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Statement by

Philip E. Coldwell

Member, Board of Governors of the Federal Reserve System

before the

Subcommittee on Historic Preservation and Coinage

Committee on Banking, Finance and Urban Affairs

House of Representatives

May 17, 1978

I am pleased to present the views of the Board of Governors of
the Federal Reserve System on H.R. 12444, a bill to change the size, weight
and design of the one dollar coin, and for other purposes.

The Federal

Reserve believes that a new dollar coin should be issued, if it will result
in a reduced demand for the one dollar note.

As I will discuss in greater

detail, a circulating dollar coin would result in significant cost savings
to the Federal Reserve, potentially exceeding $30 million each year.


because Federal Reserve earnings in excess of costs are almost all returned
to the Treasury, these Federal Reserve savings would be passed on to the




I also wish to stress the importance of taking


to ensure




new coin

circulates freely, and reduces the demand for one dollar notes.
Since 1920, the Federal Reserve has borne a major responsibility
for the exchange of currency and coin.

In accordance with the Treasury

operating circular 55, the Federal Reserve Banks supply commercial banks
with currency and coin upon request, and also absorb excess currency and
coin from commercial banks.
Circulated currency and coin flows from commercial banks to
Federal Reserve Banks where it is verified and sorted.

Reusable currency

and coin are returned to ordering banks while mutilated or worn out
currency is destroyed.

Demand in excess of the fit money returned is met

by shipment of new currency and new coin obtained from the Bureau of
Engraving and Printing and the Bureau of the Mint.

While the costs of

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minting and shipping new coin to the Reserve Banks are paid by the Bureau
of the Mint, the costs of printing and shipping new currency are paid by
the Federal Reserve System.
The Federal Reserve spent $48 million for the printing of new
currency in Fiscal Year 1977.

This cost represents roughly 7 percent of

the total operating costs of the Federal Reserve System.

Of that $48

million, $28 million were spent to print nearly 2 billion one dollar notes.
Thus, if all these dollar notes were replaced by coins, the Federal Reserve
would realize savings of $28 million in printing costs.
Of course, one must consider the cost of producing the coins in
determining the true savings to the Government.

The costs of producing the

new coin wil1 be slightly higher than the costs of printing a note--roughly
3 cents for the coin, 1.8 cents for the note.

Even so, because the new coin

is expected to last so much longer than the one dollar note, we would still
anticipate significant savings to the Government.
Most new one dollar notes are used to replace worn out notes.


the average, a new dollar note only lasts for 18 months before it is worn
out and destroyed.

On the other hand, the new dollar coin is expected to

last for 15 years or more, a greater life expectancy by a factor of ten.
Thus, while it costs $28 million annually to maintain a circulation pool of
2.4 billion one dollar notes, replacing each note every 18 months, it would
only cost $5 million annually to maintain the same size pool of dollar
coins--a savings to the Government of $23 million each year.

If coins only

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replaced half the dollar notes, the savings in production costs would still
amount to $11 million.
In addition to the savings in printing costs, the Federal Reserve
would also realize savings in lower handling costs for the coin, compared
to the costs of handling notes.

Currency is difficult to sort and verify,

and the process for destroying unfit currency is particularly cumbersome
and costly.

Unfit notes are cut longitudinally, then the upper and lower

halves are destroyed under separate controls.

Our staff estimates the cost

for processing 1,000 new coins at $.51 compared to $2.19 for processing
1,000 notes, including destruction costs.

It is estimated that each dollar

note is processed by the Federal Reserve an average of 1.13 times per year.
Thus, if dollar coins replaced half the dollar notes, and if each coin were
processed one time per year, the Federal Reserve would save an additional
$2 million, annually, in currency processing costs.

Like the savings in

production costs, those savings would grow as currency and coin volume
The introduction of the proposed new coin might also impact the
Federal Reserve in ways which we cannot quantify at this time.
example, the impact on shipping costs is unclear.


Coin weighs more than

currency but should not circulate through the Reserve Banks as often, due
to its longer life.

And, the as yet unknown circulation patterns for the

new coin could affect Reserve Bank requirements for vault space, with a
corresponding impact on our building programs.

While we have no precise

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we doubt that these effects would materially increase or

decrease the estimated potential savings from a new, circulating coin.
However, all these projected savings are contingent upon the new
dollar coin circulating and replacing dollar notes.

If the proposed new

coin is produced but fails to circulate, or circulates without reducing the
pool of dollar notes, additional costs rather than savings will be incurred
by the Federal Reserve, with a consequent reduction in payments to the

And, our recent experience with the réintroduction of the $2











automatically ensured.
Several steps could be taken to aid the circulation of the new
coin and thus replace dollar notes.

These include a marketing program, a

coordinated retail industry utilization effort, and a financial institu­
tion program to encourage use of the new coin.

We hope that the public will

accept and utilize the dollar coin and that the financial institutions and
coin vending industry will effectively encourage this usage.

However, if

the voluntary programs do not achieve acceptable circulation increases
within a year of introduction, then the program must be reconsidered.
Our experience with the $2 bill would indicate that the retailing
community will be the key to whether the new coin can circulate freely,
without controlling production of one dollar notes.
coin in making change, the coin will circulate.

If retailers use the
Moreover, our $2 bill

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experience suggests that retailers can be persuaded to use the new coin,
particularly if the coin is advantageous to their operations and if that
advantage is properly communicated.
Compared to the dollar note, the new coin would appear to offer
several advantages to retailers.

Coins do not stick together nor do they

Consequently, the new dollar coin should facilitate change-making.

Perhaps more important, the new coin should be employable in the cashier
machines that automatically dispense the coin portion of a customer's

These machines are now effectively limited to dispensing amounts

of less than one dollar.



With a useable dollar coin, this limit would be























if the proposed new coin is to succeed.




If the proposed

legislation is enacted, we would strongly urge the Treasury Department to
undertake such a program, and will offer the cooperation and assistance of
the Federal Reserve System in carrying out the effort.