The logic behind the coin shortage produced by the pandemic

The nicest explanation I’ve seen yet for not only why there’s a coin shortage but who gets hurt by it.

Everything You Need to Know About the National Coin Shortage

By Molly Olmstead Aug 07, 20201:29 PM

A woman wearing a face mask does her laundry in a laundromat.
A nurse visits a laundromat in Florida on Thursday. Tony Giberson via Imagn Content Services LLC

If you’ve been following local news lately, you’ve likely seen stories about businesses in your area asking customers to pay in exact change—or even to bring in their own coins, to be exchanged for paper bills. This is because of a strange effect of the pandemic: a coin shortage.

For answers to exactly how this happened and how it will end, here’s a brief explainer of this strange moment in the COVID-19 economy.

Why is there a coin shortage?

There are a few reasons, and they’re all connected to the pandemic.

The U.S. Mint, which produces coins, had been working at a limited capacity because of employee safety measures.

Large numbers of coins currently in circulation have also been, essentially, locked up in homes. Many Americans have been staying in more. They’ve ordered more things online or opted, out of fear of contamination, to pay for food and other in-person purchases with credit cards.

Some businesses that would normally be a hub for such transactions—coffee shops, bakeries, and other places that sell goods for under $10—have closed down or restricted payment methods.

There’s also an exchange problem: Some people have been avoiding going to banks, where they might otherwise have converted their coins into cash. Others might not have wanted to linger in grocery stores to use coin kiosks. This roadblock in the flow of coins led to a “significant” reduction of the number of coins that banks sent to the Federal Reserve, which manages the distribution of coins around the country.

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According to Senay Agca, a finance professor at the George Washington University, “coin shortage” is not really precise terminology. “There’s enough coins, but it’s not circulating at the speed it was circulating before,” she said. As a result, some people have described it more as a “disruption.” (For simplicity’s sake, we’ll keep referring to it as a coin shortage here.)

All of this added up to a real problem when businesses started to open and banks began ordering more coins, which the Fed didn’t have stockpiled in high enough numbers. According to the Fed, there is a projected monthly gap of 2.3 billion to 3.5 billion coins for the rest of the year.

Who does the coin shortage hurt most? 

To the average American, this shortage may only cause minor headaches—a harder time paying at a parking meter or exact change required at a coffee shop. But some 8 million American households, or 6 percent of Americans, are “unbanked,” meaning that because of fees and other financial hurdles, they have no checking, savings, or money market account. Many rely instead on services such as money orders, pawn shop loans, or payday loans. According to Venky Shankar, a marketing professor at the Center for Retailing Studies at Texas A&M University, Americans who make $25,000 a year or less use cash for around 45 percent of their purchases. So those Americans might struggle to pay for essential services without change on hand. They also might find it more stressful to round up or donate their change, should stores ask for it. “For an unbanked or underbanked person, it could leave them in a horrible situation if they don’t have access to the cards,” saidAngela Lyons, a professor of economics at the University of Illinois at Urbana-Champaign.

Some small businesses, already hurting from the pandemic and working on tight margins, are  also at risk. Customers might think twice about making a small purchase with cash if they have to dig through their pockets for exact change. “They’ll suffer,” Shankar said. “If they can’t hand back exact change or if they insist you must pay exact change, they’ll lose customers.”

Laundromats have been one of the hardest-hit businesses. Brian Wallace, the president and CEO of the Coin Laundry Association, said a large number of the 30,000 laundromats in the U.S. are vulnerable, given that some 56 percent accept quarters as their only form of payment. The issue is in how the industry works: Laundromats need to sustain a certain inventory of quarters in order to allow customers to be able to exchange their bills.“If we can’t make change, we can’t make money,” he said.

Some laundromats—most of which are small, family operations—have started informal quarter exchanges with on another, as well as with other coin-operated enterprises, such as car washes and vending machine businesses. According to Wallace, one owner even took to Facebook to ask friends and family to swap their coins out with him. It worked well, he said.

How will this end?

The Federal Reserve announced the formation of a U.S Coin Task Force on June 30 to deal with the issue. In recent weeks, the Mint has begun to return to something like normal operations, with safeguards in place to protect workers. The Mint is set to produce 1.65 billion coins every remaining month of 2020. (Usually, there are about 1 billion coins produced a month.) The Fed also started rationing coins, capping the amount banks can order from them, and said it was “encouraging” banks to only request the amount of coins they absolutely needed to meet immediate demand.

Banks and large retail chains have taken their own steps. To incentivize customers, some banks are offering additional cash when customers bring in their rolled coins. Some stores are giving change back through loyalty cards to be redeemed later, or are encouraging customers to leave their change, to be donated later to charity. Other businesses are simply rounding their payments to the nearest dollar.

No one appears to expect that this coin shortage will last beyond the pandemic in any significant way. As states move away from public health restrictions, they’ll circulate cash and coins through again. The measures banks and stores are taking will likely help speed things along, and Shankar projects that the shortage would end in six to 18 months, depending on how well the country handles the upcoming months of the pandemic.

What does it mean for the future of the penny? 

There a few potential longer-term changes to come out of this shortage. It may accelerate a long-simmering trend toward a cashless society. Technology has allowed the use of contactless payments through smartphones, and some have predicted that the anxiety over COVID-19 and the cleanliness of paper currency will cause more people than ever before to abandon cash. A coin shortage might have helped prime consumers to embrace the trend. “Right now, this whole COVID experience has set up this transition and shift and reliance on digital payments,” Lyons said. If paired with the right infrastructure, this change could eventually help supply better payment methods for the unbanked, who could benefit from forms of mobile payments without fees.

Other experts have been thinking more specifically about the coins themselves, and whether this shortage could cause movement in a decadeslong debate. Because of inflation, the penny costs around two cents to make. Abolitionists have long argued that we should simply round down to the nearest nickel, eliminating the need for a coin that they see as nothing but a drag. And rounding is exactly what some retailers will have to do now, possibly causing some of the public to become more comfortable with the idea. “Any time something new happens with coins, we look at the issues fresh,” said Jeff Gore, a professor of physics at the Massachusetts Institute of Technology and the founder of an organization called Citizens to Retire the Penny.

The New York Times reported in late July that the shortage has spurred “renewed discussions about the fate of the penny,” as it becomes harder to argue the Mint should spend resources manufacturing the penny in a shortage. Agca said she could imagine that the Fed would phase out some coins when it comes time to rein them in again, and it would make sense to drop the penny along the way. But Gore said he doesn’t see the penny issue really being resolved any time soon. “We have a lot of things on our mind right now,” he said.

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