The latest issue of the Gold Standard Institute (http://www.goldstandardinstitute.net/GSI/wp-content/uploads/2010/06/TheGoldStandard15.pdf) helps the average confused member of the alt-economics community get to the heart of the matter. Obviously, the GSI is devoted to the idea of money based on the gold standard. Naive, Austrian-influenced, amature economists need to understand GSI's position before spouting off about gold as "the only sound money".
For, you see, the GSI is perfectly upfront about the fact that direct trade in gold is not practical. As they put it, for example: "Gold on its own cannot support international trade; Bill circulation is essential for a viable Gold Standard."
The gold standard only works, then admit, when actual trade is in paper. The paper, which they call Real Bills, is backed by gold, but the paper is essential.
Real Bills vs Money
Now, the question becomes, what are Real Bills??? Unlike a paper money supply backed by gold, real bills are not issued by a central bank and are not permanent. Rather, they are issued by private parties, and they have an expiration date.
They are most like a personal check with an expiration date. They would say something like "Redeem this bill of sale for $100 worth of gold on July 31st 2012 at XXX Bank". In practice, that bill could then trade hands among various people right up until the redemption date.
This is the meaning of Real Bills being "self liquidating". Unlike a permanent paper money supply, Real Bills are created in response to real economic activity, and are liquidated at the commencement of that activity. Here is how they describe it: "Bills are drawn against real goods, the goods are delivered, the Bills net out the trade. Then, after doing their job, after being paid off on their due date, the Bills disappear."
The Necessity of a Clearing House
The only thing they left out of their description is the necessary role of a clearing house. The clearing house keeps track of accounts upon expiration of the bills. If necessary, on the date when accounts are settled, actually physical gold would then trade hands. But the whole point of Real Bills is to allow multilateral trades in paper certificates, rather than actual gold.
The clearning house has to function as the gold storage vault, as well as an accounting service, to clear and pay accounts of settling day. If Real Bills are drawn on multiple banks, the individual banks would have need of a central clearing house to clear their accounts. In practice, that would work like the way cheques are cleared by multiple banks.
Advantages of Real Bills
Because they aren't permanent, Real Bills can't be used to fund speculation. It is also nice because they don't disrupt the productive economy with the inflationary or deflationary effects of a permanent money supply. Real Bills are always matched perfectly to the real productive economy.
Nor are they centrally-controlled. Real Bills are like a democratically-issued money supply. People issue Real Bills on the wealth they possess. Under this system, the function of banks is simply accounting and wealth transfer. Presumably, the banks are funded on a fee-for-service basis.
Showing posts with label Alternative Money. Show all posts
Showing posts with label Alternative Money. Show all posts
Saturday, May 5, 2012
Monday, March 19, 2012
Modern Barter System at work in Greece
This is a very instructive article, dated from November, but I just discovered it. It describes how the modern barter system works in a town in Greece, like the Jubilee Network is designed to work here.
Turns out, a functioning economy doesn't need money, it just needs an accounting system. The system in Greece uses some special device to attach to cell phones. The JubileeNet doesn't need a special device, you can just enter the transactions directly on your internet-connected phone.
Just like in my JubileeNet, in Greece, the same system also functions as a store-front and help-wanted page. It both advertises its own market and tracks balances of the market participants.
If you have not yet signed up for a JubileeNet listing, you can do so here: http://www.jubileenet.com/register-form.php
See the article on the Greek system here:
https://www.npr.org/2011/11/29/142908549/modern-greeks-return-to-ancient-system-of-barter
Turns out, a functioning economy doesn't need money, it just needs an accounting system. The system in Greece uses some special device to attach to cell phones. The JubileeNet doesn't need a special device, you can just enter the transactions directly on your internet-connected phone.
Just like in my JubileeNet, in Greece, the same system also functions as a store-front and help-wanted page. It both advertises its own market and tracks balances of the market participants.
If you have not yet signed up for a JubileeNet listing, you can do so here: http://www.jubileenet.com/register-form.php
See the article on the Greek system here:
https://www.npr.org/2011/11/29/142908549/modern-greeks-return-to-ancient-system-of-barter
Monday, November 14, 2011
Monetary reform and alternatives - join the Lawful Bank movement
The Lawful Bank is an application of the concept of "worker-owned businesses" to the financial world.
Worker-owned businesses are the wave of the future, because by eliminating parasites from the business process (the "passive owners"), businesses can operate at lower costs. Operating at a lower cost is the bottom line in the survival of the fittest economic world, and thus, over time, worker-owned businesses will outperform and eliminate the parasitic passive-investor businesses. In their own words:
"By signing up to The lawful Bank you will (in due course) avail yourself of the benefits of membership of this unique monetary and banking system, the essence of which is to distribute to the people the grotesque profits being skimmed by greedy bankers from the nation’s economy. "
"There are no investors to satisfy and no high flying executives on million pound/dollar salaries or city slickers on astronomical bonuses. Our system plays no part in casino banking. TAMS is both safe and cost effective and serves the interest of the sovereign aspirations of individuals."
