M A R C H 2 0 17

CURRENCY MODERNIZATION: MORE TO BE DONEBY: A A RON K L E I N A N D G . W I L L I A M HOAG L A N D

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EXECUTIVE SUMMARY

INTRODUCTION

SECTION I: SAVINGS OFFERED BY THE DOLLAR COIN

DOLLAR COIN

HOW MUCH MONEY DOES THE DOLLAR COIN SAVE?

SUSPENDING PRODUCTION OF THE PENNY

CHANGING COMPOSITION OF THE NICKEL

SECTION II: WHY THE GOVERNMENT FAILS AT ACCOUNTING PROPERLY FOR CURRENCY AND HOW WE CAN DO BET TER

ACCOUNTING FOR SAVINGS

EXPLAINING A MY TH: SEIGNIORAGE IS NOT A TAX

SECTION III: CURRENCY MODERNIZATION WORKS ALL AROUND THE WORLD

CANADA

THE EUROPEAN UNION: A NEW CURRENCY CASE STUDY

THE INTERNATIONAL EXPERIENCE IS PROOF THE COIN WORKS

SECTION IV: ADDITIONAL SAVINGS TO ECONOMY FROM CURRENCY MODERNIZATION

BENEFITS TO BUSINESSES AND CONSUMERS

COSTS TO BUSINESSES FROM DOLLAR BILLS

FOCUS ON SMALL AND RETAIL BUSINESSES

ENVIRONMENTAL ASPECTS

COINS WORK BET TER FOR ALL AMERICANS

CONCLUSION

ABOUT THE AUTHORS

ENDNOTES

TABLE OF CONTENTS

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The face of money in America is changing, literally. With unprecedented public engagement and attention, the Treasury Department has decided to change the faces of American paper currency, including putting Harriet Tubman on the twenty-dollar bill, where she will become the first woman to grace the front of our paper currency in over a century.

This is an example of how American currency is dynamic and can change for the better. In fact, there are a series of additional changes that can be made that would save American taxpayers, businesses and public agencies money. It makes no sense to stop currency overhaul by solely changing faces, while leaving dollars on the table. Instead, we can – and must – continue to embrace simple, common-sense solutions that can save American taxpayers billions of dollars, while delivering added benefits to small businesses, the environment and the visually impaired. These changes involve how many coins we make and what we make of them.

There are not many ways government can save taxpayers billions of dollars, cut costs for small businesses and help the environment, all without cutting a single existing program or investment. Three simple, common-sense changes can do just that:

There is no better time than now to fully modernize our currency by making these three common-sense changes.

This report updates previous work from three years ago to analyze the impact of currency modernization.1 First, it provides an updated savings estimate for switching from the dollar note to the dollar coin. The paper builds upon previous savings estimates conducted by the Congressional Budget Office (CBO) and Government Accountability Office (GAO) that have been conservative in underscoring the actual and potential savings benefits. The updated estimate for converting the dollar note into a dollar coin could range from $15 to $21 billion over the next 30 to 34 years.

Second, the paper looks at several common-sense changes for how the nation produces coins. Do we need to mint more pennies (authors' opinion: we do not) and can we save money by changing the composition of the nickel in a way that does not increase costs to businesses (authors' opinion: we can)? The analysis concludes from all relevant factors and data available, that the real economic impact of taking three simple steps to modernizing our currency – switching from the dollar note to the dollar coin, ceasing producing unneeded pennies, and changing the composition of the nickel– will result in at least $16.3 billion in savings over 30 years and possibly billions more.

EXECUTIVE SUMMARY

First, switching from the dollar note to the dollar coin; Second, stopping the production of pennies that no one uses or wants, and which cost more than one cent to produce; Third, changing the composition of the nickel to reduce costs, without requiring costly retrofitting for vending machines.

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Third, the paper discusses how the federal government accounts for these savings, or more accurately, how current federal budget accounting rules understate the economic savings from modernizing our currency system.

Instead, the current accounting procedures, established in 1967, can promote inaccurate estimates that increase the nation’s debt and deficits. The paper recommends changes to more accurately align government budgeting with economic reality to fix this situation.

The paper highlights for the reader the financial and societal benefits of the dollar coin for small and large businesses, the environment and taxpayers – including the visually impaired, such as:

Small businesses in retail sales could reap savings on the magnitude of $100 million or more per year. A dollar coin, with a lifespan of over 30 years, is a more environmentally friendly form of currency compared to the non-recyclable paper note, with a lifespan of between 50 and 70 months (4.2 to 5.8 years). With one dollar coin lasting as long as seven dollar notes, we conclude switching from the dollar bill to the dollar coin would save the equivalent of the amount of trash that over 430,000 Americans (approximately the population of the city of Miami or Oakland) put into a landfill in a given year. Stopping the production of billions of pennies – we are on pace to produce over 800 billion pennies over the next forty years – would also provide substantial economic benefits. Coin currency is particularly important to the visually impaired, for whom electronic transactions are not always practical. Coins are relatively easy for the visually impaired to use as they can distinguish between denominations by feel, size and weight. They can also help prevent fraud against the visually impaired. This is no small issue: there were over 6.7 million Americans with a visual disability in 2013.2

America stands alone among major, developed economies in holding onto the low-denomination notes. Every other major industrialized nation has moved from producing paper currency to coins for lower denominations. While the rest of the world has modernized their currency, the U.S. still has the quarter as our highest widely-circulating coin denomination. We are drifting away from the global standard in currency.3

As a prime example, we will study Canada and the tremendous success they have experienced with both a one-dollar and two-dollar coin. Savings were ten times larger than initially anticipated. Public acceptance was strong with very little criticism.

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Around the globe every other major industrialized nation has chosen to use a coin instead of paper for lower denominations. Given that issues of cost, savings, technology and usage of money are relatively consistent across these nations, the overarching international trend toward using coins instead of paper for lower denomination amounts is based on sound logic and principles.

Finally, there are common myths about how Americans use money that should be dispelled. Particularly important is the myth that with electronic transactions on the rise, physical currency will no longer be needed in the future. This is not true: cash is still king and is not going to disappear from commerce. The demand for currency has, and is likely to, remain strong in the future. We also know that we have enough pennies in circulation to last the country decades and to meet consumer demand, without requiring additional production that costs taxpayers and serves little benefit.

The argument that there is no bipartisan political will to make this simple change is also not true. Bipartisan legislation has been introduced numerous times over the past two decades, including recent legislation by Senators Tom Harkin (D-Iowa), John McCain (R-Ariz.), Mike Enzi (R-Wyo.), Tom Coburn (R-Okla.) and Mark Udall (D-Colo.). The switch to the dollar coin has been endorsed by dozens of national and state newspapers, which is indicative of the common-sense conclusions one draws from the facts.

The recent decision to add Harriet Tubman to the $20 note – the first woman to grace the front of a paper note in a century – reminded America that for most of our nation’s history our currency was f luid. Public engagement on who was on the currency was high, even though the outcome did not save taxpayers any money, did not reduce the deficit, did not save businesses money or help the environment. Given the benefits of a switch to the dollar coin and the opportunity for broader currency reform, now is a unique opportunity for action to produce billions in budget savings without raising a single tax or cutting a single program.

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One of the basic functions of government is to produce a common currency. This has been true since well before the Roman Empire and remains the case today. Recognizing its importance, our founding fathers included this responsibility in the enumerated powers of Article I, Section 8 of the Constitution: “The Congress shall have the Power… to coin Money.” Currency is the vital medium through which business is transacted. People rely on a common currency on a daily basis. Technology has certainly changed how currency is made and used, but it has not changed the need for currency and, contrary to some misconceptions, the need for cold hard cash. As the saying goes, and the data shows, “cash is king.” Physical currency has continued to grow: in just one year more than 2.4 billion dollar notes and 9 billion pennies were created.4

How a government decides to provide currency is an important choice. It affects the efficiency of government’s own internal operations and more importantly, that of the consumers and businesses who rely on currency on a daily basis. Despite significant changes in purchasing power, cost of production and demand, the United States still uses paper currency for single dollar denominations, our highest widely circulating coin denomination is a quarter, and, for more than a century, the penny has been the lowest value coin in circulation. This is true despite the fact that a dollar today is worth what a quarter was in 1976 and a penny today is equal to ½ cent in 1997.

