oversight

Coin and Currency Production: Issues for Congressional Consideration

Published by the Government Accountability Office on 1997-06-26.

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

                   United States General Accounting Office

GAO                Testimony
                   Before the Subcommittee on Domestic and International
                   Monetary Policy, Committee on Banking and Financial
                   Services, House of Representatives


For Release
on Delivery
Expected at
                   COIN AND CURRENCY
10:00 a.m. EDT
Thursday,          PRODUCTION
June 26, 1997



                   Issues for Congressional
                   Consideration
                   Statement of Michael E. Motley
                   Associate Director, Government Business Operations
                   Issues, General Government Division




GAO/T-GGD-97-146
Statement

Coin and Currency Production: Issues for
Congressional Consideration

                  Mr. Chairman and Members of the Subcommittee:

                  I am pleased to be here today to discuss the results of our review that you
                  requested on issues related to decreasing the costs of producing the
                  nation’s money. My testimony today discusses the issues involved in the
                  following four areas: (1) the effects of decisions on the denominational
                  mix of coins and currency on capital investment plans and production
                  costs, (2) possible structural changes in the entities involved in producing
                  money, (3) additional contracting out of money production activities, and
                  (4) the planning of money production.

                  To address these four areas, we interviewed officials at the entities
                  involved in money production; reviewed the agencies’ strategic and capital
                  plans, and production and cost data; reviewed previous Department of the
                  Treasury studies on consolidating and reorganizing the agencies involved
                  in producing and distributing coins and currency; reviewed relevant laws,
                  legislative histories, and proposed legislation; and submitted
                  questionnaires to representatives of the other G-7 nations on how they
                  produced their money. We also reviewed past GAO and Federal Reserve
                  studies on the replacement of the 1-dollar note with a new coin. We did
                  not verify the information obtained from the various entities involved in
                  money production or from foreign countries. A more detailed explanation
                  of our objectives, scope, and methodology is contained in appendix I.

                  As I will discuss more fully, Mr. Chairman, my testimony today makes the
                  following points:

              •   Both the U.S. Mint and the Bureau of Engraving and Printing (BEP) have
                  significant capital investment plans that are based on the current
                  denominational mix of coins and currency. However, proposals have been
                  made to change the current denominational mix. Implementation of some
                  of those proposals could have a significant impact on the current capital
                  investment plans of the Mint and BEP.
              •   Treasury has considered whether merging BEP and the Mint and placing
                  BEP under the Federal Reserve System would produce cost savings.
                  However, in studies it conducted, Treasury concluded that cost savings
                  may be possible but that the overall disadvantages may outweigh the
                  advantages of such organizational changes. Federal Reserve officials also
                  identified concerns about placing BEP under the Federal Reserve System.
                  Neither the studies that were done nor Treasury officials we contacted
                  provided information explaining the basis for savings or costs associated
                  with organizational changes.



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                 Coin and Currency Production: Issues for
                 Congressional Consideration




             •   Although some other countries rely on the private sector for money
                 production to a greater extent than the U.S. does, Treasury has not
                 examined the possibility of further contracting out of money production
                 primarily because of security concerns. BEP is in the process of
                 attempting to obtain competition for currency paper. It is unclear whether
                 BEP will be successful.
             •   Strategic plans of the Mint and BEP do not consider the total cost to the
                 government of producing and distributing the current denominational mix
                 of coins and currency or of an alternative mix. Planning that considers
                 such changes and their governmentwide implications might provide
                 additional insights for Treasury and congressional decisionmaking.


                 Several different organizations have responsibilities related to money
Background       production. For example, Congress decides what coins will be issued in
                 our country, while the Secretary of the Treasury determines what currency
                 denominations will be issued. Within Treasury, the U.S. Mint, established
                 in 1792, manufactures the nation’s coins in Philadelphia and Denver, and
                 BEP has been printing the nation’s currency since 1869. BEP also
                 produces nearly half of the postage stamps needed by the U.S. Postal
                 Service. The Federal Reserve System distributes coins and currency to
                 depository institutions, identifies counterfeit currency, and replaces
                 currency unfit for circulation.

                 Money production and related activities involve substantial resources. For
                 example, in fiscal year 1996, the Mint employed about 2,200 persons and
                 spent $278 million on producing circulating coins, and BEP employed
                 2,900 persons and spent $365 million on currency production at its plants
                 in Washington, D.C., and Fort Worth, Texas. Also in calendar year 1996,
                 the Federal Reserve spent $190 million to process coins and currency, and
                 $403 million1 in new currency expenses. During the past 5 years, the Mint
                 produced coins with a total value of $3.9 billion, and BEP produced
                 currency with a face value of about $680 billion. A more complete
                 description of the entities involved, the processes used in production, and
                 some perspective on the public’s use of coin and currency are contained in
                 appendix II.




                 1
                  Federal Reserve expenditures of $403 million on new currency include the BEP’s $365 million cost to
                 print currency. The difference between the $403 million and the $365 million is because BEP operates
                 on a fiscal year basis and the Federal Reserve operates on a calendar year basis and the Federal
                 Reserve’s costs also include transportation costs and other minor new currency-related expenses.



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                          Statement
                          Coin and Currency Production: Issues for
                          Congressional Consideration




                          The Federal Reserve does not expect the demand for coins and currency
Changing the              to be significantly reduced in the near future, despite earlier predictions by
Denominational Mix        some that electronic money would replace traditional payment methods.
of Money Could Affect     To meet the expected demand for coins and currency at the current
                          denominational mix, both the Mint and the BEP have significant capital
Production and            investments planned to replace aging equipment and upgrade facilities and
Capital Costs             to add capacity in the next several years. However, legislation has been
                          introduced in Congress to replace the 1-dollar note with a 1-dollar coin. In
                          addition, last year, this Subcommittee held a hearing on the future of the
                          penny and considered proposed legislation to authorize a circulating
                          commemorative quarter. Implementing proposals to change the
                          denominational mix could have an impact on the capital investments
                          currently planned by the Mint and BEP.


