Do We Need a 37-Cent Coin?

http://freakonomics.blogs.nytimes.com/2009/10/06/do-we-need-a-37-cent-coin/

by mhb • 16 years ago

98 137 16 years ago

freakonomics.blogs.nytimes.com

Actually, the search for "the most efficient coin system" is kinda pointless -- if you are as advanced to discover and implement such a system, you are certainly advanced enough to implement and use a cashless system based on digital payment transactions...

gregpilling• 16 years ago

The cash system will be hard to get rid of in the US. Many people want to be able to hold their real money, not just have it on a bank statement. With these same people - for fun - have a few drinks with them and try to explain to them that the dollar bill they are holding is also not 'real' in the sense that it is only a piece of paper and has no intrinsic value of its own.

xyzzyz3• 16 years ago

Cash is also useful for anonymous transactions. The anonymous cashless protocols are very complicated compared to cash, and I don't even know if anyone implements them at all.

dstein3• 16 years ago

People always use this as an example, but I don't think it's true. Next time you're in line at a retail store, or even a coffee shop, pay attention to how many people use cash. It's probably down to 50% or less these days, people already use a credit card for pretty much everything if only for the value points, convenience, and high ATM fees.

chopsueyar4• 16 years ago

Currency dependent on power sources?

tomjen33• 16 years ago

Shouldn't matter - you would be dead within two weeks of a total global loss of power.

We simply couldn't produce enough food.

syvex• 16 years ago

After working with payment processing of credit, debit, EBT, and gift cards for the past few years, I have started using cash more.

For most transactions, a merchant is charged between 2-3% of the purchase price. This means that whatever you are buying could be 2-3% cheaper if cash were used instead. (However, for high-volume stores this may not be true since credit transactions take less time than getting change from cash.)

Furthermore, if someone steals your credit card number, you call them and have the charge removed. Does your credit card company take the loss with this? Not usually. The merchant that accepted the stolen card will pay. This in turn, makes the price of goods go up again.

These things take some toll on the overall economy. The real question becomes, how can we make cash transactions more efficient so that it improves commerce for individuals and improves the profits of businesses?

elai2• 16 years ago

ATM/debit bank cards? Often only a flat .25 a transaction, PIN only, and you can't chargeback just like cash. Online transactions need a PIN interface although.

mhb• 16 years ago

One way would be to get rid of any rules which prevent retailers from passing through the cost of credit card charges to credit card users in an obvious way. Like by saying that credit card transactions will cost 2-3% more than cash transactions. I think this is either discouraged or prohibited by credit card issuers.

stan_rogers2• 16 years ago

That'll require a fundamental re-ordering of a lot of the financial system. How do you pay the poor, whether working or on the dole (many of whom are refused bank sevices, which is currently a perfectly legal practice in most jurisdictions)? What level of loss per transaction would be unacceptable, and who gets to draw the line? What happens to garage sales, flea markets and charity bazaars? Can you lend me twenty bucks until Thursday, or do I need a bank loan?

pmjordan4• 16 years ago

I quite like the idea of 1/3/10/30 cent denominations. The even more efficient combinations would be mainly a social experiment: would people adapt with better mental arithmetic, would they revolt or would they rely on automation (cash tills, computers) even more?

The Euro/cent has far too many denominations with 1/2/5 at each power of 10 up to €500 (split between 8 coins and 7 notes). Combining 2s & 5s into 3s would reduce that to 10 denominations total, and I think it would be reasonable to drop single-digit cents from cash transactions entirely. IIRC Finland has "banned" 1 & 2 cent coins already. (they're in circulation obviously, but no prices require anything below the 5 cent coin)

sethg3• 16 years ago

I like the idea of a ternary currency: redefine the dollar¹ to be worth 81 pennies², and then issue 1p, 3p, 9p, and 27p coins. (cf. http://en.wikipedia.org/wiki/Balanced_ternary)

Of course no country other than Geekistan would actually do this, so I would settle for a 1/3/10/30 system.

¹Or pound or euro, of course.

²We couldn’t call them “cents” any more, could we?

pmjordan4• 16 years ago

Of course no country other than Geekistan would actually do this

You do know about pre-decimal Pound Sterling, right? http://en.wikipedia.org/wiki/Pound_sterling#Pre-decimal

I particularly like the insanity of the Guinea denomination (1 Pound + 1 Shilling = 21 Shillings). My girlfriend's mother apparently was still nominally paid in Guineas as a legal secretary in the early 70s. Reminds me of volume controls that go to 11.

protomyth4• 16 years ago

If you were going to do the dollar redefine, why not have 1 dollar = 12 "coins". Only mint one coin and 12 has a lot of nice divisors. It would also have the advantage of no minted coin really being practically worthless.

dbfclark3• 16 years ago

The story (picked up from Daniel Davies at http://d-squareddigest.blogspot.com) goes that the way one argued with Milton Friedman was to listen until he got to the part of his argument where he said "let's assume x" and then say "no, let's not!" That is, the part of the argument doing all the work tended to be hiding in some premise that economists consider innocuous but is in no way representative of the world.

