Stamp Scrip: Money People Paid to Use

Federal Reserve Bank of Cleveland. Economic Commentary, Apr 2008 by Champ, Bruce

Substitutes for government-issued money are produced and used from time to time even in countries like the United States. Understanding why people turn to these substitutes and to what degree they are successful-or not-can teach us a lot about the elements essential to a well-functioning currency.

Imagine you just want a cup of coffee. It's only $1.25, but you have no cash in your wallet. They don't take checks. They don't take credit cards. Cash only! Or...the last bus out of town leaves in 5 minutes. You have no change for the $1.75 fare, and it's 16 miles home.

Ever been there? While such cash-poor moments happen less frequently in our modern age of credit cards, gift cards, prepaid store cards, and debit cards, each of us has probably lived through a few times where the absence of cash on hand was a big inconvenience. Throughout the history of our country, there have been many times where shortages of cash were so severe they made life difficult for a lot of people-and hindered the smooth operation of the economy.

It's interesting to explore the ways people have responded to such shortages of cash in the past. Their resourcefulness is always impressive, and the strategies they used tell us a lot about the importance of money to an economy and the value people place on having an effective medium of exchange.

One frequent response to cash shortages has been to create a local substitute currency, which we call scrip. Scrip has been issued off and on in the United States by different kinds of entities-private companies like coal mines and railroads, city governments, and civic organizations, among others-and for a number of reasons, not just to overcome liquidity shortages. Every scheme to introduce scrip has involved the same considerations faced by the U.S. government when it planned how to provide a useful currency for citizens and came up with the Federal Reserve System and Federal Reserve notes-our U.S. dollars. What denominations will be handy? What forms of paper and metal will be most convenient? How to prevent counterfeiting? How to encourage workers to be paid with it, consumers to spend it, and businesses to accept it? How to keep its value stable? The approaches that different scrip issuers have taken to address these considerations have been varied and instructive.

More scrip was issued during the Great Depression in the 1930s than ever before (or since). One particular variety tried during the time, stamp scrip, was unusual in that people actually had to pay a fee to use it. In other countries, people had tried stamp scrip schemes with success, but in the United States, stamp scrip proved less useful. The one aspect of stamp scrip that might make it seem so unworkable to many people-the fee to use it-is not the naïve idea of a quaint era but one that surfaced again very recently, when ways of conducting monetary policy in times of extremely low nominal interest rates were a pressing concern. In this Commentary, we examine why stamp scrip arose, its successes and failures, and lessons we can learn from its issuance.

An Era of Scarce Cash

Throughout the Great Depression, bank failures, bank runs, and bank suspensions were common and caused or exacerbated cash shortages. Bank runs occurred when a bank's customers became concerned about the soundness of the bank (bank deposits were not yet covered by deposit insurance), and arrived at the bank in large numbers to withdraw their deposits. Since banks kept only a fraction of deposits in liquid assets, their reserves could easily be wiped out during a run. To prevent the depletion of reserves, banks often partially or completely suspended the payment of deposits. Doing so allowed them to buy time in order to liquidate assetsbut of course, customers could not get cash if they needed it. People also hoarded cash, making the shortages worse.

In March 1933, unemployment rates in the United States reached 25 percent. Household incomes had fallen in nominal and real terms for three consecutive years. Bank suspensions had spread across the country, and President Roosevelt made the suspension of payments official by declaring a national bank holiday, which lasted ten days.

In response to cash shortages, issues of scrip began to appear. These took many forms. Some scrip was payable in goods or services. Other scrip represented claims to bank deposits, which could be redeemed once a bank ended a suspension.

Stamp scrip, sometimes called coupon scrip, arose in several communities. It was denominated in dollars, in denominations from 25 cents to $5, with $1 denominations most common. Stamp scrip often became redeemable by the issuer in official U.S. dollars after one year.

What made stamp scrip unique among scrip schemes was a series of boxes on the reverse side of the note. Stamp scrip took two basic forms-dated and undated (often called "transaction stamp scrip"). Typically, 52 boxes appeared on the back of dated stamp scrip, one for each week of the year. In order to spend the dated scrip, the stamps on the back had to be current. Each week, a two-cent stamp needed to be purchased from the issuer and affixed over the corresponding week's box on the back of the scrip. Over the coming week, the scrip could be spent freely within the community. Whoever was caught holding the scrip at week's end was required to attach a new stamp before spending the scrip. In this scheme, money became a hot potato, with individuals passing it quickly to avoid having to pay for the next stamp.