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Why We Spend Coins Faster Than Bills

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Why We Spend Coins Faster Than Bills

Why We Spend Coins Faster Than Bills

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MICHELE NORRIS, host:

Economists measure our recession through numbers, charts and graphs. Our Planet Money team has been collecting different economic indicators - personal indicators. There are ways you may have noticed the economy is changing. Here's Chana Joffe-Walt with one indicator that might sound familiar.

CHANA JOFFE-WALT: This indicator begins with a financial problem many, many of you have faced - in fact, I would guess all of you have faced this. You're at the Coke machine, and it won't take your stupid dollar bill.

Mr. RICK ALFARO: So I go upstairs with my dollar bill and try to stick in the machine. And sometimes it would go (makes noise), you know, roll in and out.

JOFFE-WALT: Rick Alfaro wrote us to report this pressing issue. Alfaro works at IBM in Sacramento. The vending machine that's on the second floor of his office, he was just getting really annoyed. He'd be at work two, three in afternoon. He's tired. And every timeā€¦

Mr. ALFARO: (makes noise)

JOFFE-WALT: And then one day, Alfaro actually sees the guy refilling the machine - big guy - and he asks him, what's the deal? It doesn't take dollar bills. And the guy tells him it's because it's full. When the bin fills up with bills, it can't anymore. Ah-ha! So Rick starts using change, and it is going great for months - until just a few weeks ago.

Mr. ALFARO: Basically, what started happening was the opposite. I'd put in change, and it would just drop all the way through to the bottom.

JOFFE-WALT: So, weeks pass, with the machine spitting back quarters, and then Rick sees the guy delivering the soda again.

Mr. ALFARO: Basically, what started happening was the opposite. I'd put in change, and it would just drop all the way through to the bottom. And I thought, God, you know, this change - now the change thing wasn't working right. So it just got really frustrating. It was just sort of like the whole thing in reverse.

I said, oh, I guess a lot more people are digging for change now. And he goes, oh, yeah. People are, you know, using less bills and more change, kind of scrimping a little bit and digging in their car.

JOFFE-WALT: I told this story to Priya Raghubir, and she just loved it. She's a marketing professor at NYU's Stern School of Business, and she just published a paper exactly about this thing Rick was noticing in his vending machine. It's called the Denomination Effect.

Professor PRIYA RAGHUBIR (Marketing, NYU's Stern School of Business): In fact, we've done some studies with four quarters and a dollar, and we found that people were much less likely to spend the $1 note that they were given as compared to four quarters that they were given.

JOFFE-WALT: Raghubir has done dozens of experiments that show people are more likely to spend the same sum of money if it comes in smaller denominations. One actually involved her standing outside a gas station in Omaha. She'd have people fill out this fake survey about their gas usage, and then were thanked with either a $5 bill or five $1 bills or five $1 coins. And then people went into the store, and when they came out, Raghubir asked them for their receipts. And the ones with the coins, they spent the most. And the ones with the dollar bills spent a little less. People with the one $5 bill, though, they kept that bill in their pockets. She even gave a week's salary to housewives in China in a bunch of different denominations, and they behaved in the same way, too.

So, now here we are. We're watching consumer spending go down. Industries are hurting. Banks are hurting. Governments are hurting, and Raghubir is saying all we need to do get people to spend is to hand out change?

Prof. RAGHUBIR: If I were President Obama, the very first thing I would recommend is increase the circulation of $1 coins and consider introducing $2 coins.

JOFFE-WALT: And Raghubir says our tax rebates - come on, you don't have to send those out in big, lump sums. You can just send us traveler's checks. Send it in 20s, the way we get cash.

Prof. RAGHUBIR: The minute it goes into the bank account, it becomes saving. It becomes real money. But otherwise, if I'm getting it more like petty cash in my mail and I can go into Macy's and spend it or I can go into Safeway and spend it, then I would be more likely spend my stimulus money rather than save it, which is one of the goals, I think, of the stimulus package.

JOFFE-WALT: Of course, how you feel about all this will depend whether you're a tightwad or a spendthrift - scientific labels, people - and whether you believe you believe we all should be spending more to help save the economy. Maybe you feel we should all spend a little less, since spending is what got us here in the first place.

Chana Joffe-Walt, NPR News.

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