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The subcommittee met, pursuant to call, at 9:30 a.m., in room 2222, Rayburn House Office Building, Hon. Michael N. Castle, [chairman of the subcommittee], presiding.

Present: Chairman Castle; Representatives Manzullo, Kennedy, Flake, Bentsen, and Jackson. Chairman CASTLE. The Subcommittee International Monetary Policy will come to order.

Lucas, Paul,

on Domestic and

This is an oversight hearing on United States coin and currency production. I am pleased, as always-and I worry about some of the rumors about where he may be going to be joined by the distinguished Ranking Member, Mr. Floyd Flake. He and I will be making opening statements. If other Members do come, they are certainly welcome to submit their opening statements, but in order to get to the witnesses, we will have just the two of us speak here. Let me just also announce at the beginning, because of the desire of various people here, including the two of us, if possible, to attend the issuance of the first gold coin to Rachel Robinson and the Robinson family at the Treasury at 11:00, we are going to break promptly at 10:45. Those of us who are going to this ceremony will make a beeline-I mean, literally, a beeline-to cars, jump in cars, and return as soon as we can. But we are scheduled to resume, right now, at noon, I believe, is the bewitching hour.

That may be a little complicated for some of the witnesses, but we are going to go as hard and fast as we can, subject to votes or whatever may happen between now and 10:45, and then make that move quickly to go over to Treasury.

I will say that this is being complicated by the fact that we may have votes on the floor during that same period of time. So, I am not exactly sure what Mr. Flake and I-we are going to have to make some decisions, I suppose, before it is all said and done.

The production of our Nation's money is the subject of today's hearing. The exchange of money affects all Americans in their daily lives. Everyone has an opinion on the convenience and importance of the penny, the $1 bill, or the new look of the $100 and $50 notes. Public acceptance of, and confidence in, our coins and currency is critical to the proper functioning of the U.S. economy and, of course, the world economy.

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The creation of money is one of the fundamental duties of Congress, as outlined in the Constitution. In addition to the importance of money to the functioning of our economy, the manufacture of our money is a major business and a significant Government monopoly. It earns a profit of over $20 billion each year, the difference between what it costs to print paper and mint coins and what the Federal Reserve System credits to the Treasury and then distribútes to banks.

While these funds are not available to be spent by Congress, for which we can probably all thank God, in the same way that ordinary tax revenues are spent, they do make it possible for our Government to borrow less and limit the growth of the debt.

Overall, the United States Mint and the Bureau of Engraving and Printing, BEP, do a good job of producing our coins and currency. However, there are aspects of their operations that raise questions, and, equally as important, this subcommittee is concerned about whether the Treasury Department is devoting adequate attention to the future demands for coins and currency and for ensuring that all aspects of these basic and vital Government functions are being managed properly. They cannot be run on autopilot by the Department of the Treasury.

The purpose of this hearing is to discuss several specific issues at the Mint and the BEP and Treasury's involvement in these issues. Among the topics we would like to review today are the following:

The U.S. Mint's accounting system for commemorative coins. The subcommittee is concerned that losses in the latest United States Olympic Coin program may have been understated, and, in addition, we would like to know what steps are required to ensure that we have accurate accountings of all future commemorative coin programs;

The Treasury's management of the BEP's proposal to promote competition for the procurement of special security paper for our currency. The subcommittee is concerned that the procurement proposal was modified based on political, rather than policy, considerations;

The focus of the Treasury on the long-term planning required to assure that our currency and coin production can meet future demands and that the capacity of Mint and BEP facilities will be fully and efficiently utilized;

The Department's position on legislation passed by Congress to create a new circulating commemorative quarter. An independent study requested by the Department found that such a program would have good potential for success. The subcommittee is concerned that the Department consider all aspects of the proposal with an open mind, in a fair and comprehensive manner.

Serious questions face both the Mint and the BEP about what kinds of money they will produce in the future. Both money producing bureaus are in danger of being left with a vast overcapacity situation should they implement plant acquisition plans based on the current product mix and then find themselves in a radically changed environment.

Precedent for this kind of development lies with the BEP postage stamp printing operation. From a 100 percent monopoly before the

introduction of private sector competition and e-mail, BEP production has now fallen to about a 50 percent share of a steadily declining market for postage stamps. In addition, the Washington, DC. BEP facility is outdated and deteriorating, and its replacement could exceed $300 million.

A $1 coin replacement for the paper Federal Reserve NoteFRN could save $500 million per year for 30 years, and these savings will continue to tempt Congress as the purchasing power of the note declines.

If the BEP no longer produces stamps or the $1 FRN, all production could comfortably be consolidated at the agency's modern Fort Worth facility.

The Mint has been producing coins for several years at a rate of more than 20 billion per year, and their strategic plan calls for being able to produce 24 billion coins per year by the year 2002. However, demand has suddenly slackened in the current fiscal year, with no letup in the economy to explain it. Growth projections may have to be radically redrawn.

Complicating this scenario is the fact that more than two-thirds of the coins produced in the recent past have been 1-cent coins that the GAO last year found to be marginal in profitability and in economic utility, with over two-thirds of production simply not circulating.

Many things could account for the changes being experienced in coin demand, and they could turn out to be transitory blips on the growth chart. Still, the private sector is placing more and more coin-counting machines that take accumulations of small change off the consumer's hands for a fee and return the coins directly back into circulation. At the same time, use of debit cards and credit cards could be taking a larger share of purchases that formerly were made with cash.

The only thing that is perfectly clear is that change is occurring. In this environment, it is more important than ever that a comprehensive management strategy be thought out and implemented by the Department. Both bureaus should be managed in a coordinated manner rather than pitting them as competitors for resources and attention. This is important with the present product mix and could be even more urgent if there is any idea of creating legal tender electronic money in the future.

