Why Is There a Coin Shortage?

Why is There a Coin Shortage?

You may or may not have heard about this story, it actually took me by surprise. I had never really considered the possibility of a coin shortage, but we had a toilet paper shortage too—it’s 2020, so why not right?

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There were a few reports about this issue throughout June, but it really picked up when the Federal Reserve released a statement titled “Why do US coins seem to be in short supply?” on July 27th. Later on in July, they actually created a special task force to investigate and respond to the shortage.

At this point it became a national story, people started to worry about the coin shortage, and you might be wondering whether this is just a temporary problem or whether it’s going to continue affecting availability.

So this article is going to cover the coin shortage, why it’s happening, how bad it is, and how I expect the situation to develop over the rest of the year.

What’s Causing the Shortage?

First I want to start with the statement from the Federal Reserve, which explained that the shortage isn’t related to any issues with production or distribution.

Production vs Circulation

They said “while there is an adequate overall amount of coins in the economy, the slowed pace of circulation has reduced available inventories in some areas of the country.” Later on they clarified that “since mid-June, the U.S. Mint has been operating at full production capacity, minting almost 1.6 billion coins in June and is on track to mint 1.65 billion coins per month for the remainder of the year.”

Now this is a little ambiguous in terms of production up until mid-June, they don’t say how much it was down before that, but still it’s clear that they don’t see this as a shortage in the usual sense.

There are enough coins, as many as always at least, but they’re circulating much more slowly during the pandemic, and that makes sense—vending machines, laundromats, car wash vacuums, a lot of places where you would usually be using coins aren’t necessarily open right now.

Credit Cards and Online Purchases

Furthermore, research indicates that credit cards are now being used for 82.1 percent of retail purchases compared to just 78.7 percent in January.

Then on the other hand, Americans are spending more time at home, making more purchases online, ordering delivery. So people aren’t shopping in stores as often, and when they do shop in stores they are more likely to use credit cards.

That all adds up to less circulation, which is why there can be a shortage even without a change in the total number of coins.

More coins are staying where they are rather than being spent. Similarly, businesses have started requesting fewer coins from banks.

How Long Will the Shortage Last?

With that in mind, it wouldn’t be surprising for the shortage to continue as long as in-store spending is down. The end of the Federal Reserve’s statement touches on this point, but it doesn’t offer any specific predictions: “As the economy recovers and businesses reopen, more coins will flow back into retail and banking channels and eventually into the Federal Reserve, which should allow for the rebuilding of coin inventories.”

So the supply will gradually correct itself over the next few months, maybe longer depending on whether businesses are able to reopen and whether the US gets more control over the pandemic. I’d like to say this is just a temporary issue, and maybe it will normalize during the fall, but again there are just too many moving parts to make any definitive statements right now.

Pennies and Nickels

One interesting issue this shortage might lead to is the continued production of pennies. I’ve seen people across the political spectrum raise this point, that it costs at least two cents to produce a single penny, which leads to annual losses of nearly $70 million.

Now this is also true for the nickel, which costs more than ten cents to produce, but it may not be as much of a problem because pennies actually make up most of the coins that are created every year.

Do We Still Need Pennies?

Sure the penny might have been worth minting 50 years ago or 100 years ago, but the reality is that it should have already been phased out, and we should probably be taking a closer look at whether the nickel is still relevant.

Canada stopped producing pennies in 2012, so it’s not like it hasn’t been done before.

And it’s especially problematic at a time like this, we’re running low on coins but could we just move resources away from pennies and nickels in order to focus on dimes and quarters?

We could even consider minting more 50-cent coins, now I’m not an expert, I’m sure this is a lot easier said than done, but it seems like a good idea to move away from coins that aren’t even worth the cost of production.

Even Quarters Are Less Valuable Than Pennies Were in 1857

In 1857, for example, a penny was worth the equivalent of 30 cents now, and that was still the smallest denomination minted by the federal government.

Even tenth-cent mill coins, which were relatively rare and only produced by states and local governments, would still be worth around three pennies in 2020.

Rounding Totals

Now one response to that is well, you wouldn’t be able to pay for anything that didn’t come out to a multiple of five, or ten if we stopped making nickels.

And that’s true, but rounding to the nearest five or ten cents would actually tend to work out over time since an equal number of purchases would be rounded up and down.

Of course businesses might try to take advantage of this by rounding up, maybe things that were $9.99 are now $10, but on the other hand they would also have the option to round down to $9.95, which is basically the same situation we have now with prices that end in either $x.99 or $x.00.

One problem that could arise here is taxes on really small purchases, for example if you pay $1 for something and there’s a 5 percent tax, if there aren’t any pennies or nickels they’re going to round up to 10, and that could potentially lead to some imbalances.

But that being said I think we would be able to solve those issues, for example by including taxes in prices rather than adding them to the subtotal, now that’s just one idea but I don’t think rounding errors should stop us from addressing the problem.

Just to wrap up, the coin shortage is a relatively widespread issue, and it’s primarily caused by reduced circulation rather than reduced production.

It could take a few months or longer to bring those levels back to normal. And ultimately that’s going to depend on how effectively we contain the spread of coronavirus since that’s the main reason people aren’t using as many coins as they were in January or February.

If we’re able to reduce cases, start opening up schools and businesses safely, people will start to go back to their old routines and stabilize coin circulation.

On the other hand, the shortage will become even more severe if coin-friendly businesses are forced to stay closed for the rest of the year or even beyond that. And of course regardless of what happens with coronavirus this situation will probably put even more pressure on the Federal Reserve and the Mint to reconsider the production of pennies and nickels, in my view that’s an obvious flaw, you spend twice as much to make a penny as it’s actually worth, and that’s the coin you’re making the most of?

Doesn’t sound like a very efficient system. As I mentioned earlier in the article, it’s hard to say whether the shortage is affecting the entire country equally, or whether it’s particularly bad in certain locations.