A Thoroughly Modern Monetary System

 

A monetary system
may use banks, gold storage  vaults, coins, magnetically-stripped plastic cards,
smart cards, or bills, but these are
only various means to an end: a convenient, reliable, transparent
and secure way of accounting what all of
the participants of the system owe or are owed to all of the other participants
of the system. Note that barter has none of these desirable attributes.  This credit-debit information can be either communal or
maintained by a "trusted" third party. In a modern system,
it is usually combined with other information such as uniquely identifying
the participants and of rating their integrity and ability to repay and security
codes.

Indirect Exchange

There are many ways of getting things from someone from
whom we have nothing to give that he directly values; however, only a few these
ways are both ethical and universalizable: 

1. 
   

   IOU: personal  debit document dependent on your good faith
   and ability to repay



2. 
   

   contractual IOU: legally-binding personal debit
   document (personal check, debit card) 



3. 
   

   3rd-party IOU: a gift
   certificate that is honored by the issuing authority. This is of moderate value
   because they may not be selling an item of interest.)



4. 
   

   pooled IOU that
   can be used with millions of other vendors (This is of the highest value because
   someone is bound to have an object of interest.) Rather than thinking of a fiat
   currency as a legally-backed government creation. The most productive conception
   of it is as 3rd-party pooled IOU, where everyone agrees to honor it because they
   are honoring the work of participants in the system, knowing that they have an
   interest in maintaining the system because they are a participate in the system. This ensures that others will honor the currency when it is
   their turn to be buyers. 

The only legal backing that a established fiat currency
requires is contractual backing. A good currency system will minimize the amount
of enforcement necessary. An established fiat currency is so robust that the
only method of destroying it is to produce too much of it too fast (price hyperinflation). While
government may establish laws favoring "their" currency (the New York
Bank monopoly currency), these laws are not the primary reason for the success
of these currencies. Rather, it is their near universal acceptance for payment
that gives these currencies life. No law requires anyone to give anyone else anything for
their fiat currency. Yet, people do it gladly as members of an economic
system.  Legal tender laws are unenforceable because no one can
claim that you refused to sell because of the currency and not because you the
price was unacceptable or that you simply did not want to sell. Furthermore, legal tender laws only apply to debts, but a debt does not exist until a
contract is made. Suppose a contract stated that one would owe 50 cuid at the
end of the month if one agreed to the service. If one refuses, $ 1000 for the
service one would have to know the exchange rate between cuid and dollars to
determine whether the collector was refusing the dollars as tender for debts.
Perhaps a cuid does not have a definable exchange rate with a dollar. 
Furthermore, legal tender laws do not prohibit one from not accepting bills even if
one accepts an electronic transfer of  virtual dollars. 

Debit System

Debt Notes 

If one generates debt notes, then they must reside
with the seller because the buyer would have no incentive not to destroy them.
Anyone could grab as many debt notes as they want, but sellers would want to
make sure only that the buyer has direct assets for which they can legally force
the debtor to redeem their notes at any time. Note the similarity to a gold
based system, but with the benefit that the assets do not have to be held in
escrow, they can be used until claimed. This disadvantage is that there is no
third party guaranteeing that the debtor has sufficient assets to cover his
debts.

Debt notes could be generated by any number of debt
note authorities; however, the debt note authorities must pool their information
(just as credit agencies do) because a debtor could have debts from several
different authorities, meaning that the apparent value of one's assets from the
directly valued objects one possess may have virtual liens on them. This would
mean that one could extract debt notes equivalent to many times the value of
one's property. Another option is to create a debt note monopoly, so that no
debts are honored except those from a single entity; however, this would entail
the same moral hazards that arise any time a debt monopoly exists.  Debt
notes must positively identify the debtor. (With credit cards this is done by
signing a piece of paper. A credit card is simply a positive identifier for an
issuing. The debt note is the merchant copy of the signed credit card receipt.)
Everyone wants to hold debt notes with other's names, but do not like having
those held by others. 

Debt may be held by a third party. The debit card industry
uses this system. (Amex, ...) One does not have to worry about multiple liens
against one's property or information sharing. The issuing bank of a debit card
is always the same as the saver's bank. The transaction is not authorized unless
the funds exist. The funds may be denominated in either a fiat currency or in a
precious commodity  (eGold, ePlatinum, etc).

