What would be the effects of an expiration date on currency?

Question

Let's say we introduce a monetary system where each piece of money is printed with an expiration date - a year, perhaps.

I'm imagining something rather different from inflation (although I do not know whether it would actually behave much differently) :
With inflation, the entire money supply gradually devalues at some set rate.
With an expiration date, there is no devaluation for a while, and then a sudden drop. However, at that point (and in fact for quite some while already) there will be new money in print, which will still have the same value the old money would have had a day ago (plus/minus the undoubtedly still existing inflation rates on top of that, but unless that's somehow important in this, let's ignore that for the purpose of this question.)

So the setup would essentially be a government infinitely printing money BUT to prevent hyperinflation, old money is suddenly and permanently lost from the economy. Presumably the printing rate would roughly coincide with the expiration date such that, at any given, about the same amount of money (plus/minus external demand but let's ignore that as well) is available. It may just suddenly change owner.

What will happen, short- and long term? (Obviously short time a lot of things, like savings plans and how banks work would have to significantly change or they would downright fall flat, but after a while, assuming our hypothetical government wouldn't just frightenedly revert the laws after two years of resulting economic failure or something, a new economy would build around these new restrictions. What would that be like - without delving too deeply into pure speculation. Are there useful models adaptable/built for such a situation?)

Answer 1

A bill with an expiration date does not become worthless suddenly. Clearly its value would decrease over time until, just before the expiration date, it was next to worthless. Think about it: how much would you pay for a $1 bill that expires in 5 minutes? Certainly a lot less than you would for one that expires in 6 months.

This constantly changing value would make it hard to use as a medium of exchange. Whenever buying or selling something, one would have to look not just at the face value of the bill, but also at the expiration date, to be able to calculate its real value. People would probably start carrying calculators next to their wallets.

Cattle (which obviously "expire") were once used as currency, so it certainly could work. But that does not mean it is ideal.

Answer 2

Having paper money expire is equivalent to setting a negative interest rate. In fact, your question is closely related to one asked before, "Why is 10% the necessary upper bound for a negative interest rate?" The practical issues raised in suriv's answer are real— the particular way in which you've designed it isn't ideal. Miles Kimball has a more complicated proposal, described on his blog, that would in theory address a lot of the practical concerns that are generated by approaches like expiration dates or random invalidation.

The application for this is, obviously, to break through the zero lower bound on interest rates— it's designed to increase, not decrease, inflation, as it lowers the value of the outstanding money supply.

Answer 3

I haven't earned enough reputation to comment and so I will post this here:

This money would very obviously devalue as it reaches maturation because it loses its ability to function as a store of value. We could also assume that it would lose value exponentially and become completely valueless before the actual date of expiration. And it actually seems such a currency should be valueless. Assume person A has 10 dollars of this currency and wants to buy some good from person B. Person B must discount the 10 dollars in accordance with whatever value he thinks person C - from whom B will buy some goods - will ascribe the currency. Carry this chain of thought forward ad infinitum. Given that each successive transaction occurs more closely to the expiration date, such a chain of thought yields that the currency is valueless. This currency would only be valuable if a person was stupid enough to accept it.

Answer 4

Kenneth Rogoff mentions this idea a few times in The Curse of Cash (2016):

• During the early history of paper money (in China), many note issues did have expiration dates. One exception was Kublai Khan's issues (p. 22).

• During a phaseout of paper currency, one of the (many) possible measures might be to impose an expiration date, in particular on large notes (p. 95). This would increase the cost of holding cash. (If it were so desired, one could also allow for the possibility for trading in old notes for newer notes with later expiry dates.)

• Expiration dates are one method for implementing low/negative interest rates (p. 165).

(This is not a complete answer; I am not an expert on this issue, but thought I'd just mention what I'd come across while reading this particular book.)

Answer 5

This question has a historical predecessor in my opinion. My answer will be inspired by Gresham's Law: bad money replaces the good.

Obviously people aren't going to go around calculating the discounted value of money based on the time until expiration. Even with an expiration date, there is still going to be a face value of money, and that's going to be important.

Consider in old times with gold. If you have two types of gold coins in circulation, one with more gold and one with less gold, and these two types of coins have the same face value, then people will want to keep the coins with more gold content and circulate the coins with less gold in them. Hence, "bad" money drives out the "good". The good coins could be melted down (illegally) or hoarded.

The same thing would happen in modern times if you had money expire. People would circulate the bad money (close to expiring) and good money would leave (perhaps through international trade to countries that are not held to the same legal tender laws as the domestic currency's country).

Today, money that is too worn out or dirty is naturally destroyed by the government or disappears, and the government reprints money to replenish the base in response. I imagine the same would happen if currency had an expiration date.

Answer 6

With this system, the face value of a bill is a somewhat irrelevant upper limit on what the bill is actually worth. A \$10 bill might be worth $10 at the time it's printed, but it's worth \$0 after expiration, and somewhere in the middle during the interim (a \$10 bill might be worth only \$5 a week before it expires). The currency no longer serves its principal purpose as a fixed and agreed-upon store of value. There's no fixed number of how many \$10 bills I'd have to give you to settle a \$10 debt, as it will depend on how old each of those bills is.

