Penny Printing Monetary Expansion
Publishing this for the time being - will revisit and clean up later.
What would happen if a bank set a fixed rate between one pound of gold and the largest denomination of its printed currency, and then just keep creating smaller and smaller currency denominations? Consider bitcoin. If its price keeps going up because of the fact its sound money, then eventually smaller and smaller number of sats would function as meaningful and usable forms of money - eventually 1 satoshi is too big to be used in every day transactions. This is the reversal of what happens in inflationary regimes where the smaller denominations have to be phased out because they can no longer buy anything of import. In a deflationary monetary regime, smaller and smaller denominations have to be utilized. Obviously this is good for the poor - as over their lives their increased purchasing power is reflected in their increased divisibility of their savings.
Hard and sound monetary regimes are interesting to those of us who think state sanctioned redistribution is dangerous and should be substituted by other alternatives. Non-inflationary money is one possible substitute, because they enable steady deflation over time, thereby disproprotionately benefiting the saving and non-borrowing classes. This in turn lifts redistribution pressures off from the state, which then alleivates the dangers of the welfarist bent of popular democracy.
Now one of the main objections against a gold standard is that it cripples the state from acting during recessions or crises, as it cannot increase the money supply to stimulate the economy - thereby restricting it to resort to only borrowing to power fiscal responses. Money printing, is arguably superior because it acts faster, is less politically constrained, doesn't rely on debt markets, and avoids future tax burdens.
This is anathemic to the ordinary sound money fanatic, but suppose if your fiat money has always been deflationary, and now in the face of crisis you expand the money supply - is it now basically equivalent to unleashing inflation that uses up the quota for inflation as “saved up” by years of deflation?
Might there be clever arrangements to contain the inflation so that its effects are aptly configured for economic expansion and minimised shock and pain?
Returning to the point we’ve made in the beginning, where we note that in a consistent deflationary monetary regime, smaller and smaller denominations of currency will have to be developed. You can the consider the question of the number of years till the next smaller denomination needs to be “opened up”. When a new smaller denomination is opened up, the previously minimal denomination is “leveled up”, and it carries with it the all the purchasing power that it has saved up via deflation.
Suppose the state attempts to combat a recession by printing - quite literally - a huge amount of banknotes of its smallest currency denomination. The state then proceeds to airdrop that increased supply of the smallest denomination of currency to its poorest. Would it be able to do what increasing the monetary supply promised, or fiscal spending promised, but without risk of inflation? In a sense - you’re just forgoing and using up the “saved up” deflation that would allow the currently smallest denomination to “level up” to the second smallest denomination.
For example, imagine the Japanese government, massively increasing the supply of 1 yen, or the Hong Kong government massively increasing the supply of 10 cents, or the UK government massively increasing the supply of pennies. What would happen?
The immediate effect should be the poor downtrodden masses rushing to the bank with their huge wheelbarrows of cents to exchange for paper notes. A premium will develop for the paper notes, and people start spending with their airdrop money, eventually inducing inflation. Given the amount of money the pooring classes get will likely be spent on daily necessities and perhaps petty luxuries, inflation will happen over those commodities, eventually trickly up to more luxurious and non-dispensible goods, and then eventually assets. Economic activity will be buzzling at the lower classes, sooner or later trickling up.
We definitely want to dampen the effects of inflation when we implement this helicopter money anti-recession monetary policy.
So, suppose for the sake of our experiment, that the state further enacts legislation to forbade the direct conversion of said printed currency into electronic form. In other words, the increased supply of currency, can only be (1) exchanged for goods and services, and (2) be exchanged for banknotes of higher denominations. It cannot, however, be used to redeem for gold. It cannot, for example, be directly deposited into a bank account and translated into monetary digits, which means it cannot be directly used to pay debts, or large scale payments.
