APPLYING
SYSTEMS THINKING TO THE MONEY SYSTEM
Introduction
What
makes up an economy?
The
composition of an economic nugget
Bartering's
difficulties
Overcoming
the difficulties inherent in bartered exchanges
Safely
de-linking the two halves of a bartered exchange or, guarding against
money's pitfalls
Introducing
money safely into the exchange process
The
elements of an economic nugget when money becomes part of the
exchange process
Preventing
threats to the economic nugget's integrity
Using
new issue money safely in the exchange process
The
money system [Modelling the intrinsic values in an economy]
Accuracy
of modelling
Maintaining
the model's accuracy
Implementing
a healthy money system
Necessary
procedural changes
A
the level of economic agents
At
the collective level
The
benefits of implementation of this money system
1
Introduction
If
we are to discuss our current money crisis in a meaningful way we
first need to to accept that the essential role of any money system
is that of representing the intrinsic value in the exchangeable goods
and services that go to make up the real economic system. The money
system is not
the economy, i.e. not
the real economic system. The money system endeavours to represent,
as accurately as possible, the intrinsic value contained within the
economy and this value, even though it is represented extrinsically
by currency, is not, and cannot be, something extrinsic. It is
intrinsic only to the exchangeable real goods and services that
comprise the economy. These intrinsic values reside in people's heads
no where else. Without the goods and services or the people there is
no value to be represented and any money system established under
such circumstances would be utterly meaningless.
In
one sentence, a money system models, as accurately as possible, the
intrinsic value in the exchangeable goods and services that lie at
the heart of any economy.
We
turn now to developing an understanding of what makes up an economy
because in order to create a good model you first have to understand
the thing that you are trying to model.
What
makes up an economy?
An
economy cannot be seen as just the heap of exchangeable goods and
services that lie at its heart. It must also include the processes of
exchanging goods and services, processes that take between the
people who comprise the community to which the economy belongs
Thus
an economy is the collective noun for all the
voluntary exchanges
of goods and services,
completed,
in process, and in prospect,
that have, are and are about to take place between the members of a
community. An economy is not a static thing, it is a living thing. If
exchanges stopped there would no longer be an economy. Thus it is
fair to say that the basic building blocks of an economy are the
myriad of voluntary exchanges of goods and services entered into by
the members of a community.
For
our purpose here, which is to establish the guidelines for ensuring
the creation of an accurate model of the intrinsic value of the goods
and services in an economy, only the completed
voluntary exchanges of goods and services are regarded as of
relevance.
Exchanges
in process or in prospect are just that, they have, as yet, not
resulted in indisputable realisations of intrinsic values which is
the case once an exchange is completed. Before an exchange is
completed there is no indisputable concrete confirmation of the
veracity of the intrinsic values of the items being exchanged and
therefore there are no immutable values for our money system model to
represent.
We
shall call such completed exchanges economic
nuggets and
it is out of such economic
nuggets
that an economy is built. They are the fundamental building blocks of
any economy. Without their existence there is no economy.
2
The
composition of an economic nugget
Economic
nuggets
are comprised of a number of identifiable components. They are
comprised of six distinct elements, each of which is needed in order
to produce a completed exchange, and thus an economic
nugget.
These
six elements are:
-
the two parties, A & B, making the exchange
-
the two items, IA & IB, to be exchanged belonging to A and B
respectively
-
the two simultaneous exchanges
-
IA to B, and
-
IB to A
Clearly
the reason why A and B are happy to exchange IA and IB with one and
other is because the intrinsic values [iv] that A is according to IA
and to IB are equal and the same is true for B, otherwise they would
not complete the exchange. Whether the intrinsic values in their
respective heads are exactly the same is of no relevance.
Stated
algebraically, it is sufficient for this voluntary exchange to happen
if for A, IA(aiv) = IB(aiv) and for B, IB(biv) = IA(biv), and it is
not necessary for IA(aiv) to be equal to IB(biv) or for IA(aiv) to be
equal to IA(biv), or for IB(aiv) to be equal to IB(biv).
