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U.S. House of Representatives,
Subcommittee on Domestic and International Monetary Policy,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus, [chairman of the subcommittee], presiding.

    Present: Chairman Bachus; Representatives Castle, Inslee and Moore.

    Chairman BACHUS. Good morning. We call together the Subcommittee on Monetary Policy of the Banking Committee.

    At this time, we are going to have opening statements, and then we will introduce the first panel and have testimony from the first panel, questioning of the first panel, and then we will have the second panel seated. We will introduce the second panel and have any questions that Members may have of the second panel.

    At this time, we will have opening statements.

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    This oversight hearing on the production and protection of our Nation's coins and currency is occurring at a remarkable time in the history of U.S. currency. The United States Mint has just issued the new $1 coin. Some speculate that it may be the last new circulating coin the United States will issue.

    Next month, the Bureau of Engraving and Printing will begin releasing $5 and $10 Federal Reserve notes redesigned with a number of new anti-counterfeit features.

    Finally, we are in the second year of a very popular 50-State circulating commemorative quarter program. It has generated so much interest that the Mint has had to double projected production levels of each new quarter-dollar coin it issues.

    The U.S. Mint should be commended for their very professional and businesslike introduction of the golden $1 coin to replace the unpopular Susan B. Anthony coin. The Mint took to heart the directions given by Congress to market the new coin so it would not be a failure like its predecessor.

    But these energetic efforts have not been without some controversy. Several innovative maneuvers by the Mint are being questioned: a $45 million marketing campaign with Fleishman Hilliard, an exclusive agreement to give Wal-Mart access to coins early in the release period, and creating demand for the $1 coin without having an adequate supply at regional and local banks or some other instantaneous distribution network.

    In the final analysis, it probably would have been impossible to get a brand new product in the hands of 270 million Americans all at the same time, and it is clear that the introduction has been more successful than the Susan B. Anthony coin, because within two months several times as many new dollars will have been released than the number of Susan B. Anthony dollars issued in a whole year. Still, many others in Congress wish the release had been handled better, and some may have questions for the Mint about this today.
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    We are in a transition point between Mint directors. Philip Diehl has overseen a remarkable rebirth at the Mint, and we owe him a debt of gratitude for his energetic and enthusiastic service, as well as for the vital organization he leaves. And Jay Johnson, the incoming director, is a former Member of the House of Representatives, having ably served his constituents from Wisconsin.

    Is Mr. Johnson here? If you will stand up, Jay, we welcome you back to Washington. Being a former Member from Wisconsin, I know you served your constituents there ably, and I look forward to working with you at the Bureau. Thank you.

    Mr. JOHNSON. Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you.

    Our best wishes go out to Mr. Diehl in his future endeavors.

    The Bureau of Engraving and Printing continues to produce the finest bank notes in the world, notes that are the de facto reserve currency of the world as well as being artistic masterpieces. The new bills being issued, while not as aesthetically pleasing, are certainly more readable and less susceptible to counterfeiting.

    I look forward to Director Ferguson's testimony, both because a secure currency is so important for this country's economic well-being and because I hope he will share with us some of his thoughts on what the next generation of Federal Reserve notes will look like.
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    Today I am introducing two pieces of legislation that will help the Bureau of Engraving and Printing perform its job even better. One will allow the BEP to print, at the request of the State Department, currency for smaller countries that are our friends, but lack adequate facilities to print their own money. This will have a dual purpose, to aid in our bilateral relationship with these countries and to help the BEP retain top quality engravers and train our press operators in processes that eventually might become part of our own currency, such as printing notes in multiple colors. The BEP has recently had to defer requests to print currency for Kuwait, and that business went instead to the United Kingdom.

    The other piece of legislation will improve protection of our currency by increasing the penalties for stealing any form of currency from the Bureau's plants. My legislation will address a loophole in current law which was brought to light after a former employee removed some test printings of new currency a few years ago, and the prosecution turned out to be more difficult than it ought to have been. The legislation grew out of recommendations by the Bureau and the Secret Service which handles anti-counterfeiting efforts for the Government and which investigated the incident.

    The second panel we will hear from consists of representatives from the Federal Reserve and the Secret Service. The Federal Reserve, in addition to being the Nation's central bank, is the intermediary between the Nation's banks and the public and the producers of coins and currency. The Fed is here today to add its wisdom to the discussion about distribution patterns for coins and currency. There have been repeated reports of coin shortages, mostly pennies and quarters. With the introduction of the new $1 coin, there have been some shortages of those as well. I hope the Fed will help illuminate solutions to this distribution system and help us decide what changes need to be made to ensure that demand will be supplied promptly.
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    The Secret Service has handled its anti-counterfeiting efforts admirably since it was given the mission in the middle of the 19th Century. The Secret Service has done a masterful job meeting the new breed of high-tech criminals who produce U.S. currency overseas, as well as those who use the common, inexpensive personal computers to produce counterfeit bills.

    Production of a safe, attractive, useful set of coins and currency is vital for conducting commerce and making sure counterfeiters don't produce copies that in any way shake the confidence in our money. Both crimes amount to economic attacks against the most durable currency in the world, and we can have no letdown in our vigilance.

    Additionally, we must look ahead to a future when low value transactions will no longer use either coins or currency, and I look forward to comments by all of our witnesses here today on what that future holds and when. The four institutions of the United States Government who will testify today concern responsibilities and tasks which rarely receive the limelight. In quietly providing these functions, they provide an immeasurable and important service for each one of us. I, for one, appreciate their work and look forward to hearing their testimony.

    At this time, I will yield to Mr. Moore.

    Mr. MOORE. Mr. Chairman, I have no statement to make.

    Chairman BACHUS. OK.

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    Mr. Castle.

    Mr. CASTLE. Thank you very much.

    Mr. Chairman, let me start by thanking you and congratulating you on having this hearing. As one who has been on this subcommittee for some time, I have had a chance to chair it for awhile, I think the subject of money is very important. I have to tell you it has been an education for me. I came into this not knowing anything about money, except I didn't have enough of it most of the time. From that experience, I learned a lot about the making of currency, the minting of coins, the role of the Federal Reserve in all of this, the whole business of the Secret Service and the counterfeiting, the protecting of that, the need to change our money in order to avoid some of those things from happening, and, obviously, the tremendous value of collecting.

    But I think, Mr. Chairman, you have raised some very legitimate questions. I think these hearings are very valuable, even though it inconveniences everybody and takes some time, but I think they are valuable, because there are legitimate questions that should be asked.

    I happen to think that everyone represented here does an outstanding job and deserves very high marks with respect to the handling of money, from the Mint through the Bureau of Engraving and Printing and the Fed and the Secret Service. It is taken very seriously and done well.

    I know when we did the quarter program, there were some serious doubts in Treasury about this and whether we should go ahead. And Phil Diehl, who is represented in absentia today, off selling jewelry, hopefully making a lot of money, helped push to get that all done; and it has worked out quite well, I think even perhaps our wildest expectations.
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    But we can never forget the importance of American money. It is not only America. It is $100 bills around the country. It is the benefit of American currency and how that benefits the world, but also benefits America, because it is a strong currency, its impact on interest rates, all the things that it does. That is of vital significance.

    We can never forget the coin programs and what they have done. Obviously, who knew how successful the new quarter program would be? It has been, I think, successful beyond certainly anything I anticipated. If anyone here anticipated it would be as successful as it is, they are a little smarter than I am, which may not be all that difficult, but it would be a fact.

    That is important, too, because it has had the opportunity to teach us lessons in the history of this country, of interest to people in terms of what it tells you about your own States, but a lot of local interest on this. Obviously, everybody has become a collector of these when people weren't collecting at all before, and that is tremendously helpful.

    With respect to the $1 coin, we do need to look at the commercialization of that, how can it really be used. I think, as an interest piece, it will start to fade in a year or so; and at that point, if we aren't utilizing it in vending machines and transit systems or whatever throughout the country, then it is probably not going to be of any tremendous value.

    In fact, there are always questions. If you don't speak to it, even if you do, I hope to ask questions about the penny and what we are doing with that. I think that is a legitimate question, and I worry constantly about what is needed.

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    I mean, once we get down to the $5, we are going to have to go back and do the $100 again probably because of the speed of computers and what is happening there. I think those are the kinds of things we need to do.

    So I thank the Chairman for his abiding interest in this, for having hearings like this. I think periodically we should review where we are with all of these issues; and I think it is a good experience for all of us to make this public, to see where we are and determine what changes need to be done in the future; and, hopefully, Congress will react as well as we possibly can.

    For that reason, I am pleased to be here and pleased to participate, and I yield back, Mr. Chairman.

    Chairman BACHUS. Thank you.

    At this time, we are going to introduce the first panel.

    Tom Ferguson was appointed as the Director of the Bureau of Engraving and Printing on December 7, 1998. As Director, Mr. Ferguson is responsible for the overall operations of the Government's security printing agency, which include the production of our Nation's currency. Prior to his appointment as Director, Mr. Ferguson served as the Deputy Director with responsibility for the day-to-day operations of the Bureau. He has also served as the Chairman of the New Currency Design Task Force that recommended the new security features being incorporated into the Series 1996 currency.

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    John Mitchell has served as the Deputy Director of the United States Mint since 1995. His signature achievement was leading a team of 120 employees and consultants to implement the Mint's fully integrated enterprise resource planning system, the first of its kind in the Federal sector. In 1999, he received the Presidential Rank of Distinguished Executives Award.

    Welcome, both of you gentlemen.

    Mr. Ferguson, if you will lead off with your statement.


    Mr. FERGUSON. Thank you, Mr. Chairman and Members of this subcommittee, for having this hearing and for inviting me to testify today on behalf of the Bureau of Engraving and Printing.

    I have submitted a package of testimony for the record; and, if you will allow, I will hit the highlights of that in the interest of time and brevity.

    The Bureau of Engraving and Printing serves as the Nation's security printer. We produce the Nation's currency, most of its postage stamps and other security documents. We operate two facilities, one in Washington, DC., and one in Fort Worth, Texas. Each produces approximately 50 percent of the Nation's currency, with all of the other products produced at our Washington, DC., facility.
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    The Bureau operates on a revolving fund. It does not receive any appropriations. We charge our customer for our product.

    1999 was a very challenging year for us. During that year we needed to produce a supply of currency in anticipation of any Y2K issues that would arise. In conjunction with the Federal Reserve, which planned the requirements and distribution system, we produced over eleven billion currency notes, representing a total of $285 billion in face value. That was a 23 percent increase over the 1998 program. We accomplished that through the use of overtime and increases in productivity, without having to hire additional employees.

    The projections for the year 2000 and 2001 are about nine billion notes. This will allow the increase in currency that is out there to ease over the next few years.

    2000 also will bring to close the introduction of the new currency series, the $5 and $10 that are pictured over on the side, and I have some samples that I would like back that could be passed around for you to look at.