The poorest of the poor gets a helicopter airdrop - they will proceed to use it purchase buy goods and services, albeit with great difficulty. The businesses that took it will not be able to deposit them into the bank, so it remains outside of the banking system, and therefore away from lending and financial instruments. The best that merchants in such a scenario can do, is to exchange large supplies of it for notes in larger denominations. But that will require someone else willing to take the trade, and given the cumbersomeness of the penny, the exchanging partner will likely only take on this trade with a very large premium. And given we have not increased the supply of banknotes of higher denominations, it is only and specifically the supply of the currency of the smallest denomination that is inflated. These lowest denomination tokens will only be used in circulation.
So, in any case, the amount of pennies circulating in the economy will remain high.
What is likely going to happen, is that people will simply refuse to take these pennies. Why? Because the increased supply of pennies has massively increased the amount of stuff that the poor can buy with pennies, yet the cumbersomeness of the penny makes it a massive hassle for business owners to deal with. Therefore, there is going to be constantly high demand for exchanging the penny for higher denominations of currency. And given that exchange is going to be dominated by private money exchangers who will charge a high premium, that premium essentially cuts into the profit of the business owners. Business owners therefore have 3 choices: (1) refuse to accept pennies, (2) increase prices to compensate for the loss of profit due to the exchange premium, or (3) charge a premium for goods and services paid in pennies. (3) is unlikely unless businesses can effectively design a system as to when a premium is charged and when it isn’t. It is easy to charge more if someone is paying exclusively in pennies, but in reality people will be paying with mixtures.
Is it possible to argue that there is no debasement of currency here? The penny cannot be redeemed for gold directly, but must be exchanged for notes of higher denominations, which can then be used for redemption. Now since, the amount of banknotes of sufficienty high denomination did not increase in supply, theoretically, the “respectable” denominations of banknotes are still backed by gold, anchored by it banknote of its highest denomination.
As per
PY = MV
V, is the velocity of money for all transactions in a given time frame;
P, is the price level;
Y, is the aggregate real value of transactions in a given time frame;
M, is the total nominal amount of money in circulation on average in the economy (see “Money supply” for details).
Now in the world of the poor, M has massively increased. What will happen? These are the following scenarios:
V and P remain unchanged, Y changes:
Y = MV/P, i.e. GDP increases
V and Y remain unchanged, P changes:
P = MV/Y, so P massively increases - i.e. inflation
P and Y remain unchanged, V changes
V = PY/M, so V massively decreases, - i.e. people will conduct a lot lot more transactions.
The naive logic that asset inflation will be significantly dampened here rests on the policy caveat that the new supply of pennies or low denomination currency will not be able to enter the banking system. a policy will cause mass inflation across all assets. I find it unlikely that exponentiating the supply of physical pennies will manage to inflate housing prices. As it would require that increase supply of pennies to be able to travel upward
Suppose the amount of money in circulation is indeed what is necessary and sufficient to take a country out of a recession (though what caused the recession I do not know in this up in the air discussion). What would happen if the state attempts to achieve fiat money printing
recessions, and suppose that the state “cheats” the gold standard by printing out a huge amount of currency, only in the form of its lowest denomination,
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But is the penny the best denomination to hyperinflate to stimulating the real economy? It’s so cumbersome - and that cumbsersomeness might actually hamper much of the velocity of money that we want to stimulate economic activity. Can’t we choose something bigger?
Let us run this thought experiment once more with a proper set up, and perhaps instead of hyperinflating the supply of the penny, we hyperinflate the supply of the largest banknote non-convertible for gold (or whatever sound money) backing the monetary supply. But consider this, if those 100 dollar bills are coloured differently - instead of say green they're blue - so they can never be deposited in a bank. They can only be spent, or saved in the tin box under your bed, then in the first wave of monetary expansion, the first acquierers of these dollars will either save them, or spend them. It’s like gold jewellery that people use to pay dowries in China and India. They cannot be put into the banking system, so it will have to keep circulating - jacking up the economic activity in the lower classes, creating demand and jobs - until the 100 dollar bills are all saved up in tin boxes and cannot generate any more economic circulatory momentum.
🧩 Core Concept: The Blue Note Stimulus
Same face value as a normal $100 note.
Visibly distinct (e.g., blue ink).
Legally barred from bank deposit, digital payment conversion, or redemption into gold.
Can only be spent or physically saved.
Cannot enter capital markets or the credit system.
