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A system solution for the problems caused by the current money system

Societies, and individuals, economic problems are exacerbated by how our money systems operate. The systems were developed for commodity based currencies and as such correctly assume that the Units of Currency [UoC] have not only their face value but also have  a real value equal to the face value right from the point of issuance. This was correct because each UoC was supposed to be backed by real value in the form of a legally stipulated fraction of the State’s gold holding.

We now operate with a fiat currency however and the same is not true for the UoC of a fiat currency. Incidentally fiat currencies are now what most , if not all, countries of the world  use.

At issuance a fiat currency has no real value to back its face value. The real value comes about in one of two ways. The always honest way is when the newly issued UoC directly participates in a completed voluntary exchange.

The dishonest way is when a UoC is issued not connected to any particular voluntary exchange. If its issuance sometimes happens to  coincide with participation in a completed exchange then it gains its real value from that exchange and it’s real value is honestly acquired. If there is no completed exchange for its issuance to coincide with then it has to get  what it can, of a real value, by stealing it from the real value of the already issued currency. In this case the newly issued UoC debases the currency giving rise to inflation.

This is what is happening with our current money system. It operates as if we were still dealing with a commodity based currency, when we aren’t, we are operating with a fiat currency. This means that our money system is following the dishonest way of issuing new money. This explains our constant battle with inflation.

This problem would be solved if the money system was changed to issue new money, as new money debt, to anybody who needed it to enter into the purchase half of an exchange. They would execute the supply half of the exchange as soon as they received money from the sale of a good or service of equivalent value and thereby settled their new money debt.

Such a change would also mark the end of money poverty in society and open the way for everybody to become economically active.

Its implementation would require political will.

a) Because business as usual would not be possible for financial institutions like banks.
b) In order to be able to issue new currency at any point of need it would need to be done through a smart phone and for that ideally we would need to convert to a completely  digital currency.

The Systemic Roots of Money Poverty

The Systemic Roots of Money Poverty

Introduction
False Assumptions
One
Two
A simple exchange
A complex exchange
Some Other Facts about an Economy
The money system

Introduction

Now unlike a commodity based currency a fiat currency has no backing value at the point of issue and, we have a fiat currency. Thus it is actually not necessary for South Africans to be without the authority to trigger the creation of new money for themselves as part of their normal exchange activities. However under our current money system this is not possible.

In view of our massive problems of poverty and unemployment shouldn’t this flaw in the money system be fixed and, if yes, can it be fixed?

The essential purpose of money is to facilitate exchanges of goods and/or services so yes, this flaw in the money system should be fixed.

In essence money is nothing but the recorded, agreed upon, value of an item exchanged between two parties so there is no logical reason why any individual should not be able to trigger the production of new money, should they need it,  to enter into the first half of an exchange, i.e. into the purchase half on an exchange.

Can the money system be fixed to enable this to happen? Yes it can. It just needs the political will to take on the challenge and, it is a challenge. There are significant vested interests who are profiting from the false assumptions upon which the current money system functions.

False Assumptions

One

The first and foremost economically damaging false assumption is that, like a commodity based currency, a fiat currency has on first issue a backing value equal to its face value.

This is simply not true.

However those who behave as though it is true can get away with it because units of newly issued fiat currency will by default either

a) steal what they can of their, backing value, from the currency already in circulation and  thereby cause inflation, which the general populace has come to accept as an unfortunate given of the current monetary system

or

b) if there is insufficient currency already in circulation, for the volume of already completed exchanges, the newly issued units of currency will naturally fall into representing this currently unrepresented value and will not be inflationary.

Two

Newly issued currency cannot be issued free to anybody except as charity.

This is true for a commodity based currency because right from its issuance it has a legally enforced backing value derived from the commodity. Therefore a commodity based currency has to be earned.

This is not true for a fiat currency which has no backing value at the point of issue. It only gets its backing value from the completion of the second half of the first exchange it participates in, i.e. when the new money’s user supplies [sells] something of equivalent value into the community and thereby settles the new money debt.

