Will the Fed refill America’s piggy banks?

I recently pointed out that there is a sense in which the low production of nickels during the early 1930s “caused” the Great Depression.  I suppose I was sort of half-kidding, and in a moment I will explain which half was serious.  A commenter named Steve recently sent me evidence that it was happening all over again:

I found your statistics on US nickel production chilling due to the parallels today in quarter production.  I view the quarter today as similar in utility to the nickel in the 1930s.  I know, the quarter has half as much purchasing power today as the nickel did then, but since we don’t generally circulate larger coins, the quarter today serves as the primary medium of exchange (and change) in small transactions.  Anyway, here are quarter mintages in recent years:

2006  2,928,800,000
2007  2,712,440,000
2008  2,438,200,000
2009    636,200,000
2010    177,200,000 (January through June)

I was worried that this might be related to the phase-out of the state quarter program (which are hoarded by collectors) so I decided to check some other denominations:

The United States Mint has halted production of circulating 2009 Jefferson nickels and 2009 Roosevelt dimes for the rest of this year, according to the latest issue of Coin World. As the dime and nickel production graphs show, the stoppage creates historic, staggering low mintages for the two coins “” levels not seen since the 50s.

Coin Word’s Paul Gilkes reports the US Mint made the announcement on April 23, and included details of a scale back in producing for other circulating coins, like the three remaining 2009 Lincoln Pennies.

It’s not that the public or collectors dislike the new coins. Quite the opposite, in fact. Collector demand for 2009 circulating coinage is exceptionally high. It’s all about the recession. It has, by itself, significantly eroded demand for new coins in every day transactions.

Why? In addition to buying less, consumers as a whole no longer hoard loose change at home. They spend or cash it in, replenishing circulating supplies to such an extent that coin inventories at banks have climbed. Banks, in turn, cut Federal Reserve orders for new coin shipments. Federal Reserve banks do the same to the Mint, which is then forced to slash production.

Electronic transactions has already cut into demand for circulating coins over the last several years. The latest news from the Mint, however, overshadows how drastic demand for coins has been affected due solely to the recession.

Using the latest Mint circulating coin production figures for 2009 Jefferson nickels, 39.36 million from Denver and 39.84 million from Philadelphia were struck, for a total of 79.20 million coins. In contrast, 640.6 million nickels were minted last year. That is an astonishing 87.6 percent reduction. The last time a U.S. nickel had such a low combined mintage was in 1951.

I feel sorry for this country.  The Fed’s tight money policy is making Americans so desperate that they are emptying piggy banks and searching under couch cushions for spare change.  Isn’t there a better way to increase the money supply!

One test of whether the drop in production is primarily due to less transaction, or less coin hoarding, is to look at currency in circulation by denominations.  If there is no drop in one dollar bills, then the main problem is emptying piggy banks.  If one dollar bill production is dropping, then transactions are also falling.  Sure enough, in 2009 one dollar bill production was at the lowest level since 1983 (the last time we had 10% unemployment.) 

Production of $100 bills reached a record in 2009, as demand for cash hoards obviously rises when the opportunity cost of holding cash falls close to zero.  Interestingly, the total amount of cash in circulation has not gone up very much in recent years, suggesting that cash and T-bills are not close substitutes.  There are two reasons why our academic eggheads are wrong in assuming cash and T-bills become close substitutes at zero rates.  Law-abiding people don’t like to hold lots of cash, because they fear losing it to thieves.  Those who do hoard lots of cash are trying to avoid taxes, or engaging in transactions that they don’t want the government to know about.  T-bills lack the anonymity of cash.

The Fed controls the monetary base (coins, currency and bank reserves at the Fed.)   All other nominal variables are endogenous.  This includes NGDP, the price level, the broader monetary aggregates, and the various denominations of currency and coins.  And it also includes bank reserves.  The Fed can also influence the demand for bank reserves by changing reserve requirements or the interest paid on reserves.

