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It has been over 8 years since the U.S. experienced the Great Recession, and the same length of time has passed since it has experienced deflation in terms of the median CPI(the previous time before that was in 1955). In truth, while the recession was deep, it wasn’t historically long, lasting only from December 2007 to June 2009. According to the National Bureau of Economic Research, the average length of recessions between 1919 and 1945 is 18 months, and 22 months from 1854 to 1919. And while the average duration of recessions has fallen to 10 months since World War II, the length of the most recent fall in the economy is roughly in the middle of the pack.
In a 2011 post by Alex Tabarrock, he describes what could be considered the excess demand for money explanation of recession, and why it seems that barter, as well as the use of local currency, increases during these periods due to this shortage of cash in the economy. This shortage of money reduces consumer confidence, and thus spending, cultivating in an often intensifying process of decreasing employment, growth, incomes, and spending.
It is agreed amongst most economists that this process will eventually come to an end as prices and wages fall enough to allow businesses to find serenity in the idea of hiring and expanding production with the confidence that they will be able to sell their products to consumers(and other producers in their supply chain) who, at the same time, will be with enough confidence in both their job prospects and income(as well with the now lower prices) to spend more and purchase these goods that previously went unsold. In other words, in the beginning of an economic downturn, almost nobody’s buying what everyone’s selling(at current prices). There’s a mismatch between the bid price and the ask price of particular goods. This is why many economists qualify recessions as a result of overproduction, which is somewhat broad, if not a mischaracterization. To combat this disequilibrium, they often argue whether to let the market correct itself, like the human body heals a sprained ankle on its own, or to allow the central banking system and government to perform ‘surgery’ to compliment this corrective process with monetary and/or fiscal policy.
The focus here will not be a comparison on what policies or non-policies will bring the economy back to health. Instead we will be looking into an alternative measure that is often ignored. There are several variations of this concept, but it’s often referred to simply as scrip. It could be called money, in a sense, and has been in paper form like dollars, but has had several features on its surface that distinguishes it from Federal Reserve notes. For this purpose, however, the current author will use the name wallark for this unique solution to monetary recessions. While there is no real definitive monetary theory behind the concept of scrip, we can see that the history of scrip can help us understand the nature of recessions and how this money can fix them.
There have been several types of scrip used throughout history for different purposes, and in the U.S. in particular one of these was “stamp scrip” which centered around the concept of demurrage, originally proposed by a German economist Silvio Gesell. According to Gesell, demurrage is the concept that as money loses its value over time, the incentive for hoarding it is decreased, and the desire to exchange it for real goods or services increases, spurring economic activity. This can be applied to commodity money, in the form of storage costs, or fiat/paper money in the form of a periodic tax. This quasi-money behaves with the equivalence to a deposit account in a bank, with negative interest rates applied. Scrip has historically been traded in paper form, but could be conceivably tradable in electronic form with updated technology.
As time proceeds, instead of a recession deepening, exchange is increased, increasing employment and spending. When one looks at a well-known historical example of Gesellian demurrage in action such as Wörgl in 1932, it’s obvious that these are, in fact, the general effects of a local scrip being implemented. Arguably the most famous economist of the early 20th century, Irving Fisher, endorsed this concept due to demurrage’s ability to increase the velocity of money. He believed it kept the wheels of capitalism spinning at a time when a rise in the demand to hold cash balances caused the opposite to happen. He was correct to a large extent. During the year or so this scrip was being put into the economy, unemployment fell and spending rose.
However, some issues can be raised with this type of scrip, but that will be addressed later when we compare our new version of scrip, wallark, with the older stamp scrip concept supported by Fisher. It is important that a framework be imposed to show not only how this currency will work, but how it satisfies different schools of thought when it comes to monetary solutions to disequilibrium situations. It should also be said that this is a market solution, not a government or political one. No legislation need be passed (but perhaps some could be eliminated) in order for this proposal to work the way it should.
SAY’S LAW AS A FOUNDATION
The meaning of Say’s law is often misunderstood, even among nobel-prize winning economists. The colloquial meaning of it is “supply creates its own demand” which, when considered ex post, is true. Everything that has been sold was previously produced. According to Becker and Baumol(1952), this is not what Jean Baptist Say meant. What he intended to say was that his “law of markets” was not an identity per se, but a descriptive term that displays the coordinating efforts of entrepreneurs to adjust to the ebb and flow of consumer demand. There can be recessions and surpluses can occur, but they are quickly eliminated by businesses adjusting their prices, costs, inventories, and production to meet with the market equilibrium(although equilibrium can never actually be achieved).
