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Tuesday, January 25, 2011

Ideal form of money – empower the people

For centuries money was based on gold, and some civilizations successfully used fiat currencies for a while. However each form of money has failed to serve man’s purpose over centuries. This is because each form has flaws, and each is not a pure form of money.
Please refer back to my post on “what is money” to understand my position of money in detail. In essence money represents a debt. For example, I give you a bushel of corn I grew; you give me an IOU, and may give back the IOU to make me shoes when I need them.
For sake of argument, there is no difference between a US dollar and “credit”. Both represent the same thing, a debt owed for work done.
The problem with fiat currencies is abuse of the system. It is easier to produce no work, and just create money to get work. This has been the downfall for all fiat currencies throughout time. I recommend you watch the video on my post “Niall Ferguson: Empires on the Edge of Chaos” on to how this manifests.
The problem with Gold is, it doesn’t represent work done and a debt owed. It represents a physical material that it has value as a material. Therefore new work done cannot be symbolized in the form of money, without waiting for some miner to dig it out of the ground, manufacture it, and distribute through the banking system to my account.
In essence, the society can be only as prosperous as the mining production to generate credits for “new work”. In some cases of work, such as I mow your lawn, then you shovel my driveway create a wash, but the gold coin still must pass along the economy, and is required to do another activity.
And at any point, since the gold does represent physical value for material in jewelry or other uses, people can simply melt coins to be used for their business and sell for a higher amount of gold coins in return. Or worse yet, the rich accumulate the coins, removing them from the system, creating money shortages for the less wealthy, causing severe depressions and economic hardships on the have-nots.
The whole idea of gold as money outrages me that people cannot think of money in its purest form. It is suppose to be a guaranteed bond, akin to signing a contract, which work performed can be used to get work in return. It is universal, meaning the person who gives you the currency doesn’t have to be the same person you give it back to.
The problem comes in that individuals, companies, states, or governments would rather just make new money than create work to back the new debt created. This perversion of not having money represent work done and work owed is what we are witnessing by the actions of the Federal Reserve Bank. Ben Bernanke, in effect, is trying to show the world, that US does not have to honor repayment with new work, it can repay with sleight of hand and new paper IOU that will never get repaid with work. It is a dangerous game, which has shown throughout history to typically end with the loss in faith in the currency and destruction of the government’s ability to operate.  ** UPDATE ON THIS VIEW, "Bernanke Villain or Hero"
I am more concerned over Ben Bernanke than Osama bin Laden. Americans are aware of the dangers that the concept that Laden and others promote. To kill thy enemy at any cost, with most impact possible given the resources at hand. While Mr. Bernanke is put on the covers of magazines as man of the year and he himself takes credit for taking actions to “make people feel better so they spend more”. In that single statement, admitting, that he has not taken fundamental actions to make the situation improved. Unless you consider feelings as equal as a promise kept and law enforced.
Current Money Summary
Currently, there is two views of money, Fiat and gold based. Both also can have credit issues against them, generating their own form of new money. In both cases they have weaknesses. One for abuse and the other for holding back prosperity of the people. I recommend watching the video “Secret of Oz” for more on this background.
New money attributes
Once again, the problem is societies knee-jerk reaction is to answer with what you know. By choosing past money systems that have repeatedly failed in history, we guarantee the money system will fail again. What is needed is an improved form of currency. One that can do the following.
  • Enforces that work done is repaid with work done. If work isn’t repaid, that money is lost, and the impact is against the person or company that FAILED to repay the work. They take the hit.
  • New Money can be created literally out of thin air. All that is required is you perform work, and someone else receives the work. The one receiving the work now has a debt in life that must be repaid. This of course, is called credit. When you have no money, but need to create money out of thin air.
  • Amount of credit given to an individual is finite, determined by an open market competing for your business. For example, if GM needs more money, it can obtain credit from the market place (creditors) at a rate of interest determined by the market place. A free form of pure capitalism is required, and transparency into the applicant’s finances is crucial for this to work.
  • No one entity can create new money outside of the process. There is no grand puba called Federal Reserve Bank Chairman that can bequeath new money unto the minions of society. A fair system for all to ensure that work done will be paid back with work done.
  • Money can be freely transferable to anyone the possessor dictates. This transfer is automatically subject to taxation, with no exceptions. Perhaps a 1% flat tax across all of societies work effort. The tax is to ensure the business environment is concussive for work. This will provide incentive for governments to improve work conditions, as it will generate more tax through more business being done. The government carrot is in effect, like the profit of McDonald's. More business done = more income.
  • The system is secure, provides transparent accounting, and is governed by an open board. All work done by the board to propose changes to the system (refinement) must be done on a public web site, subject to public voting and public approval of EXACT changes being instituted. All new rules subject to 12 month revocation period by the same public voting system.
I have a slightly slanted vision, based on what I know, computer systems.
What I envision of course is a computerized marketplace where all money is stored electronically. It may in fact be a global currency. However, I am NOT in favor of a global currency, as such the risk of global failure due to corruption is too high. Instead I think what is required is to allow any company to create a system, using open review and process, to be a viable storage of wealth.
Electronic Money
For example, EBAY could create it’s own form of money, and then interface it’s money using a “currency exchange rate” to Amazon. Only in the spirit of private competition coupled with mandated open transparency can result in an evolving framework that will result in an optimal system. Over time, the currency systems that are found to be the most trustworthy will rise to the top.
Let the marketplace of ideas and private enterprise provides a solution. One of the solutions of course, I would expect would the equity exchanges, future markets, and other financial systems. The monetary rate of exchange between systems must be an open, market place where rates are found in a capitalistic fashion. No backroom deals to gain unfair market advantage.
Alternately, a single entity could be created by each country, separate from the government. But I suspect the same human tendencies to corrupt would creep into the system, as always happens with a monopoly.
You may be surprised to learn, that this is already occurring, in a form of new money through a web site called listia. They provide trading of goods without money. But they have a form of credits to help even out the valuation differences of exchanges. I think this system is just a small example of how this would work, but what is also needed is strong transparency, strict financial accounting, and public review of refinement to gain and maintain trust.
With such a system, the goal of allowing new money to come into the system can be accomplished with credit, objects, or services performed, allowing the economy to grow. It also enforces that no one entity can create money at will, that the same process is used for all. That governments or private banking cartels do not have a monopoly access to money creation. This practice is what introduces abuse, currency collapse, high inflation, or just plain old lawlessness and fraud. Unfortunately I doubt my vision will happen in my lifetime. People will try all they know to stick with “what they know” and not dive into “what they don’t know”. For now, it will be Fiat currencies and asset-backed money, both issuing pain upon mankind until demands for a new system emerges.
Such a system could be tested at first in different sites, organically growing as weaknesses are exposed, correct, improve, repeat until a tight, fraud resistant system is established.
Back to RealityI suspect if there is a US currency crisis, the solution will be a new global currency, ripe for same abuses. Or a basket of currencies that represents the single currency, gold, etc. There are multiple reasons, first, people answer crisis with what they know. Second, those who have control of money supply of course, want to keep that control. So the evolution into a new, better system is likely to be a pipe dream that may become a reality long after I am dead. In the mean time people can experience the error prone road of reverting to failed systems in an attempt to fix the prior broken system. And only after other refined broken models are proved flawed and discarded, with a new one be sought.

Next up, Economic and Monetary Inflation and Deflation.

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