People may or may not have enough knowledge to be comfortable with the above informed reasoning so let us make sure that we know what the fundamental components, including money, of an economy are.

The foundational element of any economy is the voluntary exchange of goods and/or services. How then does money become part of such an exchange? Now exchanges can be either simple, i.e without the involvement of money, or complex, i.e. with the involvement of money.

A simple exchange

A simple exchange is one which involves the following:

Physical elements:

Two parties, A & B
Two different items, IA & IB, to be exchanged
Two simultaneous exchange processes, A gives IA to B and, B gives IB to A,
[ i.e. two simultaneous zero sum games]

Mental elements:

In A’s head are the values Vaia & Vaib with Vaia = Vaib
In B’s head are the values Vbia & Vbib with Vbia = Vbib
[For the exchange to complete it is clearly not necessary for
(Vaia = Vaib) = (Vbia = Vbib).]

A complex exchange

A complex exchange is one which involves money. When completed it must result in the same result, economically, as a completed simple exchange, i.e two zero sum games which cancel one and other out, otherwise it is economically flawed in which case the value of any new money used in it remains unbacked up by the value of an exchanged item and thus a possible source of inflation.

A complex exchange happens in two halves, these halves happen independently but with a link maintained by the constant value of the money involved.

First  Half of Exchange

Physical elements:

Two parties, A & C
One item IC, owned by C and desired by A
A set of newly issued money Mn, owned as ‘new money debt’ by A
A purchase process where A gives Mn to C in exchange for IC

Mental elements:

In A’s head the value Vaic and Vaic = Mn
In C’s head the value Vcic and Vcic = Mn

Second Half of Exchange

Physical elements:

Two parties, A & D
One item IA, owned by A and desired by D
A set of money Md, equal to Mn, and owned by D
A sale process where A receives Md from D in exchange for IA
A uses Md to settle A’s new money debt, Mn, as Md=Mn
[The backing value of Mn, now in circulation, is socially affirmed.]

Mental elements:

In A’s head the value Vaia, where Vaia = Md
In D’s head the value Vdia, where Vdia = Md

Now let us look at some other facts about economies.

Some Other Facts about an Economy

As already said at base any economy is comprised of voluntary exchanges of goods and/or services; that is all.

To prevent any confusion in the meaning of exchange as used here it must be made quite clear, that an exchange here means a voluntary swapping of ownerships of, either goods and/or services, between two independent parties. Basically each party is participating in two zero sum games simultaneously which when, completed and  taken together, cancel one and other out so each party gains.

These exchanges fall into one of three groupings as follows:

G1. Completed exchanges
G2. In process exchanges
G3. Exchanges that are still only in somebody’s mind’s eye.

Money is just a socially accepted way of representing the socially affirmed values of the goods and services in the economy. This means that honest money can only come from G1 exchanges  because these exchanges are completed and therefore the values involved in the exchanges have been unambiguously, socially, affirmed.

Money can also be seen as signifying a contract between the individual, who holds it, and the community, a contract to supply goods and/or services of value equal to the face value of the money.

The contract from the community’s point of view is  always to supply, to the holder of the money, goods and/or services to the face value of the money.

The contract from the holder of the money’s point of view depends on whether it is a fiat or a commodity based currency.

If it is a commodity based currency then the holder must have earned it therefore there is never any contractual demand placed on the holder.

If it is a fiat currency then there could be a contractual demand placed on the holder depending on the money’s usage history as follows

– no usage history, i.e.new money

In this case the first user of the money is contracted to supply, into the community, goods and/or services of value equal to the money’s face value in order to give it backing value.

–  already used, i.e old money

In this case no user of it must have earned it and is therefore not contracted to supply anything into the community as they have already done so.

Changing the money system

The money system currently operates on the understanding that new money is only issued by the State. Currently the State is only responsible for issuing physical money. The State has handed over the issuing of new electronic money to the banks who are naturally only interested in dealing with people who already have money. Thus for anyone to have money they must have  got it from somebody else, preferably legitimately, not through theft or fraud. Thus the only way to get money is through someone, who already has it, by them employing you or by them buying something from you. People without money are 100% dependent on finding someone else, who already has money and has needs which they can satisfy. Currently in a money poor community this is very difficult, if not impossible, to do.

