When banknotes expire

April 22, 2009
This note has an issue date (May 2) and an expiry date (December 31). " data-share-img="" data-share="twitter,facebook,linkedin,reddit,google,mail" data-share-count="false">

Greg Mankiw had an unorthodox idea on Sunday:

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

The problem with this scheme is that it leaves too much to chance: on the day before the Fed’s announcement, you don’t know whether your $100 bill will be worth $100 or $0 the following day. So there will be a mass exodus out of $100 bills, to no good purpose.
Instead, the US should go the way of Zimbabwe, which has its own solution to this problem, as evidenced on a $500,000,000 note I just received in the mail:

This note has an issue date (May 2) and an expiry date (December 31). If Tim Geithner started putting expiry dates on the bills he signed, that would do wonders for the velocity of cash in the economy, I’m sure. And it would help reduce Treasury liabilities, too. What’s not to love?


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