TACKLING POVERTY FROM A DIFFERENT PERSPECTIVE, THE MONEY SYSTEM


ECONOMIC FUNDAMENTALS


An economy is comprised of a realised portion and a potential portion.

The realised portion of an economy consists of all the completed binary voluntary exchanges of goods and/or services within the community that possesses the economy. The economic relevance of completed exchanges is depends not so much on the time of completion but on the current economic relevance of the exchange as the exchanges can range from those just completed to those completed in the dim and distant past such as a major road network.

The potential portion of an economy consists of  all the potential voluntary exchanges of  goods and/or services within the same community and these can range from nearly completed exchanges to those that are just glitters in the eyes of members of the community.

What is fully embraced by the terms ‘completed’ and ‘potential’ is dependent on the particular universe of discourse that is being addressed. For our purposes here the universe is the immediate present.

Generically for convenience in what follows the term ‘item’ will be used to  refer to both goods and services.

A completed binary voluntary exchange is comprised of

Two exchanging parties A & B
Two items to be exchanged,
Ia, belonging to A, and
Ib, belonging to B
Two, mirror image exchange processes, taking place simultaneously,
A taking ownership of Ib, and
B taking ownership of Ia

Such completed binary exchanges are the fundamental building blocks of the realised portion of any economy. It is thus useful to give such successfully completed binary exchanges a generic term, a name that fits comfortably  within the universe of economic terms. I suggest that they be called ‘economic nuggets’, because of gold’s historical  role in economic life rather than ‘economic atoms’ which would also reflect their fundamental atomic nature from an economic perspective.

It is worth noting the following about such completed exchanges. The intrinsic worth accorded by A to both Ib and Ia must meet the following criterion Ib >/= Ia, and similarly for B Ia >/= Ib otherwise there would not have been an exchange, but, as the intrinsic worths involved are purely in the heads of A and of B, they do not need to coincide. When money is used in an exchange however they have to coincide.


INTRODUCTION OF MONEY INTO THE EXCHANGE PROCESS

But first before discussing the implications of introducing money into the exchange process we need to define some  terms relevant to the discussion.

Intrinsic worth is the relative value that a person accords, in their heads, at a point in time, to a specific item in comparison to the values that they accord to other items at the same point in time.
Quantified intrinsic worth is intrinsic worth that is externally represented in a commonly accepted and measurable way. This is usually, and conveniently, done by means of a numbering system.

Socially validated intrinsic worth is the quantified intrinsic worth of an item that at least two people nave agreed upon.

Money, in general terms money represents the quantified, socially validated, intrinsic worth accorded to the exchanged goods or services in an economy.

It is also essential that we recognise two different categories of money, old  and new.

Old money is money that has had the intrinsic worth that it represents socially validated. New money is money that has not yet had the intrinsic worth that it  represents socially validated.

Thus if new money is used in an exchange it has a direct bearing on the further actions required of its user in order for the binary exchange to be completed successfully and thus forming an economic nugget.

The obvious and completely natural way to socially validate the intrinsic worth being represented by new money is for it to participate in a successfully completed binary exchange.

Economy, is the collective result of the freedom to enter into voluntary exchanges, with others, of goods and/or services.

Currency  because a currency is a representation of the socially validated quantified intrinsic worth of the realised portion of an economy this is the umbrella term that is used to refer to society’s money as a whole.

Unit of currency this is the generic term that is used to refer to any single unit of currency.

Money is introduced into the exchange process in order to act as a stand-in, or general purpose surrogate,  for one of the exchanged items. It achieves this generality by representing the intrinsic worth of the item in question, whatever  that item might be, because intrinsic worth, although belonging to a specific exchangeable item in each instance, is nevertheless a general property of all exchangeable items.

When money is introduced into the exchange process the question that  naturally arises is, can this introduction disrupt  in anyway the formation of economic nuggets, these building blocks of the economy? The short answer is, only if new money is used and the further action[s] required of its user is/are not successfully executed.

Now let us look at the composition of two successfully completed exchanges, one involving the use of old money and the other one involving the use of new money.


AN EXCHANGE INVOLVING OLD MONEY

Two exchanging parties A & B
One item, Ib, to be exchanged [purchased] belonging to B
Intrinsic worth,W, of Ib agreed between A & B
One set of old money, Ma, belonging to A and equal to W
One sale comprised of two exchange processes
A gives Ma to B and
B gives Ib to A
The fact that old money is being used means that its user, A, has already supplied something of intrinsic worth W, equal to the value of the money, into the economy therefore the exchange is completed and an economic nugget has been correctly formed.


