Would killing the dollar bill save money? Don’t bet on it.

December 3, 2012

Now that Washington D.C. is freaking out over the deficit, no budget-cutting proposal is too small or zany to ignore. And that means an old idea is making the rounds again: The U.S. government could shrink its deficit if it got rid of all the dollar bills in circulation and replaced them with shiny new dollar coins.


The latest in fiscal hawk technology.

Total savings? About $4.4 billion over the next 30 years, according to a report from the Government Accountability Office (GAO). Sure, that's a paltry amount when we're talking about trillion-dollar deficits, but hey, every little bit helps. Better get started, right?

Well, maybe not. Despite the GAO's enthusiasm, there are plenty of budget experts who think that scrapping the dollar bill wouldn't save much money at all. Last week, the House convened a hearing on "The Future of Money" to discuss this very question. Here are some of the reasons why dollar coins might not be such a foolproof deficit plan:

1) Dollar coins largely save money by taxing cash users. Why would dollar coins reduce the budget deficit? This is actually a tricky question. It's not because coins are cheaper to produce than bills — in fact, the coins are a bit more expensive to make (though they do last longer).

The real reason has to do with what's known as "seigniorage." It costs less than $1 for the government to produce both dollar bills and dollar coins. And the government gets to pocket the difference between the cost of making money and the face value of that money. So every time the government circulates a new dollar bill or coin into the economy, it nets a small profit.

Now here's where the magic happens: If we got rid of the dollar bill entirely, the GAO assumes that the U.S. government would have to produce about 1.6 dollar coins to replace every current bill. (That's because dollar coins are more likely to get stashed in drawers and shelves and less likely to recirculate.) The government's $4.4 billion profit comes entirely from this boost in seigniorage.

Is this a problem? Well, as James Miller of the Office of Management and Budget testified at the House hearing, this $4.4 billion is essentially a tax on Americans who hold cash. The more coins that people hold, the greater the benefit they're handing over to the federal government. This money will still cut the deficit, true, but it does so through implicit taxation, not through efficiency savings.

2) The actual savings might never even materialize. What's more, the GAO makes a couple of big assumptions in its report. First, the government would have to get rid of dollar bills entirely if it wanted dollar coins to catch on. That's what Canada did when it introduced the loonie back in 1987. Otherwise, Americans will keep using bills instead of coins (as they do now), and the budget benefits won't materialize. But this could prove wildly unpopular.

Second, the GAO is assuming that the U.S. government really would produce 1.6 dollar coins to replace every lost dollar bill. That might be wrong. If the government only had to produce one new coin for every lost bill, then it would actually lose money. (Though we're talking about small amounts here either way.)

Third, the GAO is assuming that Americans will still be using physical cash for the next 30 years. Is that certain? Who knows? More and more Americans are using electronic payment systems these days. If the country managed to go cash-free a decade from now, that would be a problem, because replacing bills with coins only starts producing savings after 10 years (that's because coins last longer than bills). Before then, there's a roughly $582 million upfront cost:

Better hope we don't go cash free by 2028!

3) A dollar coin might create other hassles, as well. The GAO also found that businesses would likely incur some costs from having to make changes in how they dealt with cash. What's more, dollar coins are heavy and harder to transport. None of those costs showed up in the GAO's calculations. (In fairness, the agency is quite upfront about all this.)

4) But now... the counterarguments. That said, if you want to see some enthusiastic arguments in favor of replacing the dollar bill with coins, see this testimony from former U.S. Mint director Philip Diehl and this testimony from Beverly Levine of the Canadian Mint.

One point here is that there's more to think about than just the (tiny) budgetary effects. Levine argues that the Canadian transit systems in particular have benefited from the introduction of the loonie and toonie, which are easier for payment machines to handle. That's worth considering.

Further reading:

--David Wolman's book "The End of Money" is a fascinating look at whether the world will one day go cashless.

--By the way, Canada has also killed the penny on the theory that it saves money. Here's a longer argument by David Owen that it's time for the United States to follow suit.

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