Scrip Money, Demurrage Currencies, and Hot Money Credits
I was hoping someone will review the article by Aqdas Afzal about introducing a temporary parallel currency to stimulate consumption (i.e., to increase aggregate demand) and increase economic activity in the country to offset the slowdown due to Covid19 events: lockdowns, loss of income/jobs, people saving extra to have a rainy day fund, etc.
However, didn’t see anyone discussing it. It was disappointing but par for the course. Amnesty scheme, construction package and previous government’s corruption are what keep thinkers and policymakers awake at night. But I digres
Discussing the article may lead you down the path of wondering “what makes something money?”, which is a philosophical question that is still being debated amongst economists. For those keen on the topic, they may want to read Felix Martin’s “Money — the unauthorized biography” and they would be just dipping their toes in this fascinating topic. However, to keep this piece bite-sized and article length, I will steer clear of this discussion here.
Due to the pandemic, Paradox of Thrift has become a challenge as households change their behavior and increase their savings to prepare for uncertainty. Barron’s is asking policymakers to do whatever is necessary to stave off long term damage.
The Coronavirus Has Already Made Us Poorer for Years to Come
Households, too, can be expected to change behavior in the post-pandemic world. More money will be spent maintaining stockpiles of toilet paper and canned food, to say nothing of hand sanitizer and face masks, which means less money to spend on goods and services people want. At the same time, many people will choose to consume less overall in an attempt to build up a buffer of emergency savings. The financial crisis pushed the average American’s savings rate up from about 4% from 2000–06 to about 7.5% since 2012, and the increase looks even larger after accounting for changes in the level of interest rates and the ratio of wealth to income.
Less spending by American consumers will push American businesses to produce less, which means lower income and employment across the economy unless spending by the government and the rest of the world somehow picks up the slack.
To forestall this vicious cycle, policy makers must stop the virus and do whatever is necessary to make sure the long-term economic damage isn’t even worse.
Even the PM asked his advisors to come up with out of box thinking to steer the economy out of the crisis.
Out-of-box solutions needed for economic growth: PM
Prime Minister Imran Khan on Saturday emphasised that out-of-the-box solutions were required for economic growth in these crucial times as the Covid-19 had adversely impacted the world’s economy, including that of Pakistan.
The PM’s Adviser on Finance Dr Abdul Hafeez Shaikh, Adviser on Institutional Reforms Dr Ishrat Hussain, State Bank of Pakistan Governor Raza Baqir and former finance secretary Dr Waqar Masood Khan attended the meeting, the PM office media wing said in a press release. Adviser on Commerce Abdul Razaq Dawood, Shaukat Tareen, Sultan Alana, Dr Ijaz Nabi and Arif Habib participated via video link.
The tragedy is that the members of “Think Tank” haven’t had a new idea in a while. All their ideas have been run-of-the-mill type __ high discount rate to attract hot money by one-trick pony, real estate money laundering package by Shaukat Tareen and Arif Habib, the below thread by Mosharraf Zaidi tells you that Ishrat Hussain is out of ideas too as he is plagiarizing own ten-year-old papers.
Click to go to the thread
Anyway, you get the drift.
It was a breath of fresh air that Aqdas Afzal proposed the idea of Gesellian currency i.e., a currency that expires if not circulating i.e., there is a tax on hoarding/saving it.
Creative policies — Newspaper — DAWN.COM
Gesell came up with a radical idea that cash, like medicine, should expire. Specifically, cash savings would need to be stamped for a fee after some time, otherwise the cash would become useless. What this meant was that now savings in cash would incur a negative interest rate creating an incentive for people to spend it sooner to avoid the stamping fee. For years, cash with an expiry date remained a theoretical idea, but during the Great Depression many cities in Europe and the US ran successful experiments with stamped money. In 1933, Irving Fisher, the famous economist, even lobbied US Congress in favour of stamped money so that relief could be provided to distressed Americans.
Gesell’s work has recently gained attention with papers being published by the IMF, no less. Given the urgent need to stimulate this economy and the lack of policy options, policymakers could experiment with multiple creative policies. The government could legislate that for the next year, one-fifth of all salaries would be paid in a parallel currency — Pakistan riyal, if you will — that would expire if not renewed every quarter. The parallel currency would not be convertible into any other currency or be usable online. Rather, the parallel currency would only be able to purchase goods made in Pakistan, thereby providing a fillip to the local economy. Once the economy starts to gain momentum, the riyals would be gradually taken out with the government accepting them as payment for taxes or train tickets.
