StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



More On The Extreme Folly Of A New Dollar Coin

29 Sep 2011
Posted by Stan Collender

Long-time CG&G readers know that I don’t usually respond to comments on my posts. The biggest reason is time. The second biggest reason is that I see comments as an opportunity for members of the CG&G community to discuss among themselves what I've written. I read every comment; I just don't respond very often.

But the amount of misunderstanding that some commenters had about my original post on the new proposal for yet another dollar coin, not to mention the obvious emotion involved in some of the responses, convinced me that this time I should provide some additional information and correct some misperceptions.
 
First, I really have warm feelings for the dollar coin and, from a federal budget perspective, think it's a good idea.  The point I was making, however, was that it's more than ironic that tea partiers in the House who demand unyielding obeisance to the market, want to keep the government as far way from the private sector as possible, and especially don't want Washington ever to impose additional costs on business are proposing something that would do all of these things.
 
Now, for those comments...
 
To Jim A who said "it simply isn't true that there was a large stock of Susan B's that made banks uninterested in ordering Sacageweas"...Sorry but you're misreading dollar coin history. The Mint did, in fact, produce a small amount of Susan Bs in 1999, but that was only to provide a bridge for -- as you said -- mostly the U.S. Postal Service until the Golden Dollar would be available. In fact, the banks had vaults full of them and, as they told the Mint officials in meetings I attended, were completely uninterested in ordering any other dollar coins. We actually tried to talk the banks into sending the Susan Bs back to the Federal Reserve so that they only had Golden Dollars, but they refused because they were going to have to pay for the shipping.
 
If you asked for a roll of dollar coins at a bank when the Golden Dollar was introduced, you had no way of knowing how many Golden Dollars vs. Susan Bs you would get. In fact, at first even the Fed, which had a huge stockpile of Susan Bs. refused to guarantee that it would only ship Golden Dollars to the banks when they ordered the coins.
 
To Treasury Geek who took issue with my statement that "a dollar coin actually costs the government and taxpayers a great deal if it's not actually used"...You only have part of the equation.  You're right, of course, that the government makes a great deal of money when a coin is monetarized because it costs way less to manufacture than the $1 it charges but you're wrong to think the money is simply pocketed and reduces the deficit.
 
Coins are actually purchased from the Mint by the Federal Reserve, which pays full price (in this case, $1) for the coins and then ships them when banks want more (The distribution is way more detailed but this is a good oversimplification). Yes, the Mint gets its money from the Fed, but the Fed only gets paid if banks want them; if the coins sit in the Fed’s vaults because no one wants them, the fed’s profits decrease. That may not seem like a big deal, but the Fed transfers a large percentage of its profits to the Treasury every year so lower profits mean less is transferred and the deficit is higher than it otherwise would be. That means higher interest payments and greater taxpayer costs.
 
A quick side story.  Based solely on its experience with the Susan B, the Fed initially decided to order only a relatively small number of Golden Dollars.  The director of the Mint, Philip Diehl, one of the most dedicated public servants I have ever met (and also my client at the time), was able to convince the Fed that it was seriously underestimating the demand and it agreed to increase its order by about 300 percent.  When demand turned out to be much lower than anticipated, the Fed was stuck with them.
 
To Greg Ransom (By the way, welcome back to CG&G), who suggested that all coins be downsized and existing coins be withdrawn...Not only would the cost of withdrawing coins have an enormous cost that would likely outweigh any budget benefits, but we know from direct experience with the Susan B (which was constantly used in place of a quarter) that there's no better way to create consumer and retailer anger than to have two coins of the same size.  Now if you want to make a number of coin collectors very happy and wealthy by making some existing coins very rare by withdrawing the existing coins from circulation...
 
To John Bohn and everyone else who said all we have to do is eliminate the dollar bill so retailers and everyone else would have no choice but to use the coin...Are you really suggesting that the federal government mandate that merchants incur an additional cost so that its own deficit would be smaller?  Remember...it costs a great deal more to a retailer to have coins instead of dollar bills delivered because of the additional weight.  The amazing thing to me is that anyone who claims tea party credentials, as the sponsors of the legislation that would create the new dollar coin do, would even consider promoting something that businesses would likely consider the equivalent of a new federal tax.
 
