As the recession deepened, Rick Alfaro of Sacramento noticed that more people were using coins in his office vending machine — and clogging it up.
Alfaro's theory was that people were feeling pinched and that using coins, as opposed to dollar bills, made them feel they were spending less. He asked the worker who stocks the machine, and the answer came back that he was right. People are "kind of scrimping a little bit and digging in their car" for loose change, Alfaro says.
For Alfaro it was just a hunch, but it turns out that economists have researched the phenomenon, which they call the Denomination Effect. Priya Raghubir and Joydeep Srivastava did a series of experiments in the U.S. and China that showed people were much more willing to spend the same sum of money if they had smaller denominations instead of one large bill.
"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 than the four quarters they were given," Raghubir says.
Another experiment involved Raghubir standing outside a gas station in Omaha. She would have people fill in a survey about gas usage and then thanked them with either a $5 bill, five $1 bills or five $1 coins. People went into the store, and when they came out Raghubir asked them for their receipts. The ones with coins spent the most, people with dollar bills a little less. And people with one $5 bill kept that one in their pockets.
Raghubir wanted to see whether that effect was particular to American culture, so they ran the experiment overseas. Given a week's salary in different denominations, housewives in China behaved the same way.
If we want to get consumers going again, Raghubir says, we should hand out lots of change.
"If I were President Obama, the very first thing I'd recommend is increase the circulation of $1 coins and consider introducing $2 coins," she says.
Likewise, she says the IRS should stop sending tax rebates as lump sums. "You could send us travelers checks," Raghubir advises. "Send it in twenties, the way we get cash."
The research seems clear, and in some ways intuitive. She opens her paper with a Mexican proverb that advises taking care of small, loose bills, since large bills take care of themselves.