Unfortunately John Maynard Keynes, among others, mischaracterized this term to mean simply that supply must always equal demand, and thus there can be no recessions, surpluses, or even unemployment. In other words, total supply equals total demand. Other interpretations similarly implied that Say’s Law must abstract from monetary theory. It must hold true only in direct exchange, or barter. The demand for money(cash balances) has no effect on economic transactions in the aggregate. This is essentially known as Walras’ Law. Total demand, including the demand for money, must equal total supply, including the supply of money. Therefore if recessions occur, it must be because Say’s Law does not hold true. These unfortunate misunderstandings place money at the center of the debate on the cause of recessions. Monetarists and Keynesians often blame the lack of demand, or money, as the root cause of disequilibrium, whereas Austrians blame malinvestment due to the manipulation of the money supply as the main culprit. Each of these schools of thought will test our wallark to see if it can help, or perhaps even solve, the problem of monetary recessions. Neo Classicals tend to offer non-monetary theories of recession so we will ignore them for the purposes of this proposal.
Whereas Silvio Gesell proposed the concept of scrip and demurrage to emphasize lower interest rates(perhaps to zero), and Irving Fisher focused more on increasing the velocity of money, we will be more concerned about the equilibration of supply with demand, a la Say’s Law. During recessions according to Nick Rowe, it is easier to purchase than it is to sell. More specifically, it is more difficult for entrepreneurs to sell their product and workers to sell their labor, than it is consumers to buy products and businesses to buy that labor. This stems from the fact that there are two ways to increase your income:
1. Buy less
2. Sell more
To buy less is a simple way to increase total disposable income. It only requires the decrease in consumption on the part of yourself. However, to sell more requires not only your choice to sell more(whether goods, services, or your own labor), but also the decision of someone else who wants to buy what you’re selling at an agreed upon price. So for #2 to work, it takes two parties for it to work, thus it is easier to choose option #1. Borrowing could be an option, but it also requires a second person who is willing to forgo their income to purchase what you’re willing to sell. This can help explain why barter is more common during recessions. People are concerned about their ability to earn income and thus look to use other means for exchange during these uncertain periods. What our wallark seeks to do is to bridge the gap between barter(direct exchange) and use of the medium of exchange(indirect exchange). It does this by incentivizing businesses and workers/consumers to use an alternative to the dollar, but this alternative will not compete with the dollar. It will be complimentary to it.
A wallark is neither money, nor pure barter. It is Say’s Law personified. Money is a general medium of exchange that is almost universally accepted for an economy’s goods and services. The wallark is a piece of paper redeemable only in products sold by a specific company(and possibly its affiliates). So one cannot take this scrip earned from Target and trade it for goods at Whole Foods. It’s possible someone with scrip from Whole Foods will trade it for the Target scrip, but not automatically, unlike dollars, because that person may not desire any goods from Whole Foods. The point is that it is not as liquid as actual money, and thus should perhaps be considered a quasi-money.
It is also not direct barter because the labor that earns the scrip does not instantaneously exchange for the goods or services of that particular company, and may even have an independent purchasing power. A worker who has earned a given amount of scrip on a certain day may decide to hold it for later exchange(although this goes against the very purpose of the wallark), or may wish to convert it to dollars in a pre-determined exchange rate. The reason we can consider it to be a reflection of Say’s law is that since prices in terms of dollars take time to adjust to “deficient demand” in a macroeconomic sense, workers are able to supply their labor in exchange for the rights to goods on their respective company’s shelves with our wallark and without the use of dollars. We will cover the topic of how the value of the wallark will be determined later, but it is sufficient to note that this unique form of scrip is different from the company scrip of the past.
Historically, a company could issue scrip in exchange for that company’s goods, and it was not redeemable for goods or services from other stores. This gave these businesses a monopolistic position over its employees who could not otherwise acquire real dollars. This unfortunate aspect of old scrip is avoided since our economy is much more interconnected and diverse from 100 years ago when company scrip was more widely known. Below we will look at how the wallark separates itself from these previous forms of scrip.
The wallark is essentially company scrip. It is not born out of the need for money or Fisherian ‘circulation’, but to lower costs for a business. A company has no incentive whatsoever to increase the supply of this scrip in the same way the fractional reserve banking system increases the money supply through M1 or M2, because if it did, it would essentially be giving away its goods for free. It is only issued after work has been completed by an employee. The wallark simply entitles one of the employees of its respective company to a certain amount of goods that lay idle on the shelves, depending on the amount of labor(and the purchasing power of that labor) expended during a specific period of time. In this sense, it is no different from the Knapp, Stout and Co. lumber company in late 1870’s Wisconsin.
During recessions consumers are hesitant to spend. Businesses find ways to survive this period of time typically by reducing costs, such as laying off employees, living off reserves(savings) and selling off assets. They do eventually lower product prices to inspire consumer confidence, but that aspect will be incorporated into our analysis later. Unfortunately since wages often do not fall proportionately or efficiently, businesses often have no choice but to let some of their workers go due to the fact that by keeping them, their labor costs(which are a large portion of total costs) remain high relative to product prices. Thus they get caught in a price-cost squeeze and cannot make enough profits to stay in business if the recession is prolonged by these and other factors. It is the goal of every business to maximize profits, and during a recession this means lowering costs as much as possible.
