Why the Gov't Keeps Making Dollar Coins
By: Brian O'Connell

NEW YORK (BankingMyWay) — A cynic might say the dollar coin fiasco (in which the Treasury has minted a bunch of coins that remain largely uncirculated) is exactly why the federal government should never be in the marketing business: The coins are mounting up in government warehouses across the country as consumers have made it clear they prefer paper over metal for their dollar currency. So why does Uncle Sam keep making them?

The answer is surprising – and also surprisingly simple. In an age where every penny in the country’s budget is under increased scrutiny, the government is pushing the dollar coin in hopes that it will day take the place of the venerable dollar bill and save the country billions in the coming decades in currency production costs.

First of all, coins are cheaper to produce and manage than paper currency. According to the Government Accountability Office, replacing the $1 dollar bill with a $1 coin could save taxpayers $5.5 billion over 30 years – or about $184 million per year based on the present value of future net benefits. Other countries have already taken that step, including the U.K. and Canada.

The GAO also says that coins are more durable than paper currency, and therefore won’t need to be replaced as much. The implication is clear: The government can’t afford to maintain $1 bills when a lower-cost alternative is so easily within reach.

“During a time when Republicans and Democrats are both looking for ways to trim the budget, this is simply a good, common-sense proposal,” says Shawn Smeallie with the Dollar Coin Alliance, a Washington, D.C. small business advocacy group in favor of the change. “Every year the government is literally throwing money away on an outdated, anachronistic currency system.”

Perhaps in recognition of that profligacy, the U.S. Mint keeps pumping out those dollar coins, even though consumers aren’t exactly convinced that “coins over bills” is a good idea. A 2005 law that mandates that regional Federal Reserve banks must keep ordering $1 coins – whether the public uses them or not – has caused a huge backlog of dollar coins mounting up in Fed warehouses across the country.

According to the Fed, the nation’s reserves are holding $1.2 billion in dollar coins, and that number should grow to $2 billion by 2016. Ironically, a Fed report says that the additional storage needed to house the coins cost taxpayers even more money, “with no perceptible benefit to the taxpayer.”

The problem is so bad, government officials say, that the Fed branches are running out of storage room. “At certain times, that vault will be full and we have to look for other Fed facilities ... that have more space," says Dave Beck, senior vice president at the Federal Reserve Bank of Richmond, in comments to the Baltimore Sun. “[And] that’s just a small portion of what there is nationwide.”

The government isn’t giving up its efforts to get Americans to embrace the dollar coin, even though a 2008 Harris survey says that 76% of consumers prefer dollar bills.

Consumers may wind up giving up on physical currency anyway as they increasingly turn toward mobile payments and debit cards to conduct their financial business, but for now, paper trumps metal – even if Uncle Sam isn’t happy about it.

For more on the biggest threat to the dollar bill, check out MainStreet's examination (with infographic!) of How Americans Use Their Debit Cards!

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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