US could save $4.4B by dumping paper $1 bill for coin

GAO report finds significant savings in coins over paper

US secret service

If the US government really considers getting rid of the paper $1 bill in favor of a coin it could save $4.4 billion over 30 years, or an average of about $146 million per year.

That's the latest finding by watchdogs at the Government Accountability Office who said that replacing the $1 note with a $1 coin would provide a net government loss of about $531 million in the first 10 years, or an average of about $53 million per year. The cost of producing a large number of coins necessary for the transition would result in a net loss in 6 of the first 7 years, but in the eighth year, and for the remaining 2 years, this situation is reversed: the interest savings outweigh the production costs and the net benefits would be positive. Overall, the net loss over 10 years compared with the net benefit GAO estimated over 30 years would occur because of large costs in the first few years to produce the initial supply of $1 coins, the GAO stated.

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This savings estimate however is drastically lower than the GAO stated a little over a year ago that said the fed could save $5.5 billion by swapping out the paper dollar for coin.  The GAO explained the difference saying that because it considered recent efficiency improvements in note processing that extended the expected life of the $1 note and a concept called "seigniorage," which equals the difference between the face value of currency and its costs of production, the GAO stated.

"In March 2011, GAO reported that replacing the $1 note with a $1 coin would provide a net benefit to the government of about $5.5 billion over 30 years, or an average of about $184 million per year. This benefit, which GAO estimated using an economic model based on a set of assumptions, was entirely attributable to seigniorage.  Seigniorage reduces government borrowing and interest costs, resulting in a financial benefit to the government," the GAO stated. 

The GAO said of its research: "We used the best data available on coin production costs, which accounts for the cost of raw materials, and we used the most current discount rate. Furthermore, we recognize that our analyses are highly affected by changing conditions, such as changes in the cost of coins and notes, which may alter the total cost savings associated with replacing the $1 note with a $1 coin."

So why not make the change from paper to coin? The GAO said the Federal Reserve noted an increased risk of counterfeiting associated with replacing the $1 note with a $1 coin. The GAO reported in 2011 that counterfeiting of U.S. coins is currently minimal, according to the U.S. Secret Service

The Federal Reserve also noted that it did not evaluate the impact of the public's use of electronic payments. In 2011, the GAO reported replacement leads to a decrease in the demand for currency as people switch to electronic payments.

The Federal Reserve and Treasury Department noted that GAO's 30-year estimate does not consider the cost to the private sector or environmental impacts.

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