This need not be. The money system could administer a changed situation quite easily by creating a non-interest paying new money debt for the receiver of  the new money which debt would need to be settled by its owner when they received money from selling goods and/or services into the community. In other words the money system could issue new money as non-interest paying debt to anybody who wants to enter into a complex exchange and is short of the needed money to enter the first half of  the exchange, i.e. purchase. All that would then be required of them is that in due course they enter the second half of the exchange by selling something, of value equal to the debt, and thus settle their new money debt. There would of course have to be a democratically agreed cap on the amount of new money debt that any individual could hold at any point  in time in order to prevent free loading on the community and the consequent uncontrolled inflation

Such a change to the money system  would

a) offer everybody, and I mean everybody, the opportunity to enter the cash economy, under their own steam, and in a completely natural unforced way that did not require the involvement of anybody else. This involvement of everybody in the cash economy would be of immense benefit to our systemically hobbled economy.

b) ,in addition, if new money could only be issued in this way, end debasement of the currency and thus inflation induced through the flaws in the current money system.

To bring about the change there would need to be significant investments made in changing the current money system. Investments in time, resources and people but ultimately these investments would be beneficial to the whole country and its inhabitants.
We would need to switch to a wholly digital currency. This would relieve the economy of the cost burden of handling physical cash but it would also mean that government would need to ensure that every economically active person had a smart phone which could serve as their electronic wallet. It would also mean that every cash transaction, deposit or withdrawal, would have to start off in the money system run by a Central Currency Authority [CCA] . The  CCA would be responsible for issuing new money and enforcing the cap on new money debt. Thus every economically active person would need to be registered with the CCA in order to be able to transact and so that the CCA could control the amount of their new money debt. Each economically active person would also need to have a bank account to which the CCA would have transparent access as well as being able to deposit new money into it should it be required provided the new money cap was not being exceeded of course.

This simple change to the money system is logical and technically quite feasible, it has already been done, but only for the already banked, in ‘snapscan’ [ https://www.getsnapscan.com/%5D

The Physics of Economy and Money

The economy has become a very complex system in its own right  and money in its turn has become enmeshed in complexity but the way to develop an understanding of each of them does not have to start off with-in the current complexity. In fact we will be much better off by first getting an understanding of the basics, or physics, of both of them because the complexity is, after all, built on the basics.

Money is a by-product of a functioning economy, no economy no money. Thus we need to first understand the physics of an economy before we can develop an understanding of the physics of money.

Historically the money we use in the economy has been either a fiat currency or a commodity based currency. The general category of fiat currencies connects directly with the physics of money consequently we will only be dealing with fiat currencies here. The commodity based currencies do not relate so directly with the physics of money so they will not be dealt with here.

An economy consists of voluntary exchanges of ownership. These voluntary exchanges are in fact the only economic activities in an economy. They fall into three distinct groupings:

G1: Completed, voluntary exchanges of ownership of goods and/or services
G2: In process, voluntary exchanges of ownership of goods and/or services
G3: Potential, voluntary exchanges of ownership of goods and/or services.

Money can be either be an honest representation of the value of a good or service or a dishonest one. Honest money is a by-product of G1 activities only. G2 and G3 activities cannot result in honest money.

There are inherent difficulties in carrying out voluntary exchanges in ownership however and money was invented in order to overcome them. Once money had been invented its use became to all intents and purposes essential. Why is this? Because the use of money enabled the economic integrity of an exchange of ownership to be maintained whilst removing the constraint of, one exchange partner only, on the number of exchange partners involved. The  removal of this constraint allowed for an expansion in possible exchange partners thus opening the way to greatly increased economic activity. Through the use of money an exchange became, in a sense, a set of exchanges between one person and a community of persons.

