This is mostly an attempt to trow out some thoughts concerning advantages and disadvantages with a debt based monetary system. Perhaps it's more of a ventilating approach, hopefully open ended, and I don't want to be locked into a certain position. But discussing the properties of money is important in order to understand and develop alternatives.

So lets start with the properties of debt based money and find what might be wright or wrong with them (please feel free to add additional properties). I will start with the assumptions that:

1) Debt based money requires a centralized system based on the banks balance sheet. Payments, withdrawals and so on leaves fingerprints in the accounts at the bank (this is especially true in this digital age where every transaction is registered). Cash can be used without leaving any traces and the integrity of the individual can be protected.
2) A totally debt based monetary system escalate the inequality in the society if it is issued to individuals. Increasing the money supply is only possible be indebting those not holding any money assets. It's not possible to have an allocation based on either the right wing “trickle down” approach or the the left “take from the rich - give to the poor” approach (or any other way) without destroying the money supply when the poor pay of their debt. The interest further reinforce inequality by pumping up the interest to those already having money assets.
3) The banks can direct which part of the economy thats going to get credit and which will not get credit. The deindustrialization of the west - the neglect of giving credit to production but instead giving credit to real estates bubbles etc shows that this is a very potent power. The central bank also play a key importance role in this.

4) Feel free to fill in

Now, given these problems - is it possible to create a debt based monetary system based on democracy serving the public and not an oligarch class?

Let's start with 1). I don't know how to solve this integrity problem. But do we want private banks have full access to what, when, how and where we buy and consume? If we want a debt based system wouldn't it be better if the government, under democratic and official oversight and handled as professional secrecy in the military, police, social service and so on is handled? If something is and should be under secrecy, protecting the private integrity - why should it be handed over to private interests for the whole population?
But I have no clear answer to this integrity problem.

Lets take number 2) and 3) - dealing with inequality and the power of issuing credit.
There might, paradoxically, be something here to learn from a dictatorship (you could argue that west debt based system already is a dictatorship). Richard Werner, a German economy professor, describe in his book, "Princes of the Yen" ( a book I recommend) how the Japanese politicians took over the central bank and opened credit windows where for instance credit for speculations in real estates was strictly forbidden. The central bank issued credit maximizing the war industry and almost no credit was issued for leisure and private consumption. This meant that private citizens didn't carry the debt but the large corporations. The politicians could in this way control and maximize the build up for war. But Richard Werner stresses that Japan continued with this policy after the war and this was the key reason the Japanese wonder. The other Asian tigers later implemented the same tactic as Japan.

So the debt based state owned credit system could be a way for the democracy to tame the big cooperations, indebting them and not individuals. How large different credit windows are and to what purpose could be built into the democratic system (perhaps).

So would it be possible to create a debt based democratic economy?

Debt based money can be democratic, but the rules of its operation must be changed in order to make that possible. In principle accounting system money makes a lot of sense.

What is commonly called debt based money is an example of what I call faith based account money. (Faith based, as it is not backed by any commodity.) In other words, it is an accounting system that measures who has contributed how much to the economy and who has withdrawn how much from the economy. Money in this context is information, universal executive information. It gives anyone who has it the right to execute their desires. It can be created and extinguished at will.

1.It has to be understood that the ultimate guarantors of such an accounting system are its users, the members of the market. This is underscored by the fact that when the banks get in trouble, the expectation is that the market, as represented by taxpayers will bail it out.


2. With this knowledge, it is the members of the productive market that should be in charge of who receives executive information, (for whom it should be created) and on what terms it should be repaid (under what terms it will be extinguished). Therefore money needs to be created at the level where it is to be used. Local projects should be authorized locally, democratically, and only larger projects should be authorized at a larger scale.

3.Interest is not an appropriate part of any such accounting system. When a loan is initiated (that is how money is created in an accounting system) only the principal is created. Interest is only set up as a liability to the issuer, the bank. A result of this accounting system is that there is never enough money in circulation to pay the interest. This is the reason that economists assume that economic growth is always necessary. Growth is not necessary in an accounting system that does not include interest in its ground rules.

4. Balancing the federal budget under the present accounting rules is not feasible. When private borrowing is insufficient to power enough growth to feed the interest payments coming due, the government is forced, as is now happening, to be borrower of last resort to maintain system operation.

