The Terrible Case for Scrapping the $1 Bill

Commentary about business and finance.
Dec. 3 2012 4:31 PM

Save the $1 Bill!

A new GAO study says we could save billions by replacing dollar bills with coins. Don’t believe it.

Stack of coins.
Hundreds of presidential $1 coins with the image of Abraham Lincoln are poured out of a black top hat during an introduction event in 2010. It wouldn't really save money to eliminate the $1 bill and replace it with coins.

Photo by Chip Somodevilla/Getty Images.

A Government Accountability Office report last week concluded that the American government could save $4.4 billion over 30 years by eliminating paper dollar bills and replacing them with coins. This study essentially repeats an analysis that was performed just last year and prompted a hearing from the House financial services committee, suggesting that committee chairman Spencer Bachus has a bee in his bonnet about ridding us of the greenback. And what red-blooded Alabama conservative wouldn’t want to cut government spending? Dollar-bill elimination also has a certain cachet among liberals, since emulating European practices often has prestige on the left. Meanwhile, media outlets that cover the issue tend to focus on it as a question of savings vs. convenience. Even skeptics like veteran budget wonk Stanley Collender say the problem is that actually eliminating the paper bills isn’t credible, so the savings will never materialize “no matter how much fiscal sense it might make in theory.”

But this is all bunk. Changing coinage doesn’t save any money at all and the debate over these illusory savings, though small in the scheme of things, reflects the fallacy-ridden manner in which federal budget issues are debated.

The only sentence that matters in the whole GAO report is that the financial benefit is “entirely attributable to ‘seigniorage.’ ” That is a fancy word deriving from the French word for a noble lord. The idea is that you can take such-and-such amount of gold or silver, melt it down, cast it as a little circle, and then stamp a number on it. Then you go out and use the coins to hire people to do stuff for you. If the numbers you stamp on the coins reflect the exact value of the precious metals inside, then manufacturing the coins is a money-losing proposition. But if you stamp a number on the coins that’s somewhat higher than the value of the metallic content, then you’re making a profit. Of course, people might feel ripped off by your coin scam. But then again, you are the lord of the castle, so if they complain too much you can have them killed.

Advertisement

All of this history has only a tenuous relationship to modern currency. Seigniorage largely went out the window when currency stopped being made of precious metals and instead became claims on precious metals.

A $5 bill obviously doesn’t cost more to manufacture than a $20 bill, but in the classic days of the gold standard both were really just promissory notes. The bills themselves were stand-ins for gold, and the gold cost exactly what it cost. Governments in this paradigm suffered since the manufacture of bills cost something, and the bills added no monetary value that wasn’t already present in the reserves of precious metals. But in the wake of World War II, essentially all rich countries have moved to a system of pure fiat money. Dollars are valuable because other people think they’re valuable. The fact that the government will throw you in jail unless you pony up some dollars for tax purposes helps keep expectations coordinated.

In a world of so-called fiat money, seigniorage runs rampant. Basically worthless pieces of paper are printed with certain magic figures, and suddenly they’re valuable. Coins generally cost more to produce than dollars, so at first blush replacing dollar bills with dollar coins would seem counterproductive.

The advantage of coins turns out to be that the GAO thinks people won’t use them. Dollar bills circulate rapidly through the economy, accumulating wear and tear and needing to be replaced. Coins are much more durable. More importantly, they’re more likely to fall between the sofa cushions and be forgotten. Or to pile up in a sock drawer somewhere. I have a Ziploc bag in my dresser full of random coins. Every year or so I take the bag down to the supermarket and put it in one of those change machines. But for the year those dollars’ worth of quarters and dimes are a kind of interest-free loan to the government. Thus, the federal government’s fiscal position is improved.

If improving the federal government’s fiscal position by creating money that people forget to use sounds silly, you’re right on. But there’s an important general lesson here: namely, that the government’s fiscal position per se is not that important a question.

The fundamental issue should be the volume of real resources available to society, not an accounting math problem. Like the argument over eliminating the dollar bill, people sometimes argue that the government is wasting money minting pennies since their seigniorage value is so low. The better argument is that pennies are a waste of metal and people’s time—real things are consumed to create coins with little utility. Eliminating dollar bills would “save money” but inconvenience people and not make any new resources available.

Evaluating proposals to eliminate pennies or dollar bills in terms of their fiscal impact is very misleading. After all, once you consider the seigniorage issue for a while, you’ll swiftly see that the government can’t “run out of money” at all. The government makes the money! The problem with something like a projection of out-of-control Medicare costs can’t actually be about a shortage of money. It’s about finding the hospitals and doctors and MRI machines to provide elderly people with the health care services they’ll want, or about funding a way to say no to them. This is a harder problem to think about than just making some equations line up, but it’s the much more important one.

TODAY IN SLATE

History

The Self-Made Man

The story of America’s most pliable, pernicious, irrepressible myth.

Does Your Child Have Sluggish Cognitive Tempo? Or Is That Just a Disorder Made Up to Scare You?

Mitt Romney May Be Weighing a 2016 Run. That Would Be a Big Mistake.

Amazing Photos From Hong Kong’s Umbrella Revolution

Rehtaeh Parsons Was the Most Famous Victim in Canada. Now, Journalists Can’t Even Say Her Name.

Television

See Me

Transparent is the fall’s only great new show.

Doublex

Lena Dunham, the Book

More shtick than honesty in Not That Kind of Girl.

What a Juicy New Book About Diane Sawyer and Katie Couric Fails to Tell Us About the TV News Business

Rehtaeh Parsons Was the Most Famous Victim in Canada. Now, Journalists Can’t Even Say Her Name.

  News & Politics
Damned Spot
Sept. 30 2014 9:00 AM Now Stare. Don’t Stop. The perfect political wife’s loving gaze in campaign ads.
  Business
Moneybox
Sept. 30 2014 10:44 AM Bull---- Market America is overlooking a plentiful renewable resource: animal manure.
  Life
Atlas Obscura
Sept. 30 2014 10:10 AM A Lovable Murderer and Heroic Villain: The Story of Australia's Most Iconic Outlaw
  Double X
Doublex
Sept. 29 2014 11:43 PM Lena Dunham, the Book More shtick than honesty in Not That Kind of Girl.
  Slate Plus
Behind the Scenes
Sept. 30 2014 10:59 AM “For People, Food Is Heaven” Boer Deng on the story behind her piece “How to Order Chinese Food.”
  Arts
Brow Beat
Sept. 30 2014 10:48 AM One of Last Year’s Best Animated Shorts Is Finally Online for Free
  Technology
Future Tense
Sept. 30 2014 7:36 AM Almost Humane What sci-fi can teach us about our treatment of prisoners of war.
  Health & Science
Bad Astronomy
Sept. 30 2014 7:30 AM What Lurks Beneath the Methane Lakes of Titan?
  Sports
Sports Nut
Sept. 28 2014 8:30 PM NFL Players Die Young. Or Maybe They Live Long Lives. Why it’s so hard to pin down the effects of football on players’ lives.