What is the cause of the current U.S. coin shortage and when have there been other shortages. Why is there a push to get rid of both the penny and the hundred dollar bill.
Topics covered include:
- How many coins does the U.S. Mint produce each year and why hasn’t it been enough to avert a coin shortage in 2020.
- How the U.S. coin shortage in the early 1960s differs from today.
- How much profit does the U.S. Mint make producing coins even though it loses money minting both pennies and nickels.
- How often and under what circumstances do U.S. consumers pay with cash.
- Why the U.S. penny should be discontinued.
- Why companies and individuals are hoarding cash, mostly in one hundred dollar bills.
- Why the existence of one hundred dollar bills would impede the effectiveness of negative interest rates in the U.S.
- Why has the U.S. mint sold 300% more ounces of gold coins in 2020 compared to last year.
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 308. It’s titled, “Cash and Coins: Shortages, Hoarding, and Threats.”
A few weeks ago my daughter and I were at a bakery buying a couple of loaves of bread. We didn’t have the exact change and they didn’t have the coins to make change, so they rounded down. We got a small discount. This week I was going through the McDonald’s drive-thru and there was a sign that said “due to treasury shortage of coins, use credit or debit cards. Round up to the nearest dollar. Donate the difference to Ronald McDonald House Charities. Or use exact change on cash transactions.”
There is a coin shortage in the US right now. Federal Reserve chair Jerome Powell told Congress last month what happened is that with the partial closure of the economy, the flow of coins through the economy, it has kind of stopped. “We’ve been aware of it, we’re working with the mint to increase the supply while working with the Reserve banks to get the supply to where it needs to be.”
U.S. Mint and the Current Coin Shortage
The agency of the US Treasury responsible for minting coins is the US Mint. It was established in 1792 by Congress when it passed the Coinage Act. And it chose Philadelphia as the site of the first mint. Now the US Mint operates production facilities in Philadelphia, San Francisco, Denver, and West Point. Every 2 years, Congress requires the US Treasury to give a report on the US Mint, it’s budget, and its cost to produce its coins. In 2020 the US Mint projected that it would produce 14 billion circulating coins, including 8.5 billion pennies, 1.3 billion nickels, 2.4 billion dimes, 1.8 billion quarters.
Now due to the coronavirus pandemic, the US Mint cut back production of circulating coins in March and April. Year to date through July they had produced 8.2 billion coins. They said they were back up to full capacity by mid-June and anticipate producing 1.65 billion coins per month. That would equate to 18.1 billion coins. But here’s the thing about circulating coins in the US and other countries. The mint only contributes a relatively small percentage of the new circulating coins each year. In 2019, it was 17%, new coins going into the supply chain. The remainder came from third party coin processors or recyclers as individuals buy things, they get change back and there are machines where you can put your spare change and it’ll sort it and this recirculation process makes sure there’s a sufficient supply of coins. That has broken down.
A couple weeks ago the US Mint issued a bulletin which said, “We ask that the American public start spending their coins. Depositing them or exchanging them for currency at financial institutions. Or taking them to a coin redemption kiosk. The coin supply problem can be solved with each of us doing our part.”
This isn’t the first time that there has been a coin shortage. There was one in the early 1960s in the US. The July 11th edition of Grant’s Interest Rate Observer pointed out that at the time each silver dollar contained .77 ounces of silver. The official silver price was $1.29 per ounce which meant the face value of a silver dollar equaled its metallic value. Silver was also used in dimes, quarters, and half dollars. But then, the price of silver, at least the unofficial price, began to creep up.
The 1960s Coin Shortage
William F. Rickenbacker in his book Wooden Nickel mentioned that in 1963 the Federal Reserve bank received 20% less small change than in 1962 as part of this whole recirculation process of coins. In 1964, the Federal Reserve banks received 63% less small change than it did in 1963. Why? Because the silver price was rising and businesses and individuals were taking those coins, saving them, or melting them down for the silver content. By the middle of 1964, Rickenbacker points out that Las Vegas casino operators were paying a 20% premium for coins.
By the mid-1960s the silver held at the US treasury was being depleted. President Lyndon Johnson signed the Coinage Act of 1965 to eliminate silver from the dime and quarter and reduce the silver content in the half dollar from 90% to 40%. And by 1970, even the half dollar had no silver content.
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