How  exactly does money enable this?

To answer this question it is first necessary to unpack the various components of what I term an economic event which is nothing but a completed voluntary exchange of ownership. But we need to unpack a simple economic event first, which is an event that happens without the involvement of money.

A simple economic event

A simple economic event comprises both physical and a mental elements as follows:

Physically

– two parties, A & B, and
– two different items to be exchanged, IA & IB, and
– two exchange processes, A physically gives ownership of IA to B and, B physically gives ownership IB to A

Mentally

– in A’s head values, AVia and AVib, for IA and IB respectively
– in B’s head values, BVia and BVib, for IA and IB respectively

For a simple voluntary exchange to be completed it is clear that for A, AVia must = AVib, , and  for B, BVia must = BVib, otherwise the exchange of ownership would not happen and whether AVia = BVib, or not,  is irrelevant.
As stated above the problem with such simple economic events is that they are not simple to arrange. Why? Because A must be willing to exchange what they have with what B has available to exchange. In other words their respective needs and wants must match exactly with what is available for exchange. Now within any large collection of people there might be two people whose needs exactly match but locating them is difficult.This difficulty puts a natural damper on economic activity.

This problem would be lessened however if the supply and receipt roles of B in the simple exchange could be separated from one and other.  This would enable them to be taken up by two different parties C & D thus opening up many different exchange possibilities. From an economic perspective all that is necessary for this separation to be acceptable is that it should not damage the economic integrity of the simple economic event. In other words the value of what C supplies to A should be exactly the same as what A supplies to D. If that could be ensured then the economic integrity of this, now more complex economic event, would remain unchanged from that of the simple economic event.

A complex economic event

How is a complex economic event created from a simple economic event?

Quite simply by making an independent recording, IR, of the value of IC which both A and C are prepared to accept as being the truth. A could then take ownership of IC by exchanging it with C for IR.

Now as such a recording is standing-in for the economic value of an exchanged item it has to have the face value of that item as well as be owned by the person who claims to own the item. The IR recordings can be produced anywhere but they will only have economic relevance once the appropriate person takes ownership of them.

The socially accepted form of such recordings is known as money. So, in money terms, A gives money M, of face value IR, to C in exchange for item IC.

This is all very well but where does A get M from in the first place?

A gets ownership of M in either one of two ways.

1. A could have received M in exchange for a good or service that A supplied into the economy. M is thus honest money in that it represents the value of a real good or service supplied by A. In this case when M is handed to C in exchange for IC M is equivalent to that good or service and the payment would create an economic event.

2. On the other hand M could have been newly issued into A’s ownership as debt. In this case M would only have  its face value as it does not yet represent the value of a real good or service supplied by A. To complete the creation of the economic event A  needs at some point, to supply into the economy a good or service to the value of M, so that M can honestly become a stand-in for a good or service. In other words A’s use of newly issued M would automatically oblige A to supply, at some point, goods or services to the value of M into the economy. The money received from the sale would automatically discharge A’s newly issued M debt. Unless this happens A’s use of newly issued M is dishonest.

The logical implications of point 2 above

1. If money is involved, and point 2 above is adhered to, we can use the term ‘economic event’ not only for simple exchanges of ownership but also for complex exchanges of ownership because, taken together, the exchanges yield the same result in economic terms as a single, completed, simple voluntary exchange of ownership.

2. Any economically active person need never be short of enough money to make a purchase because any short-fall could be covered by issuing them with new money as non-interest paying debt  which debt would be settled as soon as they sold something into the economy of equivalent value.

3. Realising this change to the money system is, because of modern ICT, quite feasible. It would however require major political will to drive it. An outline of what is required is given in zzzzzzzzzz

Introduction to Short of Money

Modern life is inextricably bound up with money and economics. The intricacies of both of these topics appear to be too complex for most people to grasp so they don’t even try.This is not surprising as both topics have grown in complexity over the years. The complexity is however built on the basics which are quite simple to grasp so the the place to start in developing one’s understanding is not with the current complexity but with the basics.