Our wallark can serve this purpose. Since it is not money in the strict sense, a company loses no income by paying an employee with it. After working for a period of time, such as a week, that worker can exchange the scrip received for goods that have not yet been sold to consumers. The difference between our scrip(the wallark) and historical scrip is that while this old scrip had a ‘time’ element to it, making its purchasing power worth less with a specific amount of passing time, the wallark’s purchasing power(in terms of its company’s goods) is in direct proportion to the remaining goods laying idle on the store’s shelves. This is because when a certain amount of wallark is earned by an employee, it is only redeemable in goods that were on the shelves on the same date the wallark was issued or before that date. They cannot be used to buy a product that was put on the shelf at a date later than when the wallark was issued to the employee. If a wallark is earned on a Friday after a week of work, it can purchase any good not yet purchased(with either dollars or itself) that is on the shelves, but cannot be used to purchase goods that are put on the shelves on that Saturday or after. And since every issue of wallark and every product can easily be labeled with the date of work completed and date of being in stock(on display for sale) respectively, this company system can be maintained with little effort in any kind of business.
To use a more specific example, let’s say a recession has hit by the end of 2017, and Steven is laid off at his manufacturing job after Christmas. He applies for a job at Wal-Mart, and agrees in a contract to accept only wallark as payment, since Walmart will otherwise refuse his services in terms of dollars since that will keep its labor costs too high. He would prefer dollars as payment, since they are more widely accepted, but knows the most important thing during hard times is feeding his family and providing basic needs for them. And he understands that Walmart has a wide variety of goods that will satisfy him and his family during this recession. He is paid daily based on his labor hours and their relative purchasing power( for example, 30 minutes of sweeping floors is the equivalent of 2 cans of soup and a loaf of bread, or 1 1/2 bottles of soda and a generic candy bar). His first day of work and thus his first payment in wallark is Sunday, December 31, 2017. At the end of his shift, he can purchase any good on display he wants. There may be cash-holding shoppers in the store looking for bargains to save money during this recession, but any good that has not been taken off the shelf yet can still be bought with the scrip.
However, if he decides to hold it for later use on Monday, January 1st, 2018 or even later that week, he runs the risk of someone buying the products he desires the most before he does. His family may have wanted a pasta dinner with a specific brand of noodles and sauce. The longer he holds onto the wallark(s), the more likely it will be that the goods that yield the highest utility to him will be purchased by someone else with cash, or a fellow Wal-Mart coworker with wallark. He will then have to settle with some other goods that rank lower on his value scale. Thus he has every incentive to spend it as fast as possible.
However, let’s say that Steven decides to hold onto his earned wallark for a short period of time for whatever reason. Perhaps he is sure that the goods he desires most in Wal-Mart will not be purchased by someone else before he returns as a consumer. If he is wrong, his wallark will not lose purchasing power in the same way an increase in the supply of dollars does, nor will it increase in buying power like dollars do during recessions and deflation(unless of course they are fixed in value in terms of dollars). And just because the supply of idle goods he can purchase diminishes over time, it does not mean that the value of wallark in terms of those goods increases like during deflation. What it does mean is that as the supply of idle goods falls(whether Steven decides to hoard his earnings or not), the value of wallark falls because the stock of goods that yield the highest marginal utility to individuals will disappear from the shelves, thus leaving holders of this scrip from being able to exchange them for the goods they want the most according to their value rankings(since they cannot purchase any new goods that have been put on the shelves after their wallark was issued). In other words, if those who earn wallark hold them instead of spend them, the goods that ranked higher than the disutility of labor it took to purchase them will likely be gone, thus making their labor a “malinvestment” of human capital. And since their holdings of hoarded wallark are now the embodiment of a sunk cost, they must either purchase goods that rank relatively lower on their value scales or exchange them for dollars at a considerable discount.
This explains why our wallark reflects the colloquial meaning of Say’s law. By supplying one’s own labor to a business, goods can be directly traded for that labor. What the wallark does is allocate the goods simply by the date the labor was exerted and when the good was displayed. After the wallark is redeemed for goods, it is destroyed. One could argue that while the company reduces labor costs significantly by paying its employees in wallark instead of money, it doesn’t solve the fact that the company doesn’t make any profits either since the company scrip is nothing more than a voucher from a business perspective. So how does the company stay in business if it cannot cover other costs like overhead since selling is more difficult during recessions until prices fall enough to clear the market? The answer is that there is nothing preventing consumers from purchasing goods from a business with dollars. Remember that even during the worst economic crisis, people still require food, water, clothes, and other goods to live, so we are always consuming. Workers still need to produce things people absolutely need and thus earn money. In addition, since these businesses are no longer paying wages in dollars, their dollar reserves and savings will serve as a buffer for other expenses and unexpected costs.
