Privately-issued preloaded Drachma cards?

Forget monetary theory for a minute, and think only about the technical/engineering stuff: is Andrew Lainton basically right about this? Can something like this be done quickly and cheaply, without too much danger of counterfeit and fraud? (I don't know, which is why I'm asking.)

If you introduce a new money, you want to do it quickly. But not everyone has a bank account, and I read that it takes months to print up a new paper currency. So unless the Greek government secretly ordered a big printing of Drachma notes when it first took power (which I doubt), Greece reverting to the Drachma is different from Argentina breaking the peg to the US dollar, because Argentina already had the Peso notes.

But technology changes. The new currency doesn't have to be on paper. It could be preloaded electronic payment cards.

Can lots of preloaded payment cards be produced quickly?

Is it easy to tell whether a preloaded card is counterfeit?

Is there some easy way to tell whether a preloaded payment card has ever been used? Or some way to make cards so it is easy to tell whether they have ever been used? If so, unused cards with different denominations could themselves be passed from hand to hand just like paper currency and coins.

Now back to monetary theory (you knew I wouldn't be able to stay away). Could the issuance of Drachma cards be left to the private sector?

In the olden days commercial banks printed their own paper currency. That's why they were called "banknotes". But modern governments (mostly) banned the practice, and made currency a government monopoly, that could only be issued by the government-owned central bank. Can Greece go back to the future, with commercial banks producing a plastic version?

What about seigniorage? One reason a government like Greece would want to print its own currency is that it is bust, and can't raise enough funds through taxes and borrowing to finance its expenditure. So it wants to print money to finance the difference. If it costs $0.10 to print a $20 note it "earns" $19.90 for every $20 note it prints (or gets an interest-free loan of $19.90 for every year as long as that $20 note stays in circulation). (The second reason is that it can have a monetary policy that is more suited to its own economy.)

But seigniorage comes from the government's monopoly over the issuance of 0% interest currency. If the government wants to earn seigniorage from privately-issued currency, what would be the best way to do this? It could impose a tax, or it could sell quotas at auction.

What about monetary policy? What would be the best way for the government to implement monetary policy, if the issuance of currency were in private hands? It could vary the tax over time, or it could vary the quota over time.

The simplest way to think about this is to imagine that each bank that issues a card for 100 drachmas incurs a 100 drachma liability to the government-owned central bank. This is like 100% reserves against privately-issued currency. And the central bank can either set an interest rate (tax) on that liability, or can set a limit (quota) on the total liability, with a monthly auction of the quota rights.

We live in interesting times.

Comments

[Jim Rootham]

Unfortunately not quite. I don't have specific knowledge of gift cards (which is what we call them here) but I do know something about computer systems. My quick thinking about how fraud and counterfeiting is handled would be to have all transactions happen at a central registry. They are digital, so copying a card is by definition trivial. The way to deal with fraud is to know the history of the id on the card and if it shows up a second time with more money on it you deny the transaction. If there are no actual transactions that doesn't work.

These are really indistinguishable from debit/credit cards. Which are privately produced. Those parts of the Greek economy that can handle cards is trivial to convert to drachmas, just redenominate the accounts behind the cards and you're done. My understanding is that card handling has expanded in the Greek economy so tourists can spend more money.

Giving everyone in Greece a debit card is probably quick. I assume many people already have them. You only have to produce 1 per person, as opposed to many notes per person. Readers for all businesses might be harder, but the really small and local ones could probably let people run a tab and have them settle up at the bank. Inconvenient, but it shouldn't last that long.

Then there is this: https://squareup.com/ca/reader a card reader for smart phones. I bet it would not take long to deliver a whole whack of them.

Even if Syriza hasn't made plans I would be very surprised if no banknote company in the world hasn't designed plates for drachmas.

The comparison is with Iraq, there was a war happening there, and corruption to the point that the Greeks aren't even amateurs in comparison.

All in all it would take a while until there was enough currency in the country, but there enough work arounds that the economy should start to recover relatively quickly.

[Jim Rootham]

The banks haven't been quite as shut as I thought they were. https://greekanalyst.wordpress.com/2015/06/29/the-nonpaper-by-the-greek-government-on-the-bank-holiday/

Note: debit and credit card transactions are not affected at all by the bank holiday. I expect things would have been even worse if that wasn't true.