What does all this mean?  Take Friedman and Schwartz’s theory that the Fed caused the Great Depression by allowing M2 to fall sharply.  Given that the Fed doesn’t directly control M2, does it make sense to use the term “cause?”  It does under three conditions:

1.  The Fed can control M2 indirectly.

2.  M2 stabilization would have prevented the Great Depression.

3.  M2 stabilization is a desirable monetary policy.

The first is true under fiat money, but may not be true under the gold standard.  The second is probably true, and the third is highly debatable.  Nevertheless, although I don’t happen to favor targeting M2, I think their proposed policy is defensible enough that they are justified in calling the Fed’s decision to allow a big drop in M2 a “cause” of the Depression.  The may be right or they may be wrong, but they aren’t misusing the term ’cause.’  As an analogy, the Fed doesn’t directly control the fed funds rate; rather they influence it through open market operations.  Sometimes the market rate differs from the Fed’s target.  But people frequently suggest that Fed changes in the short term interest rate “caused” some other change in the economy (such as the housing bubble.)  

Coins are kind of like M2.  The nominal demand for coins is strongly correlated with nominal purchases of goods and services (but not assets.)  This is convenient because the nominal expenditure on goods and services (but not assets) just so happens to be NGDP.  So if the Fed had moved the monetary base in just such a way that coin production remained stable, then NGDP also would have presumably been fairly stable, and the Great Recession probably would not have happened.  

On the other hand it is probably not a good idea to target coin output.  Coin velocity is not completely constant, and hence directly targeting NGDP futures is a superior policy.  And there may be multiple equilibria.  For instance low nickel production could be associated with either deflation, or a hyperinflation that is severe enough so that nickels are no longer used for even the most basic purchases.

PS:  I hope that this post will melt the hard hearts of our inflation hawks at the Fed.  Is there anything more pathetic than little girls having to empty their piggy banks to help buy food for the family?  Won’t the Fed provide just a bit more money?  And please, more nickels, not more excess reserves that banks earn interest on, but only so long as they don’t share the money with the rest of us.



26 Responses to “Will the Fed refill America’s piggy banks?”

  1. Gravatar of Liberal Roman Liberal Roman
    19. July 2010 at 07:51

    It’s amazing though that despite Sumner and Krugman and a handful of other economists yelling at us that policy is too tight and contractionary, almost no one in the general public believes this.

    The idea that everyone has in mind is that the Fed is just pumping out trillions and trillions of dollars and we are going to have hyper-inflation any time now.

    I think Scott nailed it when he blamed this recession on the economics profession. After all, what does an ordinary layman supposed to think when the majority of economists are saying that policy is too accommodating and money is too loose.

    You go to a regular party and the usual dinner discussion when it comes to politics is something like:

    “Obama and Bernanke think they can just print money forever and just spend, spend, spend. He is going to cause hyper-inflation any day now.”

    I just remain quite and don’t say anything. What’s the point? It’s a hopeless struggle.

  2. Gravatar of Indy Indy
    19. July 2010 at 08:04

    Well, more dimes and quarters anyway. I’m of the belief that it’s time to phase out pennies, and maybe nickels too. They can only use micrograms of copper now to plate the surface of pennies – making them feel too light and unbearably shiny.

    What’s the optimal currency policy for the smallest unit of legal tender anyway? The less coins the better, I say.

    And anyway, in a decade maybe paper money and coins, especially small ones, will seem archaic and quaint. When I was in Japan, I saw people swiping their phones near vending machines and at convenient stores to make purchases. (Bluetooth? RFID? who knows…). I saw this in Finland too, and that was over 9 years ago.

  3. Gravatar of Benjamin Cole Benjamin Cole
    19. July 2010 at 08:27

    I guess the public and policy-community will have to see another round of deflation before they are convinced. We are nearly there in deflation land, it that will hurt banks, business and people.