The key to the wallark is that it is not a permanent solution. Again, it is only meant to bridge the gap between the initial stage of recession when unemployment rises and sales and incomes fall, and the end of the downturn when workers and capital are reallocated to meet the demands of the economy, and prices in terms of dollars have fallen enough for consumers and workers to feel comfortable increasing their consumption. During a recession, workers desire to sell their labor which businesses tend to reject, and businesses desire to sell their goods which consumers tend to reject as well. Our new wallark satisfies this emphasis on selling, and creates a mutual incentive for all parties to participate in this voluntary quasi-barter gray market.
PURCHASING POWER AND REDEMPTION
An important aspect of the implementation of the wallark is its purchasing power. How will it develop its purchasing power? Will it be flexible or fixed? Will it be based on labor hours or will it be pegged to the dollar? The current author believes that while other scrip have had numerous attempts by authorities to try to ‘tweak’ their purchasing power, our wallark’s value should be determined by the market. Almost no previous forms of scrip have been “backed” by anything, which is what separates them from ours. For every wallark issued, regardless of its value, there must be a corresponding good in stock that exists. This is because scrip-earning workers will only apply their labor if they know that there are goods and services available to purchase at their respective place of employment. This can be solved with a company database or phone app that allows worker to get up to date information on the availability of relevent goods they wish to exchange for their wallark. The fact that the wallark is based on Say’s Law is a corollary to this commodity-backed scrip framework.
Old scrip like the Wara were issued at the par with the national currency, while local currencies today like Ithaca Hours are based on labor time($10 per hour on average). Either of these options would be appropriate for our wallark, but perhaps another method would work even more efficiently. For example, a fixed exchange rate of 1 wallark for 1 dollar would be advantageous in the respect that it would create a fairly predictable purchasing power that workers would be able to estimate with reasonable confidence how much labor it would take to acquire the necessary goods they desire during a recession. One problem however might be that during a deflationary recession, prices in dollar terms need to fall in order for markets to clear. Since the wallark would be pegged to the dollar, labor priced in wallark might also be too high. In other words, less labor will be required to exchange for idle goods, and might possibly lead to less incentive for businesses to hire workers in exchange for this scrip. This is because our wallark is only meant to be a stop-gap while the economy recovers. Businesses don’t want to give goods away for relatively little labor in exchange. Having the scrip pegged to a deflating dollar would make labor costs higher in terms of wallark, decreasing the opportunities for businesses to hire more workers since a given amount of labor hours will acquire more purchasing power, and thus idle goods. The purpose of the wallark is provide work for those who have lost employment due to the recession.
A possible solution to this would be not to peg the wallark to the dollar, but to specifically peg it to a previous, less deflationary dollar. For instance, the Consumer Price Index is published every month and details the rate of inflation or deflation for specific goods. It is not a perfect metric by any means, but is a fairly accurate indication of the trend of market prices. The median CPI shows even less volatility and is perhaps more concise as to the trend of the abstract price level. If a recession has statistically begun as of December 2017, and the CPI indicates that prices have generally fallen by 1%(-1.0% inflation rate) beginning in January of 2018, then perhaps the wallark could be pegged to the dollar as of the december CPI report when inflation was positive but falling over time. This would make labor in terms of wallark cheaper than as if it were priced in terms of current dollars, which are now increasing in purchasing power. This will allow more labor to be absorbed from the industries that have the most discharged labor due to massive layoffs from the recession. This will reduce unemployment more efficiently and quickly than a conventional fixed exchange rate.
Another implication would be the question of the convertibility to dollars. While we won’t inquire about the subject of how the banking system or local/state authorities will develop an apparatus for an official exchange mechanism between the wallark and the dollar, we can look into how individuals can trade or barter with their scrip or trade with dollars. To start, holders of cash have no need for scrip since their currency is the general medium of exchange and has universal network effects. Virtually everyone accepts dollars in the U.S. However, one reason why dollars may exchange for scrip is due to the fact that dollars will trade for wallark at a discount, thus to acquire dollars with newly earned scrip one would need to pay a premium in addition to the relative purchasing power. This is because dollars will command value at every business, yet wallark may not. So dollar holders have bargaining power over scrip holders. A dollar holder is able to acquire a toolbox at Wal-Mart at a given price, but can instead trade those dollars with a willing employee for an even greater amount of scrip so as to acquire the toolbox with wallark to spare. This increases his disposable income. He may very well make that exchange. At the same time, someone who has earned and is holding wallark may find that he now demands a good at a store that does not accept this scrip even though his scrip has the requisite amount of purchasing power, but can trade it for enough dollars(at a premium) to acquire it. He will then make that exchange. If either of these two market forces is strong enough, it can change the relative exchange rates between wallark and dollars, depending on the emphasis.