"TAMS is a mirror image of the existing monetary system – it is tried and tested... but with a crucial difference in that there is an entirely different approach as to where the profits are delivered. In the existing system, the profits go to investors, and the people running the bank - with our system the profits are distributed to our members."
One of the fascinating innovations of the Lawful Bank is the way it leverages the power of fractional reserve banking for the INDIVIDUAL:
"A positive credit system – for every £1 of cash deposited, each member creates £10 credit in their account. This credit (created by the system) on the back of the cash deposited is the property of the member and thus not a debt to the member. This will provided streams of credit to the system – and not debt."
Check out the Lawful Bank webpage at http://lawfulbank.com/HomePage
Worker-owned businesses are the wave of the future, because by eliminating parasites from the business process (the "passive owners"), businesses can operate at lower costs. Operating at a lower cost is the bottom line in the survival of the fittest economic world, and thus, over time, worker-owned businesses will outperform and eliminate the parasitic passive-investor businesses. In their own words:
"By signing up to The lawful Bank you will (in due course) avail yourself of the benefits of membership of this unique monetary and banking system, the essence of which is to distribute to the people the grotesque profits being skimmed by greedy bankers from the nation’s economy. "
"There are no investors to satisfy and no high flying executives on million pound/dollar salaries or city slickers on astronomical bonuses. Our system plays no part in casino banking. TAMS is both safe and cost effective and serves the interest of the sovereign aspirations of individuals."
"TAMS is a mirror image of the existing monetary system – it is tried and tested... but with a crucial difference in that there is an entirely different approach as to where the profits are delivered. In the existing system, the profits go to investors, and the people running the bank - with our system the profits are distributed to our members."
One of the fascinating innovations of the Lawful Bank is the way it leverages the power of fractional reserve banking for the INDIVIDUAL:
"A positive credit system – for every £1 of cash deposited, each member creates £10 credit in their account. This credit (created by the system) on the back of the cash deposited is the property of the member and thus not a debt to the member. This will provided streams of credit to the system – and not debt."
Check out the Lawful Bank webpage at http://lawfulbank.com/HomePage
Wednesday, May 19, 2010
Analysis of potential Idaho Silver Currency
Fascinating happenings in Idaho related to currency reform and local currency. A bill was killed in Senate committee that would have created a silver coin for Idaho that could trade as money. The currency was potentially the real deal in alternative currencies, and met all the requirements that trade tokens require to be considered legitimate and widely used as money.
As I have detailed before, the most important thing about a local currency is that its use should be tied to the health of the local economy, a fact explicitly recognized by the crafters of this money, as the silver mining to create the coins would help the Idaho economy.
The coins have been christened Idaho Gems. Interestingly, the bill will also allow the state treasurer to hedge its silver position in the financial markets. It also defines all state and local taxes as payable in this coin.
According to the bill, the state will sell the one ounce coins at the daily spot price for the one ounce American Eagle. The treasurer will also accept the coins for payment at the daily spot price. The bill guards against too much state loss by allowing the treasurer to suspend acquisition if the daily market price falls below the cost of minting. According to the bill, the state will issue silver as payment to any vendor who requests it.
Unfortunately, the bill appears to have died in a Senate committee:
http://www.examiner.com/x-16226-Boise-Economic-Policy-Examiner~y2010m3d24-Harts-Silver-Gem-Act-fails-in-Senate-committee
Alternative money needs to have a buyer of last resort, to guarantee its acceptance as general currency. The problem facing alternative currencies in general is, nobody wants to hold a currency if it is a burden to find someone who accepts it. However, if the state of Idaho accepts the medalions as payment for taxes, that would exactly fit the requirement as a surefire buyer of last resort.
The monetary value of the issue of the coins, at least at first, would be limited by the size of the Idaho budget. Anything beyond that would run the risk of non-redeemability. Especially in the early stages of an alternative currency, it is important to create the expectation of full redeemability, so that people become confident using the new coins. If redeemability became an issue, people would be hesitant to accept the coinage, and it would become little more than a gimmick or collector's item.
After a general confidence in the redeemability of the coins has been established, under the condition of wide circulation and usage in general commerce, the state could produce a excess of coins beyond the limit of the state's financial budget.
The state also faces the potential problem of seasonal deflation, as coins are removed from circulation to pay taxes. Encouraging general circulation and usage in non-tax-related commerce, would allow the state to mint enough coins so that the seasonal redemption would be less noticable.