Demand for Coins and      The demand for coins and currency is not expected to diminish in the near
Currency Is Expected to   future, despite some past predictions to the contrary. According to a 1995
Continue                  telephone survey commissioned by the Federal Reserve, coin and
                          currency transactions accounted for 20 percent of adult expenditures,
                          compared with two-thirds accounted for by checks and 12 percent by
                          credit cards and debit cards. The Congressional Budget Office (CBO)
                          estimated in 1996 that cash payments represent about $1 trillion, or
                          20 percent, of annual consumer expenditures.2

                          A 1997 Federal Reserve study3 indicated that the retail payment system in
                          the United States remains heavily dependent on currency and paper
                          checks, despite predictions in the 1970s that electronic payments
                          (e-money) would replace more traditional payment methods. E-money
                          consists mainly of prepaid stored value cards, smart cards, and on-line
                          payments made through computer networks. The Federal Reserve’s study
                          concluded that e-money seems unlikely to fundamentally change the
                          nature of the current payment system in the near future. The CBO study
                          came to a similar conclusion, saying that while trials and pilot programs
                          are under way in the United States, markets for e-money payment systems
                          would emerge slowly. According to CBO, the low cost and ease of making
                          telephone calls to authorize purchases or withdrawals for credit and debit
                          cards in the United States reduce the need for, and the advantages of,
                          smart cards as used in other countries.


                          2
                           Emerging Electronic Methods for Making Retail Payments, Congressional Budget Office, June 1996.
                          3
                           Report to the Congress on the Application of the Electronic Fund Transfer Act to Electronic
                          Stored-Value Products, Board of Governors of the Federal Reserve System, March 1997.



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                        Statement
                        Coin and Currency Production: Issues for
                        Congressional Consideration




The Mint and BEP Have
Significant Capital
Investment Plans
The Mint                According to the Mint, much of the equipment that it uses to produce
                        coins is aging and will soon need to be replaced. About 80 percent of the
                        Mint’s coin presses are used primarily to make pennies and have an
                        average age of 20 years. Mint officials said that last year the Mint’s
                        equipment ran for 3 shifts per day, 5 days per week, in producing a record
                        20 billion coins. They said the equipment suffered at this high level of
                        output because the Mint rarely had time to take machines off-line to
                        perform maintenance.

                        The Mint plans to make about $176 million in capital investments over the
                        next 5 years to replace deteriorated equipment and upgrade facilities.
                        According to the Mint, this funding would allow the Mint to continue
                        producing at the 20 billion coins per year level with no overtime. The
                        Mint’s current plans show continued production of the penny, which, over
                        the last 5 years, accounted for about 71 percent of its circulating coin
                        production. Further, the Mint’s capital investment plan does not reflect the
                        goal in its strategic plan of producing 24 billion coins per year by 2002—a
                        20 percent increase in output over the current production of 20 billion
                        coins. According to Mint officials, they plan to update the capital
                        investment plan in a few years. The Mint’s goal of producing 24 billion
                        coins annually assumes continued production of the current mix of coins.

                        The Mint’s current $176 million capital investment plan also does not
                        include other capital investments that could materialize. For example, it
                        does not include an estimated $73 million in capital investments that
                        would be required to produce a new 1-dollar coin if Congress authorizes
                        its production. It also does not include the costs of acquiring a proposed
                        new headquarters facility, which have not yet been estimated.

BEP                     BEP has not developed a capital investment plan extending beyond 1999.
                        Although BEP has a capital investment plan for fiscal years 1997 through
                        1999 showing planned expenditures of $251 million for the Fort Worth, TX,
                        and Washington, D.C. plants, BEP’s Chief Financial Officer said BEP is
                        likely to spend significantly less than $251 million because all capital
                        expenditures for the current D.C. facility, except for essential maintenance
                        expenditures, have been put on hold, pending a decision on whether BEP
                        will build a replacement facility for the current Washington, D.C., facility.




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    Coin and Currency Production: Issues for
    Congressional Consideration




    BEP officials said that they did not know when this decision will be made
    and that it was at least partly dependent on whether the 1-dollar note is
    phased out. Preliminary estimates of the cost of a new D.C. facility range
    from about $158 million to $250 million.

    While BEP could produce all remaining denomination notes at the Fort
    Worth facility if the 1-dollar note were discontinued, BEP officials said this
    would not be desirable in view of the possibility of a catastrophe occurring
    at Fort Worth. BEP officials would like to continue having a facility in the
    Washington, D.C., area as a backup facility. We asked Treasury and
    Federal Reserve officials if there were alternatives to having a backup
    facility. The officials noted several alternatives, including (1) stockpiling
    currency, (2) reducing the Federal Reserve’s destruction rate for unfit
    notes in an emergency, (3) introducing reciprocal printing agreements
    with other countries, and (4) making arrangements with the private sector.
    They said currently none of these strategies are employed and each has
    both advantages and disadvantages, as discussed below.

•   Stockpile currency: This strategy could reduce the need for BEP to have
    two facilities by providing time needed to rebuild production capacity in
    the event of a catastrophe. The Federal Reserve currently has a target of
    storing a 2-month supply of currency. According to Federal Reserve
    officials, most of the major industrialized countries store a 1-year supply.
    Storing additional currency would require the Federal Reserve to acquire
    additional vault space.
•   Reduce the rate of destruction of soiled notes: This strategy would also
    have the advantage of providing the time needed to rebuild production
    capacity. A disadvantage would be that more soiled money would remain
    in circulation and that consumers might experience problems using
    vending or automated teller machines.
•   Reciprocal printing agreements with foreign countries: This alternative
    could reduce the need for BEP to have two facilities by providing a
    back-up printing capability. Other countries have shown interest in
    reciprocal agreements with the United States. This strategy, however,
    raises security concerns because the Secret Service, which has
    responsibility for investigating counterfeiting, has no investigative
    authority outside of the United States.
•   Arrangements with the private sector: This strategy could also reduce the
    need for a second BEP facility. According to an American Banknote
    Corporation official we interviewed, his company would have the capacity
    to produce up to 100 million notes per month. A disadvantage to this
    strategy is that it raises security concerns associated with producing



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                             Coin and Currency Production: Issues for
                             Congressional Consideration




                             money with non-government personnel and facilities. Also, variations in
                             note quality produced by different manufacturers could make counterfeits
                             harder to detect.


Eliminating the Penny and    As shown in table III.1, the Mint produced about 61 billion pennies over
1-Dollar Note Could Affect   the past 5 years, which accounted for about 71 percent of all circulating
Mint and BEP Capital         coins produced by the Mint. During this same period, BEP produced about
                             21 billion 1-dollar notes, which accounted for about 47 percent of BEP’s
Investment Plans             total note production, as shown in table III.2. During this 5-year period, the
                             Mint coined a total of $3.9 billion in coins, and BEP printed a total face
                             value of $679.8 billion in paper currency, for a total production of
                             $683.8 billion.