We will hear first today from the General Accounting Office, whose investigators have scrutinized the operations of the Mint, the BEP, the Treasury offices, the Director of Operations, and the Federal Reserve System that constitutes the main customer for tangible forms of money in response to marketplace demands.

Michael Motley, GAO Associate Director for Business Operations, will address the interrelationships between the Mint and the BEP and the Department of the Treasury. Theodore Barreaux, Counselor to the Comptroller General, will address the particular accounting problems presented by the most recent Olympic commemorative coin program. Ted Allison, an expert on money and a key advisor to the Fed Board of Governors, is present to answer any questions on the interaction between the Fed and the money production facilities.

We are honored to have the Treasurer of the United States, Mary Ellen Withrow, with us, and she will be followed by Phil Diehl, Director of the Mint, and Larry Rolufs, Director of the BEP, who will present testimony on their respective bureaus and outline how they are positioning their organizations for the future.

Finally, we are fortunate indeed to have the presence of the Treasury Assistant Secretary for Management and Chief Financial Officer, George Muñoz, to whom both bureaus and the Treasurer of the United States report. Mr. Muñoz has been mentioned by the White House as a potential nominee to head up the Overseas Private Investment Corporation, and we are grateful that he was able to be with us today to discuss his management of the manufacture of money.

Let me at this time turn to Mr. Flake for his opening statement. [The prepared statement of Hon. Michael N. Castle can be found on page 62 in the appendix.]

Mr. FLAKE. Thank you very much, Mr. Chairman. And as you have already indicated, we will recess at 10:45 to go to the Treasury. Therefore, I will not use this time for an opening statement but, rather, to give a heads-up on the persons who come to testify before us in relationship to questions that will be forthcoming later

on.

And these questions for the General Accounting Office: Can past Treasury studies on consolidation of the Mint and the BEP, as well as the placing of BEP under the Federal Reserve, be relied upon by Congress as authoritative and a political analysis can be made on these issues?

In addition to the capital investment needed for a new $1 coin, what else would be needed for a successful conversion from a $1 note?

And third, did you make any observations on capital planning at the Mint and the BEP, and do their capital investment plans reflect possible future changes for the denominational mix of coins. and currency?

For the Mint Director: Congress requires the Mint to make and sell commemorative coins to support civic, philanthropic, and national business organizations. The population of coin collectors is dwindling, and we would like to know how the Mint intends to address that issue, as well as, can the Mint provide quarterly revenue and cost information on every numismatic program under the managerial cost accounting concepts and standards from fiscal year 1997 forward?

For the Bureau of Engraving and Printing: The unit cost of the new anti-counterfeiting features added to the new $100 note. Is it economically feasible to add these features to the $20, $10, $5, and $1 notes?

Second, if the $1 note is not eliminated and BEP continues to produce postage stamps, what would a replacement for the Washington plant cost? If the $1 note was eliminated and you no longer produced postage stamps, what would a replacement for the Washington plant cost?

And last, what opposition is there to eliminating the $1 bill, replacing it with the $1 coin, thereby saving the Federal Government, by some estimates, $456 million a year?

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For the Assistant Secretary of the Treasury: In the GAO testimony, they state that eliminating the $1 note could substantially reduce the need for a Washington, DC., production plant. Would such a situation be desirable? Do you see advantages or disadvantages? And does the Treasury have any program to routinely examine the operations? Could they be done less expensively in the private sector? Do you think such a program would be appropriate for the Mint and the BEP? If so, why hasn't one been initiated?

These will constitute my basic questions, and when we get to that period, I would hope you will have thought about them.

And I yield back, Mr. Chairman, so that we might expeditiously move forward with this hearing.

[The prepared statement of Hon. Floyd Flake can be found on page 65 in the appendix.]

Chairman CASTLE. Thank you, Mr. Flake.

We are joined by Mr. Jackson and Mr. Kennedy.

I have already indicated, before you all arrived, that you are welcome to submit statements. We are going to try to go directly to the witnesses.

And, by the way-you may not have heard-we are going to break at 10:45. The Jackie Robinson coin is going to be issued at the Treasury at 11:00. However, we are going to be voting around the same time. So, it could be complicated before it is all said and done. So, we are going to try to move forward as expeditiously as

we can.

[The prepared statement of Hon. Jesse L. Jackson Jr. can be found on page 66 in the appendix.]

Chairman CASTLE. Mr. Motley, please.

STATEMENT OF MICHAEL E. MOTLEY, ASSOCIATE DIRECTOR
FOR GOVERNMENT BUSINESS OPERATIONS, GENERAL
ACCOUNTING OFFICE, ACCOMPANIED BY JOHN BALDWIN,
ASSISTANT DIRECTOR, GENERAL GOVERNMENT DIVISION
Mr. MOTLEY. Thank you, Mr. Chairman.

I will try and be brief. I would like to ask that my entire statement be submitted for the record, and I will summarize my statement this morning.

Chairman CASTLE. Without objection. Anyone's full statement may be submitted for the record who testifies.

Mr. MOTLEY. First, I would like to introduce John Baldwin, to my right. John is an Assistant Director in the General Government Division and has worked in areas related to money production since the early 1990's when we issued our first report on the $1 coin.

Mr. Chairman and Members of the subcommittee, I am pleased to be here today to discuss decreasing the cost of producing the Nation's money. My testimony addresses four areas: The effects of decisions on the denominational mix of coins and currency on capital investment plans and production costs; possible structural changes in the entities involved in producing money; additional contracting out of money production activities; and, the planning of money production.

In considering changes to the denominational mix, it is important to note that the Federal Reserve does not expect the demand

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