The oldest known perpetual bond in the world that still pays coupons (at a coupon rate of 2.5%) was issued in 1624. It was originally floated to raise funds for the repair of a dike by the Hoogheemraadschap Lekdijk Bovendams, a Dutch water authority responsible for maintaining levees (Andrews 2016). As the name suggests, a perpetual bond never pays principal. It pays coupons with some stated frequency on the stated principal (the face value or the price it was issued).
But, what if a perpetual bond does not pay any coupon? At what price would such a bond sell other than zero? How much would it cost to issue such a bond to the issuer other than almost nothing?
Although the idea of zero-coupon perpetual bonds may be confusing, the banknotes we carry in our wallets are a form of zero-coupon perpetual bonds. They have face values written on them, such as $10 or $ 100, but they pay neither coupon nor principal. Yet, they buy goods and services at their face value.
Of course, under current institutional arrangements, only the governments can issue zero-coupon perpetual bonds because no other issuer can get them bought. As Hyman Minsky once said, "[e]veryone can issue money; the problem is to get it accepted."
We should mention that in his monetary and financial framework proposal for economic stability, Friedman (1948) proposed the issue of non-interest-bearing bonds, that is, creating money, as one of the two means of financing government spending, the other being tax revenues. Later in 1969, in an essay titled The Optimum Quantity of Money, Friedman wrote:
"Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated (Friedman 1969)."
And the notion of helicopter money was born.
Although Friedman made no mention of zero-coupon perpetual bonds in the context of helicopter money in his 1969 essay, $1000 bills are also a form of zero-coupon perpetual bonds, as we explained. Using simple central bank and government balance sheets, Cecchetti and Schoenholtz (2016) explain why they think the notion of helicopter money today is necessarily different from what Friedman had in mind. They demonstrate how helicopter money may be implemented by Treasury issued bonds to the central bank in exchange for an increased balance in its account at the central bank. Then Treasury distributes this amount to the bank accounts of the community, assuming, of course, that there is no financial exclusion so that every citizen has a bank account. Since there are many financially excluded in almost every country, the practical implementation must be a combination of Friedman (1969), and Cecchetti and Schoenholtz (2016).
But, what if a perpetual bond does not pay any coupon? At what price would such a bond sell other than zero? How much would it cost to issue such a bond to the issuer other than almost nothing?
Although the idea of zero-coupon perpetual bonds may be confusing, the banknotes we carry in our wallets are a form of zero-coupon perpetual bonds. They have face values written on them, such as $10 or $ 100, but they pay neither coupon nor principal. Yet, they buy goods and services at their face value.
Of course, under current institutional arrangements, only the governments can issue zero-coupon perpetual bonds because no other issuer can get them bought. As Hyman Minsky once said, "[e]veryone can issue money; the problem is to get it accepted."
We should mention that in his monetary and financial framework proposal for economic stability, Friedman (1948) proposed the issue of non-interest-bearing bonds, that is, creating money, as one of the two means of financing government spending, the other being tax revenues. Later in 1969, in an essay titled The Optimum Quantity of Money, Friedman wrote:
"Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated (Friedman 1969)."
And the notion of helicopter money was born.
Although Friedman made no mention of zero-coupon perpetual bonds in the context of helicopter money in his 1969 essay, $1000 bills are also a form of zero-coupon perpetual bonds, as we explained. Using simple central bank and government balance sheets, Cecchetti and Schoenholtz (2016) explain why they think the notion of helicopter money today is necessarily different from what Friedman had in mind. They demonstrate how helicopter money may be implemented by Treasury issued bonds to the central bank in exchange for an increased balance in its account at the central bank. Then Treasury distributes this amount to the bank accounts of the community, assuming, of course, that there is no financial exclusion so that every citizen has a bank account. Since there are many financially excluded in almost every country, the practical implementation must be a combination of Friedman (1969), and Cecchetti and Schoenholtz (2016).