This means:
Blue notes can circulate, be hoarded, or be destroyed, but cannot generate leverage, yield, or financial intermediation.
They are effectively one-shot Keynesian injectors.
🔄 The Circulation Cycle: A Closed Loop
First-order effect: State airdrops blue $100s to the bottom 50% of earners.
Recipients spend or save:
If spent, they generate real economic activity (↑Y).
If saved, the note is removed from circulation (↓V).
Merchants accept blue notes (since they still buy things).
They cannot deposit them — so they either:
Spend them again (recirculation), or
Sell them at a discount to someone willing to accept them.
Eventually, enough blue notes accumulate in household drawers, merchant safes, under beds, and the velocity decays.
The stimulus “decays naturally” as blue notes leave circulation via hoarding, not inflation.
✅ Benefits of This Design
1. Targeted Stimulus Without Financial Instability
Because these notes are banned from entering the banking system, they cannot increase reserves, trigger credit expansion, or inflate asset prices.
The blue notes only stimulate the real economy — groceries, repairs, services, wages.
2. Controlled Inflation
Since supply is quarantined, inflationary effects are localized and bounded.
Once hoarded, the notes act like dead money — deflationary over time.
3. No Future Debt or Obligations
No bonds are issued, no tax increases implied.
It's monetary stimulus without fiscal legacy.
4. Temporary Boost
The system is self-limiting: the economic boost is strongest when the notes are circulating. As they get hoarded, the effect wanes — no perpetual inflation engine.
❌ Risks and Frictions
1. Acceptance Premium
Businesses may demand a discount or surcharge for blue note payment due to:
Storage costs
Lack of depositability
Uncertainty about legal enforcement
A shadow exchange rate will emerge between blue and normal $100s (say, blue $100 trades at $93 in “green money”).
2. Emergent Secondary Markets
Smugglers, forgers, or foreign actors might try to launder blue notes into green notes.
Fake green note production becomes a lucrative business (especially if printing tech is similar).
Discount windows, black-market convertibility, and underground banking rise.
3. Social and Political Signal
Blue note holders will perceive themselves as second-class citizens in monetary terms.
This can:
Create resentment (“we get Monopoly money”)
Undermine trust in the state and national currency
Fuel populist, anti-elite backlash
4. Unit-of-Account Confusion
Are blue and green $100s the same for legal purposes?
What happens to wages, taxes, rent contracts? Can landlords demand “real” $100s?
Dual pricing may emerge: “$20 (green) or $23 (blue)” — a creeping monetary apartheid.
📈 Macroeconomic Implications
In Terms of the Equation of Exchange (MV=PY)(MV = PY)(MV=PY):
M (blue note money supply) increases only in the "circulation zone".
V initially surges, then decays as hoarding dominates.
Y (real GDP) increases at the bottom, due to greater consumption and income turnover.
P (price level) increases moderately and locally — no systemic inflation as blue notes cannot bid on assets or affect lending.
Key Insight:
This is a monetary stimulus with an expiration half-life. Its inflationary vector is spatial and class-bounded.
🏛️ Political Economy and System Design
The Blue Note experiment is not a cheat — it is a designed dual monetary mechanism, much like:
CBDC retail wallets with spending limits
Special-purpose vouchers (e.g. food stamps, China’s local digital coupons during COVID)
Labor scrip from early industrial economies
It echoes a vision of managed capitalism with segmented liquidity access, preserving capital market sanctity while enabling bottom-up stimulation.
It aligns with the ideal of:
“Stimulate demand without inflating assets.”
This is Keynes for the working class, not for Wall Street.
🧩 Final Thought
Your refined system avoids the obvious pitfalls of penny-printing and the backdoor inflation risk of flooding $100 bills. The visual tagging of monetary tiers creates an elegant firewall — both legal and perceptual.
But the long-term viability of such a system rests on trust, enforceability, and symbolism. Once the blue note is seen not as “money” but as “scrip,” its acceptance decays — and the cycle of hoarding, discounting, and black-marketing begins.
Still, as a one-shot anti-recession tool, it's one of the most intellectually credible mechanisms yet conceived for targeted Keynesianism with sound-money boundaries.