The Treasury Department’s decision to change the face of our currency – from the $5 note to the $20 note – reminds us that currency is supposed to be dynamic. The United States has an opportunity to more efficiently produce currency by switching from the dollar note to the dollar coin. This switch will save taxpayers billions of dollars, effectively lowering the national debt. It does so without raising any taxes or cutting a single program. It is what economists call, “Pareto improving” – making everyone better off without making anyone else worse off (except the businesses which produce supplies for dollar notes, which in this case is one paper company and one ink company).

The U.S. has taken partial steps toward implementation of the dollar coin in the past, with attempts to introduce dollar coins in the 1970s (Susan B. Anthony), in 2000 (Sacagawea) and in 2005 with the Presidential $1 Coin Act. As a result of these attempts, many businesses have already invested in the technology necessary to process dollar coins and stand to reap significant savings from full implementation. In addition to the savings to taxpayers and businesses, there are environmental impacts that come from our continued use of non-recyclable paper-based notes instead of recyclable coins, which last more than five times longer than paper alternatives.

This paper reviews the literature, prior analysis, international examples and new changes in the field of currency modernization that prove that making the change to the dollar coin is a common-sense solution to make government function more efficiently and effectively.

INTRODUCTION

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The paper is broken down into four sections:

Savings to government from switching from the dollar note to the dollar coin, suspending production of the penny and changing the composition of the nickel; How the government fails to properly account for these savings which helps explain why the current practices remain unchanged; The experience of other nations as they successfully implemented these steps as well as the auxiliary benefits from these changes;

Why now is the right time to for the U.S. government to modernize its currency.

This analysis will show that under reasonable assumptions, modernizing our currency using these three simple steps – switching from the dollar note to the dollar coin, suspending production of the penny and changing the composition of the nickel – would save the government more than $16.3 billion over 30 years. Along the way, the paper will dispel several common myths that often arise in discussions of currency, coins and notes.

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SECTION I: SAVINGS OFFERED BY CURRENCY MODERNIZATION

DOLLAR COIN The first question often asked in this debate is: “How can it be cheaper to make a coin than a paper note?” In the following pages, we will demonstrate that once all relevant factors are considered, including lifespan, seigniorage, and the replacement rate of each, the dollar coin is far cheaper for the American taxpayer than continued reliance on the outdated paper note.

It is true that a paper note costs less to produce than a coin – but that doesn’t mean it costs less in the long run. When the Mint produced dollar coins en masse for several years earlier this decade, the actual cost of production varied between 15 and 18 cents.5 According to the Federal Reserve this is nearly three times the 5.5 cents cost to produce a one dollar note.6 The reason the dollar coin is cheaper in the long run is simple: it lasts a lot longer.

The standard estimate is that the useful lifespan of a dollar coin is thirty years. This benchmark estimate has been used since the 1980s. Prior analysis by GAO and Klein (2013) used this benchmark. The United Kingdom's Royal Mint argues that circulating coins last “in excess of forty years.” 7 Given that The Royal Mint has been producing coins for more than 1,000 years, and the UK has been using one-pound coins since 1983, their estimate should be taken seriously. This analysis will use both the standard benchmark of 30 years as well as the 40-year level to provide additional data and to demonstrate the importance of longevity in understanding how to most efficiently produce currency.

The lifespan of a dollar note has also undergone some changes. For decades the dollar note lasted only 1.5 years or 18 to 20 months on average. In comparison, the lifespan of dollar coins is measured in years, not months. Beginning in 2011, the Federal Reserve reported to GAO that the lifespan of the dollar note was increasing due to new technology in how the Fed handled and sorted currency reducing unnecessary destruction. By February of 2012, the Fed was reporting the lifespan of the average dollar note to have risen to 56 months (4.7 years). By December 2013 that number had increased again to 71 months (5.9 years). Currently, the Federal Reserve estimates that a dollar note lasts 69.6 months (5.8 years). 8

If there were a giant one-time increase in the lifespan of the dollar note, one would expect a sharp reduction in the ordering and printing of new notes as those in circulation last longer. After all, demand for currency does not increase because of new paper-sorting technology. But that is not what occurred.

Table 1 below shows the Fed has continued to order new dollar notes rapidly even though their own estimates of the lifespan of the currency has grown: 9

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YEAR NUMBER OF DOLLAR NOTES IN CIRCULATION (IN BILLIONS)

NEW ONE DOLLAR CURRENCY ORDERS BY THE FED (BILLION)

Table 1. Federal Reserve Orders of the Dollar Note

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There were 42% more new dollar notes ordered in 2016 than in 2013. If the old ones are lasting longer, where are these new dollar bills going? The Mint continues to produce pennies that consumers do not want or need, but we know where they are going – out of circulation into jars, being left on the ground and literally forgotten. It is hard to imagine that the same is happening with dollar bills.

Another way to track the data is to look at the decline in the destruction rate of dollar notes, which is the source of the sharp increase in longevity. In 2013 the Fed wrote that their improvements in one-dollar note processing for so-called misfaced notes resulted in an only 4% improvement: “Beginning in April 2011…the destruction rate of $1 notes has decreased by approximately four percentage points…”10 For 2012 the Fed reported: “Beginning in April 2011…pay(ing) out misfaced notes… decreased the destruction rate of $1 notes by 5 percentage points…” compared to pre-April 2011 rates.11

The plot thickens as the Fed reports that in total, the effect of its new sensors was “decreased destruction rates by more than two percentage points and reduced the number of notes destroyed by nearly 0.5 billion, annually.”12 However, a two percentage point destruction improvement and 500 million bills in total, would not account for the drastic lengthening of the life-span reported by the Fed.

This leads to a variety of assumptions that can be made about the longevity of dollar notes as compared to coins and how many times the dollar note would have to be reproduced to equal to lifespan of a single dollar coin.

Under no scenario will it take fewer than six prints of new dollar bills to fill the lifespan of a single dollar coin, given that one can not print half a dollar note. Up until 2011, it took 18 or more reprints of the dollar note to last as long as one coin would.

Taking seven reprints of the dollar note as a central range, one can come up with a simple estimate of the cost differential between the dollar note and dollar coin. A dollar note costs 5.5 cents to produce today, while a dollar coin costs around 18 cents to produce. It would cost 38.5 cents (5.5 cents x 7 prints) to make as many dollar notes as one dollar coin. The cost of producing a dollar coin is around 18 cents. It is, therefore, twice as costly to manufacture a dollar note as to replace it with a dollar coin.

This simple estimate misses one key element: inf lation. While it may not seem like much, even at the low rate of 3% inf lation, the cost of labor, ink, paper, etc. adds up over time. The 5.5 cents it costs to make a dollar note today will rise to 7 cents in 2025, 9 cents in 2034 and 13 cents by 2046. Adding in inf lation, brings the running total up to 62.6 cents for seven reprints of the dollar bill, instead of minting an 18-cent dollar coin to last the same amount of time. This makes the dollar bill 3.5 times more expensive an option.

Table 2. Number of Prints of Dollar Notes to Equal Lifespan of Dollar Coin

30 years

40 years

LIFESPAN OF THE DOLLAR COIN:

20 MONTHS 40 MONTHS 56 MONTHS 70 MONTHSLIFESPAN OF THE DOLLAR NOTE

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The dollar coin saves the government money, but how much?

HOW MUCH MONEY DOES THE DOLLAR COIN SAVE? The Government Accountability Office (GAO), Congress’ budget watchdog, frequently investigates the inner workings of government with an eye to boosting efficiency. The GAO has published on this topic extensively, recommending to Congress in eight separate reports over the last 23 years that the U.S. government should switch from a dollar note to a dollar coin. In its most recent estimates, in 2012 and 2013, GAO calculated that the switch would save $4.5 billion over 30 years.13 In 2011, GAO estimated that it would save the government $5.5 billion to switch from dollar notes to dollar coins, over a 30-year time horizon.14 Two major reasons driving the reduction in the estimate in just one year were:

Both of these changes reduce the net benefits of switching to the dollar coin by nearly 20 percent. It is interesting to note that even a radical increase in the expected lifespan of the dollar note did not reduce the estimated total savings significantly. In addition, the decision by the Treasury to suspend production of coins is entirely discretionary and would not likely actually occur in a transition period replacing the dollar note. In actual practice this would follow the Canadian experience, which will be discussed later, where dollar coin production continued alongside the note before the note was completely discontinued.

