12 August 2013

Coins: What Are They Good For?

A few days ago I was repaid a debt with a large amount of cash. This created an unusual situation for me, as I don't normally carry cash. I may keep a few bucks in my wallet for an emergency where only cash is accepted (a carry-over from my days in Philadelphia, where cab drivers would consistently lie about their credit card machine being broken). But here I was, stuck with over a hundred dollars in cash, not entirely sure what to do with it.

So the past few days I've been slowly spending that cash. One of the things I absolutely hate about using cash for purchases is change. I loathe change. It's bulky, it's heavy, and just an overall nuisance. I say this even though my wallet has a small coin purse, whose only consistent tenant is my bicentennial half-dollar, which I like to bring out whenever a coin flip is needed. But the more change in that purse, the bulkier the wallet. And since my wallet already has enough bulk from my various museum membership cards, I'd rather my derrière not gain a few inches due to a bunch of useless change. But that's what I'm stuck with for a while, I suppose.

Another thing that happened this week is I was reading about pre-decimalisation British currency. This interest in British currency is a common one for me, one that I indulge probably on a bi-monthly basis, occasionally branching out into European sous, thalers, reales, and groschen. Those who have visited Britain may know that the basic unit of currency is the pound and that each pound consists of 100 pence — much like how the United States dollar consists of 100 cents. But that has only been the case in Britain since 1971. Before that year, Britain used a non-decimal system: a pound consisted of 20 shillings and each shilling consisted of 12 pence. Thus, 240 pence per pound, reminiscent of the complicated systems of Imperial units of weights and measures (feet, inches, furlongs, ounces, gallons, &c.).

In 1971 Britain modernized its currency and converted to a decimal-based system. For a lover of esoterica, like myself, this also meant the loss of a convoluted system of historical denominations and coinage. No more crowns (5 shilling coin), guineas (one pound, one shilling coin), or groats (fourpence coin). Also gone were the days of listing prices with the so-called £sd format — £5.4s.6d meaning 'five pounds, four shillings, sixpence' — or using the slash for lower-priced items — 5∕3 meaning 'five shillings and threepence'.

But most importantly, for my mind as it has been the past few days, when British currency was decimalised, it also meant the demise of the farthing.1 The farthing was one of the many, many coins in the pre-decimal system and was valued at ¼ penny (the name 'farthing' derived from 'fourth'), or 1/960 pound. Think about that for a second: you could actually carry around a coin worth ¼ penny. For much of history, the British pound had enough economic value, that it warranted minting a coin worth a bit more than 0.1% of that value. It would be like the United States issuing a coin with a tenth of a cent.

Here's where all of this ties together: the minting of a coin carries with it the implication that that coin has a certain usefulness in the marketplace. When that coin is an extremely low-value coin, the specific implication is that certain items in the marketplace have a value low enough that, were said coin not to exist, you would have to overpay for it. For example, during World War II in Britain, one could buy farthing buns for — you guessed it — a farthing each. Four farthing buns would cost you a penny. And so as late as the 1940s, the farthing was still a useful coin because there were items worth only £1/960. By the time Decimal Day rolled around in 1971, inflation meant there was no longer a need for a coin worth £0.001, and the penny (£0.01) instead became the lowest denomination.

With all of this running through my head and with me spending cash left and right, I began to wonder: has the United States dollar outgrown the need for coins? As I thought about it, my initial conclusion has been that there is little need for any coin other than the quarter. Maybe the dime, too.

Think about it for a minute. How many items do you purchase that couldn't be rounded off to the nearest quarter-dollar? Would it be all that significant if that pack of batteries priced at $4.69 were instead $4.50 or $4.75? Maybe it's my own aversion to cash, but similarly, when a cashier hands you change with a bunch of pennies and nickels, does it not become your goal to get rid of the change as quickly as you can? Or how many of us immediately dump those pennies and nickels into the tip jar?

But here's the most significant question: how many things can you name that cost a dime or less to buy? There used to be such a thing as penny candy; dollar stores used to be five-and-dimes; and giving your opinion was worth two cents. But nowadays, with the exception of what I call 'change candy' — the single-item pieces of candy at the register in mom-and-pop shops — or smaller pieces of hardware, there isn't much worth so little that a quarter would be grossly overpaying for it. Just as the farthing became outpriced in the UK, so it would seem with most US coins.

Compare also to the history of the Vietnamese currency, the đồng. Previously each đồng consisted of 100 xu, like our dollars and cents. But inflation decreased the value of the đồng so much, that today most transactions occur in the thousands of đồng and the xu is no longer used. For example, a loaf of bread is approximately 20,000₫ and a car can cost 1 billion đồng. And so, sensibly enough, the lowest denomination of bill in Vietnam is 200₫.

The biggest obstacle I see to eliminating coins in the United States, aside from cultural inertia, is sales tax. For example, 7% tax on a $4.75 item is $0.33. In a system where quarters are the smallest denomination, how do you pay $5.08? But actually, when you think about it, we already know how to accommodate this sort of thing, because a 7% tax on a $4.75 item is actually $0.3325, but the cashier/government doesn't require you hand over an addition quarter of a cent. So just like taxation adjusts to the fact that the United States doesn't have farthings, it could also theoretically adjust to a hypothetical where we don't have pennies, nickels, or dimes.

Of course, eliminating coins would require some adjustments from the market, as it tries to figure out whether that item currently priced at $4.59 would be better priced at $4.50 or $4.75, but it wouldn't be the first time the market has adjusted currency changes. The restaurant franchise Chipotle, for example, has already done that preemptively, setting their prices so that, after tax, you pay in round figures (e.g., in New York City, a fountain drink is $1.87, or $2.00 after tax; a burrito is $7.81, or $8.50 after tax). Britain adjusting to the new decimal system in 1971 is also a perfect example of this happening historically, nationwide. In fact, most world currencies used to be non-decimal-based until the Enlightenment began to decimalize everything.

Would the elimination of coins actually be good for the United States? Or is it just my own wishful thinking as I try to burn through my abnormally large cache of cash over the next week? The latter is definitely true, but I would like to think that it would also be good for everyone's wallets, including the U.S. Mint's. Pennies and nickels already each cost more to produce than they're worth. But this is by no means a serious policy proposal; until someone actually does the economic study, I'm fine with it being a mere figment of my imagination. If nothing else, though, eliminating everything but the quarter would mean that all of your coins would be usable in those pesky coin-fed washers and dryers.

1 Strictly speaking, the farthing had been eliminated several years earlier, in 1960. But this was, in part, due to the run-up to Decimal Day in 1971, when the currency would fully switch over.


John Alsdorf said...

My humble opinion: pennies can go, nickels too. The loss of the dime would mean the loss of my "disoriented foreigner in my own country" story, when I couldn't identify the 10-cent coin among the many coins in my pocket. It's the one that is smaller than the 5-cent coin, which actually clearly states its value. Only many years later did I look into it and discover that "dime" means "a tenth part," something my Latin classes in school had failed to impart.

All in all, Steven, I commend your recommendations. When I have the time, I'll bring over my full coin jar as payment, much more than a "penny for your thoughts."

Mike said...

I think eliminating some coins would make sense if the per cent of non-cash interactions weren't so high. But I know when I'm buying smaller items, say produce, those cents matter to me, and I'm sure they matter to the vendors I'm purchasing from. I believe removing any of the current coins from our system would be more hassle than worth b/c physical currency is becoming near-obsolete. (Though I hope it does not as buying with cash is the easiest way to uphold some privacy.)