[Andrew Lainton]

An interesting case study is Kenya when it first allowed you to send phone credit to someone else. Very quickly it was used for micropayments and transfers as it was much cheaper than western union. So cellphone payment cards quickly became money and across africa and now the world phones are used for swift money transfers. We already have an uncrackable network of technology that can be used as money - cellphone cards. For the same reason historically postage stamps have always been legal tender in the UK. If you really wanted to you could pay your taxes in stamps.

[Jim Rootham]

Cell phone transfers, yes. Cards as money? Not so fast.

https://en.wikipedia.org/wiki/M-Pesa

Indicates the transactions are done using phones, and phone dealers are now part of the money network, cash is still a big part of this system.

[Majromax]

@Jim Rootham:

Stored value cards are something different than gift cards. True stored-value cards store the value on the card itself, such that in theory no network access is required. See a US Treasury page for a slightly less brief description.

Like anything physical, counterfeiting could be a problem. All of the information is after all stored on the chip, which means that an exact-enough replica of the chip would replicate the stored balance. Since these cards can be used in an offline mode, there's no guarantee of detection at the moment of counterfeited use.

On the other hand, with tamper-resistant chips then it might cost more to counterfeit a chip than the balance would be worth, especially if individual cards have a limited maximum balance.

The bigger avenue for fraud would be in the reloading. If any old kiosk can mark up the balance on a stored-value card, then there's no barrier to increasing the digital value arbitrarily. You'd have to control the "reloading" to the issuing financial institution, such that there is a definite chain of liability. Even still, just as with cash you could not have an official balancing of books, where all card-issued liability is matched against a corresponding reserve.

This hiding of liabilities might kill such a system. Private banking "works" because individuals can discount each issuing bank's notes separately if they so desire. In this system, all stored-value cards would circulate as equivalents, and merchants would presumably hold a consolidated rather than individual balance. That means that if the First Bank of Savings and Mafia does start fraudulently printing 500EUR cards, it could go undetected until the bank itself goes bust -- leaving a large amount of false currency in the system.

That said, the biggest issue is that there's no way implementing such a system would be faster than printing new paper money. Aside from the technical and back-end design, Greece would somehow have to get a debit terminal to every vendor who could possibly want to take payment for anything.

On the other hand, doing so even within the Euro might not be a bad thing, since digital transactions create records for VAT audits, which would help greatly with tax compliance. But this is a five-year project, not a five-week project.

[Nick Rowe]

Thanks all for the comments. I am not responding (so far) because I have nothing useful to add. I am just reading and learning.

[Frank Restly]

Majormax,

But suppose the cards also carried a transaction / previous owner history? One nice thing about currency is that it is anonymous. But money doesn't have to behave that way.

Obviously, with trackable currency, this creates some trading friction (and associated costs) that the Greek government must be able to recover.

[Denis Drew]

Just an amateur (crackpot?) idea, but: I wonder if Greece could dollarize (as Argentina did) as practical transition back to its own currency -- to give itself time design and distribute its new currency. Might fit (I don't know how) with Greece's number one import being crude oil and its number one export being refined petroleum -- both being denominated in dollars. ???

[Nick Rowe]

Denis: that won't work, because Greece can't (legally) print dollars either.

[Jacques René Giguère]

Nick: I'm sure that Lew and Tsakalotos (or at least their peoples) already had a little talk about airlifting dollars bills and equipement. The U.S. helping Greeks to get out (even though it's what the mad duo wants) would cause friction between Washington and Berlin. But keeping Russia out is primordial. (Even though Tsipras never indicated he was willing to exchange Schaüble for Putin).

[Richard H. Serlin]

I asked basically the same thing about introducing Drachmas in the digital age, and with credit cards and debit cards, and so on. But I went further: Obama had expressed interest in helping the Greeks. The US has amazing anti-counterfeit technology for printing notes, incredible machines that probably sit idle most of the time. Could the US offer to program in Drachma designs, and then run those machines 24/7, flying over the notes immediately on huge military transports? Might that not get them paper currency very quickly, and of extremely high quality?

[Frank Restly]

Richard,

If I am selling goods, why would I accept Drachmas in exchange for goods when I can just hold a bucket out of my window to get whatever Drachma's I need?

Just printing money is not enough to get it accepted as a means of exchange.