The ultimate way for the state to overcome the issue of seasonality and limited usage would be for the state to not only take the coins as payment, but also distribute the coins as income, starting with its own state workers and welfare recipients. Afterall, the state's tax receipts exactly match the states outgoing payments. If the state agrees to receive the coins in payment, it has to have a method for redistributing them. Without a regular channel of distribution, the coins again fall into the gimmick/collector item category.
From the wording of the bill, the focus seems to be on silver money as a store of wealth.
And, as always with a commodity-based money, the state would have to be concerned with the value of the underlying commodity. If silver, as a metal, rises in price relative to the US dollar, the silver coins would be hoarded if they are fixed against the dollar.
So, the legislature is in a bit of a bind. In order to issue the money to its own workers, the coins would have to be exchangable for US dollars. If that exchange rate is fixed, hoarding could quickly become a problem. Especially given the problem of the rapidly inflating US dollar, the value of silver can be reasonably expected to rise, dragging the value of the coins up with it.
Lets say the coins are issued on par with dollars. The following year, the dollar inflates by 10%, but the silver coins remain stable. 100 coins originally bought the same as 100 dollars, but now 100 dollars only buys 90 coins. Which would you rather be paid in?
The coins! Think of the converse side: 100 coins now buy 110 dollars. Holding or being paid in coins means you are getting richer in dollars. This would actually increase the value of the coins, exactly as the Idaho legislature hoped, spurring their demand and thereby stimulating the Idaho silver economy. In order to meet the demad, and discourage hoarding, the state could prudently issue more coins.
In short, against the background of an inflating dollar, doing business in Idaho silver gems would naturally increase your own wealth. But this would only work if the silver coin was not fixed versus the dollar. If the Idaho legislature had the discipline to not inflate their supply, the demand would remain strong for their silver coins.
Notice that under these conditions, people would stop paying their taxes in silver coins, preferring to pay them in depreciating dollars.
Of course, if the price of silver fell, the conditions would reverse, and the state would see its monetary position wiped out. Under conditions of falling silver, people would flee the silver coins, as they'd be worth less and less relative to dollars. Citizens would pay their taxes only in the increasingly worthless silver.
The state, as a governmental agency, is thus put in a double bind. No matter which way the currency is going, by giving the citizens a choice in payment, the state will always be paid in the worse currency.
This is the whole point of legal tender laws and capital control laws. Without those expedients, the citizens will always work to make the state the loser in currency arbitrage. With legal tender and capital controls, the state can foist the currency costs off on its beholden citizens.
http://www.silverbearcafe.com/private/03.10/medallion.html
With only one state representative dissenting, the Idaho House State Affairs committee voted on Monday to endorse HB 633, a bill that would allow Idaho citizens to pay their state taxes with an official state silver medallion.
The news comes just a month after a South Carolina legislator introduced a bill seeking to ban Federal currency altogether, and replace the upstart greenback with gold or silver coins. A half-dozen other states have considered similar legislation, reports the Tenth Amendment Center. But there's a key difference between the Idaho plan and the bills proposed in other states, most of which fall somewhere on a spectrum ranging from Tea Party rage to Ron Paul goldbug-ism. (The South Carolina bill, for example, claims that "the State is experiencing an economic crisis of severe magnitude caused in large part by the unconstitutional substitution of Federal Reserve Notes for silver and gold coin as legal tender in this State.")
In contrast, the sponsor of the Idaho bill, Republican Phil Hart, seems to be marshalling wide support by crafting legislation that is straight out industrial policy aimed at boosting Idaho's silver industry. The text of the bill is quite clear.
The intent of this act is to use the abundant silver resources of the state of Idaho to create a means whereby the people of Idaho can pay their taxes to the state using silver mined from the ground of Idaho, processed in Idaho and finally minted into a medallion in Idaho. It is the intent of the Legislature to create mining jobs in Idaho while giving the people of Idaho a means to store their wealth in a precious metal that is immune from the effects of inflation while complying with the mandates of our federal Constitution.
The Idaho bill therefore incorporates tax incentives for silver processors located in Idaho.
From The Idaho Reporter:
That, Hart believes, could bring hundreds, if not thousands of jobs to the state. In conjunction with the creation of the medallion, Hart's bill would also try to lure silver processing companies to Idaho, and in particular, north Idaho, which, according to Hart, was once called "the silver capital of the world." The bill would give companies that come to Idaho to process silver for the medallion a 10-year exemption from income taxes, as well as property taxes. The exemption would be open for 20 years and would sunset after that period of time.
Hart believes one of the advantages of silver is that it would resist inflationary pressure better than paper money. But since states aren't allowed to mint their own money, the value of the silver medallion will have to fluctuate according to market forces. In just the last ten years, the value of an ounce of silver has zig-zagged between four and twenty dollars.
As I have detailed before, the most important thing about a local currency is that its use should be tied to the health of the local economy, a fact explicitly recognized by the crafters of this money, as the silver mining to create the coins would help the Idaho economy.