Another alternative is to generate credit notes (such
as dollars). Credit notes will be passed from the buyer to the seller. All
entities have an interest in holding credit notes as long as they are honored by
sellers. Credit notes do not have to mention the creditor. Credit notes can be
generated by multiple authorities with each one promising to honor his
particular credit notes. In the past this was done by independent bank deposit
notes. Credit notes that only specify to give the bearer of the note a
particular quantity of a directly valued object (gold, for example) encourage
theft. Credit notes that only give credit to a positively identified bearer (travelers
checks) discourage theft, but do require a processing fee.  

It is also feasible to have a mixed system debt and credit
notes. In this case, every time a debt note is created a corresponding credit
note is created. To have the nicest symmetry, the seller should keep the debt
note; however, he has no incentive to do so. The debt note would be kept by a
third party credit agency. The credit note would circulate until it
reached the original debtor who could give it to the credit agency who would
eliminate both. 

Let us define a currency in terms of the modern service that it would provide
in a world without a state-sponsored currency, rather than in historical terms.
Historically, currencies started as commodities in and of themselves (gold and
silver coins with an authority figure guaranteeing their weight). This created
the temptation (moral hazard) of the authority figure cheating on the weight.
Since the authority (monarch, Caesar, etc) had a monopoly on the currency, this
was too much of a temptation. Moral hazard exists in a market economy, but
when someone cashes out his integrity, the market can realign itself. 

During the banking era money was essentially a tradable
deposit slip consisting of contracts to receive a specific quantity of a
commodity: gold, silver, etc from specific banks in exchange for them keeping
the gold safe. When people started making claims on their contracts less often,
there was a temptation on the banks to loan out the money, even though that was
a breach of implied contract. The banks justified this be claiming that they
could get the money back if the depositor ever claimed it. As an added incentive
to depositors, they would give a small percentage of interest. 

Of course the claim of recoverability of funds could no longer be
guaranteed because those being loaned the funds may run off without paying back
the banks or may be unable to repay the loan because of a miscalculation or
unavoidable loss. If the depositors should recall their deposits (savings), then
the bank may go bankrupt. In addition, banks had the temptation of writing
contracts that were supposedly backed by gold, but were not fully backed by deposits. (Today this is a
routine practice, banks are only required by the Federal Reserve to have 10%
reserves.) The lower the reserves that a bank held, the more easily it could go
bankrupt if depositors ever asked for their directly valued commodity
back.  Now the banking system is so corrupt that the Fed will just print up
the money that is required and give it to the
banks, devaluing the currency that was supposed to be convertible to a specific
quantity of whatever commodity was initially deposited (usually gold). (The Fed
only requires 10% reserves.)

This history has led many Austrian economists to say that we must backtrack
and require 100% reserves and convertibility to gold. Requiring 100% reserves is
no more than requiring honesty. Requiring convertibility to gold is only a requirement
based on the original contract that explicitly or implicitly stated that one
would be able to obtain a specific weight in gold upon demand whenever the bank
was open. Of course, a bank can store any valued commodity and this should be
redeemable at any time.

As banks consolidated and trust in the remaining banks grew, people realized
that it was more convenient to trade bank deposit slips than even denominated
gold. A purely contractual currency had been born, (backed by
frequently-misplaced faith in large private banks) which was not
the original intent of banking: a safe deposit for one's
precious commodity. In time the banks consolidated to the point that a
consortium of banks sought a single monopolized currency. Indeed modern currencies are so useful that the only way
that they are destroyed is by their excessive overproduction, which necessarily
leads to hyperinflation. 

A modern currency does not require legally forcing people to accept it;
however, a monetary system does require legal enforcement of its
contract. In
any private monetary scheme, the contract should be made explicit. The federal
government commands 40% of the economy that if it were to refuse dollars as
payment and favor some other currency, the dollar would cease to exist as a
viable currency. A
contract that says if I do x dollars of value-added service for people w,z,f,
then you will do a composite value of service for other individuals with whom I
will trade indirectly.  Anti-counterfeiting measures are a part of this
legal contract. The artificially lowered interest rate is a breach of the social
contract implicit in money. When the breach of the social contract is
sufficiently egregious, the currency will cease to be viable. 