To Yet Another Budget Wonk (the one whose comment is titled "I have no idea how much Crane")...Creating a new dollar coin absolutely would be a corporate subsidy because the government would be mandated to make a purchase that it would not otherwise make and these would be sales of copper that otherwise would not occur.  The increased demand for copper by the government would also likely drive up the price for all buyers.  
 
Your calculations also completely underestimate the number of dollar coins that would be minted.  Yes, 350 million $1 coins were produced in 2010, but that was just to satisfy the anemic demand by collectors for the presidential dollar coins, the USPS, and the few transit systems around the country.  According to the U.S. Treasury, there are "billions" of dollar bills in circulation so if, as the legislation requires, they were withdrawn, the production of the $1 coins would have to increase dramatically.
 
 Is there any doubt that copper mine owners would be the huge beneficiaries when a market that barely existed suddenly grew to a size that previously was unimaginable because it was mandated by law?  Does anyone think it's a coincidence that the primary sponsor of this legislation is from Arizona, where much of the copper industry is located, or that the honorary chairman of the Dollar Coin Alliance is a former House member from that same state?
 
Finally, to I, Kahn O'Clast (great name by the way) and Nicholas Weaver who both said that the Golden Dollar was unpopular because it was the same size as a quarter...not so.  The law creating the Golden Dollar mandated that it have a number of features that actually made it remarkably easy to distinguish from the quarter.  The color was the most obvious, but the most important was that it had a raised smooth edge instead of the quarter's ribbed edge.  We actually did tests with people who were visually impaired and they had no trouble telling the difference between the two in a number of different scenarios (in pockets, lots of coins at the same time, etc.).
 
As I mentioned in my original post, the Golden Dollar actually was enormously popular with consumers when it was introduced.  The problem was that they couldn't get it because retailers, banks, vending machine operators, and others businesses hated it and refused to carry it.

 

Mint seigniorage off-budget, Fed seigiorage on-budget

"if the coins sit in the Fed’s vaults because no one wants them, the fed’s profits decrease... less is transferred and the deficit is higher than it otherwise would be. That means higher interest payments and greater taxpayer costs."

And that's exactly the point of the bill's subsection I quoted in my previous comment (H.R.2977, Sect 2(d)). Once the Fed buys a dollar coin, the sales revenue is paid into the off-budget Mint Public Enterprise Fund before being swept into TGA. Even then, the seigniorage proceeds are kept off-budget despite the fact the 1996 Mint PEF Act, concerns (1) a "public enterprise" revolving fund, (2) that's swept into TGA as a "miscellaneous receipt". I don't think there's anything else on Tsy's books falling in either category 1 or 2 that are kept off-budget, certainly not its largest current source of miscellaneous receipts, the Fed's own seigniorage rebate. Best I can figure its because FASAB SFFAS No. 7 hasn't been updated since 1996, the year the Mint PEF Act was enacted (as was as, incidentally, the broad as barn statute authorizing platinum coin seigniorage).

If Mint and Fed seigniorage was treated the same (after all, both flow from Fed to Tsy) then the on-budget net earnings from a $1 coin issuance would roughly balance the foregone on-budget net earnings from a $1 bill issuance. Indeed, would easily exceed it once you remember coins are debt-free money while Federal Reserve notes must be backed by interest-bearing Treasuries. Kudos to the Tea Partiers for including in their bill a clarification of the Mint PEF Act to underline this point.


Thanks for the great post.

Thanks for the great post. Responding to all the misreadings, tirades, amateur opinions like mine, etc. that any interesting or novel post provokes requires great fortitude. You are quite persuasive.

Still, imposing costs on merchants to reduce government deficits is normal. With all taxes, government receipts are less than private payments plus compliance costs. The dollar coin attracts the Tea Party because the returns to government might actually outweigh the private sector costs. You have shown this may be a false hope and would require careful study at least.

But if weight is such a problem, perhaps we should have the ten cent note? What is the proper transition between coin and paper denominations? It's hard to suppose one dollar is always the optimum, given how inflation changes values. Europe has a much higher cutoff for example at five euros.

On a different note, creating a government electronic microcurrency might be the best policy all round. Fifteen years of scattered private efforts have failed to overcome the network scale problem, and if they ever did would charge heavily for it.


not sure about long-run popularity with consumers

I found the history fascinating and I did enjoy having a few unusual coins from time to time. However, on a personal level I disliked the coin dollars for everyday use because they made my purse heavier and that's unpleasant. And would suspect guys don't enjoy having their pockets weighed down either?