The coins have been christened Idaho Gems. Interestingly, the bill will also allow the state treasurer to hedge its silver position in the financial markets. It also defines all state and local taxes as payable in this coin.
According to the bill, the state will sell the one ounce coins at the daily spot price for the one ounce American Eagle. The treasurer will also accept the coins for payment at the daily spot price. The bill guards against too much state loss by allowing the treasurer to suspend acquisition if the daily market price falls below the cost of minting. According to the bill, the state will issue silver as payment to any vendor who requests it.
Unfortunately, the bill appears to have died in a Senate committee:
http://www.examiner.com/x-16226-Boise-Economic-Policy-Examiner~y2010m3d24-Harts-Silver-Gem-Act-fails-in-Senate-committee
Alternative money needs to have a buyer of last resort, to guarantee its acceptance as general currency. The problem facing alternative currencies in general is, nobody wants to hold a currency if it is a burden to find someone who accepts it. However, if the state of Idaho accepts the medalions as payment for taxes, that would exactly fit the requirement as a surefire buyer of last resort.
The monetary value of the issue of the coins, at least at first, would be limited by the size of the Idaho budget. Anything beyond that would run the risk of non-redeemability. Especially in the early stages of an alternative currency, it is important to create the expectation of full redeemability, so that people become confident using the new coins. If redeemability became an issue, people would be hesitant to accept the coinage, and it would become little more than a gimmick or collector's item.
After a general confidence in the redeemability of the coins has been established, under the condition of wide circulation and usage in general commerce, the state could produce a excess of coins beyond the limit of the state's financial budget.
The state also faces the potential problem of seasonal deflation, as coins are removed from circulation to pay taxes. Encouraging general circulation and usage in non-tax-related commerce, would allow the state to mint enough coins so that the seasonal redemption would be less noticable.
The ultimate way for the state to overcome the issue of seasonality and limited usage would be for the state to not only take the coins as payment, but also distribute the coins as income, starting with its own state workers and welfare recipients. Afterall, the state's tax receipts exactly match the states outgoing payments. If the state agrees to receive the coins in payment, it has to have a method for redistributing them. Without a regular channel of distribution, the coins again fall into the gimmick/collector item category.
From the wording of the bill, the focus seems to be on silver money as a store of wealth.
And, as always with a commodity-based money, the state would have to be concerned with the value of the underlying commodity. If silver, as a metal, rises in price relative to the US dollar, the silver coins would be hoarded if they are fixed against the dollar.
So, the legislature is in a bit of a bind. In order to issue the money to its own workers, the coins would have to be exchangable for US dollars. If that exchange rate is fixed, hoarding could quickly become a problem. Especially given the problem of the rapidly inflating US dollar, the value of silver can be reasonably expected to rise, dragging the value of the coins up with it.
Lets say the coins are issued on par with dollars. The following year, the dollar inflates by 10%, but the silver coins remain stable. 100 coins originally bought the same as 100 dollars, but now 100 dollars only buys 90 coins. Which would you rather be paid in?
The coins! Think of the converse side: 100 coins now buy 110 dollars. Holding or being paid in coins means you are getting richer in dollars. This would actually increase the value of the coins, exactly as the Idaho legislature hoped, spurring their demand and thereby stimulating the Idaho silver economy. In order to meet the demad, and discourage hoarding, the state could prudently issue more coins.
In short, against the background of an inflating dollar, doing business in Idaho silver gems would naturally increase your own wealth. But this would only work if the silver coin was not fixed versus the dollar. If the Idaho legislature had the discipline to not inflate their supply, the demand would remain strong for their silver coins.
Notice that under these conditions, people would stop paying their taxes in silver coins, preferring to pay them in depreciating dollars.
Of course, if the price of silver fell, the conditions would reverse, and the state would see its monetary position wiped out. Under conditions of falling silver, people would flee the silver coins, as they'd be worth less and less relative to dollars. Citizens would pay their taxes only in the increasingly worthless silver.
The state, as a governmental agency, is thus put in a double bind. No matter which way the currency is going, by giving the citizens a choice in payment, the state will always be paid in the worse currency.
This is the whole point of legal tender laws and capital control laws. Without those expedients, the citizens will always work to make the state the loser in currency arbitrage. With legal tender and capital controls, the state can foist the currency costs off on its beholden citizens.
http://www.silverbearcafe.com/private/03.10/medallion.html
With only one state representative dissenting, the Idaho House State Affairs committee voted on Monday to endorse HB 633, a bill that would allow Idaho citizens to pay their state taxes with an official state silver medallion.