    The $5 and $10 represent the end of the introduction of the first major change in U.S. currency since the late 1920's. This was introduced beginning with the $100 note in 1996, the $50 in 1997, the $20 in 1998 and now the $5 and $10 together. I might add that the $5 and $10 are being issued together as a result of interaction with the vending machine community, which indicated that it would reduce their costs of having to make service calls to their machines by having two notes go out together. It also assists in the public education campaign by concentrating more attention on the changes that we are making.
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    These notes will be issued starting May 24 and will be available everywhere around the country and will eventually become the notes of choice everywhere around the world.

    One of the major issues that we dealt with on the introduction of the new currency was in fact dealing with the vending machine community. Prior to the introduction of the new $100, the policy had been that when notes were issued people in the private sector simply made their own guess as to what was in it and built machines around that. We have now reached a point where we have reached out, we have an active interaction with the vending machine manufacturers so that they get samples of notes earlier. In fact, the $5 and $10 were first shown last August; and in December, for the first time, we provided each vending machine manufacturing firm with 1,000 notes of each denomination that they could take back to their facility, test, evaluate, wear out, make dirty, whatever they wanted, in order to test and evaluate their equipment and have vending machines, fare card machines, ATMs and all the currency interaction equipment ready for these new notes starting the end of May.

    Also, note that the new $5 and $10 contain many of the new security features that were included on the $100. These features are extremely effective and have demonstrated that they have, in fact, worked in the field.

    Counterfeiting, as will be testified to later by the Secret Service, is a concern. Growing out of that concern is the increase in use of copiers, especially computer printers, scanners, personal devices. We continue to look at ways to defeat that.

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    As the Chairman mentioned, we are continuing to look at changes to currency for the next generation. The Bureau of Engraving and Printing, in conjunction with the Department of Treasury, Federal Reserve and Secret Service, are working right now on what are the changes that are required to protect the currency of the future. Our goal at the Bureau is to be prepared to issue a new currency design. As we stated back in 1996, we expected to change currency every seven to ten years. Seven years will be 2003. We will be ready, if needed, to be able to issue a new currency about that time.

    We are looking at new technologies that will be incorporated to make that currency work. It means adding new manufacturing processes, it means adding new security features, and there is a lot of time and investment that is required to be ready for that.

    The Bureau has already installed the first of a new type of press which would allow us to print on both sides of the paper at the same time what we call background tints which potentially could, in fact, be color, if that is what is decided to be a good security feature and approved.

    We have committed to purchasing four more of those presses. Two more will be installed in Washington, bringing that to three. Two will be installed in our Fort Worth facility. That will also require some capital investment in our Fort Worth facility to expand the facility to provide room for new technology. So new capability, not new capacity. It will still print the same number of notes. Each note will have more features produced on it.

    I should also note that the $1 note, as we finish the $5 and $10, that there are currently no plans to redesign the $1. The security value of changing the $1, there are not a lot of counterfeits to $1 notes, and the changes that would be required in the infrastructure in the country in order to accommodate that change don't seem to warrant a change for security reasons. So at this point in time, the $1 note, which has, in fact, been an icon of our economy, will remain as it is.
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    The Bureau looked two years ago at the facility planning issue, whether or not we should move from our current Washington, DC., facility; did a study which indicated that potentially there was some economic benefit to that. However, it depended greatly on demand. At this point in time, demand is an issue.

    The $1 coin that has been introduced, the potential impact of that, as you noted, Mr. Chairman, the impact—and I know Mr. Castle has been a major proponent of the potential uses of smartcards, e-cash, e-commerce, so we are watching all of that.

    Treasury has established an interagency group to review the monetary demand of coin and currency in order to determine where we are going. In the meantime, it has been determined that the best use of our facilities is to upgrade the current Washington, DC., facility, keep it a workable, high-production, high-efficiency, environmentally safe plant.

    The Bureau is also seeking ISO certification. ISO is an international quality standard. It is one of the things that we believe will be important if we move into providing currency for international countries other than our own and also to demonstrate to both our customers at the Federal level and our customers, the public, that the Bureau of Engraving and Printing is a high-quality, state-of-the-art facility that people can rely on to produce currency that works first time, every time, no matter where or how they want to use it.

    As you noted, Mr. Chairman, the Bureau is seeking legislation, and we do appreciate your support in introducing those two bills, the first enabling us to produce for other countries. As you noted, this will allow us to utilize some skills that we currently don't use on U.S. currency, but anticipate using in the future and being able to use those skills, develop and hone them so that they are ready when the United States wants to move forward with that and we can, in fact, sell some of the product that we are testing on. It will have a marginal impact on our costs as far as reducing them to the American public, but primarily it enables us to test, evaluate and become very familiar with production operations required to do this new currency.
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    In addition, we are seeking legislation that would, in fact, define U.S. currency that is taken from our facility at its full face value. There has been proposed in cases before that, since it had not been issued, it was only worth its manufacturing costs, approximately 4 cents a note as opposed to $100 a note, and this would affect sentencing and prosecutorial decisions. And we greatly appreciate your support in that, Mr. Chairman.

    The last issue concerns our numismatic program. Not unlike my compatriots here at the Mint, we do sell certain products directly to the public. These are uncut sheets of currency, special serial number sets that we provide to numismatic people who want to collect those things. I would note that all proceeds from that are used to fund the public education campaign and the public tour that we have at the Bureau so that it allows us to provide these services free to the public. And I would note that the Bureau's tour is the third most popular in DC., another reason we believe we need to stay in the Washington area.

    With that, Mr. Chairman, I conclude my remarks and would certainly address any questions you or any Members of the subcommittee may have. Thank you.

    Chairman BACHUS. Mr. Mitchell.


    Mr. MITCHELL. Good morning and thank you, Mr. Chairman and Mr. Castle, for your earlier remarks.
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    My appearance before you this morning is an unusual role for me, as you noted earlier. As the Mint's senior career employee, it has been my privilege to have worked with you and your staffs behind the scenes in bringing about the changes that have made the Mint what it is today, a vigorous, profitable example of what a Federal agency can be.

    However, the recent change in political leadership at the Mint calls on me to come forward as the voice and face of continuity and the Mint's relationship with this distinguished body, and I am pleased and honored to do so.

    Nearly six years ago, when the confirmation of Philip Diehl as Director set us on the course you know so well, we set three chief priorities.

    The first was to revamp the Mint's financial management and accounting system, a system so poor that we had received a disclaimer of opinion from our independent auditors.

    The second was to stem the proliferation of commemorative coin programs that threatened the viability of that entire endeavor and a vital source of funds for worthy purposes authorized by Congress.

    The third was to increase the Mint's efficiency, thereby increasing contributions we make to the Nation by returning our profits to the general fund of the Treasury.

    Mr. Chairman, we met those goals in our first year working on them. We have received our sixth straight clean audit opinion. We and the Citizens Commemorative Coin Advisory Committee laid the coin communities issues before Congress, which wisely and insightfully reformed how commemorative coins are created and their profits distributed.
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    We asked Congress for latitude in funding our operations, procuring goods and services, creating new products and generating revenues. Congress granted that to us.

    Your faith in us, plus our determination to deserve it, has made the Mint one of the most stunning success stories in Government. In 1993, the last full year before the current management team, the Mint struck 14 billion coins. Last year, we struck nearly 20 billion circulating coins, second only to 1996, and shipped over 20 billion coins to the Federal Reserve bank, besting our previous record in 1995.

    Profits from circulating coinage were $300 million in 1993 and last year exceeded $1 billion. 1994 was the first year our numismatic operation operated with a public enterprise fund. Its revenues then were $314 million and profits $9.4 million. Last year, sales of numismatic commemorative and bullion coins and products rocketed to nearly $1 billion, with net income rising to nearly $39 million in a very demanding and competitive marketplace.

    Our consolidated revenues soared to $2.4 billion last year, a 51 percent increase over 1998. Our consolidated net income reached over $1 billion last year, an increase of over 75 percent over 1998.

    This year, Mr. Chairman, we expect to produce 29 billion circulating coins, a reflection of continuing economic growth, plus the incredible popularity that Mr. Castle noted earlier of our 50 States quarter program and the projection-busting enthusiasm for the new golden dollar. We believe our consolidated revenues will approach $4.3 billion this year and our profits $2.7 billion, an increase of nearly 300 percent over just last year.
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    For the sake of giving this subcommittee the fullest report, I point out that the bottom line is not the entire story of our progress. Six years ago, employees picketed the Denver Mint. Last year, we received our third National Partnership Award for labor-management relations, the third in five years.

    Five years ago, customers were mounting a boycott of our products. Over the past five years, our customer satisfaction ranking by the University of Michigan's Business School has averaged the highest of any Government agency and has equaled or surpassed industry leaders and customer satisfaction ranging from Hershey Foods, Coca-Cola, Cadillac, H.J. Heinz and many others.

    Four years ago, we kept records on a sprawl of incompatible computer systems that were literally transcribed in pencil. Today, we operate with a Mint-wide enterprise resource planning system, the first organization-wide ERP in the Federal sector. For the first time, planners and managers have point-to-point information about customers, costs, production, promotion inventory, sales revenues and profits for every program and product at the Mint.

    Three years ago, it was a triumph to close our books within ninety days after the end of each fiscal quarter. We have so streamlined our financial reporting that we now close our books within ten days of each month end, and we post results on shared technology that is available to all within the Mint that need it.

    Two years ago, we were getting the knack of telephone order taking. Last year, we launched secure online shopping in April, and on October 18th our web catalog fetched over $2 million in online sales in a single day. By 1999, those sales reached $9 million per month, making our usmint.gov website one of the Nation's top 25 e-tailers, and this year we project web sales will exceed $125 million.
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    Govexec.com, a service of Government Executive Magazine, honored us as one of the 16 ''Best Feds on the Web'' for the technological know-how, business savvy and customer service evidenced in our web pages. In addition, the Washington Times gave the Mint's website four out of four ''Screaming PCs.''

    A year ago, coin collecting was a languishing hobby. Today, the United States Mint produces the hottest collectible product in history, the 50 State quarters. One hundred and twelve million Americans now collect between 12 and 16 of each State's quarters, and that figure is projected to reach 160 million, 60 percent of our population. The earlier estimates, as Mr. Castle noted, are on track to exceed and potentially double in terms of the profit from this program over its ten years.

    This year, the 50 State quarter has a companion, the Golden Dollar. In mid-January, we began shipping coins to the Federal Reserve for its distribution on January 27. So popular are these coins that in fourteen weeks we will have produced and shipped more than 500 million Golden Dollars. It took us fourteen years for customer demand for the Susan B. Anthony to reach that same amount.

    You may have seen press reports of localized coin shortages, and you noted that, Mr. Chairman, in your earlier remarks. However small and localized, the Mint takes them seriously, and we resolve them in days. We work very closely with the Federal Reserve in predicting coinage demand and reacting to distribution issues. We have built more sophisticated models to mesh forecasting with production, and we still invest aggressively to increase production capacity. As we near the traditional Memorial Day peak of coin demand, I am confident we will prove equal to any supply issue.
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    That, Mr. Chairman, is a glance at the statistical record. Many achievements deserve to be ranked with those that I have mentioned. One of the most deserving is the manner in which the Mint Police have become a front-ranking law enforcement agency. Another is the number of Mint employees who have written career plans and attended higher education at Mint expense; tens of millions of dollars that we have saved by which we have reduced our operating costs; and, finally, the manner in which we have created a new example and higher standard of how our Government can work.

