Ideas for a New Monetary System

The purpose of this article is to explore alternatives to our current debt-based global monetary system. It is an open letter to interested economists, activists, people who work in financial services, and anyone else who might be interested to think differently about how we, through our institutions, facilitate exchange in our global and local economies... It is evident to me, that our current system is breaking, if not broken.

My name is Costa Michailidis, I'm cofounder at Innovation Bound, and though my work is primarily to lead innovation projects with scientists and business leaders, my education was in economics. My experience in innovation and my knowledge of economics both lead me to believe that there is a better path than the one we're on.

I do not presume to know exactly which path is best, though I am happy to contribute my efforts to cut back the brush. My purpose is to show that alternative monetary systems are viable, that we are not inexorably tied to the destiny of debt-based fiat currency.

Again, the scope of this article is not to produce full, battle-tested proposals with point-by-point implementation plans. Global money markets are complex and enormous. Here's an interactive diagram that shows just how complex our current system is.

The purpose of this article is to propose ideas to begin to think about how else we might set up our monetary system, because it has become evident to me and anyone paying attention to the widening income gap, depressed economic growth, mounting debts, and more that the current system is not serving us well.

This is going to be a long read. Strap in tight.

Photo By Alice Pasqual

The powers that be are too strong... what you propose is impossible.

We go by a very simple rule at Innovation Bound » Anything is possible.

Before flying was invented, flying was impossible. Before Roger Bannister, running a 4-minute mile was impossible. You want to bark about how hard it's going to be to change the monetary system, go right ahead, but we're unafraid of the word impossible, because that's all it's ever been, a word.

Believing something is impossible only guarantees one thing, that you'll remain on the couch, preserved by pessimism.

Okay, now that that's out of the way...

Debt-Based Money

Our global monetary system has a few important parts. Let's go through them.

Firstly, it's fiat. The paper bills and digital deposits we transact with are promises based in confidence that those dollars will continue to be acceptable forms of currency to transact in. There's no gold backing. We came off the gold standard in 1971. It's just our faith in the governments that print the currencies in each country. So, each country can print currency, digitally (directly into bank accounts), or in paper and coin form. That is the monetary base.

The dollar plays a special role here. A very large portion of interational trade, some estimate it to be 60% of all transaction value, is conducted in dollars. When Germany buys oil from Saudi Arabia, they pay in dollars. When Brazil buys cars from Japan, they pay in dollars, and so forth. This is what is meant when we say the dollar is the global reserve currency. It also means lots of banks and central banks hold dollars in reserve.

Another important thing to note is that international trade isn't only conducted in exchange for dollars, it's conducted through an international banking system called SWIFT, which the US largely controls.

So, that's the first part of the monetary system. The monetary base. The actual currency. There's something like $10 trillion of this total around the globe.

Then of course, there's credit. That's the money that gets created when a loan is given.

Come again? What do you mean created?

Right. So, when a loan is given, it's not someone's currency that they own being lent to someone else. It's currency that's created automagically at a bank to be loaned to someone who wants to buy a house or start a business or something like that. Now, there are some rules for how much of this a bank is allowed to create. You can imagine what would go wrong if they could just create as much new currency as they wanted.

The rules aren't as stringent as you might think, though. There's a very easy way to know how much of this debt-based currency there is out there. Just start counting up dollars of debt. The US Federal Government has about $23 trillion, US corporations have another $7 trillion, total mortgage debt in the US is $16 trillion, student loan debt is $7 trillion or so. Total US debt seems to be baout $75 trillion.

This creating of US dollars isn't restricted to the USA. If a bank in England has to make a loan to a company in Egypt in dollars, they can created the currency and give that loan in dollars. Those are called eurodollars by the way even when neither entity is in Europe. Go figure.

Global dollar-denominated debts seems to total $255 trillion or so.

These are big numbers. There's no need to be scared of big numbers just because they're big, but there is good reason to look at our system and question its stability.

As long as the money is circulating around, the monthly payments on that $255 trillion can be paid, but when the music stops, there's only $10 trillion or so in base currency, that somehow has to make payments on $255 trillion in debt.

The current pandemic and consequent economic shut down are slowing the economy, risking lots of defaults on mortgages and corporate debt payments and all kinds of things. If an unwind were to begin, we'd be in trouble.