5. Another result of interest bearing money is that it systematically moves money from the periphery toward the center of the economy to the central banks. This is the major reason for the demise of small rural communities, as more money goes out of them than comes in, and they are starved out of existence. Community currencies can give communities a way to manage inflows and outflows in order to maintain a healthy community economy.

6. Money is not currently defined in the way that other measures, such as feet and inches are defined. As Bob Blain and others point out, the universal driver of economic activity is the fact that people are willing to spend their time productively, in trade for the work of others. Therefore the hour of work is a universal measure of value. Some may, as Blain points out charge a bit more for work that is dangerous, or requires an investment in equipment but not the extreme amounts currently charged.

7. Using the hour as a universal measure of economic activity makes it much easier to carry on economic activity between communities, each with their own currency. Making the hour the standard for legal tender in payment of taxes gives it an extra boost in legitimacy.

8. Rather than having the money supply regulated by a central regulatory authority which tries to second guess the amount of economic activity that is going on, it is much superior to have the system self regulate, with each new transaction representing an increase in the account of the seller and a decrease in the account of the buyer. In such a system, the goal is to maintain account balances close to zero, rather than to maintain a positive balance.

These and other related issues are fleshed out in my paper Toward an Economy Based on Curiosity and Caring instead of Greed, which is attached.

Very great work. Thank you so much for that.

maison de credit

Thanks!
I think you've done an excellent work! And it would really improve the current system a lot.
I especially appreciate the concept of having working hours as units of money. I'm been a fan of the Aristotelian concept of money as something that works only as a catalysis (and hence without having any unit) between counterparts in transactions and not seen money as a commodity by it self, since it's then possible to create money out of money and hence live on others work. But this problem still remains even if you use the Aristotelian view - the part that has the power to issue money will still be able to live on others work.
So I agree, one problem is probably that money don't have a unit. The LETs system (even though it has flaws)could be a good starting point just as you say.

It would be harder for the parasites to live on others work if one unit of money represented one working hour. They would need to produce one hour of work in order to get one hour of the unit money - just like the rest of us. It's the other way around with the present system - we need to work to get the money from those who don't work but can produce money by indebting people.

So it would probably be harder for the parasitic financial part to extract the wealth from the real economy built on work if one unit of money represented one hour of work - since this is the real problem in the current system.

But I wouldn't really see it as a debt system as todays system. More like a work schedule system that regulates the amount of work in the society by a regular accounting system where money come to existence by work (the FRB accounting system and regular accounting is very different, real accounting deals with existing money, FRB accounting can produce new money from nothing by indebting others). That's not a critique but something I actually find positive.

Thanks for a very inspiring work!
Michael

These are great posts, from high quality thinkers. Thank you!

The crux of our dilemma, it seems to me, is in making our entire economy more "democratic" and subject to some degree of regulation and control by the citizens of any given nation or economy. I do not believe that democratic governments are possible to maintain without democratic money, and democratic economics.

The degree of ownership and control of the world's wealth by a tiny fraction of a tiny fraction of the world's people is not only absurd, bizarre, and criminal in its grasping selfishness and greed. It is also self-destructively insane on a cosmic level. The problem with the pathologically and suicidally insane is that they often find a perverse satisfaction in taking as many innocent persons as possible along with them to their destruction.

The real issue is how to achieve democratic money and economics while keeping our civilization and planet from perishing in the process. It is a situation that might be likened to the inmates not only running the asylum, but also holding their finger on the "dead man's trigger" to the world's WMD stockpiles. We not only have to solve the problem of containing suicidal power gone berserk, we also have to disarm the nuclear option.

It will matter little if we transfer the money power back under public or governmental control somehow, if the real reins of power remain with those few entities who are holding all the wealth, and thereby remain in de facto control over the governments.

Sorry to have to close on such a somber note, but obligations call.

More later.

Replacing a private monopoly with a state monopoly is unlikely to solve the problem. It was such abuse of the monetary system by the state which allowed the establishment of the current monopoly.

The only mechanism that has ever protected against tyranny is competition between equal players in the marketplace.