Updating the GAO’s analysis with the following reasonable assumptions below results in a more than tripling of previous savings estimates. Specifically:

Cost of the note and coin: GAO used 2.7 cents as the cost of a dollar note. They did not index the cost of production for inflation. Today the dollar note costs 5.5 cents and can be indexed going forward. GAO had used 15 cents for the cost of the coin. The cost rose slightly to 18 cents before minting ceased. The updated estimate assumes the 18-cent figure.

Table 3. Inflationary Impact on Cost of Producing Dollar Note Over Time vs. Dollar Coin.

Cost to Produce a Dollar Coin (cents)

1 YEARYEARS FROM TODAY TOTAL COST

Cost to Produce a Dollar Note (cents)

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An increase in the Fed’s estimated lifespan of the dollar note from 40 months to 56 months (increasing savings in the most recent estimate); and The Treasury Department's December 2011 decision to suspend production of additional circulating dollar coins.

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Replacement ratio: GAO used a replacement ratio of 1.5 to 1. This is substantially below the experience of Canada and other nations as well as CBO’s official estimate of a 2:1 replacement ratio. The updated estimate uses the 2:1 ratio. Lifespan of note and coin: GAO used a 40-month (3.3 years) lifespan of the note. Since then the Federal Reserve has claimed a further increased lifespan of 70 months (5.8 years). Additionally, a fresh look at the lifespan of the dollar coin indicates that it may well be longer than 30 years. GAO stated that the median lifespan of the dollar coin was 34 years although their analysis only covered 30 years. The updated assumption begins with the conservative 30-year lifespan on the dollar coin and the 5.8 years lifespan of the note. Currency in circulation: The amount of currency in circulation has grown substantially, and faster than estimated, in the five years since the 2011 GAO study. GAO used 9.5 billion dollar notes, the figure then in circulation. The updated assumptions use today’s figure: 11.5 billion

dollar notes in circulation.

Simply updating for the higher cost of dollar notes, the higher currency production rate, the 30-year lifespan of the coin, and future inf lation in the cost of producing dollar notes means that GAO’s savings estimate would show that producing dollar notes would cost $8.3 billion more than replacing notes with the dollar coin over the next 30 years.

In 2011 GAO assumed that over the following 30 years, 109 billion dollar notes would be printed. Today, the Fed’s actual production order pattern for dollar notes over the next 30 years is nearly double at 191 billion notes. The Fed does not attempt to control for a change in the lifespan of the note, because that one-time observed increase did not translate into a decrease in currency order. Whether that is because the lifespan is not as robust in practice or because demand for paper currency increased for another reason is not relevant. The question is simply, how many dollar notes are likely to be ordered over the next 30 to 40 years and how many coins would be needed instead?

The increase in coins needed would also come at some cost. GAO had initially estimated 67 billion more dollar coins over 30 years using a 2:1 replacement ratio at the prior level of coin production. Increasing the cost of producing a coin by 3 cents (from 15 to 18 cents) and increasing the number of coins that need to be produced from 67 million to 80 million to account for increased currency demand (the number is not so great for notes because the notes are continually destroyed and reprinted 6 to 10 times over the 30 years), that translates into an increase in coin production costs of $2.4 billion. Thus net savings from updating currency production, cost increases, and lifespan of the dollar note are $5.9 billion.

The last factor to account for is the increase in replacement ratio as it impacts seigniorage and savings to the government from reduced interest payments. GAO did this calculation in 2011 and with the 2:1 replacement ratio, savings increased from $5.5 to $8.9 billion. There are reasons to think this number may be lower or higher today. The growth in overall currency demand has been greater than GAO projected – in 2011 they estimated 3.3% currency growth. In reality, currency demand growth has increased 3.5% for dollar notes between 2011 and 2015.15 This is doubly important because the increased replacement ratio doubles the number of coins that would be produced, increasing the savings to the taxpayer. In

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addition, GAO used a discount rate of 3.6%. Continued low rates of inf lation indicate that the costs of the fixed costs in the future are of greater cost today. That is, as the discount rate falls, less of future cost is discounted, meaning that in present dollar terms future savings are worth more today.

On the other hand, GAO used estimated average government borrowing rates of 5.4% over a 30-year span. In reality, the borrowing rate has been sharply lower over the last five years, although government forecasts have repeatedly assumed it will rise again. CBO currently projects the long-run government debt will cost 4.6% annually over the next 30 years. Looking at 30-year or longer horizons, these rate assumptions are important. Without attempting to recreate exactly how GAO discounts the stream of savings and costs on a year-by-year basis, it is difficult to model these changes, particularly in the increased replacement ratio. Hence, they are noted and the analysis will simply continue to use GAO’s prior estimate for the change in savings resulting in the change in replacement ratio. After all, this savings estimate is based on GAO’s model with only the specified changes made.

Using GAO’s baseline estimate of $5.5 billion, with GAO’s own increase in savings from the higher replacement ratio, brings estimated savings to $8.9 billion. Plus, the updated figures from the known costs of currency production, cost increases and actual order rates for the dollar note ($5.9 billion) generate a potential savings of $14.8 billion over 30 years by switching the dollar note to the dollar coin.

Using a 34-year lifespan of the dollar coin, the figure GAO cites as the true median lifespan of the coin, the figure is even higher. First there are an additional $3.6 billion in savings from no longer printing dollar notes over those additional four years. Second, there is another $4 billion in seigniorage based on the increase in coins circulating over those four years. The cost of producing additional coins is marginal given that they continue to last, although there are a few additional ones over four more years as currency demand grows, so it is not zero. Using the same currency model, it projects an additional 2.5 billion dollar coins to be minted in the 2047-2051 time frame at the cost of 44 cents per coin, costing $1 billion. Thus the net savings over 34 years would rise by $6.6 billion to a total of $21.4 billion.

SUSPENDING PRODUCTION OF THE PENNY The penny has cost more than a cent to make for many years. In 2015, each penny cost an average of 1.43 cents to make.16 This is nothing new; the penny has been losing money for years. It cost 2.4 cents per penny in 2011 and 1.83 cents in 2013. Despite continuing to cut costs for penny production, the Mint has lost nearly $300 million producing the penny this decade.

Despite losing money each time one is made, the Mint keeps cranking them out. In 2015, the Mint created more than 9 billion new pennies – more than that year's nickels, dimes and quarters combined! Further, the Mint has been increasing penny production at a prodigious rate – penny production is up 58% since 2012. Why are we making more pennies? Do you, or anyone you know, want 58% more pennies today than four years ago?

The reality is that people do not even want or use the pennies that are already in circulation. According to a different GAO report, approximately two-thirds of pennies are out of circulation. As GAO put it: “These numbers tell us that for almost two-thirds of the billions of pennies produced, the trip from the Mint to the Federal Reserve to the commercial banks and finally to consumers is a ‘one-way trip’ – they are not seen again in circulation.”17 Put more simply – people put them in jars, drawers or literally throw them away.

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Going forward, the current system is likely to produce a net loss to taxpayers of $1 billion or more, over the next decade of penny production. This conservative projection is based on the following two assumptions:

Using the average cost of making a penny over the last three years, which is 1.64 cents and adjusting for cost growth of 3% a year going forward; and Projecting a 6% growth in the production of pennies going forward, a sharp decrease from the

double-digit growth rate of the past.

With these assumptions, penny production would slow down substantially and costs would continue to rise slowly. Annual losses would break $100 million a year around 2022 and rise to over $150 million a year by 2026. Cumulative losses between 2017 and 2031 would break $2 billion.

Instead, we ought to simply cease production of the penny. This would save taxpayers over $1 billion over the next decade. It would not mean the end of the penny; there are still billions in circulation. Pennies would still be legal tender and consumers, banks and businesses who need them would have the billions of pennies still around to use. Even if the Mint ceased production in 2017, as this projection assumes, there would be almost 34 billion pennies available for use that were made in the last five years alone. Given the average lifespan of a coin is far longer, there may well be 100 billion pennies available. There is no reason to spend taxpayer dollars making more.

If after a decade-break from the penny, there is strong consumer demand, we can always make more. If people wanted the half-cent piece – the lowest denomination coin minted that was ceased in the 19th century – we could start up the presses again. Perhaps a decade is long enough to work through the penny supply overhang that has been created. But in doing so, we would save $1 billion that could better be invested in retiring our nation’s debt, curing cancer, or building infrastructure, as examples.

