February 25, 2014 – The USA are discussing for some time whether the introduction of a $1 coin instead of a banknote may be an economically reasonable step. Last December three experts of the Federal Reserve Bank put forward a study analysing the supposed scenario of replacing the note with a coin. However, this is only a staff paper and therefore aims at stimulating discussion as the paper states.
While a GAO analysis had favoured the replacement, this new study comes to different results. The authors stress the fact that seigniorage is not really a point in favour of introducing coins since it is an ‘inter-sector transfer of wealth’ being a sort of tax paid by the payment participants to the government. In addition, the aspect of longer life does not outweigh the higher production costs of coins since US notes have a much higher life expectation than notes of other countries due to the mixture of cotton and linen.
Also the current $1 coins do not have security features like the notes and are expected to become a target of counterfeiting which would result in decisively higher costs for the USA. The authors compare the danger to the situation of the British £1 coin which has been heavily counterfeited in the last years.
And then, as the authors underline, there is another aspect to be taken into account. The $1 coin exists already, but users do not accept them. Hence it is to be expected that after an elimination of the $1 notes people would prefer to use cashless payment or other ways avoiding the coins.
According to the authors the USA should keep the notes in order to save money.
The staff paper is available on the website of The Federal Reserve Bank.