So here, premise (2): "probability of a transaction resulting in value v is uniform." No! Not true! In reality, people price a disproportionate number of transactions to make easy change with the coins we have, be easily divisible, be .01 less than a larger number of dollars, and so on. The discovery that cash transactions had a uniform distribution of change would actually be quite weird.

But worse is the smuggling in of an unconsidered definition of the good in the form of the efficiency metric -- fewest coins per transaction. Even granting the uniform distribution, making change out of your pocket is still solving the subset-sum problem in your head, which is of course NP-complete. The existing setup of coins, including the first three powers of 5, makes this problem very easy while almost all the proposed "better" solutions actually make this aspect of the problem harder rather than easier. Who cares if I have to handle a few extra tenths of a coin per transaction if it means I don't have to spend two minutes puzzling out how to make change?

I suppose the lesson, as usual, is that business logic is lived experience, not theory.

xyzzyz3• 16 years ago

>making change out of your pocket is still solving the subset-sum problem in your head, which is of course NP-complete.

Generally speaking, that's true. Most currencies however are designed, so that the greedy algorithm always works and produces optimal solution. The coin systems given in the linked article do not have this property, so they are actually inferior to real systems.

edit: come to think of it, they in fact do, but it requires ridiculous amounts of pennies, so my argument still holds.

Locke1689• 16 years ago

FWIW I got that from the original poster: the general case problem is NP complete but most of our special cases are not.

frgbhnmnjh3• 16 years ago

Not quite in the USA you buy three items that end in 99c, but two of them have state sales tax, one of those has local sales tax and the other has a liquor tax.

SO you can work out the change IF you know the random extra amount that will be added at the checkout

dbfclark3• 16 years ago

This actually makes the non-uniformity worse, not better -- things priced at an even number of dollars don't factor into the calculation before tax (and there are lots of those), but after, change amounts get disproportionately weighted to the amounts of change produced by even numbers of dollars. Argh.

chopsueyar4• 16 years ago

I've actually started using $2 bills for this reason.

ahi• 16 years ago

He's also using the average as the only metric. Some systems may have better distributions.

j_baker• 16 years ago

Reminds me of a joke I heard recently.

A chemist, a physicist and an economist were stranded on a desert island when they discover a crate of canned food. The chemist says that they should leave the cans in the salt water for a while and then try opening them. The physicist says they should try banging them open with rocks. The economist says "Let's assume we have a can opener."

godorito• 16 years ago

I am totally stealing this joke for the next faculty meeting. But, we have to make some assumptions in life. Until we get that cranial recording unit running.

Gormo• 16 years ago

Also, his most efficient system of coins in one in which every denomination is a prime number, so no denomination but the penny factors evenly into any other.

In our current system, the only one that doesn't work is breaking a quarter into dimes.

(And I presume you mean "first three multiples of 5".)

dbfclark3• 16 years ago

Nope, powers: depending on indexing, the first three multiples of 5 are either 0,5,10 or 5,10,15, and we have neither a zero-cent coin nor a 15-cent one. The first three powers of 5, on the other hand, are 1, 5, and 25.

endtime• 16 years ago

The coins just need to be coprime, not prime.

jerf3• 16 years ago

I rather suspect that if we consider "the ability for most of the population to correctly and reliably perform mental math using the tokens provided" that while our current system still doesn't win it has a much better showing. And yes, I'm willing to ignore the fact that people are already familiar with the current system, but I can't come up with a much better one off the top of my head.

By that metric, 37-cent pieces are just about the worst coinage possible, 11-cent pieces are a joke, and even 15-cent pieces which don't evenly add up to a dollar are a suboptimal.

Even by economist standards, ignoring this aspect of the system is rather a disappointment.

jjcm• 16 years ago

Perhaps a good measure of whether or not the general populous can perform mental math based on the value of the coins is to check and see whether or not a single dollar is divisible by the value of the coins (as you hinted with the 15 cent coin). It allows for many mental paths to arrive at the correct answer for what amount of coins are needed to make a certain sum. Take the nickel for example, to make 50 cents you might think to yourself, "I just need to divide 50 by 5, which is obviously 10." Alternately one might think, "I know there are 20 nickels in a dollar, if I halve this I'll have half a dollar, which is 50 cents. That means I need 10 nickels."

I'd say that the pool of coin values we can choose from then are 50, 25, 20, 10, 5, 2, 1. The two cent piece is already in use in Europe, and many economists have suggested adding it to the coinage in the united states (usually in replacement for the penny altogether). It'd be interesting to see if the 20 cent coin would be a viable addition though.

daychilde2• 16 years ago

I very much agree that's the practical pool of possible coin values.