An
exchange process not using money, as described above, is known as
bartering
but
bartering is a process that naturally has a number of difficulties,
difficulties get in the way of the exchange process ever getting
started.
Bartering's
difficulties
For
someone wanting to complete a bartered
exchange these
difficulties are:
locating
the group of people, G,
who want to enter into bartered exchanges
finding
amongst the members of G the sub-group of people, GO,
who are offering things that you want
finding
amongst the members of GO the sub-group of people, GOW,
who also want what you are offering
finding
amongst the members of GOW the sub-group of people, GOWW,
who feel that what you are offering has the equivalent intrinsic
value to them as what they are offering to you.
Clearly
the above four difficulties present major obstacles to completing
voluntary bartered
exchanges, and a way needs to be found to overcome them.
Overcoming
the difficulties inherent in bartered exchanges
A
bartered exchange is a binary process, that is it has two equal
halves to it and these two
3
halves
are tightly linked to one and other because the needs of the two
participants have to match.
If
a way of separating these two halves could be found then the whole
process would become less cumbersome and more efficient in terms of
the time and the energy required to complete it. This is so because
by de-linking the two halves the needs of A and B would no longer
have to match.
At
some point in time it was discovered that the way to de-link the two
halves of a bartered exchange was to externalise the intrinsic
values involved in the exchange. Once this was successfully done the
intrinsic values involved could be ported and used in one, or many,
exchanges distinct from the original single bartered exchange.
With
successful externalisation A only needs to give to B the now
externalised 'intrinsic value' of IB rather than exchange IA for IB,
and then B is free to find another item, IX say, that they want and
for which they can give to the owner of IX the externalised
'intrinsic value' received from A.
How
is this externalisation of intrinsic values historically done?
It
is done by rendering intrinsic values into generic, visible forms the
veracity, the accuracy, the integrity etc., of which forms is
generally accepted by the community.
Over
the centuries the externalisations have involved many different types
of physical objects but now-a-days the externalisations are mainly
rendered in the form of physical notes and coins, generally known as
money
or
currency,
and now-a-days also in the more abstract less physical form of the
recording of currency values in writing or electronically.
The
use of money
might have removed the difficulties associated with bartered
exchanges but it does not removed the need for the formation of
economic
nuggets.
Now money does bring with it some changes to the processes that form
economic
nuggets
and thus some threats to their integrity and these threats need to be
guarded against if the two halves of a bartered exchange are to be
safely
de-linked.
Safely
here means de-linking the two halves of the bartering process without
in anyway damaging the integrity of the resulting economic
nugget.
Introducing
money safely into the exchange process
By
introducing money into the exchange process we are enabling the
separation of the two halves of the binary exchange process from one
and other with each half becoming a distinct sales and purchase
operation in its own right. But when considered together these two
halves must still be able to fully substitute for the original
bartered exchange, that is, from the point of view of the integrity
of the original intrinsic value, otherwise the economic nugget will
not be formed.
It
is necessary at this point to recognise two distinct categories of
money, old
issue money
and new
issue money.
4
Old
issue
money is money the value of which has already been uniquely and
honestly linked to the intrinsic value of a particular item, or group
of items, be they goods and/or services, and it is therefore
representing actual, i.e. real, intrinsic value and as a consequence
its introduction into the exchange process cannot damage the
integrity of an economic
nugget in
any way.
New
issue
money is money the value of which has not yet been linked to the
intrinsic value in
any
specific goods and/or services. Thus it has no real value and the
value stated on it is illusory. Clearly the introduction of such
money into the exchange process undermines the value accuracy of the
money system model.
The
elements of an economic nugget when money becomes part of the
exchange process
In
order for an exchange involving money to still yield the economic
nugget,
that would have resulted had it been a bartered exchange, the
exchange must meet two criteria
1.
include the following nine elements
party
A who both buys and sells
party
B selling IB to A
party
C buying IA from A
two
items to be sold, IA & IB, belonging to A and B respectively
two
equal sets of money, MA & MC, to the value of IA ,or IB,
belonging to A & C
respectively
and to be used for purchasing IB and IA
two
completed purchase processes where A buys IB from B using MA and C
buys IA from A using MC
MA
and MC must be comprised of old
issue money.
