Barnett and Company

Keep The Change

First it was toilet paper. Then milk and eggs. Now the coronavirus has taken dead aim at the Tooth Fairy by manifesting another critical shortage: coins.

Believe it or not, in the current cashless age, the US is experiencing a notable decline in the number of metal coins in circulation that is having a real impact on businesses and certain consumers. The issue is acute enough to have warranted the creation of a special US Coin Task Force by the Federal Reserve to address this unanticipated side effect of Covid-19.

The use of standardized metal tokens as a store and medium of exchange of value traces back the Greeks and Lydians of the mid-7th century BCE. With the eventual advent of paper currency around 1,000 BCE and ultimately contactless electronic exchange so ubiquitous today, one might have expected the demise of metal slugs as unwieldy and inefficient. Leave it to a pandemic to highlight just how surprisingly dependent we still are on coins.

The problem is not a lack of coins, but rather a retardation of routine circulation. With the economy locked down and Americans remaining at home, the volume of transactions dropped dramatically. Collection and recirculation of coins therefore fell off a cliff. In addition, recycling of coins by consumers through banks and grocery store counting machines sharply declined as people have refrained from making nonessential trips. These are also important mechanisms of exchange that are presently offline, leaving billions of coins stranded in ashtrays across the nation.

In addition, in an effort to reduce risk of infection, merchants have encouraged and customers have preferred non-cash payments, further constraining the active circulation of coins.

Most of us are able and even prefer to transact electronically through debit or credit cards or touchless phone apps. But for a surprisingly large segment of the population, this is not an option. According to the Federal Deposit Insurance Corporation, 8.5 million American households including roughly 15 million adults are “unbanked”; that is, they do not have a primary banking relationship and are therefore excluded from most non-cash daily transactions. And consider that many of these unbanked households are most likely to utilize services like coin laundries and vending machines and so are most impacted by the shortage.

The US Mint has stepped up efforts to alleviate the shortage. In addition to issuing pleas for the public to turn in uncirculated coins, production has been accelerated to maximum capacity. Officials are ramping up coin output from one billion coins per month to 1.6 billion per month through year-end.

In dealing with the shortfall, merchants have gotten creative. Kroger Foods, for example, has largely stopped making change and is offering customers alternatives: round up to the nearest dollar with the remainder going to a local food bank, or load the change onto a store loyalty card for future redemption.

Restaurants have also responded creatively, offering free drinks or side items in lieu of making change, and have found the gesture has paid dividends in customer goodwill.

Some banks who previously charged a fee for counting and exchanging loads of hoarded coins are now offering the service at no charge just to garner the supply. A few smaller community banks have even offered a small cash bounty as an additional inducement.

Many have questioned the continuing need for so many coins. Nearly 60% of all US coins are pennies, each of which costs about 2 cents to manufacture. Many other countries including Canada have ceased issuing pennies or their equivalents in recent years. But as in so many other areas, the pandemic has highlighted sectors of our economy that are underserved and have been most acutely impacted by financial disruptions. Add a coin shortage to the list.

Christopher A. Hopkins, CFA

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