The news comes just a month after a South Carolina legislator introduced a bill seeking to ban Federal currency altogether, and replace the upstart greenback with gold or silver coins. A half-dozen other states have considered similar legislation, reports the Tenth Amendment Center. But there's a key difference between the Idaho plan and the bills proposed in other states, most of which fall somewhere on a spectrum ranging from Tea Party rage to Ron Paul goldbug-ism. (The South Carolina bill, for example, claims that "the State is experiencing an economic crisis of severe magnitude caused in large part by the unconstitutional substitution of Federal Reserve Notes for silver and gold coin as legal tender in this State.")
In contrast, the sponsor of the Idaho bill, Republican Phil Hart, seems to be marshalling wide support by crafting legislation that is straight out industrial policy aimed at boosting Idaho's silver industry. The text of the bill is quite clear.
The intent of this act is to use the abundant silver resources of the state of Idaho to create a means whereby the people of Idaho can pay their taxes to the state using silver mined from the ground of Idaho, processed in Idaho and finally minted into a medallion in Idaho. It is the intent of the Legislature to create mining jobs in Idaho while giving the people of Idaho a means to store their wealth in a precious metal that is immune from the effects of inflation while complying with the mandates of our federal Constitution.
The Idaho bill therefore incorporates tax incentives for silver processors located in Idaho.
From The Idaho Reporter:
That, Hart believes, could bring hundreds, if not thousands of jobs to the state. In conjunction with the creation of the medallion, Hart's bill would also try to lure silver processing companies to Idaho, and in particular, north Idaho, which, according to Hart, was once called "the silver capital of the world." The bill would give companies that come to Idaho to process silver for the medallion a 10-year exemption from income taxes, as well as property taxes. The exemption would be open for 20 years and would sunset after that period of time.
Hart believes one of the advantages of silver is that it would resist inflationary pressure better than paper money. But since states aren't allowed to mint their own money, the value of the silver medallion will have to fluctuate according to market forces. In just the last ten years, the value of an ounce of silver has zig-zagged between four and twenty dollars.
Tuesday, April 27, 2010
The History of Free Banking and Alternative Currencies
The academic study of the history of free banking and the contemporary practice of alternative currencies are strongly related. It seems clear to me that the contemporary monetary reform movement should be based upon lessons of monetary history, but such a connection rarely seems to take place. Perhaps because monetary history is so obscure, and monetary theory so confusing?
A wonderful interview was recently published by the Daily Bell (http://www.thedailybell.com/975/George-Selgin-Austrian-Finance-Central-Banks-Free-Banking.html ), with an academic expert on the history of free banking, George Selgin.
One important takeaway: Dr. Selgin drives another nail in the coffin of the "100% non-fractional gold reserve" argument. He appears to conclusively demonstrate through the historical record that free market conditions will not result in a 100% gold standard. As I have argued before, we have moved onward, never to return to a gold standard, because our monetary theory has simply advanced to far. The idea of non-fractional gold as the only legitimate form of money is excessively retrograde, IMHO.
One important takeaway: Dr. Selgin drives another nail in the coffin of the "100% non-fractional gold reserve" argument. He appears to conclusively demonstrate through the historical record that free market conditions will not result in a 100% gold standard. As I have argued before, we have moved onward, never to return to a gold standard, because our monetary theory has simply advanced to far. The idea of non-fractional gold as the only legitimate form of money is excessively retrograde, IMHO.
Another important takeaway is the limitations of viewing pre-Civil War America as a true example of free banking. In that era, bank charters often contained onerous provisions related to capital requirements. As I have detailed elsewhere, any asset can be monetized, which is to say, used as collateral to create a money supply. In the Wildcat Banking Era (as in most eras), land and government debt were the primary collateral monetized by regional banks.
In Dr. Selgin's view, as I interpret it, it was the instability of land speculation in that boom-bust pioneer era which caused the instability of those banks, not anything inherent in the institution of free banking itself. In effect, our most popular idea of why Free Banks were a failure, is simply wrong.
In Dr. Selgin's view, as I interpret it, it was the instability of land speculation in that boom-bust pioneer era which caused the instability of those banks, not anything inherent in the institution of free banking itself. In effect, our most popular idea of why Free Banks were a failure, is simply wrong.
A third important takeaway is the history of free banking in early modern Scotland. Monetary reform advocates have over a century of history to plumb in their search for workable alternative monetary solutions. I look forward to researching more into this era myself, particularly with an eye towards how the Scottish Free Banking system was related to the real bills system and the gold standard system of the same era.
Tuesday, November 10, 2009
Tokens as Alternative Money and Problems with Metallic Coins
What exactly is the difference between tokens and money? In many ways, none at all. Tokens are money. However, they are privately issued money. What we normally think of as money is just publicly-issued and government-controlled tokens.
For those wishing to start their own alternative currencies, keep in mind, there is nothing illegal about issuing your own private money supply, as long as your money does not look like government money (which would leave you open to charges of counterfeiting).
Tokens can also be seen as a subset of metalic money. When used for general trade, tokens were characterized by their composition from common metals like copper, rather than the standard precious metals used for official money like gold or silver.
