Recommendations on Currency Modernization Measures
Testimony of Thomas A. Schatz
President, Citizens Against Government Waste
Before the House Financial Services Subcommittee on Domestic Monetary Policy
Recommendations on Currency Modernization Measures
November 29, 2012
My name is Thomas A. Schatz and I am president of Citizens Against Government Waste (CAGW). CAGW was founded in 1984 by the late industrialist J. Peter Grace and nationally- syndicated columnist Jack Anderson to build support for implementation of President Ronald Reagan’s Grace Commission recommendations and other waste-cutting proposals. Since its inception, CAGW has been at the forefront of the fight for efficiency, economy, and accountability in government. CAGW has more than one million members and supporters nationwide, and, over the past 28 years, has helped save taxpayers $1.2 trillion through the implementation of Grace Commission findings and other recommendations.
CAGW does not accept government funds. Eighty-five percent of the organization’s funding comes from individual contributors around the nation. Corporate and foundation gifts account for the other 15 percent. CAGW’s mission reflects the interests of taxpayers. All citizens benefit when government programs work cost-effectively, when deficit spending is reduced and government is held accountable. Not only will representative government benefit from the pursuit of these interests, but the country will prosper economically because government mismanagement, fiscal profligacy, and chronic deficits soak up private savings and crowd out the private investment necessary for long-term growth.
With recurring annual budget deficits of more than $1 trillion and a national debt of $16.2 trillion, the federal government should be reducing spending wherever possible. One painless way to save billions of dollars is to phase out the $1 note and transition to the $1 coin.
The United States is alone among industrialized countries in having such a low value for its paper currency. Canada, the European Union, Japan, and other nations switched to the $1 coin and have experienced cost savings far greater than their initial estimates. The smallest denomination of countries using the Euro is 5 Euro, worth $6.36. In Britain, the 5-pound note, worth $7.93, is the smallest paper currency. In Japan, it is 1,000 yen, or about $12.30.
The Currency Optimization, Innovation, and National Savings (COINS) Act, introduced as H.R. 2977 in the House of Representatives by Rep. David Schweikert (R-Ariz.) and as S. 2049 in the Senate by Sens. Tom Harkin (R-Iowa) and John McCain (R-Ariz.) would require Federal Reserve Banks to stop issuing the $1 note four years after enactment of the legislation or when circulation of $1 coins exceeds 600 million annually, whichever comes first.
The Government Accountability Office (GAO) has issued six separate reports over 22 years stating that billions could be saved from eliminating the $1 note. In its most recent report released in February 2012, the GAO estimated that switching to the $1 coin would save at least $4.4 billion over 30 years, or $146 million per year. This report builds on GAO’s March 2011 report, which cited $5.5 billion in savings over a 30-year period.
There is ample reason to believe that GAO’s most recent cost-savings estimate is too low. Prior GAO estimates relied on a replacement ratio of 2:1 coins to notes. This is consistent with the experience of most other modern economies that have made the transition from low denomination paper currency in previous decades. The replacement ratio most likely to occur would therefore generate far greater savings than the GAO’s current estimate, which relies on a 1.5:1 replacement ratio.
Most of the cost savings associated with coins come from their comparative durability. The Bureau of Engraving and Printing produces approximately 3.4 billion $1 bills each year, each of which costs 4.2 cents to manufacture and lasts 40 months. By comparison, the $1 coin costs between 12 and 20 cents to produce, but has a lifespan of 30 years or more. The $1 coin also saves money because it is cheaper to handle and process.
Many private-sector businesses have already benefited from $1 coins. Mass transit agencies have found that processing $1 coins costs 83 percent less than processing $1 bills. In addition, vending machine operators have determined that $1 coins save their industry $1 billion a year. Other benefits include savings on the processing of money by banks and businesses. Coins cost 30 cents per thousand pieces to process at Federal Reserve Banks, compared to 75 cents per thousand for $1 notes. Coins are also much more difficult to counterfeit.
Beyond saving money, there are many other advantages to the use of $1 coins. Unlike $1 bills, $1 coins are 100 percent recyclable. Scrap metal from the production process, and coins that become too damaged for circulation, are melted and re-formed into strip metal for minting new coins. Conversely, $1 bills have a far more negative impact on the environment. Each year, around 3.2 billion $1 bills are removed from circulation due to wear and tear. The majority of these bills are shredded and deposited into landfills, creating millions of pounds of waste.
The arguments against the $1 coin, therefore, are not about saving money. They are about sentiment, nostalgia, and stubbornness. A January 2011 poll conducted by the Tarrance Group and Hart Research found that, when informed of the potential cost savings, 65 percent of Americans support replacing the $1 bill with the $1 coin. Any deficit-reduction measure on which two-thirds of Americans agree should be at the forefront of the fiscal cliff deliberations.
Some people believe the $1 coin will force them to carry more coins. That is not the case around the world and would not be true in the United States. In fact, it would result in fewer coins being used. For example, it takes eight quarters to pay for one hour at a parking meter in Washington, D.C. Two $1 coins would replace those eight quarters. The frustration of trying to put a $1 bill into any machine would be eliminated.
Among other reasons for the failure of Congress to pass legislation to eliminate the $1 bill, Crane Paper Company, the Treasury’s sole supplier of currency paper, is located in Massachusetts, in the congressional district next to former House Financial Services Chairman Barney Frank (D-Mass.). Massachusetts senators Scott Brown (R) and John Kerry (D) co- sponsored S. 1624, the Currency Efficiency Act of 2011, which would limit production of $1 coins. Local interests should not supersede the needs of the taxpayers.
There is also a bureaucratic turf war over the $1 coin. The Federal Reserve and the U.S. Mint are required by law to remove barriers to the $1 coin’s circulation. However, the Federal Reserve issues the United States’ paper currency and doesn’t like the competition from the $1 coin, which is issued by the Mint. The Fed’s leaders have instituted regulations and red tape that restrict access to $1 coins for banks, businesses, and individual Americans. Under current law, the Federal Reserve is responsible for determining the amount of $1 notes necessary for commerce and the Secretary of the Treasury determines the amount of $1 coins necessary to meet the needs of the United States. The Federal Reserve banks distribute notes and coins to commercial banks to meet the demand of retailers and the public. While $1 notes are re-circulated at high rates, about 1.1 billion $1 coins are held in storage by the Federal Reserve banks because, according to senior Federal Reserve officials, of the limited public demand. As the aforementioned Tarrance Group and Hart Research poll demonstrates, any perceived lack of demand for these coins is due to a lack of public awareness about the potential cost savings of $1 coins.
Finally, using a $1 coin is the only way that taxpayers can directly help to reduce the deficit. An individual cannot directly cut a program or raise taxes, but each person can do something to help save hundreds of millions of dollars each year by ditching $1 bills and using $1 coins.
The daunting fiscal challenges being faced by the federal government require immediate action to adopt dramatic reductions in spending. Phasing out the $1 bill for the $1 coin should be an easy decision for elected officials in Washington, who claim to be looking everywhere for ways to reduce the record deficit and debt. It truly is time to look under the proverbial seat cushion for loose coins. Thank you for the opportunity to provide this testimony.