No, We Won’t Need More Nickels

Just so you know, the claim by the penny lovers that we’ll need more nickels if the penny goes away is NOT true.  Let me give you a straight forward example here.  Let’s say you have 100 ten dollar bills.  Over the next 100 days you make 1 cash purchase each day and use the $10 bills to pay for them.  The total of each purchase (whether you buy one or many items, or if there is tax or not, is irrelevant) is somewhere between $9.01 and $10.00.  Now the purchase amounts are evenly distributed, so one purchase is $9.01, one is $9.02, one is $9.03, etc. all the way up to $10.00.  Are you with me so far? Good.  Now let’s assume you only use the $10 bills for purchasing, and get between $0.00 and $0.99 in change each time. How much change will you have at the end of the 100 days? Answer $49.50, and assuming they give you the largest denomination of coins possible (there’re a lot of assumptions here, but don’t worry, I’ll handle it), you’ll have 150 quarters ($37.50), 80 dimes ($8.00), 40 nickels ($2.00), and 200 pennies ($2.00).

So now, what if we rounded each of these transactions to the nearest nickel? What would happen?  In this example, you’ll still have $49.50 (since the amounts are evenly distributed, you get an equal number rounded up as you do down), but more importantly, how is that change distributed? Amazingly, you’ll still have 150 quarters, 80 dimes, and 40 nickels, but instead of having 200 pennies, you have 2 one dollar bills. The purchases for $9.01 and $9.02 would get rounded down to $9.00, so you’d get dollar bills for those two transactions. 

But what if the rounding doesn’t go in your favor? What if you get rounded up most or all of the time?  Then you could potentially lose some or all of that $2.00 in pennies/dollar bills, and instead have an extra couple nickels, dimes, or quarters.  Conversely, if the rounding does go in your favor, you’d still have those 2 one dollar bills, plus a couple extra nickels, dimes, or quarters.  Basically when it comes to rounding, think of it this way:  For every 100 pennies you would’ve gotten in change, instead you’ll have a $1 bill.  Or if you want to include an error for rounding:  For every 90-110 pennies you would’ve gotten in change, instead you’ll have a $1 bill.

This data shows another interesting fact.  If this is how change is given out (43% of coins given in change are pennies, 9% nickels, 17% dimes, and 32% quarters, error due to rounding), then it stands to reason that similar percentages should be used by the mint in producing the coins.  In reality, this is not the case.  Over the last 3 years it’s been 63% pennies, 12% nickels, 19% dimes, and 7% quarters (error due to rounding again) for coin production by the mint for the four most widely circulated coins.  The glaring discrepancies are the penny and the quarter.  I would guess that the reason they produce 20% more pennies than needed is because the coins are falling out of circulation too rapidly, meaning that people are not using them to purchase, they’re only getting them as change, and then taking them out of circulation by hoarding them or throwing them away.  On the flip side, the quarter (with 25% less) seems to be regularly circulated, and used both in purchasing and for change, and therefore the mint doesn’t need to make more, because they are not being removed from circulation as rapidly as the other coins.

I look at it this way.  Each and every coin that the mint produces, minus the coins that are returned to the mint and retired (this number is extremely small), and minus the extra coins needed each year because there are more businesses, people, transactions, etc. (this number is relatively small too), is money that we as consumers are hoarding or throwing away.  In other words, it is money that we are WASTING!

There are only two ways to stop the gross coin hemorrhage that is going on in the country.  Either we as consumers need to stop hoarding and start spending coins, or the government needs to stop making them!  If one of these two things happens, then the other will follow automatically. I really don’t see consumers changing to spend MORE coins, so it will have to be Congress that initiates the change (no pun intended).  Either way, the mint would go to making just a few million coins, instead of several billion!

But no matter how you look at it, we won't need more nickels or any other coin. The only way we would need more nickels, is if people start treating them like they do the pennies now, and remove them from circulation at a much faster rate.  Of course, then I'll have to change the name of my blog to US Nickel Info. 😛