I wish the professor had dwelled more on it but I presume the word length restriction in a weekly newspaper column prevented him from expanding on it. It would have been interesting if professor sb elaborated on how it will work.
Backing up. Why is such a complex scheme being proposed? If the economy is stalling because people arent purchasing, why doesn’t the government purchase goods and services instead of giving people money. The effect will be the same i.e., the economic activity picks up and if confidence returns, the government can reduce its purchases of goods and services. This is how the central banks do quantitative easing but instead of the central bank, it will be treasury or government and instead of buy stocks/bonds, the government/treasury will be buying physical goods and related services. I think the drawback here is that our local Hayek/Friedman fans will deem this intervention too extreme i.e. the government is choosing which sector or rent-seekers to direct its orders to which goes against free-market ideals.
The other option is the give everyone money aka helicopter money. Not only one has the same propensity to consume. The rich will probably bank the money. The poor may spend the money but since it is a one time or a limited drop from the government, the retailer or the wholesaler who sells the goods to the poor for this money may decide to bank it thinking that this was a one-time windfall and he should save it in case economy doesn’t turn around. If the objective was to keep the engine of the economy running and money circulating, helicopter money didn’t achieve the purpose.
This is where the concept of stamp scrip or scrip money or stamp money comes in. The money loses its value (incurs “demurrage”) if it isn’t circulating. It is easier to explain this with the example
Stamp Scrip: Money People Paid to Use
Stamp scrip, sometimes called coupon scrip, arose in several communities. It was denominated in dollars, in denominations from 25 cents to $5, with $1 denominations most common. Stamp scrip often became redeemable by the issuer in official U.S. dollars after one year.
What made stamp scrip unique among scrip schemes was a series of boxes on the reverse side of the note. Typically, 52 boxes appeared on the back of dated stamp scrip, one for each week of the year. In order to spend the dated scrip, the stamps on the back had to be current. Each week, a two-cent stamp needed to be purchased from the issuer and affixed over the corresponding week’s box on the back of the scrip. Over the coming week, the scrip could be spent freely within the community. Whoever was caught holding the scrip at week’s end was required to attach a new stamp before spending the scrip. In this scheme, money became a hot potato, with individuals passing it quickly to avoid having to pay for the next stamp.
In either of its forms, the scrip could be redeemed at the issuer once the boxes were completely filled with stamps — the issuer took the scrip and gave back dollars equivalent to the scrip’s denomination. If the issuer had kept the proceeds of the stamp sales throughout the year (which didn’t always happen), there would be enough funds set aside to fully redeem the scrip, with a little extra to cover the costs of operating the scheme. Often, 4 cents extra on the dollar was built into the pricing for this purpose.
Issuing scrip was also viewed during the 1930s as a way to encourage local spending. (In fact, there is a scrip in use today in Ithaca, New York, that exists for the same purpose.) Aside from the general slowdown in business caused by the Depression, local merchants were also concerned about the growth of big chain stores. They saw locally issued scrip as a way of thwarting “the growing menace of chain-store competition,” as the scrip historian Joel W. Harper put it, and for that reason merchants could be persuaded to accept it. The idea of using scrip to stimulate spending is one of the reasons people chose to issue stamp scrip rather than other kinds of scrip. Other scrip, which did not require the use of stamps to spend (and involved no hot-potato scenario), would not have given consumers the same incentive to spend. The other advantage of stamp scrip was the automatic means it provided for redeeming it. For this reason, people often referred to it as “self-liquidating money.” Note that since the ultimate redemption of stamp scrip and the costs associated with its issue were financed by the users of the scrip, the issuer earned 100 percent of the seigniorage. For example, a municipality that paid for labor services with stamp scrip received those services at basically zero cost.
Such scrips were tried in Alberta, Canada where they were known as Alberta Prosperity Certificate. The picture below shows 1 cent stamps affixed behind a scrip
Alberta Prosperity Certificates and a Greek parallel currency
Here’s how Alberta’s stamp scrip worked. In early August 1936, when the program debuted, an unemployed Albertan was paid, say, a $1 certificate for each $1 worth of road maintenance work rendered. This certificate was to be redeemed by the Alberta government two years hence, or in August 1938, for $1 in Canadian dollars. However, redemption required that the certificate have 104 stamps affixed to it (see figure above). Each week during that two year period, the owner of the certificate was to buy a government stamp for 1 cent from an approved stamp dealer and glue it to the note.