Furthermore, arbitrage is quite possible in the wallark system as well. Workers can exchange their scrip for idle goods at their place of employment, then resell them for cash if the worker has a selling price(in dollars) below the asking price at their store, or if those good are not available at that low price elsewhere. This would marginally increase incomes and money velocity, decreasing the demand to hold cash. Private arbitrage could also conceivably work between scrip from different stores who do not accept each others wallark.
Wallark would work particularly well in retail and consumer industries for several reasons. More competition in products would provide more variety and selection for workers and help them decide which businesses issuing this scrip will allow them to acquire these products.Next, labor in retail and consumer industries is much less specialized and requires less training and expertise, thus increasing the flexibility of these labor markets to absorb more wallark-earning workers from industries higher up in the structure of production, which typically are the ones most affected by demand shocks and recessions. This only enhances the ability of the economy to recover, and labor to be more efficiently, if temporarily, reallocated.
The U.S. economy is primarily service-based. Wallark can be used to acquire services just as easily as physical goods. For example, to use our previous example, Wal-Mart provides oil changes and works on tires and car engines as well. Steven could just as easily trade his wallark for lube services on his car instead of food for his family’s dinner if he desires. What distinguishes using this scrip for services rather than goods is that while the idle goods are able to be sold with a given dated wallark and whose supply falls, services are “infinite” in a sense. They do not run out. However, if it is not redeemed immediately, one can run the risk of waiting a longer period for acquiring necessary services if others also use their scrip for the same services first. This could be considered a loss of utility if that service was higher on one’s value ranking than a given good. Thus, it is in a worker’s best interest to exchange the script for services in the same manner as for physical goods.
It would be difficult for businesses to acquire a monopoly position in the issue of scrip as in the past because there is so much more competition between retailers and other consumer sector businesses, as well as other types of businesses like local farms. In addition, even stores that merge and acquire others can conceivably allow wallark to purchase goods and services at store affiliates and subsidiaries. For example, an employee of Target can use their wallark at CVS Pharmacy, since CVS bought out Target’s pharmacy and clinic business in 2015. And a worker at Walgreens may be able to buy goods at certain Rite Aide stores. More importantly, workers at Whole Foods could possibly be able to use their earned scrip at physical Amazon stores or perhaps even on its website. This shows that the division of labor is so widespread and integrated, that even workers who cannot acquire the dollars they need can still have tremendous bargaining power in terms of their labor. The selection of stores that can offer a variety of quality goods is extensive: Wal-Mart, Costco, BJ’s, Target, Home Depot, Wegmans, Best Buy, Sears, Amazon, Dollar Tree, Macy’s, Aldi, Kroger, Lowes, JC Penny’s, CVS, Rite Aide, Wawa, and many others. And since wallark can be issued in either digital or paper form, employees at online stores would be accommodated if they wanted to use them in brick and mortar affiliates.
Further solidifying this position is the fact that, again, this is not a permanent solution. It is truly temporary in nature. This is demonstrated by the historical record of stamp scrip and self-help scrip in the words of Loren Gatch:
The scrip of such groups tended to depreciate if their commissaries lacked the inventory for which scrip could be spent. In addition, the quantity and quality of the labor power backing the scrip suffered when the more capable group members left to find conventional work.
This indirectly explains the simple equilibrating tendencies of the Misein ‘money relation’ in the wallark nexus. In our Wal-Mart example, on day 1(December 31), the marginal utilities of the stock of goods on display is given for all of the workers who have scrip to exchange. Each worker can certainly hoard his or her wallark, but doing so runs the risk of losing goods that are higher on their subjective ordinal value scales relative to the goods that rank lower than the disutility of labor that was needed to acquire them through the wallark system. Others who possess scrip labeled on the same day have the same incentive to exchange their scrip as soon as possible because they will be competing not only with holders of store scrip, but holders of cash too, since this system does not preclude(and in fact, prefers) any non-employee consumers to purchase their stock of goods. By increasing their redemptions of wallark, the marginal utilities of the remaining idle goods, which are decreasing in supply, fall in terms of wallark, thus reducing the value(though not necessarily purchasing power) of this specifically dated scrip. Yet at the same time, the marginal utilities of these goods rises in terms of dollars since the wallark-demand for them is very low, thus making their dollar prices fall even faster, increasing the incentive for dollar holders to spend them on the remaining goods and thus potentially competing with the holders of the original scrip for these ‘inferior’ goods. This is the price mechanism adjusting to the relative demands of holders of different monies, allowing prices to fall in terms of the general medium of exchange as the value of the quasi money falls, solidifying this inverse relationship. This analysis does not fully apply, however, to earners of scrip after December 31st, since they are able to acquire any new goods that come into stock and are put on display on the same label date as the newly issued scrip, in addition to the older idle goods. Thus the newer wallark has a relatively higher utility to the older scrip. As long as the supply of newly produced goods coming into stock on the stores shelves outpaces the amount of labor hours earning new scrip, this wallark system will maintain relative stability until dollar prices fall enough for the recovery to be completed.
