December 14, 2013

Fed claims a switch to dollar coins is a loser

But critics say the Federal Reserve has a vested interest in staying with dollar bills.

By Jim Puzzanghera
Los Angeles Times

WASHINGTON — To lawmakers and others arguing that replacing the $1 bill with a $1 coin would save the government money, the Federal Reserve says, “Don’t bet on it.”

A new analysis by Fed staffers said the old-fashioned greenback is more durable than people realize and replacing it with a $1 coin, which is more expensive to produce, would cost the government $1.2 billion over 30 years.

“Based on our analysis of the benefits and costs of a currency-to-coin transition, we believe that the $1 Federal Reserve note should remain in circulation and not be replaced with a $1 coin,” concluded the authors of a Fed staff working paper released this week.

Some in Congress are pushing the government to replace the $1 dollar bill with the longer-lasting $1 coin. Several countries, including Canada and Britain, and the eurozone have replaced small-denomination paper currency with coins.

Last year, the Government Accountability Office estimated a switch could save the federal government $4.4 billion over 30 years.

The Dollar Coin Alliance, a lobbying organization that includes government watchdogs, transit agencies, and mining and vending industry groups, touts an economic report that estimated a switch would save $13.8 billion over 30 years.

The organization criticized the Fed analysis, saying the central bank has a vested interest in keeping the $1 bill because it profits from the sale of paper currency.

“It’s no surprise the Fed is fighting currency modernization, when you understand their motives behind this report,” said Shawn Smeallie, executive director of the Dollar Coin Alliance. “The best interests of taxpayers, not the Fed, must come first.”

The Fed issues currency through its reserve banks and orders it from the Treasury’s Bureau of Engraving and Printing. The Fed said it is not a profit-making institution and annually turns over any profits to the Treasury Department.

The Fed study said estimates of costs savings for a $1 coin are way off the mark.

The $1 bill, made with paper that blends cotton and linen, now is more durable and lasts about 70 months compared with 18 months in 1990, the report said. Small-denomination bills eliminated in other countries lasted less than 20 months.

Although a $1 coin has a useful life of 30 years, it also costs much more to produce.

A $1 bill costs about 5 cents to make while a $1 coin costs about 33 cents, the Fed said. Over 30 years, the government would spend an additional $6.9 billion if it replaced $1 bills with coins.

At that cost, the government would make money on the switch only if $1 bills lasted less than 4.75 years. With a current shelf life of 70 months, or about 5.8 years, the $1 bill is more efficient, the Fed said.

In addition, the shift to a $1 coin would result in additional costs to banks for extra vault storage space and equipment that would be “perhaps in the hundreds of millions of dollars per year,” the Fed said.

Finally, the Fed said the public has shown no great love for $1 coins so far.

The latest incarnation – coins with images of American presidents – was promoted by the Fed and the U.S. Mint, but the effort “failed to stimulate demand,” the report said.

As of June 30, there were 1.4 billion $1 coins sitting in Fed vaults, approximately a 40-year supply.

The report said polls have shown that a majority of Americans prefer the $1 bill to the $1 coin and making the switch could lead more people to shun cash for credit cards and other alternative payment methods.

But the Dollar Coin Alliance said polls have shown about two-thirds of Americans support a switch to a $1 coin when told of potential budget savings.

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