Any monopoly will be abused - the priority, therefore, is to abolish any monopoly of the money power, whether by private banking cartel or by the state. Legislation is required that allows that any currency issued according to certain rules, has equal legal footing.

The market will determine which system is best.

Hi

The document within this post, "Toward an economy based on caring..." is certainly one of the most succinct descriptions of the problems in the current monetary system.

It will take me a while to think about all the conclusions you have drawn, but it is well worth the effort.

It is illuminating to know that bankers are essentially on welfare. One of the continuing problems of the money system is that it, Escher-like, somehow has to pay for itself out what is assumed to be a finite amount of funds. This can only end in deficit, and is as illogical as a perpetual motion machine. This is why money creation should be 'non-profit'.

I am a little behind on how mutual credit works, with a debit from the buyer's account and a credit into the seller's account. If an individual's balance starts at zero (does it?) do they go into debt with purchases, or are purchases impossible without a credit in their account? Can they go bankrupt? I would love a little story about this to compare to the other stories.

The document states:
"There must be some mechanism for payment of expenses of system
operation. Transaction fees have been shown to slow down the rate of
trading. Where demurrage is a part of system design, it can cover system
operation."

I completely disagree here that somehow the system must be paid for by the economy that facilitates. I think that this is a similar, if not as negative, idea as interest. Paying for the economy, or paying for money, whether through interest, demurrage, tax, etc. is entropy--energy that can never be turned into work. In essence, somehow paying for the economy out of the economy will tend the economy toward the negative, because everyone builds this 'running cost' into their prices. I think this is the biggest mistake the economy has to offer. If the cost of the economy is internalized, it can never offer 100% value by design.

Another quote:
"Betting on the exchange value between different currencies for personal
gain adds nothing to social value, is immoral and must be made illegal. It
is for good reason that Jesus threw out the money changers and that for 18
centuries the Catholic Church decried the payment of interest. The Muslim
faith still maintains this practice."

Here I completely agree. Gaining monetary value by buying and selling money is again illogical and entropic. Islamic economics bans 'riba' or interest, as well as gambling (to such an extent that it bans insurance) and also bans 'gharar'--excessive risk, also notably defined as 'When the buyer does not know what he is buying or the seller not know what he is selling'. It is often applied to intangible transactions.

I am not convinced that the hour of work should be the absolute criterion for a unit of money, unless it takes into account how many years a person has studied, and relative incentives and motivations (not every hour of work is as appealing as others). As a base rate, we already compare pay by the hour, and I think that it could easily spiral out of control once again (a CEO may claim that his hour is worth as much as a month, etc.)

Sorry about the double posting!

That is a problem. Even two people who have the same training, years of experience, and working for the same employer may be so different in their work efficiency that one produces fives times what the other produces in the same period of time. I have no problem paying the more efficient worker five times the wage of the less efficient worker.

To complicate matters, as the degree to which labor is divided between workers makes their work less and less comparible to each other - how to you rate each person's contribution? Ideally, each person would receive the same proportion in wages as they contributed toward the product. Realistically, I don't know how anyone could accurately compare the contributions of a software engineer, a front line manager, a salesperson, a mechanical engineer, a few senior managers, and a team of technicians -- they all participated to different degrees over a period of years to produce the final product. Some were more efficient than the others, some put forth more time, some put forth more physical labor, some more social labor, some more mental labor. Each has different training, and differing levels of experience. Some made major contributions outside the view of the others. Some really enjoyed what they did - others hated what they did.

"Toward an Economy Based on Caring" (link above) - is an excellent summary of the issues involved. I have read much of the same literature (as have many others), and have come to similar conclusions.

The question is, therefore, why are these ideas not more generally acceptable? I frequent many forums, whose subject matter focuses upon alternative currency and currency reform - and even there, compound interest is accepted without question (often championed by some who imho should know better.) It appears that the concept of demurrage is not acceptable - even my spell checker does not recognize the word.

note:

For those of you interested in such matters - I would like to add to the reading list: Thorstein Veblen - "The Theory of the Leisure Class"; Henry George - "Progress and Poverty"; and the writings of Ronald Coase (not to be confused with Coase's Theorem - I think originating from Joseph Stiglitz). These go some way toward illuminating the other half of the problem - how, when and why markets do or do not function.