Do it yourself Canadian monetary stimulus, scissors edition

by on January 13, 2016 at 12:49 am in Current Affairs, Economics | Permalink

On the Gaspé Peninsula in eastern Quebec, a group of locals and small-business owners have begun to accept an alternative currency—one where $5, $10, $20, $50, even $100 bills, get cut in two, ostensibly reducing their value by half—as a means to promote the local economy.

Confused yet?

Here’s how it works, or, at least, how locals argue it’s supposed to: When someone buys clothes at a Wal-Mart, Zibeau explains, there’s no telling how much of that money will be reinvested in the community. But with stores and locals accepting the cut-up bills, a currency they’ve dubbed the “demi”—French for half—that money can only be spent locally. And because banks don’t accept half a $20 bill, the money would be reinvested right away and not pile up at home (perhaps out of fear that storeowners might just stop accepting the half-bills). This would help keep the economy rolling.

The story is here, via David Siegel.  And ladies and gentlemen…do not try this at home!  No matter what Kareken and Wallace might say…

1 EH January 13, 2016 at 12:55 am

There needs to be an empirical study on this.

2 T. Shaw January 13, 2016 at 11:05 am

This (cutting up) works for gold/silver coins. IO don’t see it for the green-dyed confetti in your wallet.

In 1930’s, black-and-white movies two members of a secret movement would identify each other by exchanging halves of a paper money bill – matching serial numbers.

I don’t see how this is more beneficial or preferable to simply making change for the larger bills.

Is half of, say, a twenty dollar bill still “legal tender for all debts public and private?” If so, which half?

3 fwiw January 13, 2016 at 6:34 pm

…did you read the post at all?

4 Adrian Ratnapala January 13, 2016 at 12:58 am

At the level of econ 101 theory, is this even supposed to be stimulative. It seems to be about the locale hoarding cash-like assets while sacrificing overal spending power.

5 BC January 13, 2016 at 3:18 am

It sounds like they are trying to increase velocity of (decrease demand for) money, but I think it only works if wages switch to being denominated (and sticky) in demis. So, on day 0 you change all wages and prices to demi at 1 demi = 0.50 dollars and cut up each dollar-denominated bill to form two demi-denominated bills. Presumably, the demi will depreciate to a lower value than 0.50 dollars due to the difficulty of converting demi to dollars, depositing at banks, etc. That causes non-sticky prices to rise faster than sticky wages, which is where the stimulus comes in.

The question is whether wages would really be that sticky in demi, even if starting in a period of high unemployment. It depends on what causes sticky wages to begin with. Would workers react to having their wages converted from dollars to demi at 1 demi = 0.50 dollars similarly or differently from having their nominal wages in dollars cut in a dollar-denominated economy?

6 dan1111 January 13, 2016 at 5:11 am

Actually, once you analyze it, it is a brilliant plan. The only small detail they have to resolve is getting workers to agree to get paid in a currency that can’t be used to get a mortgage, pay for utilities, buy a car, pay taxes, travel, etc. Once they clear that hurdle, they will be golden. The sales of Ma’s diner and Joe’s antique shop will go through the roof.

7 dearieme January 13, 2016 at 10:49 am

Is this the opposite of money-laundering?

8 BC January 13, 2016 at 9:00 am

I think in the likely scenario that prices and wages continue to be denominated in dollars, i.e., dollars remain the medium of account even if demis are accepted as a medium of exchange, then the plan could actually be contractionary. If enough dollars are cut into demis, that could actually decrease the local supply of dollars enough to cause dollar deflation even if there is demi inflation. (Exchange rate drops so that 1 demi is less than 0.50 dollars to make that happen.) I’m thinking here of a scenario where prices and wages are dollar-denominated but people and shops accept demis at some floating exchange rate. Then, the “money” that matters for monetary policy would probably be the medium of account (dollar), not the medium of exchange (demi). Devaluation of the demi wouldn’t seem to unstick dollar-denominated wages but, if there aren’t enough dollars in circulation because too many have been cut into demis, then the hoarding of dollars could turn out to be deflationary. Maybe, the prospect of demi devaluation would prevent too many dollars from being cut up in the first place but at the very least I don’t see what would cause dollar inflation.

9 Alann Gunn January 13, 2016 at 8:18 am

Isn’t “keeping the money in the local community” just another form of protectionism (though local and voluntary, here)? It ultimately rests on the silly idea that money is more valuable than whatever people might buy with money, so if you give your money to a foreigner in exchange for something, your country is supposedly poorer. As when France sold food to England during the Napoleonic wars, in a fiendishly clever plot to bankrupt the English by supplying them with the food they desperately needed. If I remember corre3ctly, France lost that one.

10 mulp January 13, 2016 at 11:03 am

If you use debt to buy entertainment from China and then sell your house to China to pay your debt, you are not poorer?

Note, China is using the money used from selling stuff chinese workers produced to buy US capital assets like food processors and entertainment companies, and if past is prologue, they will proceed to put chinese workers in the majority of the jobs going forward. US workers have been replaced making appliances by Chinese workers. US workers making batteries were replaced by Chinese workers in vastly higher numbers.