                             Our prior report on the 1-dollar note showed that eliminating this note
                             could generate substantial operating cost savings and our testimony on the
                             penny showed that eliminating this coin could also result in savings. Last
                             year, we testified before this Subcommittee that the production and
                             distribution of the penny is no longer profitable to the government.4 After
                             considering both the Mint’s profit from producing pennies and the Federal
                             Reserve System’s cost of distributing them, we estimated that the net cost
                             to the government was about $9 million in fiscal year 1994.5 We testified in
                             1995 that $456 million per year could be saved if a new 1-dollar coin
                             replaced the 1-dollar note.6 These estimates did not include the long-term
                             capital investments that could be avoided by not producing the penny or
                             1-dollar note.7

                             Changing the denominational mix of coin and currency in the near future
                             could significantly affect the capital investments the Mint and BEP would
                             have to make in the next decade. Eliminating the penny could save the
                             Mint about $2 million in planned capital improvements over the next 5

                             4
                              Future of the Penny: Options for Congressional Consideration (GAO/T-GGD-96-153, July 16, 1996).
                             5
                              The Mint has disagreed with our methodology for estimating the cost to the government of producing
                             and distributing the penny. The Mint maintains the penny is still profitable, based on the difference
                             between the face value of pennies produced and their production costs, or the seigniorage. We based
                             our methodology on the interest avoided from the seigniorage, not the gross seigniorage. We did this to
                             be consistent with our past analyses of a dollar coin and because only the interest savings is
                             considered by budgetary rules established in 1968 by the President’s Commission on Budget Concepts.
                             6
                              A Dollar Coin Could Save Millions (GAO/T-GGD-95-203, July 13, 1995).
                             7
                              In our 1990 analysis of the dollar coin, we assumed the Mint would need about $18 million in start-up
                             costs, including capital equipment. The Mint now estimates that about $92 million in start-up costs,
                             including $73 million in capital investments, would be needed for a new 1-dollar coin to replace the
                             1-dollar note.



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                            Congressional Consideration




                            years and perhaps even larger amounts as the Mint’s aging presses exceed
                            their useful lives and become increasingly unreliable. Eliminating the
                            1-dollar note could substantially reduce, and possibly eliminate, the need
                            for a Washington, D.C., production plant. The amount of the savings would
                            vary depending on what decisions are made by BEP and Treasury
                            regarding whether a backup facility is needed to supplement the Fort
                            Worth plant for currency production and whether BEP continues to
                            produce postage stamps. While no firm estimates have been made, BEP
                            officials said a new facility could range between $158 million and
                            $250 million. According to the Mint, a new dollar coin could require an
                            additional $73 million in capital investment.

                            As we have reported in the past, decisions on whether to eliminate the
                            penny and 1-dollar note should include consideration of a variety of
                            factors in addition to the government’s cost savings, such as public
                            acceptance, the needs of commerce, impact on the economy, impact on
                            private sector and government workers producing the pennies and the
                            dollar notes, and the experiences other countries have had.


Other Congressional         Recent congressional proposals have been made to produce a circulating
Decisions on                commemorative quarter and replacing the Susan B. Anthony dollar with
Denominations Could Also    another coin. The Mint is no longer producing Susan B. Anthony dollar
                            coins and remaining inventories are decreasing. At the current withdrawal
Affect Capital Investment   rate, the Mint and the Federal Reserve have a 36-month supply of Anthony
Plans                       dollars. Currently, the Susan B. Anthony coin is the only dollar coin
                            authorized by law. A new dollar coin would require action by Congress
                            and, according to the Mint, 30 months time to develop and begin
                            manufacturing. If a decision is not made to replace the Anthony dollar
                            with a new coin before the Anthony dollar is depleted and a new coin is
                            ready for production, the Mint would be required to resume production of
                            Anthony dollars to meet the Federal Reserve’s demand. Although the coin
                            has not had widespread public acceptance, due in part to its close
                            resemblance to the quarter, it is used in certain vending machines and
                            transit systems and some businesses depend on it.

                            Congress is also considering a proposal to authorize circulating
                            commemorative quarters, which would be issued at face value with a
                            distinctive design. Last year, Congress required the Treasury to report by
                            June 1, 1997, on the feasibility of a circulating quarter program to
                            commemorate each of the 50 states. The May 30, 1997, report contained
                            the results of a public opinion survey indicating that 51 percent of



                            Page 7                                                      GAO/T-GGD-97-146
                            Statement
                            Coin and Currency Production: Issues for
                            Congressional Consideration




                            respondents would favor a 50-state circulating commemorative coin
                            program, 38 percent had no opinion, and 11 percent would be opposed.
                            The report said that the seigniorage8 generated from this program could be
                            from $2.6 billion to $5.1 billion over a 10-year period. According to the
                            report, this would require an additional $13 million in capital investments
                            at the Philadelphia Mint and possibly an additional $22 million at the
                            Denver Mint.


                            Treasury has considered consolidating BEP and the Mint and placing BEP
Available Information       under the Federal Reserve. However, it has not moved forward with either
Does Not                    idea. Studies have been done, but none have quantified whether the
Demonstrate                 savings would outweigh the costs. Furthermore, both Federal Reserve and
                            Treasury officials identified difficulties that would need to be overcome
Significant Benefits        before organizational changes would be successful, and some of the
From Organizational         savings that were identified as possible from structural changes could
                            possibly be achieved by other means. None of the foreign countries we
Changes                     contacted had merged coin and currency production into the same
                            organization. However, five of the six countries placed currency
                            production under their central banks.


Consolidation of the Mint   A Treasury-commissioned study in 1987 and studies recently done for the
and BEP                     National Performance Review (NPR) have identified possible
                            administrative cost savings from consolidating the Mint and BEP. In 1987,
                            the Assistant Secretary for Management, the Treasurer, and the Treasury
                            Inspector General conducted a study to determine whether the
                            consolidation of the Mint and BEP would increase operating efficiencies.
                            The report concluded that consolidation was feasible only for a limited
                            number of administrative functions, which comprised no more than 5
                            percent of the total workforce of both bureaus. The functions included
                            executive management, management analysis, procurement, human
                            resource management, and information resources management. Treasury
                            officials told us they believed the savings from consolidation would not
                            significantly exceed implementation costs. However, the study did not
                            address the implementation costs. A 1995 Treasury-commissioned NPR
                            study, which included the merger of BEP and the Mint, identified savings
                            of $4.8 million over a 5-year period through consolidating administrative
                            functions and reducing personnel. It noted that an expanded distribution
                            of fixed costs could occur as they could be allocated across both coins and
                            currency. Another advantage indicated in the study was that space

                            8
                             Seigniorage is the difference between the face value of coins and their cost of production.



