Statement by Theodore E. Allison, Assistant to the Board for Federal Reserve System Affairs, Board of Governors of the Federal Reserve System, before the Task Force on Economic Policy, Projections, and Revenues of the Committee on the Budget, U.S. House of Representatives, May 28, 1992

Federal Reserve Bulletin, July 1992 | Go to article overview

Statement by Theodore E. Allison, Assistant to the Board for Federal Reserve System Affairs, Board of Governors of the Federal Reserve System, before the Task Force on Economic Policy, Projections, and Revenues of the Committee on the Budget, U.S. House of Representatives, May 28, 1992


Statement by Theodore E. Allison, Assistant to the Board for Federal Reserve System Affairs, Board of Governors of the Federal Reserve System, before the Task Force on Economic Policy, Projections, and Revenues of the Committee on the Budget, U.S. House of Representatives, May 28, 1992

I am pleased to have this opportunity to present estimates of the impact on the Federal Reserve System of substituting a one-dollar coin for the one-dollar bank note now in circulation, as would be required by H.R. 1245, the United States One Dollar Coin Act of 1991. In brief, a dollar coin could produce sizable cost savings for the federal government as a whole, for three reasons: First, production costs for dollar coins, over time, would be lower than for dollar notes. Second, Federal Reserve processing costs for incoming coin deposits would be lower than for incoming note deposits. And, third, the Treasury's interest saving as a result of one-dollar coin seigniorage would be greater than the Federal Reserve's interest earnings derived from one-dollar notes (this is true because the number of dollar coins in circulation is likely to exceed significantly the number of dollar notes). These savings would aggregate to about $400 million a year on average, in present value terms, over the next thirty years.

The potential savings can be achieved, however, only if the one-dollar note is withdrawn from circulation. Moreover, the budgetary savings would be even larger--more than $500 million a year if the two-dollar note is not made available.

Before turning to the impact of a dollar coin on the Federal Reserve's financial position and to the specific questions raised in your invitation for this testimony, I would like to explain briefly the ways in which the federal government budget would be affected by issuance of a dollar coin. As will be seen, the budgetary impacts would be somewhat complex, and the overall savings would not come solely--or even predominantly-through the Federal Reserve.

Coins are placed into circulation in a process in which the Department of Treasury (1) mints new coins in accord with the needs of the public (using appropriated budget funds for all but the metal cost), (2) books a"profit" (called seigniorage) equal to the difference between the face value of the coins and their cost of production, which is treated as a means of financing the federal budget, and (3) deposits the coins with the Federal Reserve Banks for credit to the Treasury Department's checking account. Thus, in budgetary terms, production of additional coins would (a) raise budgeted outlays by the Treasury for Mint operations in the year of production and (b) increase seigniorage, and consequently reduce budgeted outlays for interest on the borrowing displaced thereby, in the year of production and in all future years.

The mechanism by which notes are placed into circulation is rather different: (1) The cost of new bank notes enters the federal budget indirectly: New notes are purchased by the Federal Reserve from the Bureau of Engraving and Printing, a unit of the Treasury Department, at a price set to recover the Bureau's full cost of production. The Bureau's expenses are not included in the federal budget. Instead, the Federal Reserve's outlays for production of new notes are assessed against the earnings of the Reserve Banks, thereby reducing the net earnings of the System remitted to the Treasury Department and, accordingly, miscellaneous receipts in the budget of the federal government. (2) The "profit" on the bank note issue also is accounted for differently than the "profit" (or seigniorage) on the coin issue: Bank notes in circulation are a liability of the Federal Reserve Banks for which the Reserve Banks hold corresponding earning assets. Increases (or decreases) in bank notes in circulation would result in higher (or lower) Federal Reserve portfolio earnings and concomitantly higher (or lower) budgetary miscellaneous receipts of the federal government. …

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Statement by Theodore E. Allison, Assistant to the Board for Federal Reserve System Affairs, Board of Governors of the Federal Reserve System, before the Task Force on Economic Policy, Projections, and Revenues of the Committee on the Budget, U.S. House of Representatives, May 28, 1992
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