Dear Pat,
To your original question "Why on earth would someone want to hold money that is destined to die?" perhaps the answer is that being paid (as a government worker) with money with an expiry date beats not being paid at all; and the use of such money beats barter.
From the point of view of the public, it is no different than Zimbabwe's hyperinflationary emission of currency: the Zim dollar was known to become quickly worthless and so was unattractive to hold. But government workers preferred to be paid in (soon-to-be-worthless) Zim dollars than in IOUs.
Finally, you say that it would make sense to "short sell all of the nation's money today." That is, it would make sense to stop hoarding money and use it as quickly as possible to buy goods and services.
I'm not arguing that this is a good policy but I can see how someone would think it is a good way to stimulate consumption.
(My apologies if these points were already made)
Yours,
Gabriel
Sent via BlackBerry from T-Mobile
-----Original Message-----
From: Pat Gunning <[log in to unmask]>
Sender: Societies for the History of Economics <[log in to unmask]>
Date: Wed, 29 Sep 2010 20:33:54
To: <[log in to unmask]>
Reply-To: Societies for the History of Economics <[log in to unmask]>
Subject: Re: [SHOE] Dated currency
Robert, you seem to be repeating yourself, suggesting either that you
don't understand my points or that you do not regard dealing with them
as important.
I think you are committing the fallacy of truth by assumption. You
assumed that dated currency is money. Therefore, it is accepted in
exchange. Evidence of this is your reference to "from whence it came."
James has a scheme to assure that dated currency has value in exchange.
Is that the kind of scheme you are assuming? If you fail to specify a
means that the currency you are assuming will have value, it is
difficult to assign much importance to your term "dated currency."
You say that the "consumed income tax structure" imposes "costs on
currency balances." These phrases are not commonly used and both of your
sentences contain an anthropomorphism, which is a good way to obscure
one's meaning.
I have suggested that what you really mean is that because the agents of
government can more easily track bank deposit transfers than they can
track transfers of currency, they can more easily enforce income and
sales taxes laws if transactions are made in the form of deposit
transfers. Because of this, if the government could find a way to raise
the costs of making exchanges in the form of currency as opposed to
deposits, the maximizing decisions of money holders to switch from
currency to deposits would reduce the amount of tax avoidance by means
of currency transactions. The question is whether a dated currency would
achieve this goal.
I believe that it would but it would also raise the costs of making
currency transactions for other purposes as well. There are other issues
dealing with economic freedom why people may not want such a policy. Do
we really want Uncle Sam (alias Big Brother) to be able to monitor every
financial transaction in the name of tax collection efficiency?
Martin's analogies are interesting but they are not of the same
substance. The classroom exam would have some relevance if dated
currency is defined as currency that might completely lose its exchange
value at any time. But it would be difficult to find an actual policy by
the government that is operational and that would achieve this goal. The
decaying asset, unlike currency, has value in use, which differentiates
it from currency. The currency James has in mind also has value in use
but it decays all at once.
Of course, there is nothing wrong with studying the history of the
phrase "dated currency." But I doubt that you will be able to reach any
useful conclusions about that term until you define it in an operational
way.
On 9/29/2010 6:23 AM, Robert Leeson wrote:
> The consumed income tax structure imposes costs on currency balances; dated money pricks the bubble of underground currency at the end of each dated period (by which time all currency must be returned from whence it came, the trackable banking system).
>
> The underground cash economy imposes externalities (higher taxes); here, market forces are being enlisted to impose reciprocal (or internalising) costs.
>
> RL
>
> ----- Original Message -----
> From: "Pat Gunning"<[log in to unmask]>
> To:[log in to unmask]
> Sent: Wednesday, 29 September, 2010 12:28:49 AM
> Subject: Re: [SHOE] Dated currency
>
> Robert, thanks for the explanation. I think I understand now but
> permit me to rephrase the policy goal that a dated currency policy
> proposal aims to achieve.