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                        Statement
                        Coin and Currency Production: Issues for
                        Congressional Consideration




                        requirements could be reduced by combining like functions, such as
                        testing labs.

                        The 1995 study also noted several disadvantages of merging the two
                        organizations. Specifically, it concluded that savings would not
                        significantly exceed implementation costs. The study, however, did not
                        identify these costs. Another disadvantage cited by the report was that
                        BEP and the Mint are in substantially different lines of business, with no
                        technology overlap. Additionally, the study noted two obstacles to the
                        consolidation. The first was that legislation would be required, and the
                        second was that bargaining with the Mint’s union and BEP’s 18 unions
                        would be required.

                        Treasury and Federal Reserve officials we interviewed said that the
                        production processes of BEP and the Mint were dissimilar and that the
                        production plants were located in different cities. While they said a merger
                        could produce some administrative savings, most commented that they did
                        not believe that the savings associated with the merger would justify the
                        costs. However, they had no analytical basis for their opinions.

                        We also contacted representatives of Canada, Germany, France, Italy,
                        Japan, and the United Kingdom to ask them how they had organized
                        money production. None of the countries reported that they had coin and
                        currency production merged within the same organization.


Placing BEP Under the   Treasury has not studied the possibility of placing the Mint under the
Federal Reserve         Federal Reserve, but a 1995 NPR study considered the possibility of
                        bringing the BEP under the Federal Reserve. The study indicated that,
                        under the reorganization, the Federal Reserve would have more control
                        and direct oversight of BEP, and BEP would gain the same procurement
                        and personnel flexibility that benefits the Federal Reserve, saving
                        $34 million over a 5-year period. However, the study did not provide any
                        analysis or explanation of how the $34 million savings were estimated.
                        Treasury officials in the office that directed the study were not able to
                        provide any additional information on the savings estimates.

                        It would be possible to exempt BEP from existing procurement and
                        personnel regulations while retaining BEP under the Treasury
                        Department. The Mint already has a waiver from federal procurement
                        regulations and is attempting to seek such a waiver from personnel




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                         Statement
                         Coin and Currency Production: Issues for
                         Congressional Consideration




                         regulations by seeking authority to become a Performance Based
                         Organization.

                         Officials at the Federal Reserve told us that they had reservations about
                         moving BEP to the Federal Reserve. Federal Reserve officials said that the
                         Federal Reserve has no unionized employees and may not be prepared to
                         inherit BEP’s 18 unions. A Federal Reserve official also said that placing
                         BEP under the Federal Reserve, with its fully funded retirement system,
                         could lead to an unfunded pension liability unless Congress made
                         provisions to appropriate funds to cover the retirement costs of the BEP
                         employees that would be transferred to the Federal Reserve’s pension
                         system.

                         For additional perspective, we also contacted representatives of Canada,
                         Germany, France, Italy, Japan, and the United Kingdom to ask them how
                         their money production agencies were organized. In all the countries, coin
                         production is under the executive branch of government, while currency
                         production, except in Japan, is under the central bank. In Japan, both
                         currency and coin production are under the executive branch of
                         government.


                         Both the Mint and BEP rely on contracting out for most of the materials
Options May Exist for    used in money production, as well as for several support activities.
Further Contracting      Although some of the foreign countries we contacted rely on the private
Out of Money             sector for basic money production to a greater extent than we do in this
                         country, Treasury, the Mint, and BEP have not explored the possibility of
Production               contracting out additional money production activities. Officials within
                         Treasury have a number of concerns about greater use of the private
                         sector. These concerns include security as well as the appropriateness of
                         contracting out for basic money production, which they view as an
                         inherently governmental function. Treasury contractors we contacted
                         disagree with Treasury’s views. However, since the advantages and
                         disadvantages of further contracting out have not been thoroughly studied,
                         it is not clear whether savings would be achieved or whether the concerns
                         raised by Treasury are valid or could be mitigated. The BEP has begun
                         recent efforts to obtain competition for supplying currency paper. It
                         remains to be seen if BEP’s recent efforts will be successful.


Some Countries Rely on   We sent questionnaires to representatives from Canada, Germany, France,
the Private Sector for   Italy, Japan, and the United Kingdom asking if they contracted out the
Basic Money Production   production of money. Canada and Germany replied that currency


                         Page 10                                                    GAO/T-GGD-97-146
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                             production is done by private companies, while the government produces
                             coins.9 France, Italy, and Japan said that both coins and currency are
                             produced by the government. In France, currency production is done by
                             the Bank of France, and in Italy, by the Bank of Italy. The United Kingdom
                             said that currency is produced by the Bank of England, a publicly-owned
                             corporation that is not a government department, and coins are produced
                             by the government mint. Japan said that it uses a private company to
                             perform some of the minting process for small denomination coins.

                             Canada said it contracts out the production of bank notes to two private
                             companies. According to the Bank of Canada, the advantages of having
                             private companies produce notes are that the government is not required
                             to make large capital investments and using two private producers
                             provides competition. Officials said that the disadvantages of this
                             arrangement are that research and development efforts are more costly
                             and difficult. Canadian coins are produced by the Royal Canadian Mint,
                             which contracts out for supplies of blanks for the 1-dollar and 1-cent
                             coins. The Canadian Mint obtains nickel strip for the other coin
                             denominations from private suppliers.


The Mint Contracts Out       The Mint has contracted out certain support activities related to basic coin
Many Services and            production. It has contracted out for the transportation of finished coins
Materials and Is Reluctant   from Mint facilities to the Federal Reserve Banks; the manufacture of
                             commemorative and bullion coin packaging materials and precious metal
to Contract Out Additional   (e.g., gold, platinum, and silver) coin blanks; manufacture and assembly of
Blanks                       numismatic jewelry; telemarketing services to assist in marketing
                             commemorative programs; Philadelphia Mint retail sales; janitorial
                             services; and executive and employee development programs. The Mint
                             also uses advertising agencies to develop marketing strategies, creative
                             mailings, and print advertisements for its commemorative and bullion
                             programs. Mint officials said that they are also exploring the possibility of
                             privatizing retail operations at the Denver facility, but are not considering
                             other contracting opportunities.

