     respond        to   questions.




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