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.”
Posted by: adminEcon
Tags: Birmingham, coinage, coins, England, George Selgin, hyperinflation, industrial revolution, medium of exchange, money, penny, small denominations, store of value, token makers, U.S. dollar, unit of value, Zimbabwe
Because cost is up and use is down, the Royal Canadian Mint stopped producing pennies and, during the fall, will stop distributing those that exist.
Should we also eliminate the penny?
Pennies are expensive. At 2 1/2 cents a piece, making and distributing them lost the Treasury $60.2 million last year. Proposals, though, for a cheaper coin, have always generated a flap. When, to save money, President Reagan proposed diminishing the copper in a penny in 1981, the uproar included a suit from the Copper and Brass Fabricator’s Council. However, the switch did take place and today’s penny is 97.5% zinc and 2.5% copper.
Now, we are debating whether to eliminate the penny, create a cheaper one, or do nothing. A penny phase-out has some people worrying that rounding up prices will be inflationary. Others say charities will raise less. And some just like Abraham Lincoln. You can see that the arguments are not really convincing and yet all Congress has done is ask the Mint if it can make a less expensive small coin. Perhaps, tradition is the real reason that many of us feel penny loyalty.
My bottom line: Eliminating the penny might not be necessary. Soon it might no longer have the basic characteristics of money:
- It is accepted as a medium of exchange. For example, you and I are willing to use the commodity in a supermarket. A peso or a tie is not a medium of exchange in the United States.
- It is a unit of value. We all know how much purchasing power a penny represents but not necessarily the yen.
- It is a store of value. We all like our money to retain its purchasing power if we do not spend it immediately.
My sources were this Huffington Post article, this NY Times article, an excellent New Yorker Magazine discussion from David Owen, and this from a Canadian newspaper.
Just an interesting post script: In 2001, the NYSE did the reverse. Replacing fractions with decimals, the trading price included pennies. For example, instead of 50 1/8, the price of a stock had to be expressed as $50.12 or $50.13.
To a Yap islander, in 1903, a 12-foot limestone wheel had considerable value. Described by NPR’s Planet Money, the wheels, as small as a foot in diameter and as large as twelve, composed the islanders’ monetary system. With smaller transactions, you just inserted a pole through the wheel’s center hole and took it to whomever you owed money.
With larger wheels, you did not even need to move them. In a 1991 paper, Nobel Laureate Milton Friedman tells us that when one valuable massive wheel was lost at sea, its owners could still use it. The islanders “…universally conceded…that the mere accident of its loss overboard…ought not to affect its marketable value…The purchasing power of that stone remains, therefore, as valid as if it were leaning visibly against the side of the owner’s house…”
Fast forward to 2012. Increasingly, transactions have become cashless. A phone swipe can pay for a cup of coffee. We can pay bills online. We’ve got credit and debit cards and PayPal. Currently at Slate.com, one journalist is investigating a cashless life. And, in one 2004 study, researchers concluded that although consumers benefit more than merchants, “the shift to a cashless society will improve economic welfare.”
Sounds like the Yap’s big wheels.
The Economic Lesson
To be called money, a commodity needs 3 characteristics:
- It should be a medium of exchange. (People willingly use the commodity for exchange.)
- It should be a store of value. (In the future, it still will have relatively comparable purchasing power.)
- It should be a measure of value. (When someone says one dollar, you know what that means.)
Today, in the U.S., the basic money supply includes cash, currency, travelers checks and demand deposits (checks). Thinking of ATM payments and a phone swiper at Starbucks, the traditional examples of the money supply are not quite working anymore.
An Economic Question: How has the increased use of credit and debit cards since the 1950s affected our purchasing habits?
What a fantastic idea! When University of Pennsylvania economist Justin Wolpers suggested Federal Reserve Valentines, the Fed and others responded.
The San Francisco Fed:
- “I’m going to extraordinary measures to increase your stimulus.”
- “My love is elastic; my commitment too big to fail.”
The Atlanta Fed:
- “Being with you hikes my pulse by several basis points.”
The Philadelphia Fed:
- “Love me Tender. I have no cents when it comes to you!”
- “My initial projections never forecast someone like you would be in my next quarter.”
- “Your equation is deriving me crazy.”
- “Like fiat money, our love is built on trust.”
- “I’ll be your lover of last resort.”
- “You’re my gold standard.”
- “There’s nothing irrational about my exuberance for you.”
- “I’d like to borrow you overnight and then hold you to maturity.”
You can see lots more at #FedValentines.
The Economic Lesson
An independent agency, the Federal Reserve oversees monetary policy. Through its basic tools that recently have expanded considerably, it expands and contracts the supply of money and credit in the U.S. economy.
An Economic Question: You might enjoy visiting this Fed website to determine your own monetary response to different economic scenarios.
By Mira Korber, guest blogger, Kent Place School alumna, Yale student, and recent traveler to Buenos Aires, Argentina.
In Argentina, a $100 USD bill is a hot item.
And though Argentines want US dollars — for traveling, saving, or otherwise — they cannot get them easily. Government imposed restrictions prohibit citizens from withdrawing any currency other than pesos from the bank.
Despite this, Argentines are attempting to access their funds in dollars due to mistrust in the global economy. They fear losing their savings as they did in 2001, when the peso was devalued over 300% and unpegged from the US dollar.
After Argentina defaulted on its loans from the IMF, it imposed the “corralito;” in other words, savers could only withdraw $250 USD each week from their bank accounts. Argentines began protesting by whacking pots and pans, a phenomenon known as the “cacerolazo” before disintegrating into fully-fledged protests against the economic mismanagement of their country.
Read an explanation of how the 2001 crisis unfolded here.
The Economic Lesson
An economic definition of money states that it must be a unit of value, medium of exchange, and store of value. The Argentine peso should function in all three arenas, so why are citizens seeking US dollars in the first place? Globally, whenever a country experiences stormy economic conditions, citizens tend to seek refuge in a currency that they know is a legitimate store of value — in the long run. Now, 10 years after the riots of 2001, it appears that Argentines fear their pesos will devalue drastically again if economic disaster strikes for a second time. They turn to dollars as a symbol of security.