                             The Mint has also contracted out some activities directly related to coin
                             production. In fact, in fiscal year 1996, $79 million, or about 69 percent, of
                             the $115 million the Mint spent on contracting was for suppliers of penny
                             blanks and clad strip-metal that is blanked and stamped for higher



                             9
                              In Germany, the federal government is currently the sole shareholder in one of the two private
                             printers.



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                             denomination coins. The Mint has two suppliers for copper-plated zinc
                             penny blanks and has two suppliers of clad strip.

                             When we asked whether blanks could be contracted out for coins other
                             than the penny, Mint officials said that none of the Mint’s clad strip
                             suppliers have the necessary equipment to produce blanks for 5-cent
                             through 50-cent denominations. Further, Mint officials said that
                             contracting out 5-cent through 50-cent coin blanks would present more of
                             a security risk than penny blanks, since the blanks could be used in
                             vending machines. Mint officials said its suppliers would have to construct
                             or obtain separate, secure facilities dedicated solely to producing coin
                             blanks, the cost of which would be passed on to the Mint. However,
                             officials from two strip suppliers we contacted did not agree. Officials
                             from the contractors told us they could institute additional security
                             measures and could produce a total of between 2.3 billion and 2.8 billion
                             one-dollar coin blanks a year with a total capital investment of about
                             $300,000. We did not independently verify these companies’ ability to
                             produce these blanks or whether cost savings could be achieved by
                             contracting out the blanks, nor did we examine the security issue.


BEP Contracts Out Many       In fiscal year 1997, BEP said that it plans to contract out supplies and
Services and Materials,      services totalling $128 million specifically related to currency production,
Has Relied on a              including $65 million for purchasing currency paper. Since 1879, the
                             Bureau has used a single source, Crane & Co., of Dalton, MA., for its
Sole-Source Currency         currency paper. The Treasury Inspector General has completed numerous
Paper Supplier, and Has      audits of BEP’s distinctive currency paper supplier, and has questioned
Not Fully Explored Further   how the contractor has calculated profit. BEP and the contractor
Contracting                  eventually reached a settlement for the costs questioned by the Inspector
                             General for $12.7 million in 1995. The Treasury Inspector General is
                             currently continuing to audit the contract.

                             In 1996, Treasury studied the feasibility of obtaining competition for the
                             supplying of currency paper. The study noted that other paper companies
                             have chosen not to compete with Crane because of the high capital
                             start-up costs that would be required and the limited market. On May 2,
                             1997, BEP sought potential offerors for that business. Before issuing the
                             solicitation, BEP made a draft solicitation available to interested parties.
                             The draft solicitation contained a contractor acquired government
                             property provision that would have provided financial assistance to
                             offerors for acquiring the necessary equipment to manufacture distinctive
                             currency paper. The provision, which was to be considered in the price



                             Page 12                                                      GAO/T-GGD-97-146
Statement
Coin and Currency Production: Issues for
Congressional Consideration




evaluation when BEP evaluated offerors’ proposals, was eliminated from
the final solicitation. In the solicitation issued by BEP in May 1997, the
provision was replaced by another provision allowing offerors to propose
innovative acquisition and financing arrangements. This solicitation does
not specifically mention how this replacement provision will be evaluated.
It is uncertain what effect this will have on potential offerors. The
solicitation was extended on June 19, 1997, to allow offerors until
October 24, 1997, to submit their proposals.

The 1997 Emergency Supplemental Appropriations Act, P.L. 105-18, signed
into law on June 12, 1997, requires us to analyze “the optimum
circumstances for government procurement of distinctive currency paper”
and report our findings to the House and Senate Committees on
Appropriations no later than August 1, 1998. The act also prohibits BEP
from awarding a contract under the solicitation until our review is
completed.

Aside from exploring the possibility of obtaining more than one supplier of
paper, neither Treasury nor BEP has fully explored the potential for
contracting out additional activities associated with currency production.
According to the Treasury Department, currency production is an
inherently governmental function, since a secure and reliable source for
the production of U.S. currency is of paramount importance to the nation’s
economy and system of commerce. Treasury officials also said that the
production of currency by a private contractor is not desirable from a
national security perspective. The Treasurer said that the government does
not want to privatize money production for security and appearance
reasons. In addition, Secret Service officials said that contracting out the
production of 1-dollar notes, for example, would be a problem because
having more than one producer creates more variations from the original
currency, making counterfeit detection more difficult. The BEP Director
said that some agency functions such as currency engraving could not be
privatized because of limited availability in the private sector.

We did not independently evaluate whether cost savings would be
achieved by further contracting out currency production or whether
further contracting out would be desirable from a public policy standpoint.
These issues would obviously have to be addressed before decisions on
further contracting out of basic money production could be made.




Page 13                                                     GAO/T-GGD-97-146
                     Statement
                     Coin and Currency Production: Issues for
                     Congressional Consideration




                     Neither the Mint, BEP, nor the Treasury have overall goals to reduce
Planning for Money   production and distribution costs across denominations or across
Production           agencies. This issue is not new and was reported by Treasury in a 1987
                     study.10 The study found that planning for future coin and currency needs
                     is done independently by the Mint and BEP. It stated that in view of
                     technological changes, including electronic money, coins and currency
                     should be treated as a single money system by a single planning entity. The
                     study recommended that a permanent planning capability be created in
                     the Office of the Treasurer to focus on strategic planning related to the
                     future structure of coin and currency for consideration by Congress and
                     the Secretary of the Treasury. Further, because of the time required to
                     establish a permanent planning staff, the study recommended that
                     interbureau working groups should be established until a permanent staff
                     could be arranged. Treasury officials told us that they established the
                     interbureau working groups but did not establish the permanent planning
                     staff in the Office of the Treasurer because they believed that it was
                     unnecessary.

                     However, a decade later, Treasury’s planning for the production of money
                     does not consider governmentwide costs or address the mix of coins and
                     currency. As we have reported in the past, while the Mint produces
                     pennies at a small unit profit, after considering the Federal Reserve’s costs
                     to distribute pennies, the government as a whole loses money on the
                     penny. Similarly, a 1-dollar coin would be much less costly for the
                     government than the 1-dollar note, as we have reported in the past.