The necessity of buying stamps created a fairly onerous fee on cash holdings. As such, any laborer who received the scrip from the government was unlikely to hoard it, preferring instead to spend it on, say at a retailer, who in turn would only accept scrip as payment for goods and services if the correct number of stamps has been affixed. In order to avoid the cost of buying the next weekly stamp in order to keep the scrip current, the retailer themselves would quickly offload it to their suppliers and so on.
The 1 cent stamp fee was collected by the Alberta government and held as a reserve for redemption in two years. With 104 cents being collected over each $1 certificate’s life time, this meant that the scheme was entirely self financing. The extra four cents represented a profit to the government.
The scrip, however, failed to achieve its objectives and faced the “problem of wholesaler” which is different than the one I described above
In the planning stages of the program, government officials ran into what Coe refers to as the “problem of the wholesaler.” The first to receive the certificates would be farmers on relief, who in turn would make payments to retailers. The payments by retailers would primarily flow to Albertan wholesalers whose dominant payments were to manufacturers and others outside the province. However, those outside the province would not accept Prosperity Certificates, requiring instead hard currency, or Canadian dollars. The Albertan wholesaler would be left holding the bag, so to say, having acquired the entire issue of Prosperity Certificates with no outlet. According to Coe, wholesalers and large retailers were vocal in their opposition to the plan, which they expressed through trade associations and in the press.
One way of solving the wholesalers’ problem would have been to establish an exchange market such that wholesalers could sell certificates in order to buy the necessary hard currency and thus fund out-of-Province imports…. Even if such a market were to be created, chances are that it would have priced the Certificates at a large discount to Canadian dollars given the onerous fee on certificates relative to Canadian notes and the inferior credit of their issuer. After all, by then the Alberta government had defaulted on its international obligations whereas the Federal government’s credit was still good. Such a discount would have been at odds with the Alberta government’s policy of using a dollar’s worth of certificates to buy one Canadian dollar’s worth of labour. If the certificates were trading at 69 cents on the dollar in the wholesale market, workers paid in scrip would be loath to accept them at face value, for if they did, they would probably have problems passing them off at retailers for that amount.
In the present era, when electronic money (debit/credit card, Easypaisa) is prevalent and when history has shown that buying stamps and affixing them behind scrips can be an onerous exercise, the idea of a parallel expiring currency was proposed by former Greek Finance Minister Yanis Varoufakis in his 2014 blogpost when Greece was facing extreme austerity imposed by Eurozone, ECB, IMF, and WB.
Varoufakis proposed FT-money (future taxes money) to be issued in Euro to run parallel. As bitcoin was all the rage at the time, he also brought in e-wallets and algorithms in the discussion. Instead of affixing stamps, the electronic payment system / bitcoin hash algorithms etc would stamp the currency regularly. This is how he proposed his currency will work
BITCOIN: A flawed currency blueprint with a potentially useful application for the Eurozone
You pay, say, €1000 to buy 1 FT-coin from a national Treasury’s website (Spain, Italy, Ireland etc. would run their separate FT-coin markets) under a contract that binds the national Treasury: (a) to redeem your FT-coin for €1000 at any time or (b) to accept your FT-coin two years after it was issued as payment that extinguishes, say, €1500 worth of taxes.
Each FT-coin is time stamped i.e. in its code the date of issue is contained and can be used to check that it is not used to extinguish taxes before two years have passed.
Every year (after the system has been operating for at least two years) the Treasury issues a new batch of FT-coins to replace the ones that have been extinguished (as taxpayers use them, two years after the system’s inauguration, to pay their taxes) on the understanding that the nominal value of the total number of FT-coins in circulation does not exceed a certain percentage of GDP (e.g. 10% of nominal GDP so that there is no danger that, if all FT-coins are redeemed simultaneously, the government will end up, during that year, with no taxes).
Once in possession of an FT-coin, you can either keep it in your FT-coin e’wallet or you can trade it. To make sure that the system is fully transparent and that transactions are completely free, FT-coin could be run by a Bitcoin-like algorithm designed and supervised by an independent non-governmental national authority. Just as in the case of Bitcoin, the total amount of FT-coins can be fixed in advance, at least in relation to a variable not in the government’s control (i.e. nominalGDP), while every single transaction (including the tax extinction using FT-coins) is monitored fully by the community of FT-coin users on the basis of the blockchain pioneered by the infamous Mr Nakamoto.
