Thursday, July 7, 2011

A penny for your thoughts...A private market invention is saving the Taxpayers BILLIONS of dollars, or I should say cents...

The next time you pass (or use) a CoinStar machine, give it a wink and a nod and a pat on the head.  It is a nice example of a POSITIVE unintended consequence of bringing an invention to the marketplace. It takes "dead" financial capital (all those pennies, nickels and dimes) in a jar, under your car seat, or under the cushions of your couch, and turns them into financial capital that is "alive" and more likely to be spent. CoinStar then returns these coins back to the banking system to be re-circulated again.  The Dept of Treasury then needs to produce fewer coins to meet existing demand.  Natural and labor resources are conserved, hence fewer tax dollars are spent producing coins. 

How come the inventors of this machine don't win the Nobel Prize in Economics and Greenpeace's award for environmental activism?  A simple invention designed to solve an everyday, unromanticm, unflashy, non-technical problem. THAT is the free market at its best...

Source for this entry is at Economix:
The U.S. Mint produced about 5 billion pennies, nickels, dimes and quarters in 2010, less than one-third of the average annual production over the last 30 years.

Just like paper currency, right? Well, not quite.

People clearly are using fewer coins.

But there’s something else too. Call it The Coinstar Effect.

In 1992, three Stanford University graduate students convinced four Bay Area supermarkets to let them install a new machine designed to count spare change. The concept was rather brilliant, like a slot machine with a guaranteed payout. There’s nothing quite like the sound and sight of money — your money — being counted. And as the company grew, the technology began to change the basic physics of change.

Americans keep vast quantities of coins around the house. “Keep” is maybe the wrong word. Coins gather in the folds of couches and drawer bottoms and coat pockets. They are collected in jars, popped into piggy banks, socked away. And until Coinstar came along, that money mostly just sat there. In keeping with the law of entropy, it was easy to turn bills into coins and difficult to turn coins back into useable money.

And that is exactly what Coinstar made easy.

By the early 2000s, the company’s machines were annually collecting more coins than the U.S. Mint was producing. And the company was putting those coins back into circulation, meeting a growing share of market demand, reducing the need to mint new coins.

There’s another important difference between bills and coins: Coin production tracks the American economy much more closely, because the demand for coins is almost entirely domestic, while the demand for paper currency comes mostly from overseas. (Moreover, the demand for paper currency can rise during a financial crisis, as it did in 2008, because people sought to withdraw their money from the banks.)

Coin production, in other words, is likely to rebound somewhat as the economy recovers. But the U.S. Mint estimates that production still won’t top 10 billion coins a year, so it is shuttering equipment and reducing capacity at its plants in Philadelphia and Denver.
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