                     Both the Mint and BEP view their roles as that of meeting public demand
                     for coins and currency and do not believe they have a role in determining
                     the denominational mix of the nation’s coins and currency. Both the Mint
                     and BEP’s performance measures neglect those costs of coins and
                     currency borne by other entities, such as the Federal Reserve. In these
                     respects, both the Mint and BEP have strategic plans that reflect
                     compartmentalized views of the costs to produce and distribute money.
                     Although the Treasury Department is responsible for overseeing the
                     strategic planning efforts of the Mint and BEP, it has not ensured that
                     strategic plans address the denominational mix of money or
                     governmentwide costs to furnish money to the economy.




                     10
                      The U.S. Mint and the Bureau of Engraving and Printing: a Study to Assess the Feasibility of
                     Consolidation, Department of the Treasury, January 1987.



                     Page 14                                                                          GAO/T-GGD-97-146
                  Statement
                  Coin and Currency Production: Issues for
                  Congressional Consideration




                  Congress will soon be faced with several decisions concerning money
Conclusions       production. These decisions are likely to have long-term and wide-ranging
                  effects on such issues as operating costs and capital investments of the
                  Mint and BEP, public reaction, the needs of commerce, and the impact on
                  the current Treasury and Treasury contractors’ workforces. Among the
                  issues Congress may want to pursue with Treasury as it deliberates on the
                  nation’s coins and currency are the following:

              •   The impact that changes to the denominational mix of coins and currency
                  could have on capital investment needs of the Mint and BEP;
              •   Whether consolidating any administrative functions of the Mint and BEP
                  or further exempting them from procurement and personnel regulations
                  would produce cost savings and be otherwise advantageous;
              •   Whether the Mint and BEP should explore additional contracting out
                  opportunities related to money production; and
              •   Whether it would be useful for Treasury, the Mint, and BEP to address in
                  their strategic plans possible changes to the denominational mix of coins
                  and currency and the issue of governmentwide money production and
                  distribution costs.


                  Mr. Chairman, this concludes my statement. I would be happy to answer
                  any questions you or other Subcommittee members may have.




                  Page 15                                                   GAO/T-GGD-97-146
Appendix I

Objectives, Scope, and Methodology


              Our objective was to identify potential issues related to reducing costs in
              producing coins and currency for the nation’s economy. We were
              specifically asked to consider our past work on the dollar coin and penny.
              We identified the following four issues: the denominational mix of coins
              and currency, changes to the organizational structures of the Mint and
              BEP, additional contracting out opportunities, and planning for the future
              of money production.

              To meet our objectives, we interviewed officials from the Treasury, Mint,
              BEP, and Federal Reserve and reviewed Mint and BEP strategic plans,
              budgets, performance measures, capital investment plans, production and
              cost data, reports on the agency revolving funds, and Treasury studies on
              consolidating the Mint and BEP and on circulating commemorative coins.
              We obtained information about the condition of money production
              facilities and equipment by reviewing information on their age and
              condition and by touring the Denver Mint and the BEP production
              facilities in Washington, D.C., and Fort Worth. To obtain information about
              BEP’s production of postage stamps, we interviewed BEP and Postal
              Service officials and reviewed agency production agreements.

              To study the effects of decisions on the denominational mix of coins and
              currency on capital and production costs, we reviewed the capital
              investment plans of the Mint and BEP, prior GAO reports on a dollar coin
              and the penny, and recent congressional proposals to change the mix of
              coins and currency.

              We also interviewed Secret Service officials regarding their
              anticounterfeiting efforts. To obtain the views of BEP’s work force on
              management initiatives, we interviewed officials from the Bureau’s major
              labor unions. We also reviewed historical information about the creation
              of the agencies involved in money production and distribution.

              To obtain information about options for contracting Mint and BEP
              operations, we interviewed agency officials and obtained information from
              the Mint and BEP on the operations they have privatized, contacted
              private metal and coin blank suppliers (Olin Brass and PMX Industries)
              and a currency printer (American Banknote Corp.), and reviewed
              Treasury’s May 1997 solicitation for additional currency suppliers.

              We obtained information about the future of electronic money by
              interviewing officials from the Office of the Comptroller of the Currency,




              Page 16                                                     GAO/T-GGD-97-146
Appendix I
Objectives, Scope, and Methodology




the Federal Reserve, Treasury, Mint, and BEP, and by reviewing CBO and
Federal Reserve studies.

We reviewed relevant laws, legislative histories, and proposed legislation
to obtain information about the congressional role in money production.

To obtain information about the organization of money producing
agencies in other countries, we prepared and submitted questionnaires to
representatives of the other G-7 nations (Canada, France, Germany, Italy,
Japan, and the United Kingdom).

We did not verify the information obtained from the agencies or the G-7
nations.

We did our work in Washington, D.C., Denver, and Fort Worth, in
accordance with generally accepted government auditing practices from
January through June 1997.




Page 17                                                     GAO/T-GGD-97-146
Appendix II

Description of the Entities Involved in
Money Production, Production Processes
Used, and the Public’s Use of Coins and
Currency
              Several government entities are involved in money production, including
              the U.S. Mint, BEP, the Secret Service, the Treasury Department, the
              Federal Reserve System, and the Congress.


U.S. Mint     The Mint was established in 1792 to issue coins as a standard monetary
              system for the newly formed country. Before 1792, money from other
              countries was used in the colonies. In addition to producing circulating
              coins, starting in 1892, the Mint also began issuing noncirculating coins
              commemorating certain events, organizations, and individuals. In 1937, the
              Mint also assumed responsibility for protecting the nation’s supply of gold
              and silver.

              The Mint’s primary mission is to manufacture an adequate number of coins
              for the nation to conduct its trade and commerce. The Mint’s circulating
              and commemorative coin production facilities are located in Philadelphia
              and Denver. The Mint also has facilities in San Francisco and West Point,
              NY, that manufacture commemorative coins. The Mint’s gold reserves are
              stored primarily in Fort Knox, KY. As of February 1997, the Mint had about
              2,200 employees at its five regional facilities and Washington, D.C.,
              headquarters.

