COVID’s Latest Trick: Making Coins Disappear

Foundation for Economic Education

Photo by Josh Appel on Unsplash

COVID-19 has altered almost every facet of our lives. And it doesn’t seem to be done yet. The latest trick from up COVID-19’s sleeve? A national coin shortage.

How did it come to this? How did the nation get to a point where businesses across the country are begging patrons to pay in exact change?

How Coins Go from Here to There and Everywhere In Between

Let’s take a break from 2020. In normal times, businesses withdraw coins from banks in order to stock cash registers. When change is needed for a transaction, the cashier simply hands off the correct amount to the customer.

Now, this costumer has a few choices to make. She can spend the coins, save them in a jar, or exchange them at a bank or coin service (i.e. Coinstar). However, let's simplify things a bit and ignore saving them in a jar for now. In the long run, those mason jars of coins end up spent or exchanged. So for the moment, it’s of little consequence.

If the coins are spent, then they end up in the cash register of a business and they will eventually be sent back out into the world as change or deposited at a bank. If the coins are exchanged for bills, then the bank will hold them until a business comes calling for more coins.

As for how coins enter this circle of life, we need to turn to the Federal Reserve and U.S. Mint. Whenever a bank needs cash or coins, it can reach out to one of the 12 regional Federal Reserve Banks. From there, the bank’s reserve account will be debited to pay for the withdraw. However, some larger banks do acquire coins directly from the U.S. Mint. The flow between banks and the Fed or U.S. Mint is mostly done to meet changes in demand. However, this exchange also doubles as a method to introduce freshly minted coins and retire worn ones.

The story does have a few more paths interwoven within this. But for our purposes, this is enough to understand what has happened here.

Stopping the Flow

So let’s return to 2020. First up, shops closed across the board to combat the spread of COVID-19. Then, the World Health Organization announced that the virus may be spreading through cash transactions. Next, the National Institute of Health announced that COVID-19 could survive on metal surfaces (i.e. coins) for extended periods of time. And then, the U.S. Centers for Disease Control recommended stores utilize touchless payment options.

Remember how I said jars of coins are inconsequential in the long run? Well, we are not so lucky in the short run. The risk of contaminated money has turned jars of loose change into nuclear waste—no one wants to touch it and no one knows what do with it. So it never gets spent or deposited.

And it doesn’t end there.

To top it off, the U.S. Mint reduced production, like many businesses, in order to protect its employees in the wake of the pandemic. Will Luther was able to show that there is not only an observable shift in coin production when one compares 2019 and 2020 data, but also a noticeable uptick in production as the Mint has tried to respond to the shortage.

In short, the flow of coins from government to banks, banks to businesses, businesses to customers, and customers to banks has all but stopped. Almost every link in the chain has been interrupted.

Looking Forward

Now, all is not lost. While it is still an inconvenience, Wawa has decided to let customers use cash on the condition that purchases are rounded up to the nearest dollar and then the difference is donated to charities. This move puts a positive spin on the perceived loss for those unfamiliar with Swedish rounding.

And this may be a more long-term solution. As many other countries have done prior, it may be time to abandon the penny. The U.S. Mint loses more money on the penny than any other coin. And while it’s hard to imagine life without it, the truth is that it’s really quite simple to adjust prices in order to deal with its absence.

In Wisconsin, North Shore Bank took a different route and decided to open their coin counting machines to everyone, regardless of whether or not they hold an account. North Shore hopes that waiving fees will get coins out of the couch cushions and into circulation. Amarillo National Bank, in Texas, went one step further by paying 10% cashback for coins brought in.

But human ingenuity does not end there! J.P. Koning noted that grocery stores in Argentina are actually issuing small notes, or IOUs, in response to their own currency shortage. Koning says this is directly akin to the idea that George Selgin suggested here. By issuing their own IOUs, stores circumvent the problem of waiting for the government to mint and distribute enough coins.

All in all, I don’t think COVID-19 is done with us yet. Hindsight might be 2020, but the rest if 2020 is still unclear. This year has been riddled with surprises and I imagine there are more to come. Whether the solution is abandoning the penny, let banks pay premiums for coins to reallocate the supply, or let private businesses issue their own currencies, Will Luther is correct that now is the time to acknowledge the weaknesses of our current system and make improvements.