mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Coming Soon To Club Med: Scrip?

The European financial disaster (after two years it can hardly be called a crisis anymore) continues to get more complicated and more dire. With the world watching the election in Greece, matters in Spain and Italy are going from bad to worse.

As national and local governments from Cyprus to Portugal come under greater pressure, we could soon see them resorting to a very old fashioned expedient: issuing scrip. Scrip is paper that, technically, isn’t money, but it looks like money and circulates like money. Think of it as an IOU: the Greek government could issue small denomination bearer bonds that would not be euros. They would be promises by the Greek Central Bank or the government to pay the bearer five, ten or whatever number of euros on some date in the future.

The government could offer its domestic suppliers and employees a choice: get paid in scrip now, or stand in line to get paid five or ten years down the road. What past experience with scrip has shown is that most will take the scrip because something is better than nothing; most stores will also accept scrip from their customers as otherwise they can’t do business at all. Depending on how dire things are, government employees could get anywhere from ten to one hundred percent of their salaries paid in scrip, and to sweeten the pill, the government could require its own offices to accept scrip in payment of debts — at an appropriate discount.

Scrip would be worth less than euros. Nobody is going to swap a real five euro banknote for a “promise to pay” five euro certificate from the government of Greece. But the scrip wouldn’t be worthless, and its value would fluctuate depending on peoples’ perceptions of the situation in Greece. If the government were careful and restrained in its use of scrip, and if it continued to pursue economic reforms and if tourism and the economy begin to recover, scrip could even increase in value as confidence returned.

Since few people outside of Greece would accept scrip, oil and other items would have to be paid for in international currencies at international prices. The government might well choose to impose capital controls and, for example, convert what few deposits remain in the domestic banking system to scrip at an inflated value, conserving the euros to cover necessary imports.

This would be a colossal mess, but so what? Greece has no course open to it today that doesn’t result in a colossal mess with lots of suffering all round.

When and if Italy and Spain find themselves at a dead end similar to the one now facing the Greeks, they too may find that for national, regional or local governments to issue scrip is a way to cushion the impact of austerity without formally breaking with the euro.

This is a very Mediterranean solution to a problem. You don’t formally break with the old system; you merely improvise around it. It is a way of devaluing but not devaluing, of blurring the line between leaving the euro and staying in. Europe would still have one money, but the different European countries would have different relations to the single currency.

It may not work, but we should not be surprised if it is tried. The inability of European institutions to resolve the euro’s problems by ordinary methods is driving people everywhere to embrace more heterodox approaches. Scrip has appeared at other times of monetary meltdown, and it could easily reappear now.

Features Icon
show comments
  • Kenny

    If introduced, script will be another means of incrementally ratcheting down of the wealth & living standards in those countries that resort to it.

    Those who accept the script will never realize its full, ‘promised’ value. The script will only be a means of getting through the day.

    Why will anyone accept script? Because, they have no choice.

  • chase

    Professor, you should propose a solution, or perhaps several hypothetical solutions.

  • Jacksonian Libertarian

    We have seen this in California, America’s Greece. It’s just a method of kicking the can down the road, and does nothing to solve the problems which created the need to use script in the first place. Eventually everyone that accepts Greek script will be forced to take Drachma’s for it, or not get paid at all.

  • vanderleun

    Scrip could reappear and then so could wheelbarrows full of bundles of scrip carted around the city to buy a pack of smokes.

  • Mrs. Davis

    How is scrip different from Federal Reserve Notes?

  • GC

    This is where you hit the nail on the head:
    “Greece has no course open to it today that doesn’t result in a colossal mess with lots of suffering all round.”
    This is true not only for Greece but for all governments that are excessively indebted, including the US.
    The economists writing op-eds for the US media urge us to take on more debt in order to fuel more deficit spending in order to avoid “lots of suffering all round.”
    No, there is no way to avoid the coming storms. We have a choice: stay on our current ship of state – the one that has brought us to where we are – or abandon ship and board a smaller, more stable and enduring vessel. Yes, either way we’re in for a very rough ride, but if we seize the moment and take some risks we will come out of this stronger and healthier rather than weaker and more vulnerable to future crises.
    More debt and more interest payments are not solutions.
    “In the 40 years from 1970 through 2010, our elected representatives in
    Congress and the White House spent $5.7 trillion on interest payments
    on the national debt. In the 2000 – 2010 period, they spent $2.2 trillion.
    Based on CBO’s interest rate forecast for the 2012 – 2021 period, they
    will spend $5.5 trillion on interest payments in the 2012 – 2021 period.”
    page 46 The National Debt: A Primer and A Plan (Booklocker, 2011).

  • Kis

    I believe the Greek word for scrip is “Drachma”.

  • Kevin

    If merchants are forced to accept script at face value it will instantly lead to an all cash (script) economy. (I am assuming script will make up a significant fraction of the money in circulation, which it will have to to have much affect.) No one will part with Euros when they could spend the same face value of script. This means no use use checks or credit cards for consumer transactions. It would probably also seize up the commercial lending market. Who would barrow in Euros for business if their revenue will come in script the bank won’t accept for repayment. If banks are forced to accept script in return for Euro loans, interest rates will go through the roof to reflect the lower value of script.

    I suspect a clean switch over to Drachmas would work out better. It would destroy a lot of stored value but if done wel should allow the economy to begin functioning again.

    An even better solution might be to kick Germany and other fiscally responsible states out of the Euro and leave the Club Med countries with the weak and devaluing currency their politics seems to require. The advantage of this over the weaker states leaving is that it would avoid a lot of litigation and/or defaults over debts owed in Euros. Sure it would screw over creditors but they are going to get shafted sooner or later anyway.

    In any case Europe clearly needs an open policy of acknowledging unpleasant truths rather than papering them over and hoping the nightmare will just go away. That and maybe prosecuting a generation of Greek poloiticians and bureaucrats who cooked the books to hide national debt.

  • Kenny

    From Wikipedia:

    Gresham’s law is an economic principle that states: “When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”[1] It is commonly stated as: “Bad money drives out good”, but is more accurately stated: “Bad money drives out good if their exchange rate is set by law.”

  • Snorri Godhi

    Issuing scrip or Californian IOUs, like going back to the drachma, is just a way to cut public spending and will not necessarily have much of an impact on the private sector.
    When the State pays its employees and contractors in devaluing scrip/IOUs/drachmas, it is maintaining constant nominal spending while cutting real spending.
    Meanwhile, the private sector happily keeps using some medium of exchange that is also useful as a unit of account and store of value.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service