    We have moved from strength to strength. By representing customers' interests before Congress and seeking authority to operate more efficiently, we became able to offer products both the public and numismatic markets welcomed and to manage ourselves as a business. We turned our ability to create successful new products into higher revenues, as we turned expanded managerial authority into lower costs and streamlined operations. Higher revenues enabled more investment in employees, equipment and customer service, a greater administrative and manufacturing productivity, wider customer outreach, and careers in which employees add value.

    When rewarded employees produce the more desired product at a lower cost and sold to more and more customers, profits took off.

    Congress gave us a charter to succeed, and we took its seriously. However, Mr. Chairman, as we go forward, I urge you and Congress to focus on copyright and trademark protection for Mint products. We feel this is one of the most important issues facing the Mint, our customers and the collectibles consumer today.

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    In prior years, we have asked Congress for legislation extending copyright protection to coin designs. None has been forthcoming. As a result, our commercial success is jeopardized by private coin producers who pirate our designs and purloin our name. We are determined to preserve the artistic integrity of our product designs, and we have had to prove it. The Department of Justice has initiated action against one firm that has repeatedly replicated our designs, tried to expropriate our identity and scoffed at our warnings to stop. This is an ongoing problem that is so intolerable we are pursuing judicial remedy. I again urge in the strongest terms to provide a legislative one.

    That concludes my remarks, Mr. Chairman. I close on a note of great satisfaction for what we have accomplished. This subcommittee has been among the strongest supporters of the Mint, and by providing us the authority to operate more like a business this subcommittee has made the accomplishments, which I have just described, possible. At the Mint we have always known our problems have solutions, that our opportunities were limited only by our vision and that our results would more than repay our efforts. By any measure, they most assuredly have.

    Thank you, and I will be happy to answer any questions that you or Mr. Castle may have.

    Chairman BACHUS. Thank you.

    I am going to yield to Mr. Castle for questions.

    Mr. CASTLE. Thank you, Mr. Chairman.
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    I am going to start with something—Mr. Mitchell, I am not sure if you mentioned or not, and that is the penny. I think I would like to ask for this answer in writing—or show us where it is in writing. That is, I would like you to sort of take a little stab at it now. That is the true current cost of producing the one cent coin.

    I am not advocating getting rid of the penny here at this point, but we all know at some point the cost of making a penny is going to exceed the one cent that we get for it when we sell it. At some point it is going to exceed it by enough that it is going to become—you are going to be concerned about a bit of—a drain on that.

    I increasingly see, first of all, pennies lying around in every store I go into, little penny things. I mean, obviously, prices can be rounded off, although there are those who are convinced there will be a conspiracy to always round them off to the five cent rather than the zero cent mark.

    But having said all of that, the whole business of what we are doing with the penny, or the one cent coin or whatever you want to call it, concerns me, and I would be interested—I mean, the production costs on this are tremendous. I think that is the major part of your workforce, and I am sure there are labor problems on that and everything else that has to be dealt with, but the Mint is being run as a business, and for that I give you a great deal of credit, but I worry about where we are going on the penny. If you would give me a short answer on that and then perhaps later, through the Chairman, we could get in writing that actual cost if you have it.

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    Mr. MITCHELL. OK. I would be happy to provide that for you in writing.

    Our current costs for the penny are a little more than eight-tenths of a cent per penny. So we are still making a very modest profit off of each penny, which is returning somewhere in the $20 million to $30 million range of profit to the Treasury every year. We work very hard, because of the challenges you have noted, to ensure that the penny is a profitable coin.

    Clearly, out of $1 billion in profits last year and nearly $3 billion that we are projecting this year, $20 million or $30 million in profits is very modest, but nonetheless the penny still does return a profit.

    One of the reasons we are able to hold our costs down is because many years ago we privatized most of the production of the penny, and the penny blanks come in ready to use, and we basically stamp them and get them out the door.

    Mr. CASTLE. Let me interrupt you. Have you looked into doing that for the other coins? I note that is an object of efficiency. Are you doing it with the other coins or have you looked into doing it with the other coins to save costs?

    Mr. MITCHELL. We have looked, in prior years, and continue to look at options for doing that on other denominations. We are currently doing that with nickel blanks as a way to bridge the demand from $20 billion to $29 billion while we bring in the last of our major capital improvements, our coin presses and furnaces and others so that we can increase our production capacity.
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    So we are purchasing nickel blanks from three different fabricators at a cost that is slightly more than what we could otherwise produce them at ourselves.

    Mr. CASTLE. That is part of your mentality in terms of how you approach looking into this whole blank business?

    Mr. MITCHELL. Absolutely. We always look at what the business case is for what we are doing. As you know, we have a very strong partnership with our union. Nonetheless, that has never been a hindrance to us. We work together to seek business opportunities.

    Mr. CASTLE. Let me go to the $1 coin for a minute, if I can.

    Chairman BACHUS. Before you do that——

    Mr. CASTLE. Sure, I yield to the Chairman.

    Chairman BACHUS. For the record, because of Mr. Castle's question, would you describe the difference in stamping out the blanks and buying the blanks? Are they already stamped?

    Mr. MITCHELL. What happens is, just to turn to two quick points, and if you would like me to go into more detail after this answer I would be happy to or, again, provide it for the record.
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    With all of our other coins we get very large rolls of what we call strip, copper nickel strip and other combinations of that, and this large strip is fed through machines that stamp out a metal disk and from there the rim gets upset. It goes through a furnace process and eventually when metal becomes coin is when a die comes down at anywhere from 60 to 120 tons of pressure to imprint the image for that coin on that piece of metal.

    For the penny process, two things happened a number of years ago back in the 1980's. One was when copper was getting as expensive as it was in terms of its market value, the coin shifted from being predominately copper to over 97 percent zinc, with less than 3 percent copper in it.

    The other thing was, we contracted with some suppliers who provide the blank already cut from strip in the front door so that most of the front-end processing or manufacturing process for the penny has been privatized for a number of years, and that is another way we are able to contain our costs.

    Chairman BACHUS. And I don't know that you—how much savings—what percentage of savings do you realize from that? I know Mr. Castle has asked you the nickel and the dime. That might be some indication. Can you tell us something about that?

    Mr. MITCHELL. I don't have figures readily available, I could get them to you, as to whether we would still be able to make the penny at a profit to the Government if we had not privatized the operation.

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    Chairman BACHUS. Really I am more interested in how much you saved and whether you would save it with other coins.

    Mr. MITCHELL. Yes. I guess two answers. What I am saying is, in terms of giving you a hard number, I would have to get back to you on that in terms of what we estimate the savings are from having privatized so much of the manufacturing process of the penny blank.

    I would venture a guess that, if we hadn't, we would be in exactly the situation that Mr. Castle described where perhaps it would cost more to mint than the face value of the penny. But, nonetheless, I will get you the figures that would give you that information.

    On the other denominations, we periodically check the market and what we have found is we can more efficiently stamp out the blanks ourselves. But, nonetheless, it is something that we regularly do check into as a business proposition for us. As it relates to the extreme demand for coins this year, they increased from $20 billion, a record, to $29 billion. We have pulled out all the stops to find ways to increase our efficiency and increase our production capacity.

    Chairman BACHUS. That report will include—you know, you are running at overtime?

    Mr. MITCHELL. Yes, sir, we are. For over a year now in our circulating plants we have been running seven days a week, basically three shifts a day, and we are continuing to do that to make sure we meet the Nation's demand for coin.
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    Chairman BACHUS. All right. I will yield back to Mr. Castle.

    Mr. CASTLE. Thank you, Mr. Chairman.

    I appreciate the intervention, because I think those questions are important.

    I would like to ask some questions about the $1 coin. Basically, I feel it is going very well, but, obviously, things arise that we need to pay attention to, and I may give you a series of questions just to speed this up a little bit.

    First, what cooperation are you receiving from such organizations as transit systems? I mean, even here in Washington there has been a little bit of discussion about that, the people who make parking meters, vending machines. The casino industry, I don't know that the slot machines which probably handle more of this money than anybody else, can take these coins or not, but I would be very interested in knowing if you are getting cooperation from those groups.

    My judgment is that this is a bit of a phenomenon now, but at some point, after people have handled these for awhile, if they don't have a commercial utilization factor then they are probably not going to be as successful in the future as they may seem to be right now, and we need to pay attention to that.

    So that is one set of questions.
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    The second thing is, I am sure you are aware of the letter Mr. Hoekstra has written to Mr. Summers, and I don't know if that has been answered or not, although I was just handed another answer on some of the Wal-Mart questions to Mr. Ike Skelton of February second from Phil Diehl, but I think all of us are somewhat interested in the Wal-Mart deal.

    I mean, there are those who are saying, ''Gee, we can't get it at the banks, but Wal-Mart has it. Why was that? Why was that done?''

    Plus, one of the things in his letter that really interested me, that I just read—in fact, I just saw this letter for the first time about ten minutes before I came over here. He sent it to me. It was on my desk—is the fact that he said that some of the people, the clerks at the Wal-Marts where he lives, were complaining of the coins chipping, being defaced, and so forth, from natural wear or whatever it may be. I don't know if you are familiar with that or not, but it is one of the last points he made. I would be interested in that as well, because obviously—long-term, because we expect these coins to last for a long time. That would obviously be a problem.

    If you could state again, I think you already stated this, again, what I think you said it was fourteen years' worth or something, but whatever. I would like to see the comparison on the distribution of this coin in whatever measurable period of time you have versus what was happening with the Susan B. Anthony dollar before.

    I know it is a lot of questions, but, hopefully, you can wrap them in altogether.
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    Mr. MITCHELL. I have been busy with my pen, Mr. Castle.

    I will start off with the last question first.

    We, by the end of next month, will have issued to demand, not going out there to inventory like the Susan B. Anthony did, over 500 million coins. That will be by the end of April.

    So my note earlier was that in fourteen weeks we will have met a demand level that the Susan B. Anthony took fourteen years to reach. The Susan B. Anthony, we minted a little less than 900 million of them in 1979 and 1980. To ensure that we would have a steady flow of $1 coins uninterrupted into commerce, we did mint 1999 dated SBAs of about 40 million. So you have a little bit more than 900 million Susan B. Anthonys that were out there in twenty-one years.

    We will exceed one billion Golden Dollars this year, and I would venture to guess that we will go beyond that. So it is a very successful coin.

    As you also noted, and it is an excellent point, the key to the success on our ongoing basis of this program is the business and the commercial use of the coin; the fact that we need it to become a workhorse of our circulating coinage throughout the country. We have been working for over a year in a number of business-to-business promotions to accomplish that.