In any case, yes this was ALREADY TRIED and has FAILED for the reasons Stan enumerates -- let's learn from experience. As this Onion story recommends: http://www.theonion.com/articles/historians-politely-remind-nation-to-ch...


Four points on coin demand:

I remember clearly the refusal of vending machine manufacturers to retool for the Sac Golden Dollar. Of all agencies....WMATA! What a slap in the face that was! But I still think that (1) had the dollar bill been taken out of circulation and (2) had Congress adhered to the original 1996 Commemorative Coin Reform Act we would have no problem today.

1. Why is it that Canada has successful dollar and two dollar coins and US does not? Canada took their low demonimation bills out of circulation. With the US paper bill still in circulation, of course, demand will be soft for the coin. My original comment did not accept your premise on the stockpile because the Tea Party proposal is to take paper out of circulation.

2. The other point I made that you did not address, was that the Presidential Dollar Coin caused today's stockpile. This was a quasi-numismatic program that set production minimums for the purpose of getting people to collect the coins. This sort of legislation should be abolished. If the Tea Party does nothing else, take care of this and our problem is solved. The Mint produces only 35 M non-Presidential dollar coins vs. the Presidential program.

Demand issues aside, the '96 coin act made it so that there would be no incentive to build a stockpile. Congress superceded that with bad legislation. This has nothing to do with whether the dollar coin is a good idea.


Thank you for responding to

Thank you for responding to my comment (re Crane and copper).

re impact of "dollar coinage" on the copper market. China imports 200,000 to 350,000 metric tonnes of copper per month. Current usage for US Mint coinage is roughly 0.02% (1/7500) of annual worldwide copper production. Doubling coin mintage would have a marginal impact of 1/7500.

I assume thus that you also oppose highway construction (asphalt industry subsidy), hiring any govt employees in DC (regional labor market subsidy), govt purchases of computers/furniture/telephones/fuel/etc (industry subsidy), all Pentagon purchases (arms industry subsidy), medical services (health industry subsidy), university research grants (tenured professor subsidy), "green jobs stimulus" (GE/windmill industry subsidy), etc. And doing everything possible to shrink government itself down to annual spending of $7.7 billion (1/7500 of the global economy) - $2 billion if we go all isolationist and fund ourselves solely from the US economy. That either makes you more magnitudes more libertarian than Ron Paul or we're dealing with a strawman here re "subsidy"/"impact".

But the real point re expanded mintage is how many extra valueless coins would you expect Americans to carry? Base metal coinage is always "small change". A $1 coin now is small change in our debasement era. All modern coin denominations are as significant as a penny/nickel was to WJ Bryan. Producing six base metal denominations to replace two does not mean people will carry more small change. It merely means we are parsing the insignificant.

The government will of course never consider reminting coinage that actually competes with bank-based money and allows people to choose how to make more significant purchases (for example filling a gas tank which used to require a couple of $1 coins).

And yes, I would agree that remonetizing silver (or gold - which never really circulates as coins but is used more for collateral/trade settlement) would affect the prices of those metals. Even though that would also eliminate TBTF bailouts, level the playing field for the working class (far fewer payday loans or heavy transaction fees), eliminate banking power over govt officials, provide people with an actual way to protest bank bailouts, eliminate much of the income inequality that inflation has caused since 1969, etc. And all the other effects that WJ Bryan understood (and more recently Hayek on the other political side) and which modern Americans do not.


An addendum: Canada has

An addendum:

Canada has converted from paper to metal for its $1 and $2 coins. It mints 40 million of each per eyar - 1 coin per Canadian per year. That is remarkably similar to our current normal run rate for $1 coins - 1 per American per year.

They did convert so they had a one-time big mint run. 10x more than "normal" in year one - followed by four years of extremely low mint runs (basically shut down) - followed by "return to normal". The average over those first four years was a bit over 2x normal run rate.

Even that one-time mint run (ie a pretty serious overestimate by the Canadian mint) would create one-time demand for 1/750 of that year's copper production. ie - insignificant even to influence a counter-cyclical floor price for copper in the next recession (starting in a few weeks). I don't see any evidence for any "subsidy" here.


