The Evolution of Money part 2.

Kevin Cox
Kevin Cox
Aug 28, 2017 · 3 min read

In the evolution of money from shells to the mobile phone, I discussed the physical changes in the way we exchange value with money. Here I examine the implications of changing the meaning of money to have no value over time.

All technologies evolve, and money is no exception. Evolution involves mutations, and we are familiar with physical mutations like electronic money. Evolutions that change the meaning are rarer but have a greater impact. In the history of money, the last meaning money mutation was giving money a value over time or interest. It took centuries for the new meaning to take hold but interest is now the dominant way for investors to receive a return on investment.

New software technologies mean we have other ways than using an interest charge of giving a return on investment. We have always had these methods, but until recently they were challenging and hard to scale. The challenge is to collect money from many people and to combine the money and to lend to many other people. We created banks to do this by banks operating as intermediary between many entities. Banks also create new money when they make loans. Interest is the charge banks make when they create money.

Individuals can make peer to peer loans and not use banks as intermediaries. When loans are peer to peer, then there is no bank interest to pay.

Instead of giving a return on investment using interest, we can give a return on investment by using existing money and give a return when the investment generates sales. The difference between using interest and giving a return after the sales are generated means we remove the cost of interest. It means both the lender and borrower depend on the money generating sales, and hence the lender takes a greater risk. To spread the risk and make the money fungible we need many lenders, many borrowers, and many customers buying the goods and services generated by the investments made possible with the loans. Loans using this approach requires a distributed ledger to keep track of loans and the repayments and returns on the loans and to spread the risk now taken by the borrower and the bank.

The Blockchain is one technology to create a distributed ledger. Another is a Complex Adaptive System. Complex Adaptive Systems are simpler, have increased functionality and are less expensive to operate than block chains.

The above approach only changes the meaning of money on the loans that use the approach. All other money and all other existing money systems operate as normal because the loan money still has a value over time. It is just zero. It means loans with zero interest can integrate seamlessly into the existing money system. Most people will see little or no difference except the financial system is simpler because of the uncertainty with the time value of money.

Such systems are common in organisations where one part of the organisation making sales and put the profits into funding investments in other parts of the company. With zero interest loans, the cost advantage of internal investment can spread across organisations and individuals.

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