There are additional savings from combining the suspension of the penny with modernization to the dollar coin. These savings come from repurposing Mint personnel and space. The Mint is currently producing nine billion pennies a year. That requires a lot of machinery, space and people. While it is unclear how much could be saved through combinatory efficiency at the Mint between the dollar coin and the penny, the answer is clearly greater than zero and perhaps on the order of $50-100 million annually. Looking across thirty years, those savings would really add up.

Finally, this break from making new pennies may lead people to realize that pennies are not worth it. Similar to the costs of handling dollar notes, fumbling with pennies costs businesses real money. One estimate from the National Association of Convenience Stores indicated that it adds two seconds or more to each cash transaction. Based on that estimate, Greg Mankiw, former Chief Economist for President George W. Bush, calculated that “getting rid of the penny would free up economic resources valued at about $1 billion a year.”18 Perhaps, we would follow this route and cease using pennies altogether for physical currency (electronic transactions can still be made to the penny, in fact gasoline is usually sold with pricing to the tenth-of-a-cent). But perhaps during the decade break consumers and businesses would realize that sometimes a penny not made is a penny saved.

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CHANGING COMPOSITION OF THE NICKEL When thinking about the production of money it is important to remember that inf lation only exists in one direction: that is, the cost of making money increases over time, but the value of that money stays constant. A nickel sells for five cents today just as it did one hundred years ago, even if one hundred years ago five cents had the same buying power as $1.10.19 Thus, over time the cost of producing a nickel has risen, reaching over 11 cents a few years ago. Today, we still lose money on every nickel made, in fact the nickel loses money at a slightly faster rate than the penny.20 The Mint lost $246 million this decade (FY10-15) producing nickels. Like the penny, the nickel has lost money for 10 consecutive years, totaling $346 million. Unlike the penny though, we still need nickels. The Mint made less than 1.5 billion nickels last year (as opposed to over nine billion pennies) and there is no evidence that the majority of nickels are sitting in jars out of circulation. If you cannot suspend production, there may still be a way to generate cost savings by making the nickel more efficiently, without requiring a costly set of retrofits on change accepting machines. Here’s how this can be done.

Changing the composition of a coin is not at as easy as it sounds. Vending machines and other change-accepting/distributing machines (think subway card machines) are based on knowing the specific weight and dimensions of coins. Forcing these machines to retrofit to accept different coinage is costly. It would be poor public policy for the government to impose a greater cost on private industry than it would save taxpayers to alter coins. Estimates are that changes to the weight, shape and electromagnetic signature (EMS) of existing currency could impose one-time costs of $2-6 billion on coin acceptors.21 Further, if the government repeatedly did this it would significantly discourage adoption and promotion of cash vending technology. Does anyone want to wait in longer lines with a teller for subway fare, or slow down a bus driver on his route as he counts change manually?

However, there are times when coin composition can be slightly altered without requiring retrofitting. Concerned about the rising cost of the nickel and about the cost of changing currency, Congress asked the U.S. Mint to review options. After extensive testing, the Mint did find a change that would save taxpayers money, while offering “nearly identical weights and EMS as the current nickel, thus eliminating the impact on coin industry stakeholders.”22 Specifically, this change was to go to an 80-percent copper and 20-percent nickel alloy composition. The Mint estimated savings from this change at approximately $5 million, based off of 2014’s annual production level. However, the Mint increased nickel production by 22% in 2015, thus, the projected savings should be higher. Using 2015’s production and assuming coin production and cost growth at the same rate for the penny (which again is below the Mint’s historical rate of production growth), the taxpayer would save over $90 million by switching the composition of the nickel over the next decade. Annual savings would start at $7 million in 2017 and reach almost $12 million by 2026.

Given that this change in composition represents a permanent shift, and that the life of these coins should last at least 30 years, we can project savings out ever further. Similar to that of the dollar coin, over 30 years, the change in how we make the nickel would save taxpayers over $550 million. This is without causing any additional burden on the vending industry, according to the Mint.

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SECTION II: WHY THE GOVERNMENT FAILS AT ACCOUNTING PROPERLY FOR CURRENCY AND HOW WE CAN DO BETTER

ACCOUNTING FOR SAVINGS The profit from the sale of circulating money is called seigniorage. It is a profitable source of revenue for the government: the government makes money by literally making money. The government accounts for seigniorage, the difference between currency’s face value and its cost of production, differently for notes and coins. This distinction is critical to the accounting and exists because the sale of coins is handled by the Treasury Department through the U.S. Mint (on-budget), while the sale of notes is handled by the Federal Reserve System (off-budget).

The disparate treatment of notes and coins in the federal accounting system stems from a series of decisions made by the 1967 President’s Commission on Budget Concepts. Those decisions have remained unchanged over nearly 50 years. While the receipts and expenditures of the Federal Reserve regional banks would remain excluded from the federal budget, any payment of excess Federal Reserve earnings (profits) would be made to the “on-budget” Treasury and treated as federal budget receipts (revenues).

The Federal Reserve regional banks are government-sponsored, private, non-profit entities. They are not part of the government in terms of revenue or expense; they do not use federal government civil service employees or report through the Office of Management and Budget. Instead, they operate independently and are centralized through the Federal Reserve Board of Governors, which is a part of the U.S. Government, operating as an independent agency.

Conversely, the Mint’s revenue and expenses are accounted for in a more straightforward manner. The Mint books the revenue from the sale of coins, subtracts its production costs and returns the rest as profit to the Treasury. Thus, if after the 18-cent cost of producing a dollar coin, the Mint would sell the coin to the Federal Reserve at its face value, and book the 82 cent profit. After covering its other expenses, the Mint would return its profit to the U.S. Treasury. The Federal Reserve now will sell the dollar coin for one dollar, resulting in no profit or loss for the Fed.

The federal budget accounting system has very specific rules for accounting for seigniorage. Seigniorage is classified as a “means of financing” that is it does not count directly in the budget, but nonetheless, provides resources to finance public debt. Changes in seigniorage “are not counted in the budget totals either as collections (receipts) or outgo (outlays).”23 Therefore, changes in the total amount of seigniorage are simply passed through directly to produce a smaller public debt. Thus, changing from a dollar note to a dollar coin produces guaranteed savings that reduce financing costs of the public debt. These savings are not subject to annual Congressional appropriations or usable in a scoring sense as an offset to other spending programs or revenue reductions. Instead they are locked in to the very foundational accounting that determines the size of the country’s recorded debt.

Unlike the Mint, which is part of the U.S. Treasury, the Federal Reserve Regional banks (Fed), which handle the sale of notes, are not part of the government.

The way that the federal government handles the budgetary treatment, “scoring,” of the Federal Reserve’s distribution of notes is complicated and often confusing. When a Federal Reserve regional bank orders a

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dollar note from the Bureau of Engraving and Printing (BEP), it pays 5.5 cents to the BEP for the note. It then sells the note to a bank or depository institution for one dollar, which it collects by decreasing that institution’s balance at the Fed (often called its reserve account). The Fed uses the profit on the sale (94.5 cents) to purchase Treasury bonds (or, in modern times, other securities) on which the Fed earns interest. These assets are used as securities to offset the liability on the Fed’s balance sheet for the dollar note that has been issued.24 In other words, unlike the Mint, the Fed’s profits on each dollar note do not go directly back to the Treasury for deficit reduction. At the end of the process the Federal Reserve Board of Governors sums up all profits and expenses for all operations and activities across the entire Federal Reserve System and transmits any excess earnings (profit) to the U.S. Treasury.

The way that the budget treats the Federal Reserve System is, therefore, different from that of the Mint. The entire balance of transfers that are “shown as a miscellaneous receipt in the federal budget under ‘deposit of earnings, Federal Reserve System,’ are counted in the federal budget’s annual calculation of the deficit or surplus.”25

It is far more difficult to treat the changes in net income that the Federal Reserve would remit to the Treasury as a result of offering fewer dollar notes, if replaced by the dollar coin. This would depend on the interest income the Fed earns from its securities, which as noted above has changed substantially as a result of the Fed’s move into unconventional monetary policy and asset purchases. It also depends on the budgeting choices of the Federal Reserve Regional banks, whose cumulative budget in 2016 was over $4.1 billion, a growth of over 5% as compared to 2015’s actual expenses.

