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COVID-19 Leaves Less Change in Our Pockets, Literally

COVID-19 Leaves Less Change in Our Pockets, Literally

Thursday, 20 August, 2020 - 06:15

As if a deep recession and a never-ending pandemic wasn’t enough, the US now faces another crisis: a coin shortage. Thanks to the lockdowns, fewer coins are in circulation, leaving businesses unable to make change when customers hand over paper money.


Coin shortages, though, are nothing new. In fact, they were the norm until modern times. As we grapple with our own version of a perennial problem, it’s worth contemplating how people in the past dealt with the issue — and the ingenious methods they used to solve it.


Medieval Europe suffered from a perennial shortage of small change. These shortages grew out of a belief that every coin had to have an amount of gold or silver relative to its official value, no matter how small. There were several problems with this logic.


The first was that official mints found it difficult and expensive to produce all the tiny coins necessary to fill demand; it was far easier to turn a certain amount of silver into a handful of large-denomination coins than to mint countless small ones.


An even bigger problem lay in the fact that the metal in these coins made them vulnerable to being melted down. If metal prices exceeded the nominal or face value of the coins, the coins became more valuable as raw material for bullion, not coin. They would disappear from circulation.


This is what economic historians have dubbed the “big problem of small change.” Indeed, medieval manuscripts are full of grumbling about constant shortages of small coins. In 14th-century England, petitioners complained of a “great scarcity of coins in the realm,” a lament echoed in virtually every European nation at the time.


Each country’s government eventually solved the problem, though private businesses took the critical first step. Unable to pay their workers the correct amounts, much less make change for customers, they had more incentives than most to find a solution.


As economic historian George Selgin has shown, a number of button makers in the industrial city of Birmingham took the initiative, coining copper tokens in small denominations. The copper in these coins wasn’t worth anything close to the face value, so there was little incentive to melt them down.


Many of these tokens also featured intricate designs, making them hard to counterfeit. Most exceeded the quality of the few small coins produced by the British Mint; indeed, a private coin-making facility run by industrialist Matthew Boulton was arguably the world’s most sophisticated mint at the time.


In 10 short years at the end of the 18th century, Birmingham’s private mints produced 600 tons of copper coinage, flooding the country with much-needed small change, none of which ended up melted down for bullion.


Though the British government eventually declared a monopoly on coinage and ramped up production of shillings and pence, the US lagged behind. The US Mint was a sorry affair for the first few decades of the country’s existence, with limited ability to supply coins of any kind.


Private token makers began to meet the need, making tokens worth a half cent or 1 cent that could be used to make change. People accepted them because the businesses that issued the tokens pledged to redeem them. They circulated widely, advertising the businesses that issued them.


By the 1830s, private tokens had become commonplace. But as historian Joshua Greenberg has noted, it was the brutal panic of 1837 and the ensuing depression that drove many more businesses to experiment with private currencies in sums of less than a dollar.


Most of these were made of paper, not metal. Dubbed shinplasters, scrip or less printable names, these notes typically involved a promise to pay back the person who accepted them first, but usually contained an “or bearer” clause. Inevitably, the person who received them unloaded the note as quickly as possible.


Over the next quarter-century, private tokens and scrip met the growing demand for small change. The outbreak of the Civil War, though, took the problem to a higher level, as virtually all government-issued coins disappeared from circulation.


Unable to make change or pay workers, businesses issued a blizzard of paper notes, cardboard chits, brass tokens, and other currency substitutes. By one estimate, businesses issued at least 25 million “coins” to solve the shortage of small change. As before, these advertised the businesses that issued them.


Some entrepreneurs came up with even more ingenious substitutes. An entrepreneur named John Gault was the first to realize that postage stamps could be used as small change if protected from wear and tear. He quickly patented a brass stamp holder with a see-through mica cover that could be used to transform a 1-cent stamp into a penny.


The businesses that bought Gault’s device typically had them stamped with an advertisement. In the space of a single year, Gault sold upward of a million of his blank “coins.” They became so popular that the North suffered a shortage of stamps.


The outsize popularity of these private currencies eventually attracted the ire of Congress. In 1862 and 1864, Congress passed two acts designed to put an end to private versions of small change. By then, the government’s newly established Bureau of Engraving and Printing had begun issuing official, state-sanctioned paper money in denominations such as 3 and 5 cents.


After the war passed, the mint vastly expanded its production of small change. Other governments did much the same thing over the course of the 19th century, creating coins that had little or no valuable metal in them. In the process, the big problem of small change became a thing of the past.


Though tokens, scrip, and other forms of private currency worth less than a dollar largely disappeared, they did not die out altogether. In fact, courts have occasionally made exceptions to the legislation from the 1860s, permitting currencies that circulate locally. These have included so-called company scrip, issued in towns dominated by a single business, and, more recently, the currencies issued by liberal enclaves: the Berkshares that circulate in Massachusetts.


If today’s coin shortage continues much longer, businesses struggling to make money in these tough times may want to take a page from the past and make money — literally.


(Bloomberg)


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