    The most important economic commentator right now is Scott Sumner.

  4. Gravatar of Liberal Roman Liberal Roman
    19. July 2010 at 08:44

    “The most important economic commentator right now is Scott Sumner.”

    And no one is listening. People are listening to guys like Michael Pento. A guy who is out there on CNBC yelling for the Fed to hike rates.

  5. Gravatar of Benjamin Cole Benjamin Cole
    19. July 2010 at 08:53

    I think the Fed is beginning to come around–Ben Bernanke is a smart guy. Does he want to presdient over a long deflationary recession?

  6. Gravatar of BB BB
    19. July 2010 at 09:33

    People use their bank cards instead of carrying coins. I don’t remember the last time I actually spent a coin as opposed to receiving one and throwing it in a drawer.

  7. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2010 at 09:50

    “Won’t the Fed provide just a bit more money? And please, more nickels, not more excess reserves that banks earn interest on, but only so long as they don’t share the money with the rest of us.”

    Please make a serious guesstimate at exactly what the fed needs to buy and HOW MUCH of it – for the life of me, I don’t see it ever not being reserves.

  8. Gravatar of jsalvati jsalvati
    19. July 2010 at 10:03

    If today the Fed announced that it wanted the price level to be 10x higher than now at the start of 2012 and that it was willing to do what it takes to get there. Do you think we should still have really high levels of reserves like we do right now? If so, why do you expect a qualitatively different response with a smaller change in expectations? Why do you persist in ignoring the central role of expectations about nominal variables?

  9. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2010 at 10:46


    Because if the Fed said it wanted price levels 10x higher than now – the Tea Party would chew them to their bones, and end them once and for all.

    With your extreme example put to the side, we can agree that the Fed’s magic wand is hampered by the political control rightly exerted on the country by small business conservatives across the land who are pissed – we should explore if indeed, ALL the problems we face can’t be solved by serving their interests exclusively. Which is what I’ve been arguing for…

    View real estate assets as an inflated bauble, who’s inflation is the only thing keeping banksters afloat – and keeping everyone else from eating the banksters lunch.

    Give the small business conservatives their due – let them buy up cheap all the properties in their home towns cheap – move 10% of our population over into the renter category – and suddenly the insolvent banks, and all the human capital headed towards Wall Street will fade. No one will want to be a banker.

    But to your point – Scott never goes on record, accept to say that the Fed will buy treasuries, even worse would be MBS, neither is going to equate to banks loaning money – it will sit in reserves.

    BUT, if the price of housing drops in a meaningful way, and a number of banks go under and their assets are also auctioned… prices will be down where the deals are found.

    Go look at a home on Trulia look at it’s price in 2000, when you can own it for 2% inflation – we’re back to normal – and all that inflated worth the banksters are hoping Scott will help them keep – it floats away, and they are doomed.

    The question is about WHO owns the assets before we start considering inflation. Right now, the right people don’t own the assets.

  10. Gravatar of Andy Harless Andy Harless
    19. July 2010 at 10:50

    Couple of technical points. (I may have a real comment later.)

    1. You say that the Fed controls the monetary base and that bank reserves are endogenous. My understanding (which may be wrong) of the Fed’s operating procedures is that they automatically offset any change in demand for currency (i.e. when banks want to convert reserves to currency or vice versa) by making an offsetting change in bank reserves, so that there is no net change in bank reserves. I would describe this situation by saying that the Fed is choosing to control bank reserves and allowing the monetary base to be endogenous.