Ultimately, even the Federal Reserve acknowledges that switching to the dollar coin would save taxpayers money. As a Federal Reserve official testified to Congress: “I should observe that the Treasury of the United States – and thereby taxpayers – would benefit financially if, and to the extent that, the availability of a more acceptable dollar coin either caused dollar coins to substitute for dollar notes in circulation more than would be the case without it or caused the total circulation of dollar notes and dollar coins to increase further than would have been the case otherwise.”26

Adding to the confusion, the Congressional Budget Office (CBO) uses a different method to calculate savings, often called ‘scoring.’ When CBO scores a change they are looking at a very specific subset of costs and savings, which are different than what GAO looks at and sometimes different from OMB. GAO was attempting to calculate economic savings. CBO is only looking for budgetary savings that “count” based on congressional scorekeeping rules. Similar to OMB those rules do not include seigniorage.

In addition, CBO historically looks at a shorter time frame of a five-to-ten year window for scoring policy changes. In fact, CBO attempted to score the savings from the dollar coin in the mid 1990s. CBO’s methodology differed substantially from GAO on a number of fronts. First, CBO used a five-year budget window, which was how budgetary effects were scored at the time, rather than the full 30-year window that GAO rightly uses when considering the full impact of the coin as compared to the note. Congress recently recognized the wisdom of the longer scoring window when it included language in its most recently passed FY 2016 Budget Resolution (S. Con. Res 11) which required CBO to use a 30-year window when conducting analysis of the potential savings from converting the dollar note to the dollar coin.

Second, CBO does not include any gains in seigniorage in calculating changes to the deficit. This follows OMB’s scorekeeping rules in which seigniorage is not factored. At the time, there was no Presidential Coin or Sacagawea coin so the start-up costs to the Mint were radically higher. CBO can also create a one-sided

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score if it were to factor in the costs of producing the coins, a cost borne by the Mint, but not factored in the cost of producing the notes, a cost borne ultimately by the Fed. Finally, CBO was using the lifespan for the dollar note at the time, which was the traditional 20 months.

Despite these differences, CBO found that “over the 1996-2000 period, budgetary savings would total $100 million… After the switch to coin is complete, budgetary savings could exceed $200 million per year.”27

CBO did comment on the possibility of a seigniorage effect, stating that, “If the public chooses to hold two coins for each note in circulation, significant secondary effects would have a positive impact on the federal budget.”28 CBO estimated those effects at $270 million using prevailing interest rates and currency levels at the time. Thus, we can try to adjust for some of these differences between CBO and GAO’s estimates.

It is interesting to note that these seigniorage effects, which CBO and OMB do not score and CBO called “secondary,” would actually exceed the primary scored savings of $200 million per year during the 1995 estimate. This is consistent with GAO’s findings that the savings to the government derive from seigniorage. Thus, while the numbers are different, the differences are a result of rules, time frames and specific assumptions such as replacement rate or the lifespan of the note. CBO Deputy Director Blum put it well when he testified: “The GAO and the Federal Reserve have projected much larger budgetary savings to the government from substituting the one dollar coin for the one dollar note than has CBO. Those larger estimates, however, are not the result of disagreements over basic assumptions, such as the cost to produce coins or process notes. Rather, the dissimilarities stem from different approaches, items of measurement, and time frames.”29

In fact, if you take CBO’s 1990s estimate and properly adjust for the real economic effects, you get a very similar result. CBO estimated $100 million for each of the first five years and then $200 million for each subsequent year. Plus, once the transition is done, they would estimate $270 million in seigniorage per year. That comes to $12.2 billion in savings over 30 years. Those figures are using 1990s costs for production of the note and for the amount of currency in circulation. We know those figures have changed substantially; we have almost double the number of dollar notes in circulation today as we did in 1995. Economic savings, which are not measured by CBO who instead focuses on score-able savings, are similar to estimates in the $15 - $20 billion range estimated earlier in this paper.

Thus, all of the various government agencies agree that the real savings to taxpayers are far greater than what the Washington budget scorekeepers count. This is unique for America because we are unique in separating the production, distribution and accounting for coins and paper currency. Other nations combine these entities into a single consistent accounting system. However, because of the unique and distinct treatment accorded the Federal Reserve and the Mint in our budgetary accounting system, the savings calculated for making a switch can be vastly under-estimated. Further, because these savings result from mandatory non-discretionary changes – that is, once the switch is made it is not annually reapproved by Congress – savings are guaranteed to accrue to the taxpayer and not be dependent on future Congressional actions. All of the economic and political benefits are there, but they are not captured accurately by the official budgetary scorekeepers.

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E X PL A IN ING A M Y T H: SEIGN IOR AGE IS NOT A TA X

Seigniorage is the profit that arises from the creation of hard currency money. This profit goes to the government, which created the money (or the Federal Reserve Regional Banks that function as government-chartered sellers of money). A simple way to think about it is if you leave $100 in your bank account, you are earning the interest. If you withdraw it and carry it in your wallet, the government is earning the interest. The more currency people choose to hold in circulation, the more the government earns.

In the context of the dollar note as compared to the dollar coin, this is purely the choice of individuals, who can decide how much cash they want to keep. It is not related to trying to print a lot of money, to cause inflation. So the question is empirical: How do people react when there are dollar coins instead of dollar notes? The answer is that they keep more of them in circulation. International estimates range from 1.5 to 4 coins for every note. Why this is the case is not entirely clear. It may involve a different usage for the coin, such as vending machines, parking meters and laundromats. You probably don’t keep a stack of singles in your car, but keeping change in your car is so common, most new cars come pre-equipped with change holders next to the driver. It may involve personal accounting where people keep change in jars or piggy banks at home for a type of savings. Businesses may keep change in cash registers over night, but send bills back to the bank on a daily basis. Whatever the reason, it represents a completely voluntary form of behavior on the part of consumers and businesses as part of their natural preference for the use of coins as compared to notes.

Thus it is not a tax in the sense that everyone or anyone is paying the government. It is simply the choice of people and businesses to how much and in what form to hold hard currency because of preference and efficiency.

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SECTION III: CURRENCY MODERNIZATION WORKS ALL AROUND THE WORLD

America is unique among major, developed economies in holding onto its low-denomination notes. Every other major industrialized nation has moved from producing paper currency to coins for lower denominations. Examples include Australia, Canada, Japan, Switzerland, the United Kingdom and the European Union. In fact, many of the member countries in the Euro-Zone, such as France, Spain and Holland had already switched to coins before the introduction of the common currency in circulation in 2002. With the quarter as our highest widely circulating denomination of coin, the U.S. is very far from the global standard. The Economist noted recently stated: “Among big economies America is one of the few that issues a low-denomination bank note,” and provided the facts at the time in 2013.30 (See chart below)

7/8/13 Notes and coins: Kill bill | The Economist

www.economist.com/news/finance-and-economics/21573582-will-deficit-finally-spur-america-replace-dollar-bills-coins-kill-bill/print 1/2

Notes and coins

Kill billWill the deficit finally spur America to replace dollar bills with coins?

Mar 16th 2013 | Washington, DC | From the print edition

EARLIER this year the blogosphere was full of calls for America to pay its bills by minting a $1trillion platinum coin. That idea has mercifully died, but the fiscal pressures that gave birth to ithave provided the impetus for a less nutty variant: phasing out the dollar bill in favour of adollar coin.

Among big economies America is one of the fewthat issues a low-denomination bank note (seetable). Britain introduced the one-pound coin in1983; Canada started replacing its one- and two-dollar notes with coins in 1987 and 1996,respectively. America does mint dollar coins buthas failed to prise consumers away from theirpreference for the paper bill. Some $1.4 billion-worth of dollar coins have piled up in the vaults ofthe Federal Reserve, prompting the Treasury toorder a halt to production in 2011.

Businesses from vending-machine operators to public-transport providers complain about thecost of counting and stacking dollar bills, and of fixing machines jammed by misfed bills. Manyhave already installed equipment to handle dollar coins “but we didn’t reap the savings byimplementing the switch,” laments Aaron Klein, a consultant to the Dollar Coin Alliance, anadvocacy group.

