If any of the following confuses you, please read, or re-read, E.C. Riegel's book, Private Enterprise Money, until the following makes sense to you.
So, assuming that we know why things are the way they are, how can we change things for the better?
Let's summarize the mistakes made in the story, "I Want The Earth Plus 5%". The people in the story let the bankers convince them to use gold as money, they let the bankers get the government involved in money, they let the bankers charge interest without creating enough money to pay the interest, and they let the bankers create money via "book entries".
Notice a common thread running through all the mistakes, the bankers. Now this may lead you to suspect that I am about to suggest that we shoot all the bankers and burn all the banks. I am sorry to disappoint you. I am going to suggest, however, that we need to get the bankers out of the money creating business. We also need to get the government out of the money creating business. It's actually the combination of bankers and governments that create the problem, along with the popular misunderstanding of what money is and how it is created.
Looking at the mistakes one at a time:
Using Gold as Money
Using gold as a medium of exchange is not a problem other than the fact that there's not enough of it to handle the volume of transactions in today's world. As noted elsewhere, gold has been successfully used as a medium of exchange for centuries and has been imminently successful. The problem occurs when we try to use gold as money rather than just a medium of exchange.
Money, as defined in Riegel's works, is a way of accounting for a generalized debt to a community of traders. If you exchange something of value for something else of equal value, as determined by you and the trader during negotiations, then you have completed a barter transaction and no money has been created since there is no debt to account for. This is true even if the value you exchanged was gold since the gold has intrinsic value. Money itself is an abstract accounting concept and therefore has zero intrinsic value and what we usually call money, the paper or coin that attests to the amount of abstract money that we have personally created, should have near zero intrinsic value, as near to zero as we can get it, and should have no relationship to the amount of money attested to. Gold does not meet this criterion and neither does any other precious or semi-precious material.
Government Involvement
Money, as defined in Riegel's works, can only be created by the act of buying something and can only be retired (i.e., spent out of existence, Riegel says destroyed) by selling something in exchange for an equal amount of the same kind of money in the same trading community. Also, legitimate money can only be created in the amount that the creator can retire by selling things in the free market. Any money created in excess of this amount is counterfeit money. Governments are very good at buying things, especially during wartime, so they can easily create money. However, governments produce very little of value in a free market so they can retire only a fraction of the amounts created by any modern government. The rest of the money created by governments is counterfeit and leads to such undesirable results as runaway inflation and the welfare state.
Letting Bankers Charge Interest
As noted in the story and in the analysis of the story, the problem with interest is that there is not enough money created to pay it. Therefore, the interest inexorably builds until the interest is so high that you cannot even pay the interest on the interest. At this point, the assets securing the "loan" becomes the property of the bank, provided it hasn't become the property of the bank long before the interest builds to that point. Some authors have suggested that we have government banks rather than private banks. This only moves the problem to a different set of people. What we have to do is to redesign the functions of the bank, not just give the existing system to a different owner.
Letting Bankers Create Book Entry Money
The problem here is the "letting bankers create" part. There's nothing wrong with creating book entry money. In fact, if you remember the definition of money as an abstract accounting concept, book entry money is the only kind of money there is. But the bankers should not be creating it for you. You should be creating it for yourself, although you, and the other traders in the community, may need something similar to a bank to keep track of the money.
The Solution
Now we are ready to examine ways to change things so that the situation improves. The solution is simplicity itself. Anyone should be able to buy products and services using money they don't already have. We simply let everyone create their own money.
We are not here talking about the paper and coin that attest to the amount of money you have created. We are instead talking about the abstract accounting concept of money. Anyone should be able to buy products and services using money they don't already have. This is, in fact, the only way that money can be created. If you have money, i.e., a positive balance in your account, then you just spend what you have. The only time you create money is when you have a negative balance in your account, i.e., you have spent more than you have. In general, minus a lot of details, such a system would work as follows.
The traders in a trading community will get together and set up a system of accounting whereby money can be accounted for. In order to participate in this system, you will need an account somewhere in the system. (This may be a single set of accounts or it may be spread out over several companies, each with it's own set of accounts.) Let's call the organization that keeps the accounts a "mint" since one of its major functions will be to allow account holders to create money. We will probably also need an organization to clear accounts among the various mints. Let's call this organization a "clearinghouse".
There will be two classes of accounts in a mint. One class, Class A, will allow the account holder to draw on the account up to a specified negative balance. Thus, this class will be able to create money. The other class, Class B, will only be able to draw on the account until it reaches zero. For example, a government agency would be a Class B account holder since a government agency does not produce anything of value in the free market. How about clearinghouse accounts? Only mints will be able to have an account in a clearinghouse since a clearinghouse will not deal directly with the public.
Assuming you have an account in one of these mints, you start managing your account by depositing money that you receive from others and by writing checks, either to a specific entity (to pay bills, for example) or to the mint to obtain some currency (notes and coins, possibly in electronic form) to enable you to pay cash for things. So far, this is no different from the current banking system. But now things start to get interesting.
Assuming you are a Class A account holder, and most people would be, then you can write checks in excess of the amount you have on deposit. Let's say that you have a zero account balance, just to keep things simple, and you want to purchase a bicycle. You negotiate a price for the bicycle and write a check for that amount, even though you have a zero account balance. (In today's banking system, this would immediately get you into a lot of hot water.) In the system we are describing, however, the check clears, money in the amount of the check is created and subtracted from your account and is deposited into the seller's account. Your account will now show a negative balance in the amount of the check and you have just created money. You are now, of course, expected to be ready, willing, and able to retire that amount of money by selling your own products or services for a freely-negotiated price and that is how the money is "backed".
What is to keep you, or anyone else with a Class A account, from writing large checks, buying everything in sight, and then refusing to sell anything in return? First, each mint will have its own policies about how much credit to allow each account holder and each account holder will have such a limit. (Clearinghouses will have similar policies concerning mints.) This keeps you from spending amounts that is outside your ability to retire. (How this limit is determined is, of course, up to each mint and will probably be a major item of competition.) Second, if you spend up to your credit limit and then don't sell anything to retire it, you will no longer be able to buy anything. You may be able to open an account in another mint but I suspect that the mints will cooperate on such matters so you shouldn't count on that technique to last very long. The system, as described, is pretty much self-policing.
How do the mints make their money? The mints are providing a service so they should be compensated. However, since you are now creating your own money and not "borrowing" it from the mint, the mint should not be charging interest. (Any mints that do will quickly find themselves without customers.) The mints will probably charge various fees for services they provide. The services and the fees charged will also be an item of competition. As a minimum, though, there will probably be a membership fee, possibly fees for processing checks, and perhaps some others that I'm sure the mint owners will come up with.
For a full appreciation of such a money system, you need to study E.C. Riegel's works but you should be able to see that we have resolved a number of problems with this system.
What are the prospects for such a system? Pretty good, actually. It has been estimated that approximately half of all business transactions are completed barter transactions. It should be fairly easy to convince these businesses of the advantages of a split barter system. There is currently a project looking seriously at implementing a split barter system which would include electronic currency. When, and if, the project is ready to advertise, you can expect to find a reference to it on this web site. If you are interested in assisting with the development, implementation, or marketing of such a system, we would like to hear from you. (You will be expected to use PGP as our serious discussions are encrypted.)
In the meantime, press on with your study of the Three Steps to Freedom.
Copyright at Common Law, West El Paso Information Network, 1998