In a system such as this, the logical thing to do is to move all your money into non-expiring assets, and exchange for cash only when needed. As this seems to only apply to printed money, I could keep my money electronically in a bank account (not physical bills), or in some other store of value like gold or diamonds. No one should ever hold cash that they don't plan to immediately spend. This is completely different than normal inflation, because with inflation, prices rise and purchasing power decreases, but the store of value is irrelevant - everyone experiences inflation regardless of whether they hold cash or gold. Here, only people who hold physical bills experience "inflation," so abandoning the currency is a great way to retain purchasing power over time.

Answer 7

Consider how the world worked prior to the use of money. We were hunter/gatherers. The best way to survive was to cooperate as a part of a community. Earning a living was all about having enough of the essentials to live from day to day. The essentials in this context are food, clothing and shelter. Importantly, as a community the goods collected were distributed across the community according to need. There was no concept of hoarding, indeed no need for hoarding - food did not keep for long, there was no sense of fashion and so clothing was worn primarily for warmth, and no one needed more than a single modest home (typically a cave or a wooden hut). Instead there was a symbiotic relationship between the individual and the community (a united we stand, divided we fall type philosophy to life).

Now fast forward to the introduction of money which ultimately led to a specialisation of labour (Adam Smith type economic principles). Now people could be greedy. They could hoard money. They did not need to work for the benefit of the community generally, but instead for their own insatiable appetite for more. Inheritance became possible. Inequality ensued. Then we saw game theory defeating community and, more importantly, working to the detriment of the economy.

We are all familiar with Keynsian economics and spending multipliers which boost GDP and contribute to higher employment, better standards of living, etc. Hoarding of money works counter to Keynsian principles.

So it is easy to see that if there were a means of removing the negative aspects of a fiat currency and defeating the hoarding of money that society as a whole would benefit. The expiry of money (which is not the same as inflation) might achieve that objective.

Inflation results in a price/wage spiral which is incredibly damaging for an economy and if wages keep up with prices then this would not achieve the same objective as that discussed above in relation to the expiry of money.

This is very much a utopian idea because all else being equal, if such a system were to be introduced in a single jurisdiction then people would simply hoard wealth elsewhere. However, it is an interesting academic exercise.

Ultimately, we would need to replicate the hunter/gatherer model. So each day a person would start with a clean slate. Each person would only need enough food to survive and so anything hunted or gathered that day which was surplus to requirement would be shared before it perished or maybe exchanged for something else (food for clothing or for tools that somebody else had made that day perhaps). In this way people's time is measured more fairly. I spend my day hunting, you spend your day collecting fruit and vegetables while someone else makes clothing from the skins of yesterday's kills. At the end of the day everyone eats and everyone is clothed. Everyone is happy and tomorrow we go again.

So the way that this may work is a day to day currency. Based on your contribution to the community that day (which could also be in terms of non-tangible services such as teaching, nursing, etc.) you would be entitled to share in the output of the community (food, clothing, etc.) according to need. Tomorrow the currency for today becomes obsolete and we go again.

How much better might our society be if we were able to implement such a model?

The problem that we have is that we live in a very complex society now which requires infrastructure investment. How might we develop a currency that expires and also encourage long term investments (buildings of roads, airports, etc). This takes us on a path to nationalisation of all infrastructure which tends towards a flawed communist model (so let us not dwell on that any more).

The banking model to fund infrastructure projects is reliant on the hoarding of wealth and the encouragement of investment. Catch 22.

Another problem is in quantification of productivity of each person. Does money become something that represents time expended rather than the value of the output - so we invent a "time bank". That might be fairer as nurses and teachers would be paid the same hourly rate as Hollywood actors or football stars. But logistically, who becomes the arbiter of time banked by each person each day?

It would again require full centralisation. Each person delivers their output to a central power and is provided with all that they need (are we heading back to a communist model again - I fear that this is where such a model always ends up).

Perhaps the imperfections of money are simply the price that we have to pay for living in a capitalist society for which there appears to be no credible alternative. It is the least worst mechanism which is probably why we have evolved economically as we have to where we are today.

Sorry!

Answer 8

RBI can print expiration date on notes.

Cons

1. Inconvenience to people when they change currencies.
2. People has to go to bank whenever they want to get them changed.
3. People will face loss if they forget to get the expired notes changed.
4. People might face loss if they receive counterfeit by mistake.
5. Govt. has to spend money to print such notes every now and then.
6. Vendors might not accept currencies that expires in few days time.

Pros.

1. Since people are forced to take the currencies to the bank for new notes or to deposit, and counterfeit will be caught if they are present.

2. Nobody will be willing to keep such currencies beyond the date of expiration. They will be forced to surrender such notes at the Bank to get them exchanged.

3. It will become inconvenient to people who keep cash in bulk quantities beyond the date of expiration.

4. There will be a window period to get the expired notes exchanged provided they inform the bank in advance that the rightful owner has few of them.

5. They will be forced to use plastic currencies as it is difficult to verify the date printed on it.

6. Only higher denominations carry such expiration date.

7. Fraudsters will stop making counterfeits every now and them as it becomes difficult to get exchanged.

Argument that has not relevance

1. People can exchange their currencies to gold or anything they wish.
2. This will curb black money (Black money doesn't have a traceable source of income.)