[Makrointelligenz]

In order to gain seignorage, one would need to displace the Euro as good as possible which seems kinda difficult, as initially the new currency would be a crappy means of payment comparatively. So what could insure that the drachma would not just be the equivalent of another altcoin that no one uses? Paying taxes could be an option, ideally structure it in a way that all taxes would have to be paid on a certain date in cash. In that way you could guarantee the maximum seignorage as the money could not be double spend for taxes.

[Makroint]

I think to get Drachma accepted you would first need to get rid of the Euro because this would be a much better means of exchange initially. I suspect currencies are sort of winner takes it all and if the new Drachma could just be another worthless altcoin. One idea to give it value would be to make tax payments in drachma mandatory. Ideally on one specific point of time for everyone because that would ensure maximum demand for drachma as they could not be double spent.

[Jacques René Giguère]

Richard H. Serlin: printing is easy. Preparing and engraving of the plate is an extremely long and complex business.

[Jim Rootham]

On stored value cards. Given physical possession of a card and a validation machine any stored value card is crackable to the point of being able to generate arbitrary numbers of cards. It may be hard, but it is doable. Central (or possibly distributed) validation is the only thing that works.

The motivating proposal does not work.

@Jacques I assume this is true because you do it infrequently almost never need to do it in a hurry. Is the cost such that no banknote company would do it on spec given the past few months?

[Bob Smith]

Are there other countries with their own currency who'd be interested in selling theirs to greece. I mean, while does Greece have to go onto the Drachma? Maybe they could buy the right to issue, say, Micronesian or Pitcairn Island dollars from Micronesia or Pitcairn Island (along with plates, etc.), and just start issuing those as your own currency? You have to think that there's a small country out there who'd be willing to trade their monetary policy for Greek monetary policy (perhaps because their own monetary policy is every bit as terrible as Greece's is likely to be or because all their citizens use US dollars or New Zealand dollars anyhow -as in Micronesia or Pitcairn Island) and cold hard cash for the right to print their currency (I imagine the printing itself is done by the Royal Canadian Mint or similar insitutions around the world). Greece could just buy a currency off the shelf, as it were. (Note to self, given that Greece isn't likely to be the last EU country to face leaving the Euro, consider a speculative venture to produce a "shelf currency" - the way lawyers have "shelf companies" - ready to go for such a country).

Or, you could just contract with the Franklin mint and smart using commemorative coins as your currency.

[Nick Rowe]

Bob: especially for a temporary currency, for the first few months. Canadian Tire money would work fine.

[Lorenzo from Oz]

They could threaten to dollarise (just declare US$ legal tender). Probably wouldn't help their economic situation all that much, but it would terrify the EuroElite.

[Lorenzo from Oz]

Perhaps they should put the matter out to tender: see who made what innovative offers. I am sure Note Printing Australia would be happy to put in a bid, they already do the currency for a range of countries.
http://www.noteprinting.com/index1.shtml

A surprising range of countries use NPA's polymer note technology, though the public sources are coy about whether NPA actually prints them:
http://www.rba.gov.au/Museum/Displays/1988_onwards_polymer_currency_notes/export_of_notes.html

[Justin Rietz]

Is it correct to assume that all of the old Drachmas were destroyed?

[Jacques René Giguère]

Instead of NPA, why not CBN?

https://www.cbnco.com/corp/corp-about.php

Note how they pride themselves in the hundreds of professionnals they need? Part of it may signaling but it's a complex business.
Small countries usually print in batch now and then and issue as needed.
As Lorenzo proudly noted, the medium on which the currency is printed is now a main characteristic on the product.

[Patrick]

If their infrastructure was better, I'd say some kind of cryto-currency could work for them, but it won't be useful with limited access to technology, as I imagine is now the case in rural areas and among individuals and businesses struggling to stay afloat. There is no money for investment in e.g. card readers.

The cellphone thing works in Africa because of the limited number of people with skills to hack the thing. That wouldn't be the case in Greece, if for no other reason than its proximity to Russia. Any technological solution would attract criminals and unsavory state actors like flies to dung. It would be compromised in hours.

I sure hope the Greek gov't has been working on the exit plan they should have had from day 1. It's shocking that they didn't. The consensus seems to be that the 'deal' will just continue to crush their economy and they'll be back begging for more in short order. What then? The Germans will eventually say no. Greece needs to be ready for that.

