Content: Stamp Scrip (by Irving Fisher, 1933)

V. CONGRESSMAN PETTENGILL'S SPEECH

Without taking part at this time in the present debate about "inflation," it is admitted by everyone that perhaps the most fundamental thing to be accomplished is to cause a recovery of values. Various expedients have been used to accomplish that objective - open market operations, change in discount rates, the Reconstruction Finance Corporation, the Glass-Steagall bill, the Glass-Borah national bank note amendment to the home loan bank bills, all sorts of domestic moratoriums, and the distressed debtors bill. The reservoirs of credit have been filled, but they remain stagnant. Meantime values continue downward. The commodity price index of the Bureau of Labor Statistics has just touched a new low. The decline of commodity values his affected all other values, both on the farms and in the city. It is causing foreclosures and tax sales to spread like a prairie fire.
It is manifest that all expedients thus far used have not stopped the decline, and disaster knocks at the door of all.
On a falling market no one will buy except from hand to mouth. Therefore, available credit is not used. Merchants and manufacturers can not safely borrow against an avalanche of melting values. Nor can banks safely loan. As Professor Fisher says:
"Business does not wish to borrow until it is sure of buyers. In a depression the buyers wait for business to inspire confidence, and business can not inspire confidence until it gets back on a normal borrowing basis. If only buying could be started first, business borrowing would follow:"
It is submitted that this bill attacks the problem at its foundation. It brings buyers into the market. It encourages the payment of debt. It penalizes buyers for not using available purchasing power.
The bill is essentially a tax on hoarding. Everyone into whose hands one of these certificates comes will get rid of it as quickly as possible, will try to pass it on before the following Wednesday, as he will be taxed 2 per cent if he does not.
It is apparent that an issue of $1,000,000,000 would circulate at least once a week, thereby doing $52,000,000,000 of money work in a year. It is likely, however, that it will circulate much more often than once a week, perhaps from three to five times, thus doing from $156,000,000,000 to $260,000,000,000 worth of money work in 12 months' time.
The possibilities in stopping the further decline of values,and starting them upward, by introducing this enormous and compulsory buying power into a stagnant market are worthy of very serious consideration. It might be all that is necessary to "prime the pump." As soon as these buyers come into the market place, confidence should return and values immediately start to rise. If that should be the result, then other money, now hoarded by the hundreds of millions of dollars, would also come into the market. People would say, "Now is the time to buy." They would feel that if they did not their dollars will buy less a few weeks later. With these new certificates and the hoarded money coming into the market merchants and manufacturers could again borrow with confidence and the banks could loan with confidence. This would melt the frozen reservoirs of bank credit and let them again flow in the channels of trade. As soon as that happens the "stamped money certificates" would then be taken out of circulation as provided in section 12. Or if recovery should then halt, new issues of this nonhoardable currency could be poured into the market places.
It is possible that this relatively simple mechanism would be all that is necessary to start values upward. In the early days of railroading it is said that when the locomotive stopped with the driving shaft at the "dead center" of the wheel that the fireman would get out with a crowbar and lift the wheel an inch or two and thus start the train with a crowbar.
 
 

REFLATION WITH A BRAKE

Section 12 of the bill provides that if and when the wholesale-commodity price level of the Bureau of Labor Statistics reaches a certain level the nonhoardable currency is to be retired from circulation. The "brake" might be stated in the alternative as suggested to me by a distinguished economist from Wisconsin, (1) restoration of the price level as set forth in section 12, or (2) full employment of labor, or (3) international agreement on a uniform gold standard, discretion being given to the President or the Federal Reserve Board to apply the "brake" when either, or a combination of these standards, is arrived at. In fact, he suggests that more than $1,000,000,000 be authorized to be issued with provisions for reissue until recovery has been reached in conformity with the standards adopted. I agree with this. There is no use going into this halfheartedly. The plan is to start buying, start values upward, and reemploy idle men. We should pour enough of this nonhoardable currency into the market places until that objective is attained.
 
 

NO SCARE FROM INFLATION

The proposal increases the volume of circulating medium, but, more important, it increases its velocity which students of the money question recognize to be as important, if not more important than volume. An increase in the volume of money if it, too, goes into hoarding or drives other money into hoarding, might not affect the price level. At the same time, due to the fact that the issue is absolutely selfliquidating, providing funds for its own redemption in 12 months - through the sale of the required postage stamps - and due further to the "brakes" to be provided against a rising price level, the confidence of the public should not be disturbed by reason of the increased volume and velocity of the proposed issue. It is submitted that this is a middle-of-the-road measure that both the friends and foes of "inflation" could agree on.
 
 

NO STRAIN ON GOLD RESERVES

As the issue is not redeemable in gold or other lawful money of the United States until the Government has collected $1.04 - through the sale of fifty-two 2-cent stamps - for each $1 issued, it is manifest that the proposal does not place any strain on existing gold reserves. For that reason, it should not have any disturbing effect on the ability of the Government to sell its bonds. In fact, if it causes prices to move upward, farmers, merchants, and manufacturers would begin to liquidate their commodities at a profit, begin to make money, resume the payment of income taxes, and improve rather than harm the credit of the Nation and its ability to "balance the Budget." It is manifest also that as goods are bought replacement goods must be provided, and thus labor be reemployed.
 
