Dollar Wars

by Elaine Schwartz    •    May 1, 2012    •    597 Views

By Mira Korber, guest blogger.

Do you have a coin jar? I do. It is home to my quarters for NYC parking meters.

Now, imagine if the dollar bill didn’t exist, but a dollar coin did. Coin jars would probably hold more than just quarters.  Why? The “coin jar effect.” But before we talk about that, let’s look at the background story.

1. Sens. Tom Harkin (D) 0f Iowa, and John McCain (R) of Arizona are leading the charge to vanquish paper dollar bills from existence. Calling coins the more cost-effective (and vending machine friendly) option, they have proposed a bill eliminating paper bills in the one dollar denomination.

Worth noting: Harkin and McCain both hail from states that would profit from producing coins instead of bills.

2. Douglas Crane and “Americans for George” oppose the coin groupies, and say that paper dollars are better.

Also worth noting: Mr. Crane gives the behemoth paper company “Crane and Co.” its name. Said company produces the paper on which dollar bills are printed.

Here’s the funny part: both sides point to the same Government Accountability Office report. And within the report, you can see that coins last about 30 years and each costs about 15 cents to make, which is .5 cents/year. Each bank note lasts about 4.5 years and costs about 2.7 cents to make, which is .6 cents/year.

Enter the “coin jar” effect. People simply don’t like carrying around a pocket of jangling change. So they put it into a jar, where it either sits idly, or perhaps feeds a few meters. For example, in Canada and the UK, the government had to produce 50% more one dollar coins than it did with dollar bills, simply because people stuffed their coins into jars and didn’t use them.

Paper starts looking more attractive, yes?

But here’s another twist: the very same GAO report recommends switching to coins, which would yield $4.4 billion net benefit to the government over 30 years, thanks to “seignorage.”

Seignorage is extra profit the government makes by putting more money into circulation. By buying bonds, the Fed releases its dollars into usage. Then, those bonds accumulate interest, which outweighs the cost of producing the dollars; there’s the seignorage, or extra money turned over to the government. Returning to the “coin jar effect,” more coins mean more interest, which means more seignorage and government profits.

According to Wake Forest University economist Robert Whaples, “The government can make profits in all sorts of bad ways.” He (and other economists) think seignorage is one of these “bad ways,” because here, an individual’s loss is government’s gain.

So, according to the economists, it looks like dollar bills “win” the bills/coins war.

The Bottom Line: Finally, this lobbying war over coins vs. bills points to one question: how should the US government make money? The “coin jar effect” doesn’t seem to hold the answer.

Most source material for this post can be found on NPR – here and here. The Washington Post pro-coin editorial is here. And the GAO report, here.

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