[Robert]

Would greatly simplify collection of the VAT, too.

On the downside, it would make haircuts and bail-ins much easier..

[JKH]

As a more direct alternative, this is what Varoufakis had in mind:

“He said he spent the past month warning the Greek cabinet that the ECB would close Greece’s banks to force a deal. When they did, he was prepared to do three things: issue euro-denominated IOUs; apply a “haircut” to the bonds Greek issued to the ECB in 2012, reducing Greece’s debt; and seize control of the Bank of Greece from the ECB.

None of the moves would constitute a Grexit but they would have threatened it. Varoufakis was confident that Greece could not be expelled by the Eurogroup; there is no legal provision for such a move. But only by making Grexit possible could Greece win a better deal. And Varoufakis thought the referendum offered Syriza the mandate they needed to strike with such bold moves – or at least to announce them.

He hinted at this plan on the eve of the referendum, and reports later suggested this was what cost him his job.”

[Max]

If the drachma is initially pegged to the euro, then continuing to use paper euros on a temporary basis (which presumably are in plentiful supply) would be easy.

Realistically, a transition from the euro to the drachma would be a multi-year project, and initially would not provide much government financing, since people would be cautious in the quantity they hold.

[Patrick]

"Varoufakis was confident that Greece could not be expelled by the Eurogroup; there is no legal provision for such a move."

No, but there is a requirement that members use the euro unless they've arranged some kind of opt-out. I don't know what sanctions can be imposed, but given how events have unfolded I'm pretty sure Germany would go ape sh_t. Especially since a switch to the Drachma would probably also imply pulling an Iceland and flipping the bird to their creditors.

[SvN]

Has anyone gone back 25 years to recall how the new Ukranian, Estonia, Latvian, etc. currencies were introduced when the currency union that was the USSR (and then the CIS) broke up? Or the Yugoslavian currency union? or Czechoslovakia? These should be all be practical examples of how to introduce a new currency on the fly, right?

[SvN]

I think a better way to attack the problem is to do it in two stages.

In the short term, you need a medium of exchange and account. You also need a way to get the banks to re-open (i.e. some way of providing them with enough liquidity in the new medium of exchange.) In that short term perspective, worries about fraud and seigniorage are secondary. The key is finding *something* that you role out within the week.

Once that is in place, you have a limited amount of time (a couple of months?) to plan a second currency reform: one that phases out the old debt cards/coupons/IOUs with new, govt-issued, hard to counterfeit, traditional currency. The exchange rate between the old-new and new-new money is 1-to-1 for those who can show how they legally acquired the cash. (The Russian govt. had just such a monetary reform, under Yeltsin IIRC.) Once that's done, you've got a shiny, new, conventional monetary system in place.

[SvN]

Patrick: "there is a requirement that members use the euro unless they've arranged some kind of opt-out. I don't know what sanctions can be imposed, but given how events have unfolded I'm pretty sure Germany would go ape sh_t."

You mean, Germany hasn't already? I thought Greece had made them shrill quite some time ago.

[Majromax]

@Patrick:

> The cellphone thing works in Africa because of the limited number of people with skills to hack the thing.

The cellphone thing works in Africa because cellphones have a network connection, so validation of the transaction is online.

Cellphones as a payment vehicle are ultimately limited in areas where wired infrastructure is available since then there is little barrier to adopting existing wired payment methods like debit card readers. Ordinary users then can carry really cheap plastic instead of a relatively expensive cellphone. (Although over the medium term I suspect cellphone-payments will be adopted here alongside credit and debit transactions.)

[Justin Rietz]

@SvN

The Czech Republic - Slovakia split in 1993 is a good example in which one country (Slovakia) was economically fairing poorer than the other (Czech Republic). My understanding is that capital controls were put into place and border controls tightened (to avoid Slovakia to Czech Republic flows). Meanwhile, in secret, the government had a UK firm secretly print up stamps (Czech and Slovak) that were then glued onto existing banknotes. The army quietly distributed the notes, and then it was announced that there would be a one-for-one exchange in each country, old notes for country-stamped notes. There was a limit on how many notes could be exchanged, and once a person's limit was reached, the only option they had was to deposit old notes in a bank. The old notes were then claimed to be no longer valid. Later, new notes were printed and exchanged for the stamped notes.