    Let me then go back to your first question. We have worked very closely with the vending industry and a number of associations throughout the country, and as a matter of fact when the Transit Authority was in last week we hosted them at the Mint. We have met with them on a number of occasions; and of the top twenty transit authorities throughout the country, eighteen of them are using the coin or will be doing so soon.
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    There are only two that do not use the coin, and, unfortunately, one them happens to be in our Nation's capital. We are working with them to encourage them to also use our coins. They are able to on the bus, but not the Metro.

    Casinos, because they realize their own seigniorage from tokens that are sold by casinos, they are not real interested in using coins, because a lot of folks, as tokens of their visit to casinos, and so forth, take them home, never redeem them for the value they purchased them for, and so forth. So casinos realize a nice profit, somewhat similar to what the Mint does on its circulating coinage. I will get to Wal-Mart as the last point.

    As to the wear of the coins, as we educate the public about the use of these Golden Dollars, they are going to be very similar to what people experience with pennies. You get very shiny brand new pennies, and over time they become darker in color as the oils from the human skin, and the wear of the coin occurs, but the coin stands up very well to commercial use. Similarly with the Golden Dollar, the more that it is handled over time, it will get an antique sort of darker or bronze finish to it versus the golden color, the shiny color that it has coming off of our presses.

    So this is something that the public will experience as we continue to get these coins out there, and, most importantly, have them used in everyday commerce.

    The Wal-Mart deal has been an often-discussed issue, and the bottom line that I tell you is it has been a great success. When we went out over the last year with all of our business-to-business meetings, and I am talking about everyone from grocers to the ABA to various financial institutions, and so forth, we were given a challenge. We made over, for example, 11,000 calls to over 4,000 financial institutions representing over 100,000 banks.
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    We had a lot of face-to-face as well as convention and telephone meetings and conversations with retail transportation and a number of different industries. What the financial institutions indicated to us was for us to basically prove to them there would be a demand for the coin, because everyone remembered the Susan B. Anthony, and did not want to have too much inventory in their vaults.

    So our challenge was how to convince the financial institutions there was demand for the coin when business would go to the banks looking for the coin and not necessarily have it there to initiate the program.

    So when Congress passed the law back in December, we said we would bring the coin to market in thirty to thirty-six months. We brought it to market in twenty-five. The opportunity to launch it in January of this year and use the Millennium as a great promotional way to get it into the everyday ads and knowledge of consumers was a great opportunity.

    We were working with about 60 different retailers to see who would partner with us to get the coin out there in cash registers for the public. We reached agreement with two, and almost a third. We reached agreement with General Mills to put pennies and then some $1 coins in over 11 million Cheerios boxes. We reached the deal with Wal-Mart that you are familiar with, which, by the way, was never an exclusive deal.

    Unfortunately, a Wal-Mart spokesperson made that comment which was picked up many times thereafter in the press. The first we heard about it, we called Wal-Mart and they retracted it. But corrections sometimes don't get picked up as readily.
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    We were working with Southland in terms of distributing the coins through the 7-Elevens throughout the country. At the last minute, Southland decided that for the time being, they would not work with us on that because of logistical problems and some security concerns about their tellers, particularly overnight.

    So we did partner with Wal-Mart, and it has been a tremendous success in making the coin seen in everyday use by consumers. Throughout the rest of the year, we are going to be doing promotions with transit authorities, retail organizations. We hope to partner with grocers and every other group out there to come up with promotions and find additional ways to get the coin into everyday use.

    Mr. CASTLE. You entered into a fairly high ticket advertising program on all of this. I think that is the George Washington—which is ironic, considering we almost took him off the quarter. But with the free press you are getting on this, and maybe there is a contract we could not get out of even if you wanted to, but is it necessary to continue the advertising? Is it the judgment of your marketing people that this is something we need to put dollars into in order to make this program a success, or have we reached all the success you are going to reach with something such as this, since we are not selling lawnmowers, we could let it circulate naturally?

    Mr. MITCHELL. It is very important. The $40 million campaign that you and the Chairman have referenced earlier is going to be a campaign that takes place over the next six months, everything from television, radio, print ad, transit authorities, even Internet advertisements. The television campaign with the George Washington ads will run for four months, and the rest of the promotional program will run for the entire six months.
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    What is very important is to get the message out to the public that this is a coin that you can use in everyday use and it is easy to use, you can use it in various—in any commerce situation that you are in. The point that you made earlier, Mr. Castle, it is very important to do these promotions, both for the public to learn more about the coin, as well as businesses, transit authorities, various business publications, and so forth, to get more interested and see that the coin is something that they should use in their everyday commercial requirements, and in fact, throughout the country. With our network of folks that are out there talking to businesses, we are coordinating the orders from those businesses with the regional Federal Reserve offices to ensure that that demand will be met and, in fact, for April, because of that demand, we ended up increasing the original order from the Fed from approximately 105 to 165 million coins for April that we hope will meet that initial demand from various businesses across the country.

    So I think the campaign is very important.

    Mr. CASTLE. The Chairman has been exceedingly generous in his allowance of time, and I am going to take advantage of that by asking one or two more questions. I want to ask Mr. Ferguson a question also about the coins.

    I want to switch to the quarter program. When you measure profit, I always get confused about this. Mr. Lopez is here and I have discussed this many a time. But are you talking about the seigniorage profit, that is the interest foregone, because it doesn't have to be paid, or talking about just the difference between the cost and the sell, the sales price of that particular coin?
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    In fact, in this case, they are almost all being collected, as I understand it. Virtually none of them are being turned back. It is almost like an issue of you are selling a product and nobody is going to redeem it like the way they did in the past. I am concerned about how you are calculating profit. It is very nice to talk about these things, but frankly, I like to talk realistically. I like to have the cost be realistic and actual profits be realistic. But let's not play games with it. I would be curious as to how you construct profit with respect to the quarter program?

    Mr. MITCHELL. There are two reasons that the quarter is very profitable and beneficial to the Government and to the American taxpayer. One is ''seigniorage,'' a term that technically doesn't exist anymore, based on the Public Enterprise Fund Act in 1995, but nonetheless, the term continues in regular usage as the difference between the face value of the coin and the cost for us to produce the coin and get it out to the Federal Reserve.

    So for the quarter, our costs average about 4.5 cents per quarter. So we are making anywhere from 20 to 21 cents on each quarter as we sell it to the Federal Reserve at face value.

    Then we also do a turnkey operation for the Federal Reserve where we distribute it to over 110 Federal Reserve Banks, branches and depots out there. So the savings the Cooper's study referenced of $2.6 to $5.1 billion in profit, not revenue, but profit over the ten-year life of the program is the difference between the face value of the coin and the cost of producing it.

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    Right now we are on track to at least meet that $5 billion estimate and perhaps exceed it. We are still, of course, learning about the patterns of the coin and its acceptance by the public, but the demand for the quarters is extraordinary and well beyond the base demand of quarters of about a billion-and-a-half each year we issued before this program.

    The other point that you noted is the interest that is saved on the public debt. When we turn over these extraordinary profits to the Treasury general fund, Treasury has to issue that much less debt to finance the Government's operations, and the interest that is saved on not having to issue that debt is scoreable revenue, and over the life of both the Golden Dollar and the quarter program, will also be in the hundreds of millions of dollars.

    But, again, we can get you a very specific answer on what those current estimates are.

    So you have got seigniorage, which is the profit derived from the difference between the face value and the cost of the coin, and then as we turn over profits to the Treasury general fund and debt does not have to be issued because of that, interest is saved on the debt that otherwise would have been issued.

    Mr. CASTLE. On the seigniorage end of it, you have on your balance sheet a liability, which is you would owe the money back to people if they came in and turned the coins in to their banks and ultimately to the Federal Reserve. You always carry that on the other side, do you not, as a liability? I am just suggesting that is a liability that may never, if I am correct in my assumption, that may never be realized, simply because in the case of the 50 State quarters, they are being generally almost universally collected, whereas I assume pennies, nickels and other things are turned in more frequently.
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    Mr. MITCHELL. As a matter of fact, Philip has even referenced coins as being an interest-free loan to the Government, a loan that never gets called. Coins basically do not ever come back.

    Mr. CASTLE. That is true of all coins then?

    Mr. MITCHELL. Of all coins in general. We expect that pattern to count with quarters and be more the case.

    Mr. CASTLE. One other question on this, and that is, one of the things I have learned about these quarters, and I hope the Chairman has had a chance to do this too, and all Members will, they are a wonderful thing to discuss with kids. The kids in schools are vitally interested in this, which is one of the targets that we had when we did this, to educate and capture their interest. It has worked beautifully.

    Does the Mint have any kind of a lesson plan or anything along that line it can distribute? Are you developing things to distribute this to teachers and schools to increase the educational value? It seems to me the Governors in the States have been very good about explaining the choice they have put on their quarters. Thank God, they have taken it seriously. When it started, we were all concerned somebody might do something frivolous. That is not happening. But to me, that is a huge value.

    The teachers are interested in this. When I go into a school, frankly they are a heck of a lot more interested in that than me talking about democracy and things normally Members of Congress start talking about. When we bring out the quarters, they get pretty worked up. I am wondering what you all are doing to try to help with that? It is a very positive force in education out there in America today.
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    Mr. MITCHELL. We have jumped on that. It is a great opportunity. First of all, as you know, one of the key components of the program is the educational value in teaching our Nation and our children about the history of our Nation and the importance of various facts by State. So that is a very important component of the program.

    We have developed on our website—usmint.gov, should anyone want to purchase any products from this morning's hearing, you can click right on to our home page what we call ''h.i.p.pocket change,'' history-in-your-pocket. It is a site that we have developed with several different teachers' foundations and teachers in general from across the country, and as parts of it, it has got games, you can design your own coin, it is a very fun site.

    Most importantly related to your question, Mr. Castle, we have lesson plans that we have built into the website that can be downloaded at no cost by teachers across the country that use our coins as a way of teaching their children and their schools about the Nation's history. So that is something that we continue to pursue and we are going to be adding more features to it as well.

    Mr. CASTLE. If you can reduce the price on those maps I had to buy for my nieces and nephews, I would appreciate that too.

    Mr. Ferguson, very quickly, because again, the Chairman has been very generous, with respect to the $1 bill, I know you are not planning to do anything with it, but are there any lessons from these other bills that could be incorporated simply into the $1 bill, or is it just such a lack of a security threat you don't need to worry about that at all, or there are artistic reasons?
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    I don't know how artistic people think these bills are. Or are there commonality reasons to change the $1 bill at all?

    Mr. FERGUSON. A number of answers to that, sir. First off, there are some lessons from the other denominations that we have considered. One that we are introducing to the one that is non-visual, it is a feature that we introduced starting with the $20 and will eventually be on all of our currencies, it is an invisible machine-readable pattern that will be incorporated, and we are giving that technology, we are working with different manufacturers to potentially build easy, small detectors that can be utilized by the visually impaired in order to denominate their currency.

    We would add that feature to the $1. It is something that doesn't interfere with other machine-reading technologies or in the vending community.

    We have also looked at the potential of adding that large numeral, but that does interfere, and which will not be doing that at this time.