Preventing
threats to the economic nugget's integrity
Threat
to the intrinsic value integrity of economic
nuggets
only arises if the money introduced into the exchange process is new
issue
money, and continues to remain new
issue money
into the future. That is this new
issue
money never becomes old
issue
money in an honest
manner.
When
new
issue
money remains a fictitious externalisation of intrinsic value such
new money is fraudulent and if it is put into circulation it remains
quite unrecognisable as fraudulent, unless it is in the form
counterfeit notes and coins of poor quality. Then its fraudulent
nature being unseen, it has, by default, to steal for itself some of
the intrinsic value of the money already in circulation. This damages
the accuracy of the model of the intrinsic value in an
economy,
i.e. the money system, by debasing, or devaluing, the building blocks
of the money system, i.e. the currency, giving rise to general price
inreases. These increases are commonly referred to as inflation.
5
The
issuing of new money is a necessity however. The question is, can new
money be issued without the risk of creating inflation?
If
the volume of exchangeable goods and services in the economy has
increased then there is a genuine need for an amount of new money of
equivalent intrinsic value to the increase in goods and services and
the issuing of such new money will not be inflationary.
If
however the new money is being put into circulation before there are
in existence, actual exchangeable goods and services the intrinsic
value of which the money can represent, the new money will be
inflationary until such time as these exchangeable goods and services
come into existence and then the money can represent the intrinsic
value of these goods and services. Because of this it is essential to
keep a tight control on the amount of new money issued in order to be
able ensure that it uniquely represents the intrinsic value of newly
developed goods and services.
Using
new issue money safely in the exchange process
Now
the possibility exists that either one, or both, of MA, and MC in the
above specification 'The
elements of an economic nugget when money becomes part of the
exchange process'
involve new
issue
money,
in which case
Criteria
2 is replaced by the following over-arching rule:
The
person who first puts new
issue money
into circulation has to recognise that the new issue money is
actually a commitment on their parts to supply goods and/or
services, to the value of the
new issue money,
into the community and to do so as soon as possible. Failure to do
so will inevitably be inflationary and the entity concerned should
then be prevented from issuing any new money into circulation until
they meet their outstanding new
issue
money commitment(s).
Meeting
their commitments is probably best done by the transfer of the
intrinsic value attached to old
issue
money, presently in their possession, equivalent in value to the new
issue
money, by withdrawing the old
issue
money from circulation at which point the new
issue
money becomes old
issue
money.
6
The
money system [modelling the intrinsic values in an economy]
Money
is so effective in its facilitation of the exchange process that
bartering has, to all intents and purposes, ceased to be practised.
Consequently the use of money has become integral to virtually all
economic activity. In other words the modelling of the intrinsic
values of the goods and services that comprise an economy has become
an integral part of that economy, shaping virtually all economic
decisions and actions .This means that the accuracy of the modelling
of the intrinsic values in an economy, which is what the money system
does, is of critical importance to maintaining a healthy economy.
Once money is introduced into an economy its health can only be
maintained if the modelling accuracy of the money system is
maintained.
Accuracy
of modelling
The
accuracy of representation achievable by a model is determined by the
granularity of the representation, i.e. the more fine the detail
being represented the more accurate the model is likely to be. In the
case of the intrinsic values of exchangeable goods and services their
range is truly unbounded so the logical thing to do when establishing
extrinsic representations of these values is to have something that
represents the smallest possible intrinsic value as the basic
building block of the model. Historically this is what has been done
and usually 1/100 of the unit of the currency represents the lowest
intrinsic value and these
units,
or fractions thereof, can be accumulated as needed to represent any
desired intrinsic value. This has meant that the granularity of the
money system is such that it can be used to represent from the
smallest intrinsic value to the greatest.
