Friday, July 10, 2020

Why is There a Coin Shortage?



Will Luther writes:
"If you put the federal government in charge of the Sahara Desert," the economist Milton Friedman once quipped, "in five years there'd be a shortage of sand." The U.S. Mint, to its credit, had a much longer run.

The Federal Reserve, which purchases coins from the Mint and distributes them to depository institutions, announced it would begin rationing coins "based on historical order volume by coin denomination" last month as its coin inventory had been "reduced to below normal levels." The Fed also called on the Mint to increase the supply. Until the shortage is resolved, however, retailers unable to acquire enough coins from banks are left requesting customers pay with a card or use exact change.

No doubt many find the idea of a coin shortage perplexing. Coins are not consumed; they get passed along from one person to another. In the US, the average coin circulates for around 30 years. How, then, can there suddenly be a shortage of coins? Where have they all gone?

Each year, some coins are lost, discarded, or worn beyond use. They get thrown in a well with a wish; or, dropped down a drain by mistake. To offset the outflow, and keep up with secular growth in demand, the Mint must produce new coins. It issued nearly 12 billion circulating coins in 2019.

So far, the Mint has not matched its 2019 pace. The global pandemic slowed production at the Denver and Philadelphia branches in March and April. By the beginning of May, the cumulative mintage—that is, the total number of circulating coins produced for the year—was just 4.02 billion, compared with 5.07 billion over the same period in 2019. Both facilities have been operating at full capacity since June 15, though, so that the gap has since fallen to less than 0.06 billion.

But the temporary shortfall in production is only a small part of the problem. A much bigger issue has been the limited extent to which coins have been circulating.

Coins have a much higher weight-to-value ratio than cash, which makes them relatively cumbersome to use. Cash goes into wallets, ready to make the next transaction. Coins go into piggy banks, to be deposited or exchanged for cash only occasionally.

Usually, the vast stockpile of coins held by the public is of little consequence because it represents a roughly steady share of the total coin supply. Sure, paper currency circulates more quickly. But peoples' depositing or exchanging coins when their piggy banks get full also results in a relatively steady flow of coins back into the banking system.

Alas, not much has been as usual in the last few months. The global pandemic and corresponding shutdowns have led to a huge slowdown in economic activity. Consequently, the usual flow of coins from our piggy banks into the banking system has dried up. Of course, the flow from the banking system to our piggy banks also dried up, as retailers did not need to request coins from their banks to make change for non-existent customers.

But as the economy reopened, stores quickly exhausted their existing coin inventories, and then turned to their banks for more. The flow of coins out of the banking system picked up, as coins started piling up in our piggy banks once more. But the flow of coins back into the banking system, from our piggy banks, had not yet restarted. Lacking the usual coin deposits from the public, the banks, in turn, requested coins from the Fed, which requested them from the Mint. With the Mint unable to fill the gap with new coins—and, indeed, falling short of its usual production levels—-a shortage resulted.

It is tempting to give the Mint a pass. Few among us expected a pandemic. And, all things considered, it is probably unreasonable to expect the Mint, with its own staff shortages to contend with, to have hit 2019 production levels, let alone accommodate a huge albeit temporary surge in coin demand.
-RW


10 comments:

  1. Thanks for the information. But never give a pass to a monopolist.

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  2. Because they shut down the laundromats! :)

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  3. When times are hard I empty my piggy bank. I view it as basically free money. Usually goes to the casino. I emptied my piggy bank at the beginning of the lock down for fun.

    I doubt I was the only one that is in the same situation.

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    1. You are not the only one. Most go into coinstar machines. We believe there is coin shortage because the Fed says so?
      My question is why is the Fed saying this?

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    2. Of course in reality it isn't free and actually costs you wealth (in lost purchasing power) the longer you keep it.

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  4. They can have my coins when they pry them from my cold, dead hands.

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  5. How can there be a shortage even with re-opening I read something like 40% of restaurants have closed for good.

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  6. I buy all my coins over face value because I need uncirculated ones for my business Trittello (jewelry line) - I do think there is definitely an amount of hoarding going on. If cash goes away coins may become more valuable down the road in my opinion.

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    1. US coins are never worth zero. Depending on the coin they may be worth very very little but they are of metals that have economic value.

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    2. I thought it was very interesting when it was announced that there was and is a shortage of silver coins. My 5 gallon water bottle is getting full of nickels and dimes, quarters are saved in old whiskey bags. When the almighty dollar bill goes away, at least I will have something of value in all the silver coinage I possess. They won't be worth face value I expect but the sliver content will (I hope anyway)

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