Give a Penny, Take a Penny
by Clifford F. Thies
At my supermarket, there’s a machine that says: “convert your coins into money,” for which service it charges “only” three percent.
Aren’t coins already money? And, why should it cost money to convert one form of money into another form?
As to whether coins are or are not money, perhaps it depends on their legal tender status. That is, how many coins are creditors required to accept in payment of debts? Possibly, creditors can legally refuse to accept the tender of more than $X in the form of coins, and demand actual Federal Reserve Notes.
Back in the day when only gold and silver were money, when the government got into the business of issuing subsidiary coins (or, less-than-full-weight coins), subsidiary coins enjoyed only limited legal tender status. But, that was a long time ago, and I don’t know that legal tender laws have anything to do with the coinage of today.
The reason the machine charges three percent to convert coins into “money” is because people are willing to pay the premium to convert the nuisance of vast qualities of low-value coins into a more convenient form. That is, the reason is simple economics, and has nothing to do with legal tender laws.
Recently, a member of the U.S. Congress introduced a bill to eliminate the penny from the coinage. The idea is that, in cash transactions, amounts ending in three or four cents and in eight or nine cents would be rounded up, and amounts ending in one or two cents and in six or seven cents would be rounded down. Supposedly, this would save a second or two in every cash transaction, as well as the time that merchants and bankers spend on pennies.
While the loss of a second or two per cash transaction might not seem like much, when you add up all the seconds that are lost by all the people of the country in all their cash transactions over the course of an entire year, the loss of time amounts to something. To this, my reaction as an economist is: if it were really true, people would figure it out and do something about it on their own. Why do we need a law?
Actually, people have figured it, and are already doing something about it, namely, using “give a penny, take a penny” trays at convenience stores and elsewhere. These “give a penny, take a penny” trays reflect the fact that most people realize, nowadays, the penny has fallen so much in value, that it is mostly a waste of time to worry about.
The way these trays are supposed to work is: if you can use a penny or two to make the cents part of a transaction, you can pull pennies from the tray; and, conversely, if you receive some pennies in your change, you should put them into the tray. The problem with these trays is that people mainly take pennies out of them, and don’t always put pennies into them.
In addition, there are some customers who seriously abuse the “give a penny, take a penny” tray. Without naming names, let me just say that one time, I observed a person who pretended that he didn’t have any nickels, who took seven pennies out of the “give a penny, take a penny” tray to help make a transaction.
Because of the bias and the abuse of the “give a penny, take a penny” tray, merchants often seed their trays with pennies. Perhaps these merchants have grown sick and tired of all the little cheating that is going on at their cash registers, and are now agitating the Congress to “do something.”
Having mentioned the time when only gold and silver were money, I thought I would give some of the history of the problems of coinage in the United States. Way, way back in the beginning, there was no problem with coinage whatsoever. The dollar was simply a measure of silver that happened to approximately equal the amount in the Spanish dollars that were then in circulation in the country.
These Spanish dollars were very nice coins. Being made out of silver, they were very hard and did not much wear out in use. Being dollar coins, they were large. Their hardness, their heft, and the distinctive sound they made when flipped onto a solid wood counter top made them difficult to counterfeit, and very useful as hand-to-hand money. But, being dollar coins, they were of limited use for making change.
These Spanish dollars were also known as “Pieces of Eight,” since – in Spanish denominations – they were worth eight reals (pronounced “ree-als”). Smaller denomination Spanish coins, including the half dollar (four reals) and quarter dollar (two reals) also circulated; as did the one bit (one real) and half bit (one-half real). The last two coins – the one bit and half bit – were rather small coins, in terms of weight, diameter and thickness, and didn’t hold up very well in circulation. But, given the social necessity of making change, they circulated nevertheless.
For the first several decades of the republic, these Spanish coins were the main medium of exchange for cash transactions. To be sure, bank notes in denominations of $5 and above, various gold coins (at their weight rather than at their legal tender value) and a variety of copper coins also circulated, as well as certain expedients – e.g., in North Carolina, for a time, small, dried fish served as change. And, with regard to the copper coins, these were mostly tokens issued by merchants that circulated in the local area as long as the merchant remained in good repute.
Then, in 1834, the legal ratio of gold to silver was re-jiggered so as to overvalue gold and make it into the actual money of the country. The next several decades proved very difficult for our monetary standard, since full-bodied coins could not be sustained in circulation. To make a long story short, the temporary fix to the new gold standard was to require banks to carry a gold reserve and for the government to issue subsidiary coins; and, the permanent fix was to replace commodity money with fiat money.
But, we have not yet completed the evolution to our new fiat money standard. True, all references to gold and silver and even to “lawful money” have been removed from our paper money. But, our coinage still reflects much of our original Spanish coinage. Our quarters and half dollars are the same size as the subsidiary silver coins first issued in 1851, and are just a tad smaller than the original quarters and half dollars. And, our dimes are about the same size as the original bits, although our dimes reflect the conversion from fractional to decimal coinage effected during the early 19th century.
To be sure, our nickels are not the same size as the original half bits, since the nickel was cast with nickel rather than silver as its distinctive metal. And, our dollar coins are not the same size as the original Spanish Dollars or the somewhat smaller American Dollars that replaced them, but reflect a pathetic series of attempts by the government to get us to use a re-sized token coin in place of the paper dollar.
With the cumulative effects of inflation, the face values of our coins no longer have any relation to historic commodity value. Our quarter, for example, was originally a full-bodied coin, and then a subsidiary coin whose silver content was worth almost but not quite its face value. But, with the inflation of the 1960s and ’70s, the quarter was re-cast as a sandwich coin, with only a small amount of silver on its obverse and reverse sides. Our penny, likewise, was re-cast as a zinc coin covered in copper, as opposed to a copper coin.
Today, the irregular sizes of our coins make no sense, when formerly their irregular sizes reflected, approximately, the value of their metallic content. Accordingly, were the Congress to consider reform of the coinage, it might consider replacing the entire set of coins with a rationalized set, such as has been done in many other countries.
Of course, with the continuing possibility of inflation with fiat money, we will one day find “give a nickel, take a nickel” trays, and perhaps even “give a dollar, take a dollar” trays, at the convenience store.
Editor’s Note: Clifford F. Thies is the Eldon R. Lindsay Professor of Economics and Finance at Shenandoah University.