By Victor Yan
- The Purpose of Coins
- Stepping Foot Inside a Coin Shortage
- Supply Side: Production Chain Disruptions
- Demand Side: The Velocity of Money
- The American Payment System
- Money in the Future: Physical or Digital
Shortages are a fundamental concept within the world of economics and finance, occurring when quantity demanded is unable to satisfy quantity supplied. After over 5 months living in a COVID-19 stricken reality, we have witnessed constant shortages – whether it be the initial shortage in China’s manufacturing of intermediary goods, the shortage of sufficient PPE, or even the shortage of toilet paper as a result of panic buying. However, a new shortage may be precipitating in American circles: one that reflects a shortchange for coins.
In this article, we will aim to explore the functional purpose of coins and see how it plays into the current coin shortage. We’ll delve into the implications of this shortage upon common American businesses and households, as well as pick out some fundamental drivers behind the phenomenon. Finally, we’ll question the efficacy of having a cash/coin payment system leading on in a COVID-19 disrupted future, noting the common criticisms but exploring the possible benefits of embracing a digitalized payment system.
One might be naturally suspicious of this supposed “coin shortage”. After all, a great deal of attention has been dedicated to the Fed’s actions in providing the economy with ample liquidity via monetary policy. The evidence is clear: measures of money supply such as M2 has dramatically increased to historical highs as illustrated below:
This is factually true, as the money supply has indeed increased – even inciting medium-term inflationary fears (read more on ‘Inflation Volatility’, here) from market commentators once we approach the mature stages of the virus (eg. Wharton’s Jeremy Siegel’s opinion on inflation)
However, money can come in many forms by varying degrees of liquidity. Cash and coins come most obvious, but near-term money mediums such as checking/savings accounts, time deposits and money-market securities also qualify. In this case, the shortage is concerned with the spare change you keep in your wallet.
The Purpose of Coins
Before examining the current shortage, we should question the actual point of having coins at all. After all, wouldn’t an electronic $100 in my bank account be the same as $100 in coins if they are all $100? It would be a reasonable assumption in economics for money mediums to be fungible, however coins play a functional role in our payment system.
This is typically to make up for the gap of the base money we put down on purchases. For example, I might buy a box of $9.75 sushi and pay a $10 note, where I would receive $0.25 of change back to make up for excess pay. This works the other way around too. If I were to buy a $25.40 book, I might pay a $20 note plus a $5 note, then use $0.40 of pocket change to make up for the shortfall.
Stepping Foot Inside a Coin Shortage
With that established, what’s actually happening in the States? Well if you were to walk into a local Walmart or Kroger , you’d be asked to either use cards or exact change, while these businesses are increasingly denying reimbursing change in coins. Interesting tactics have surfaced addressing this issue such as stores offering the difference on loyalty cards or encouraging customers to donate the gap towards charity.
Meanwhile, banks and institutions have been begging customers to pump more coins into circulation – some offering incentive schemes on offering a premium above the coin’s face value if you were to deposit it with them. For example, Wisconsin-based Community State Bank had issued a coin buyback program which offered an extra $5 for every $100 in coins brought in (ie. a 5% premium above par). With coins needed by these businesses as part of their operations, the lack of spare change has massively complicated normal consumer to vendor transactions.
Furthermore, this coin shortage is likely to disproportionately affect the lower income class of America. It is no new revelation that the USA has a growing wealth inequality issue (For further reading: Robert Reich, Thomas Piketty), and this has extended towards the “unbanked and underbanked” – adults without bank accounts or are reliant on other financial services for their needs. The FDIC estimates around 22% of the American population are grouped into this classification – of which a majority are lower income immigrants who lack the minimum balance to open accounts. As such, an overreliance on physical money within these groups coinciding with a coin shortage spells a disastrous equation where many can give out coins but are denied coins back for their services.
Simply put, an unwillingness towards transactions in coins have led towards certain activities becoming very difficult. For example, if I wanted to do my laundry at the local laundromat, I’d have to slip in a quarter for clean clothes. If I had insufficient coins, I’d end up running to a bank to exchange money to spare change, only to be denied as banks are short on supply. As a last resort, I might run to the local 7/11 to buy a candy bar for change, only to be told to pay with a card or pay in the exact change I don’t have. With businesses and institutions facing a short supply of change, one can imagine it’s bottleneck effects flowing onto the everyday household.
Supply Side: Production Chain Disruptions
So why is this happening? Part of the reason behind the shortage stems from a temporary closure of the US Mint for safety reasons due to COVID-19- the institution in charge of manufacturing the nation’s coin supply. Even after opening, the Mint is operating under reduced capacity – to the point where gold and silver coins cannot be produced simultaneously and one metal must be accommodated over the other at any given time. In response to this supply issue, the Federal Reserve has convened a US Coin Task Force – a group of industry leaders towards finding solutions towards the COVID-19 disruption of normal coin circulation. In addition, the “Strategic Allocation of Coin Inventories” was announced on June 11th – where The Reserve will temporarily allocate their spare coin inventories towards depository institutions.