Features of a Good Currency

		Direct Commodity Exchange	Banked- Commodity-backed Notes	Scam Notes	IOU	Credit Cards	Debit Cards	Transparent Crecit
Examples		Gold Coins	Gold-backed Notes	Dollars	Personal Check	Visa	ATM/eGold	(quid)
Convenience	Portability	4	5	50	6			9
	Durability
	Universality
	Stability
Security	Verifiability
	Counterfeit Protection
	Transparency
	Accountability
	Exchangeability
	Integrity
	Identity Protection
	Brokerage
	Legal Protection
Cost

Moral hazards: 

A true debit system has commodity assets banked at a central location. A
modern "debit" system simply has dollars (credit notes that say that
you have done so ) banked at a location. Credit systems have the following
issues: 

1. not accounting for depreciation of assets, 


2. multiple lines of credit backed by the same set of assets (appraisal does
   not help)

Debit systems have the following issues:

1. The commodity bank will sell off communal assets (Current dollar system)


2. System of claims may never get cleared. 


3. The commodity bank incurs costs related to storing, accounting and
   protecting the communal commodity. 

The transparent monetary system reduces moral hazard by
distributing massive amounts of account information among the participants in
the monetary system. By being voluntary,  everyone can see
everyone else's debits and assets and assess their ability to repay.

Everything to the right of direct gold coins, consists of promissory notes.
One does work for nothing until one sells them off. It is at that point that the
promissory contract is closed.  If a monetary system has integrity, the
particpants in the system will voluntarily labor in exchange for promissory notes.  TETS Transparent Electronic
Transaction System is a proposed improvement over other currency systems. Like
ATM and Credit Cards monetary units would be electronic; however, it would have
the following innovations that would leverage the ability to handle large
quantities of information:

1. All currency units would be enumerated (just as all dollar bills are
   enumerated). 


2. All participants are enumerated when they join the currency system.
   Biometric and contact information is collected and made public to all
   participants, including other brokerage firms. A default credit rating is
   assigned and a user password created.


3. Participation may also require buying a minimum number of cuids
   from a central issuing authority or the bank. The bank sets
   the currently accepted exchange rate, records and publishes a foreign
   exchange transaction. As far as the ETS is concerned the cuids are
   created de novo. This constitutes an expansion of the ETS
   economy. 


4. A participant agrees to honor all cuids.


5. The ETS would promise never to sell, loan, or invest the deposited assets
   and would not issue interest in cuids. The central authority's mission would
   be to stabilize the value of the cuid by not issuing any that are unbacked. 
   Deposited assets may include durable goods. Cuids may also be issued against
   assets that the participant agrees to have seized, if one's account balance
   should fall below a certain level.  The cuid bank does not own
   deposited assets, assets are supposed to be held in escrow. 


6. A participant who leaves the system must receive a fiat currency of the
   same type that was deposited at the exchange rates at which the funds were
   deposited in exchange for CUIDs that he possesses minus a pre-agreed
   upon transaction fee. (Because brokerage firms are forbidden from investing,
   it would not be feasible to give the funds at the current exchange
   rates.)  Any brokerage firm that is unable or unwilling to refund the
   amount deposited will have its assets seized and the brokers will be jailed
   and barred from continuing as brokers. (Real monetary deflation (as opposed
   to price deflation) in a fiat currency would destroy the ETS, but that has
   never happened. )


7. A brokerage firm is chosen that validates the transaction and that is
   obligated to act as an arbitrator should there be a dispute.


8. A transaction consists of the following:
   
   
   
   1. The buyer and seller agree to a transaction and a brokerage firm
      (eVisa, eMoney, ...)
   
   
   2. The buyer and seller IDs and quantity of the transaction are
      transmitted to the broker.
   
   
   3. The broker inspects both public available files and, if he accepts the
      transaction, proposes a (small) transaction fee.
   
   
   4. If the participants accept the fee, the broker must record and publish
      the following information:
      
      
      
      1. A unique transaction identifier assigned by the broker (that might
         roll over at, say, 1 trillion transactions),
      
      
      2. the buyer and seller IDs (either of which may be institutions),
      
      
      3. a list of the currency units that are transferred:
         
         (broker ID-transaction ID), BuyerID, SellerID,
         CUID#1,CUID#2,CUID#3,..... 109834-70983, 098787634-129384985,
         895-123-498-943,
         895-093-840-102,895-120-394,895-123-948,987-130-989-858,....
      