US corporations since Reagan have made a virtue out of taking money out of local communities and paying it out in far away communities, especially communities in other nations.

I don’t see many people extolling the business strategy of Elon Musk, while they praise Tim Cook who sucks about 50% of the price of goods sold in the US out of the US.

Where are US consumers supposed to get the cash to pay for stuff if the money they spend is never returned to them and their community?

Economies are zero sum, if not in the short run, in the long run.

And France lost because the British balanced the scale with war.

11 Doug January 13, 2016 at 2:33 pm

“Economies are zero sum, if not in the short run, in the long run.”
Please explain. I can’t see from what perspective or in what sense this could be true.

12 Pshrnk January 13, 2016 at 4:28 pm

Second Law of Thermodynamics.

“In the long run we are all dead.”

13 Tarrou January 13, 2016 at 4:36 pm

Whoever has had the most fun at the heat death of the universe will have taken the largest slice of the pie.

14 fwiw January 13, 2016 at 6:41 pm

Kind of what pshrnk said, kind of what Tarrou said.

It’s kind of a weird statement; neither false nor true, because it gets philosophically weird.

But if economics is the allocation of scarce resources, and matter is neither created nor destroyed, then yeah, it’s zero-sum in the long run.

But if economics is about utility maximization, then we can create more utility by creating more people. Not zero-sum.

There’s some weird economics/physics theory about organization of matter being the true subject matter of economics.

15 ZZZ January 13, 2016 at 9:39 am

How much of an effect can it really have when Scotch Tape is an effective arbitrage strategy?

16 Yancey Ward January 13, 2016 at 11:04 am

Can one deposit, successfully, a bill with two different serial numbers? I know US currency has the number of both halves, but does a Loonie?

17 Shane M January 13, 2016 at 1:11 am

The exchange rate for the “demi” will fall to a ratio below what it was worth if it remained a “full” bill. Sounds like gift cards – you can’t convert them back to cash at full asking price.

18 jb January 13, 2016 at 4:35 am

Right.

19 Nylund January 13, 2016 at 8:06 am

I think this is correct. They are essentially gift cards that, instead of being store specific are town specific.

20 Chip January 13, 2016 at 1:26 am

Illegal?

This is for coins but …

Melting Coins

Marginal note:Melting down coins

11 (1) No person shall, except in accordance with a licence granted by the Minister, melt down, break up or use otherwise than as currency any coin that is current and legal tender in Canada.

21 Urso January 13, 2016 at 10:42 am

Hmm, sounds like the CFL is in clear violation of federal law. See Section 7, article 1 of the rulebook.
https://cfldb.ca/rulebook/conduct-of-the-game/starting-and-timing/

22 JVM January 13, 2016 at 1:36 am

Seems equivalent to a local devaluation, is that approximately the economic impact? I’d be pretty angry if my employer tried to pay my salary in these…

23 DBP January 13, 2016 at 1:46 am

What if a national government led the charge to cut bills in half?

https://en.wikipedia.org/wiki/History_of_the_Indonesian_rupiah#The_Sjafruddin_cut

24 Willitts January 13, 2016 at 10:37 am

Pieces of eight.

25 Gordon Mohr January 13, 2016 at 2:02 am

If you squint, this is also a bit like an idea in the Bitcoin world called ‘sidechains’ – where some amount of value on the ‘main chain’ – Bitcoin itself – gets locked up in the main ledger, but then managed on some other chain according to other rules. (The point is to allow more aggressive experiments in functionality/capacity while working within the same overall unit cap.)

Certain proofs from the sidechain are meant to be sufficient to eventually destroy the same unit-count in the sidechain, and re-awaken it on the main chain. Analogized to the Gaspé ‘sidepaper’ system, it’s like having certainty that if desired, you could easily re-acquire matching bill halves to tape-together a bill that is again usable in the ‘main paper’ system.

26 fwiw January 13, 2016 at 6:43 pm

you lost me at ‘Bitcoin’.

That’s not a slight against you; it just means I don’t have the patience to understand it. That will probably hurt my future earnings potential…

27 dan1111 January 13, 2016 at 2:34 am

In the U.S. you can send in 51% of a damaged bill to the treasury and get a replacement. I suspect the same may be true in Canada.

Unless they are checking very closely that you give them exactly half of a bill, you could probably do this and then spend the slightly less than half portion, increasing your money by 50%. It is stimulus after all!

28 Peter Gerdes January 13, 2016 at 6:20 am

Given that bad money pushes out good I would fully expect that very quickly only bills that were less than 49% would be left in circulation.

29 Gordon Mohr January 13, 2016 at 6:54 am

If 51%-of-a-bill official redemption becomes a problem in practice, perhaps switch to ‘tiers’ (thirds)?

30 dan1111 January 13, 2016 at 7:15 am

Then you can still redeem 2/3 of the bill and spend 1/3.

31 dan1111 January 13, 2016 at 7:19 am

This seems like a silly problem, but actually, I don’t think it is solvable without either a register of all valid notes or a local marker of authenticity. In either case, why not just make a local currency the old-fashioned way?

