A loyal MR reader asks:
What is currency and what are the potential implications of a
completely digital currency that could have unlimited meta information
attached to it? [Some obvious implications would be tracking
transactions and the government's ability to enforce taxes, etc., some
more esoteric stuff would be attaching conditions much like covenants,
say that a particular payment could only be used to buy products that
were carbon neutral, possibly down the road having policy implications.]
Higher taxes and carbon offsets we’ve already covered. More generally, the use of "covenant currency," as I shall call it, would raise prices. Restricted money simply isn’t worth as much. It also would lead to a secondary market in currency. Say you paid with me with money that can only be used to buy corn from Africa. I’ll try to resell that money to the people who were going to buy corn in Africa anyway. Of course the supply of targeted covenant money for that end may exceed the demand for it, and then price will adjust; think of this as an extreme form of legal tender laws.
Would it ever be efficient to use covenant money? I doubt it. It is a tax — on the holding and use of cash balances — when a simple transfer would do. Use regular money for your transactions and, if you wish, send some cash to the corn sellers of Africa.
Inflation is also a tax on cash balances, and few people think that is the right or the best fiscal way to finance subsidies to various worthy groups.
#11 in a series of 50.
Isn’t this exactly what gift cards are?
You’d also get serious Gresham’s Law action, with the most restricted and marked-up cash circulating, while people hoarded the most useful stuff. Plus “Regulatory pollution” — the circulating money supply would get more and more bizarrely and assortedly marked up, to the point that you might need to ponder a dozen different sets of restrictions to buy a 25-cent gumball.
Tyler,
Surprised by your answer, I checked in google and the only good reference to “covenant currency” is in p. 14 of
http://www.reformationmedia.org/main/newsletter/December_06.pdf
As you can see it is a gift card.
I’m sure the question posed to you refer to electronic currency as discussed in wikipedia (see also the entries “alternative currency” and “digital gold currency”). Indeed electronic currency is not a gift card and raises some of the interesting issues detailed in the question to you.
Surely the downside of privately issued currency is that the issuer is unregulated, and may go bust/refuse to redeem your currency/hyperinflate it etc.
Hmm. Well, it does have the effect of subsidizing cash payments to corn suppliers in Africa. If the supply of “African-corn-money” was way high, then corn-buyers would have the option of buying the cheaper “African-corn-money” to buy the African corn, instead of say, American corn. That’s just a subsidy.
On the other hand, this can be handled more simply through some mechanism like the “energy credits” example, where people can “buy” African corn credits even if they don’t buy African corn. Then you just need to make sure credits get minted properly (no double counting, etc.), and you should be fine.
The supply curve for the African corn money turns into a demand curve for African corn credits. (I dunno, maybe you still call this a supply curve).
I also meant to add that I look forward to any commenters responses.
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