Self-funding credit (bank-free currency)
We are painfully aware of the severely distorted distribution of wealth on our planet, and how it came about.
But what can we do about it?
Current crypto-currencies can only be obtained through fiat, whether purchasing them on an exchange (with fiat), or purchasing rigs (with fiat) and mining them.
So where does fiat come from then? Well it is created out of nothing on the strength of a a loan contract signed by the borrower pledging assets and/or labour as collateral.
Let’s consider a few scenarios for buying a house:
- In the current system the borrower approaches the bank, negotiates the terms, pays off the loan and interest, and hopefully owns the house at the end.
We are all familiar with this, but please note the following:
- The currency did not come into existence until the borrower was approved, and signed a promissory note with the terms of the agreement. Then the bank created the currency (out of nothing, a bookkeeping entry) for the builder to be paid. This promissory note becomes an asset at the bank, that can be traded (sold) if desired.
- At the start the bank had nothing, but at the end the bank had either the interest payments (often many times the principal), or the house. In other words the bank benefited without any assets to start with.
- Also important to note is that the bank created only the principle. The interest was drawn out of the mainstream economy, reducing the currency supply, and creating the need for more and more borrowing just to pay interest and maintain liquidity.
- In this first scenario above, the currency can be inflated almost without throttle. Some countries, such as Canada and the UK, have no reserve requirements, but even those with fractional reserve requirements can multiply the currency, and even borrow the small reserve from the central bank.
Please note the inflation of the money supply is an invisible tax on savings and wages.
In the second scenario, mandating a 100% reserve requirement means banks cannot create currency, but are custodians of savings which they can lend to borrowers.
The builder might be in a position to do the financing without an intermediary.
Unless the interest earned is returned to the mainstream economy, we still have to deal with the deflation of the currency supply as interest is paid out of principals.
- Thirdly, let us consider an ideal world
- Without interest on the currency supply,
- Price stability (currency inflation matching economic activity), and
- Full employment
Recall that the banker does not create the currency to pay the builder until a promissory note is signed by the borrower. It is on the strength of the promissory note that the currency is created out of nothing.
If currency is created out of nothing, and the promissory note is the authorisation for the amount, why not simply pass the promissory note through to the builder without the bank, ie. the promissory note is the currency. Just as the bank could trade promissory notes, so the builder can use it to make payments.
What about gold or crypto currencies?
Gold has been successful at providing trust and as a hedge against inflation. Cryptos such as Bitcoin behave similarly.
The snag is that we either need fiat to acquire gold / cryptos (like commodities), or we need to mine them (and managing our currency supply through the rate of mining is not accurate enough for price stability).
OK let’s see how this would work.
An often proposed extension on barter (to cope with the coincidence of needs by buyer and seller at the same time), suggests that a purchaser issues an IOU specifying that their product or service can be redeemed with that voucher (at a later date, by someone else who needs the product then) proffered as payment.
These vouchers could also serve as mediums of exchange without being redeemed, and the value floated against other products, or at least one dominant commodity.
To simplify this idea, we propose that all notes be issued in one currency (rather than the myriad of products and services offered by all the issuers of IOUs).
Other than mining bitcoins, or purchasing them with fiat, we can of course earn them, mostly with small on-line tasks, but these sources are perhaps too limited for widespread adoption.
Rating an issuer of a promissory note (ie. self-issued currency, IOU) would be the same tried and tested way that banks evaluate potential borrowers on debt, income, assets, reliability, etc.
If the issuer is found to be good for an amount, the promissory note is accepted as currency and the transaction takes place. Trust and confidence in this note is the result of the vetting algorithm.
This creates the currency for the community to operate with.
Examples of other forms of trust are whether the document can be exchanged for gold, or having expensive crypto mining rigs ensure the incorruptibility of the transactions.
In this proposal, the promissory note, backed by the vetting algorithm, is the currency.
A beneficial new world
Let’s make the evil of contemporary banking obsolete by basing our currency on transparent, open-source algorithms that set the standard for trust, confidence, and honesty:
- Our money in our own crypto wallets, under our control, and
- A currency based on trusted notes issued for real economic activity.
Not inflated paper created out of nothing, issued as debt, charged at interest, under complete control of banks, crushing society into dispossession and destitution.