    2. Is it “true under fiat money” that “the Fed can control M2 indirectly”? I think that depends on what you mean by “control” (and also perhaps on unsettled empirical questions). The Fed can influence M2 to an arbitrarily large extent, but it can only “control” M2, in the sense of being able to hit a specific target at a specific time, to the extent that it can predict both the exogenous influences that it needs to offset and the intensity with which its own actions will influence M2. Both of these are quite uncertain even in normal times, and I think the uncertainty becomes much greater when the Fed (as today) is using tools (asset purchases) with which it has limited experience and when the demand for base money (as today) is particularly elastic. I would suggest that, by most people’s definition of “control” (though not necessarily by all reasonable definitions), the Fed cannot control M2 today. To put my point a little differently, the real question is not “Can the Fed control M2?” but “How closely can the Fed control M2?” and the answer, under today’s conditions (and during at least part of the 1930’s) is: not closely at all.

  11. Gravatar of scott sumner scott sumner
    19. July 2010 at 11:25

    Liberal Roman, Exactly.

    Indy, I agree.

    Thanks Benjamin. And I agree about Bernanke.

    BB, I still use coins, but they are a pain.

    Morgan, I don’t think we want the Fed paying attention to Trulia. Jsalvati is right. I am answering your question but you are ignoring my answers for some reason. If the Fed sets a higher NGDP or price level target they don’t need to buy any more debt, just eliminate the interest on reserves. I can’t give you a specific number.

    jsalvati, Thanks.

    Andy. Thanks for commenting. I’ve discussed a few of your excellent posts over here. Yes, I oversimplified. They can target anything they want, and then everything else including the base is endogenous. Short term they tend to target interest rates, and longer term they target . . . what? Supposedly inflation, or inflation and real growth, but they aren’t acting like they do. If they really had a flexible inflation target they’d try to get lower inflation during booms and higher inflation during recessions. Instead they do exactly the opposite–something I’ve seen called “opportunistic disinflation.”

    But yes, I should have said they could make the base exogenous, if they wanted to.

    2. I’m not sure they can’t control M2 pretty easily, but it is a moot point as I don’t favor targeting M2, and they aren’t going to target M2 in any case. So if I was wrong, and if the control is only over very long periods of time, it would simply reinforce my skepticism about targeting M2. However, the zero bound problem doesn’t really bear on this issue, as the zero bound is not a constraint on easier money, but rather an indication of tight money (i.e. an excessively low price level and/or NGDP growth expectations.)

    In my blog I put a lot of emphasis on the unreliability of interest rates as an indicator of the stance of policy. As you know, interest rate targeting, by itself, leaves the price level indeterminate. You need some sort of inflation target as well (i.e., something like the Taylor rule.) In that case the important indicator of policy is the expected change in the goal variable, prices or nominal output. That’s the indicator I always use when talking about easy money and tight money.

    BTW, it would be easier to control the aggregates if they got rid of ERs via a negative interest rate on ERs. This would be easy to do. Without sizable ERs, changes in the base would go through almost one for one with changes in currency held by the public–which are part of the aggregates. I’d like to see the Fed stop paying interest on reserves, but for reasons unrelated to control of the aggregates.

  12. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2010 at 13:01

    Wait, NOW you are saying, the Fed just has to stop paying interest?

    Scott make up your mind! I already know you want to stop paying interest, I agree we should – but now you are saying THAT will be the thing that causes NGDP to go up?

    C’mon be serious. All that will happen is more treasuries get purchased, the rates on them will go down, and Krugman will post a graphic saying:

    1. the government should be borrowing!
    2. the market sure is comfortable with Federal Debt!

    Trulia: Of course the Fed lives and dies on Trulia – many banks are insolvent if prices fall back to earth.

    The entire crisis is based entirely on real estate not being worth what banksters are claiming, and the prices are too sticky to come down as fast as they should.

    Scott, if we had mark-to-market, we wouldn’t have this problem. The Fed buying MBS was not to create liquidity, it was to try and keep the price of real estate from cratering.

    Tell ya what, why don’t you do a whole post, where you get down into the dirt which Fed actions are going to cause this sudden new flurry of economic activity, don’t assert it again please, show the whole recipe, how you think it works.

    Just show: How are businesses going to be suddenly be credible borrowers – that’s it, just show that one little thing. They won’t be. The economy is horrible.

