Review of Proposed Currency System
Public Service Credits and competing currencies can help solve the imbalances in our economy
The problems our economy faces have to do with the fact that we have structured our economy based on an incorrect perspective of the foundation of economic activity. Humans seek to exchange resources they have for resources they need or want. That is the origin and essence of the free market. We eventually develop sophisticated means, using money, to make this process more efficient. Unfortunately we have lost sight of what the basic interaction is, and allowed money to drive the economy. This is what has led to problems such as the widening wealth inequality and the accumulation of so much debt that we have to try to inflate away this debt, but in the process end up robbing people of their wealth especially the poor.
Currency System
Our current currency system is regressive, in that it transfers wealth from the poor to the rich. The main problem we have with our implementation of a currency system is that we have created a monopoly in currency. The banking sector creates currency that everyone is forced by the government to use. Banks became the creators of currency because we started off with commodity currency in the form of metals such as gold and silver which were too bulky to carry around. Banks would store the actual metal while issuing certificates that could be used for transactions and also exchanged at any time for the real gold or silver in the banks. These certificates were easier and safer to carry, and they evolved into the paper currency we have now. But only banks can create currency now as they have allied with the government to create a monopoly. Legal tender laws and taxation prevent any alternative currency from having a real chance to compete. It is important to understand that money is an attractive force. It draws labour and resources to whoever has the money. A currency monopoly, such as the banking system has, is bad because it draws resources and labour into the banking and financial sector where those resources would have been better utilised elsewhere. The fact that banks, through their loans, issue currency in the form of debt which has to be paid back with interest not only causes a mounting problem of debt but also forces central banks to pursue a policy of inflation, which transfers wealth from the poor to the rich.
Exchange-Based Currencies
The true free market is about the freedom to create, transform, and exchange all resources. That includes money. If you think about it, there is no real reason why each country should only have one currency, provided by the banking sector. The free market creates all kinds of goods including similar goods from different manufacturers who are in competition with each other. Why should currency be different? I have introduced the idea of exchange-based currencies which are produced as a side effect of the exchanges in the economy. Exchange-based currencies are divisible and transferrable contracts that are created whenever two parties engage in an economic exchange. Whenever two parties engage in an exchange, in the first half one party, say P, provides the other, say Q, with some good or service. At this point, a contract is created which says Q must provide P with some good or service in return. At some point in the future, Q honours this contract and provides P with the reciprocal goods. If the time between the two halves of the exchange is long enough, a written contract may be created. In general, the written contract will say that Q owes the bearer some goods, rather than Q owes P some goods. This makes the contract transferrable and P can use it to purchase goods or services from a third party. The third party may also use the contract to purchase goods from a fourth party and so on. Eventually, someone in the chain will use that contract to redeem the reciprocal goods from Q, thus completing the exchange. Q honours that contract regardless of who the bearer is. P and Q do not have to be part of the banking sector or government to create this contract as part of the exchange between them. But this contract they created acts as currency. The only requirement is that the other actors in the economy have some trust in P and Q so that they know that if they accept that contract, they will always be able to redeem it with Q. Thus any exchange can result in money being created and anybody who the public trusts can be a currency creator. Therefore in a true free market, you are going to have privately issued competing currencies.
Exchange-based currencies take two forms, namely, IOUs and UOIs. IOUs derive from the concept of “I Owe You” or more generally “I Owe Bearer”. In the example above, an IOU is the exchange-based contract issued by Q to P for the exchange between them. The contract basically says: “I, Q, owe the bearer goods of some specific value”. The other kind of exchange-based currency is the UOI which comes from the concept of “You Owe Me”, or “You Owe Bearer” more generally. In the exchange between P and Q above, the UOI will be issued by P and states that: “You, Q, owe the bearer goods of some specific value”. Since P is the issuer of the UOI, Q must keep a record of the exchange so that he knows that the UOI is valid and will accept it if presented to him. IOUs are useful for exchanges between individuals or small organisations, but UOIs are useful for exchanges between large groups and organisations. This makes UOIs a good candidate for a national currency and a replacement for the bank-issued currency. UOIs arise as contracts from the exchange between the government and the general public, i.e., the provision of public goods. Instead of viewing public goods and services as products which the public purchases from the government using taxes, we observe that there is an exchange between government and the general public where the government provides the public with public goods and services, and the public provides government workers and contractors with private goods and services in return. This exchange, like any other, generates exchange-based contracts. Since this exchange is between two large groups, it is UOIs, created by the government, that are the kind of contracts generated. I call the contracts generated by this particular exchange Public Service Credits, or just credits for short. Public Service Credits function as a national currency without a need for legal tender laws. Instead, it depends on the contract between the government and the people. Unlike today’s currencies, the public has the right to refuse credits if they are issued for public services they did not request.
Public Service Credits
Public Service Credits and taxation are duals of each other. They solve the same problem, i.e., the problem of compensating government workers and contractors for their services. In a true free market, all parties in the economy are equal. The problem with taxation is that it gives one party in the economy, namely the government, the right to confiscate the property (money) of all other parties in the economy. This is theft, even if the government is using that money to provide services to the public. The mistake with taxation is that we think that money is compensation. As mentioned before, the fundamental interaction is the exchange of resources for other resources. Real compensation is in the form of resources, goods, or services. If you have some bureaucrat working in government, providing services to the public, and you collect taxes and use it to pay her, the money paid to her is not her compensation. The money she earns is her claim to her real compensation, and it is what she uses that money to buy from the public that constitutes her real compensation. The dual solution, which is Public Service Credits, recognises that. It also recognises that not everyone in the society has to compensate government workers and contractors directly. If you think money is compensation, then you might think that everyone should contribute a bit to the bureaucrat’s salary. But if you understand that resources, goods and services provided to the bureaucrat by the public are her real compensation, then you understand that only a subset of society can in reality compensate the bureaucrat directly. The supermarket for example might compensate her with groceries, while some department store might compensate her with clothes and other goods. In return, the supermarket and department store earn credits from the bureaucrat for the public service they have done for her, just as the bureaucrat earned credits for the public service she did as part of her job.