    Mr. CASTLE. That would help the visually impaired?

    Mr. FERGUSON. Yes. We have met with the groups representing the visually impaired. That is the only note that will not have that. It will be distinctive in its own. They are not pushing to have that done. The aesthetics of the $1 note, again, whether you like the new or old $1, the $1 note is a symbol of our economy. It is recognized not only here, but around the world as the symbol of our economy. We would enter into a change of that very carefully and only for a good reason.
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    Mr. CASTLE. I for one am not ready to advocate getting rid of the $1 bill, I might add. My last question to you, we have had this discussion before, but what is the status of the R&D on the plastic substrates as a replacement for paper in the printing of currency? That has happened, as I understand it, in a lot of other countries. The issues of wearability, ultimately cost, and that kind of thing, to me it seems ultimately it is the direction to go. I just didn't know where all that is going.

    Mr. FERGUSON. Yes, sir, we have had this discussion, and it continues. We are actively involved and have been now for several years in reviewing several different types of substrates that would potentially reduce the system's cost of currency. These include polymers, laminents, paper-polymer laminents, and actually some changes just to paper that would potentially increase its durability, reduce the amount of dirt and oils that are absorbed by the substrate.

    We are moving along in that area. I would say we will not be seeing those in the next year or two, but we are continuing to look into that to see if we get something that meets all the requirements, that makes it a secure substrate, it works in all the environments it needs to work in, it has the kinds of durability that will, in fact, decrease costs and not increase those.

    Mr. CASTLE. One final question, are any of these new designs increasing the life of a piece of paper bill? Is it still what, fourteen to sixteen months?

    Mr. FERGUSON. It varies by denominations. It is approximately eighteen months for a $1 and goes up to eight years or more actually for a $100. The $20s, $5s, $10s are somewhere around three years. There is no reason to expect the new notes will change the durability life in either direction. It is basically the same materials, rearranged in a different picture.
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    Mr. CASTLE. Thank you both very much.

    Mr. Chairman, thank you very much. You are exceedingly generous. You will probably never call on me again after this. I yield back, sir.

    Chairman BACHUS. Thank you. The audience may not know that we actually have the George Washington of the 50 State quarter program with us today, and sort of a legend in his own time. That has been a great success. I remember when it was first proposed, people were making little jokes about——

    Mr. CASTLE. Big jokes.

    Chairman BACHUS. Big jokes about Representative Castle and a lot of them described it as ill-fated or ill-conceived, and it has turned out to be quite a success.

    Mr. CASTLE. If it failed, I was going to blame it all on Phil Diehl anyhow. I always had an out on this.

    Chairman BACHUS. I was calculating the profits, and, Mike, you have gone a long way toward balancing the budget.

    Let me go back, did you say that you may anticipate a profit this year of between a $1 billion and $3 billion?
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    Mr. MITCHELL. You heard that correctly, Mr. Chairman. In 1999, we did turn over $1 billion in profit to Treasury. This year we think we will be close to $3 billion in profits based on revenues of about $4.5 billion.

    Chairman BACHUS. That is incredible. The penny, does the penny—you are still, from your earlier testimony, you are still making a slight profit on the penny?

    Mr. MITCHELL. Yes, sir.

    Chairman BACHUS. OK. Is there any discussion on taking the penny out? The penny doesn't really circulate, does it?

    Mr. MITCHELL. The penny is a very interesting creature in that we, this year, will be getting very close to minting a record demand again of pennies of over 13 billion of them. They tend to accumulate on people's dressers and in jars and everywhere else, and the numbers of coins, I haven't seen stats in a number of months, but the last time I checked, we had something like 450 pennies for every man, woman and child in circulation.

    Chairman BACHUS. Using that term loosely, I guess I am, because it doesn't do a lot of circulating.

    Mr. MITCHELL. That is exactly right.

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    Chairman BACHUS. A non-circulating coin.

    Mr. MITCHELL. A non-circulating coin is exactly right. So what happens is when we get into these increase demand periods of time and people are having difficulty in returning their coins back into circulation for those who choose to, we work very closely with the Federal Reserve to move existing stocks of pennies as well as to increase additional pennies to move it into targeted areas where there are low inventories in localized or regional areas. It is a fascinating process to watch with so many pennies being outstanding.

    Chairman BACHUS. Thank you.

    Director Ferguson, there was some discussion earlier, you are going to be authorized, hopefully by law, to start printing currency for—currencies, is that the right word—money, for other countries. Do you anticipate ever using some of those technologies—some of those, do you think, Representative Castle mentioned the plastic substrates. Will some of those bills employ that technology? They will be multicolored. Would you comment on whether that is being considered for our currency and whether you anticipate printing any of those bills for foreign governments?

    Mr. FERGUSON. OK. Potentially the currency that which would produce for a foreign country would have to meet whatever requirement they want, so it is wide range of things that they would potentially ask for, including the potential of something other than the kind of paper that we currently produce on.

    There are, as Mr. Castle mentioned, several countries now, especially in the Asian area, Australia being the leader in this technology, that use polymer, plastic, clear windows and other features. It has moved into Europe and soon South America also will have a note.
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    So this is something, that, yes, if someone asked us, and it would give us an opportunity to get a lot more experience in producing a product under the rigors of actual production, the requirements of a customer before we try to do it to our currencies. The American currency system is so large compared to anyone else's, for us to go from zero to full production on a new product is very, very testing. Even the changes that we made starting with the $100, we produced the same product virtually for seventy years, and it tested some of our resolve and some of our manufacturing expertise.

    So this will give us an opportunity to go under actual conditions, produce a product, meet customer expectations, without having to print several billion of them and have them tested in the American markets. We can't recall a product. We have to have it right the first time it goes out.

    As far as the potential of using those kind of things on U.S. currency, certainly we are considering everything. We are looking at the potential of color, we are looking at the potential of foil-type features, anything you can see on a currency in circulation around the world is currently on the table for the next generation of U.S. currency. But we always want to maintain that tradition of a U.S. note looks like a U.S. note, it is recognized as American currency, and it reflects the stability, it reflects our economy, it reflects our country.

    Chairman BACHUS. What is the life-span of the $1 bill? We talked about the penny. I want to get to the $1 bill, since you are using the $1 bill in your promotion of the coin.

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    Mr. FERGUSON. We do have to talk about the copyright infringement. We do note that the only image of a dollar recognized is ours. But the dollar bill lasts approximately eighteen months in circulation. It varies greatly, depending on how the note is used. It is really more a matter of how many passes that it goes through, the velocity of that.

    But on an average, we have used eighteen months for a number of years. There has been some indication at one time it was a little shorter, there have been indications lately it might be longer. But eighteen months is probably a pretty good figure.

    Chairman BACHUS. Has there been any estimates—there has been a lot of discussion—I think there has been legislation proposed in the past to take the $1 bill out of circulation. Has there been any discussion on if you went to a $2 bill and it was widely circulated, how much the $1 bill would be replaced, or the need?

    Mr. FERGUSON. There were, a number of years ago, the last time $2s were in active production was in the late 1970's, we produced $2s in 1976 and 1977, and then didn't print any more, although it is an active, circulating note, sort of like the penny, a non-circulating, circulating note. We produced the $2s again in 1997, I believe, a limited number to replenish the supply as the inventories from 1977 were eventually depleted.

    The currency system is a demand-based system. We print what the Fed needs in order follow meet the needs of commerce and commercial banking. The $2 simply is not demanded by the public, and, therefore, we don't print that. Should it be demanded, we would.

    The earlier estimates were it would replace approximately 25 percent of the face value of $1s. So about 12.5 percent of the pieces, $2s, since they are double the value.
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    Chairman BACHUS. That hasn't happened, has it?

    Mr. FERGUSON. Absolutely not, sir. The $2 has some limited applications and circulation, but it is really not a true circulating note, although, again, it remains as part of the Federal Reserve Act and therefore is an available note should anyone want it.

    Chairman BACHUS. If you stopped circulating the $1 bill, you stopped printing the $1 bill, then obviously, the demand for the $2 bill would increase?

    Mr. FERGUSON. Yes.

    Chairman BACHUS. Any studies or any consideration in doing that?

    Mr. FERGUSON. The current policy of the department and according to the current legislation, both the $1 coin and the $1 bill will continue to co-circulate. Therefore, at this point, we would expect the $1 bill to maintain its place in the monetary system and meet the demand of the public.

    Chairman BACHUS. I might mention to you that we are anticipating sending a letter to the Treasury Department concerning the continued counterfeiting of bills, and also whether or not there is sufficient legislation to prevent software and certain technology from reproducing these bills digitally. If you have any—I will supply you with a copy of that letter and would ask you to also maybe respond with any opinion that you have.
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    Would you agree that there is still far too much printing of counterfeit money with the new technologies? Do you find that actually there is software out there which enables people to print certain bills?

    Mr. FERGUSON. Certainly we believe that any counterfeiting is too much, and would move to do everything we can to reduce that, never eliminating most likely, but certainly reducing.

    There are systems out there that can produce a good picture of a U.S. note. If looked at carefully, they do not reproduce the features, they do not reproduce watermarks, color shifting, embedded security threads, microprinting. The general feel of the note, the high quality print that we do from the engraved plates. If you looked carefully, the note would be distinguished as a counterfeit.

    However, in the day-to-day transactions sometimes and quite often, these are, in fact, accepted. We are working very hard in conjunction with the Secret Service and the Federal Reserve to identify systems which are designed specifically to interact with the digital reproduction systems. Therefore, something that would be embedded potentially in computers, software, scanners, drivers, somewhere in the system hopefully in multiple places in the system that would detect something, we would put into the note so that it would disable the systems from being able to reproduce that.

    This is the next line of counterfeiting that we have to deal with. We dealt with offset type printing back up until the 1980's, color copiers in the 1980's, computers, personal computers and printers and scanners are the next target that we have to really focus on, and I would agree that these systems are major threats, and I am sure that my colleagues in the Secret Service will comment on that on the upcoming panel.
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    Chairman BACHUS. There is an agreement with photocopiers where I think they scar, deface the currency.

    Mr. FERGUSON. Yes. There is a system that was created in conjunction with a number of countries around the world at the auspices of the G–10 that does, in fact, disable copiers, high end digital copiers, from reproducing currencies in a number of countries that have incorporated this system.

    Chairman BACHUS. I am thinking with the printers and scanners and software, we embed that same technology.

    Mr. FERGUSON. It becomes a little more difficult in that there are so many different ones, it is a very large market and there are a number of different ways to interact. You can avoid scanners and go right off the Internet, so it is a little bit more complex, but certainly the target we are all working toward, sir.

    Chairman BACHUS. Fine. I appreciate that.

    At this time we will dismiss the panel. Let me also say this, and we are going to—why don't you go ahead, Chairman Castle, and ask some additional questions?