AN EXCHANGE INVOLVING NEW MONEY

The completed exchange will exist in two mirror image halves dis-connected from one and other in time and location and only one participant is constant. The halves remain connected to one and other by only one thing and that is, the unchanging aggregate quantified intrinsic worth, W, of the items exchanged. W is reflected in the money used.

In each half of the exchange the constant participant plays different roles, in the first as buyer and in the second as seller.

First half of the exchange: [enacted in the present]

One item, Ib, to be sold, belonging to B 
One set of new money, Ma, possessed by A
A & B agree that the intrinsic worth, W, of Ib is reflected in Ma
A purchases Ib from B with Ma, or put the other way round,
B sells Ib to A for Ma

Second half of the exchange: [enacted after the first half]

One item, Ia, belonging to A, to be sold 
One set of money, Mc, category irrelevant, possessed by C
A & C agree that the intrinsic worth, W, of Ia is reflected in Mc
A sells Ia to C for Mc, or put the other way round,
C purchases Ia from A for Mc
Mc is then withdrawn from circulation because A has already expended intrinsic worth W when, earlier purchasing, Ib from B with Ma.

The completion of the second half of the exchange ensures the completion of the full exchange and thus the correct formation of the economic nugget.


A CAUSE OF POVERTY

From the foregoing it is hopefully clear that when we broadly view money as ‘the facilitator of exchange’ rather the more limited view of ‘the means of exchange’ then there is no theoretical reason why any member of a cash based society should be poverty stricken. Poverty is endemic however in our societies so there must be an on the ground reason for this to be. To find it we need to look at the current money system and its evolution.


THE EVOLUTION OF CURRENCY

In order to understand why the powerful in society have become fixated on ‘money as the means of exchange’ rather than on the broader ‘money as the facilitator of exchange’ it is useful to look at the  development of money over time.

During the social evolution of the concept of money the things that were used as money had intrinsic worth in themselves so that any  ‘money’ that you held was unlikely to either, gradually [through inflation] or suddenly [through changes in outer circumstances] become worthless.

A consequence of money having an intrinsic worth in its own right, e.g. gold,or legally attached to it under the gold standard if it was paper, was that money was always old, as define here, and naturally this kind of money, which was the only money that there was, could only be earned in trade or given as charity to somebody who had no money.

When paper money was introduced we adhered to the gold standard which meant that each unit of currency had to be legally backed by a fraction of the hoard of gold stored and held by the State. Under these circumstances money in itself had real intrinsic worth, even though it was only paper, because  legally it had to be convertable to gold, something with inherent intrinsic worth, thus it  was old money whether just printed or not.

When nations abandoned the gold standard for their paper money then the currency became a ‘fiat’  currency. This meant that there was no longer, even at one step removed for paper money, a real physical material, the intrinsic worth of which  attached, at least legally, to the currency. Money’s value under the current money system now had uncertain backing. With a change in the money system however new money’s value  could, naturally and rightfully, be linked to the value of the economic nugget that it played a role in forming. As we saw from the earlier section, titled ‘AN EXCHANGE INVOLVING NEW MONEY’, honest money, i.e.  new money that has successfully been converted to  old ,is the consequence of successfully completed halves of a binary exchange using the new money as the exchange facilitator.

Exchanges by ordinary citizens using new money will probably not be sufficient to address any real  needs for increases in the overall money supply so the National Currency Authority will have to keep a watchful eye on the Monetary supply statistics releasing new money into circulation when needed. The new money should be released to government for State expenses. Such releases of new money will not be inflationary provided that they correlate with the real need for new money in the economy.

For all this to be actualised however we will need to make many changes to how  the current money system, i.e. the system that administers the money, operates. This will be a multi-year project and because money is in a sense both the glue and the lubricant which keeps society together the whole of society will need to be involved. Involvement of the whole of Society will also be essential if the maximum number of beneficial changes to the system are to be conceived of and implemented.

EVOLUTION, SEX AND SPIRITUALITY

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THE PHYSICS OF MONEY

   THE PHYSICS OF MONEY

Background

The exchange process without money

The exchange process with money

Suggested method for

 uniquely linking newly issued money to

 the intrinsic value in real exchangeable items

Suggested changes to the money system

The benefits

Background

Even though money is a concept created by humans this concept springs from physical  reality, hence the above title ‘The  Physics of Money’. This reality is actually quite easily grasped by ordinary people. What ordinary people do not see however is  the logical connection that exists between money and this everyday reality. In this article I will try to demystify money for the ordinary person by explaining how money plays a role in this ordinary every day reality. Unfortunately money’s role can be either an honest one or a dishonest one. It is the honest role, of course, that we are primarly interested here but reference has to be made to the places where dishonesty is legally practiced.