The open question, to which I don't have an answer, is how the government ensured the old notes weren't "valid." My guess is that they could no longer be used to pay taxes.

[Richard H. Serlin]

Ok, the money printing criticisms.

In a first term monetary economics course they go over the reasons why fiat money has value. So here are some:

A big one is the fiat money, so Drachmas in this case, can be used to pay taxes, and if taxes are substantial, and the government has at least fairly good collection, this can be huge.

Also, often by law fiat money must be accepted to pay for a debt, or the debt is cancelled, so fiat money cannot be refused. This is especially true if the government is the buyer. So this gives the Greek government a lot of power to stimulate fiscally by just buying lots of goods and services with Drachmas.

Now, there are potential problems with exchange rates and a shadow economy in Euros. To deal with this, it used to be not that rare to have a fixed government mandated exchange rate within the country coupled with capital controls, until the currency is established. But make no mistake about it, even a poorer country, with all kinds of poor governance, can have a fiat currency with real value. Anyone who thinks Hungarian Forints are worthless, or Mexican Pesos, can send them to me.

[Jim Rootham]

I think SvN has it nailed. Given the trouble Greece is in, I'd say counterfeiters are even sort of helpful, they inject more liquidity into the system. Print temporary Drachmas, have making counterfeits be illegal, but not possessing them, keep the the denominations low, chase large scale violaters. Transfer out of them as soon as you have enough New Drachmas.

The banks are the gatekeepers of currency, If a bank will accept it, it has value, if not, who else accepts it? So making a currency invalid is easy.

[Jacques René Giguère]

Of course the main difference between the Czech-Slovak velvet divorce and the German (there is no Europe as of now, only a 4th Reich (ONG Godwin strikes again!)-Greece colonial conflict is that the two divorcees, basically and despite some misgivings, didn't view their former partner as despicable ennemies to be crushed.
Politics determine economics far more than the other way around.

[Makrointelligenz]

I think if you really wanted to issue a new currency, you should require by law that all contracts are rewritten from Euros to Drachma immediately and all bank deposits become drachma as well. The Government only accepts drachma as payments. Politically that was a non-starter, as 80% of the population prefer Euros and the law could be difficult to apply. I don't think issuing drachma that are not backed by euros or anything different which clearly has value would otherwise be any successful as they will turn out to be the equivalent of a useless altcoin. Issueing other pieces of paper (IOUs) that are Euro backed is very different and i m not sure if you could ever successfully cut that backing with the pieces of paper retaining there value somewhat. So if you issue IOUs that can be used to pay taxes in the future, i feel this is essentially a payment cut (+forced borrowing) and not much else. Sure you could replace some Euros in payment with the IOUs to gain some seignorage, but that would be illegal i suspect or it at the very least against the spirit of a currency union.

[Tom Grey]

Greece should issue and print Bearer Bonds, 1 year, 0% interest bonds, convertible to Euros in 1 Aug 2016, and issue them in the amount of 100% of their budget deficit plus 10% of their outstanding debt.

Gov't pensions and salaries would be paid in part euros and part bonds, initially up to 50% bonds.
Greek banks would be required to open a free separate bond account for all depositors.
The bearer bonds would be treated as a separate currency, until Aug 2016, where the bond deposits would be redeemed and converted into Euros*.

No business would be forced to accept them as payment (NOT legal tender), altho they would be allowed to.
Greeks & businesses could pay taxes with the bearer bonds at par (100%)
The Greek central bank should redeem them at 50% euros for bonds of par -- and investigate tax payments of any person or business which redeems "large amounts".

It would be expected to slightly increase the total amount of taxes collected (possibly a huge increase).

The idea is to have a Euro based "Bond currency" where the people who are loaning money to the Greek Gov't become the Greek people, especially those who are receiving money from the gov't.

With bearer bonds returning a little stability to the Greek economy, there should be room for more greek investment into new local businesses and job creation.

***Job creation in the private sector is the most important macro issue. Debt and monetary issues need some resolution so that the economic actors can focus on getting the Greek economy growing.

*in July, 2016, there may be a new issue of 2-year, 0% interest, bearer bonds, 100% of budget deficit (maybe 0? due to taxes paid in bonds with reduced gov't spending) plus 20% of outstanding debt (including not yet redeemed 1 year bonds).

https://tomgrey.wordpress.com/2015/07/08/greece-bearer-bonds-can-still-help/