              In 1996, the Mint spent about $278 million to produce circulating coins, or
              about 46 percent of its total $601 million operating costs. The Mint sells
              circulating coins at face value to the Federal Reserve and earns
              seigniorage, the difference between the coins’ face value and their cost of
              production.11


BEP           BEP prints the nation’s paper currency. Before 1861, state-chartered,
              private banks issued paper money, and the federal government only
              produced coins. The privately issued notes were easily counterfeited. In
              1861, Congress authorized the U.S. Treasury to issue the first U.S.
              government paper money in the form of non-interest bearing Treasury
              notes called “demand notes,” because of a shortage of coins and the need
              to finance the Civil War. Demand notes were replaced by U.S. notes in
              1862, when Congress authorized the Secretary of the Treasury to have
              notes engraved and printed by private bank note companies. The actual
              printing of currency notes by Treasury employees began in 1863. In 1869,


              11
               Seigniorage is deposited into the Mint’s revolving fund, which was established in 1995. Under P.L.
              104-52, the Mint is required to deposit excess funds from its revolving fund to the Treasury’s General
              Fund at least annually. In 1996, the Mint transferred about $587 million to the Treasury’s General Fund.



              Page 18                                                                           GAO/T-GGD-97-146
                      Appendix II
                      Description of the Entities Involved in
                      Money Production, Production Processes
                      Used, and the Public’s Use of Coins and
                      Currency




                      Congress recognized BEP in legislation as the entity producing currency
                      notes.

                      Currently, BEP designs and prints all of the nation’s paper currency in
                      Washington, D.C., and Fort Worth, TX, and produces some U.S. postage
                      stamps in Washington, D.C. BEP began printing postage stamps for the
                      Postal Service in 1894. It produced all of the nation’s postage stamps until
                      1978, when the Postal Service began contracting out stamp production to
                      determine if costs could be lowered through competitive bidding by
                      private contractors. Private-sector capacity to produce postage stamps has
                      grown since 1978, and BEP now produces less than half of the stamps that
                      the Postal Service requires. In 1996, BEP spent $365 million on currency
                      note production, or about 81 percent of its $450 million in total operating
                      costs; $77 million on stamp production; and $8 million on other activities,
                      such as the production of security documents.


U.S. Secret Service   The U.S. Secret Service, another Treasury agency, was created in 1865 to
                      suppress counterfeit currency. By the end of the Civil War, one-third of all
                      paper currency in circulation was counterfeit. According to the Treasury
                      Department, by 1875 counterfeiting was sharply reduced. The current
                      mission of the Secret Service includes protecting the President and Vice
                      President, their families, and visiting foreign dignitaries, and enforcing
                      laws relating to U.S. money and securities as well as those relating to
                      electronic funds transfer and credit card fraud. The Secret Service works
                      with BEP in assessing the security of the Bureau’s money production
                      facilities and with currency redesign. For the first 6 months of fiscal year
                      1997, the Secret Service spent about 11 percent of its time on
                      anticounterfeiting efforts.


Department of the     The Department of the Treasury was established in 1789 and performs
Treasury              four basic functions: formulating and recommending the nation’s
                      economic, financial, tax, and fiscal policies; serving as a financial agent for
                      the U.S. government; enforcing laws under the jurisdiction of the Secret
                      Service and other Treasury agencies; and overseeing the production of
                      coins and currency.

                      The Mint and BEP report to the Secretary of the Treasury through the U.S.
                      Treasurer and the Assistant Treasury Secretary for Management and Chief
                      Financial Officer. The Office of the Treasurer of the United States was
                      established in 1777 and was originally charged with the receipt and



                      Page 19                                                       GAO/T-GGD-97-146
                         Appendix II
                         Description of the Entities Involved in
                         Money Production, Production Processes
                         Used, and the Public’s Use of Coins and
                         Currency




                         custody of government funds, but these functions have been assumed by
                         different Treasury bureaus. The Treasurer is also consulted on policy
                         issues affecting the Mint and BEP, is a member of Treasury’s Advanced
                         Counterfeit Deterrence Committee, acts as a spokesperson to the public
                         for Mint and BEP issues such as currency redesign, and promotes the sales
                         of U.S. savings bonds.


Federal Reserve System   The Federal Reserve System was established in 1913 as the nation’s
                         central bank to establish a safe and flexible monetary and banking system.
                         In addition to setting monetary policy for the nation, the Federal Reserve,
                         which consists of a Board of Governors and 12 Federal Reserve Banks and
                         25 branches around the country, obtains new currency and coins from
                         BEP and the Mint and distribute them to the public through depository
                         institutions. The Federal Reserve Banks also identify counterfeits and
                         destroy currency that is unfit for circulation, provide wire and automated
                         clearinghouse transfers of funds and securities, and process domestic
                         checks.

                         In 1996, expenses related to coin and currency, including paying and
                         receiving, processing, and currency destruction, were estimated at
                         $190 million, or about 9 percent of the Federal Reserve’s nearly $2.2 billion
                         budget. The Federal Reserve also spent $403 million on new currency in
                         1996.12 If the cost of new currency is included in the Federal Reserve’s
                         budget, coin and currency costs would represent 23 percent of its total
                         annual costs.13


Congress                 Congress has treated coins and currency differently in the law. While
                         Congress has specified the denominations of coins that may be minted as
                         well as their size and metallic composition, it has authorized the Secretary
                         of the Treasury to decide which currency denominations to issue,
                         provided that they are at least $1 in value.


Production Processes     The Mint and BEP produce coins and currency in the amounts ordered by
                         the Federal Reserve, which are driven by demand for various

                         12
                          Of the $403 million in new currency expenses, $389 million was charged by the BEP for printing
                         currency. The remainder was for shipping new currency to Federal Reserve banks and other related
                         expenses.
                         13
                          The Federal Reserve does not include the cost of printing new currency in its operating budget.
                         According to a Federal Reserve official, new currency costs are considered separately to avoid being
                         driven by Federal Reserve Bank operating budgets.



                         Page 20                                                                         GAO/T-GGD-97-146
                          Appendix II
                          Description of the Entities Involved in
                          Money Production, Production Processes
                          Used, and the Public’s Use of Coins and
                          Currency




                          denominations conveyed through the banking system. The Mint, rather
                          than the Federal Reserve, estimates how many coins to produce, while the
                          Federal Reserve determines the level of currency production. The Mint
                          uses an economic model to make a projection, with input from the Federal
                          Reserve’s economic forecasts.

