Tuesday, February 24, 2009

The Real Bill Economy, part 1

The history of real bills offers a potential solution to the difficulties of non-dollar commerce. A real bill is essentially a direct IOU, guaranteed by your own ability to produce. It is essentially a store of value for whatever you offer. The advantage is that it can be transferred to multiple owners. Thus, in effect, your IOU, representing your service, becomes part of a market, and you would not control who cashed it in.

Here is a practical example. Say you are a laborer, and you want to buy some food. In a pure barter economy, you could offer to work for the farmer in exchange for food. But what if the farmer had no need of your labor? Instead of refusing the sale, the farmer could accept from you a real bill for 8 hours of your labor. He wouldn't even have to use redeem the bill himself. Say the farmer needed to visit the doctor. He could pay with your real bill, signing it over to the doctor, who would then own your 8 hours of labor.

The ownership trail of real signatures would be the main safeguard against counterfeiting of real bills. You would never redeem a real bill that you yourself had not written, and a valid ownership chain would be easy to verify, in a case of multiple real bills being fabricated. As you can see, theft of real bills would be senseless, since, unlike fiat money, they had to be redeemed by their legitimate owner. A stolen or lost real bill would be worthless, unless returned to its owner.

A real bill is also given an expiration date, which guarantees both its worth and its marketability. The market would determine the validity of various expiration dates, primarily based on risk assessment. For example, a physical labor bill might have a weekly or monthly expiration date, whereas a doctor's or teacher's service bill might have a year-long or even multi-year expiration date, since such a professional is much less likely to "go out of business".

Specific expiration dates and real bill values would also depend upon your own personal skill, ability, and work ethic. If someone knows you are a lazy laborer, they are not likely to give you much in return for your 8-hour labor bill. Someone who is a known hard worker will command much more for their labor bill.

Character assessment would also play a role in real bill value. Such as, most obviously, your consistency in redeeming your outstanding bills faithfully. Defaulting on your real bills would quickly mean no one would accept them, thus taking you out of the real bill economy.

Since stolen real bills are worthless, defaulting on your own real bills would have serious consequences. Essentially, everyone would have to work faithfully, or face starvation.

But how would you know if some random person's real bill was worth anything or not? This is the role of the real bill clearing house. The clearing house would provide the verification and market service for real bills. Verification means the clearing house would track the performance of your real bills and make that performance available to the public, acting as a rating agency. Anyone desiring to do business with you could simply check your real bill rating. If your real bills have a certified 100% performance, they would be rock solid in trade or transaction, and your services would be in high demand. If you were lazy or unfaithful in writing or redeeming your real bills, no one would accept your bills and no one would want your services. Violating the terms of your own real bills could also be against the law, resulting in criminal penalties.

The clearing house would also provide a market for real bills, greatly facilitating general commerce. Upon receipt of a real bill, you wouldn't personally have to use that service or personally find a matching buyer. Rather, you would only have to give it to the clearing house. The clearing house would then match people who have the need for that real bill. With today's economy, it could all be done electronically.


wraft said...

My knowledge of real bills is based mostly on Antal Fekete's example of the retailer and his wholesale supplier:

1. The wholesaler delivers goods to a retailer;

2. The retailer cannot pay cash for the goods and gives a real bill iou payable in 90 days;

3. The wholesaler doesn't want to wait 90 days. He sells the bill to a clearing house at a discount.

4. The clearing house holds the bill to maturity and collects the bill in full from the retailer at the end of 90 days.

In your above example. I don't see the point of the expiration date on the laborer's note.

Also, I would think that a clearing house would prefer to purchase the bills of highly reputable businesses. It would be too risky to buy the notes of random laborers. The buying of those notes would be like buying subprime mortgages. The clearing house would soon be a zombie

My experience with local currencies is limited to the local Traverse City currency - the Baybuck.

Baybucks have never caught on with the local businesses due to the fact that there is no fixed exchange rate between Baybucks and dollars.

It costs 1 dollar to purchase a Baybuck but 1 Baybuck will not get you a dollar. A Baybuck will get you nothing.

The fact that local businesses have no interest in Baybucks seems to make no difference to the Baybuck governing board. I have tried in vain to get them to consider a plan to recall existing Baybucks and reissue them as convertible to dollars at a fixed exchange rate. This is unfortunate because with the hard times coming the local population might be amenable to considering an alternative currency.

For a functioning local currency, it would seem to me that the local currency issuer could do some profitable business clearing real bills from reputable, low risk merchants.

Justin said...

Wraft, in answer to your questions:

The expiration date on a personal real bill would inhance it's market value and prevent inflation of the supply with bad notes. The natural extinguishing of bills is what keeps the system stable and responsive to the market. Printed dollars (w/o expiration dates) exist perpetually, no longer connected to economic realities, whereas time-dependent real bills keep the monetary base connected to the real economy. An expiration date allows a laborer to schedule and budget his own time, and ensures the purchaser that the bill is still valid.

That is why a reputation score is vital to making the credit exchange functional. Technology can make even "random laborers" have a verifyable reputation.

Justin said...

Wraft, in regard to the fixed exchange rate for Baybucks, I have a question: Don't we want our alternative currency to float vs the dollar, so that it doesn't inflate along with the dollar?

I do see your point that a Baybuck must be convertable to dollars, otherwise who would want to buy it.

wraft said...

I think the people who are doing local currency right are the Berkshares.

In Great Barrington, Massachusetts, the average Berkshare circulations is about 170,000 B. Tourists buy Berkshares at the local banks at the exchange rate of 100 Berkshares to $95. The rate was recently raised from 100 B/$90 . The storeowners requested the increase. The Berkshare organization keeps an amount of money in a bank account sufficient to redeem the entire Berkshare circulation.

Local currencies require this inducement otherwise there is no reason to prefer local money.

Bernard Lietaer proposed that a store could issue its own money. I own a winery. I could sell money
at a discount to get through the slow winter. The money could say, for example. "Redeemable for $10 merchandise or $9 cash at the tasting room". However, I am hesitant because alcohol is regulated and such an idea may be illegal.

Justin said...

The discounting function of local money is quite clever. Your idea of issuing WraftBucks is a great illustration of the flexibility of money. As long as the basic commodity is in high demand, theoretically, any number of scripts could be exchanged.

The legality is the real problem, not just with alcohol, but with taxes. The government is very jealous of its revenues, and any attempt to escape taxation through alternative currencies or barter is scrutinized very carefully.