The problem with using gold or silver for coins is that the metal itself has a value, and that value can change over time. Thus, if the value of the metal goes up, people will hoard the coin for its metal, rather than use the coin as money.
When people hoard coins for their valuable metal, the trade economy is affected by a shortage of money. As strange as it sounds, money shortages have plagued humankind since the dawn of history up into the modern era. Sometimes, when shortages of gold or silver money occur, people have often resorted to tokens (such as the fascinating case described here of privately-issued token usage in early modern England).
The use of multiple types of metal coins, such as in the system of bimetalism (using gold and silver) brings up the further problem of convertability. That is, in a multi-metal system, the coins have to be fixed in relation to each other (one gold piece equaling 17 silver pieces, for example). When one metal rises in price against the other, coins made of that metal will be hoarded, since their market ratio no longer equals their official exchange ratio.
Now, the advantage of tokens lies in their production from cheap and abundant metal. Tokens are also often stamped with money-denomination values below their metal value. That is, 100 dollars worth of copper might be used to create 200 dollars worth of tokens. This mass-production of cheap tokens helps meet the needs of daily commerce, alleviating the problems of money shortage.
A critical thinking question for the reader arises: what problem is created when coins are stamped with a greater value than their metal is worth?
The answer is: counterfeiting! If you can turn 100 dollars of metal into 200 dollars worth of coin, you can make a great profit by creating money. The production of paper money represents the ultimate spread between the cost of materials versus the value of the money produced, and so counterfeiting of paper money is a perpetual problem when it is used. Given our modern printing technology, the ability today to counterfeit paper money is much more widespread than the ability to counterfeit metal money.
The critical balance point which thwarts counterfeiting is when the cost of materials is exactly equal to the value of the money. Why counterfeit money, if the cost of the materials is equal to the value of money you'd produce? In that case, you wouldn't be making any money by counterfeiting, so why bother.
For anyone today considering the issue of an alternative currency, this balance point is key, since there is essentially no way to stop or punish counterfeiters when a private money supply is issued. The value of any currency issued should be carefully tied to the value of its underlying metal, thereby avoiding the twin problems of counterfeiting and hoarding.
Local artists can make tokens, like the Phoenix bux (pictured here). Or tokens can also be ordered from a number of private mints today, such as this one, which promises tokens of the same quality as government issued coins. The list of advantages of using tokens are parallel in many cases to the arguments made for using local alternative currencies, including promotion/advertisement/publicity, price discounting, seignorage (i.e. souvenir value), and captured/circulated/repeated business encouragment.
For those wishing to start their own alternative currencies, keep in mind, there is nothing illegal about issuing your own private money supply, as long as your money does not look like government money (which would leave you open to charges of counterfeiting).
Tokens can also be seen as a subset of metalic money. When used for general trade, tokens were characterized by their composition from common metals like copper, rather than the standard precious metals used for official money like gold or silver.
The problem with using gold or silver for coins is that the metal itself has a value, and that value can change over time. Thus, if the value of the metal goes up, people will hoard the coin for its metal, rather than use the coin as money.
When people hoard coins for their valuable metal, the trade economy is affected by a shortage of money. As strange as it sounds, money shortages have plagued humankind since the dawn of history up into the modern era. Sometimes, when shortages of gold or silver money occur, people have often resorted to tokens (such as the fascinating case described here of privately-issued token usage in early modern England).
The use of multiple types of metal coins, such as in the system of bimetalism (using gold and silver) brings up the further problem of convertability. That is, in a multi-metal system, the coins have to be fixed in relation to each other (one gold piece equaling 17 silver pieces, for example). When one metal rises in price against the other, coins made of that metal will be hoarded, since their market ratio no longer equals their official exchange ratio.
Now, the advantage of tokens lies in their production from cheap and abundant metal. Tokens are also often stamped with money-denomination values below their metal value. That is, 100 dollars worth of copper might be used to create 200 dollars worth of tokens. This mass-production of cheap tokens helps meet the needs of daily commerce, alleviating the problems of money shortage.
A critical thinking question for the reader arises: what problem is created when coins are stamped with a greater value than their metal is worth?
The answer is: counterfeiting! If you can turn 100 dollars of metal into 200 dollars worth of coin, you can make a great profit by creating money. The production of paper money represents the ultimate spread between the cost of materials versus the value of the money produced, and so counterfeiting of paper money is a perpetual problem when it is used. Given our modern printing technology, the ability today to counterfeit paper money is much more widespread than the ability to counterfeit metal money.
The critical balance point which thwarts counterfeiting is when the cost of materials is exactly equal to the value of the money. Why counterfeit money, if the cost of the materials is equal to the value of money you'd produce? In that case, you wouldn't be making any money by counterfeiting, so why bother.