Demand Side: The Velocity of Money
However, the larger driver behind the shortage is attributed to the buyer side. After all, we are in a global pandemic, which sees a greater emphasis towards staying indoors. Here, limiting exposure has seen more purchases online rather than physically stepping into brick and mortar stores and using cash/coins. Moreover, a portion of the population may be fearful of incurring the virus effectively through receiving coins from a stranger. As such, many have opted towards paying via credit cards or if forced to pay with coins, have gone to the measures of sterilizing their coins afterwards.
The reality is, for the most part, there seems to be an adequate stock of coins in the economy, however, the coins just aren’t changing hands as frequently – termed as the velocity of money. The basic money supply equation taught in Economics suggests that nominal GDP is determined by both the amount of money within the economy, as well as how often that money changes hands during a specific period:
As previously noted by the Fed’s actions, the money supply is indisputably up, however, the velocity of money is overall down. While a large part is due to household fear to spend and a higher propensity to save to brave the financially tumultuous months ahead (USA saving rate increased to 33%), the stale circulation of coins hardly plays a positive influence in this equation.
There is a common economics adage that “one man’s spending is another man’s income, and that man’s spending is another man’s income”. To apply the saying in current circumstances, that same man can have all the income in the world, but with little to no spending towards another man, the sequence of money flows fails to flow down the perpetual chain – placing negative pressure on the economic growth of society.
The American Payment System: Stuck in the Old Days?
With the present US coin shortage defined, many Americans question whether this might signal a transition into a more electronically-dependent, cashless society. While there are sophisticated aspects in the American payment system, the virus has indeed exposed some of its flaws – some of which I was able to anecdotally experience from my USA exchange during Semester 1 of this year.
The aforementioned purpose of change in making up the gap in payments against actual product price is exacerbated in the USA, mainly due to the existence of the 1 cent penny. During my USA exchange, I would often see prices listed as $3.27 for a morning coffee and knowing that after paying, I’d be stuck with an annoying amount of quarters, dimes, and cents in my pocket. (I eventually settled on buying a batch of Pete’s Coffee and making it in-house)
Even worse, anyone who has tried to stock on fuel in their vehicle suffers through the same issue. We all like to play the game of squeezing the handle and timing our fuel charge to a clean number such as $25.00. But more often than not, we miss the mark and end up charged $25.08 or something of the like. We need that $0.08 of change to cover the shortfall, but amidst a coin shortage, such a trivial issue can magnify into quite the frustrating predicament.
The Future of Money: Cash or Digital?
Unless you have a side hobby in coin collecting, these transactional frictions run commonplace within a cash and coin system. Yet, some countries have transitioned towards a cashless society. A good example of this would be China’s payment system. Aside from paying for street food from a vendor, virtually every item is conventionally purchased electronically via scanning QR Codes on your phone, and new applications such as Blockchain technology look only to reinforce the safety and compliance issues behind a fully-integrated online model.
We’ve seen a transition towards a new era of contactless, online payments. Just over the past few months in western spheres, we’ve witnessed high market sentiment towards online platforms such as APT, ZIP, SZL and SQ – their growth compounded by a series of SEOs and M&A activity (eg. ZIP’s acquisition of QuadPay) in signals of entering international markets.
Many pundits criticize this change from “change” and are vehemently against a cashless society, citing privacy concerns, discrimination against technophobic elders, or making it harder to monetarily give out to the poor. However, there are benefits towards such a system, a lot of which I’ve experienced by personally using only bank cards and phone payments, for example:
- I saw less risk of monetary loss. Whenever losing my bank cards (I’ve lost perhaps over 30), I’ve never feared losing my money as I could simply call up my bank(s) to lock my account and issue a replacement card free of charge. When losing physical money in a wallet, most of the time you can kiss them both goodbye.
- Only needing my phone to pay most of the time, and with more banks accepted into the Apple Pay ecosystem, I could feasibly cut down my storage costs without the need to buy a wallet in the first place.
- Whenever I pay contactlessly, I can simply have the system automate the counting of money for me. This reduces transactional frictions, thereby increasing the velocity of money.
- I have an automated online record of my payments, which I can use that data to more accurately track my own spending and design a budget. Even with the banks having my payment data, provided I am a reasonable spender, they have more payment evidence to boost my credit history. This same data can also be used by economists to better conduct data analysis and understand consumer spending habits.
- In the case of COVID-19, although medical research has suggested that the virus does not last too long on surfaces, contactless payments via my phone offers that extra layer of risk protection against contracting the virus, as no money physically exchanges hands.
The persisting coin shortage, while hidden amongst an unprecedented stimulus wave by the FED, can spell for negative ramifications in American society as economics see businesses and banks hoard and demand for coins. We can see the structural disruption on everyday transactions as an immediate impact, and implications towards an ever-widening inequality gap as a long term consequence.
COVID-19 has undoubtedly exposed the downsides of adopting a heavy cash/coin system, and after the dust clears, many might be increasingly in favour of adopting a digital-heavy model to replace their Franklins. While valid criticisms towards this paradigm shift have surfaced, there are equal benefits that may manifest from an acceptance for change.
Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.