 

GRESHAM'S LAW

Would it drive "good money" into hiding? It is submitted that the exact opposite would occur. This for the reason that this issue is full legal tender, is self-liquidating, would be redeemable in gold when fully stamped, and would buy as much and no more and no less than any other dollar. It is of course true that if I had $2, one a Federal reserve or Treasury note and the other one of the "stamped" dollars, and had a debt of $1 to pay, I would pay it with the latter in order that it would not be in my hands on the Wednesday following, when another 2-cent stamp is due to be affixed. But having passed it on, I would then use the Federal reserve or Treasury note in the next transaction; and if the expectations of the sponsor of this proposal should be realized in a rising price level, all dollars of lawful money now in hoarding would begin to circulate and not "go into hiding," under the Gresham formula.
The proposal really comes down to this: The Government would lend $1,000,000,000 - or any other amount - of its credit and money power - its legal tender - to the people of the Nation for a period of one year, to be paid back in installments of 2 cents a week for 52 weeks. It is therefore no strain on the Federal Treasury.
 
 

METHOD OF PUTTING IN CIRCULATION

Sections 13, 14, and 15 of the tentative draft provide that the money shall be apportioned to the States to be used in the payment of State or municipal public works now or hereafter in process of construction. This would in itself immediately employ labor and provide jobs. It would permit the States and municipalities to continue and expand necessary public works without cost to them, as they would give no note to the Federal Government for the money used. It would, therefore, release other of their tax moneys for other uses, and impose no tax burden on their citizens except as they would buy from week to week the necessary postage stamps to keep the certificates a legal tender for the payment of debts and the purchase of goods.
Other ways of putting it in circulation may be suggested - unemployment relief through the Reconstruction Finance Corporation, or in the payment in part of the wages of Federal, State, or municipal employees, or disbursement to veterans.
 
 

IS IT SUBJECT TO OBJECTION AS A SALES TAX ?

At first blush the proposal might seem to be a species of sales tax. On analysis, however, this objection disappears to almost the vanishing point. To begin with, it could not even indirectly operate as a tax on sales except on Wednesdays, and then only 2 cents on the dollar. But all other sales between Wednesdays would be free from any burden whatever. Week-end buying, for example, would be entirely free. If, therefore, the certificates were to circulate four times a week, the 2-cent tax would average only one half of 1 per cent on total transactions performed by these certificates weekly. But, still more important, all other transactions made with other mediums of exchange - bank checks, Treasury notes, silver certificates, and so forth - would be free from any tax burden whatever. On the total volume of business done in the course of a week the 2-cent burden on transactions covered by these certificates would be an almost infinitesimal fraction of 1 per cent on total volume. It does not seem possible therefore that merchants would or could mark up their commodities to cover the 2-cent tax that they would have to pay on Wednesdays on account of receiving these certificates on Tuesdays before they have an opportunity to pass them on to another holder.
 
 

WOULD MERCHANTS ACCEPT THEM IN CASH TRANSACTIONS ?

For all debts owing merchants they would be obliged to accept them the same as any other creditor for the reason that the certificates are legal tender. There is, of course, no way to make a merchant accept them for cash transactions, if he refuses to do so. A merchant can refuse to accept gold if he chooses to in cash transactions. But in these days when merchants are going to the wall for want of customers it does not seem likely that they are going to close their doors to any buyer who walks into their stores with cash in his hands. To begin with, all transactions with these certificates between Wednesdays impose no burden on the merchant, as has been pointed out. A stamped certificate which he receives on Thursday, for example, he will pass on without tax before the following Wednesday in pay rolls, in payment of rent, or for merchandise to his jobber, and so forth. Of course, all credit transactions of the merchants would be payable by these certificates, as they would then be legal tender for a debt. In many cash transactions the stamped certificate would represent only a fraction of the total cash involved, the rest being paid in existing currency. In the present starvation of retail trade it is more likely than not that merchants would advertise that the certificates would be accepted by them in all cash transactions as well as in the payment of book accounts.
 
 

PROTECTION TO BANKS

In the payment of debts owing banks they would be subject to tax like other creditors. But section 10 provides that with respect to deposits by customers banks are not required to accept these certificates unless the depositor pays a service charge of 2 cents. This would prevent the dumping of the certificates in banks on Tuesdays by their depositors. Deposits would be made in other forms of money. The certificates would remain in the channels of trade, which is what the proposal intends. And, as stated before, the surplus of $40,000,000 on a billion-dollar issue which the Government receives by collecting $1.04 on every dollar might warrant including in the bill the repeal of the existing tax on bank checks - thus further freeing banking transactions and the return of deposit money to banking institutions.
 
 

PATRIOTIC APPEAL
 

Section 4 provides that the Secretary of the Treasury is to advertise the issue by posters in post offices and public buildings, as well as by advertising in newspapers and magazines. We are at war. We can build up a war psychology. When we recall how effective was the campaign in 1917-18 for the sale of war-savings stamps, confidence can be placed in the effectiveness of a patriotic appeal at this time with respect to this issue. "This dollar fed a hungry man"; "This dollar gave an American a job," "'Stamp' out the depression," and so forth, is a sample of the appeal that could be made.
 
 

OTHER DETAILS

It is considered important that for the convenience of a hundred million people in daily transactions, the regular 2-cent postage stamps be used, rather than a special smallsize stamp. Postage stamps are in use everywhere. Any other kind of stamp would subject the public to tremendous inconvenience. This, of course, would require a larger certificate than currency now in use; but it should be pointed out that 18 postage stamps can be affixed on the back of the small-size currency now in use. A certificate therefore of the same length as the currency now in use but folded once, like a voucher check, would accommodate the 52 stamps. Also, for the convenience of the public, it is suggested that the entire issue be in one denomination, preferably $1, so only one denomination of postage stamps need to be used and kept on hand.
 
 

IN CONCLUSION

It is submitted, finally, that this proposal conforms to the "adequate but sound currency" formula used by the President elect in his inaugural address. Currency now in use is sound but it is not adequate either in volume or velocity to equalize hoarding and frozen deposits. A copy of the bill is appended. Suggestions and criticisms are invited.