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Republished with permission from
Executive summary
The financial markets provide us with the means of investing in large companies and buying their products. They do not, however, enable us to invest in future production. Such an arrangement would bring advantages both to production companies and their customers, and it should be possible using the notion of "target currencies".
This paper proposes that large manufacturing corporations should create their own special currencies which would be exchangeable for, or "targeted" on, their products. IBM, for example, could sell "IBM dollars" which entitled the purchaser to buy a stated amount of computer equipment at a future date. The currency would be issued at a discount from its face value, the discount being determined by reference to interest rates, the perceived value of IBM products, and the level of market confidence in IBM's ability to remain competitive. At the redemption date the purchaser would exchange the currency, at face value, for equipment.
The advantage for IBM would be improved cash flow and greater sales predictability. For the purchaser, the scheme would provide a means of exploiting interest rate expectations to obtain equipment more cheaply. The risks for both sides would be minimised if a secondary market in IBM dollars were to develop, based on market makers.
The IBM dollar is only one example of the potential for target currencies. These could be developed around a wide range of services and goods such as housing, luxury goods, airline seats and supermarkets. They might also be issued by official agencies for circulation in selected geographical areas, such as development zones. The concept has macro-economic implications insofar as these currencies would enable government to stimulate selected sectors of the economy without fueling all-round inflation.
Introduction
You are head of the computer department of a large corporation. You are about to buy IBM product. You can get a 20 per cent discount just by asking for it. Would you bother to ask? You would have to. You would be seriously failing in your duty if you did not ask for the discount. What if the discount was only one per cent? Would you have to ask for such a tiny discount? Of course you would. There is no logical reason which would ever justify your paying more than you have to - no matter how small the difference.
We are used to investing in production capacity, for example by buying stock in IBM. When we invest in the product itself, we call it trade. But there is an in-between position which the usual dichotomy habits of thinking make it somewhat difficult for us to perceive.
Instead of investing in the company itself or in a finished product, we can come to invest in future product. There may already exist roundabout ways of achieving this aim. However, for convenience, it requires a new investment instrument. This new instrument could be of value to four classes of people:
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the corporation issuing the instrument;
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the future buyer of the product;
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the future buyer who changes his or her mind; and
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a potential investor who has no intention of buying the indicated product.
One way of achieving this is shown in the following example.
The concept is that IBM would issue its own currency. In practice this would take the form of warrants or vouchers, but not forward purchase contracts. For example an "IBM dollar" would be usable after March 1 1995 at its full face value of IBM $1 when used to purchase IBM product. Such an IBM dollar could be purchased today for, say, 80 cents. This deep discount would, of course, diminish as the full value date approached.
The opposite approach could also be used. The IBM dollar could bear the date of issue or purchase - and could then appreciate in value by, say, ten per cent or 15 per cent a year (perhaps up to a maximum) when used for the purchase of IBM product.
In essence, IBM would be issuing zero-coupon bonds or appreciating assets targeted directly and exclusively at IBM purchases.
Although we use IBM as an example here, such a currency could be issued by any major corporation which sells large volumes of popular products, like cars, consumer goods, even airline seats. Indeed, "target currencies" have a potentially very much broader application, not only for industrial corporations but for economic management.
They could be issued by official bodies or governments, and targeted at particular areas of the economy, geographical or sectoral. They could be exchangeable for designated types of goods, or in chosen parts of the country such as development zones, enabling governments to stimulate the economy more selectively. We will examine these wider possibilities in a moment.
Who would benefit from IBM dollars? And what would be the risks?
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