                          The Mint has two contractors that supply metal blanks for stamping of
                          pennies and two suppliers of clad strip metal, which is blanked and
                          stamped by the Mint for nickels, dimes, quarters, and half-dollars. Coins
                          are produced by means of a multistep process involving (1) punching out
                          round disks called blanks from metal strips, (2) heating the blanks in an
                          annealing furnace to soften them, (3) sorting out blanks that are the wrong
                          shape or size, (4) raising a rim around the edges of the blanks, and
                          (5) striking the blanks in a coining press with designs and inscriptions to
                          make them U.S. coins.

                          The BEP’s Washington, D.C., currency production facility was built in 1914
                          (the annex was built in 1938) and is a multifloor manufacturing plant used
                          for both currency and postage stamps. The Fort Worth facility, built in
                          1991, is a single-floor, modern facility used solely for currency production.
                          BEP has one currency paper supplier. One contractor provides the Bureau
                          with most of the ink used for the production of currency. BEP also
                          produces some ink at its Washington, D.C., plant.

                          BEP produces currency using intaglio printing, which involves the
                          engraving of images below the surface of printing plates to provide a
                          raised image on the notes. Engraved designs are made into dies, which are
                          transferred to printing plates. The plates are used to print the currency on
                          high-speed presses. The backs of the notes are printed with green ink and
                          are allowed to dry for 24 to 48 hours before the faces are printed with
                          black ink.

                          After production, coins and currency are transported to the Federal
                          Reserve System for distribution to depository institutions.


Coin and Currency Usage   According to the Federal Reserve, a 1995 telephone survey that it
in the United States      commissioned indicated that cash (coin and currency) transactions
                          account for 20 percent of the expenditures of the average adult in the
                          United States, compared with roughly two-thirds accounted for by checks
                          and 12 percent by credit and debit cards. A 1995 Federal Reserve System
                          survey indicated that 67 percent of U.S. families have bank credit cards;



                          Page 21                                                      GAO/T-GGD-97-146
Appendix II
Description of the Entities Involved in
Money Production, Production Processes
Used, and the Public’s Use of Coins and
Currency




that 40 percent of families have an outstanding balance on a credit card;
and that 15.1 percent of families do not have checking accounts.14 A 1996
CBO report estimated that cash payments represented approximately $1
trillion of annual consumer expenditures, or about 20 percent of the total
consumer expenditures of $5 trillion.15




14
 In the survey, reported in “Family Finances in the U.S.: Recent Evidence from the Survey of
Consumer Finances,” Federal Reserve Bulletin, January 1997, families were defined as households,
which includes single people.
15
  Emerging Electronic Methods for Making Retail Payments, Congressional Budget Office, June 1996.


Page 22                                                                        GAO/T-GGD-97-146
Appendix III

Mint and BEP Money Production



Table III.1: Mint Coinage Production, Fiscal Years 1992-1996
Numbers in millions
                                     % of                   % of             % of                % of              % of                % of
Denomination                 1992    total      1993        total   1994     total     1995      total     1996    total       total   total
1¢                          9,007     74.8 11,282           79.7 13,459      70.0 13,419         68.7 13,669        67.6     60,836     71.4
5¢                            903      7.5       655         4.6    1,450      7.5    1,623       8.3      1,740     8.6      6,371      7.5
10¢                         1,294     10.7     1,177         8.3    2,521    13.1     2,365      12.1      2,801    13.8     10,158     11.9
25¢                           806      6.7     1,009         7.1    1,752      9.1    2,070      10.6      1,955     9.7      7,592      8.9
50¢                            35      0.3        30         0.2      38       0.2       42       0.2        70      0.4        215      0.3
Total                      12,045    100.0 14,153        100.0 19,220       100.0 19,519        100.0 20,235       100.0     85,172    100.0
                                             Note: Some percentages do not total to 100 due to rounding.

                                             Source: U.S. Mint.




Table III.2: BEP Note Production, Fiscal Years 1992-1996
Number in millions
                                     % of                   % of             % of                % of              % of                % of
Denomination                 1992    total      1993        total   1994     total     1995      total     1996    total       total   total
$1                          4,090     48.4     3,577        44.5    4,563    48.9     4,787      48.1      4,167    44.1     21,184     46.8
$2                              0      0.0          0        0.0       0       0.0         0      0.0        51      0.5         51      0.1
$5                            787      9.3       877        10.9    1,005    10.8     1,069      10.7      1,158    12.3      4,896     10.8
$10                         1,037     12.3       826        10.3     794       8.5      672       6.7      1,011    10.7      4,340      9.6
$20                         1,760     20.8     2,170        27.0    2,253    24.1     2,553      25.6      1,363    14.4     10,099     22.3
$50                           557      6.6       259         3.2     115       1.2      147       1.5       442      4.7      1,520      3.4
$100                          218      2.6       323         4.0     605       6.5      730       7.3      1,251    13.2      3,127      6.9
Total                       8,449    100.0     8,032     100.0      9,335   100.0     9,958     100.0      9,443   100.0     45,217    100.0
                                             Note: Some percentages do not total to 100 due to rounding.

                                             Source: BEP.




                                             Page 23                                                                       GAO/T-GGD-97-146
Related GAO Products


              Future of the Penny: Options for Congressional Consideration
              (GAO/T-GGD-96-153, July 16, 1996).

              Federal Reserve System: Current and Future Challenges Require
              Systemwide Attention (GAO/GGD-96-128, June 17, 1996).

              U.S. Mint: Commemorative Coins Could be More Profitable (GAO/GGD-96-113,
              August 7, 1996).

              A Dollar Coin Could Save Millions (GAO/T-GGD-95-203, July 13, 1995).

              1-Dollar Coin: Reintroduction Could Save Millions if It Replaced the
              1-Dollar Note (GAO/T-GGD-95-146, May 3, 1995).

              1-Dollar Coin: Reintroduction Could Save Millions If Properly Managed
              (GAO/GGD-93-56, Mar. 11, 1993).

              A New Dollar Coin Has Budgetary Savings Potential But Questionable
              Acceptability (GAO/T-GGD-90-50, June 20, 1990).

              Limited Public Demand for New Dollar Coin or Elimination of Penny
              (GAO/T-GGD-90-43, May 23, 1990).

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




(240242)      Page 24                                                      GAO/T-GGD-97-146
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