THE COVID-19 COIN SHORTAGE: CAUSES, RESPONSES, AND LESSONS.

• Author: Anthony, Nicholas

COVID-19 altered almost every facet of the human experience in 2020. For those who were lucky, living rooms became offices, cocktail hours went virtual, and spare time was spent exploring new passions. But others suffered: hundreds of thousands of people died, millions became unemployed, and even more were left uncertain about their future. All the while, smaller inconveniences multiplied. Of these, the most unexpected was a serious coin shortage in the summer of 2020.

This article first documents the severity of the COVID-19 coin shortage. It then describes how coins normally circulate and how the failure of this circulation led to the shortage. Next it discusses the federal government and private sector responses. Finally, it draws lessons for avoiding future coin shortages.

The Severity of the Shortage

The COVID-19 coin shortage was a disruption at the most basic level of the U.S. currency system (see Siegel 2020a). Without coins to make change, many businesses had no choice but to turn away cash transactions. For some businesses, that meant having no business. "At the front end of the pandemic, we were deemed to be an essential business because we're providing a basic public health service," said Brian Wallace, Chief Executive of tire Coin Laundry Association, "[but if] we can't make change, we can't make money" (Siegel 2020b).

The shortage was difficult for consumers as well. Although today's consumers often have access to alternative means of payments (e.g., credit or debit cards), there are still 7.1 million unbanked and 24.2 million underbanked American households (FDIC 2018, 2020). (1) So, for approximately 31 million households, cash is an important, if not the only, resource for making day-to-day payments.

For those who could switch to credit or debit cards, other issues arose. In normal times, small businesses insist on minimum purchase amounts for card payments because of card processing fees (Smith 2020). By forcing businesses into using cards almost exclusively, the COVID-19 coin shortage reduced their already thin profit margins. And, while prepaid cards might appear to be an easy solution for the unbanked, these too have associated fees (CFPB 2019).

As the shortage grew worse, concern spread further. Jack Riddle, president of Delaware Community Bank, told the Cape Gazette:

Every bank we talk to says they are experiencing a [coin] shortage. We were told our orders would be substantially shorted, but we never anticipated such a drastic decrease. I've never seen anything like this before [MacArthur 2020].

By June 2020, reporters even saw the early stages of "coin runs." Some business owners began to request several months' worth ol coins out of fear of a worsening shortage (Smialek and Rappeport 2020). And laundromat owners watched customers take out thousands of dollars' worth of coins from the change machines for use elsewhere (Vanselow 2020). There were even multiple accounts of business owners driving hours, sometimes across state lines, to find available coins (Masunaga 2020; Sell 2020; Siegel 2020b; Tobin 2020). It may not have been a full-blown banking panic like that of years past, but panic was starting to set in for the people who depend on coins to do business.

Coin Circulation in Context

Under normal circumstances, the circulation of coins in the United States runs smoothly (Figure 1). First, the U.S. Mint gives newly minted coins to the Federal Reserve for distribution. When private banks need additional coins to service businesses and households, they can place an order with one of the 12 regional Federal Reserve banks. The coins are paid for with the banks' reserve accounts. This exchange also doubles as a time for banks to return excess coins to be redistributed and damaged coins to be retired from circulation. (2)

When banks receive coins from the Federal Reserve, they can provide them to businesses for day-to-day operations. Banks also accept surpluses as deposits to be paid out again or, if not needed, returned to the Federal Reserve. Although some businesses primarily receive coins as payment, (3) most businesses store only enough to make change for routine transactions. When these coins enter the pockets of consumers, they are eventually spent, deposited at banks, or exchanged for paper money. (4) Finally, if consumers want additional coins, they can withdraw them from a bank or exchange paper money for coins at most local businesses.

Tracing Causation

The COVID-19 coin shortage had three central causes: (1) the government mandate to shut down businesses; (2) consumer health concerns; and (3) the U.S. mint shutdown. The government mandate to shut down businesses reduced both the paths in which coins could travel and the number of transactions that would prompt the need for coins to travel in the first place. (5) The distinction is subtle, but important. When the lockdown began, it fractured the paths between the participants in the system. (6) By fracturing those paths, the mandate also reduced the number of potential transactions. If the paths were reduced, but the number of transactions were held constant, the coins would have been funneled--an effect which would have maintained circulation. In that case, any shortage could be mended by minting and distributing additional coins.

However, people do not commit to a set number of transactions per period. Rather, they desire a unique basket of goods and services, which changes with income and preferences. People who spend $42 in cash on a burger, a t-shirt, and a haircut will not suddenly spend $42 on burgers alone when the clothing store and barber shop are ordered to close. Instead, it is more likely that they will continue to purchase burgers but save the rest of their money. In other words, if the system is flooded with coins, those coins will be destined for coffee cans and old jars.

The change in consumer spending is evident in the velocity of Ml, which measures the...