How Do We Fix Our Broken Monetary System
In most countries, about 3% of money originates from government-owned mints that make notes and coins. But the rest, over the past 30 years, is digital and created by private banks, out of nothing, when they issue loans. When a person goes to a bank to take out a loan, the bank does not lend its own money or that of its depositors. Rather, banks extend credit by simply increasing the borrowing customer’s current account. That is, banks extend credit by creating money. As banks create the amount borrowed, but not the interest to be paid on that loan, there is now more debt in the world than money. That means there must be an increasing amount of lending to pay off debts plus interest while maintaining the amount of money in circulation, which means economic activity must continually increase. Otherwise, as debts are paid off, the money supply shrinks, which leads to defaults, foreclosures, bankruptcies, unemployment, depression, and ultimately, extremism.
This monetary system also means that, although individually a person might pay off his debts, collectively everyone is in debt forever, paying interest to the banks. So this money system makes increasing inequality a mathematical certainty. Is it any wonder that 2% of the world’s population controls about half the world’s wealth? This monetary system means governments do not issue the money they spend, but go into debt to private banks that “lend” money that they simply create. It’s a sleight of hand that becomes a stranglehold, as people assume their governments cannot afford to help their citizens by spending their own currency, due to the deficit.
Given the institutional impotence to solve any problem, let alone something as large and ingrained as money itself and its various structural issues, some people and groups have taken matters into their own hand and created their own systems for clearing credit amongst networks of peers and businesses, i.e., their own currencies. While this sounds very unorthodox, it is not a new idea.
The oldest and largest such system comes from the home of financial conservatism, Switzerland. In Basel, there is a nationwide bank, the Banque WIR, that since 1934 has issued its own currency. Each WIR is the equivalent of one Swiss franc, but is not convertible to the franc, as it really acts as an accounting system for the value of trades amongst its 70,000 business members. About $2 billion in value is traded each year between members in this alternative currency. Of the participants, 80% are small firms that believe their use of this help their business during economic downturns. That is when banks restrict new credit, especially to small businesses, and so at such times these firms rely on WIR to buy supplies from other member businesses.
In a relevant sense, many people are facing various kinds of economic downturns. Similar to businesses in a downturn that cannot obtain money, many people are not able to create new economic activities for others, and in turn, for themselves. Some have tried to bring back bartering to solve this. After all, in terms of clean transactions with no time related distortions, barter was the perfect system. But bartering did not and still does not have the liquidity or the flexibility to support economic growth.
We can now track, monitor, and measure all activities through smartphones and emerging technologies like blockchain to an unprecedented degree. Gone is the guesswork of who does what, when, where, and for how much. Such technologies in the Internet will keep shifting power from institutions to people, eliminate constraints on economic organization, and perhaps even reduce the need for money.
People will use technology to find the right people, at the right time, in the right place, in the right context to transact in a manner that is transparent and stable but with unlimited scale and flexibility. This technology will give the power to people to increase their economic activities, something institutions are failing to do.