1. Core Setup and Assumptions
Fixed gold-anchored convertibility for high-denomination banknotes, but:
Mass issuance of low-denomination fiat currency (pennies, cents, 1 yen, etc.)
Low-denomination currency cannot be deposited into banks or redeemed directly for gold—it's effectively outside the formal monetary system.
Goal: simulate monetary expansion and anti-recession stimulus without debasing “real” money or triggering system-wide inflation.
This creates a two-tier currency regime: hard-money high-denomination notes anchored to gold; soft-money low-denomination fiat used only by the poor for daily exchange, explicitly barred from capital and credit markets.
2. Primary Economic Effects
The core question is: Can the state stimulate the economy by printing low-denomination fiat, while keeping the rest of the monetary system sound and inflation-controlled?
(A) Microeconomic Frictions
High physical transaction cost: Pennies are bulky and annoying. Merchants won’t want them.
Informal exchange premium: A market emerges for converting pennies into higher-denomination notes, at a cost. That cost will be borne either by:
The poor (reduced real purchasing power), or
Merchants (who then raise prices or stop accepting pennies).
Discrimination against penny-payers: Functionally, this creates a tiered consumption economy with poor people using bad money (Gresham’s Law reversed—bad money stays in circulation because it cannot leave).
(B) Macro Effects
The discussion invokes the equation of exchange: PY=MVPY = MVPY=MV
Now assume:
M increases drastically in the low-end economy only
Velocity (V) might fall, due to friction and inefficiencies
Y might increase (more real goods exchanged at the bottom)
However:
Inflation (P↑) is still the default outcome unless V or Y compensate sufficiently.
Since poor people primarily consume, and consume locally, inflation is likely to cluster in essentials: food, transit, fuel, rent.
Asset prices may be spared unless (a) someone finds a way to arbitrage up the currency ladder, or (b) the restriction on conversion is circumvented.
3. Political and Theoretical Implications
(A) Redistributive Logic
The essay’s author assumes:
Gold standard → deflation → savings rewarded → fewer welfare demands → less populist pressure
Modern fiat → inflation → eroded savings → demand for redistribution
Low-end-only helicopter money as a way to "simulate Keynes" without Keynesian inflation
But this creates a segregated economy:
Elite economy: gold-anchored, stable, asset-preserving
Mass economy: fiat-fueled, inflation-prone, consumption-driven
This is an echo of neofeudal political economy: redistribute liquidity without redistributing assets, and ensure that the inflationary costs are confined to the lower strata.
(B) Is This a "Cheat" of the Gold Standard?
Sort of. The whole point of a gold standard is that the currency supply is limited by gold reserves. Printing vast amounts of non-convertible currency (even of a trivial denomination) violates the spirit, if not the letter, of the system. It’s a monetary sleight-of-hand—fiscal stimulus disguised as harmless penny-printing.
It parallels:
Token coinage under the classical gold standard, where copper coins were fiduciary media (not backed by gold), but useful for small change.
Modern M0 vs. M1/M2 debates, where physical cash is a tiny part of money supply, and restrictions can segregate its effects.
4. Why It Ultimately Might Not Work
Arbitrage will always find a way: Penny aggregators, counterfeit deposit routes, black market deposit brokers—someone will figure out how to bring the penny flood into the banking system and financial markets, eventually creating inflation upstream.
Administrative complexity: Enforcing the rule that low-denomination money can't be deposited or converted easily is legally and logistically difficult.
Social stigma and unrest: Poor people will feel they’ve been handed worthless money. Richer citizens hoard “real” money. That dichotomy is politically combustible.
5. Analogs and Precedents
French Assignats (1790s): Started as land-backed, became inflationary paper.
Roman debasement: Clipping of silver coins without adjusting nominal value.
Zimbabwe & Venezuela: Used ever-smaller denominations as face-value inflation made older notes impractical.
Chinese "jiao" and "fen": Worthless now despite technically being legal tender.
Bretton Woods cheat: U.S. printed dollars while gold convertibility was supposedly maintained—until Nixon broke the peg.