Medium of Exchange's Economic Effects

Nicaragua just released a new note, with a curious high rate of velocity:

For Nicaraguans, New Currency Is a Hot Potato:

In a country accustomed to surprises from its government, Nicaraguans received another curiosity on May 15 when they awoke to find that the Central Bank, moving in the night as stealthily as the Tooth Fairy, had snuck a new legal tender into their economy while the markets were sound asleep.

The new bills, printed on a peculiar plastic-like material in an unfamiliar size and adorned with never-before-seen designs, are meant to replace the old, ratty paper bills that cause germaphobes to collapse in conniptions every time they are handed change. The problem is the new bills were slipped into the economy without any public awareness campaign and minimal forewarning. A week after the plastic money was let loose on the economy, the Central Bank still hadn't updated its website to indicate that the new bills even existed.

As a result, most people didn't know what to think when they were suddenly handed a new plastic 10 or 20 cordoba bill, the lowest denominations of Nicaraguan tender and therefore the most commonly used. "This looks like European money," says one taxi driver, in a voice hinting pride, as he twisted and creased the bill in cruel defiance of its seemingly indestructible space-age properties. Others have described it as "play money" or complain that its gloss makes it "slip through my hands."

Most of the criticism, however, seems to indicate an underlying lack of confidence and trust in the government. There are many who remember the first Sandinista government's inventive monetary policies and the resulting mega-inflation of the 1980s. As a result, some people are now treating the new plastic dinero as if it were a hot potato. "Many people don't want these bills because they think they are valueless and they're going to get stuck with them, so they're spending them as fast as they can," says clothing vendor Fabiola Espinoza. It has unintentionally created a bizarre stimulus effect on Nicaragua's beleaguered economy. "As soon as I get one of the plastic bills, I try to pass it on right away to someone else," says shopkeeper Gloria Romero.

The most immediate trouble with this new medium of exchange is that people are not recognizable. as per wikipedia for Medium of Exchange:

To be widely marketable, a medium of exchange should possess the following characteristics:

1. transportability
2. divisibility
3. high market value in relation to volume and weight
4. recognizability
5. resistance to counterfeiting

Because people dont recognize it, and are not sure that it is a good store of value, they pass it along. Stimulating the economy in the short term, the decrease in trust can cause both political and economic trouble down the road.

I dont have access to the now 2 year old economist article, but among the "cash is dead" hubris, the study proclaiming how people spend 20% more when they use a credit card, rather than cash, even when there is no liquidity constraint. The Economist wants consumers to spend more and get more into debt, so this is viewed as positive by the editors of the Economist.

back to the article:

The public's suspicion of the new bills has been validated by serious legal concerns by economists and opposition lawmakers. Several legislators have pointed out that the new bills were printed without the signature of the Minister of Finance, as required by the country's Monetary Law, effectively making them fake bills. "These bills are illegal and worthless and should only be used to play Monopoly," says opposition legislative leader Wilfredo Navarro. "President Daniel Ortega is a counterfeiter. That's the level things have gotten to in Nicaragua these days." The lawmaker, a member of the legislature's Economic Commission, says "any serious government" would immediately recognize the error and recall the money. But so far the Sandinistas aren't budging.

Instead, government officials have responded in what has become the Sandinistas' standard reaction to criticism: triumphalism mixed with personal attacks. Sandinista lawmakers have accused Navarro of "economic terrorism" for questioning the bills' legality, and Central Bank president Antenor Rosales dismissed the criticism as the complaints of rich people "who are more accustomed to using debit cards and checks and don't care about the people." Said Rosales, "The Central Bank is profoundly satisfied with the excellent reception that the bills have had with the Nicaraguan population. Everywhere in Nicaragua the bills are being used."

Rosales defended the legality of the bills, insisting that legislation passed in 1995 gives the Central Bank "exclusive authority" to mint and print money. The number of signatures that appear or don't appear on the money is not important, he said. Critics, however, argue that the Central Bank's exclusive authority doesn't give it creative license to invent new styles of currency that stray from the technical specifications laid out in the Monetary Law. "The government couldn't just start circulating cacao beans and say it's currency like the indigenous did," says economist Nestor Avendano. "They have to respect the law."

Ah, the medium is the message. Of course recognizability is important. people forget how trust is built up in these mediums. I find it telling how the treasurer's guaranteeing signature is important.

With loss of expression in the treasury control, no wonder people are less likely to trust it. Creating money overnight without proper controls can cause a devalue a currency as a store of value (inflation). Pity the people in these coffee shops dont understand that the devaluation will probably be in all of their national money supply. But at least they're smart enough to understand there's possibly a scam going on.