For anyone today considering the issue of an alternative currency, this balance point is key, since there is essentially no way to stop or punish counterfeiters when a private money supply is issued. The value of any currency issued should be carefully tied to the value of its underlying metal, thereby avoiding the twin problems of counterfeiting and hoarding.
Local artists can make tokens, like the Phoenix bux (pictured here). Or tokens can also be ordered from a number of private mints today, such as this one, which promises tokens of the same quality as government issued coins. The list of advantages of using tokens are parallel in many cases to the arguments made for using local alternative currencies, including promotion/advertisement/publicity, price discounting, seignorage (i.e. souvenir value), and captured/circulated/repeated business encouragment.
Wednesday, July 15, 2009
The Theory and Practice of Credit Exchanges and Alternative Money
Money represents wealth. Money can be issued based on anything of value, be it a good or a service. Creating money to represent some object of wealth is called monetizing. Any collateral can be monetized to create new money. Even labor can be monetized to create money.
Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.
Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.
For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.
A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.
Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.
A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.
This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.
If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.
Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.
New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.
Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.
Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.
Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.
The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.
If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.
Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.
Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.
So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.
Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.
Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.
Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.
For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.
A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.
Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.
A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.
This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.
If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.
Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.
New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.
Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.
Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.
Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.
The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.
If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.
Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.
Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.
So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.
Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.
Monday, July 6, 2009
California Issues its Own IOU Money
The official name for this new money issue is registered warrants, popularly called IOUs, but it is a form of money, like a bond or a real bill. Banks are accepting these IOUs (for this week at least), and there is a market already developing for them. I'll call them CaliBonds, since that what they really are.
The CaliBonds are issued for face value, but come with an interest premium (3.75%) payable at a certain future date (starting October 2nd, if the state has cash available). In order to complete the loop and have these function fully as money, the state would just have to make them acceptable for state payments like taxes, fees, and so on.
The first batch of 27,000 Calibonds worth $53 million are being mailed today, mostly to residents owed tax refunds. By the end of July, California will have issued $3.2 billion worth of CaliBonds.
Bids on the CaliBonds are already coming in below face value as investors attempt to take advantage of their uncertainly. In all honesty, their future payment is definitely in question, so below face value is probably an accurate assessment of their value.
Looking at California area Craigslist ads, a number of people are offering to pay cash for these CaliBonds right now. Three ads posted today in Los Angeles mentioned specific amounts: one ad is offering 65%, another 70%, while another is offering 90% of face value. One ad posted yesterday in San Diego offered 85%. Some entrepreneur has also already set up an IOU exchange web site http://ioumarket.com/ (although it has only 3 ads as of Monday afternoon).
This is while banks are honoring them, this week only, maybe. What will happen when banks are no longer accepting them for deposit? Values would likely fall even further.
While they provide tax exempt income, the real difference between these CaliBonds and real bonds is that no one is offering to buy these CaliBonds. They are being forced on people who were expecting cash. The fact they are being bid at a 10-35% discount shows more of their true worth. Regular citizens, who expected a cash refund on their tax overpayments are being given the short end of the stick.
The funny part is, a 3.75% tax free return is not bad in today's environment, and normally, people don't get any interest on their refund checks. The big question, IF, IF, IF the state government makes good on the payments in October.
Payment categories protected by the State Constitution, federal law and court decisions (education, debt service, state payroll, pensions, In-Home Supportive Services, and Medi-Cal providers) will receive regular payments in cash. All other general fund payments will be paid with CaliBonds (including payments to local governments for social services, private contractors, state vendors, income and corporate tax refunds, and payments for State operations including legislative per diem).
UPDATE:
The California registered warrants were available for redemption a month early:
http://www.sco.ca.gov/eo_news_registeredwarrants.html
The CaliBonds are issued for face value, but come with an interest premium (3.75%) payable at a certain future date (starting October 2nd, if the state has cash available). In order to complete the loop and have these function fully as money, the state would just have to make them acceptable for state payments like taxes, fees, and so on.
The first batch of 27,000 Calibonds worth $53 million are being mailed today, mostly to residents owed tax refunds. By the end of July, California will have issued $3.2 billion worth of CaliBonds.
Bids on the CaliBonds are already coming in below face value as investors attempt to take advantage of their uncertainly. In all honesty, their future payment is definitely in question, so below face value is probably an accurate assessment of their value.
Looking at California area Craigslist ads, a number of people are offering to pay cash for these CaliBonds right now. Three ads posted today in Los Angeles mentioned specific amounts: one ad is offering 65%, another 70%, while another is offering 90% of face value. One ad posted yesterday in San Diego offered 85%. Some entrepreneur has also already set up an IOU exchange web site http://ioumarket.com/ (although it has only 3 ads as of Monday afternoon).
This is while banks are honoring them, this week only, maybe. What will happen when banks are no longer accepting them for deposit? Values would likely fall even further.