32 Dan Weber January 13, 2016 at 4:05 pm

I think the defense is that “very few people are dumb enough to show up with the carefully torn-apart and reconstructed bills to attempt this.”

If it were an automated process, I could exploit it to double my money at each step. In practice, someone is going to raise an alarm If I try it with more than one bill.

33 Willitts January 13, 2016 at 10:36 am

Not quite. To be replaced immediately, a person has to have bills that are CLEARLY more than 50%.

If it is not clearly more than 50%, the bills have to be examined along with your explanation of how the bills became mutilated, proving that the remaining portions have been destroyed. If approved, this could take months or years.

34 Asher January 13, 2016 at 5:34 am

Advantage of this over scrip is that they free-ride on the mint’s investment in hard-to-counterfeit bills.

35 Professor Mojo January 13, 2016 at 6:23 am

1) Um, Gresham’s Law, anyone?
2) …that episode of The Young Ones where Vivian wins a bet and gives the money to Mike, who promptly cuts the money in two. I want to say the gag was based on an old scam whereby the Bank of England had to redeem each half at full face value, but that may be a myth.

36 Gallego January 13, 2016 at 7:22 am

As I see it, this is nothing but a “buy local” club, that you enter by accepting demis, which you can stop doing any time (alhough there might be peer pressure). The result is that more purchases are done in a less efficient way (local store versus Wal-Mart, which will likely be cheaper, otherwise people would prefer local already). The aftermath is a voluntary redistribution of wealth from consumers to local producers, quite possibly with an overall negative efect – some are better off as producers, all are worse off as consumers.

37 Willitts January 13, 2016 at 10:30 am

The demis are a collusion enforcement mechanism. The demis only have value outside the community if you get the other half. They have their full (half) value only in the community. Therefore you must trade inside the community most of the time.

A broker could buy halves to make wholes, charging a spread., in order for retailers to buy wholesale outside the community.

Would this be preferable to just creating your own local currency? Assuming there are no laws against doing so, the local currency would be approximately as efficient. It would have higher printing costs. There would be exchange rates and spreads. There would also be serious liquidity problems.

38 Slocum January 13, 2016 at 7:29 am

Hmmm. What will happen? If this actually survives, merchants will, of course, need a way to convert demis back to dollars in order to buy goods, pay employees, etc, so somebody will step into that role. The money changer will buy demis at a discount and also sell them at a (smaller) discount. If the discounts are high enough, the money changer may also start to try matching up bill halves to turn 2 discounted demis back into dollars. If the discounts are small enough, maybe it could keep going. If not, merchants will stop taking them and that’ll be it.

39 buddyglass January 13, 2016 at 8:42 am

Article asks why anyone (presumably the consumer) would want to do this. I’m probably missing something, but it seems like you effectively “double” your Canadian dollar by cutting it in half, with the caveat that you can only shop locally. I can spend $20 at Walmart or I can cut it in half and spend 2x $20 at some local shops.

I wonder what the tax implications are. Can the shop owners claim (when given half a $20) that they weren’t actually paid anything since a half-bill isn’t valid Canadian currency anywhere other than that village?

Are employees in that village going to start accepting half-bills as salary? Doubtful. So all the shop owner can do with the bills is take them as his personal salary, or maybe make B2B transactions within the village.

On the surface this looks great for consumers and not-so-great for the businesses.

40 Chris S January 13, 2016 at 9:09 am

A demi-twenty is worth only “$10”, natch.

Whoever is left holding the bills when the scheme collapses subsidizes the rest.

Could differential time preferences for demis lead to a Babysitting Club-style stagnation? What would Krugman say [sic]?
http://primary.slate.com/articles/business/the_dismal_science/1998/08/babysitting_the_economy.html

41 Erick January 13, 2016 at 9:16 am

If keeping money in the community is good, than keeping it to yourself should be even better. Just shred the bills and consume them. You get to keep all the money!

If they’re worried about Walmart sending money away, then why didn’t they just keep shopping at the terrible local store with high prices and no selection that Walmart pushed out of business?

Basically I assume anyone promoting keeping money in the community is an idiot and any policies sprung from this goal will be dumb. Like this one.

Do you have to spend twice as much in demis as something would cost in dollars? Story doesn’t make it clear, but I assume you still give two halves of a $20 bill for something that costs $20. The point is supposed to be to limit what they do with it, not suddenly get twice as much stuff. Though as dumb as these people are, they might have thought that was a great idea with no possible downsides for merchants suddenly selling everything at half price.

42 Willitts January 13, 2016 at 10:22 am

I doubt this will be effective.

The same angst that provokes people to spend their demi note will also dissuade them from accepting them. As soon as it becomes more difficult to spend them, people will be less eager to accept them, and the plan will enter a death spiral.

First and foremost, a fiat system relies on near absolute assurance that the notes can be freely traded for goods and services.

43 The Anti-Gnostic January 13, 2016 at 10:41 am

In other words, money is simply the medium of exchange, so printing it doesn’t actually make us richer. However, some people get the new money first and can buy assets and consumables with it before downstream recipients. There–I just wrote Piketty’s book for him.

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