two currencies and Korean war

[pdavidso <pdavidso@xxxxxxx>]

>===== Original Message From "Alan G. Isaac" <aisaac@xxxxxxxxxxxx> =====
>On Fri, 28 Dec 2001, Warren Mosler wrote:
>> The new currency will function just fine if it is acceptable for
>> payment of taxes.
>
>Thought experiment:
>A country introduces two currencies, both of which
>are acceptable in the payment of taxes but one of which has a higher
>expected rate of inflation. (Keep things simple: only these point
>expectations matter for the asset decision.) Who will hold the high
>inflation *currency*?


I have suggested the following (black swan) illustration to tax-based money
chartalists several times -- but to little avail.

During the Korean war, the South Korean civilian population legally had only
access to South Korean yuan as the currency to pay taxes -- and as legal
tender. The US servicemen in Korea were paid in military script -- which
looked like US dollars except for large black block letters across the back
saying KOREA.

This script was only acceptable (legally) in U.S. Armed Forces Post Exchanges
(stores) and in the US. Upon being shippped back to the US, servicemen had to
turn in their military script for US Federal Reserve Notes.

The Armed Services purpose of using script to pay soldiers was to prevent any
transactions betweeen US service personnel and the civilian population.

Nevertheless when servicemen were on leave in Korea they wanted to engage in
transactions for "wine, women and song".

The Korean civilian population had little faith in their government and hence
gladly sold anything the servicemen wanted for military script. Legally the
Korean civilian population could NOT use military script to buy things at the
US. Post Exchanges, could NOT use the military script to pay taxes, could NOT
legally convert military script into yuan, and could not legally settle
contracts between civilians.


The US Armed Swervices printed the script and paid the servicement once a
month. The US authorities expected to get most of the script back via the cash
registers in the US Post Exchanges during the month -- and then use the same
script to pay the soldiers the next month.

What the authorities found out was that only a small portion of the script was
refluxed through the Post Exchanges -- much of the monthly payroll script
ended up in the pockets of the civilian population who would use the US
military script for settling liabilities between civilians. The civilian
population would accept yuan in private sector transactions when they had to
pay taxes -- and only enough to pay these taxes.

Consequently the US authorities were continually printing more script. Every
once in a while, all servicemen would be restricted to base, and the US
authorities would have a currency (script)conversion where a new form of
script would be issued and the old script would --after 24 or 48 hours --no
longer be acceptable to buy things at the Post Exchange.

When the civilian population got wind that such a currency (script) conversion
was about to take place-- they would lose confidence in the old script. They
would go to Army base fences and try to sell their old script to soldiers for
products from the Post Exchange -=- at a very profitable rate of exchange for
the soldiers who could throw products over the fence in exchange for bundles
of old script.

(Query: Since the old script could never be used by the civilian population
except for transactions between themselves-- why did the old script become
worthless to civilians when the US authorities had a script conversion?)

When the US paymaster called the servicemen in to exchange old script for new
script they found that each serviceman had accumulated (saved?) a large
amounmt of script relative to their pay. How did they explain this? Thjey woon
it in a crap game -- where apparently there were no losers.

As the new script was issued, it again filtered into the civilian population
who used it for transactions betweeen themselves-- .

Why? the civilians trusted the yuan less than the military script even though
they "knew" they might be caught with military script at the next script
conversion.

Paul

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 523
Knoxville, Tennessee 37996-0550
phone # (865)974-4221; fax #(561)737-8262;
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/Davidson.html