Macoeconomics

The little city of Macon, Georgia has a median household income of about $28,000 – barely more than half the state average. Its per capita income is one MacBook Pro more than Mexico’s, and almost a half its children are in poverty.

Far from the Federal Reserve in the Beltway, where the per capita income is almost $200,000, it is also home to what might be the most revolutionary monetary experiment in America:

Macon Money is a community-wide social game designed for the residents of Macon, Georgia. Using a new local currency with a fun twist, the game builds person to person connections throughout the community while supporting local businesses.

This was a social endeavor sponsored by the John L. and James S. Knight Foundation’s Games for Engagement Initiative. Kati London used her $65,000 in funding to back the issue of “Macon Money” bonds. They were split in two, and disbursed to random residents of this southern town. The pair would have unite and exchange the funny-money for real cash. The idea was to create new social bonds and form a strong sense of community. And to have a little fun in the process. Briefly (you can read the evaluation summary for more detail), this was a fabulous success:

• 46% of the random sample spent Macon Money at a business new to them, and 85% had an improved perception of local shops and parks in the “target revitalization area”.
• 20% of the matches led to further personal contact, of which 15% became “Facebook friends”
• Almost two-thirds of all matches would have been “very unlikely” if not for Macon Money.

And this newfangled technology not only builds social capital, but can have deep implications for expansionary government policy. Macon was basically a local injection of liquidity into a tight system (remember: low interest rates mean monetary policy has been tight). But this is a very special kind of liquidity: it can’t be used to pay taxes or debt. Now, in fairness, the “value” of this money is its parity with the dollar. And that the case, theoretically the bonds can be exchanged to a national currency then used to deleverage indebted households. This is a good thing, but doesn’t help when aggregate demand is lousy and counteracts the injection.

But what if parity conditions were relaxed and exchange rate with the dollar was governed by market forces and the Macon Mint? This policy would require three guiding conditions:

1. Macon Money will never appreciate over parity on the dollar.
2. Severe depreciation would be binding. That is, if Macon Money falls below any $n ∈ N, where N is a predetermined set of values (including the floor) this becomes an effective cap on its value.
3. Some determined time after the Macon falls to F, it will no longer be guaranteed against the dollar.

This allows for free movement within discrete bands, but never the chance of significant appreciation. In fact, it’s almost inevitable Macon will only decline in value, incentivizing immediate consumption. A floor F is necessary to ensure longevity of the currency through the whole AD crisis.

But what’s the meaning of this? Depending on the industry, merchants have to pay between “2.89 and 3.20%” on transactions handled through American Express. They gladly do this because the convenience to the customer results in a sufficiently higher demand. (And for many goods the burden is likely to fall on the consumer).

Macon Money will be like that, but with a big difference. As the experiment was conceived, businesses would redeem the bonds at face value. But prices (even for funny money) are sticky in the downward direction. In the short run, the merchant can purchase things in the local community from others. There will be two things that cause Macon inflation, and hence relative depreciation to the dollar: increasing velocity and monetary base.

Here’s where we get important freedom with a small-scale currency. Lucas tells us any anticipated or rule-based increase in monetary supply would be incorporated into market expectations and hence useless. The Fed could, to some extent, overcome this by adding probabilistic factors to its policy. But this is suicide for the world’s reserve currency, where people treasure stability. For many, the dollar is a store of value.

But no one wants to save and invest in Macon! So the central authority can follow an opaque and stochastic process in minting new bonds. The only guarantee would be the floor, which maintains temporary credibility. So we have a medium of exchange that is not a store of value!

So in this little Georgian town, if Macon was allowed to depreciate, we’d find a robust shadow economy. Instead of trading it on the dollar, people would use it as a unit of exchange with high velocity. It could be made even more sustainable by only allowing “Macon-to-dollar exchanges” on random days, this would mitigate the desire to immediately trade off the currency. Alternatively, the Macon could initially be priced less than parity, which allows a good possibility of appreciation while the currency establishes itself.

And no one would be “worried” about sell-offs because once a Macon is traded for a dollar it disappears, and the contraction of the money supply would balance prices on the exchange market. It can only be used in the community, can’t be stored in a bank, and has to be used for consumption, resulting in a marginal propensity to consume of 1.

Eventually, of course, as the Macon depreciates too significantly against the dollar, most Macons would be traded for dollars and “burned” – effectively returning to a dollar economy with rejuvenated aggregate demand. But money supply won’t totally contract. If the central bank is actually just an offshoot of the Fed, which guarantees Macons with new dollars, then the new money supply has grown by F*n, where F is the floor and n is the number of Macons traded in for dollars. (Actually, it’s greater than this considering that some would be traded at a higher exchange rate).

The trick here is creating a unit of exchange that is in the public conscious not a store of value. This gives the government broad scope to inflate that currency to spur consumption, without hurting savers. The dollar would loose some value, as the Fed guarantees an exchange rate. Today some people are saying we need 4% inflation or more to stabilize AD. This would be a cheaper way to do the same thing.

At worst, people just immediately trade the currency for dollars. This reduces to a plain monetary stimulus of the helicopter sort. On the other hand, it can support a sustained increase in money velocity, commerce, and AD recovery. And if things ever “heat up” too much the Fed can just devalue the currency. Because it came out of nowhere.