Sunday, May 27, 2012

How to Stimulate the Economy Without Increasing the Debt

John Maynard Keynes had a charming propensity to praise the unorthodox ideas of lesser known economists.  A case in point is Keynes’s tribute to Silvio Cassel’s notion of “stamped money.”  Under Cassel’s scheme, money must be periodically stamped at a small cost in order to retain its validity as legal tender.  This scheme appealed to Keynes because it was, in effect, a tax on hoarding.  The drawback, Keynes dutifully pointed out, is that a public desperate for a liquid store of wealth will find another vehicle to replace (stamped) money once its newly added “carrying cost” has diminished its appeal as a liquid asset.

This is a good argument against the introduction of stamped money as a permanent substitute for ordinary currency.  But, one might ask, could some variation of the stamped-money idea play a temporary role in getting a slumping economy going again?  The great Yale economist, Irving Fisher, thought so and even helped write legislation that would allow the U. S. Treasury to issue stamped scrip or “stamped money.”  In Fisher’s scheme, this money must be stamped every Wednesday.  The stamps, which are pasted onto the back of the scrip, are purchased from the government at a price equal to two percent of the scrip’s face value.  If you are holding scrip on Wednesday, you must affix a stamp to it in order to preserve its exchange value.  The “Wednesday stamp requirement” sets in motion a flurry of buying wherein the holders of the scrip scramble to spend it before Wednesday arrives and they incur what is, in effect, a tax on their scrip holdings.

Stamped script, or stamped money, is like ordinary currency in that it may be spent, deposited at the bank, or invested in securities.  But unlike currency, stamped money cannot be hoarded without cost.  If you are holding stamped money on Wednesday, you must pay the “stamp tax.”  As a consequence, stamped money flies through the economy, accelerating the pace of trade during a period when the public’s lack of confidence is self-reinforcing.

The Outline of a Stamped Money Plan

In the current economic circumstances, Fisher’s stamped money scheme might work in the following way: 1) the Treasury sends $1,000 in special stimulus checks (scrip) to every household; 2) each check is worth twenty dollars; 3) the checks must be stamped every two weeks to retain their validity as legal tender; 4) the stamps are sold by the government at a price of $0.80, or four percent of the scrip’s twenty-dollar face value; 5) after one year, all scrip checks bearing twenty-six stamps may be exchanged for twenty dollars in ordinary currency from the Treasury; and 6) when a twenty-dollar scrip check arrives at the Treasury, it will find waiting there $20.80, which is the sum of the twenty-six “stamp tax” payments.  Twenty dollars covers the Treasury’s outlay, and the remaining $0.80 is used to offset administrative costs.

A Tax on Hoarding

The stamped-money plan is propelled by everyone’s attempt to avoid paying the “stamp tax.”  In trying to avoid this tax, each citizen speeds the circulation of the stamped money, which is the program’s intended effect.  Moreover, the faster the stamped money moves, the smaller is each citizen’s tax burden.  For example, suppose a business takes in and pays out $600 in stamped money during a two-week period, $550 of which turned over before “tax stamp day” in the middle of the month.  In this instance, the business pays a tax, not of $24 (= 4% of $600), but a tax of $2 (= 4% of $50), which is a “sales tax” rate of only 0.33% on $600 of stamped-money sales.  Since a significant portion of these sales would not have occurred without the introduction of the stamped money and the accompanying “stamp tax,” the business is actually better off after the imposition of this temporary tax.

To be clear, the “stamp tax” is neither a sales tax, nor a tax on transactions, but rather a tax on hoarding, which aims to increase the speed at which money circulates through the economy.  Fisher estimated that stamped money with characteristics like those described above would circulate at least six times faster than ordinary currency circulates during times of depression.  Of course, this does not mean that business sales would increase six fold, for stamped money would comprise a small percentage of the total money stock, and some ordinary currency might be held for a longer period of time than usual following the introduction of stamped money.  But even if $100 billion in stamped money were to drive $50 billion of ordinary currency into idle hoards, the increase in the average velocity of money would still be sufficient to the give the economy a significant boost.

