The Great Coin Shortage of 2020

Hello everyone. This is Breaking the Dollar. I'm your host, Everett Millman. And we have a great show for you today. Originally, I was going to discuss a lot of the different things going on in the banking sector right now. There's a lot to say about that, but that issue is probably going to be on the table for a while, so I decided instead I would tackle something a little bit more timely, and in fact, it relates directly to coins. So it's right up our alley.

If you haven't heard, there is a coin shortage in the United States. We do not have enough coins, and obviously that is a problem right now. Even the Fed Chair, Jay Powell, had to address this question in front of Congress because it is becoming a bigger and bigger issue. If there's not enough coins, business and commerce can't operate as normal.

So let's talk about how this happened. Why are there not enough coins? And the obvious answer is this has to do with COVID and the closure of businesses all across the country. That means that as people aren't paying in cash and receiving change, and businesses are not then depositing that change in cash in banks because they're not operating, not enough coins are circulating around the economy the way they should.

And when it comes to money, keep in mind that circulating is exactly what money is supposed to do. That is the function of money. It is supposed to move around. It is a medium of exchange. So technically, if you're holding a lot of wealth, you're not supposed to just keep it all in cash and hoard it. You're supposed to convert it into an asset or into investments, something where that money is still doing its job. It's still circulating around so people can spend it at businesses, businesses that can spend it or invest it, etc. Now that dynamic because of COVID is only one half of the equation. The other reason that we have a shortage of coins is that the United States Mint, like any other operation, had to close down for a little while. At minimum, they were running at limited capacity. So not as many coins were being produced at the Mint as normal. Obviously, that is also going to restrict the supply.

So we have a lack of coins being made and a lack of coins moving around the economy. Now this story has been picking up a little bit of steam. National Public Radio on their excellent podcast, Planet Money, actually discusses this topic every so often. It came up recently in July and it's certainly not the first time that Planet Money has touched on some of the strange problems that are arising with US coinage. Now in their most recent episode, they focused on the penny specifically, the 1 cent coin. And the reason being is that surprisingly, the penny loses the US government money every single time they make one. So let me step back here and explain something called seigniorage. Seigniorage is essentially the profit that the government makes on issuing money. And the way that it works is obviously a paper bill that says $20 on it is worth $20, but it didn't cost the government $20 to print that note. And that same principle should apply to all of our physical money. And for the most part, it does. The government does make a sort of passive income just off of issuing money because the face value is worth more than the materials to make that money.

This concept led to a lot of strange changes to the composition of our coins over the 1800s and the 20th century. Anytime the materials used to make a coin were more valuable than the actual face value of the coin itself, well that means the government is losing money and they need to change the composition. The last time that the United States Mint did this was with the penny and it was in 1982. Although the appearance of the penny hasn't changed, which is something that is very clever, no matter what when the government changes the composition of the coins, it does have an interest in keeping the appearance the same. So as not to throw it went off and to kind of signal that hey, this is still worth the same amount as it was. So in the early '80s we changed the composition of the penny from bronze, which is mostly made of copper, to a zinc-based composition.

So today's pennies are 95% zinc. But even with that change, each penny today costs more than two cents for the government to make it. The materials, the labor, all of the costs combined mean that each penny is a loser every time the government issues one. Now this is especially a problem when you consider that the US Mint makes more pennies than any other coin. And that makes sense because it's such a low denomination, it takes a lot of pennies to add up to even a few dollars. In total each year, the US government makes about 7 billion pennies. As I said, it loses money on each and every one of them. So in total, the treasury is losing tens of millions of dollars a year on issuing pennies. Sure, that is a drop in the bucket compared to the federal budget. But nonetheless, it raises the question, why are we even making pennies then? And this has been going on for more than a decade. I think it was in the mid 2000s that the price of producing a penny crossed over into this territory where it is now more expensive than it is worth as money.