To put it another way, in the beginning of an economic downturn when unemployment sets in, scrip will initially have much value for those laid off in other industries who desire to sell their labor directly for goods, rather than dollars, and for those companies who wish to sell their goods directly for labor, without paying in dollars. As this wallark is earned and exchanged, the amount of older idle goods decreases, thus making older scrip fall in value since the selection of available goods is now diminished. And again, even a new supply of idle goods may not be sufficient enough for the total purchasing power of workers earning new scrip. The disutility of labor(for idle goods and thus scrip) begins to rise as the opportunity cost of looking for employment in more “conventional” jobs that pay in dollars falls since costs have been given time to adjust to allow for a certain amount of price deflation, thus maintaining profit margins large enough to absorb higher labor costs(assuming that businesses see the light at the end of the deflationary tunnel). Eventually these two forces help equilibrate the structure of production. And as the recession proceeds, prices of these consumer goods and services fall in terms of dollars making them more attractive to consumers and workers who earn income in dollars from other businesses who have kept their employees during the downturn. This process continues until the cost of holding dollars instead of spending them on goods rises, which entails a lower demand to hold dollars, higher prices and profit, and more incentive for businesses to hire labor in exchange for dollars. The recession eventually comes to an end, with the wallark being merely transient and allowing the dollar’s purchasing power to correct itself.
ADVANTAGE OVER OTHER TYPES OF SCRIP
The wallark has several advantages over other proposals of scrip, both historical and theoretical. Most importantly, wallark cannot be “printed out of thin air” like past scrip. In fact, according to Hans Cohrssen(1932), The Wara was introduced and cities such as Wörgl experienced higher prices than cities that did not have it circulating. In addition, Irving Fisher states:
This amount was later found to be in excess of the actual need, and instead of following an ‘inflationary’ policy, only about l/3 of the issue or less was kept in circulation through re-issues.
So while there was no inflation in terms of Wara, relative prices compared in Austrian schillings were higher than in the areas where they did not circulate, probably due to the over-issue of them. Wallark on the contrary cannot be inflated or experience supply-side devaluation, only through the reduced demand for them by market participants. If a business wishes to issue it to someone who has not earned it through a comparable amount of labor, then that business loses that good and potential income from a cash-paying customer. On the other hand, scrip that is issued by a municipality or bank can easily be inflated ad hoc or to benefit political allies and won’t be used to allow commerce to progress and will be purely inflationary.
The opposite of the previous outcome is the result of hoarding(economists call it the demand to hold cash or money). We stated earlier that the probability of people increasing their demand to hold wallark after earning them is negligible, if not zero. And while it is possible(though highly unlikely), it has been shown that the demurrage scrip issued in Wörgl was hoarded to an extent despite its intentions. According to The Wörgl Experiment With Depreciating Money, by Alex Von Muralt, 12,000 notes were issued, but approximately 4,000 of these were hoarded for other purposes such as collectibles. Thus, demurrage is not full proof, despite it having improved economic activity in several cities in several different countries.
Another aspect of time scrip is its influence on interest rates. While the wallark would have no direct impact on rates in the economy, it is conceivable that other form of demurrage and time scrip would, and would cause further malinvestment if the scrip were seen to be both a permanent and monopoly currency in a complex economy. An in-depth analysis of the effect on interest rates will not be pursued here. For further investigation of this concept, this author suggests reading The Curious Case of the Disappearing Money: Demurrage-Based Currencies in Theory and Practice(2013) by Kyle Marchini.
SOLVING THE KEYNESIAN-AUSTRIAN-MONETARIST TRIFECTA
When it comes to finding solutions to monetary recessions the Keynesians, Monetarists, and Austrians all have their ideas about what the most efficient path is. Each of them agrees that money is the root cause of downturns, but their respective explanations of the boom-bust process differ significantly(in reality, recent Monetarists and Keynesians have more in common on this topic than is usually admitted). It is our purpose here to provide a solution that satisfies each of these schools of economic thought and at the same time show how this proposal is different from those of monetary cranks like Silvio Gesell and Murray Rothbard.