    But even the average credit risk is worth loaning too IF the deal he’s getting on a house is 40% off the current price.

  13. Gravatar of SymbolicalHead SymbolicalHead
    19. July 2010 at 13:11

    I’m not sure I get it.

    If this were really money in piggy banks and tossed in drawers, isn’t it, for all practical purposes money that is freshly coming into circulation?

    All else equal, that should raise the price level. Slashing production of coins offsets that, so pretty much nothing happens on net.

    The symbolism seems a bit off, as the Fed minting a bunch of new coins to replace and supplement the existing base by no means mean that I’ll get them to refill my piggy bank.

    Deflation would help me just as much by raising the purchasing power of my wages. I’m more likely to have left over cash for my piggy bank from that than I would with diminishing purchasing power from a rising price level.

    Increased purchasing power that is not the result of increased productivity may cause unemployment to go up, but we’ve really run into a different argument by then, where we are talking about adjusting the real cost of employment instead, and there are better ways than minting quarters to help with that.

  14. Gravatar of JimP JimP
    19. July 2010 at 16:06


  15. Gravatar of Doc Merlin Doc Merlin
    20. July 2010 at 00:20

    @Symbolical Head

    “Deflation would help me just as much by raising the purchasing power of my wages. I’m more likely to have left over cash for my piggy bank from that than I would with diminishing purchasing power from a rising price level.”

    This is true for supply side deflation.

    “Increased purchasing power that is not the result of increased productivity may cause unemployment to go up, but we’ve really run into a different argument by then, where we are talking about adjusting the real cost of employment instead, and there are better ways than minting quarters to help with that.”

    Yes, agreed for demand side deflation, it means your boss will start cutting wages or cutting payroll to make ends meet. Likely this still won’t affect you, as only a small percent of employees are laid off during a recession, but the expectation value of it still puts you in a risk of bad place despite things getting cheaper.

    Well, thats the standard macro story for what happens anyway. The reason you almost never hear about both sides is because the right wingers almost always concentrate on the (long term) supply side and the left wingers concentrate on the (short term) demand side.

    Really, we just need to stop talking about prices, and start talking about more useful things.

  16. Gravatar of Morgan Warstler Morgan Warstler
    20. July 2010 at 05:20

    It’s ALL about real estate prices:


    Stop trying to print money to keep housing prices high. Take your loss, and move on, Scott, take your loss and move on.

  17. Gravatar of scott sumner scott sumner
    20. July 2010 at 06:38

    Morgan, I’m not changing my tune, I’ve always said their is plenty of base money, just get rid of all those ERs with a negative rate, and the Fed wouldn’t need to print more money.

    SymbolicalHead. In the post I pointed out that piggy banks are only part of the story. There actually is a drop in transactions balances, as shown by the drop in one dollar bills in circulation.

    Regarding deflation, you are ignoring sticky wages.

    JimP, Thanks, That is a good article. Good to see more attention paid to lower rates on ERs, and price level targets.

    Doc Merlin,

    “Really, we just need to stop talking about prices, and start talking about more useful things.”

    Yes, NGDP!

  18. Gravatar of Morgan Warstler Morgan Warstler
    20. July 2010 at 08:31

    Scott you wrote elsewhere:

    “Who gets the cash? I don’t know their names, if that’s what you mean. But it would be the people who sell bonds to the Fed. It really makes no difference who gets the cash, as they’d get rid of it quickly in any case.

    If there is a problem with banks hoarding cash (and I doubt there would be) just charge them a interest penalty on reserves. They’ll quickly spend their cash.”

    And this is the thing I’ve been trying to get you to repeat – is that ultimately, you have the Fed FORCING banks into actions you imagine will cause more loans.

    And so suddenly a ton of money buying Treasuries… which makes Krugman very happy. The government can do more cheap fiscal spending!