In
any economy the vast majority of exchangeable goods and services have
intrinsic values that are greater than a single unit of currency. Now
there is no sense in seeking to match each unit of currency with the
intrinsic value of a particular fraction of a good or service rather
the intrinsic values of goods and services need to be matched with
their own particular accumulations of the units of currency. In other
words each accumulation of currency has to have an unseen umbilical
cord which connects it , and only it, irrevocably to the good or
service the intrinsic value of which it is representing. Otherwise
the accumulation is representing nothing and is therefore
meaningless. Such empty representations degrade the model because it
to loses its accuracy.
Maintaining
the model's accuracy
The
model's accuracy is maintained if any accumulation of currency
uniquely represents the intrinsic value in a particular exchangeable
good or service, otherwise not. How then do we establish a mechanism
which will ensure that that accuracy, that integrity, is maintained?
In
order to ensure this the use of new
issue money
in the exchange process has to abide by certain rules as explained
above in, Introducing
money safely into the exchange process,
If these rules are observed then the currency will not be debased,
i.e. the model will retain its accuracy.
Implementing
a healthy money system
Money's
primary purpose is to facilitate the voluntary exchange of goods and
services between the members of a community. Therefore as the issuing
of money is essential to the existence of any modern economy its
issuance should be at no cost to its first recipients, any associated
issuance costs should be borne by the whole community.
The
most socially healthy way for new
issue
money to come into existence is for it to only be produced at the
point where a purchaser has need of it because they have zero or
insufficient old
issue money
to complete a purchase.
Now
provided that, the new
issue
money recipient, i.e. the purchaser, goes on to meet the associated
commitment to supply into the community goods and/or services of
itrinsic value equal to the value of the new
issue
money, the integrity of the economic
nugget,
that they are party to creating through this transaction, is
preserved and secondly the accuracy of the model, i.e. the money
system, is maintained.
Prior
to the advent of computers and IT, notes and coins had of necessity
to be in a physical form which meant that issuing new money in
response to such individual demands as outlined above was really not
practicable. As a consequence of this physical limitation our current
dysfunctional
money system evolved. It is dysfunctional because new money is issued
without it being umbilically linked to the intrinsic values in
specfic goods and/or services. Consequently the model of intrinsic
value, i.e. the money system, loses its accuracy. To add insult to
injury the recipients of the new
issue
money are charged interest on it as though it was old
issue
money which is fraudulent.
However
with the advent of infomation technology, notes and coins no longer
need to be in a physical form, they can, and are, already kept in the
form of electronic records. Thus in conjunction with mobile phone
technology this situation holds out the possibility of new money
being issued electronically on demand to any individual anywhere
provided that they have a phone and are within the reach of the
mobile phone network.
Thus
as money's primary purpose is to facilitate voluntary exchanges of
goods and/or services between the members of a community it makes
good moral sense, and it is now technically feasible, for this to be
done, free of charge to the individual by a central, publicly funded,
currency authority, the Hational Currency Authority [NCA]
How
might this work in practice?
Firstly
there is already a very successful worldwide alternative money system
issuing its currency in this way, it can be found at www.ces.org.za
, and there is no reason why such a system could not be adapted to
serve an NCA.
The rest of current monetary facilities such as banks etc., etc.
would remain in place but they would only handle old
issue
money.. In order to control the accuracy of the model, i.e. the money
system, a necessary procedural change would be that any transaction
involving money would, as its first port of call, have to pass
through the NCA's
national currency system [NCS].
8
Necessary
procedural changes
A
the level of economic agents
Every
economic agent in the country would need to be registered with the
NCA
as an Account Holder[AH].
For people it would probably be simplest to use their Id numbers for
this purpose.
Every
AH
would have a record in the NCS.and
every AH
would have a limit on the amount of unredeemed
new issue
money that it could hold at any point in time. AH's
would probably need to be categorised for the allocation of limits
according to some yet to be defined criterion. Ideally these limits
would be set periodically in a national democratic referendum on the
matter.
For
each AH
the NCA
would keep a record of the amount of unredeemed new
issue
money issued to the AH.