    Mr. CASTLE. Briefly, Mr. Mitchell, I think I will ask you this in writing too along with—because it connects with the cost of the penny, is the cost of the production of the new $1 coin. We have heard estimates of 14 cents, I have seen 12 cents too as to the estimate on that particular coin. But it is unclear to me whether that includes the advertising costs or not, or that is being costed out in some other way. If it did it would increase the cost to something like 17 cents or whatever. I would be interested in knowing all the cost implications that go into that coin. If you could do that in writing, unless you want to take a very quick stab at it now.
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    The only other question, we met with the coin collectors who came up with this idea, they had said that we really needed a circulating commemorative coin to help spur coin collecting in general, and other non-circulating coins. I haven't heard much back from them since then. Is coin collecting in general doing well as a result of all of this, or is it just the quarters themselves that are doing well?

    Mr. MITCHELL. On your last question, Mr. Castle, thanks largely to this subcommittee and this Congress' passage of the Reform Act, Commemorative Coin Reform Act, the programs have begun to recover. It is still very modest and we still urge Congress to comply with the Act and to use restraint in the limit of two programs per year, and so forth.

    Exactly as you have noted, the impact of having 112 million Americans looking at their coinage, actually close to 150 million that are aware of the changes of our Nation's coinage and 112 million that actively collecting.

    Actively collecting and pulling quarters out of that, we hope to translate that to an interest in other non-recurring and commemorative coin programs. There is a tie-in to that, and we need to work hard to make that connection.

    The other information I will provide to you for the record. A quick answer is the cost of the $1 coin, we project that over the first year of producing this coin, it will be around 12 cents. I would caution that we are just a few months into the production of this coin, and we are learning how to become more efficient, so our early costs are going to be higher. But we think that will average out over the year to roughly 12 cents. It is a brand new manganese-based alloy, it is a new production process, the burnishing of the coin is a different process than we typically do for circulating coins. We are learning and getting better and better at manufacturing this coin.
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    Mr. CASTLE. Thank you. I thought it was gold all along. I yield back.

    Chairman BACHUS. Mr. Inslee.

    Mr. INSLEE. Thank you, Mr. Chairman. I have one personal statement and then a quick question. First, I want to recognize the genius of Representative Castle when it comes to money, because when I served here in the 103rd Congress, he had this tremendous idea. In retrospect, on quarters for the States. I remember when I first heard about it, I thought, you know, where do these people get these ideas? Having seen the national tribute to that, I want to join my voice and saying my reservations, although temporary, I supported it, in the ultimate analysis, my early reservations were certainly inaccurate. So congratulations, Representative Castle, on your great success.

    But I just have one question for—and we really appreciate the work you have been doing. Let me ask you the trivia question. Who was the first woman in America to cast a vote west of the Mississippi? I just want to ask you two fellows if you know this. If you don't know it, don't be embarrassed. This is not ''Who Wants To Be A Millionaire.''

    Mr. FERGUSON. I want to call a friend.

    Mr. INSLEE. Maybe you can get help from a friend.

    Mr. MITCHELL. I got a confirmation on my guess. Was it Sacagawea?
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    Mr. INSLEE. You bet. I wanted to tell you how much we appreciate the work you have done on that. It has been greatly appreciated by my constituents.

    Mr. MITCHELL. Historians tell us, which is not recognized by a lot of folks in the Northeast, on the east side of the Nation, that there are more statues of Sacagawea throughout the country than any other woman. So she is quite an honored person for her role in our history in the Lewis and Clark Expedition.

    Mr. INSLEE. Thank you.

    Chairman BACHUS. She was the first one to cast a vote?

    Mr. INSLEE. I should explain this, I am sorry. When the Expedition got to Astoria, there was a vote taken basically on the question of when they go back and how to go back and whether to wait for marine transport or head back or stay the winter. I am sure she cast the deciding vote that saved America.

    Chairman BACHUS. I always heard it had been Annie Oakley. So I didn't know.

    At this time, without objection, all witnesses' testimony will be entered into the record, both for the first panel and the panel which will be seated in a moment, and additional questions will be submitted to the witnesses so that they may respond in writing for the record if Members have those questions.
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    At this time, we will dismiss the first panel.

    It is a pleasure to have both of you here today. It has been quite a success. Your agencies have been quite a success, proving that there are some very fine operations within the Federal Government. You represent two of those agencies. Thank you.

    At this time we will have the second panel seated. Representatives of the Federal Reserve and of the U.S. Secret Service. I will introduce the second panel at this time.

    Louise Roseman is the Director of the Division of Reserve Bank Operations and Payments Systems at the Federal Reserve Board. She is responsible for the oversight of the Federal Reserve's provision of financial services to depository institutions, fiscal agency services to the Treasury and other Government agencies. Prior to joining the Federal Reserve Board in 1985, Ms. Roseman was Director of Regulatory Affairs for Visa USA and a member of the Government Relations staff of the American Banking Association.

    Was that here in Washington?

    Ms. ROSEMAN. Yes, it was.

    Chairman BACHUS. Our second panelist is Special Agent Bruce Townsend. Agent Townsend served in the United States Secret Service for seventeen years. Presently he is assigned as Special Agent in Charge of the Counterfeit Division. Prior to that, Mr. Townsend served on the Vice Presidential protective division and at the Office of the Director.
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    Mr. Townsend's investigative experience includes working as Assistant Special Agent in Charge of the Memphis Office of the Secret Service and a narcotics officer in the Illinois Metropolitan Enforcement Group. That is a lot of grassroots enforcement work.

    What Vice Presidents did you protect?

    Mr. TOWNSEND. The last two years of the Bush-Quayle Administration and the first two years with Vice President Gore.

    Mr. HORN. Thank you.

    All right, Ms. Roseman, if you will proceed to give an opening statement.


    Ms. ROSEMAN. Thank you. Good morning. I appreciate this opportunity to discuss with you the Federal Reserve's perspectives on several cash-related issues. To provide some context for this discussion, it may be useful to first briefly describe the Federal Reserve's role in currency and coin.

    The Federal Reserve provides cash services to about 9,600 of the Nation's depository institutions. These institutions, in turn, provide cash services to the remaining depository institutions that choose not to obtain these services directly from the Fed, as well as to the public more broadly.
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    While the Fed distributes both currency and coin throughout the economy, our role in these two areas is very different.

    The first important distinction is that while the Federal Reserve issues Federal Reserve notes, the Treasury issues coins. Consequently, the Fed determines the amount of new currency of each denomination to be printed annually by the Bureau of Engraving and Printing. In contrast, the Mint, not the Fed, determines the number and denominational mix for the coins that are produced.

    Another significant difference is the way the Federal Reserve operationally handles currency and coin. The Federal Reserve distributes new and previously circulated currency and coin to depository institutions and accepts deposits of currency and coin from them. In the case of currency, the Reserve Banks verify all notes deposited with them by the banking industry on a note-by-note basis. During this verification, deposited currency is counted for accuracy, counterfeit notes are identified, and unfit notes are destroyed.

    The Federal Reserve's role in coin operations, on the other hand, is much more limited. For example, in addition to the Reserve Banks' 37 cash offices, the Fed uses more than 100 additional sites, known as coin terminals, to handle nearly 80 percent of the Fed's coin volume. Coin terminals, which are generally operated by armored carriers, improve the efficiency of coin distribution.

    In addition, rather than piece-verify coin deposits, the Reserve Banks and the coin terminals generally weigh coin bags to verify the value of the coin received.
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    Let me turn now to some specific issues that are the subject of this hearing. These issues are discussed more fully in my written testimony.

    As the subcommittee is aware, over the years, the Mint and the Federal Reserve have encountered periods when the demand for pennies has temporarily exceeded the Reserve Banks' inventories and the Mint's production capacity. Most recently, the demand for pennies last summer and for other denominations later in the year at times exceeded the Federal Reserve's ability to meet the orders of depository institutions.

    To address this situation, we have centralized our management of coin at a single office to better coordinate with the Mint in balancing Federal Reserve coin inventories nationwide. To better anticipate future short-term peaks in coin demand, the Federal Reserve and the Mint are working collaboratively to develop more refined models to improve our capability to project coin demand.

    Additionally, we are taking further steps to enhance our inventory management, such as reviewing our coin inventory standards and evaluating the benefits of creating regional depots to store coin in easy-to-access locations.

    You also asked for our perspectives on the introduction of the new $1 coin. This launch posed particular challenges to both the Mint and the Federal Reserve. Initially, the new coins release to the public had been scheduled for this month to give the banking industry, armored carriers and the Federal Reserve time to deal with the remaining Y2K currency transportation and storage issues. We had planned to build adequate inventories by the release date to ensure that the launch would proceed smoothly.
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    When the Mint announced its plans late last year to have Wal-Mart begin promoting the new $1 coin in January, however, the banking industry asked that it receive the new coin at the same time. The Mint and the Federal Reserve have tried to accommodate the industry's request, but the production and distribution logistics associated with the accelerated schedule made it difficult to meet all of the banks' initial orders for the Golden Dollar.

    To address this situation, the Mint moved aggressively to increase its production of $1 coins, and the Federal Reserve has worked closely with the Mint to increase Reserve Bank orders to take on the Mint's extra production.

    The Mint and Federal Reserve also developed a temporary direct-shipment program, managed by the Mint, to help expedite delivery of limited quantities of $1 coins to small institutions. Demand for the new $1 coin has been, and in the near term, will continue to be very difficult to estimate. We are confident, however, that within the next few weeks, the distribution channels will catch up with the initial demand and that the Federal Reserve will be able to fill all orders for the new Golden Dollar on a timely basis.

    Finally, the subcommittee asked for our views on the pros and cons of issuing U.S. currency in denominations greater than $100. Demand for our current high-denomination bank notes, the $100 and $50s, come primarily from the international market. Ultimately, we believe that the stability of foreign currencies, the confidence in the U.S. dollar as a stable currency backed by a strong economy, and the lack of any recall of U.S. currency will continue to be the primary factors influencing international demand.

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    Domestic demand for high-denomination notes has been modest. The American public tends to use checks, credit or debit cards, or other non-cash forms of payment, rather than cash, for larger dollar transactions.

    Therefore, we do not believe that the introduction of a higher denomination note would materially enhance the attractiveness of using U.S. currency, and that the cost savings from reduced printing, processing, and transportation would likely be de minimus. We also recognize that the law enforcement community has expressed concerns that high denomination bank notes could facilitate money laundering and drug trafficking activities. Thus, the Federal Reserve does not foresee any immediate need to issue higher denomination notes.

    Thank you for this opportunity to share our perspectives.

    Chairman BACHUS. Special Agent Townsend.


    Mr. TOWNSEND. Mr. Chairman, Members of the subcommittee, good morning. Thank you for this opportunity to appear before you. It is my first time having had this opportunity, and I look forward to working with you in the years and months to come.

    I have submitted testimony for the record, and with your permission, I will summarize it at this time.

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    In addition to providing the highest level of physical protection to our Nation's leaders, the Secret Service has set as its highest investigative priority, the identification and suppression of counterfeit currency production and distribution networks. The Secret Service continues to protects the integrity of the Nation's financial systems through aggressive criminal investigations and assessing international trends in order to identify preventative measures to counter systemic weaknesses. Recent trends in the counterfeiting of U.S. Currency indicate a growing globalization in production and distribution of the counterfeit notes.