As an FT-coin is about to ‘mature’ (i.e. to reach two years of ‘age’), the demand for it will obviously rise from those that do not possess FT-coins of that vintage (as it allows for a major reduction in their current taxes). FT-coin owners with equivalent tax liabilities will have no reason to sell (as they will want to use it themselves to extinguish their own taxes) but those who have ‘stocked up’ on FT-coins (to a tune beyond what they need to pay their taxes), as an alternative to putting their money in the bank or in the stock exchange, will be selling; possibly with a view to buying freshly minted FT-coins.
Whereas the FT-coin allows the Greek government and citizens to bypass the Eurozone imposed austerity (Greece does not issue its own currency in Eurozone) and allows for economic activity through FT-coin, however, the currency doesn’t overcome the two challenges. One, the problem of wholesaler i.e. the wholesaler will need to redeem the currency in hard Euros if he wants to imports goods from the rest of the eurozone or the rest of the world. Two, FT-money doesn’t solve the problem of people hoarding the currency rather Varoufakis himself hints hoarding as an advantage for tax minimization purposes.
His blogpost, however, provides us with a concept (I haven’t thought about it deeply) of using e-wallets and bitcoin-like algorithms to issue such currency electronically to avoid the cumbersome process of affixing physical stamps every week or every month. A weekly transaction online or by swiping the card at the retailer etc will refresh the currency for another period. This will require everyone to keep track of the expiry date of money in their wallet on a regular basis so that they can spend it before it expires. On the flip side, one of the key properties of money is “fungibility” i.e. a one hundred rupee in your wallet or e-wallet is similar to another hundred rupee note in somebody else’s bank account. But in this parallel currency, each note or e-note will have a different expiry date thus FT-money will not be fungible. But I am getting ahead.
Federal Reserve economist David Andolfatto wrote a blogpost followed by a paper on the topic. He calls them hot money credits.
Hot Money Credits for Kick-Starting the Economy?
Suppose the economy shows signs of stalling in the next quarter for no apparent (or fundamental) reason. If the issue is a problem of coordinating spending and hiring decisions (again, it is easy to imagine how one won’t happen without the other), then it’s not obvious how to make this coordination happen.
Government purchases of goods and services may be one way to accomplish this, though it’s not clear what exactly the government should purchase. Cash transfers made directly to households and small businesses may be preferable, because we can trust individuals to direct their spending on the goods and services they value most.
However, if the general outlook remains bleak, cash transfers are more likely to be saved rather than spent. And if the idea is to incentivize a coordinated private sector spending effort, this may not be the best way to do it. This is where the idea of a hot money credit (HMC) program comes in. An HMC program is like a regular cash transfer program, except that the money deposited in your account (or stored-value card) comes with an expiration date. As with many gift cards, the recipient must either “use it, or lose it.” The technology to program money with an expiry date is already available and, indeed, the policy is presently used in the Supplemental Nutrition Assistance Program (SNAP), where unused credits expire after 365 days.
Unlike SNAP money, individuals would be permitted to spend their HMCs on a wide variety of goods and services. What makes an HMC “hot” is its short expiry date. Consider, for example, a (non-cashable) $1,000 deposit that would be removed from the recipient’s account if it is not spent by the end of 30 days. This type of money generates what economists call a “hot potato effect.”
There is the question of what happens to an HMC once it is spent (that is, transferred from the recipient’s bank account to a merchant’s bank account). There are a number of possibilities. One option is to reset the expiry date every time the money is spent. Hot money can be turned into regular money at any time by setting an infinite expiry date. Another option is to convert the money that lands in a merchant’s bank account into a tax credit.
Enough with the theory and historical examples. Do we have some recent examples of such currency/usage? I thought you’d never ask.
Macau introduced such credits in the post Covid19 environment to boost their local economy. They are providing the debit cards with 300 patacas that can be used 10 times for transactions at local retailers.
Macau will give residents vouchers worth 2.2 billion patacas to boost economy
“When the coronavirus outbreak is over, the government will invest around 2.2 billion patacas in vouchers to revitalise consumption,” Secretary for Economy and Finance Lei Wai-nong said, while announcing a series of relief measures, including tax cuts.
He said each permanent resident would be given a card with a stored value of 3,000 patacas that would be valid for three months. “It can be used for catering, retail or groceries, but only in Macau,” he said. “The intention is to help enterprises survive through consumption.”
Lei added there would be a 300-pataca cap on spending, meaning the card would have to be used at least 10 times.
“I hope the consumption will benefit medium and small-sized enterprises.”
The permanent residents will also get an extra medical coupon worth 600 patacas this year, Lei said.