One more problem with this is as I said, the government issues more pennies than any other coin. In fact, it's more than the rest of them combined. I believe last year the statistics that they quoted on Planet Money where that 60% of the coins produced by the Mint were pennies. So aside from the fact that making pennies loses money, you could also see it as sort of a waste of time and labor that the Mint could be putting its resources to better things than this money losing endeavor. So it begs the question, why do we still make pennies? I know from personal experience that a lot of people don't even keep their pennies. They don't tend to use them. In a lot of cases, they just throw them away. So again, you can see how this is compounding the problem. The Mint is pumping out all of these pennies, losing money on it, and then people turn around and don't even use the penny. Again, why are we doing this?

So when you look around a lot of other comparable economies in the world, many of them have already eliminated their one cent or the equivalent of their one cent coin. This has been done in Canada, in Australia, and in the UK, just to name a few. And what they found is that it hasn't been a problem. Nobody is freaking out that they don't have pennies anymore. Nobody feels like they're losing money because they can't get back a few pennies and change when they make a purchase. So in fact, the solution that we've seen is that in these countries, most prices are rounded to the nearest five cents, to the nearest nickel. One other issue that distinguishes the United States from some of these other countries is that all of them use the equivalent of a $1 and $2 coin. Believe it or not, it is actually cheaper, in most cases, to produce $1 coins rather than $1 bills, but at least in the United States, we have become so accustomed to the $1 bill. And it is seen as more convenient. It takes up a lot less space and a lot less weight to have a bunch of $1 bills than a pocket full of $1 coins. So the convenience consideration is one factor.

But in many ways, this seems to be a US-specific problem because as you may know, we do produce $1 coins every year, but for the most part, they are ignored by everyone except for coin collectors. So that means nobody is spending these $1 coins. In fact, what's fascinating is that the places where you do see those $1 coins circulate are in foreign countries because as we've discussed several times, the dollar is the world's reserve currency and foreign countries often like to hold and use dollars because they hold their value better than the local currency in many cases. And so rather than Americans using the $1 coins, you see them used throughout Latin America and in other parts of the world where they have no problem using a coin. You know, it's not inconvenient to them, but I digress on that.

So after hearing about this problem with the penny for years and years and seeing some of the different takes on it, the most plausible explanation for why we haven't resolved this problem yet has everything to do with symbolism and nostalgia. So Abraham Lincoln is on the penny, is basically the longest running design in US coins without being changed. Lincoln on the penny goes all the way back to 1909. There's some history there where he was the first actual person to be featured on US currency. Before we always had some portrayal of Lady Liberty, not a real human being, not a historical figure. So Lincoln was the first. And obviously Abraham Lincoln is one of the most revered, but also polarizing and controversial, presidents. So it does seem that besides some lobby groups like zinc miners who want their material to continue to be used for coins, the main reason we haven't ditched the penny yet is purely because of the symbolism.

One possible solution that occurred to me is why don't they just again change the composition of the penny, make it into cheaper material so that we're not losing money on every penny. And that does seem to be a quagmire. I am positive that the US Mint has explored those options. Over the decades they have a lot of experience with experimenting with different compositions for coins and apparently none of them have proven to be satisfactory. As I said earlier, there might be some hesitancy because we don't want to change the way the penny looks. We don't want to confuse people or have them lose confidence that this isn't actually worth what it says it is or that it didn't actually come from the government. All of that makes sense. But it doesn't change the fact that as the world's largest economy, we are still one of the only countries that is dealing with this problem and losing money year after year after year. Now you might think that this sort of issue could creep up into the higher denominations of coins and you wouldn't be totally wrong for assuming that. Our next smallest coin, the nickel, the 5 cent coin, is also right on that borderline of the actual value of the materials used to make it are not worth as much as its face value. But in the case of the nickel, this trend is much less durable even at the times where it is being produced at a loss, the loss is not nearly as big as the penny. As I said, if it costs more than two cents to make a penny, it's literally 100% loss. With the nickel, it is fractions of that.

