If you’ve headed to a store recently, you may have noticed signs requesting exact change. Some stores are claiming there’s a coin shortage because U.S. Mint closures have affected the coin supply right now and they don’t have enough change on hand for customers.
But does this mean that the U.S. is actually running out of coins?
On June 11, the Federal Reserve acknowledged that the COVID-19 pandemic has disrupted the “normal circulation patterns for U.S. coin.”
“In the past few months, coin deposits from depository institutions to the Federal Reserve have declined significantly and the U.S. Mint’s production of coin also decreased due to measures put in place to protect its employees,” the Fed wrote in a statement. “The Federal Reserve is working on several fronts to mitigate the effects of low coin inventories.”
Experts Say This Isn’t a Coin Shortage, It’s a Circulation Disruption
Yiming Ma, assistant professor in the finance division of the Columbia Business School, says describing the current coin circulation disruption as a coin shortage isn’t entirely accurate.
Ma says businesses that primarily take coins, such as laundromats, vending machines and car washes, likely stopped operating during the pandemic due to social distancing and stay-at-home measures. These businesses are usually key components in getting coins back to banks to redistribute back into the economy. Since they weren’t receiving coins, the flow of them back into the economy has been significantly reduced.
In economic terms, the current coin situation is the result of a low velocity of circulation, or how quickly a single unit of money changes hands in an economy over a specific period of time. Stephen Miller, director of the Center for Business and Economic Research at the University of Nevada Las Vegas, explains how the low velocity is affecting consumers and businesses.
“The coins just aren’t circulating fast enough to meet the demand,” says Miller. “During the shutdown, people just stayed home. And the purchases on retail changed a lot, and less coins were being used.”
In July, the Federal Reserve created a U.S. Coin Task Force to mitigate and act on the coin shortage. The task force comprises nearly two dozen individuals representing organizations such as the Federal Reserve, the U.S. Mint, the American Bankers Association, Independent Community Bankers of America and more. The task force is expected to publish its recommendations in early August.
Is the Current Coin Disruption Worth Stressing Over?
Experiencing a disruption in currency can be anxiety-inducing, especially during a pandemic when there’s already so much uncertainty. Some consumers might be thinking, Is the country running out of money?
According to Miller, the country isn’t running out of money, there are just more coins “sitting in pots at home,” instead of circulating through the economy.
Now, since bank coin supplies are lower than normal, the banks are forced to be more intentional with how many coins they give to businesses. This is why your local gas station may be offering to pay you for any coins you might have on hand, or ask for you to pay with exact change.
Although a lack of available coins may sound scary, existing research may suggest that the disruption only affects a portion of transactions in the U.S. The Federal Reserve Bank of San Francisco reports credit and debit cards accounted for 51% of payments in 2018. Consumers used cash in only 26% of total payments, and most used cash for payments under $10.
Disruption in Coin Circulation Hurts Underbanked, Small Businesses
But that’s not to say everyone is only slightly inconvenienced. Bill Clancy, vice president of deposit banking at Northpointe Bank, says the coin shortage can severely impact individuals who don’t have access to bank accounts and credit or debit cards.
“I’d be concerned about folks who are less affluent and can’t qualify for a checking account, so that makes cash their only option,” Clancy says. “What’s the potential impact on this if they’re not able to spend like normal because businesses won’t accept cash or will only accept exact cash? Does that create problems for them trying to pay their bills or buy groceries, or other basic necessities?”
Approximately 6% of U.S. adults were unbanked in 2018, according to a 2019 report by the Federal Reserve. An additional 16% were underbanked, meaning they had an account at a bank but also used alternative services, such as money orders, check cashing services or payday loans.
Prepaid debit cards might be a fix for individuals who don’t have credit or debit cards, but Clancy warns they often come with costs, such as fees to obtain the card, keep it active each month or even take money out of an ATM.
“You’re potentially forcing them into a product that has fees and limits their access to their cash,” Clancy says. “It creates cascading effects of negative impacts.”
Ma adds that small businesses will also bear the brunt of the coin circulation disruption, especially if their profits were already affected by the pandemic due to social distancing measures.
Swipe fees, which are interchange fees charged to merchants by credit card companies to process the transaction, are already difficult for small businesses to manage. This is why some small stores will require a minimum purchase amount before accepting a card payment, or require customers to pay with cash instead.
Requiring a card transaction on all small purchases because the store might not be able to provide the customer with change will ultimately hurt the business. “That’s going to likely further cut into their profit margins and affect their ability for their business to stay alive,” Ma says. “That’s the worst-case scenario.”
How Is a Coin Circulation Problem Solved?
As of now, it’s hard to say when the current coin shortage will end. Actions are being taken to try and boost coins back into normal circulation. The Fed said it’s working with the U.S. Mint to minimize any constraints on Mint production and is advising banks and other depository institutions to only order what they absolutely need in terms of coins.
There’s also the issue of how much it costs to produce new coins. Some coins, like pennies and nickels, cost more to make and distribute than they’re actually worth. In 2019, it cost $0.019 to produce and distribute a penny, and $0.076 to produce and distribute a nickel, according to the U.S. Mint’s 2019 Annual Report.
“It’s not a good business to be in,” Miller says. “Usually producing money is a great business. But not necessarily for coins.”
Ma says the Federal Reserve should be thoughtful about how it plans to solve the issue. Flooding the economy with more coins won’t necessarily help those who need it the most.
“It’s not a one day and everything is solved type of problem,” Ma says. “We should be thinking about how to allocate distribution so it’s taken back in a way to help communities and businesses that are in the most need of coins. It’s easier said than done.”
Posted by Kelly Anne Smith – Forbes