In October 2020, Shenzhen’s Luohu district announced the distribution of 10 million digital yuan—200 digital yuan (USD 30) to about 50,000 people. Lucky winners could spend their money at designated shops in Luohu between October 12 and 18, 2020. A similar announcement happened in Shenzhen, where registered citizens would receive their money on January 11, 2021, and would need to spend it before January 17, 2021.

Expiring money, one whose value falls to zero after a specific date, is a potential monetary policy tool . “Programmability,” a technical feature made possible by digitalization, can accelerate decisions to spend it, making it a very effective means for stimulating consumption.

This could be very useful for central banks and governments distributing aid to people during severe recessions or events like pandemics or calamities, when higher uncertainty makes people spend less.

Programmable money is smart money

Features of programmable money go beyond expiration. Digital money can be programmed for a predefined purpose (e.g., transfer of ownership, transfer of value, redemption, and so forth), at certain dates or at the occurrence of certain contingencies, as explained by the US Federal Reserve’s Alexandre Lee (2021) and the Deutsche Bundesbank.

Programmability could be applied to digital cash for all kinds of purposes, including to pay a positive interest rate or charge a negative interest rate on cash; to set conditions for the transfer of money to specific types of users or types of goods and services; to automate the transfer of specific values, such as tax payments for each purchase from a merchant, or to ban certain users from access to cash in a way similar to blacklisting. It can facilitate pay-per-use, for example for automated payment of rented items. It could facilitate so-called Internet of Things payments, where ”smart” machines make buying orders and authorize payments when needed (e.g., a refrigerator could automatically order milk from a grocer when running low, or a printer tracking toner usage could buy it via Amazon once it reaches a certain level). Digital money could be programmed to settle payments between systems that are exchanging currency, where a payment from one system in a specific currency is conditioned of another payment from the other system in a different currency.

In all such cases, payments or transfers of value would be triggered based on preset conditions handled under “smart contracts.” These are computer programs or transaction protocols that are intended to execute automatically to control or document legally relevant events and actions according to the terms of a contract or agreement. Smart contracts remove the need for trusted intermediators and arbitrations, reduce enforcement costs and fraud losses, and lower the risk of malicious or accidental exceptions.       

Programmable money could eventually allow for far-reaching scenarios where the government limits access to scarce resources, applying dynamic fees on the use of, say, electricity or tolled roads, based on their usage or carbon emission measurements, and attaching pay-per-use systems to houses and cars, as discussed by Casey (2020).

Programming the expiration of money

These are all interesting curiosities, but could expiring money really work?

Expiring money would increase both the velocity of money and overall economic activity, similar to applying a negative rate to digital cash. In practice, a carrying fee on money would encourage people to spend it and thus prevent it from being hoarded. For notes to keep their face value, Silvio Gesell, and economists writing about money in the early 20th century, proposed a stamp that would be fixed on it weekly and be paid for by the holder. The periodic fee would make money costly to hold and would thus pressure people to spend it quickly. The proposal was successfully implemented during the depression of the 1930s in the city of Wörgl (Austria) – where the depreciating money pushed people to get rid of it by exchanging it in the markets for goods and this soon brought the local economy back to prosperity.

In the case of expiring money, the penalty for holding it would be even more radical: the money would keep its full value for a predetermined interval after issuance and would decline in value from then onwards. This form of programmable money would set in motion a sequence of spending decisions – since no holder would have reasons to hold it beyond expiration – and would thus raise aggregate demand permanently (all else being equal).

For this money to be acceptable, however, the expiration mechanism should be designed on a “resettable timer” basis, so that while the interval to expiration is fixed for each holder, the clock is set back to zero anytime money passes hands. This would give its new holders the full time interval before the new expiration date sets in. An automated alert system could advise holders of the approaching expiration dates.

Expiring money acts differently than quantitative easing, through which central banks stimulate economic activity by purchasing securities and driving interest rates down. Expiring money would not act indirectly on aggregate demand via the portfolio rebalancing or the neutral real rate of interest channel discussed by the Bank of England’s Gertjan Vlieghe (2021), and would rather impact spending decisions directly by generating a positive wealth effect. The wealth effect would be compounded by the certainty that the additional wealth would vanish if it were unspent before expiration.

In our next post, we will explore some drawbacks to expiring money but also the policy objectives that could motivate its use.