POLITICS: PennAve

Federal Reserve throws cold water on the idea of dollar coins

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PennAve,Joseph Lawler,Economy,Federal Reserve

The Federal Reserve struck a blow Thursday in favor of the dollar bill, saying that replacing it with a coin would lose the government money and raise costs for businesses.

In past years, some lawmakers, such as Sens. Tom Harkin, D-Iowa, and John McCain, R-Ariz., have introduced bills to phase out the $1 bill in favor of $1 coins. The move is favored by some vendors and other businesses that involve a high volume of coin transactions. Other countries have already taken that step. For instance, the United Kingdom, Australia and Canada switched out their lowest-denominated bill for coins in the 1980s.

The Government Accountability Office estimated in 2012 that switching to coins would save the government $4.4 billion over 30 years through increased seigniorage -- that is, the difference, which would accrue to the government, between the face value of the coins and the cost to produce them.

But the Fed disagrees, saying that using a $1 coin exclusively wouldn't be cost-effective. Officials at the Fed's Board of Governors noted in a study released Thursday that it would take more than one coin to replace every bill because of the different ways coins and bills are used and that the higher cost of producing coins would not be offset by the longer life of the coins.

Part of that analysis involves the increasing durability of U.S. dollars. The Fed says that the average lifespan of a dollar has increased from 18 months in 1990 to 70 months today thanks to the introduction of new technologies such as sensors that can distinguish between dirt and blemishes caused by ink or folds, preventing the Fed from prematurely destroying many bills.

The Fed also surveyed retailers to learn what costs handling large quantities of coins might impose on them. Society "would likely bear costs in the hundreds of millions of dollars per year" to make the switch, losses that would outweigh any possible government savings.

Without a law phasing out the dollar bill, dollar coins are not likely to gain much traction. Despite efforts by Federal Reserve banks and the U.S. Mint to promote the dollar coins in existence, low consumer demand has left regional Fed banks with a 40-year supply of inventory of the coins.

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