Having failed to persuade Congress to kill the dollar bill for business reasons, campaigners nowpromote it as a painless way to reduce the deficit. The switch would save $4.4 billion over 30years, according to the Government Accountability Office, a non-partisan research arm ofCongress. This is not, however, because of reduced production expenses (coins last longer thanbills but are more expensive to make). Rather, the money comes from seigniorage: the difference

CANADA

Perhaps the best country to look at for a comparison is our neighbor to the north, Canada. Canada began transitioning from the dollar note to the dollar coin in 1987. In 1987, Canada introduced a new dollar coin – known as the “Loonie” – and in 1989 they stopped issuing dollar notes completely. At the time, the Canadian government estimated savings of $175 million over a 20-year time horizon as a result of the transition.31 While this estimate sounds smaller than the figures discussed for the U.S. above, consider that Canada has only approximately 10 percent of the population of the U.S. and thus needs a lot less currency. Further the shorter, 20-year time horizon would show smaller savings, and the figures are not adjusted for inf lation. Still, the economics on the basis of those figures were compelling and Canada made the switch. The results were astonishing:

Savings were almost ten times greater than estimated. Canadian officials have gone back and estimated that over the first five years the Canadian government saved $450 million.32 That is a rate of $90 million of savings per year, as compared to an estimate of $8.75 million. Further, savings are likely to be larger over the out-years as the initial start-up costs are greatest during the transition. Public sentiment grew strongly in support of the coin. Initially, the public was split with support ranging from 38 to 52 percent during the introductory phase of the coin.33 However by 1992, five years after the coin was introduced and three years after the dollar note was eliminated, only 18 percent disapproved of the action according to a Gallup survey.34 Beyond that, the strongly negative reaction was minimal, as fewer than 100 people wrote to the Canadian government to complain about the transition.

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Canada subsequently replaced the two-dollar note with a two-dollar coin. The change over was so successful and the savings so great that Canada also converted its two-dollar note into a two-dollar coin in 1996. According to the Canadian mint, the two-dollar coin has a life span that is approximately 20 times longer than the previous paper currency.35 Canada’s experience “can be deemed a success,” according to Beverly Lepine, Chief Operating Officer of the Royal Canadian Mint, who testified at the House Financial Services Subcommittee Hearing in 2012. “In a June 2013 online poll conducted on the Loonie’s 25th anniversary…almost 70% of Canadians identified the coin as a recognizable symbol of Canada and many of those consider it a national icon equal to the beaver and the maple leaf.”36

Canada’s experience with currency reform has recently led it to end production of the penny. Similar to the United States, Canada was losing money producing the penny. In 2012, Canada began to phase out the penny, which it stopped distributing entirely in 2013. Canada expects to save $11 million annually by eliminating the penny. It should be noted that Canada’s decision to suspend production went a step further and encouraged rounding by merchants as they did not have quite the penny backlog that the United States does. It also spurred penny charity drives, including one that collected 70 million pennies to support Free The Children, a better use for pennies than being discarded on the street.37

In both suspending production of the penny and switching to the dollar coin, Canada has led the way in currency modernization. It is worth noting the substantial cultural and economic similarities between the United States and Canada. Every argument that switching currency will not work in America needs to explain why it has been so successful in Canada.

THE EUROPEAN UNION: A NEW CURRENCY CASE STUDY

Currency production is one of the most basic services provided by governments. Thus, one of the inherent difficulties in an international comparison of currencies is that each nation has a pre-set starting point for the form of currency it produces. It is extremely rare for a new currency to be created, particularly among an industrialized nation comparable in other ways to the United States. The only example of such a new currency coming into circulation over the past three decades is that of the Euro. Currently, 23 countries comprising 320 million Europeans use the Euro.

This new common currency provided the opportunity to start with a clean slate in determining where to draw the line between notes and coins. Public acceptance of the new currency was a major goal of the Euro movement. There was significant public backlash in multiple countries against ending the production of local currency. The total value of seigniorage was not divided between coins and notes as it is in the U.S., but rather divided up between the member nations in proportion to “a specific key based on each country’s GDP and population.”38 Because of this, there was no competition or difference in accounting for the production of notes or coins. Thus, the Europeans had a relatively free platform to select the optimal mix of coins and notes with incentives to maximize revenue and public acceptance.

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The European Central Bank (ECB) selected coins ranging from one cent to two Euros and notes from five Euros to 500 Euros. At its launch, the Euro was priced just above one U.S. dollar ($1.05 approximately). Using current exchange rates a two-Euro coin would be equal to slightly more than $2.20 in dollars while a five-Euro note would be equivalent to about $5.50 in dollars (This is similar to Canada’s use of one and two dollar coins and five dollar notes). The equivalent in the U.S. would be to replace the one-dollar and two-dollar notes with coins.

The introduction of the Euro as a common functioning currency was a major success. Participating countries produced 15 billion notes and 51 billion coins.39 Public adoption was swift and strong among participating nations. Use and integration of the physical currency went extremely smoothly. As the European Commission cited in their review of the roll out of the Euro: “The public in Europe have accepted their new currency rapidly and enthusiastically.”40

In explaining the decision for the currency choices, the ECB revealed their original estimate for the lifespan of the five-Euro note as being only one year, while they estimated several years for higher denomination notes.41 This is consistent with, although shorter than, the U.S. experience in 2002 of 20 months.

The decision by the European Union to use Euro coins up to two-Euros is further evidence that similarly situated, modern, advanced economies use coins more successfully and efficiently for lower denominations than notes. The European case is particularly interesting because the goal of public acceptance was so prevalent at inception. Here the public was dealing with a far greater shift than just one denomination of notes to coins as they were translating and digesting an entirely new currency. However, use of the physical coins and notes between all of the various Euro-nations, has been a success.

Many European countries also no longer make pennies. The Netherlands, Ireland, Finland and Belgium do not use one-cent coins (and some do not use two-cent coins). The Irish were among the most recent to eliminate pennies for cash transactions. While still permitted as legal currency and for electronic transactions, the government has a system in place for rounding transactions to the nearest five cents.42 To be clear, rounding would not be necessary in the United States as there are still tens of billions of extra pennies. However, the fact that European countries have stopped production and mainstream distribution of new pennies with no problems is further evidence that eliminating new penny production in the United States is not likely to create any problems and will definitely save taxpayers money.

THE INTERNATIONAL EXPERIENCE IS PROOF THAT CURRENCY MODERNIZATION WORKS

We have seen the tremendous success that our neighbors to the north Canada have experienced. Their savings were far larger than initially anticipated. Public acceptance was strong with very little criticism. Support grew to the point where subsequently transitioning to a two-dollar coin was also supported. We have also seen how the Euro-zone introduced the only major new currency in a generation. Faced with a clean slate and a strong need for public acceptance, the ECB decided to use coins in one and two Euro denominations. They also experienced a major success in adoption and public use. Around the globe every other major industrialized nation has chosen to use a coin instead of paper for lower denominations. In fact, the U.S. with the quarter as our highest major circulating coin sticks out like a sore thumb. Every other country has a coin at least $1, with an average value of around $2.50 for the highest circulating coin. Japan and Switzerland have gone the further with circulating coins valued at around $5. The one exception to this is Russia, a country that we are emulating in our decision to stick with low value paper currency.

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That the rest of the world has made this change makes sense, as the issues of cost, savings, technology, and usage of money are relatively constant across these nations. It stands to reason that the overarching international trend toward using coins instead of paper for lower denomination amounts is based on sound logic and principals. This is similar to the findings of GAO, CBO and others who have studied the issue. A full look at all of these major currencies highest circulating coin and lowest circulating note proves the point.

In addition to Canada, Ireland, the Netherlands, Belgium and Finland, other industrialized nations have stopped making pennies, such as Australia, Sweden and New Zealand.43 These countries stopped production of the penny for the same reason that we should: continued production just doesn’t make sense.

NEW CURRENCY DATA

Australia

Canada

France

Germany

Italy

Japan

Sweden

Swiss

UK

Average

$1.50

$1.51

$2.20

$2.20

$2.20

$4.78

$1.15

$5.04

$2.67

$2.58

2

2

2 euro

2 euro

2 euro

500 yen

10 kronas

5 francs

2 pounds

HIGHEST CIRCULATING COIN

Table 4. Highest Widely Circulated Coin

VALUE IN US DOLLARS

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SECTION IV: ADDITIONAL SAVINGS TO ECONOMY FROM CURRENCY MODERNIZATION

Having demonstrated the significant savings currency modernization offers the federal government and the American taxpayer, the following section highlights several ways in which currency modernization would benefit businesses, the environment and millions of disabled Americans.