    With 60 percent of our genuine currency circulating outside the United States, the dollar continues to be a target for transnational counterfeit activity.

    This activity has also been associated with organized crime and drug trafficking and round the globe. Ink jet technology also continues to significantly contribute to the domestic passing of counterfeit currency. In fiscal year 1998, for the first time, passing activity surpassed ceased activity due in large part to the proliferation of ink jet technology throughout our communities. Of all the domestically passed counterfeit notes this year, 46 percent have been digitally produced. Although these notes tend to be of lesser quality, they are often investigatively linked to gang activity and interstate drug trafficking.

    As new technologies continue to emerge, the challenges facing law enforcement are significant. Leading-edge technology has enabled an expanding criminal element to conduct a variety of schemes. The Secret Service continues to meet these challenges with investigative strategies that incorporate successful methodologies of the past with the new technologies of the present and future.

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    An advantage in reprographic technology mean large quantities of counterfeit currency and other obligations can be reproduced on demand. Today's criminals need relatively little knowledge or specialized training to print counterfeit currency or other obligations.

    Utilizing equipment ranging from inexpensive color copiers to scanners, computers and ink jet printers, to large commercial presses, a counterfeiter or criminal organization can flood a region with counterfeit currency. In the foreign arena, higher quality notes with wide international distribution continues to be associated with transnational counterfeit activity. Of all the counterfeit notes passed domestically this year, slightly more than half of these notes were produced utilizing classical printing techniques. 87 percent of that number were produced outside the United States and transported here for distribution.

    Last fiscal year, foreign arrests for counterfeiting increased significantly from 421 in fiscal year 1998 to 593 in fiscal year 1999. Foreign seizures of counterfeit currency rose from $66 million in fiscal year 1998 to $84 million in fiscal year 1999. Overseas counterfeit printing plant suppressions also increased from 29 in fiscal year 1998 to 38 in fiscal year 1999.

    The Secret Service currently maintains 15 offices throughout the world staffed by 54 special agents and support staff. These strategically located offices allow the Secret Service to extend its investigative reach and present a coordinated response to transnational crime.

    We have recently opened field offices in Moscow, Russia, and Pretoria, South Africa, due in large part to combat the counterfeiting of U.S. currency in those regions. Efforts are underway to increase the staffing of our Bogota resident office in support of the joint effort with Colombian officials to intensify their investigation and prosecution of those who counterfeit U.S. currency.
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    If we are to effectively address foreign-based crime at its source, our first line of defense must be abroad. In geographical regions where Secret Service personnel are not permanently assigned, task forces are employed to address specific concerns. Personnel are temporarily assigned to address the problem and provide sufficient information to help assess whether the problem is short or long-term in nature and if the permanent placement of personnel is needed.

    Under the authority of Title 18, United States Code, Section 470, the Secret Service investigates and presents for prosecution cases in which suspects produce or distribute counterfeit U.S. currency outside the United States. The Secret Service continues to aggressively use this extra territorial jurisdiction to compliment our overseas mission. We plan to expand the use of Section 470 in the coming years in order to bring international counterfeiters of U.S. currency to justice in the United States.

    For the past 135 years, the Secret Service has steadfastly safeguarded the monetary obligations of our country. The U.S. dollar is the currency of choice around the globe and we take pride in the part we play in sustaining the confidence which our currency enjoys.

    Mr. Chairman, this concludes my prepared remarks. I would be pleased to answer any questions that you or other Members of the subcommittee may have. Thank you.

    Chairman BACHUS. I appreciate your all's remarks. They are very, very illuminating. Very good remarks.

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    Chairman Castle.

    Mr. CASTLE. Thank you, Mr. Chairman.

    You know, that is interesting, the business about the overseas counterfeiting. I come back to the question I asked earlier of the BEP, and that is the whole business of—I have two questions basically. One, I assume with all the modern technology of computers and printers and everything else, that your desire and the need probably to change our currency more frequently is probably going to come up. I am not suggesting anyone knows how, but I can't imagine there won't be more agitation to change it much more frequently than we did in the past for security reasons. That is one thing I would like you to answer.

    The other part is, as I asked them, with respect to the use of plastic substrates, whatever, artificial materials as they are using apparently in Australia and other countries, clear windows and things like that, what is your research with respect to the security of that? Setting aside the cost of the technology for it. I would think the security of that would be better than doing it just on paper in terms of the copying, and so forth. Are you all being consulted about that or being involved in the research and development of that or anything else that is happening in bringing that on stream if we are ever going to do it?

    Mr. TOWNSEND. Let me answer your first question at this time. With regard to changing the currency, we are in consultation with the Fed, with BEP, and with Treasury on a regular basis. In terms of the time, certainly the Secret Service would recommend more often than the sixty years it took us to change the first time.

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    I feel very comfortable with where we are at in terms of our progress on resurging technology. With regards to the substrates and other possible substances for use in our currency, I don't think we want to delude ourselves that we are going to find the magic formulation, the magic combination. I don't know that a counterfeit-proof currency exists. It certainly doesn't exist today anywhere in the world. The currencies that we see in other countries are counterfeited. To what degree depends, of course, on what we are talking about.

    With regard to Secret Service involvement in this process, as I mentioned, I am very comfortable in that. The forensic specialists we have assigned to our division, some of whom are seated behind me today, are active participants in the research that goes on. We travel the country, from California to New York to Massachusetts to Washington, in terms of making sure that the Secret Service has input into where we need to go with the security features in our currency.

    Mr. CASTLE. Let me change subject a little bit, something Ms. Roseman said that I was actually going to ask her, she implied the making of the $500 and $1,000 bills, we should exercise caution in that area, and designated certain reasons, including the passage of drug money and various other things.

    As I understand it, the European Union is making these somewhat equal to a $500- or $1,000 bill, or is getting ready to. It seems to me with our currency being the preeminent currency in the world today, I am not too sure we want to allow a competitive currency to go out there and do it without us getting involved as well. Obviously a $500 bill is probably equal to a $100 bill of so many years or decades ago. It would seem to be almost an economic necessity perhaps, but economic convenience to have that.
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    Do you share those feelings? If you do, do you share it enthusiastically, or in a lukewarm way, or aren't sure or what?

    Mr. TOWNSEND. We in the Secret Service do share those feelings. I would like to mention a couple of reasons why.

    First of all, we do have concerns, although it is not specifically within the realm of the Counterfeit Division, we in the Secret Service do investigate money laundering. We have concerns about how this new denomination would facilitate money laundering.

    Second, as you may know, the $100 note that we have in service today is the counterfeit target of choice overseas. So we have concerns that by going to a $500 note, would that then become the target of choice overseas and replace any benefit we might see in seigniorage revenues with that?

    With regard to the introduction of the euro, we are looking at that very carefully. We are anticipating the possibility of euro-counterfeiting cases domestically, cases overseas certainly of counterfeiting of the euro and dollars jointly, and, of course, we want to ensure we protect those seigniorage revenues by ensuring that the dollar remains the global currency against the euro.

    Mr. CASTLE. If I may, Mr. Chairman, let me ask Ms. Roseman a question. I am going to combine several things into one question. I am concerned about the distribution of coinage in the country, because I was involved as a sponsor of all these bills that did these coinage, the people in Delaware tend to call my office, so I am hearing a lot more about this than probably the average Congressman who did not participate in this would. My staff relays it to me on a regular basis.
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    But people really are having trouble getting, for example, the Golden Dollar at this point. It is very difficult to do. Small banks complain about big banks, the big banks complain we are not getting it either, Wal-Mart is getting them. We are also hearing of problems in other States and also with other coinage in terms of availability right now.

    For some reason or another, a lot of coinage is apparently difficult to achieve or to find. For example, last week, vending machine operators' reported inability to get adequate supply of $1 coins, Anthony or new dollars, in Wisconsin, Illinois and South Carolina. It may be different around various parts of the country.

    I don't think this a great problem. The Nation is not going to falter because of this. But is it is an inconvenience and it is something which is disturbing some people. It leads me to raise the question of whether or not we are really—you went through this when you deal with coins, you are dealing with a little different problem than with currency in that you have to deal with the Mint and various distribution points or whatever.

    But is anyone looking at this carefully, or are we just assuming the way it has always worked before will work in the future, or because of the interest in the quarters in particular, or perhaps these new Golden Dollars, at least temporarily, we need to look at the distribution methodologies and the contact points and try to perhaps ameliorate this problem if it is a problem?

    Ms. ROSEMAN. Mr. Castle, this is something we are looking at actively right now. As I mentioned, and as you are well aware, we have had temporary periods over time, most recently last year, where the demand did outstrip the supply. We are looking to see what we could do to minimize the risk of that happening in the future; a lot of those efforts involve working collaboratively with the Mint. So, for example, one of the things we wanted to make sure of is that we can better project what the demand is in the future, and we are working with the Mint on more sophisticated modeling that will enable us to project out in the future, both seasonally and then over longer timeframes, what the demand for various denominations would be so we can better prepare.
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    As part of that, I think we need to look at the way we do our inventory management within the Federal Reserve.

    As I mentioned, we recently centralized our inventory management so we look at things from an overall system perspective rather than having each Reserve Bank office look at it totally independently, and we are able to better ensure the coin gets to the parts of the country it needs to be.

    But I think there are further things we can do along those lines. We are looking at whether we could change the target inventory we have for different denomination of coins, perhaps even having it vary by time of year given the seasonality and coin demand.

    We are looking at whether we need to have reserve inventories of coin to be able to meet the short-term spikes in demand regionally around the country that we would be able to access when needed.

    So we are going to be working with the Mint to try to take whatever steps we can to ensure that, going forward into the future, as depository institutions order coin, we would be able to fill those orders on a timely basis all year round, every year, rather than having these short-term problems.

    Mr. CASTLE. Let me ask you one final question, a little bit of change of subject, and that is the subject of e-cash or electronic money. This is a pretty wide open question, because I haven't had an update on this, and I don't know where you are at this point. But what are your views or, if you can express it, the views of the Fed with respect to this? Should the Federal Government continue to be a producer in this area? Should we be a regulator in this area? Do you see these various forms of plastic and other transmissions of use of monetary policy influencing your decisions with respect to monetary policy?
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    Even I, and I am an old dog, you know, use little cards for the vending machines here, and this is happening more and more, as we had testimony on before the subcommittee when Mr. Lopez was on this side instead of over on your side.

    Ms. ROSEMAN. Right.

    Mr. CASTLE. I am just curious as to—I want to make sure that you all are thinking about that, focusing on it and making whatever the—I don't know what the right decisions are, but I don't want to make the wrong decisions, and I would hope that some agency of the Government is paying some attention to it. Could you bring us up to date on that?