But first ,what is this everyday reality that I am speaking of?

All life forms, whilst they are alive, have constant exchanges with their environments and these exchanges are vital for the life form’s continued survival.

For us humans an every day example of this would be our breathing which is essential for our continued survival. We inhale into our lungs air containing oxygen in order to infuse the oxygen into our bloodstreams. Simultaneously our lungs extract CO2 from our bloodstreams so that the extracted CO2 can be excreted along with the exhaled air.

The breath is just one of the vital exchanges that we humans are dependent upon for our survival. These vital exchanges can be split into two groups those requiring the involvement of our fellow human beings and those not necessarily involving our fellow humans. The exchanges with our fellows can range from conversations to the exchanges of goods and/or services. Now it is these latter exchanges that we are particularly interested in here because, these days, money plays a central role in them and they too are vital for our continue physical survival. The role that money plays is a facilitative one as will hopefully become clear.

Unfortunately, as metioned above, money can also be created dishonestly. This is because it  can be created independent of any actual link to particular real goods or services. Such money, being indistinguishable from honest money, does however play the normal facilitative role of money in exchanges, but it does so dishonestly because it is claiming to represent the intrinsic value in particular goods or services which it simply cannot do because it is not uniquely linked to any particular exchangeable goods or services.

Individuals who put such money into circulation are prosecuted and gaoled, sadly not for their economic crime, e.g. theft , that they have committed, but for usurping the State’s money producing role. This is not to say that the State and its agents do not produce such fraudulent money, they do. The State sees it as its right to do so, publically stating that  this is done in order to better manage the economy. Ordinary people have become accustomed to this dishonest practice. There is even an accepted, rather than pejorative, name for it in the USA. It is titled, QE, or quantative easing, by the US Federal Reserve.

Undoubtedly exchanges of goods and services have to take place if we humans are to survive.

In a healthy society these exchanges are voluntarily. Such voluntary exchanges form the rock solid foundation for any healthy economy, the only foundation in fact. This in turn provides the basis for the continued survival of the human community. Basically without such exchanges the members of the human community would die and the community, without members, would cease to exist and so would its economy.

Interestingly such exchanges do not require the use of money but once the concept of money was conceived, money, because of its facilitative utility soon became regarded as a vital part of any exchange process. It came to be viewed in this way because it has the ability to facilitate binary exchanges, enabling them to happen at any time in any place and to include an unknown third party in the process thus widening the possibilities for making exchanges.

The exchange process without money

Two parties A & B agree with one and other to voluntarily  exchange two items with one and other, item IA, belonging to A,  is swopped with item IB, belonging to B, i.e. the ownership of the two items is exchanged.

It is safe to say that because the exchange was completed voluntarily neither party,  although they are now  in possession of different items, experienced any loss of value through the transaction. So for each of them the intrinsic values that they accord to IA and IB must be the same. Notice, however, that in an exchange not invoving money the intrinsic values accorded by A do not necessarily have to be the same as those accorded by B.

As already noted such completed exchanges are what make up any healthy economy. They are the indivisible economic events, or atoms, that form the essential building blocks of a healthy economy.  We shall call them economic nuggets because they are literally equivalent  to gold nuggets in economic terms. 

Now if we wish to maintain a healthy economy the formation of economic nuggets must remain the same, even when money becomes part of the exchange process. However the potential for serious disruption of their formation is a very real possibility when newly issued money is introduced into the exchange process. To avoid this happening special preventative measures need to be taken as explained below.

The exchange process with money

Quite simply money is a stand-in, or surrogate, for the intrinsic value of one of the items being exchanged. Clearly if the exchange is to properly form an economic nugget then the money involved in the exchange must be honest, not fraudulent.

For money to act as an honest stand-in it must be old money, i.e. already be representing the intrinsic value of a particular exchangeable item. So if money is not to disrupt the formation of an economic nugget the money must be honest, it cannot just claim to represent intrinsic value, it must uniquely represent the intrinsic value of a real exchangeable item. If not the money is counterfeit in the full meaning of the word. It is pretending to represent an intrinsic value which does not exist because the exchangeable item in which the value should inhere does not exist. The money is thus fraudulent and consequently the formation of a healthy economic nugget  is compromised. In economic terms the nugget is, corrupted.