By unwind I mean a cascading sequence of defaults. If Bob can't pay rent on his dry cleaner, then Jamal who owns the property can't pay his mortgage, and Xiaming who owns the bank that gave that mortgage is in trouble, and we all know from 2008 what happens when banks are in trouble. If you haven't seen it The Big Short is a fantastic replay of the financial crisis of 2008.

Summary of Our Debt-based Monetary System

To sum up, we have a fiat currency system where the worth of the currency is based on the faith in the government that prints it. The US dollar is the global currency that most international trade uses. Currency is printed by governments, but also created when banks initate new loans. The loan-created money is far greater than the base currency, introducing some fragility into the system.

The Income Gap & Our Regressive Credit System

Fragility isn't the only bad thing about our current system. Inequality is another.

We all know about our progressive tax system. The higher your income the higher your tax rate. This is supposed to help the poor, and it might if we didn't have an entirely regressive credit system.

Consider:

• If you're a bank you borrow from the central bank at 0.25% interest.
• If you're middle class you borrow at the mortgage rate, about 3.25%.
• If you're a student maybe your student loan charged 6% interest.
• If you're none of those, your only choice is to borrow with your credit card at 15% of more.

The wealthier you are the more likely you are to pay your debts, and so the less interest you're charged.

Progressive tax system.

Regressive credit system.

There's more to say about our current system. Jeffrey Snider of Alhambra Investments is probably the best person to learn about our current monetary system from.

Onward!

What is the purpose of a good monetary system?

If we could imagine a new monetary system, what would make it a good one?

Let's start with features of the actual money. There are some well-known, historical features of good money. I've adapted them a bit and added a few items:

1. Durable - Good money is durable. It doesn't get lost or stolen and doesn't break.
2. Divisible - You can chunk it out into portions.
3. Fungible - One equal sized unit is just as good as the next.
4. Portable - You can take it with you anywhere.
5. Valuable - It has value besides as a medium of exchange.
6. Transferable - You can transfer it easily from one person or entity to another.
7. Acceptible - It is widely accepted in exchange for goods and services.
8. Stable - It resists manipulation, market shocks, counterfeiting, and fluctuations in price.

These features of money enable two important function for people in the real economy:

1. Exchanging money for goods and services.
2. Saving money for future investment or consumption.

Wait! What do you mean the real economy?

The real economy is made up of people, factories, schools, the goods and servies we buy and sell, the knowledge we have and expand, the hardware and the software, and the natural resources we utilize (and hopefully replenish). This is the stuff we care about.

The financial system stands on top of the real economy and facilitates transactions, lending, saving, and investing. Everything from money, to bonds, and stocks is part of the financial system, not the real economy.

So, if those features we listed above make for good money, then what would we want from the monetary system?

We might want a system that's accessible to as many people as possible, a system that is self-correcting, or doesn't tend toward collapse or calamity. We might want a monetary system that upholds certain societal values like liberty and equality.

Maybe we want a monetary system that rewards those who add the most value to society.

Maybe we want a monetary system that makes sure no one gets left too far behind.

I'm not going to pick our goals for us, but we do have a nice cross section of criteria above. You choose what's important to you.

What's important from an innovation standpoint is that we use criteria not just to evaluate ideas, but to improve them. There's a whole Innovation Bound article on that here: Giving Feedback to Improve Ideas.

Let's list out our ideas!

Here we go!

1) Money With an Expiration Date

One novel idea I have heard over the years from lots of creative thinkers is money with an expiration date.

The idea is that if money expires, no one can hoard it.

There are certainly ways to implement this digitally. If we wanted a physical way we could print bills with expiration dates on them.

What would happen?

First, bills that are closer to expiration would be worth less than notes with more time left. If we used a digital solution we might adapt against this by having a random chance of expiration on any unit of currency, but then you'd have strange edge cases where people go broke, because their money would happen to all expire at once.

It's a fun idea, and perhaps a feature worth incorporating into a larger more robust idea.

2) Government Spending Money Into Existance

The government spending money into existance, better known as Modern Montary Theory, has quite a following at this point, mostly from the far left side of the political spectrum.

The idea is that the goverment can print money into existance and use it for government spending programs.

Of course with an ever increasing amount of money, we'd have inflation problems, prices would continuously increase to meet the inflating volume of currency.

This can be solved through taxation.

The government spends money into existance, and then taxes it out of existance.

By adjusting what the government spends money on, and who is taxed, the government can determine who benefits and who loses. Who gets rich and who doesn't.