    Ms. ROSEMAN. This is something we have been paying a lot of attention to and we have been monitoring very closely. It is really interesting, if you go back a couple of years, what the expectations were of a number of people in the industry at that time about the explosive growth of various stored value card systems and e-money systems. That hasn't come to pass to date, but I think there is still a lot of experimentation and innovation going on in the private sector, which the Federal Reserve strongly supports. And I think our primary objective is to ensure that that innovation can take place with minimal impediment from the Government.

    We are not concerned with e-money from a monetary policy perspective. It has not at all deterred our ability to implement monetary policy. With respect to Government involvement in issuing e-money, I think this is one area in which we need to tread very carefully, because we do want to encourage private sector experimentation and initiatives in this area, and it is unclear to what extent active Government involvement, as far as being a provider, would deter the private sector from really moving forward with their own initiatives.
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    So that is something that I think needs really careful review.

    Mr. CASTLE. Well, thank you both very much.

    I yield back to the Chairman.

    Chairman BACHUS. Thank you. Thank you.

    Agent Townsend, with the rapid pace of technology, do you feel that the current Federal laws and statutes are in step with the evolution of criminal activity when it comes to counterfeiting?

    Mr. TOWNSEND. Mr. Chairman, that is a topic of great concern and of frequent discussion in the Secret Service.

    I would first like to say that this is a very complex issue involving privacy rights, involving commerce issues and so forth. Clearly, though, as Mr. Ferguson alluded when he was up this morning, we have seen a very clear evolution in terms of counterfeiting, even during the seventeen years I have been in the Secret Service, from the so-called classical printing technology with offset printing of plates and negatives, I mean inks and presses and so forth, to the digital imaging we are seeing today.

    From our conversations with the industry, they tell us if you think you have a problem now with the quality of the images that are able to be produced, wait five years. They will be able to be downloaded from the Internet to your palm pilot to probably your cell phone and moved around in that manner. So we do have some concerns that perhaps clarity is needed with regard to the issue you bring up, and we would welcome the opportunity to explore some of those clarifications or participate in the process which might ensure that our criminal laws stay apace with technology.
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    Chairman BACHUS. Thank you. You know, you have mentioned—in fact, at your operations you deal transnationally overseas, do you feel like you have the resources adequate to combat the threat?

    Mr. TOWNSEND. Well, there is no question that in the Secret Service today we are stretched. We are in the good position right now of bringing some more personnel on board, but when we talk about, as I mentioned in my opening statement, the concern with transnational counterfeiting, these notes tend to be of higher quality. The time and distance involved—we don't expect to be everyplace in the world, obviously, but clearly where Secret Service sees its investigative program needing to go in the next five to ten years is overseas.

    We are overseas now. We have a good presence, but that presence needs to be increased so we can continue to stay on top of these issues, and additional resources at some point probably will be necessary.

    Chairman BACHUS. I was Chairman of the Oversight Committee in the past few Congresses, and we dealt a lot in counterfeiting and money laundering, and the amazing fact with narco-trafficking, with the drug trafficking, is that the drugs come in, but to make a successful transaction the money has to go back.

    Mr. TOWNSEND. Yes, sir.

    Chairman BACHUS. Often, the money weighs more than the drugs. People don't realize that.
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    Mr. TOWNSEND. Yes.

    Chairman BACHUS. We seize very little of the money. We have seized a lot of drugs, but we haven't seized a lot of the money, which means that they have been successful in one way or the other, once they have had that transaction at the street level, in getting that money back overseas.

    I think part of that has been that we haven't adequately funded that part of the equation. I mean, we have put all of our resources into the interdiction of drugs, not on the interdiction of the flow of the money back. Then the counterfeiting is obviously mixed into all of that.

    Mr. TOWNSEND. Yes, sir.

    Chairman BACHUS. When you say—one thing that I can say from personal experience on listening to those hearings, if we went to a $500 bill it would be 5 times easier for narcotic traffickers to get the money back out.

    Mr. TOWNSEND. Yes, sir, it would.

    Chairman BACHUS. So it obviously would be something that they would probably choose to use, because it would be less likely to be detected because it wouldn't be as bulky.

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    Mr. TOWNSEND. I think that is exactly right. I think there are a lot of questions with regard to that that still need to be explored with regard to this new denomination, the potential of that. While it may seem at first glance a good thing, and it might so-called keep us in competition with the euro, I think there are just a lot of issues which we need to more fully explore.

    Chairman BACHUS. All right. Thank you.

    You have addressed the computer-generated counterfeit notes. How does this tie in with—you know, the Secret Service has been quite vocal about asking for sentencing guideline changes for counterfeiters.

    Mr. TOWNSEND. Yes, sir.

    Chairman BACHUS. You haven't made a lot of progress with the Sentencing Commission, have you? What is the status of that?

    Mr. TOWNSEND. The status is——

    Chairman BACHUS. Why are you doing that? What are these new guidelines?

    Mr. TOWNSEND. Mr. Chairman, again referring to our history in counterfeiting, with regard to classical counterfeiting, a counterfeiter had to have, first of all, some printing expertise. He or she had to know how to make plates and negatives, how to be a printer, if you will. Our currency has three different kinds of inks. You had to clean the press and make negatives and blow up images using a graphic arts camera and so forth. That was a pretty time-consuming operation, and that operation was also a static one. It didn't go anywhere. Once you got a printing operation set up, it remained either in a garage or a basement, and the illicit operation continued there. It didn't move around.
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    One further point on that is, once the person is all set up, he or she is going to print. They are going to print—and we have seen $17 million, $20 million, $40 million seizures because of this time-consuming and hard to move operation. They are going to print large quantities.

    Well, today, all that from the illicit operation is now condensed on a laptop which can be thrown in a briefcase and go on an airplane across the country or in the trunk of a car.

    The distributor of counterfeit money, instead of having to purchase maybe a $200,000 package from this illicit operation that maybe had $50 million printed at one time, the distributor now can purchase a $5,000 package on demand. He might do that forty times to have the same economic impact as the $200,000 package.

    The Sentencing Guidelines are tied to amounts of counterfeit with regard to distribution. So in days heretofore when we made those arrests of that $200,000 trafficker that was a good arrest and he got good sentencing points. Well, today, digital imaging has created the situation where we might make the arrest of the trafficker who, because he knows he can go back and buy another $5,000 package tomorrow, there is no reason to walk around with $200,000.

    For example, when we make the arrest, he has $5,000. The Sentencing Guidelines, as I said, are tied to amounts, and although that criminal has created the same negative economic impact over a period of weeks or months as his predecessor, we are faced with a situation where we can only charge him with that particular amount. When it comes to sentencing, the guidelines would only take into account that $5,000 package.
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    We are concerned that the guidelines need to be updated to keep up with technology. In the world today, if any law or procedure or policy or technology is more than two or three years old, it probably deserves a second look.

    Chairman BACHUS. You could still deal with that and, as you have it now, your so-called casual activity by your juvenile or something, are you seeing a lot of that?

    Mr. TOWNSEND. We do see some of that, but I think the term ''casual counterfeiting'' is misleading to the American people.

    Chairman BACHUS. OK. All right.

    Mr. TOWNSEND. We do see some of that, but we also see just as much cases of ink jet or computer-generated counterfeiting that are tied to criminal street gangs, that have interstate transportation involved and that have narcotics involved. So this term ''casual counterfeiting,'' I think, is one that is overused and misleading.

    Chairman BACHUS. OK. That, I guess, has sort of, as you said, misled folks to believe something.

    Mr. TOWNSEND. Well, I believe so.

    For example, in December of 1999, not very long ago, in Sacramento, California, methamphetamine lab, very dangerous drug, a search warrant was executed and found, as you talked about earlier, Mr. Chairman, both parts of the production were in evidence there. They were creating the methamphetamine and the counterfeit money.
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    In Chicago recently, a violent street gang there determined, by taking a look at the Sentencing Guidelines, if you compare them to cocaine versus counterfeiting, much more profitable to go into counterfeiting. They took that up and caused us considerable concern there.

    In Memphis, Tennessee, in the fall of 1999, over $100,000 seizure with a street trafficker that had gang ties. So, again, I think the evidence is out there to refute this notion of casual counterfeiting.

    Clearly, the sixteen-year-old who prints a counterfeit note and takes it to the school cafeteria is good fodder for the media, and that always makes it in there, but for every one of those cases we can cite cases that I just have for you that have negative impact on our communities.

    Chairman BACHUS. Thank you. Thank you. I appreciate that.

    Director Roseman, you were asked about coin shortages earlier. How much of that might—even of the domination of quarters or dimes—have occurred because of the $1 coin, of the attention and maybe the system being overwhelmed by the $1 coin? Was there some of that?

    Ms. ROSEMAN. I don't think so. If you look at the timing of the shortages last year, that, I don't think, was really affected by the $1 coin introduction.

    Maybe the Mint could address this more specifically as far as the inability to meet total demand at the end of the year, whether they had diverted some of their production at that point in time toward the $1 coin. But I think if that had an effect it was probably a fairly minimal one.
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    Chairman BACHUS. OK.

    Can we expect to see fewer shortages or have the shortages been sort of overpublicized or overstated?

    Ms. ROSEMAN. Generally, we have been able to fill the orders of depository institutions. As I mentioned, there are some temporary periods we may not be able to fully fill the coin orders of all depository institutions in some regions on a timely basis. Some portions of the order may need to be delayed, but I don't think that there had been any major shortages per se.

    I think it was just that our inventories were getting very low and we needed to manage that very carefully in responding to the orders of the banks that were placing them with us, but I don't think it created any material economic effects in those regions.

    Chairman BACHUS. OK. Thank you.

    Chairman Castle.

    Mr. CASTLE. Nothing further.

    Chairman BACHUS. I wanted to ask one other question, if I can find it here. It has to do with gold plating of U.S. coins.

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    I will ask this to Agent Townsend. What is your opinion of private sector operations gold plating U.S. coins? Is it legal or does it amount to defacing?

    First, do you have an opinion on that?

    Mr. TOWNSEND. I have to tell you, Mr. Chairman, that is not something—with regard to the whole issue of altering and defacing coins, I am happy to report to you that that is not something that we see on a regular basis.

    Chairman BACHUS. OK.

    Mr. TOWNSEND. The counterfeiting of coins and the defacing of coins and so forth has been very low and very incidental to our total problem that we see.

    We did have an issue, a very small case in the Boston and Maine area late last fall, which arrests were made on that, but with regard to the counterfeit coin issue we don't anticipate problems with that. We have seen some cases in the past where genuine coins were altered for numismatic purposes, but the wholesale counterfeiting or plating of that has not been an issue, fortunately, which has been of grave concern.

    I also want to tell you that, with the introduction of the new $1 coin, my office sent out an alert to our field offices worldwide to begin to monitor any suspected activity and to report it to us immediately so that we can stay on top of the issue.

    Chairman BACHUS. And you haven't had any reports?
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    Mr. TOWNSEND. No, sir, we have not.

    Chairman BACHUS. OK. Thank you.

    I think I am going to close out the questioning with that. I very much appreciate your attendance, and the hearing is adjourned. Thank you.

    [Whereupon, at 12:15 p.m., the hearing was adjourned.]