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Coin Matters

Apr 27, 2012 • Demand, Supply, and Markets, Economic History, Economic Thinkers, Households, Innovation, Labor, Money and Monetary Policy, Uncategorized • 236 Views    No Comments

Hearing that Zimbabweans had a limited supply of coins, I recalled one person’s response to Starbucks’ price hike to $2.01 for a tall coffee in NYC: “I can’t believe it. Now I need to walk around with pennies?”

I guess we take change for granted.

When Zimbabwe replaced its currency with the U.S. dollar, happily, they no longer had to cope with (the unimaginable) 489 billion percent inflation rate. But, using the U.S. dollar meant they had limited ability to make change. No one would trust any currency minted by Zimbabwe. But where to get enough pennies or nickels or dimes? They couldn’t.

Imagine buying $15.76 worth of groceries. You expect 24 cents change. Most of the time in Zimbabwe, there is no coin to give as change. What to do? Many people just buy more. Gum. Candy. A pen. Something that will take the purchase to an even dollar amount.

Having the right amount of money circulating in the right denominations is tougher than we might expect. I have begun to read a fascinating tale from 18th century Birmingham, England when currency problems prevented button manufacturers from paying their employees. The reason was an insufficient supply of small denomination currency from the mint. Responding, the button manufacturers produced their own coins and their employees accepted them.

The Bottom Line: For a commodity to function as money, we have to accept is as a unit of value, a medium of exchange, and a store of value.  So, perhaps we are right to take the penny for granted. Although others elsewhere may need it, maybe we no longer do.

You might enjoy this NY Times article about the situation in Zimbabwe. Then, I recommend continuing with economist George Selgin’s charming tour of early 19th century Birmingham, England and its token (coin) makers and also looking at his book, Good Money.  For a shorter description, Marginal Revolution presents a good overview of small coin shortages. And finally, econlife talks about the “annoying penny.”

 

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