Let’s begin with the Keynesians. Strictly speaking, there are different subsets of Keynesianism(Neo-Keynesian, New Keynesian, and Post Keynesian). However, we’ll focus on the general concerns that each of them share. The most commonly stated problem of recessions stems from the lack of aggregate demand, or the total amount of spending on goods in an economy. Without going too far in-depth, the Keynesians claim that a shortfall in spending causes businesses to cut back on capital and employment investment, thus reducing incomes further and proceeds in a spiral of falling incomes, lower growth, and rising unemployment. While our wallark does not increase aggregate demand in terms of dollars and will hence not show up in official GDP statistics, it allows for prices to fall in dollars while over this span of time, the value of said scrip will fall, signaling that workers will be looking for other job opportunities that have seen larger hiring rates due to rising spending. This has several implications that we will touch on briefly.
What Keynesian policies aim to accomplish is to increase consumption(AD) through either fiscal or central bank mechanisms, or a combination of both. If the central bank has driven nominal rates to the zero lower bound, then monetary policy loses effectiveness. They then say fiscal policy such as increased government spending should be able do the trick. The wallark bypasses all of this. It prevents hoarding. To repeat our argument from earlier, our version of scrip is only redeemable for idle goods that have ‘matured’, or been put on shelves for sale, on the same day that the scrip was issued or before, which is always after the labor has been completed. Therefore there is quite literally no reason for a worker to hold onto the wallark(s) for any extended period of time, or at all. This contradicts the Keynesian concept known as the liquidity trap which states that consumers tend to keep the money out of bonds and hoard it, making monetary policy impotent. Wallark allow people to spend as much as the earn without having any incentive to increase their demand to hold wallark balances.
This brings us to the other Keynesian linchpin known as “sticky”or rigid prices, particularly wage rates. Stated above, as a form of wage payment, the wallark allows wages, in terms of dollars, to fall significantly, if not to zero. This eliminates the sticky wage argument since labor is a significant portion of total costs in retail and consumer goods industries. Allowing costs to fall helps prevent the price-cost squeeze that many businesses go through during recessions. And while dollar prices of goods take time to fall enough to incentivize other consumers to spend, reduced labor costs allow 1) profit margins to be more manageable 2) a business’s savings and dollar reserves to provide a buffer during times of low demand and sales and 3) employment to rise. In fact, unemployment is the proverbial fly in the Keynesians ointment. What the wallark is able to accomplish is allow labor from more capital-intensive and specialized industries to be absorbed into consumer industries, since it costs very little, other than perhaps the time it takes to train a worker(although since retail is less specialized, this should not be taken too seriously), to hire workers for scrip. Furthermore a case can be made that unemployment could possibly fall below the non-accelerating inflationary rate of unemployment(NAIRU), since, in the absence of monetary stimulus, prices will fall in dollars as wages and jobs will rise in wallark. It is only when labor starts to discharge from wallark-paying jobs in favor of dollar-paying jobs(since falling consumer prices have inspired higher spending) that prices cease falling, because workers are now earning dollars and are thus more comfortable and secure in increasing their consumption. A minor addition to this is that it also does not apply to the Phillips Curve, and in fact, shows the opposite relationship between inflation and unemployment.
The Monetarists are just as concerned with money and demand during recessions as Keynesians are but show some interesting differences that we will also cover. Older monetarists emphasis the velocity of money, or how fast money is spent, and thus turns over in the economy. They claim that this velocity shrinks during a recession and an increase in the money supply is needed to offset this. We have already shown that velocity will increase and be ‘infinite” in a sense for wallark since the cost of hoarding them is very high, and while the velocity of money will remain low for a time, this process will be sped up as labor reallocates itself to allow spending to rise. This will eventually stabilize the so-called price level, which is another concept Monetarists think should be focused on. The fact that the wallark is neither deflationary or inflationary in nature reinforces our stance on this. It embodies the standard version of Say’s law in the sense that its supply to the workers creates its own demand without any leakages into increased cash/wallark balances.
A separate branch of monetarists(and somewhat Austrian) are known as the free banking economists. They support what is known as monetary disequilibrium theory, which states that an excess demand for money means that there is an excess supply of goods. Since money has no market, and therefore single price of its own, the adjustment must fall on quantities instead of prices(essentially the sticky wage argument). There is an over abundance of unsold goods and idle labor due to the inability of market prices to adjust quickly and proportionately enough for these resources to allocate themselves to areas of the economy that are able to absorb and utilize them. The overall result is there are less exchanges made then there otherwise would be if prices were completely flexible. On the goods side, there is the idea the competing businesses are hesitant to cut their prices during a recessionary/deflationary phase of the business cycle because their supplies may not cut imput prices, thus creating a disappearing profit margin. The wallark allows the prices of labor inputs to fall in such a way as to allow businesses to lower their prices(in dollar terms) faster than they otherwise would, allowing demand to increase as prices fall.
