What Can Be Done to Remedy the Coin Shortage? – J.P. Koning (07/10/2020)

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It is common to hear calls for change in an election year. But such requests are not usually directed at the Mint. Alas, the US is currently experiencing a coin shortage. And many stores are asking customers to use a card or pay with exact change until the shortage is remedied. 

What is causing the coin shortage? “The flow of coins through the economy, it has gotten all — it’s kind of stopped,” said Jerome Powell, the Chair of the Federal Reserve, while testifying in front of a House Financial Services Committee last month.

FRBServices, the branch of the Federal Reserve that offers customer service to member banks, provides a more complete explanation. The problem is twofold. Coin production is down thanks to measures taken by the US Mint to protect its employees during the COVID-19 pandemic. Specifically, shifts at its Philadelphia and Denver production facilities, which produce circulation coins, have been reduced. At the same time, recirculation of unused coins back into the economy has dried up as the public avoids spending its personal stash of coins.

On June 15th the Federal Reserve announced its response to the coin crisis: coin rationing. Pennies, nickels, dimes, and quarters would be allocated to banks on the basis of historical order volume. In the meantime, the US Mint will ramp up production to meet demand.

Under rationing, banks don’t get the amount of coins they’d prefer, and so neither do their customers. For instance, NPR recounts how the Bank of Lincoln County in Tennessee typically dispenses 400 to 500 rolls of pennies each week. With rationing, the bank’s allotment has been cut down to just 100 rolls.

Despite facing many of the same challenges as the US, neighbouring Canada isn’t suffering from a coin shortage. Much like the US Mint, the Royal Canadian Mint has faced production constraints—it was shut down for two weeks beginning in late March to deal with worries about the spread of COVID-19. Canadians use cash for around a quarter to a third of all transactions, about the same rate as Americans.

My suspicion is that this divergence could have to do with the ongoing existence of the US penny. Canada cancelled the penny back in 2013. But an outsized chunk of US coin capacity—which includes minting, transporting, and storing—continues to be sacrificed to supporting one cent coins. For instance, of the 4.9 billion coins that the US Mint has produced so far in 2020, the majority of them—2.7 billion—have been pennies.

This means that when there is a shock to the economy, it is much easier for the penniless Canadian coinage system to adjust than the US one. The US Mint must continue allocating scarce coin press time and labor to making huge amounts of tiny denomination coins when it could be making more valuable dimes and quarters.

This is especially unfortunate because the penny has long since become a useless item. A one-cent increment is simply too small to bother thinking about in retail transactions. These tiny nuisances often end up discarded or forgotten in jars. Each penny that the US Mint produces costs 1.6 cents. In 2019, the mint lost $73 million producing pennies!

Rationing is one temporary fix, but there are a few other options.

One is to allow the private sector to issue their own alternative versions of small change, an idea that George Selgin has suggested here. It’s not a crazy idea.Grocery stores in Argentina, which are also suffering from a shortage of spare change, are issuing their own 2 and 5 peso notes–worth around 3 and 7US cents, respectively. Walmart and Circle-K could just as easily issue 5-, 10-, and 25-cent IOUs in the US.

Source: https://twitter.com/jp_koning/status/1278301653247111169

Another option would be for the Fed to ask all retailers to temporarily implement Swedish rounding.Under Swedish rounding, retailers continue to set their sticker prices as before. For example, Walmart could still use the ever-popular $0.99 or $1.99. But when the final receipt is calculated at the checkout counter and cash is presented as payment, the amount owed gets rounded to the nearest five or even ten cents. 

In the case of five cent rounding, if the final amount on the receipt is $3.47, then the buyer owes an even $3.45. But if the final amount is $3.48, then the buyer owes an even $3.50. With ten-cent rounding, $3.44 gets rounded down to $3.40, but $3.45 gets rounded up to $3.50.

By temporarily implementing five cent rounding, American stores would not need to have any pennies on hand. Ten cent rounding would free them from the need of having both pennies and nickels in stock. 

In the meantime, the US Mint could focus all of its resources on producing dimes and quarters, not silly pennies. This would put an end to the US’s coin shortage, almost immediately. Then, the Mint could refocus on nickels and pennies (if it insists). Once sufficient stocks of these small coins are rebuilt, the Federal Reserve could ask stores to cease Swedish rounding and go back to normal pricing.

Or not. The US could simply continue its temporary fix indefinitely. My guess is that once Americans experienced life without the penny, they’d come to prefer it.


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