Wednesday, March 29, 2017

Why Does the Federal Reserve Dislike $1 Coins?

Since this blog is focused on the topic of potential monetary system change, I thought it might be interesting to offer some information about the money we all use every day. A significant per cent of the public probably does not really think much about the money they use every day. But it can an interesting topic.

First, for those who want to learn more about how the actual cash we use gets into the hands of the public, try this link. Below I picked out a couple of interesting questions and answers as examples. Here is thought question to get you started. What (if any) is the difference between a US $1 bill (Federal Reserve Note) and a $1 coin minted at the US mint? Most people would say nothing since both are commonly accepted at equal value wherever cash is accepted for payment. But who profits from the production of each of these forms of cash? We'll look at that further below.

First here are a few selected questions and answers from the Federal Reserve Bank Services Q&A page:

Q: What is the role of the Federal Reserve with respect to banknotes and coins?
A: Currency
Within the Federal Reserve System, there are three entities responsible for the management and distribution of currency.
The Board of Governors of the Federal Reserve System is the issuing authority for Federal Reserve notes, the currency of the United States. The Board has a wide range of responsibilities related to Federal Reserve notes, from ensuring an adequate supply to protecting and maintaining confidence in U.S. currency.
Working very closely with the Board, the Federal Reserve System’s Cash Product Office (CPO) is responsible for strategic leadership to Reserve Bank cash departments by formulating policies, operational guidance, and technology strategies for U.S. currency and coin services provided nationally and internationally. The CPO’s primary mission and responsibility is to maintain public confidence in U.S. currency.
The 12 regional Federal Reserve Banks and their branches distribute Federal Reserve notes to the public through depository institutions. Reserve Banks process notes on high-speed sorting machines that check to ensure they are genuine and fit for commerce. If the notes are deemed suspect counterfeits, Reserve Banks forward them to the local U.S. Secret Service office. If they are genuine and still in good condition, the notes are sent to depository institutions to fill orders for currency. An individual note continues moving through this cycle until it is deemed unfit, or too worn, to be kept in circulation. Unfit notes are destroyed on-site at Reserve Banks in order to maintain the quality of currency in circulation.
Unlike currency, the United States Mint is the issuing authority for coins. Reserve Banks distribute new and circulated coin to depository institutions to meet the public's demand, and take as deposits coin that exceeds the public's needs.
Q: How much does it cost to produce currency?
A: Each year, the Federal Reserve Board projects the need for new currency, which it acquires from the Department of the Treasury's Bureau of Engraving and Printing at the cost of production. The new currency budget (Off-site Link)for 2015 is $717.9 million, and reflects the following costs per denomination:
  • $1 and $2 notes -- 4.9 cents per note
  • $5 -- 10.9 cents per note
  • $10 notes -- 10.3 cents per note
  • $20 and $50 notes --10.5 cents per note
  • $100 note -- 12.3 cents per note
Q: How much does it cost to produce coin?
A: The United States Mint determines annual coin production. The Federal Reserve’s Cash Product Office influences this process by providing the Mint with monthly coin orders and a twelve-month, rolling coin-order forecast. Reserve Banks purchase coin at face value from the Mint. Further details on coins can be found on the Mint's website 

Well, there is some interesting informatiion right there. The Federal Reserve notes issued by the Federal Reserve only cost them 12 cents or less to produce. So, a $100 bill only costs the Fed twelve cents. Pretty good deal.

On the other hand, did you catch that the Federal Reserve has to purchase $1 coins "at face value from the Mint". So they have to pay a full $1 for a $1 coin (which costs the US Mint around 10 cents to produce based on estimates you see out there). A decent deal for the Mint, but not nearly as attractive (for the Fed) as those Federal Reserve notes they get for 5 to 12 cents each depending on the face value as shown above.

Here's another interesting question. 

Is this situation the real reason the US does not replace $1 bills with $1 coins? After all, the Fed has quite a vested interest in people using Federal Reserve notes rather than US Mint $1 coins. It seems like former US Mint Director Phillip Diehl thought so when he testified before Congress trying to get the dollar coin to replace the dollar bill a few years ago. Here is what he had to say about it on page three in the link above:


"For many years the dollar coin has faced another significant obstacle: the FRB's (Federal Reserve Board's) preference for the dollar note. I discovered this for myself when the Mint launched the Sacagawea dollar in 2000. The FRB is the sole channel through which the US Mint distributes coins to banks and ultimately to businesses and consumers. If the FRB doesn't order a coin, it doesn't get into the hands of the public."

Mr. Diehl goes on to say that the FRB actually placed all kinds of obstacles in the way of the US Mint in trying to get the one dollar coins into circulation. They eventually bypassed the Fed and sent the coins straight to Walmart. While the conventional wisdom has been that people wanted bills and not coins, the actual initial public demand was huge according to Mr. Diehl. So, Mr. Diehl goes on to say this in his testimony:

"This debunked another piece of conventional wisdom that Americans are opposed to eliminating the dollar note. When readily available to the public, coins are readily accepted."

Mr. Diehl did not stop there. Later on he adds these comments:

"As GAO has noted, both coins and notes make a profit termed "seigniorage", but they are accounted for differently . . . .  The Federal Reserve Board buys coins from the Mint at full face value. The Mint then records all coin seigniorage, or profit, on its books and ultimately deposits profits into the general Treasury's general fund. In contrast, the FRB buys notes from the Bureau of Engraving and Printing at cost, with the FRB reporting all note profit on its books. In 2011, the FRB's note profit was estimated at $200 billion and the FRB returned $77 billion to Treasury. I am not an expert on the Federal Reserve's finances, but the math here is pretty simple: eliminating the dollar note denies the FRB a significant source of its profits."

Is this the real reason the dollar coin never seems to "catch on" with the public? 

Many other countries have eliminated their paper bills and only have coins for their equivalent of one US dollar (see Canada for example). The US could do the same and save a lot of money (an estimated $4.4 billion over 30 years) because the coins last a lot longer than the bills do in circulation. 

But the Fed would clearly lose a huge source of profit on the $1 notes which eventually flows into the US Treasury. Perhaps this is why Congress never passed the bill to do away with the one dollar bill and replace them with one dollar coins despite the obvious cost savings over time? It clearly makes the Fed look better and show more profit returned to Treasury (at the expense of the US Mint).

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