BENEFITS TO BUSINESSES AND CONSUMERS

There are many uses for which coins are easier, cheaper and more efficient than notes. Common examples include vending machines, parking meters and laundromats. The cost of these has grown over time; recall that a quarter in the mid-1970s was worth the same as a dollar is today. Many Americans have rolls of quarters reserved just for these expenses. Cars have built-in change holders to anticipate drivers’ needs for parking meters. But we need more and more low-denomination coins to purchase the same level of services. In addition, when purchasing anything with cash through a machine that requires change, such as buying a fare card for public transit, having a dollar coin would make life a lot easier. When you have to buy a $2 trip on a subway but only have a $10 bill, you will receive $8 dollars in coins as your change; the difference between eight dollar coins and 32 quarters is pretty significant – especially when you consider that four quarters are about three times heavier than a dollar coin. From the business perspective, using coins instead of accepting dollar bills is a lot more efficient due to less jamming and the general cost of technology to accept and process notes. These benefits to consumers and costs to businesses from small transactions can really add up.

COSTS TO BUSINESSES FROM DOLLAR BILLS

Processing paper currency is more expensive than processing coins, especially for businesses that use vending machines or have to handle large volumes of small-denomination notes. One estimate of the cost of processing dollar notes versus coins comes from the public transit industry. A transit trade association “determined that the cost to process one thousand dollars worth of one-dollar bills is approximately $10.11. The cost to process the same amount in dollar coins is $1.22.”44 They cited a series of factors to explain this cost difference, including the cost of handling, counting and stacking the bills, as well as the cost of vending coins as compared to dollars. That is a savings of $8.89 per one thousand dollar bills, which translates into $8,890 per million or $8.89 million per billion.

While it may seem difficult to posit that transit agencies nationally could save almost $9 million per year in processing costs by switching from dollar notes to dollar coins, consider that across the nation transit agencies collected over $13 billion in passenger fares in 2011.45 If only eight percent of this revenue came in the form of one-dollar bills, that would translate into approximately one billion dollar bills being processed by the transit agency. Under this assumption, modernizing to the dollar coin would produce almost $9 million in savings due to cheaper processing costs.

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FOCUS ON SMALL AND RETAIL BUSINESSES

Individuals would similarly realize these savings and small businesses that rely on cash transactions, such as restaurants and small, family-owned retail stores. However, it would be less impactful for those who conduct business through the internet or high-dollar volume transactions (not many people buy cars with suitcases full of cash). It is difficult to quantify the cost structure for handling the currency for these businesses, much less the cost savings for switching to coins. Just because these cost savings are difficult to estimate and small in the individual transaction doesn’t mean that they couldn’t add up.

One study by researchers at the Federal Reserve Bank of Atlanta estimates that roughly one-third of in-store purchases are made in cash.46 Another indicates that cash payment is far more common among lower-dollar transactions, with cash accounting for two-thirds of all transactions under $10.47 Looking specifically at small businesses, Intuit found that a majority, 55%, did not accept credit cards as a form of payment.48 According to the U.S. Census Bureau, retail sales for businesses with fewer than 100 employees were over $2.5 trillion annually.49 If the share of transactions using dollars were the same as the total volume of business, that would translate into $816 billion of retail sales in cash to small businesses in the U.S. on an annual basis. How many dollar bills are in those transactions is a difficult figure to know. One starting point for an estimate would be to use the share of dollar bills as a share of total currency, which is just under one-third.50 Using that assumption leads to just over $250 billion of cash transactions using dollar bills at small retail businesses alone.

The question of savings now comes down to the estimate of how much small businesses could save by using dollar coins instead of notes. This is very difficult to estimate. Small businesses that use vending machines would experience savings in line with the transit agency example. Those that sell high-dollar, low-volume merchandise would not. Also, the transit estimate only looked at the cost of handling the money, and didn’t focus as much on the cost of time to the customer and to the business serving the customer. Using coins can keep a line moving, which is very important in retail; recall how fast food chains sometimes use automated dispensers for coins because they are more efficient. Let’s be extremely conservative and estimate that the savings for a retail small business is only five-percent of that of the transit agency. That would still create estimated savings for small, retail businesses of over $100 million per year, just from switching from the dollar note to the dollar coin.

Additional savings may come from having to deal with fewer pennies. Suspending production of the penny itself does not eliminate the penny from circulation or public use. However, it could pave the way for future elimination, as was the case in Canada. Clerks spending less time making change, dealing with pennies, will speed up lines at convenience stores, cafeterias and supermarkets. There is a reason that toll roads don’t accept pennies: they need to keep the cars moving.

ENVIRONMENTAL ASPECTS

The above discussion focused primarily on the economics of production, distribution and usage of the note and the coin. These estimates frequently do not go into any great depth on the question of the environmental impacts of producing notes as compared to coins. The environmental aspects are important and merit strong consideration in determining which method of production the government should choose in making one-dollar instruments of currency.

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There are a lot of factors at play in considering a holistic environmental analysis. Similar to the analysis with respect to cost, the time horizon chosen is critically important. Because a coin will last for 30 years while a dollar note lasts for far less time, it will require the production of many notes to equal the lifespan of one coin. The discrepancy in production between the two is exacerbated, as the dollar coin is 100% recyclable. The metal in an old coin retains its metallurgic value beyond its functionality as a coin; once it is no longer usable as a coin, the metal can be reused to make a new coin. Conversely, the dollar note is not recyclable for the most part. A group of scientists and engineers at Michigan State University attempted to quantify the difference in waste generated between coins and notes over a 30-year time horizon. This would underestimate the real savings of the dollar coin, because even at the end of its useful life, it is still 100 percent recyclable, as compared to the end of the useful life of the last dollar note used to last through the 30th year. However, even with that caveat, the findings are very interesting.

They found that over thirty years, to meet the demand for dollar notes, the U.S. would generate 1164.7 million kilograms of landfill waste, as compared to zero for the dollar coin. That is a tremendous amount of waste, but keep in mind that according to GAO estimates, we will produce 109 billion new dollar notes over the next 30 years.51 Those figures are slightly outdated based on a 2011 estimate. Looking over the next 40 years, from 2017 to 2047, we will produce over 170 billion new dollar notes.

To put that figure in perspective, it is equivalent to the amount of trash that 290,000 Americans create in a given year.52 When you consider that Americans today recycle approximately one-third of the waste that they create, the landfill impact is even greater.53 Switching from the dollar bill to the dollar coin would save the equivalent of the amount of trash that over 430,000 Americans – or all inhabitants of Miami or Oakland – put into a landfill in a given year. It should not be surprising, then, that the scientists at Michigan State University concluded: “The life cycle assessment of the dollar coin and note has demonstrated that the coin is better for the environment than the note.”54

Eliminating production of the penny will also have substantial positive benefits for the environment. Producing over nine billion pennies harms the environment for no benefit to citizens who throw them away or store them in jars. Using the projected rate of penny growth, we would produce over 800 billion between 2017 and 2047. Ceasing production of the penny would truly be a penny earned for the environment.

COINS WORK BETTER FOR ALL AMERICANS

Hard currency is particularly important to the visually impaired, for whom electronic transactions are not always practicable. Coins are relatively easy for the visually impaired to use as they can distinguish between denominations by feel, size and weight. America is somewhat unique among major industrialized nations in that our paper currency is impossible to distinguish between denominations for the visually impaired. Other nations use different size currency or have unique tactile features on the currency to address this problem. This is no small issue as there are over 6.7 million Americans who have a visual disability, including over 2.7 million senior citizens and over 650,000 children.55

In fact, the U.S.’s refusal to address this issue led to a lawsuit in which the court “ruled that the Department of the Treasury and BEP must provide meaningful access to the denomination of U.S. currency notes for blind and visually impaired U.S. citizens and legal permanent residents.”56 As a result, the Treasury Department is considering purchasing digital currency readers and giving them to all visually impaired

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people at a cost of $122 million in fiscal year 2013 alone.57 Of course, switching to dollar coins would eliminate problems for the visually impaired in distinguishing and using a one-dollar note. However, it would be of significant assistance as the one-dollar note is often the note used by immoral thieves when failing to give the blind proper change. This is another example of how the switch will be Pareto improving as it improves the lives of one group without negatively affecting others.

