Ryan Cooper proposes a big idea to make coins more useful so that people start spending them again instead of hoarding them in jars for months at a time.
Here’s my solution: multiply the face value of every U.S. coin by 10. A penny will be worth 10 cents, a nickel 50 cents, a dime one dollar, a quarter $2.50, and a dollar coin 10 bucks. (We could also reinvent the half-dollar, which is barely produced now, as a nice $5 coin.)
This will have several beneficial effects: first, it will make change real money again. The whole point of having money is to facilitate the process of exchange, but studies have shown that people tend not to spend even the vaunted dollar coin. It’s no surprise, given that we’ve been training people for decades to think of change as worthless. And multiplying by 10 sounds like a lot, but if anything, it isn’t going far enough — the BLS inflation calculator only goes back to 1913, but even so, one dollar from that time was worth the equivalent of $23.87 today! The one-cent coin was the smallest then, and people still somehow survived. Rounding to the nearest tenth of a dollar in cash transactions today will be no problem.
Second, it will be easy to accomplish. We won’t have to have a big fight with the zinc lobby or Abraham Lincoln fans over whether to stop production of a particular coin, or rebuild all the vending machines around differently-shaped coins. Instead, we just alter the mint plates slightly with new numbers. (Making U.S. money more coin-based would also save the government a bit of money, since coins last much, much longer than paper money.)
Third — and this might be the most contentious part of this proposal — changing coins could be a nice piece of badly-needed economic stimulus. Effectively, we’d be printing up a bunch of new money and handing it to whoever has coins on hand. We’d have to think carefully about the details, but the idea would be to allow people who have old coins to hand them in for fresh new versions worth 10 times as much. Vending machines can be easily reprogrammed to help soak up the old currency (which will be exactly the same size and weight as the new stuff), and banks could be required to exchange for the new versions for a few years. To keep them from being swamped and to ease the effect, we could say banks don’t have to exchange more than $50 worth of new currency per person per day, or something similar.
How much money are we talking about? According to the Federal Reserve, as of 2010 there was about $40 billion worth of coins in circulation, which constituted 4.3 percent of the U.S. currency stock. We’d be increasing that by $360 billion at a stroke, which would actually be a pretty powerful economic stimulus. Indeed, it might cause a bit of moderate inflationary pressure, as all the coin hoarders with soup tureens full of pennies went on spending sprees. However, that would be exactly the kind of situation the Federal Reserve is equipped to handle. I doubt any inflationary pressure would be sustained long, but if so, it would be a godsend to the Fed, which has been stuck at the zero lower bound and mostly below its inflation target since the financial crisis. Indeed, there is a very strong case that a bit higher inflation target is wise economic policy for the future.
Usually, when I blog about coins it’s in the context of arguing against eliminating the dollar bill in favor of dollar coins, but I have also objected to killing the penny. As does Kevin Drum, I mostly like this idea, but I think Cooper sells short the problem of rounding prices to the nearest old-school dime. The limited bit of empirical evidence we have suggests this would affect poorer folks adversely, since prices would be rounded up much more often than they would be rounded down. One thing that occurred to me in writing this post is that it would likely cause a hike in transit fares around the country – here in Houston, a ride costs $1.25, which would undoubtedly become $1.30 under Cooper’s plan. I’m not sure what the best way to deal with that is. On the plus side, it would as Cooper notes provide a bit of short-term stimulus, which likely means Cooper is underestimating the opposition to his idea as well. This will never happen, but it’s an interesting suggestion. What do you think?