>
> There are two kinds of money: transferable bank deposits and currency.
> The total money balance of each individual consists of two parts: a
> deposit balance and a currency balance. By withdrawing currency from a
> bank, an individual can increase her currency balance at the expense of
> her deposit balance. And vice versa.
>
> The government can more easily track deposit balances than currency
> balances. Therefore, it can more easily enforce a sales tax or an income
> tax on the money income earned by retailers and producers if individuals
> transfer deposit when they exchange than if they transfer currency.
>
> Given these assumptions, sellers of goods, in anticipation of a higher
> tax on bank-recorded deposit transfers than on exchanges of currency,
> tend to offer lower prices on currency transactions than on deposit
> transactions. In order to take advantage of the lower prices, buyers of
> such goods tend to withdraw more currency than they would in the absence
> of a tax or in the absence of more easily traceable deposit transactions.
>
> Underground economic activity consists of buying and selling consumer
> goods and factors of production for currency in order to avoid the sales
> or income tax.
>
> The POLICY GOAL is to reduce the amount of this underground,
> tax-avoidance economic activity.
>
> Assuming that all currency consists of paper notes, dated currency
> refers to currency which, at a date and time specified on the face of
> the paper note, will become worthless as legal tender. This means that
> after the date on the face of the note, no judge will enforce a contract
> that is stated in terms of the dated currency and the government will
> not accept the currency in payment of taxes. Banks may be ordered by
> regulators to stop accepting deposits of the dated currency. The
> government also does not offer to exchange the dated currency for
> anything of value.
>
> The literature you have in mind proposes that dated currency, as defined
> here, could achieve the above-stated policy goal.
>
> Is all this an accurate and fair interpretation of your implicit
> assumptions and definitions?
>
>
>
> If these are the correct assumptions, my analysis was not directed at
> the policy proposal you implicitly had in mind. The policy would not
> cause the use of money to die; it would cause the use of currency will die.
>
> However, could not the effect of eliminating the use of currency in
> exchange be achieved more simply by outlawing all currency transactions
> after a certain date?
>
> My earlier analysis would be correct only in a pure currency economy.
>
>
>
> On 9/28/2010 9:01 AM, Robert Leeson wrote:
>> The consumed income tax structure is a (witholding) tax on money balances (earning income ceases to be a taxable event). This increases the incentive to economise on the holding of currency; dated money imposes costs on the underground cash economy.
>>
>> Robert Leeson
>> [log in to unmask]
>>
>>
>> ----- Original Message -----
>> From: "Pat Gunning"<[log in to unmask]>
>> To:[log in to unmask]
>> Sent: Tuesday, 28 September, 2010 10:33:29 AM
>> Subject: Re: [SHOE] Dated currency
>>
>> I wish this thread made sense to me. Perhaps someone can clue me in?
>>
>> Why on earth would someone want to hold money that is destined to die?
>> If I were a speculator in such a system, I would short sell all of the
>> nation's money today. That is, I would borrow money from everyone and
>> then use it to buy their durable assets, promising to repay the money
>> the instant before it is scheduled to die. At that time, I could buy the
>> money back for a song and repay my money debts. Ultimately, I would gain
>> a bunch of real assets in exchange for my song.
>>
>> Anyone who lent me money to buy goods would surely not be a shrewd operator.
>>
>> Is it not true that money that is due to die tomorrow would, in a world
>> of reasonably astute people, die today? How can an item be acceptable in
>> exchange by shrewd operators today if they know it will not be accepted
>> in exchange tomorrow?
>>
>>
>> On 9/26/2010 4:23 AM, Robert Leeson wrote:
>>> Is there any literature on dated currency (currency that has an expiry date as legal tender) as an assault on the underground economy?
>>>
>>> Robert Leeson
>>> [log in to unmask]
>>>
>>>
--
Pat Gunning
Professor of Economics
Groton, Connecticut
http://www.nomadpress.com/gunning/welcome.htm
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