With Public Service Credits, just as P creates a UOI after providing goods to Q, the government can create credits after providing the public with goods or services. Practically, this means that the government creates new credits which it uses to pay its workers and contractors. So newly created credits will be issued to the bureaucrat, essentially giving her transferable credits for the public services she has performed. These credits are a claim to goods and services provided by the general public. She can use them to seek real compensation in goods and services from the general public. For example she can use them to claim groceries from the supermarket. The supermarket then gets credit for compensating the bureaucrat with groceries and thus is in possession of the credits. You can think of the groceries provided by the supermarket to the bureaucrat as the tax paid by the supermarket as compensation for the services the bureaucrat provided to the general public. The supermarket can then use those credits it has just received to claim goods or services from its suppliers, thus transferring those credits to its suppliers. In this second transaction, the suppliers provided goods to the supermarket and those goods can be thought of as an indirect tax paid by the suppliers to the supermarket to compensate the supermarket for the tax that it paid in groceries to the bureaucrat. Public Service Credits, as they are used for transactions in the economy, keep track of public services (or taxes in the dual paradigm) provided by the actors in the economy to the general public and to each other. If you hold X credits, then the value of goods and services you have provided to other members of society minus the value of goods and services you have received from other members of society is X.
Borrowing and Taxation
Public Service Credits mean that governments do not have to borrow and saddle the public with debt, unless that country is for some reason very deficient in resources. The real reason for borrowing is to acquire resources you don’t have. When an individual borrows, the resources they use the money to acquire is what they are really borrowing. Countries usually have all the resources they need and do not need to borrow to acquire new resources. In reality, when governments borrow, they are just acquiring money to use to redirect resources. In fact, whether they tax, borrow, or print money, the purpose is the same: to redirect resources from private uses to public uses. Taxation is inefficient since it adds a lot of overhead to the economy and there is no way to accurately calculate each person’s share. Borrowing puts an unnecessary burden on the members of the public, both present and future, as they have to pay back the debt. Printing, when done as it currently is by the banking sector, creates inflation which slowly devalues the currency and transfers wealth from the poor to the rich. All three solutions are money-driven. The idea behind Public Service Credits is to move to a resource-driven solution, where we understand that all we need to do is redirect the resources we already have from their current uses to new public uses, and to appropriately compensate those who provide those resources. It looks like printing money at first glance and in some way it is. But it is not the same as banks printing money and loaning it out as we have now. Public Service Credits are created only when there is an exchange between the government and the public. An example is if a road is being built by a government contractor. The contractor needs resources from the public in order to build the road so those resources must be diverted from their present uses to building the road. The contractor is issued credits which he can use to purchase the resources he needs from the public. Thus the members of the public who provide resources towards building the road are compensated with those credits. The resources that these members of the public provide to build the road can be thought of as the real taxes needed to build the road. When these members of the public pay those taxes, they get the credits from the contractor, which they can then use to claim goods and services from other members of the public as their compensation for paying all the taxes for the road. The other members of the public will then have paid indirect taxes towards the building of the road. Notice again how this is different from the current solution. The current solution would be to collect money from everybody to give to the government contractor who will then use the money to purchase the resources he needs from the public. The net effect is that the contractor gets the resources he needs for the road, and existing money is redistributed among members of the public. The new solution is to create Public Service Credits and give them to the contractor who uses them to purchase the resources he needs from the public. In this case, the net effect is that once again the contractor gets the resources he needs to build the road, but this time it is new money that is distributed among the members of the public. The credits approach has less overhead.
The fact is that for any currency, somebody has to create it. The question is should the banks be given the sole privilege of doing this, especially since they inject it into the economy by loaning it, which creates debt that cannot be paid back. Public Service Credits puts the responsibility of creating currency into the hands of an agent of the general public, which would generally be an independent branch of the government to prevent conflicts of interest. The advantage of credits is that they are created as a side effect of exchanges in the economy, so the supply and demand for credits is aligned with economic activity. This is in contrast with our current monetary system where central banks arbitrarily create and inject new money into the system in an effort to regulate the economy. Unfortunately, their view of the economy is narrow and generally only captures the banking and financial sector so their policies are designed to favour that sector.
In a true free market, credits, and privately issued currencies will exist together. The reason for this is that the free market allows anyone to create currency. With Public Service Credits, there will be no legal tender laws or taxation so it will be possible for private currencies to compete. Private currencies are important because they can spur growth in local economies for example. Also, they are critical to having a real democracy since they put real power into the hands of the people by putting the public and the government on an equal playing field. Governments cannot do things arbitrarily because everything they do will require them to create Public Service Credits to pay for them instead of just confiscating money from the public. Since the public can reject credits, the government could find that it is unable to implement projects that the public never asked for. This monetary power in the hands of the people can give the public a real say on what the government can and cannot do.