A downside is that it places economic and political powers into the same hands; too much centralized power without checks and balances.

Another consequence is that the currency of a nation that implements MMT could lose tremendous value against other currencies.

3) Produce The Money Into Existance

Another option is to produce money into existance. The classic way to do this is to mine gold and silver for use as money. We can use another convenient commodity, or even a cryptocurrency with a fixed supply such as Bitcoin.

Gold and silver supplies are very stable. Doubling the gold supply would take something like 50 years of mining at the current rate.

Money with a stable supply will tend to rise in value at the same rate as the economy grows. Effectively this means people's purchasing power will increase proportional to the efficiencies gained by the whole economy. This is in stark contrast to the inflationary policies we currently operate with, where people lose purchasing power at more than 2% per year, and don't make much at all in their savings accounts.

Using gold and silver is also currently available to everyone. People can simply put themselves on a gold standard. Keep their savings in gold and silver. Price their services and products in ounces of gold and silver, and do simply math conversions to convert to any currency. Online businesses can easily implement these measures, and settle up in gold at the end of the month.

Tax policies and other laws complicate this in many places.

Also, with a relatively fix money supply there wouldn't be massive credit contractions and expansions. If in order to borrow money, someone has to lend actual savings, that would likely keep interest rates higher, and would not have the multiplier effect that our current system has (turning that 10 trillion into 255 trillion from our description above). There would then be less potential for an unwind or credit crisis.

Stable money supply, means stable financial system.

A potential downside to this is that there is very little a government can do in the event of a crisis. It is only through the action of savers that monetary action can be taken in a crisis. The government could send the national guard to help, but they couldn't cut checks to everyone. This kind of monetary system relies on self-reliance.

4) Labor Created Currency

Another ideas is to issue currency directly to people who earn wages.

Instead of a payroll tax, you could issue a payroll bonus to the employee in the form of newly minted currency. Those pay stubs that show tax withholdings, imagine they showed tax rebates!

Don't go crazy, this one has obvious downsides too.

If money is created every time someone earns wages, then there would be a lot of inflation. A sales tax in proportion to the wage bonus might balance things out.

One downside of this is that at the end of the day it might just be a wash. Employers would just decrease wages and customer prices to account for the employees' wage bonuses and customers' sales taxes.

5) Cash Back Currency Creation

Another way to issue new money is on every transaction, just like your credit card gives you cash back. This is like a bonus given to every consumer on every purchase.

Imagine a 5% cash bonus on every purchase. Every time you spent $100, you'd get $5 bonus in newly created money.

This would inflate consumer prices of course, so you'd have to account for that somewhere. If you did this by raising income taxes, you might control for inflation.

A major downside might be that you'd over-incentivize spending, and punish working. Kind of makes for a pretty lazy, consumerist society.

6) Create Currency for High Credit Scores

One dangerous element of economic activity is malinvestment. When interest rates are very low and people borrow more than they should, or when the government starts expensive programs that ultimately fail, this ends up being a terrible waste of time and resources.

Perhaps a solution to this could be tying credit scores, or corporate ratings, to individuals and companies that succesfully convert savings into economic growth. Then, create new currency for those individuals.

If they continue to be successful, and the economy grows, the newly created currency wouldn't be inflationary.

The balancing act here would be incredibly difficult to say the least. How do you create exactly the right amount of currency? How do these credit scores accurately predict economic growth resulting from investments?

A seed of an idea; needs work.

7) Energy Backed Money

Energy (oil, solar, gas) is an input into lots of production processes. Almost every single product and most services rely on some form of energy as a cost of production.

Energy might be a reliable unit of account, as well as a store of value (two of the basic features of money we listed above).

It would be difficult to pass around actual barrels of oil or rays of sunshine, but an energy-backed currency might be a really appropriate medium of exchange. The total quantity could be pegged to the total quantity of energy generated (we'd need a technical approach to accomplish this pegging).

As we produced more products and services, requiring more energy, more currency would be minted. As our technology became more energy efficient, our currency would obtain more purchasing power.

Energy is measured in Joules, that's your metric. We'd price things in Joules instead of dollars.

There are plenty of technical hurdles with this would, that ultimately might be too costly to bare.

8) Money Based in a Basket of Assets

The Facebook project, Libra, tried to accomplish this in a way, by creating a digital currency backed by a basket of fiat currencies, but in theory you could use any set of assets.

