In Part I of this post, we discussed “expiring” digital cash as a possible type of programmable money, which a central bank (in coordination with government) could issue and distribute to people during severe recessions or events like pandemics or calamities, when higher uncertainty makes people spend less. We argued that the instrument could be a most powerful policy tool — one that would resemble what economist Milton Friedman called “helicopter money” — an imaginative expression describing efforts to stimulate consumption by dropping newly created money to people free of charge.
“Hyperbolic” helicopter money
As expiring money would offset the incentive to hoard, it would in fact be a form of “hyperbolic” helicopter money, which, once injected into the economy, would support a permanently higher velocity of money. It would thus likely represent the most powerful tool of monetary policy imaginable (see Bossone here and here). The higher velocity of money would continue unabated unless a circuit breaker were activated to stop its circulation.
A circuit breaker would require transforming expiring money into regular money. That is, by removing the expiration term from it and then using conventional monetary policy to remove the newly created regular cash from the financial system. Authorities should therefore stand ready to withdraw the stimulus from expiring money if this appeared to cause overheating of the economy. This raises the issue of how to design an institutional framework that would enable the authorities to govern the instrument under stringent rules that would prevent its misuse and abuse (see, for instance, the discussion in Balls et al. 2018).
Other important issues should be considered as regards the desirability of introducing expiring money. The following is only a very high-level discussion of some of the most relevant ones.
First, agents might want to see their right protected not to accept expiring money in the exchange process, thereby undermining its status as legal tender and most probably disempowering it altogether. Expiring money could be acceptable in exceptional cases like the distribution in a lottery where people do not even have to pay for the ticket, as in the China example mentioned in the first blog. But what about when such a “non” store of value would have to be accepted by firms and merchants in exchange for goods and services, or by workers in exchange for their labor services? And can the use of a certain money instrument be imposed on society?
Second, while a critical function of money is to store value, this function would not be featured by expiring money, which — by construction — would only serve as a means of payment. More precisely, expiring money would not store value for the individual holders but would do so for society until it is kept circulating in the economy. Yet, the lack of store-of-value functionality for individual holders would add to the risk of holding it in one’s wallet, as it would turn it into a “hot potato” that everyone would want to get rid of as soon as possible.
Third, in the absence of an obligation of the issuer to redeem expiring or expired money for physical cash or other conventional forms of money (possibly in an automated fashion once expiration has elapsed), people may lose value just because they did not check on the expiration date of their holdings or forgot to spend their holdings by the expiration date. This concern would be amplified where financial literacy is low (as is normally the case everywhere) and where people are not sophisticated enough to handle such type of instrument.
Finally, since expiring money would be a liability of the central bank, the time-bound nature of its value might hurt people’s confidence in the central bank as the national monetary authority and the country’s monetary system more broadly. This is an important consideration.
Public choices and trade-offs
Seldom are collective actions free of difficult trade-offs as when pursuing some objectives can only be done at the expense of others. Examples can be seen in all countries that were hit by the COVID-19 pandemic, as governments temporarily restrained or suspended individual rights (to move, meet, assemble, work, and so forth) for the purpose of mitigating the risk of contagion. It was a public choice to reduce externalities from the behavior of individuals, which would have hurt other individuals.
Expiring money, too, as discussed, would raise critical trade-offs, since it would affect important rights of money holders and their interest in their money holdings. Yet,. It would constitute the outcome of a deliberate public choice taken to mitigate the externalities from hoarding behaviors: those externalities that typically limit the effectiveness of expansionary policies and thus hurt society.
Obviously, it would be for societies and their political systems to determine whether and how to use expiring money in people’s best interest. Here we only notice that technology makes this instrument feasible today, and we only wish to suggest that it might work for the purposes discussed.
Its pros and cons should be evaluated against the backdrop of the enormous costs that the world, and especially the poor, have suffered from the economic and health crises of the past 15 years and the slow, and often inadequate, effects of the (conventional and unconventional) policy tools adopted by governments and central banks in response to them.