Daniel L. Thornton

English

Research Papers in Economics

December 2000
MonetaryTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
The Golden Dollar: 
The Early Evidence
Earlier this year, the United States introduced its
eighth dollar coin.  The new dollar coin is gold in
color and bears the image of Sacagawea—the only
woman on the Lewis and Clark expedition.  Proponents
of the dollar coin point out that the widespread use 
of dollar coins would result in considerable savings to
the government.  On average, coins have a projected
life of 30 years, compared with about 18 months for
the dollar bill.  Although dollar bills cost about 3.5
cents to produce, compared to 12 cents for the dollar
coin, the relatively short life of dollar bills make them
more expensive in the long run.
Dollar coins, however, have never found wide 
use for day-to-day transactions in the United States.
One possible explanation for this is simply that people
find coins inconvenient relative to paper currency.
Accordingly, dollar coins would replace notes only if
the public has no choice.  Supporters of this explanation
point out that high-denomination coins circulate only
in countries that discontinued issuing the corresponding
denomination notes.
Some people argue that dollar coins and dollar
bills can coexist, and they attribute the failure of 
previous dollar coins to circulate widely to other 
factors, such as physical characteristics of the coins.
The Eisenhower dollar was said to be too bulky and
the Susan B. Anthony (SBA) dollar too difficult to
distinguish from the quarter.
The golden dollar was designed to avoid many of
the supposed impediments that kept previous dollar
coins from circulating.  The coin is the same size as
the quarter, but is gold in color and, unlike the Susan 
B. Anthony dollar, is easily distinguished from the
quarter by sight or touch.  Furthermore, the new 
coin was specifically designed to have the same 
"electronic signature" as the SBA dollar so that the
vending machine industry would not have to retool
their machines.
Despite a $45 million ad campaign, of the $1.1 
billion dollar coins produced through September 30,
2000, approximately half of the new coins remain in
the vaults of Federal Reserve Banks and the U.S.
Mint as of October 20, 2000.  The other half are in
"circulation."  It appears, however, that many of these
are being hoarded, because few of the coins are
observed in day-to-day transactions.
Is the golden dollar more successful than the SBA
dollar, which was introduced in 1979?  It depends 
on how you measure it.  Of the $682 million SBA
dollars produced in 1979, only about $275 million
were in circulation that year.  In absolute terms, or on
a per-capita basis, the initial year of the new golden
dollar has been much more successful.  Relative 
to the initial year’s nominal GDP or initial year’s 
currency component of the money supply, however,
the golden dollar has been less successful.
Some people argue that the new golden dollar will
not circulate simultaneously with the dollar note until
the demand by those who want to hoard the coin is
met.  This argument, however, is at odds with the fact
that U.S. currency is supplied elastically.  That is,
currency is supplied to meet the public’s demand.  
If individuals want dollar coins (or two-dollar bills,
fifty-cent coins or any other denomination currency)
they simply request them from their bank.  Banks, in
turn, go to Federal Reserve Banks whose job it is to
meet demand.  In the final analysis, denominations 
of money fail to circulate because of lack of demand,
not because of lack of supply.  The fact that, to date,
the new dollar coin has not been widely used in 
day-to-day transactions—even though it avoids the
alleged physical impediments to the success of previous
dollar coins—suggests that, given a choice, the public
prefers dollar notes to dollar coins.
--Daniel L. Thornton

The golden dollar: the early evidence

http://research.stlouisfed.org/publications/mt/20001201/cover.pdf

The golden dollar: the early evidence

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Research Papers in Economics