Imagine a currency backed by stock in various companies.

Let's imagine a currency called the FANG, that's backed by stock in Facebook, Apple, Netflix, and Google. You'd need a reserve of shares in those companies, and a way to issue and facilitate transactions of FANG tokens. If someone wanted to buy FANG tokens, whatever they purchased the FANG tokens with (dollars, euros, yen...) would immediately be converted to FANG stocks held in a trust, and the user would get the appropriate amount of FANG tokens. At any point in time they could trade in their FANG tokens for stock in those companies.

The value of those tokens would of course fluctuate with the value of those stocks. This is effectively a currency pegged to the FANG stocks.

We could imagine any number of asset-backed currencies like this.

Imagine a real estate backed currency, or a currency that attemped to peg against multiple international stock markets.

In theory any celebrity could issue a currency backed by shares in their net worth.

Video games often feature an in game currency that's convertible to real world fiat currencies. There might be a game token than were featured in many games, so that coins earned in one game could be usable in another.

9) Personalized Stores of Value

Building on the previous idea, an individual could create a currency backed by a basket of assets of their choosing.

This might be a specialized way people could store their savings. Many retirement funds already provide this function.

Okay, now let's get into some really wild and crazy ideas!

10) Using Time As Currency

What if we tried to use time, or a representation of time, as currency?

Labor markets already do this to an extent, but what if it were explicit?

A dozen eggs might cost 5 minutes, a pack of gum 30 seconds, and a car 7 months.

Your job might pay you 45 minutes per hour, or 3 hours per hour if you're really good at what you do, with 15-minute bonuses for each new sale you bring in.

A house might cost 15 years. You might think twice before trying to purchase one. Or you might take out a mortgage at an interest rate of 5% which makes your mortage payment 695 hours per month.

o _ O

You've come this far. Let's do two more!

11) Using A Credit System Instead of Money

What if we abandoned the base currency part of our system entirely, and just dealt with the world in terms of credit?

No cash. Only credit.

Imagine walking into your favorite bar, ordering a drink, and telling the bar tender to put it on your tab. Then, imagine doing the same thing the following week, and the week after that, and never squaring up.

Imagine going to work, working super hard, achieving your quotas, but never getting paid.

Somewhere, on a ledger, there would be a record of each transaction. A cost for each consumption of a good or service, and an income for each job completed.

If you consume too much and work too little, your credit score comes down, and you start getting rejected from purchases. If you produce a lot and consume less, your credit score goes up and more goods and services become available to you.

Each transaction remains on the ledger indefinitely. There's no paying your credit card bill. There's no monthly statement. It's just an ongoing set of transactions. It's like a giant scale. The reading on the scale adjusts as your stack transactions onto the expense side or on the revenue side.

Credit card companie already have these scores, and the algorithms are quite sophisticated. It might just be a matter of removing the backing. We came off the gold standard in 1971, what if we came off the dollar standard, and just used credit?

12) A Progressive Monetary System

We currently have a regressive credit system, where the wealthiest borrow at the lowest interest rates, and the poorest at the highest rates. We covered this in detail above.

This drives a wedge between the rich and the poor. What if we could mitigate it?

What if we had savings accounts that paid higher interest rates for those with less money in the accounts.

These could be run by the Federal Reserve, and limited to one per social security number, so no one tries to double dip.

There's a stat that's going around that says something like, 50% of Americans don't have enough in savings to weather a $500 emergency.

What if instead of the measly .25% interest they're currently making on their savings accounts it were 50% for the first $1,000, and 45% for the next $1,000, so on?

This would give the poorest a leg up, it would incentivize them to save, and to plan, and not just inflate away their purchasing power.

It could also serve as a policy instrument if those rates could be adjusted as a way to increase and decrease the money supply to fight recessions. In fact, it might be quite effective since it's a bottom up tool, working funds directly into local economies.

Looking Back

The last two times our monetary system changed was post WWII, when much of the world joined a global gold-backed dollar standard, and in 1971 when Nixon temporarily (quotes because it was permanent) closed the gold window and took us off that gold-standard.

It is almost a certainty in my mind that the current monetary system will change. Perhaps not as drastically as in the past, perhaps moreso, perhaps sooner than we expect, and perhaps not for a long while, but it will change.

Change after all is the only constant.

And that is almost certainly a blessing.