Taiwan proposed a similar scheme where Taiwanese residents can buy T$3,000 coupons for T$1,000 (a gain of T$2,000) but these coupons will be used for stimulating the local economy and have to be used within 6 months i.e. July 15, 2020, to Dec 31, 2020.
Virus Outbreak: Cabinet shares stimulus coupon details
While the coupons are to have a wide range of uses, including at department stores, restaurants, book stores, night markets, beauty and hair salons, hotels, and to purchase travel and concert tickets, they cannot be used to pay for online purchases, taxes, fines, cigarettes, stock bonds, insurance, credit card loans, pensions, gift cards or to store value.
Korea provided stimulus money to all Koreans based on family size, and if not claimed or spent by August 31, is deemed a donation to the state.
COVID-19 relief payouts 92 percent complete
Under the program, households with four or more members get 1 million won, three-person households get 800,000 won, two-person households get 600,000 won and single-person households get 400,000 won. Households can choose to receive their share in the form of credit or debit card points, prepaid cards, cash points or gift certificates.
The card points, gift certificates and prepaid cards cannot be used online, at large supermarkets or at entertainment venues.
What all these measures share with scrip money is the temporary nature of it i.e., “use it or lose it”. The credits need to be used within certain months for eligible consumption purposes otherwise they expire. However, like the hot money credits in Andolfatto paper, they turn into normal money when they hit the retailer’s account who may not be keen on circulating them.
The government of Pakistan announced a time-bound relief under Chota Karobar Imdadi Package. It wasn’t scrip money but it had the characteristic of “use it or lose it” of scrip money or demurrage money.
Govt to pay small businesses’ power bills for three months
According to him, under the announced package, at least 3.5 million small businesses will be given relief. Businesses with 5KW connections and industries with 70KW connections will not have to pay their bills for three months. The government was going to approximate their energy usage for the months of May, June and July, when they resume operations, and pay their bills in advance.
“The sums deposited in their bills will stay valid for utilisation up to six months. The sum will be based on actual consumption and total payments made from the meter in the May, June, July 2019 period combined,” he said.
The minister said that this would help reduce burden on 95 per cent commercial connections and 80 per cent industrial connections. “These are two schemes we have brought in,” he said, adding that they will now work on a third scheme — a financial aid package for small businesses.
People usually don’t think about such stuff but aap ka bhai kabhi kabhi bohot hi farigh hota hai.
What all the recently introduced measures share with scrip money is an expiry date of the stimulus or money. However, they don’t encourage circulation (if that is even an intention of these schemes). I read this as the concept of circulation is easy to grasp but implementing it is quite hard. As such, all the stimulus packages bypass it.
However, for the crypto currency and Satoshi Nakamoto fans, Freicoin claims to have solved the problem.
Freicoin: a peer-to-peer digital currency delivering freedom from usury
Freicoin is a peer-to-peer (P2P) currency based on the accounting concept of a proof-of-work block chain used by Satoshi Nakamoto in the creation of Bitcoin.
Unlike Bitcoin, Freicoin has a demurrage fee that ensures its circulation and bearers of the currency pay this fee automatically. This demurrage fee was proposed by Silvio Gesell to eliminate the privileged position held by money compared with capital goods, which is the underlying cause of the boom/bust business cycle and the entrenchment of the financial elite, and has been tested several times with positive results.
I have no idea if Freicoin works or promises to do what it says it does or even what it does. Just came across it and thought to share it.
Now that the stage is set, let’s visit the key concept proposed by professor sb.
The government could legislate that for the next year, one-fifth of all salaries would be paid in a parallel currency — Pakistan riyal, if you will — that would expire if not renewed every quarter. The parallel currency would not be convertible into any other currency or be usable online. Rather, the parallel currency would only be able to purchase goods made in Pakistan, thereby providing a fillip to the local economy. Once the economy starts to gain momentum, the riyals would be gradually taken out with the government accepting them as payment for taxes or train tickets.
So so many questions.
- Will it be only digital as physical printing of currency is hard and we have a large population?
- Will the low-income wage earners be paid in two currencies i.e. maintaining two wallets or e-wallets?
- Will the CEO of HBL whose is salary is Rs. 2 crore per month, will he get Rs. 40 lac in Pakistani riyals every month?
- What about businessmen and self-employed who don’t pay themselves salaries?
- How will the currency be refreshed every three months (new currency notes or stamps/scrips affixed)?
- Will the banks accept this money and what will they do if expiry approaches?
There are many more but you get the drift.
