Money for nothing, or how the federal government can make an easy $1b

Angelo Melino points us to this page summarising Bank of Canada note liabilities, and notes that

... the Bank of Canada has a lot of archaic notes outstanding.  In addition to about $12M of notes issued by other entities that it took on as its own liabilities, there are a few small commemorative issues (for $25 and $500 issued in 1935), and larger floats of denominations that have been withdrawn (1$, $2, $1000).  Other than the $1K bills, is this stuff really money?  Is it circulating?  Are the $1K bills useful to anyone other than criminals?  Given the problems with counterfeiting, shouldn't we give a window of, say, 12 months to hand this stuff in and declare anything else outstanding as no longer legal tender?  Should we do the same for old currency that is easy to counterfeit?  Lots of this stuff won't be handed in.  The Bank could write off some its liability and pass it along to the government.  It's an accounting trick, but there could be a billion dollars in it.

 

Comments

[Jim Sentance]

A lot of this would I think be in the hands of collectors, who I also think would be enormously pissed off at a government that essentially gave them the choice of handing over their stashes for face value, or risk losing a good bit of that value once the paper isn't at least convertible.

[Trevor]

How would this be different than just printing $1B of new money? Cancelling the outstanding bills would not just lower the "M" but would also lower the "V", since the defunct bills have zero velocity? Then print up fresh $1B for the government in exchange, to hold the overall money supply to its original level, would be with bills that will be used in exchange.

So, the overall effect would be no change in money supply but an increase in velocity... hence, expansionary monetary policy? There seems to be a better way of expanding the money supply rather than worry aboub defunct bills.

[Stephen Gordon]

The argument is that these bills aren't really money, or if they are, they're only money in the underground economy.

[Nick Rowe]

Dunno. If someone gave you a 0% interest loan, and seemed to have no desire of your ever paying it off, why phone them and say "Either I pay it now, or never"?

[Bob Smith]

"A lot of this would I think be in the hands of collectors, who I also think would be enormously pissed off at a government that essentially gave them the choice of handing over their stashes for face value, or risk losing a good bit of that value once the paper isn't at least convertible."

Presumably, though, collectible notes derive their value from something other than their status as legal tender. I mean, if a $1 note is worth more than a dollar in the hand of a collector, it's not becaue a potential buyer has any intention of using it as legal tender. Similarly, roman coins continue to hold value far in excess of their inherent worth, notwithstanding that they stopped being legal tender centuries ago. If anything, if the government were to declare that old bills ceased to be legal tender after 12 months, it would drive people who aren't collectors to exchange their old bills for new, driving up the value of the few remaining bills held by collectors.

In any event, in practice, even if a $1000 or $500 dollar bill is still technically legal tender, good luck finding someone who'll take it. These days, people are reluctant to take a $100 dollar bill. If you gave them a salmon pink $1000 bill that looks like monopoly money, they'd probably call the cops.

[Determinant]

So if this liability is cancelled, do you propose consequently retiring $1 Billion of Government of Canada debt held by the Bank of Canada in order to balance off this adjustment?

[Angelo Melino]

Sorry for the delay in responding (I've been fighting the flu).

Determinant is right. If the Bank wrote off a liability of say $1 Billion and passed this along to the government, then it would have to reduce the asset side of its balance sheet by $1 Billion as well. So it would be giving up the stream of earnings from its $1 Billion of Government of Canada debt in exchange for booking a "one-shot" $1 Billion profit that it would realize more or less right away. In present value terms, it's a wash. But the government of the day gets to take credit for the entire present value if the old notes are written off. That's the "accounting trick" that I referred to. I know, I know, it sounds like the sort of stuff the Greek government used to do to balance its books...

The real issue is that we have a bunch of archaic currency floating around. It must be next to impossible to pass notes of the various withdrawn denominations without taking them to a bank for redemption (if sales clerks need to be trained to detect forgeries on recent issue notes, how can we expect them to recognize valid archaic currency from the real thing?). Many of these archaic notes must be held by collectors or are lost. They can't be serving a role as money. And the older series of the remaining denominations don't have the various safeguards that are now available and having them floating around leaves us vulnerable to counterfeiting. Isn't it time to do some housecleaning?

[Determinant]

Well, the solution in that case seems to be making the notes redeemable at the Bank of Canada's Head Office in Ottawa where there are trained clerks to inspect retired notes. Chartered bank branches could forward them for redemption, either for themselves or on behalf of their clients. The Bank of Canada has a habit of only dealing with other banks. Fine.

There is no legal requirement that private merchants take any sort of note, they just do. When the old $100's were so distrusted it was pointed out that stores were perfectly within their rights to refuse them.

[Angelo Melino]

Determinant:

I think you're right. I did a bid of surfing and lots of other central banks have had to deal with the issue of retiring archaic currency. (For example, see the Riksbank page http://www.riksbank.com/templates/Page.aspx?id=15374 ). The first step seems to be to remove their status as legal tender. And after a while, you have to send your currency to the central bank to have it redeemed. It looks like some central banks (eg. Bank of France) gave a fixed deadline of 10 years to turn in the archaic currency. Others give a window after which there is a charge for verifying the currency. Some sort of penalty for not redeeming the currency within a few years would help to drive out the $1K bills from circulation, as well as older series bills that don't have the recent security features.

After some further thought, I do think, however, that it makes sense for the Bank to give itself a credit for a fraction of the archaic currency that will never be returned (This would be like the mirror image of the bad loan provisions that private sector banks make). The Bank's Directors decided to increase its equity during the crisis, just in case it took a loss on any of its liquidity initiatives. This was a response to a fairly ridiculous accounting restriction imposed on it (although the Bank only had about $25million in equity to support a greater than $55B balance sheet, when you print money you don't really have to worry about becoming insolvent. Apparently those who set the accounting standards for government agencies have a hard time with that...). Declaring a credit on the archaic currency that won't be returned to the Bank could be kept as an addition to its equity without changing the Bank's holding of government debt. And this could allow the Bank to forward to the government the funds that were unnecessarily kept back during the crisis to increase its stated equity. So maybe we could solve a silly (but annoying) accounting problem with a silly accounting trick.