This
is so that the NCA
can both issue and control the amount of unredeemed new
issue
money in circulation.
Every
AH
would also need to have a specified bank account [SBA]
accessible to the NCA.
The SBA
would only hold old
issue
money. Because of the controls on new
issue money
when such money is paid into an AH's
SBA
it can be safely regarded as old
issue
money.
9
When
a payment is to be made by an AH
then it would have to start with a request to the NCA
for an amount to be paid from its SBA
into another AH's
SBA.
The
NCA
would first check to see if there were sufficient funds in the SBA
to make the payment.
If
that was
the case then the NCA
would do the transfer and that would be it.
If
that was NOT
the case then the NCA
would check in its records to see if the amount of new
issue
money required by the AH
was within the specified limit for unredeemed new
issue
money.
If
that was
the case then the NCA
would issue the necessary new
issue
money, add it to the AHs
unredeemed amount of new
issue
money and do the transfer and that would be the that.
If
that was NOT
the case then the NCA
would refuse to issue the new
issue
money or do the transfer and report the situation to the AH.
If
an AH
was to receive a payment into it's SBA
from another AH's
SBA
the payment would first be passed to the NCA
and the NCA
would check to see if the AH
had any unredeemed new
issue money.
If
that was
the case then the NCA
would use the payment to redeem the AH's
unredeemed new
issue
money by writing off, i.e. permanently withdrawing from circulation,
the equivalent amount of old
issue
money received. The consequence of this redemption is
10
that
the money received in payment rightly goes out of circulation being
replaced by the now redeemed new
issue
money. Any excess could rightly be transferred to the AH's
SBA.
If there was no excess then no transfer to the AH's
SBA
could be done.
If
that was NOT
the case then the NCA
would transfer the payment as is to the AH's
SBA
and that would be that.
Procedure
at the collective level
The
NCA
would need to constantly monitor whether the amount of money in
circulation corresponded with the intrinsic value of the economy. In
other words that there was neither deflation nor inflation. This is a
difficult balancing act requiring the perusal of a variety of
national statistical reports before issuing planned amounts of new
money into circulation. The NCA
should probably aim for a 1 to 2 percent inflation rate.
With
the NCS
there are a variety of ways that new money could be issued ranging
from to the Treasury to every citizen.
Implementation
of this money system, the benefits
Monetary
stability
The immediate major benefit of the implementation of the above
procedures for dealing with new
issue
money is that the accuracy of the model, i.e. the money system, could
be largely maintained and currency induced inflation in prices could
be minimised.
The
NCS
would not only keep control of the amount of unredeemed new
issue
money held by a AH
it would also keep a unique record of every unit of currency issued
into circulation and the successive AH
holders of it.
This
would enable other valuable benefits to arise from this money system.
They are as follows:
Democratisation
of money:
Should
any AH
need extra money to complete a purchase the NCA
would produce for them as much new
issue
money as they needed for the purchase, provided that the amount of
unredeemed
new issue
money already given to them did not exceed the limit allowed. Thus
shortages of cash would not block any person from entry into the
economy,
Money
with a built-in moral history:
Each
unit of currency would have a unique digital identity and a history
of its holders starting from when it was first issued into
circulation would be kept in the NCS. Thus there would be an
accessible moral history available to all AHs.
Thus
any AH
who wanted to view the transaction history of a unit of currency in
order to see if the currency was acceptable to themselves would be
able to do so. 11
This
is equivalent to the level of information that a purchaser would
have had were they in a bartering situation. In a bartering
situation if the purchaser did not like the source of the goods
being offered for exchange they would not enter into the exchange.
Similarly if money being proffered is money that has passed through
transactions that the seller does not approve of, like drug dealing,
arms trading, or environmental destruction for example they can
refuse to accept it. In other words the units of currency would
carry a moral colour instead of, as at present, being morally
colourless.
Money
laundering would no longer be possible.
Tax
system simplification:
The
current Tax system could be radically simplified by reducing it to
the collection of a percentage on every transaction made through the
NCS.
11