And that does bring to mind a fascinating story that involves an analyst that I respect very much named Kyle Bass. He has been a financial analyst for a long time and he has a lot of inside information on China. But he factors into this story because about 10 or so maybe 15 years ago, Kyle Bass very publicly purchased an inordinate amount of nickels. It was like millions of dollars worth of nickels and he just wanted to hoard them and store them under the assumption that in the future, the melt value of the nickel would be worth more than five cents. So just to illustrate how mind boggling this issue at the penny is, with the next smallest coin, you have almost the opposite possibility where the intrinsic value, the melt value of the nickel could very well become higher than five cents. And so his whole plan is to hoard those nickels, wait until they're worth more, and then essentially melt them. And if you do this at a large enough scale, let's say you're making a few cents per nickel, but you have millions of them, well, then that adds up to a lot of money. So we will see if we're not at the point yet where the nickel exceeds its value, but it will be interesting to see if Kyle Bass can make a killing on that.

But back to this issue with eliminating the penny and the fact that we have a shortage of coins, it does tie into this broader topic that comes up all over the world. And as a shorthand, we tend to refer to as the “war on cash.” There are many government initiatives around the world where they are trying to essentially ween people off of cash, they want to eliminate cash, and by that I mean physical money, whether paper notes or metal coins, and move toward a fully digital currency system, whether that is something similar to credit cards or we're actually talking about a central bank-issued digital currency, sort of a Bitcoin clone. Now if you've listened to this show at all, you know that I am definitely bullish on Bitcoin and cryptocurrencies, I do think that they have great future potential as money, but apart and separate from that, eliminating cash would be a loss of freedom for regular citizens.

Now the reasons that governments and policymakers have given for eliminating cash all sound noble enough in theory. I know that in Europe they started eliminating their largest denomination paper bills because a lot of criminal activity is done in those large denomination notes. They want to make exchanges with the fewest number of bills possible. So stopping organized crime is one prominent reason they give. I can already envision that another one that will be coming up now is using the spread of COVID as a reason to eliminate physical money. That is definitely a bit of a red herring. I'm not saying that there isn't any logic to it at all, but for hundreds of years, this even before germ theory was a thing. People have been concerned about money being dirty and not wanting to handle it. And so in the current environment where everyone is much more on edge about spreading infections, money could get some of the blame. Again, I think that is largely unfounded, it's not hard for people who are handling money all the time to just wear some plastic gloves that basically eliminates the problem.

But back to the main point, the existence of cash and physical money is a form of freedom and liberty. Once the government issues money and it's out there, the free market should really decide what happens to that currency. Where it goes, what people do with it, it's up to you. You have the liberty and the choice. If we were to eliminate cash altogether, that would certainly give the authorities far greater control over everybody's spending habits, everybody's wealth. And it would certainly create inconveniences for the poorest members of society who can least afford not to be able to pay for things. A really remarkable percentage of people across the world, but also in the United States, don't even have access to a bank account. So transacting in cash is their only way of engaging in commerce.

Not only that, as I said, once money is issued by the government, it's out there. They no longer have direct control over what happens to that money or who it goes to. In the case of a fully digital currency system, you no longer have that guaranteed. It's very easy to imagine that digital money, unless it is in the mold of Bitcoin where it relies on a blockchain, where all of the transactions are permanently recorded and public. Without that, you're handing over so much control over the money supply and not just the money supply, but then how that money moves if you go to a fully digital currency. I do have to admit that in many ways, that's the direction we're headed eventually. Some day, yes, there probably will no longer be a need for cash. But we're not at that point yet. The infrastructure for a digital currency does not exist yet. Not everyone would have access to it, as I pointed out.

So in my opinion, having a parallel system where if a digital currency is introduced, I still have the option to use cash would be a much better alternative, a much better transition toward that eventuality. But I do certainly think, it is my opinion, that some of these legitimate issues with the coin shortage, with the penny losing money, all of this could be used as a future justification for just eliminating coins and paper currency altogether. And that, I believe, would be a major mistake. It would make us less free as consumers and less free to conduct business in a manner that is of our choosing, not the government.

So as always, thank you so much for tuning in. We appreciate everybody listening out there. Be sure to check out our next episode where I will be discussing all of the strange things going on with banks in the era of COVID. Don't miss it.