As Nick Rowe has pointed out, the emphasis during a recession is the desire to sell, rather than the desire to purchase. Monetarist Leland Yeager makes this clear when he states, “The most striking characteristic of depression is not overproduction of some things and underproduction of others but, rather, a general “buyers’ market” in which sellers have special trouble finding people willing to pay money for goods and labor.” Within the wallark system, laborers are better able to sell their labor in exchange directly for goods, and stores are better able to sell these goods directly for labor. And while barter solves this problem, it is costly in terms of finding others who want to exchange goods directly. Our scrip, on the other hand, reduces this cost by allowing unemployed workers to find jobs at locations which supply a wide variety of products, particularly in retail, that allow them to have better knowledge, thanks to the internet and smartphones, of opportunities to work in exchange for the goods they need most during times of lower incomes and spending.
The Austrian school of economics takes a different view to recessions and recoveries than the Keynesians and Monetarists(in fairness there are several different branches of Austrianism that emphasis different methods but we will only cover the popular view). In Austrian Business Cycle Theory, a recession is a result of previous inflationary policies by the central bank. What occurs is a rapid expansion of capital good industries, and this is due to increases in the money supply that are not backed by previous savings. This creates a mismatch between the time preference of consumers, and interest rates which have been artificially lowered by monetary policy. As consumer preferences assert themselves, it is revealed that most capital investments have been made in error, due to the fact that there are not enough resources to complete longer term projects and other economic infrastructure. During the recession, the Austrians prescribe price flexibility and the absence of further monetary stimulation to allow resources to allocate themselves so that they become more in line with what market participants actually want. Should the government step in with price controls, excess regulations, fiscal stimulus, or central bank monetary policy, this will not allow the price mechanism to do its job re-pricing labor, capital, and final goods. This is the very basic explanation of the their theory of recessions, but several points should be made to clarify why the wallark should completely satisfy these Austrian prescriptions.
Austrians are more tolerant of deflation(falling prices) than virtually any other school of thought. They advocate the idea that savings should fund the credit system(not all Austrians believe this however), instead of a fractional reserve banking system artificially lowering interest rates and “printing money” to fuel economic expansion. With the wallark as a means for payment of labor completed, credit is less necessary for individuals to acquire necessities. And while it has no direct effect on interest rates, perhaps the widespread use of this variation of company scrip will allow rates to fall naturally as consumption in terms of dollars slows at the start of a recession, instead of the monetary authorities trying to stimulate rates through credit expansion sooner. Since short terms rates are typically highest at the peak of a boom, they also fall to their lowest point at the bottom of a recession and beginning of a recovery.
The banking system printing money, or more accurately, increasing the money supply is one of the major complaints of Austrian economists, especially during recessions. The wallark cannot be printed or inflated like dollars or euros can, because a company issuing them will simply lose the potential income needed to maintain a profitable business model, particularly during hard times when profits are more difficult to come by. Thus they have no reason to overissue wallark beyond the supply of idle goods in stock. This falls in line with many Austrians concerns with fiat money when they state that they are not backed by gold or any other commodity. Our wallark is actually backed by goods. For every wallark issued, there is a corresponding good that exists. There is no such thing as “too much wallark chasing too few goods”, i.e. inflation. In addition, the use of scrip allows savings in dollars to rise as businesses use wallark instead to cover labor costs, thus allowing businesses to have more reserves to stay afloat during times when their products aren’t selling. So the Austrian emphasis on increased savings is enhanced by the wallark.
Austrian capital theory, which is an important aspect of their overall theory of the business cycle, is focused on the structure of production(supply chains). During a boom, they state the “higher order capital goods” industries such as mining, manufacturing, and construction are stimulated by lower interest rates. After the recession hits, these industries lay off their workers and unemployment settles as this labor takes time to be absorbed in other markets. Our wallark allows these unemployed workers to find jobs in industries that have not been as affected by recession, like “lower order goods” industries such as retail and food services. The wallark makes hiring these idled workers much more attractive because they do not demand dollars at high and unprofitable wages. This circumvents price inflexibility that Austrians blame on government intervention.
The last and most important point to make in regards to the wallark’s role in the monetary system is that it’s not a policy. Unlike other monetary recommendations and initiatives suggested by planners, the wallark is an organic exchange mechanism borne by the need for a market order. Not an order that is designed by a committee or a leader, but by the extemporaneous manifestation of natural human needs during times of serious economic deprivation. If money is an expression of mutual exchange, then the wallark is the homogenization of need and want. Each one is created only to be destroyed, so that individuals can persist during periods of hardship. It seeks not to trick the populace with artificially created incentives like unanticipated inflation or negative interest rates. It is not a scheme. It can be the lube that keeps money efficient as a “loose joint” in the economic machine, to use F.A. Hayek’s words. And for those who believe in the invisible hand, the wallark can provide an economy with a subtle, but helpful push.