      
      
      
   
   
   5. Once a brokerage firm asserts that a transaction has taken place, the
      currency units enumerated are deleted from the memory card of the buyer
      and added to that of the seller.  This information must also be
      made publicly available. Brokerage information is updated immediately on
      the computer systems of the brokerage firms and is updated periodically
      on everyone's information devices. This helps to prevent theft and one
      can also trace the flow of any give currency unit.
   
   
   
   


9. Transaction disputes are settled by brokers. If necessary, independent
   arbitrators. Finally, by public courts.

(The "buyer" is the buyer of a commodity and a seller of
currency units.)

• Portability: The unit of currency or information should be easily
  moved around.


• Durability: The information of the participants should not be
  easily lost.


• Verifiability: all transactions are enumerated and trackable by all
  participants


• Accountability: One's monetary assets and those of all other
  participants of the system should be known as well as why they have those
  assets, not just the total. Each individual assets should be Every exchange
  of assets should be known.  This prevents theft. Nonmonetary assets
  cannot be known exactly because value is created de novo.


• Transparency: All users of the system should have easy access to
  where the currency is and who produces it. In the cuid system this is done
  by publishing and dissemination of information files to stored info cards.


• Universality: The currency system should be accepted by as many
  people as possible.


• Exchangeability: The ability to convert the currency into other
  currencies with minimal transaction costs. No legal restrictions or barriers
  should be placed on its conversion.


• Integrity: The integrity (credit) of each of the participants
  should be rated if and only if this is important for establishing intention
  to pay. These credit ratings should be available at no cost. 


• Incorruptibility
  
  
  
  • Security
    
    
    
    • Counterfeit Protection: ideally the currency should not rely on
      the integrity of a monopoly authority. If bills are issued, these
      should be difficult to forge.
    
    
    • Brokerage: consumer, seller protection transaction Brokers should
      not be biased to either the buyer or seller.
    
    
    • Identity Protection: Either biometric or security code based
      identification as the proper owner of an account.
    
    
    
    
  
  
  • Legal Protection: Those who do try to corrupt information
    such as the amount of currency owned, transactions that did not occur or
    were not mutually satisfactory, or one's credit ratings should be
    punished appropriately. All legal protection can come under the
    miniarchist rubric of contract violation.
  
  
  • Stability: The currency should not depreciate as a result of
    government counterfeiting money. This makes savings more difficult.
  
  
  
  


• Cost: The total cost of the currency system should be as low as
  possible while maximizing the other features.

Why would someone want to use the cuid system instead of trading in dollars?

Because of all of its great transaction features. It would also allow
competition for trust. Not trust in a monopoly authority.

What is to prevent the cuid bank from lowering the value of the cuid to
expand the cuid economy at the expense of those participating in the cuid
economy?

cuid price = e * d

The cuid value of an object is the product of an exchange and a dollar price.
Imagine the exchange rate e = 1 and the interconvertibility with dollars does
not involve any exchange penalty. In that case, users of the cuid economy would
not even realize that they are using a different currency. Users of the system
would conceive of the system simply as another payment scheme with added
security and convenience features. People would be satisfied to trade their
dollars for cuid, resulting in an expansion of the cuid economy. 

How would the currency be decoupled from the dollar?

If the currency is supposed to be non-inflationary, at some point it would
have to decouple from inflationary fiat currencies, such as the dollar. The
central issuing authority 

Unlike the FED, if the central authority is irresponsible in its production
of cuids, participants will balk and other currencies will be used. Cuids should
only be issued for deposited cash or verifiable declared assets.  The
system acts as a shelter from government inflation (just like an interest
bearing long-term account at a bank). The system also offers transaction
services. 

The cuid economy could expand slowly because participants would have all of
the other benefits conferred by the system. Fast expansion of the cuid economy
by the bank placing a very low value on the cuid would be unfair to cuid
participants who respond slowly to cuid monetary policy. The participants could,
however, leave the economy.

One can think of the cuid system as a currency that is coupled to the dollar,
but only according to some formula that seeks to boost the cuid. Like any other
currency there would be a natural exchange rate dependent upon the previous
exchange rate and whatever expectation there is that the currency issuer
(central bank) will be responsible and not over-issue the currency. Central
banks know that by printing up a lot of bills they debase the currency making it
attractive for people to buy an item with newly created currency; however,
exchangers try to anticipate the eagerness of the central banks to do this and
therefore lower the exchange rate of the inflating currency.