Seems to me if one wanted to simplify the system, a good solution would be (1, 5, 10, 50). This would really make the math simple.

But I don't think people would give up quarters happily; nor do I think fifty cent pieces would go over well; and I think it's high time to lose pennies. So if I was the evil overlord in charge, I think I'd just drop to (5, 25). Cash transactions would round to the nearest nickel instead of penny. Getting back four nickels instead of two dimes would be gotten used to quickly, I think.

impeachgod• 16 years ago

Actually, in the Soviet Union you used to have 3-kopek and 15-kopek coins, as well as 3-ruble notes.

listic• 16 years ago

Clarification: late Soviet ruble (1961-1991) had the following coins: 1, 2, 3, 5, 10, 15, 20, 50 copecks and 1 ruble http://en.wikipedia.org/wiki/Soviet_ruble

I think if you really want to minimize the number of coins per transaction, you can always add more (than four) denominations of coins, up to some reasonable number.

z0r• 16 years ago

Abolish the penny, use a uniform rounding rule to make the nickel the smallest denomination. I hate pennies.

matrix• 16 years ago

I strongly agree. This is the correct answer to the problem. That and adding sales tax to the tagged price (i.e. don't add sales tax at the time of the transaction).

Splines2• 16 years ago

The problem with adding sales tax to the price tag is that sales tax isn't uniform across the U.S., and residents from one state can buy something and have a different sales tax applied (I see this happen frequently with Oregon -> Washington travelers).

I suppose the first step would be to unify sales (or whatever) tax across the country.

decadentcactus2• 16 years ago

Read somewhere that $1 notes account for almost 50% of paper money in the US. To me it also makes sense to get rid of them (replace them with $1 coins).

astine• 16 years ago

They keep trying that, but no one uses them.

delackner• 16 years ago

Not holding my breath, but:

The Japanese solution works very very well. the 100 yen coin (their system's $1 equivalent) is smaller than a US quarter and much lighter than a british pound coin. The 500 yen coin is about as big as a Susan B. Dollar coin, yet is still quite light. I often have as much as 2000 yen in coins in my pocket at a time, and it doesn't feel particularly heavy. Paying a transaction under 1000 yen is generally quick and pleasant.

Contrast with US $1 dollar bills, that are for some reason almost always falling apart, crumpled rags, and with the Quarter being the largest coin in common circulation, paying for something under $10 inevitably means fishing out a mix of disintegrating bills and small change.

pavel_lishin• 16 years ago

And in twenty years, abolish the nickel, use a uniform rounding rule to make the dime the smallest denomination.

You'll hate nickels.

ars3• 16 years ago

Why 20 years?

Do it now.

We'll rename the coins (issue all new ones) "decies".

Sort of like a reverse stock split. Let's renormalize all our cash. Due to inflation it's necessary to do this every 100 years or so.

enf• 16 years ago

I already hate nickels. The dime is the smallest useful coin.

growt2• 16 years ago

Maybe he should take into account that in the real world most prices are xy.99, this might change stipulation 2.

jonknee4• 16 years ago

Except there is sales tax, so your $xx.99 purchases usually don't end up that way. For a $1.99 purchase in my city I end up paying $2.13 which would be helped nicely by the $.37 cent coin.

I see your point, I doubt the distribution is completely uniform. But it's probably not as clustered as you'd think (different taxation levels helps).

growt2• 16 years ago

Ok, I see. I live in germany, where the tax is already included (a 99 cent coin would be really efficient here).

mfukar• 16 years ago

That is not the case in all countries. In fact, I'm not even sure it applies in the majority.

Assumptions of uniformity are usually (uniformly) wrong.

jasonfried• 16 years ago

Yes!

laut• 16 years ago

I'm more concerned about other aspects of the U.S. economy. Such as inflation. That's what made pennies worth so little in the first place.

These numbers are also more interesting than pennies: http://usdebtclock.org/

martingordon• 16 years ago

Jeez, the 37signals worshipping around here is getting a bit out of hand.

In all seriousness, how about vendors start pricing products with tax included, rounding to the nearest quarter dollar? Say what you will about movie theatre concession pricing, at least you're not going to walk out of there needing a tub for your change as well as your popcorn.

decadentcactus2• 16 years ago

At least here in Australia, prices at the shops will include taxes. So getting the correct change out while waiting in line is pretty simple.

points• 16 years ago

Same in the UK.

Sales tax in the US is just ridiculous. I've never understood why they would prefer things that way.

harisenbon2• 16 years ago

Same in Japan. 6-7 years ago a law was passed that all posted prices must have the sales tax figured in. I think it makes things much clearer to know exactly what you're paying.

