Friday, January 16, 2009

More Irving Fisher

Anyone that doesn't think that the Fed simply messed up during the GD (the first Great Depression in the 1930's) as well as the executive branch (lack of fiscal stimulus) should check out the Stamp Scrip writings by Fisher.  The idea is that with a shortage of money, scrip would be issued in the denomination of $1, and in order to use it, it had to have a 2 cent stamp affixed every week.  At the end of the year, the group issuing the scrip and selling the stamps would redeem the scrip for $1, funded with the proceeds of the stamps.  The weekly stamp feature acted as a "tax" on hoarding and the velocity of the script was kept relatively high.

This can only work in a situation where there is significant excess capacity.

Fisher tells a joke that illustrates the concept in an interesting fashion:
A travelling salesman stopped at a hotel and handed the clerk a hundred dollar bill to be put in the safe, saying he would call for it in twenty-four hours. The clerk, whose name was A, owed $100 to B and clandestinely he used this bill for the liquidation of his debt, thinking that before the expiration of 24 hours he could collect $100 from his own debtor, whose name was Z. So this 100 dollar bill went to B, who, greatly surprised, used it to pay his own 100 dollar debt to one C, who (equally surprised) . . . and so on, and so on, all the way down to Z, who, with much pleasure, returned the bill to A, the clerk, who, in the morning, restored it to the salesman. And then did A, the clerk, stand petrified with horror to see the salesman light a cigar with it.
"Counterfeit," said the salesman, "a fake gift from a crazy friend, Abner; but he didn't put it over, did he?"

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