New dollar coins tomorrow

I've never understood why the US hasn't been able to profit by other countries' experience in its numerous half-hearted attempts at winning public acceptance of a one-dollar coin:

Eisenhower dollar: too large.
Susan B. Anthony dollar: confusingly similar to the quarter.
Sacagawea dollar: same size as the Susan B., but gold-colored and with a smooth edge -- still not distinctive enough.

And now, starting tomorrow, we'll have the Presidential dollars, which will again follow in the same rut. Why couldn't we have had something like the British "round pound", which from the beginning was made substantially thicker than any other British coin in circulation, yet small enough in diameter not to be too large overall? And when are we going to get around to getting rid of the one-dollar bill?

The New York Times has more on the new dollar coins here, including this:

The American dollar is now one of the smallest-value banknotes remaining in circulation in the world. Thirteen European nations use one- and two-euro coins, worth $1.32 and $2.64 respectively, and smallest bill there is five euros, or $6.60. Japan circulates a 500-yen coin, worth $4.14, with a smallest bill worth 1,000 yen, or $8.28. Most other Western nations have similar value levels for their largest coins and smallest bills. The most widely used coin in the United States, of course, is just 25 cents.

Paradoxically, Sacagawea coins circulate widely in countries like Ecuador that use the American currency.

Very interesting, that. I wonder if one-cent coins also circulate there?

The Times article really drops the ball with the following paragraphs, though:

Dollar coins cost about 20 cents each to make, but last for up to 30 years; bills only cost about 4 cents each, but need to be replaced every 18 to 22 months.

The cost of money is more than just production, however. Storage and handling must be factored in, as well as the different kinds of seignorage, or profit to the government from putting currency into circulation. When a dollar coin is issued, the Mint “earns” the difference between its production cost and face value — now about 80 cents. If a collector saves the coin, another must be issued to replace it. A banknote, since it is redeemable, counts as a government liability, and the Federal Reserve has to back it by buying securities, which earn interest. According to the Fed, there are now about 8 billion dollar bills in circulation, so that interest income is considerable. Coins do not yield such income.

Where to begin with such a mess? A government does profit when a coin is taken permanently out of circulation, but it profits in the same manner from the withdrawal of banknotes (fewer of them may be retained by collectors, but many more are accidentally destroyed). At the same time, a government also profits from its money that remains in circulation, coins and banknotes alike, constitutes in effect an interest-free loan from the currency holders to the currency issuer. The statement, "Coins do not yield such income", is flatly wrong. For more, see the Wikipedia entry under "Seigniorage".

ADDENDUM: For those still attached to the one-dollar bill, note that we did just fine back in 1970 when our smallest banknote (that same dollar bill) was worth a bit over $5 in 2006 dollars (per the Consumer Price Index). In fact, it's been a very long time since we had any bills in circulation smaller than one dollar (the last fractional currency was issued in 1876). Some more CPI-based past valuations of a dollar bill in 2006 dollars: 1900, $24.77; 1920, $10.06; 1950, $8.37; 1960, $6.81.

Note that this also bears upon the fate of the penny, which is now worth a fraction of the lowest-denomination coin historically in circulation. The US hasn't struck half-cents since 1857, and the last US half-cent postage stamp was issued in the mid-1950s. That half-cent back then, though, had the purchasing power of a bit under four cents today.

Posted by David on February 14, 2007 7:52 PM