    But it doesn’t mean more bank loans, more economic activity. It doesn’t mean people with cash suddenly want to go buy cheap homes, able to make cheap rents.

    You don’t touch the real crisis: housing prices are too high (no one wants to buy them) and banks are insolvent under mark to market (if the inventory goes on the market).

    Unless your plan actually leads to banks selling off non-performing assets at liquidation prices, and unwinding more banks – why would there be any new growth in NGDP?

    The one thing zombie banks can’t do is make loans. How does it add up to growth without loans?

  19. Gravatar of Left Outside Left Outside
    20. July 2010 at 08:51

    Off topic but, have you seen this?


  20. Gravatar of Mari Mari
    20. July 2010 at 09:13

    BB is listening…yell louder…


  21. Gravatar of JL JL
    20. July 2010 at 10:11

    Dear mr Sumner, I think you have just found the slogan to start a grassroots movement to increase the money supply:

    I feel sorry for this country. The Fed’s tight money policy is making Americans so desperate that they are emptying piggy banks and searching under couch cushions for spare change.
    Isn’t there a better way to increase the money supply?!

    Enlarge the last sentence, put it one bumper stickers, and include some site that explains the need for new money as simply as possible (even if not as accurate as possible).

    It’s a pity the Fed officials aren’t elected…

    It’s like we’re back on the gold standard: Since we can’t print our money, we’ll have to go dig it up.

  22. Gravatar of Benjamin Cole Benjamin Cole
    20. July 2010 at 10:14

    FYI, this US News & World Report writer has been writing about deflation.


    Good guy to get to know?

  23. Gravatar of Liberal Roman Liberal Roman
    20. July 2010 at 10:39

    Hmm…some people in this thread are trying to make Scott feel a little happier by pointing out that the MSM is picking up on the theme of deflation and perhaps, perhaps this will be an impetus for the so called politically independent Fed to do something.

    But, here is something more depressing…


    “It has been said that if one laid all the world’s economists end to end, they wouldn’t reach a conclusion. Even so, a surprisingly large number of economists now agree that then-Federal Reserve Chairman Alan Greenspan made a tragic mistake. After the dot-com bubble burst in 2000, Greenspan opened the monetary floodgates.

    Specifically, Greenspan allowed the “monetary base” to increase 22% from June 2000 through June 2003. ”

    He then goes on to say how Bernanke has increased the monetary base even more and that is “obviously” even worse. And then he goes through the same colloqualisms that dominate economic discussions today: “You can’t print your way to prosperity,etc.etc.etc.”

    And BTW, it’s one of the top most read articles on MarketWatch today. Sad. Very sad.

  24. Gravatar of scott sumner scott sumner
    21. July 2010 at 05:38

    Morgan, Where did I say I was trying to force banks to make more loans?

    Left Outside, I can’t open that, can you post a key paragraph?

    Thanks Mari.

    JL, That’s a good idea.

    Benjamin, That’s good to see.

    Liberal Roman, That’s not good to see.

  25. Gravatar of Andy Harless Andy Harless
    21. July 2010 at 08:34


    “Where did I say I was trying to force banks to make more loans?”

    You have advocated negative IOER (at least as a possibility). That means penalizing banks for not making loans. It is “forcing” in the same sense that communities “force” their citizens to take certain actions (e.g. recycling) by imposing fines on those who don’t. (Unless you want to say that you’re not penalizing banks for not making loans but penalizing them for having assets, but that seems kind of silly, as if fines for improper disposal of recyclables were penalizing people for using recyclables in the first place.)

  26. Gravatar of ssumner ssumner
    22. July 2010 at 04:13

    Andy, I’ve told Morgan many times that banks would be free to either make loans or buy T-securities. I do understand that in some sense buying T-bonds is making a “loan” to the government, but it is generally put in a different category on bank balance sheets. Certainly a negative IOR doesn’t force banks to make loans to risky borrowers in a weak economy, which is what Morgan was getting at.

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