CONCLUSION Adding Harriet Tubman, the first woman to grace the front of a paper note in a century, reminded America that for most of our nation’s history our currency was f luid. Public engagement on who was on the currency was high, even though the outcome did not save taxpayers any money, did not reduce the deficit, did not save businesses money, or help the environment. Historically, America modernized its currency to improve commerce and meet consumer and business demand. We once minted half-cents, two-cent and 20-cent coins. The penny can join them. Given the benefits from switching to the dollar coin and the opportunity for broader currency reform, now is a unique opportunity for action to produce $16 billion or more in budget savings without raising a single tax or cutting a single program.

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ABOUT THE AUTHORS Aaron Klein Aaron Klein was appointed as Deputy Assistant Secretary for Economic Policy in 2009 and served through 2012. In that capacity he worked on a variety of economic issues, including drafting and securing passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, housing policy, TARP implementation, infrastructure policy and finance, and many interagency working groups and task forces. Before joining the Obama Administration, Klein served as Chief Economist of the Senate Banking, Housing and Urban Affairs Committee for Chairmen Chris Dodd and Paul Sarbanes. During his tenure on the Banking Committee, Klein worked on currency and coinage issues in addition to playing a leading role on a host of economic, monetary, international, housing and financial issues. After leaving the government, Klein worked at the Bipartisan Policy Center (BPC) where he directed the Financial Regulatory Reform Initiative.

Klein graduated from Dartmouth College with high honors and from the Woodrow Wilson School for Public Affairs at Princeton University. He lives with his wife and two children in Silver Spring, Maryland. 

G. William HoaglandG. William Hoagland completed 33 years of federal government service, including 25 years on the U.S. Senate staff. From 2003 to 2007, he served as the director of budget and appropriations in the office of Senate Majority Leader Bill Frist. He assisted in evaluating the fiscal impact of major legislation and helped to coordinate budget policy for the Senate leadership.

From 1982 to 2003, Hoagland served as a staff member and director of the Senate Budget Committee, reporting to U.S. Sen. Pete V. Domenici, chairman and ranking member of the committee during this period. He participated in major federal budget negotiations, including the 1985 Gramm-Rudman-Hollings Budget Deficit Reduction Act, the 1990 Omnibus Budget Reconciliation Act, and the historic 1997 Balanced Budget Agreement.

In 1981, he served as the administrator of the Department of Agriculture’s Food and Nutrition Service and as a special assistant to the Secretary of Agriculture. He was one of the first employees of the Congressional Budget Office in 1975, working with its first director, Alice Rivlin.

G. William Hoagland also served as vice president of public policy for CIGNA Corporation, working with business leaders, trade associations, business coalitions, and interest groups to develop CIGNA policy on health care reform issues at both the federal and state levels.

Hoagland is an affiliate professor of public policy at the George Mason University and a board member of the Committee for a Responsible Federal Budget, the National Academy of Social Insurance, and the National Advisory Committee.

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ENDNOTES

Klein, Aaron, Time for Change, 2013

American Federation for the Blind quoting U.S. Census Bureau 2013 ACS survey; http://www.afb.org/info/programs-and-services/public-policy-center/directconnect-newsletter/research-navigator-just-how-many-blind-folks-are-there-anyway/1235

The Economist, Kill Bill, Will the deficit finally spur America to replace dollar bills with coins? March 16, 2013

Federal Reserve currency order, (https://www.federalreserve.gov/paymentsystems/coin_currency_orders.htm) and US Mint order

US Mint 2012 Annual Report, http://www.usmint.gov/downloads/about/annual_report/2012AnnualReport.pdf

https://www.federalreserve.gov/faqs/currency_12771.htm

http://www.royalmint.com/help/help/life-expectancy-of-a-coin

https://www.federalreserve.gov/faqs/how-long-is-the-life-span-of-us-paper-money.htm

https://www.federalreserve.gov/paymentsystems/coin_currcircvalue.htm and https://www.federalreserve.gov/foia/2016currency.htm

Federal Reserve Website: http://www.federalreserve.gov/foia/2012newcurrency.htm

Federal Reserve Website: http://www.federalreserve.gov/foia/2012newcurrency.htm

https://www.federalreserve.gov/paymentsystems/coin_currency_orders.htm

GAO-12-307, http://www.gao.gov/assets/590/588549.pdf

GAO: U.S. Coins Replacing the $1 Note with a $1 Coin Would Provide a Financial Benefit to the Government, GAO-11-281, http://www.gao.gov/new.items/d11281.pdf

https://www.federalreserve.gov/paymentsystems/coin_currcircvalue.htm

US Mint Annual report, 2015, https://www.usmint.gov/downloads/about/annual_report/2015AnnualReport.pdf

Future of the Penny: Options for Congressional Consideration, GAO-96-152, page 7 http://www.gao.gov/assets/110/106568.pdf

http://gregmankiw.blogspot.com/2006/09/how-to-make-1-billion.html

BLS inflation calculator: http://www.bls.gov/data/inflation_calculator.htm

https://www.usmint.gov/downloads/about/annual_report/2015AnnualReport.pdf

https://www.usmint.gov/about_the_mint/PDFs/2014-rd-biennial-report.pdf

https://www.usmint.gov/about_the_mint/PDFs/2014-rd-biennial-report.pdf, page 3.

OMB, Circular No. A-11: http://www.whitehouse.gov/sites/default/files/omb/assets/a11_current_year/a_11_2012.pdf

GAO, Report to the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology, Committee on Financial Services, house of Representatives, April 2004, GAO-04-283

GAO-04-283, page 10

Allison, Theodore, Assistant to the Board for Federal Reserve System Affairs, http://www.federalreserve.gov/boarddocs/testimony/1997/19971021.htm

http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/54x x/doc5499/doc56.pdf

Ibid, page 13

http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/54x x/doc5499/doc56.pdf

The Economist, Kill Bill, Will the deficit finally spur America to replace dollar bills with coins? March 16, 2013

ibid, GAO-11-281

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GAO 93-56 http://www.gao.gov/assets/160/153109.pdf

ibid, GAO

Royal Canadian Mint: http://www.mint.ca/store/mint/learn/2-dollars-5300016#.Udm4xj7SMi4

Beverly Lepine testimony before Congress, November 29, 2011, http://www.dollarcoinalliance.org/wp-content/uploads/2012/11/Beverley-Lepine.pdf

http://www.bbc.com/news/world-us-canada-21328892

European Commission, Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank - Five years of Euro banknotes and coins, Section 3.5, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006DC0862:EN:NOT

Communication from the Commission to the European Council - Review of the introduction of Euro notes and coins, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52002DC0124:EN:NOT

ibid, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52002DC0124:EN:NOT

http://www.ecb.int/pub/pdf/other/eurobren.pdf

http://www.centralbank.ie/press-area/press-releases/Pages/CentralBankannouncesrolloutofroundingof1cand2ccoinsnationally.aspx

http://www.bbc.com/news/world-us-canada-21328892

APTA testimony before Congress, April 28, 2004, http://www.apta.com/gap/testimony/2004/Pages/testimony040428.aspx

APTA, 2013 Public Transportation Fact Book, Appendix A, page 219: http://www.apta.com/resources/statistics/Documents/FactBook/2013-Fact-Book-Appendix-A.pdf

Clark, Carol, Shopping without cash, Federal Reserve Bank of Chicago, http://qa.chicagofed.org/digital_assets/publications/economic_perspectives/2005/ep_4qtr2005_part3_clark_.pdf

http://takeonpayments.frbatlanta.org/2016/07/cash-reports-of-its-pending-death-are-greatly-exaggerated.html

http://investors.intuit.com/press-releases/press-release-details/2012/GoPayment-Survey-Estimates-100-Billion-in-Missed-Sales-for-Small-Businesses-that-Deny-Plastic/default.aspx

http://www.census.gov/econ/census/pdf/smallbiz_snapshot.pdf

http://www.federalreserve.gov/paymentsystems/coin_currcircvolume.htm

GAO 11-281, page 32, http://www.gao.gov/new.items/d11281.pdf

According to the EPA the typical American produces 4.4 pounds of trash per day (http://www.epa.gov/epawaste/nonhaz/municipal/index.htm).

Ibid, from EPA

Claus, Michael, Shepherd, Reid, Wayne, Brandon, Life Cycle Assessment of Environmental Impact of United States Dollar Note and Coin, Michigan State University, https://www.msu.edu/~alocilja/undergrad/BE230/dollar_vs_coin.pdf

https://nfb.org/factsaboutblindnessintheus

http://www.treasury.gov/about/budget-performance/Documents/19%20-%20F Y%202013%20BEP%20CJ.pdf page 11.

ibid