When banknotes expire

By Felix Salmon
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" data-share-count="true">

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:
zim.jpg

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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Comments
14 comments so far

A lot. You’re being sarcastic, right? As evidenced by the voluminous commentary over at Free Exchange (http://www.economist.com/blogs/freeexch ange/2009/04/how_to_really_scare_china.c fm#list-comments) this is a terrible idea for many reasons. Chief among them is the fact that money is fungible, and while you can put an expiration date on paper money, you can’t do so with the rest of the money supply. Putting an expiry date on savings accounts would ensure that no one held any cash balances at all before the expiry date, except perhaps the undereducated. Maybe Zimbabwe put expiry dates on its currency because the government knows its already worthless?

Posted by Jacob | Report as abusive

Bah. its –> it’s

Posted by Jacob | Report as abusive

Most of the money in the world’s economies (especially the US) is digital, not scrip. That check card attached to a bank account we swiped to pay for yesterday’s Wally World purchases? No paper money changes hands.. all that happened was that my digital bank account was debited and Wally’s was credited.

Personally, I only use cash when traveling or going out late at night. This proposal would change ZERO of my personal money velocity.

Posted by Unsympathetic | Report as abusive

LET’S DOUBLE THE VALUE OF CURRENCY THAT ENDS IN 666

Posted by jerry | Report as abusive

Mankiw is just full of great ideas, isn’t he?

So everybody puts all of their cash in the bank, the banks lose 10% of their cash assets that they can’t send to the local federal reserve branch. That would be a huge help for the banking industry, wouldn’t it? Who would want to hold on to dollars at all?

this would effectively be a 10% tax on the cash-based society, the poor and the criminals.

How did he ever get a job as economic adviser? Oh wait, it was adviser to Bush, who probably would have like this idea.

Posted by KenG | Report as abusive

This is the first step in the introduction of the Amero,our new north american currency.It will be pegged to IMF currency.Turn them dollars in!

Posted by jerry | Report as abusive

Academics, eh?

Posted by otto | Report as abusive

This isn’t the first time I’ve read/heard about the note/digit idea (and it certainly wasn’t Mankiw I was reading), but I’ll be damned if I can find the reference.

It was several months ago. It might have been EconTalk podcast, though.

One of the ideas expressed on the possible future nature of money in this (http://www.realitysandwich.com/money_a_ new_beginning) article by Charles Eisenstein has an echo to this idea of attaching something akin to a lifetime to a currency. The motivations do not match at all though.

The more we exercise irrational bearish attitude every time economic indicators like housing and constructions and or consumer confidence show a trend contrary to those with a speculative financial behavior, we become the punisher of our economic recovery. The market reacts like a rubber band because the self proclaimed experts push it in that direction. There is no fundamental support for a company stock to swing the way it has been happening in recent months just because of a single quarter result when all the fundamental is sound.

Posted by Charles Thevnin | Report as abusive

This is surely simply a default by the Treasury which would have untold repercussions and is rather similar to what you’re criticising in Peru.

Posted by Matthew | Report as abusive

Or Ecudaor, perhaps.

Posted by Matthew | Report as abusive

in zim’s case, the expiry date seems to be associated with a complete suspension of the currency, with USD taking its’ place until further notice.

April 22 (Bloomberg) – “Zimbabwe stocks more than doubled in value in the first two months of trading since the market reopened after shares were re-denominated in dollars… The gain of more than 120 percent is bigger than the advance of any of 88 equity markets tracked by Bloomberg. “In an economy which continues to be devoid of dollar liquidity the rise has come as a surprise… Interestingly there is still no evidence of significant foreign portfolio inflows, and much of the trade can be attributable to locals.”.. Gains have been led by Innscor Africa Ltd., producer of crocodile skin for Gucci Group NV and Prada SpA, Delta Corp., Zimbabwe’s largest beer and beverages maker, and Econet Wireless Holdings Ltd., the country’s biggest mobile-phone operator… Stocks may fall over the next few weeks as companies report earnings in dollars for the first time since the formation of the coalition government, which has all but abandoned the wrecked Zimbabwe dollar. Zimbabwe won’t reintroduce the Zimbabwe dollar for at least another year…” http://www.bloomberg.com/apps/news?pid=n ewsarchive&sid=aCRG2yBg_8xQ

Posted by mtm | Report as abusive

Might i suggest we use snakes instead of either? Since they need to be fed, they have the same benefit of increasing aggregate demand as both solutions, but they need to be fed always as opposed to simply on one expiration date.

So rather than a boom in aggregate demand or a rush from large denomination bills at a fixed date we just get all of the benefits.

except your money might kill you.

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