Peter Earl -
Real-World Economics Review Blog

emphasis in bold type added

SOURCE. about halfway down the article.

....the obvious solution is not merely to foster the use of transferable product-specific vouchers as stores of value but to make them company-specific and include expiry dates on them. Businesses that issue them could then be confident about the level of sales they can achieve before the end of the expiry period. This is where we go, roughly speaking, if we follow the ingenious Digital Coin proposal of Paul Grignon, a Canadian film maker whose excellent animated documentary Money as Debt deserves to be screened to all students of economics.

Grignon’s plan is available in summary form in its own must-see animated video. It appears to be a way of simultaneously overcoming both Say’s Law and the problems of the Bartercard concept. From the standpoint of scholars of the evolution of Keynes’s General Theory of Employment, Interest and Money, Grignon’s proposal amounts to using modern technology to replace an ‘entrepreneur economy’ with a ‘co-operative economy’ (see Keynes’s Collected Works, Vol. XXIX, pp. 77-80). This is because workers and other suppliers of inputs used by a company accept payment for their inputs in the form of claims on the output to whose production they have contributed. Since they cannot be sure what they can exchange these claims for in terms of claims on outputs of other firms, they are sharing the risk of the business with the owners of the business. So long as substitution can be induced by relative price adjustments (and I do not believe it always can be), unemployed workers can price themselves into employment by offering to work for fewer credits that were previously being paid per hour. The employer issues the extra credits associated with making extra output and these credits will end up being used to relieve the firm of its output within the expiry period of the credits. In the world of Digital Coin, unlike Keynes’s vision of a conventional monetary/entrepreneur economy, wage cuts do not have adverse effects on aggregate demand and a fractional marginal propensity to consume on the part of workers cannot result in additional output having to be sold at a price that covers the costs of creating it.

In Grignon’s scenario, there are two kinds of coin: (i) a limited supply of ‘perpetual coins’ that serve, like ounces of gold, as the unit of account, and (ii) ‘credit coins’ that are issued by firms and can be exchanged within a specific expiry period for credit coins issued by other companies or output produced by the firm that issued them. The credit coins do not need to exist in physical terms and Grignon envisages them being exchanged and traded electronically with electronic records being kept of who is holding balances of particular credit coins being continually updated.

Imagine the case of a salaried worker who helps produce cars for Ford. The worker would be electronically credited with an agreed number of Ford credits each week. Component suppliers would be paid in Ford credits, too. Mostly they would not want to accumulate these credits to purchase Ford cars before the credit expiry date arrived. However, at any point in time, they would be able to get a price online for Ford credits, and credits for any other company’s products. To buy, say, an Apple computer, they could trade Ford credits for Apple credits at the payment terminal in the computer store. If Ford cars are not strongly in demand and demand for Apple computers is booming, Ford credits would tend to trade below their par value against perpetual coin, and Apple credits would command a premium.

It would also be possible to create a mixed portfolio of credits from a variety of companies by trading online. Because people may prefer to hold mixed portfolios, it is likely that financial institutions would offer the option of exchanging credits for any specific company, at the going price, for units of a bundle of credits comprising credits from a wide range of companies. These credit bundles would be rather like holdings of present-day unit trusts, except that they are claims on the flow of output rather than shares. We can imagine consumers simply keying in which kind of credit they wished to use to buy credits of the business at which they were buying something, much as we now selects from the ‘cheque’, ‘savings’ or ‘credit’ account menu on a payment terminal. Once a credit has made its way back to the company that issued it and been exchanged for goods, it is deleted — just as with an airline ticket that has been used and is then thrown away because it cannot be used again.

The companies that issue their respective credits to the expected value of their outputs expressed in terms of the perpetual coin unit of account do not have to worry about whether or not what they produce will be sold. This is because they have paid for production with these self-issued credits and the fact that the credits have expiry dates will ensure that their prices adjusted to a level low enough to ensure that the credits are redeemed against their output. Rather, what the firms’ shareholders, workers and input suppliers have to worry about is the exchange value of the credits in terms of which they are remunerated. Thus if workers bargain aggressively to be paid more units of their company’s credit per week, management will have to decide whether to pay fewer credits to shareholders or simply create more credits and impose on workers and shareholders the risk that their exchange value will fall if demand for the product does not expand in line with the increase in the supply of credits. If either strategy seems likely to involve unsatisfactory returns to shareholders, the managers may cut production and employment until workers moderate their claims.

Under Grignon’s Digital Coin system everyone who accepted payment in a firm’s self-issued credit becomes, in effect, a member of a cooperative. Keynes’s problem of effective demand falls away, the more so the shorter the expiry time on each new batch of credits. Supply creates its own demand but the crucial issue becomes what supply to create, so that one’s credit coins have a worthwhile exchange value. Aggregate-level coordination problems of a Keynesian monetary economy lose centre stage to the sectoral coordination problems emphasized by George Richardson in his 1960 book Information and Investment (Oxford University Press, 2nd edition 1990; see also his article in the 1959 Economic Journal). All manner of behind-the-scenes trading activities would be likely to spring up to enable risks to be traded between those who wanted to limit their exposure to risk and those who were keen to risk making incorrect guesses about the relative price trajectories taken by different companies’ credits. However, it appears that if credits had short-dated expiry periods the scope for destabilizing speculation would be relatively limited: credit coin markets would function more like short-term bond markets than more volatile long-term bond markets.

I find Grignon’s Digital Coin proposal especially well thought out. The time for this self-issued credit system to be implemented seems ripe both because of the failure of the existing bank-credit system and because we now have the technology to make it work. (If it were implemented, I presume that initially firms might offer a choice between payment in standard currency units or in credit coin.)...