It is essential here to draw a distinction between new money and old money. New money is money that has not yet been uniquely linked to a real intrinsic value. That is the intrinsic value inhering in a real exchangeable item whereas old money has been so linked.

Thus old money,  because it  cannot help but honestly represent the intrinsic value of existing exchangeable items can never be fraudulent. So when old money is used as the surrogate in the exchange process the formation of an economic nugget will not be compromised in any way.

The problem of corrupted nugget formation occurs when newly issued money is used as a surrogate for an exchangeable item. This is because the newly issued money cannot honestly claim to represent the intrinsic value of an exchangeable item. For it to do so a deliberate effort has got to be made to uniquely link the newly issued money to the intrinsic value of a particular exchangeable item. Once this is done it then becomes old money and can honestly claim to represent the intrinsic value inherent in a real exchangeable item.

Ensuring that this happens will require a change in the way the current money system operates.

Suggested method for uniquely linking newly issued money to the intrinsic value in real exchangeable items.

The intrinsic value that inheres in exchangeable items resides in the heads of the people wanting to make exchanges of the items. It belongs to nobody else.

The workings of the suggested money system are predicated on the above fact. The current money system simply ignores it.

As already pointed out unfortunately once intrinsic values become externalised in the form of money it becomes possible for the externalising agents [i.e. the monetary authorities] to lay false claim to the value in the money. This is a temptation that the authorities have unfortunately succumbed to time and again throughout history.

In previous eras money had to have a physical form and for this reason alone money had to have a central controlling body to oversee its production and issuance. This made it easy for the members of the controlling body to lose sight of the fact that the intrinsic values of exchangable items, externalised in money, actually belonged to the people making the exchanges, not to anybody else particularly the monetary authorities.

In the current era of ubiquitous electronics there is no reason to be bound by the  physical constraints of previous eras. Now, provided that an individual has a cell phone, money, both old and new, can be issued electronically to the individual when and where it is needed. The only constraints on this practice will be the ones that are logically neccessary to mantain the honesty of the money.

The banks are already issuing money electronically. They do this by means of credit and debit cards. These cards can be used to make payments at the point of purchase and in due course the money involved in the transaction is transferred electronically from the purchaser’s bank account to the supplier’s bank account.

Unfortunately under the present monetary system before people can make use of these cards they have to have a bank account and for this they have to already have money.

People with little or no money cannot have a bank account, thus a credit or debit card, nor can they enter into voluntary exchanges of goods and services that involve money. This situation is highly undesirable both from an individual and from a societal health point of view.

The situation can be rectified however by adjusting the money system to operate in a different way to that in which it currently operates. This change is not a radical one as the bulk of the money system can remain unchanged.

Suggested changes to the money system

The change will be in how money is created, put into circulation and removed from circulation. Physical money will be discarded completely, replacing it with electronic money. Electronic money, both new and old, will be issued directly to individuals at their  point of need. Further more in order to impede the accumulation of money in financial centres individuals will be encouraged to spend their money within their proximate community by levying an ‘out of community’ tax on money spent outside of their proximate community.

The following points list some of the most important changes. Other ones will of course be uncovered as the reformed money system is fully developed.

1. Money is only ever recorded and held in an electronic form. It will no longer exist in any ‘hard copy’ form.

2. Thus the national currency  will only need to have a single unit of currency [UoC].

3. An independent National Currency Authority [NCA] will need to be established. It will look after and keep a record of every UoC created.

4. Because each UoC is intended to be representing an economic nugget it will exist as a uniquely identified record on the national currency database [NCDB]. The NCDB wiII be the electronic equivalent of a central bank’s gold holding.

5. The NCA will maintain the NCDB.  

6. The NCDB will also  contain a recorded history of the identities of the successive holders of each UoC.

7. Through strict controls on the amount of new UoCs issued into circulation at any one time the NCA will ensure that the national currency contains the absolute minimum of new UoCs, and thus the national currency will never be deliberately debased as currently happens.

8. All UoC will be held only on the NCDB.  Outside of the NCA they will only appear as the recorded amounts of UoC held by, economically functional entities[EFE’s]. EFE’s are either real persons, or legal persons.

9. The amounts of recorded UoCs held outside of the NCA will, just as is currently the case, require regular auditing to ensure the integrity of the recordings.

10. Every EFE will have to be registered with the NCA before they can be involved in any monetary transactions.

11. Every ‘person’ EFE will have to be recorded as a member of an identified community comprised only of persons proximate to the EFE in question.

12. All ‘legal person’ EFE’s will have to be recorded as members of a single national community.

13. Every EFE will have to have an account with the NCA. These accounts will be maintained by the NCA on a EFE database [EFEDB].

