The Financial System is Economically Inefficient

The current Financial System is inefficient because it creates new money through a market in money. It does it this way because economists believe that markets are the most economically efficient way to distribute things of value. Unfortunately, markets are often economically inefficient, and money markets, where money tokens have a value over time, are always economically inefficient compared to distributing money without a market.

A system is economically efficient if it creates the greatest value for the least cost. The cost of money markets is the cost of interest, dividends and capital gains. Other methods of distributing money do not have these costs.

The financial system creates most money by banks lending money into existence. The banks create the money which has value because it exists. The value is the accumulated interest. However, the real value of a loan is how much value the loan generates. The real value is different from the fixed value because different loans generate different value when invested in producing goods and services.

The above graph simulates the value created from loans over time where the value created varies randomly. If, on average, the value created is greater than the amount lent the number of money tokens increase and if, on average, the value created is less the number of money tokens decreases. If we stop giving money tokens a value and we give returns on investment by returning more money tokens in other ways we get a stable currency and stable asset values that reflect their true value.

The cost of operating the financial system reduces by the cost of interest, dividends and capital gains when we eliminate the cost of money tokens. Investors and savers still get a return on their money, but they only get a return when the money is used to sell more goods and services.

The question remains on how to give a return on investment without giving money tokens a value over time. Here are some ways:

Governments create new money

If the government is the only party to create money, then money value remains stable provided the government only creates enough money to top up the money needed to operate the economy at full capacity and with full employment. It leaves open the question of determining who gets the newly created money.

Loans without the creation of new money

The simplest and easiest to implement is to create loans without new money and repay the loans with discounted goods and services. By repaying with goods and services means there is no need to create new money. By giving a discount on goods and services instead of repaying with money means the investor gets a return on investment. We can use the same approach with any loan where the loan results in the delivery of goods and services. Any bank can convert existing loans to this method or get depositors to invest their funds with this approach.

Variations on this is for the individuals who receive the discounts to invest in infrastructure for the common good and to receive back goods and services. The approach is available to support investments in renewable energy or any community infrastructure.

Local Currency Schemes

Local Currency Schemes are ones where a local community brands existing money under its name as Community Vouchers or some other name. People purchase the vouchers and use them for local payments. Merchants give a discount when used for payments. The discount does not go to the customer but goes back into the community for community projects as decided by the community, not by the merchants.