I don't fight with a gold bug

I don't fight with a gold bug except on specific facts. But I think you got your Hayek wrong. In his book, "The Denationalisation [sic] of Money", he advocated private money, which he thought would be most logically based on commodity baskets, rather than gold.


Hayek reasons for proposing a

Hayek reasons for proposing a change (government abusing its money monopoly) are the same as Bryan's. Back then, govt deliberately restricted silver coinage even while govt was purchasing gobs of silver bullion at above market prices - and paying for silver bullion with gold note paper rather than with silver coins. All to support gold deposits at national-chartered banks which were required to use govt bonds as reserves (our version of gold standard).

The solutions are obviously different - but so were the abuses.


You're a HOOT, have a GREAT

You're a HOOT, have a GREAT weekend.


Not so? Remarkably easy??

Finally, to I, Kahn O'Clast (great name by the way) and Nicholas Weaver who both said that the Golden Dollar was unpopular because it was the same size as a quarter...not so.

Really??

The law creating the Golden Dollar mandated that it have a number of features that actually made it remarkably easy to distinguish from the quarter.

My local post office in Manhattan insisted on out handing dollar coins as change for purchases. Waiting in line (often waiting, waiting) one could hear one customer after another say, "No please, no dollar coins" and get back the answer "Sorry, policy, it's the money we have to give change with". Then it would be your turn to walk with a bunch golden Sacageweas.

Then a few days later you'd want to use one to buy something and not be able to find any of them. Where'd they all go???

Well, I asked the owners of the deli located right across the street from the Post Office how they felt about the dollar coins, figuring they had to see a lot of them.

Their response: "Love them. People leave them on the counter as quarters all the time when buying newspapers, coffee, candy, and walk off before we can give them change. Keep making them!"

But, hey, if this couldn't have happened because the law said it wasn't supposed to, I'm sure it didn't.

After all, the government experts responsible were assuring it didn't were also responsible for assuring adequate demand for the dollars, and they certainly did that, right?

BTW, if confusing dollar coins with quarters wasn't a problem to start with, why did the law make a special point of naming it as an issue to be fixed?

And why was it that "The Mint took great care to create the coin with the same size, weight, and electromagnetic properties as the Anthony dollar", as Wikipedia puts it? When people quickly reaching for change in their pocket primarily distinguish coins by their size and weight? And they knew that people confusing Anthony dollar with quarters by their size and weight was a problem -- just as the law stated.

Of course, we know why -- so the new coins would still fit the old vending machines, and the machine owners wouldn't have to spend a few bucks modifying them. But how did *that* help solve the problem, instead of blocking them from addressing it in the meaningful way? Though maybe it indicates the convenience of the vending machine people was concern #1 during the entire course of events and that was the *real* problem.

Who was the genius who decided the Anthony dollar should be so close to a quarter in size and weight to begin with?

BTW, after reading the arguments for more dollar coins I agree that they combine several different levels of foolishness, dreams of seigniorage or not. But that doesn't change the problems with the old ones.


Jim...Anecdotes Don't Prove A Thing

Sorry Jim, but while you confidently cite an insignificant number of anecdotes to prove your point, I had access to multiple statistically significant national samples of consumers to judge sentiment.  I know from the scientifically valid work that was done at the time that the coin was actually very popular with consumers.  They just couldn't get it.  It was a classic distribution issue.

And you're quoting Wikipedia as an authoritative source?  Again, I know from the research done at the time that a dollar coin the size of one of the old Eisenhower dollars -- which was larger than a quarter -- would have been a huge flop from the start both because people didn't want to carry them and businesses wouldn't pay to have them delivered.  The only ones who would have benefited were grandparents and the tooth fairy (along with the copper mine owners).

The genius you asked about was Congress, which also was the one than mandated in the law that the coin be the same weight, size, and electromagnetic signature as the Susan B.  Not surprisingly, it was the copper mine owners and the vending machine operators that pushed the legislation.

One more correction: You're absolutely wrong when you say that people primary distinguish coins by size and weight.  Weight has nothing to do with it at all.  And while size is clearly important, the other features of the Golden Dollar, especially it's raised smooth edge made it very easy to distinguish by feel from a quarter.  The Mint did the right thing by working with a number of organizations that represent the visually impaired to make sure these features would work as needed and then did extensive testing to make sure that it actually worked as planned.




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