14. Every EFE will be required to have a bank account registered with the NCA.

15. The NCA will keep a record, on the EFEDB, of every UoC, old and, new if any, issued  to individual EFEs.

16. Only the NCA will be allowed to issue new UoCs or to remove old UoCs from circulation.

17. The preferred means of EFE access to the NCA will be electronic.This will not preclude face to face or email interaction with the NCA when necessary.

18. It will be essential for the NCA to provide, for every EFE,the means for secure electronic access to the money system.

19. Many positive benefits to individuals and to the community as a whole will arise from a switch to a solely electronic currency thus the State should bear the electronic transmission costs of all monetary transactions between individual EFEs and the NCA. This means that  the State will bear the electronic transmission costs between the NCA and banks as they too are EFEs.

20. For those at the lowest levels of the economy cell phones are likely to be the only means of access to the NCA’s systems and thus money. Therefore the State must fund cell phones for EFEs where necessary.

21. Every monetary transaction entered into by an EFE will have to start its life with the NCA.

22. When an EFE wants to make a payment to another EFE the NCA would first check to see if the receiving EFE was a member of the same community as the paying EFE.

22.1. If yes the NCA would ensure that the ‘out of community’ tax register on the transaction was set to zero and proceed to step 23.

22.2. If no the NCA would calculate the tax payable on this ‘out of community’ transaction and put this amount in the ‘out of community’ tax register before proceeding to step 23.

23. The NCA would check to see if the paying EFE had enough funds in its bank account to make the full payment, i.e. transaction plus tax, if any.

23.1. If yes the NCA would first take the tax portion of the transaction, if any, for itself before passing the transaction through to the receiving EFE’s bank account. The tax  portion could be used to defray the NCA’s operating costs.

23.2. If no the NCA would fist check to see if the required amount of new money could be issued to the paying EFE. [EFE’s would have an enforced limit on the number of unredeemed new UoCs that could be issued to them.]

23.2.1. If yes it would transfer the new UoCs to the EFE’s bank account and add them to the amount of new, i.e. unredeemed, UoCs issued to the EFE and proceed to step 23.1..

23.2.2. If no it would halt the transaction and inform the paying EFE accordingly.

24. If money from another EFE was to be deposited into the EFE’s bank account then the NCA would first check to see if the recieving EFE has any record of new UoCs issued to it.

24.1 If no then the money would be immediately transferred to the EFE’s bank account.

24.2 If yes the NCA would, before transferring the deposited UoCs to the EFE’s bank account,

24.2.1. Deduct from the deposited UoCs the number of UoCs equivalent to the number of new UoCs previously issued to the EFE and reduce the amount of previously issued new UoCs accordingly.

24.2.2. Pass the remainder of the deposited UoCs, if any, through to the EFE’s bank account.

24.2.3. The deducted, deposited UoCs, would be removed from circulation and placed on hold awaiting their re-issue into circulation through the national treasury.

25. The NCA in conjunction with the Dept of Statistics would constantly monitor the percentage change in the size of the economy.

26. At regular intervals, based on these statistics, the NCA would issue into circulation via the National Treasury the volume of additional UoCs, if any, needed in the economy. These UoCs would come first from the UoCs currently on hold then, if there are insufficient UoCs on hold to meet the need, issue new UoCs. Under these circumstances these new UoCs would not be inflationary.

The benefits

1. Adherence to procedures 22 to 24 would ensure that newly issued UoCs  become old UoCs without corrupting the formation of economic nuggets.

2.  The controlled issuing of new money to individuals at the point of need would eliminate cash starved individuals and communities and begin a natural process of eradicating  poverty.

3. The elimination of cash starved communities would naturally boost the economy and in due course drastically reduce poverty.

4.  The switch to an electronic currency would eliminate the need for

a) the infrastructure established to handle and secure physical money and

b) all the infrastructure’s associated costs.

5.The criminal uses of money would become impossible once the switch to an electronic currency takes place because of suggestions 8, 9 and 10 above.

6. Any criminal activity that flourishes because of the anonymity accorded to the holders of money under the current money system would be threatened once suggestion 6 above is implemented.

Rory Short  2014/04/27

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:

1. locating the group of people, G, who want to enter into bartered exchanges
2. finding amongst the members of G the sub-group of people, GO, who are offering things that you want
3. finding amongst the members of GO the sub-group of people, GOW, who also want what you are offering
4. 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.

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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

2. 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.

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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.

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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].

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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.

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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

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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.

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