While they provide tax exempt income, the real difference between these CaliBonds and real bonds is that no one is offering to buy these CaliBonds. They are being forced on people who were expecting cash. The fact they are being bid at a 10-35% discount shows more of their true worth. Regular citizens, who expected a cash refund on their tax overpayments are being given the short end of the stick.
The funny part is, a 3.75% tax free return is not bad in today's environment, and normally, people don't get any interest on their refund checks. The big question, IF, IF, IF the state government makes good on the payments in October.
Payment categories protected by the State Constitution, federal law and court decisions (education, debt service, state payroll, pensions, In-Home Supportive Services, and Medi-Cal providers) will receive regular payments in cash. All other general fund payments will be paid with CaliBonds (including payments to local governments for social services, private contractors, state vendors, income and corporate tax refunds, and payments for State operations including legislative per diem).
UPDATE:
The California registered warrants were available for redemption a month early:
http://www.sco.ca.gov/eo_news_registeredwarrants.html
Wednesday, March 18, 2009
Financial Survival Strategies - International and Local
It is amazing to read about China's and Russia's current financial strategies, because they are the exact same as mine. For the exact same reasons, too: the impending dollar collapse.
China is using its dollars to buy up cheap hard assets, just as I am. Russia is attempting to create a new non-dollar exchange system, just as I am.
Clearly, the writing is on the wall. Everyone who isn't blinded by wishful thinking can see it. There is no magical happy ending in the works for the dollar-denominated economic system.
If you don't like my advice, take it from the Chinese and Russians: stock up on hard assets and productive capacity, and get involved in a non-dollar exchange system. At least then you will be partially insulated from the coming economic shocks.
If you have the capital, investing in productive capacity will be especially profitable after the dollar collapse. After the dollar collapse, imports will no longer be cheap, in fact, the price of everything will skyrocket. The updside is, made-in-America will make economic sense again. The US manufacturing base will have the opportunity to rebuild itself from the ground up. Unfortunately, in the meantime, we will face massive unemployment, and the economy will be hampered by the government's socialist policies.
China inoculates itself against dollar collapse
http://www.atimes.com/atimes/China_Business/KC18Cb02.html
At G20, Kremlin to Pitch New Currency
http://www.themoscowtimes.com/article/600/42/375364.htm
China is using its dollars to buy up cheap hard assets, just as I am. Russia is attempting to create a new non-dollar exchange system, just as I am.
Clearly, the writing is on the wall. Everyone who isn't blinded by wishful thinking can see it. There is no magical happy ending in the works for the dollar-denominated economic system.
If you don't like my advice, take it from the Chinese and Russians: stock up on hard assets and productive capacity, and get involved in a non-dollar exchange system. At least then you will be partially insulated from the coming economic shocks.
If you have the capital, investing in productive capacity will be especially profitable after the dollar collapse. After the dollar collapse, imports will no longer be cheap, in fact, the price of everything will skyrocket. The updside is, made-in-America will make economic sense again. The US manufacturing base will have the opportunity to rebuild itself from the ground up. Unfortunately, in the meantime, we will face massive unemployment, and the economy will be hampered by the government's socialist policies.
China inoculates itself against dollar collapse
http://www.atimes.com/atimes/China_Business/KC18Cb02.html
At G20, Kremlin to Pitch New Currency
http://www.themoscowtimes.com/article/600/42/375364.htm
Sunday, March 15, 2009
Alternative Money Systems and Barter
Found a few nice resources online providing a discussion of a number of different potential monetary systems and barter networks.
I do not think a system that declares all labor to be equal is workable. Nor, frankly, do I think a fully-backed money system would work. Raw barter is especially cumbersome and must be made more efficient.
I think a real bill system with cash redemption backing, combined with a barter network, is the best alternative system. But these systems provide a nice ground for brainstorming:
http://www.transaction.net/money/index.html
http://projects.exeter.ac.uk/RDavies/arian/local.html
http://barternews.com/community_barter-pg1.htm
The current barter exchange groups are really not suitable for mass consumption, as they are limited to a select group of businesses, and are run on a for-profit basis.
A real bills clearinghouse and barter network for the masses needs to be super cheap, as close to transparent as possible, and open to all.
I do not think a system that declares all labor to be equal is workable. Nor, frankly, do I think a fully-backed money system would work. Raw barter is especially cumbersome and must be made more efficient.
I think a real bill system with cash redemption backing, combined with a barter network, is the best alternative system. But these systems provide a nice ground for brainstorming:
http://www.transaction.net/money/index.html
http://projects.exeter.ac.uk/RDavies/arian/local.html
http://barternews.com/community_barter-pg1.htm
The current barter exchange groups are really not suitable for mass consumption, as they are limited to a select group of businesses, and are run on a for-profit basis.
A real bills clearinghouse and barter network for the masses needs to be super cheap, as close to transparent as possible, and open to all.
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