Thursday, September 02, 2010

Main Street Money

Given the extent of the Main Street Depression now raging across America, and given that monetary and fiscal policies have left America with insufficient legal tender to conduct local and regional commerce, should municipalities, counties, and even states consider issuing their own "scrip" as a means to expand the available money supply?

National Park Bank of New York Clearing House Certificate for $500 (1873)

During past depressions in the US, the appearance of local currencies in the form of "depression scrip" became commonplace (see examples). California has recently experimented with issuing warrants to its citizens in lieu of tax returns (see last example). The use of local and regional currencies is not without precedent in the US.

Five Dollar Certificate issued by the San Francisco Clearing House (1907)

Town, cities, counties, and states across the US are being strangled by deficits, and the supply of legal tender for commerce is simply inadequate to sustain current spending levels and public services. Should these same entities consider issuing their own currencies as a way to supplement the local money supply and maintain current levels of public employment and services? So far, a Main Street economic recovery appears elusive, especially given that our nation's fiscal and monetary policy-makers view local prosperity as a by-product of national prosperity. I would not be surprised to see local, regional, and even state currencies sometime in the near future.

Five Dollar Certificate issued by the Chicago Clearing House (1933)

Public entities that create their own currencies could use these "dollars" to pay public employees, contractors, suppliers, and pensioners. Additionally, public healthcare programs funded by states could be paid for using local currencies as services are rendered. Finally, local currencies could be used to pay public taxes due from taxpayers and business entities within those jurisdictions. Of course, this would mean that what America knows to be a "dollar" would become somewhat confusing. However, the creation of local and regional currencies could very well be a useful way for states to manage their budget deficits, or at least until the US money supply becomes more robust on a local and regional basis.

Warrant issued by California (2009)

The shortage of money in various localities and regions across the US has created a crisis, especially given that the nation's largest banks and corporations are continuing to hoard cash for whatever reasons. Perhaps expanding the Main Street money supply can be accomplished without the consent of the US Federal Reserve after all.


W.M. said...

"insufficient legal tender to conduct local and regional commerce"

What do you base that statement on?

Dr William J McKibbin said...

Hi W.M., several pieces of evidence come to mind, including the sharp declines in US consumer spending and savage increase in foreclosures. Additionally, the decreases in tax revenues to municipalities and states evidence a money shortage. Main Street America is starved for money (which is very scarce right now), while the Federal Reserve and the largest "too big to fail" corporations and banks in America are hoarding money. The same thing happened during the Great Depression incidentally. Thanks for your question...

Anonymous said...

William, money supply is a key element in the economy, but today it is no longer the official currency that is relevant. Money is a IOU secured by national bank loans, typically to private banks.
The financial crisis was caused by the 'legal tender' of credit derivatives created by the investment houses. Because they were highly insecure they were sold as being insured against the loss by for example AIG. We still have many of those on the market causing enough problems, so can it be good to allow even more printing of such notes that will most probably even less secure?

Dr William J McKibbin said...

Max, you ask a good question. Note the condition that Main Street is without money, but the Federal government and large corporations are flush with money. Ironically, the distribution of the money is not reaching Main Street America for many reasons. What good is legal tender if that tender is unavailable for Main Street commerce? I do not know the answer to my own question, but I would not be surprised to see "script" appearing in localities and regions of the US. By the way, I am not a fan of "script" as a solution to economics. But, the appearance of "script" says a great deal about what is happening in the US macroeconomically. As always, thank you for your comments...

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