January 11, 2005
The Fate of One-Dollar Coins in the US: Counterpoint

I am largely skeptical of claims that the market has failed to adopt this or that efficiency-enhancing improvement because of “network externality” problems. Proponents of the problem’s relevance often illustrate it (as in the dollar coin article Robert Lawson cites below) with the example of fax machines, but note that fax machines did in fact manage to gain widespread adoption without subsidies or mandates. (For more on the rarity of network externality tragedies, see the debunking by Liebowitz and Margolis.)

It is true that the dollar coin hasn’t caught on in a big way, and probably won’t unless the dollar bill is withdrawn. But the reason need not be a network externality problem. It could instead simply be that for most of us the dollar coin, being heavier and bulkier, is less convenient to carry around. I don’t know about you, but after a week in London or Belfast I’m usually bemoaning the weight and bulk of the pound coins that have accumulated in my pockets. People who feel differently are free to adopt the dollar coin for their own use. Why deny the rest of us our preferred option?

The fact that the dollar coin costs the government less to maintain (because a dollar bill wears out in 12-18 months) doesn’t mean that forcing it into use would be efficient. Not if its benefits to the public (net of carrying costs) are lower, too.

But maybe I'm wrong; maybe the benefits of the one-dollar bill aren't great enough to justify its greater cost. The only way really to know is to let the market decide. So here’s a compromise proposal: Withdraw the one-dollar Federal Reserve Note, but let US commercial banks issue their own one-dollar notes if they think there’s a market for them. Note that one of the private commercial banks in Scotland, where it is allowed, still issues one-pound paper notes.

Posted by Lawrence H. White at 03:23 PM  ·  TrackBack (3)

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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