Overcoming Objections

Some conservative economists have complained that the stimulus checks sent out by the U. S. Treasury in the spring of 2008 had little effect on the economy because most households declined to spend their temporary windfall.  Realizing that the tax bill for this windfall would come due in the future, these economists claimed that people saved their stimulus checks in order to offset this liability.  Whether this explanation is true or not, it is misplaced as a criticism of the stamped-money program.  Unlike the spring 2008 stimulus package, the stamped-money program outlined above is self-liquidating.  The Treasury’s end-of-year receipts (not including administrative costs) are equal to the amount the Treasury advanced to the public at the beginning of the year.  Since there is no future tax liability associated with stamped money, households need not increase their saving on this account.

The proponent of stamped money may also expect criticism from Monetarists who insist that an injection of money into the financial system will raise prices, a view summarized in Milton Friedman’s characterization of inflation as “too much money chasing too few goods.”  In Keynes view, by contrast, when workers and equipment are idle, there is apt to be “too little money chasing too few goods.”  If more money were put into circulation, or if it changed hands at a faster clip, sales revenue would rise, factory orders would increase, additional workers would be hired, and so on.  At the end of this multiplier process, the increased volume of money would be chasing more, not fewer, goods.  Moreover, the stamped-money plan has an extra margin of safety in that the high-velocity stamped money would be extinguished after one year, replaced by its slow-footed counterpart – ordinary currency.

Economists from the Rational Expectations School will insist that households receiving stamped money will simply save an equivalent amount of ordinary currency, leaving total expenditure unchanged.  While there may be some truth in this criticism, it misses three important considerations: 1) households that are liquidity constrained will spend whatever they can; 2) since there is no future tax liability associated with stamped money, there is no reason to save on this account; and 3) people tend to maintain separate “mental accounts” for their holdings, which is one reason why some people simultaneously hold low-interest savings accounts while maintaining high-interest credit card balances.  And let us not ignore the effect that a “spend-for-the-common-good” campaign could have in encouraging citizens to refrain from hoarding regular currency so as offset the intended effect of the stamped money.

It must be acknowledged that a stamped money program would be challenging to administer.  But most of these difficulties could be avoided by eliminating the stamp requirement and replacing it with scrip that automatically lost 1/12 of its face value at the end of each month, becoming worthless at the end of one year.  Under this alternative, there would still be an effective tax on hoarding, thereby providing an inducement to spend.


It has been said that money is the root of all evil, though some would argue that lack of it is the root of many problems.  Occasionally, it is our reluctance to part with it that is the source of our difficulties.  As long as everyone waits for others to increase their spending, there will be no increase in spending.  But if the Treasury can make it costly to hoard, at least for awhile, then the circumstances that gave rise to the hoarding will themselves disappear, and we can get back to work again.


  1. Why would anyone accept stamped money in exchange for goods or services?

  2. Because it's legal tender. Suppose someone owes you $100, and they give you an ordinary $100 bill (not stamped money). Can you refuse to accept it and demand gold instead? Stamped money has actually been used in some places in Europe.

  3. Greg, Thanks for sending me a link to this. I think that the basic idea is sound. However, I just wanted to call your attention to the fact that it was not Gustav Cassel who came up with idea for stamped money, but Silvio Gessel. Check the General Theory and you will find Keynes's acknowledgment of Gesell as a forerunner of his.

  4. Jan said: Interesting observations Greg!And yes David Glasner is right that not only Gustav Casell but also Silvio Gessel (and i would add also Irving Fischer as well as Norwegian Ragnar Frisch and French Maurice Allais)- was in favor of idea of stamped money.In later years Professor Lars Pålsson Syll at Malmö University-Sweden been a lively advocate of the idea and taken it up again,as a way to stimulate the economy.

  5. Anon,

    Thanks for the additional references. I had no idea about Frisch and Allais. Irving Fisher's book about stamped money can be found at

  6. Mr Hill,

    Irrelevant to your blog post but do you know of good papers online on the loanable funds theory and how it is easily dismissed when looking at expectations?


    1. Try this:

  7. Surely this would make for some strange behaviour on Tuesday and Wednesday?

    1. Yes, these could be called the "pass-the-hot-potato" days. Alternatively, the checks described in my post could designed so that some of them must be "stamped" on Monday, some on Tuesday, etc.