Also, something of interest, I have a lot of friends who come over here to Japan and complain at how expensive food is in restaurants. What I noticed is that while the price on the menu is much more expensive than in the States, your final cost is pretty comparative.

US Cocos: ($20 + 10% tax) + 15% tip = $25.30

JP Cocos: ($25 incl. tax, no tip) = $25

dstein3• 16 years ago

Why go to the effort of eliminating small coins? Why not just go ahead and switch to an electronic currency? Or at least an electronic replacement for coins and bills like they do in Japan:

http://en.wikipedia.org/wiki/Suica

Splines2• 16 years ago

From a user perspective, debit/credit cards already fill this niche (is the plastic money culture different in Japan?).

timwiseman• 16 years ago

Subsantial new infrastructure would have to be built to accommodate person to person transactions. When I deal with an established vendor, I use a credit card almost 100% of the time and while not electronic currency it is close.

When I buy orsell something of craigslist right now it is almost always cash and the infrastructure available would have to change substantially for that to change.

vaksel3• 16 years ago

frankly I don't see why we even need coins at all. Talk about your waste of resources minting all of those. It was fine when a can of coke was 25 cents or when you could get a new car for 2 grand. But in this day and age? It's just a waste.

should just switch to a digital currency already...disposable credit cards that can transfer funds between each other.

protomyth4• 16 years ago

Well, some people really like cash, and I still run into places, particularly in rural areas, where credit cards are only allowed on purchases over $20. The credit card fees are a great incentive to keep cash / coins.

vaksel3• 16 years ago

I'd imagine the digital currency would be run by the government. So they'd be 'minting' these new cards, and as such there'd be no fees to talk about.

graywh2• 16 years ago

Visa and MasterCard don't allow merchants to impose a minimum purchase requirement.

lukeqsee• 16 years ago

While you have a point, there is a flipside, specifically regarding cash v credit/debit cards.

1. Privacy

If you use a card for every transaction, then you can be tracked for every transaction. Simple as that.

2. Tangible spending

If you have digital currency, it is often hard to mentally understand the value of money. Everything is equal; be it $10 or $1000. I value an hundred dollar bill much more than an hundred dollars in my bank account, and consequently am less likely to spend the bill.

Digital currency has it's upsides. Let's remember there are real downsides as well.

Anomaly775• 16 years ago

I'm willing to use 0.60 more coins during transactions if it saves people from actually learning how to count.

frgbhnmnjh3• 16 years ago

Can i suggest splitting the $ into 20 equal parts and then each of those parts into 12cents.

Then you could have 1,2,3,6 cent coins and 1,2,10 part coins.

For anyone that can manage the calculations for feet/inches/yards/miles, drams/ounces/pounds/tons it should be simple.

blahedo• 16 years ago

Brilliant! But perhaps we could go with a 2.5 part coin instead? There's just something that feels right about that.

frgbhnmnjh3• 16 years ago

A sterling suggestion - I award you half-a-crown

Aron• 16 years ago

The negPenny! Anyone want to write a quick script to check combinations that include negative values?

limmeau4• 16 years ago

Joking of which, complex currency would also be an interesting toy.

The imaginary part could represent some orthogonal aspect of worth, e.g. consumption of scarce resources.

jerf3• 16 years ago

Interesting, but since there's no reason to multiply two money values together (what use is a square dollar?), it doesn't really do anything. It ends up trivially degenerating into two currencies with some exchange rate between them.

nsfmc• 16 years ago

Say what you will, at least the article has a sense of humor.

“How can you tell that Patrick is a young economist from the preceding discussion? Because he finds that the current government solution for the coins we use is 98 percent efficient and thinks this is inefficient.”

saraid216• 16 years ago

it would be a lot more efficient if we went to only 1 decimal place and got rid of everything but the dime.

ryanwanger• 16 years ago

10 years ago, when I visited Australia, their currency was similar in value to the US (I think an aussie dollar was worth roughly 65 cents US), and they had no pennies OR nickles. It started at 10 cents.

They also had 1 and 2 dollar coins.

The best part was that the change in your pocket was worth enough to actually allow you to buy things with it. Not like we have now, where people only use it to avoid getting more change back.

JoeAltmaier• 16 years ago

Who uses coins to pay exact change? I use bills, pocket the change (or leave it in the dish), it piles up in jars at home.

Make the coins lighter! So my pocket doesn't wear out from carrying half a pound of worthless metal.

code_duck• 16 years ago

I hate economists.

julius_geezer• 16 years ago

The novelist Anthony Burgess once wrote about the convenience of the old British system of pence, shillings, pounds, and guineas: the pound was evenly divisible to a value in pence if not shillings by 2, 3, 5, and guinea also by 7.

Do We Need a 37-Cent Coin?

Related Stories