The set of papers presented here attempt to do just that.

Commodity Currency Vs Fiat Currency

Economic activity consists quite simply of the voluntary exchange of goods and services. Literally everybody, unless they are severely disabled in some way, is capable of entering into this activity. It is in fact an activity which is essential for human survival.

It is however an activity which is logistically very difficult to execute because finding a person with matching needs and potential offerings is not easy. The level of difficulty was significantly reduced however when the concept of a general purpose means of exchange [GPME] was accepted. Suddenly you could get something that you wanted by giving its owner sufficient GMPE in exchange for the desired item and the erstwhile owner could then exchange the received GPME with somebody else to gain possession of something that they wanted. The whole exchange process was still fully completed but suddenly it was relieved of one of the major inherent difficulties. As a natural consequence of this, GPME’s, now known as money, became regarded as an integral and, in a sense, an essential part of any economic exchange.

For ease of understanding it is worth noting that when money is used in the exchange process special terminology is used to distinguish between the two halves of a completed exchange. When somebody uses money to acquire an item they are a purchaser, or some other similar term, and when somebody receives money for an item they are a seller, or some other similar term.

There was a downside to the general acceptance of the GPME concept however and this arose out of efforts to ensure that the users of GPME’s need never fear that their GPME’s would lose exchangeable value. This required that the GMPE’s, i.e. the money, had real economic value besides being a GPME. This meant that a GPME had also to be a real exchangeable good in itself. Thus it was that goods such as precious metals like gold became used as GPME’s.

The consequence of GMPE’s having real value right from the time of issuance was that  GMPE’s had to be earned from others who already had them. This requirement inevitably gave rise to poverty for some people as entry into the exchange process now required prior possession of GPME’s either by the entrant themselves or by their possible exchange partner(s). Thus a poor person who lived in a poor community had very little chance of ever being able to enter into a completed exchange process involving GMPE’s as they were highly unlikely to find someone to enter into the process with them who was already in possession of the necessary GMPE’s.

Things are, potentially, different now however as we are blessed with a fiat currency. A fiat currency is not legally bound to the intrinsic value of a physical, and therefore limited, commodity such as gold but instead derives its value from the value of the first completed exchange in which it participates. Fiat currencies are never compelled to be linked to an exchangeable good like gold. Fiat currencies are just recordings of value and thus open the way to money playing its primary role for everybody, whether they have any money or not, and that is, to facilitate exchanges of real goods and services.

Our trouble is that although we have a fiat currency our money system has not currently been adjusted to exploit the opportunity that a fiat currency provides. The money system  thus continues, in many ways, to function as if the currency was based on a commodity, i.e. gold. So right now our money cannot wholly fulfill its primary role for everyone. Under the current money system any person, who is without sufficient money to enter into an exchange, is unable to do so because they cannot be issued with new money to make a purchase even if they could subsequently sell something of value equal to that of the newly issued money.

A commodity based currency plays the exchange facilitative role but only to a limited extent. The limitation derives from the fact that when a unit of a commodity based currency is introduction into circulation it already has to have a real fraction of the commodity linked to it. Thus it cannot just be issued to someone who needs it to enter into an exchange except as a gift  or as charity, i.e. Social Grants. This is because the receiver has not earned it through an exchange, equivalent in value, of goods and/or services.

New units of a fiat currency on the other hand can be issued to any one who needs them, to enter into an exchange, because the value of the units derives not from a commodity such as gold but from the completion of the first exchange in which the newly issued currency participates, i.e. purchase followed by a sale, by the first user of the new money, equivalent in value to the new money. The currency received from the sale being used to off-set the new money debt of the first user of the new money.

Economy

An economy is comprised of an accumulation of economic acts.

An economic act is the completed voluntary exchange between two parties  of two items be they good(s) and/or service(s).

Thus as an economy is comprised of an accumulation of economic acts and which acts are included is what defines the economy. If the economic acts are dependent on the use of a single currency then the currency usage sets the limits to which acts are included in the economy.

 

 

 

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