What would a rational US policy on the circulating medium of exchange look like? What notes and coins should be in circulation? I think it’s time to start thinking about narrowing the range in order to reduce costs (and increase convenience).
One obvious way to reduce costs would be to follow countries including Australia and Canada and in replacing paper banknotes with plastic (polymer) banknotes. In a paper on this called “Production Costs, Seigniorage and Counterfeiting: Central Banks’ Incentives for Improving their Banknote Technology” from October last year, Forum friend Leo van Hove, together with co-authors Bouhdaoui and Bounie, calculates that the adoption of such notes would entail a drop in seigniorage revenue of roughly 0.1% (because of higher initial production costs) but would halve the annual replacement costs for banknotes, resulting in net savings of $374m per annum.
Using data from 1998, they find that the biggest cost saving would come from moving to a plastic $20, whereas the replacement of the $100 bill only becomes profitable after accounting for counterfeiting because without the reduction in counterfeiting the decrease in seigniorage revenue exceeds the savings in replacement costs. It’s easy to see why: $100 bills are not used to support commerce, so they don’t circulate in the US (I’m sure the majority are outside the US and will never be repatriated) and therefore don’t get worn and returned for replacement, whereas $20s are still used in retail.
In fact, I’ve noticed that more and more places in the US will no longer accept bills greater than $20 anyway, so if the US government could be persuaded to give up the seigniorage income from the $100 (in return for much reduced tax evasion and such like) then it would surely be sensible to move the $5, $10 and $20 to plastic and abolish the $50 and $100.
The $1 is another case entirely. The US is crazy to continue producing $1 bills as well as pennies that cost nearly two cents to make. I say scrap both. Give up on the penny and make the $1 coin work (which it would do if there were a deadline for withdrawing the bills). Leo and the chaps note that the “golden dollar” coin costs six times more to produce than the $1 bill (but lasts 14 times longer) ). If the government were to completely replace the $1 bill with the coin then it would save $116m per annum. This is interestingly slightly less than the estimate of $119m per annum it would save by going to plastic $1 bills.
Maybe we need a new, technology-neutral Durbin-like amendement to reduce the cost of payments in the US, but this time one that doesn’t discriminate in favour of cash at the expense of more efficient alternatives and imposes cost-reduction targets on the currency. Incidentally, just to show how up-to-date I am with my finger on the pulse of money, after typing in the above, I settled down and found myself reading this…
In American, the questions are still more pressing, involving the return to specie payments, the future regulation of paper currency, its partial replacement by coin, and the exact size and character of the American dollar.
What hip and trendy blog did I find this on? Actually, it’s from “Money and the Mechanism of Exchange” by William Stanley Jevons, published in 1875. Money’s a conservative topic.
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