Most people do not realise that banks have been giving the privilege to literally “make money”. Certain privileged banks throughout the world can lend money to people even though the bank does not have matching funds on deposit. In fact for every $100 in real deposit the banks can typically lend $900 in “new money”. This is an enormous privilege but with the privilege there is a responsibility. The current credit crisis is a result of the banks not fulfilling their responsibilities and it is time for our society to think of a better way to “make money”. To put the figure in context last year $170 billion dollars in new money, as measured by the M3 money supply, was created out of thin air. This was up by 12% from the previous year and is about $8,000 for every person in Australia. 
Banks only lend money to people who have money or who have assets. When you borrow money to buy a new house the bank is not concerned too much about the house value but about your future earnings. That is, the main criteria that banks use for deciding whether to lend money is whether you are likely to pay it back. They really do not care too much about what you do with the money as long as they will get their loan back and they make no distinction between loaning “old money” or “new money”. 

This system has several inherent flaws and leads to instabilities. Perhaps the major flaw is that “new money” immediately attracts interest. This leads to inflation because we should not pay interest on money that is not backed by an asset. The idea of interest is a payment on the use of an asset. With new money there is no asset earning money. What happens is that as a society we create more new money to pay the interest which then causes us to create more money to pay interest …
The second flaw is that the system leads to asset inflation bubbles. Remember banks will loan you money if you have an existing asset. If you already own a house the bank will lend you money for a second house if you use the first house as collateral for the loan. The bank does not really care if the underlying value of the first house is less as long as they will get their money if you default on the loan of the second house. You do not care that the first or second house is overvalued because you expect both houses to increase in value and pay the interest on the loans. The government does not care if the prices inflate because they collect more taxes and can charge more taxes.
The only people who suffer are those not in the house market or those who are the last people to get a loan before the bubble bursts. They have little voice in the matter. The house price bubble has to stop sooner or later because it is a form of pyramid selling or Ponzi scheme.
When the bubble bursts or starts to leak slowly we then get a credit crisis with governments rushing around in a panic. The reason governments panic is that the banks reduce lending because asset prices have dropped and so banks are unwilling to lend because there are less asset values against which to lend. This then leads to recessions or depressions because no one wants to loan anyone any money even though it will produce productive assets. The problem is not a lack of money. The problem is one of lack of assets and the government adding more money without thinking about how it will be spent will cause the problem to get worse. In particular the current approach of “handouts” is almost certain to lead to inflation because we have more money chasing fewer assets.
There is a solution and that is to stop the banks creating new money. Let new money be treated differently from old money. Let governments take back control creating all new money and let it lend it to the citizens but require the citizens to invest the money in productive community infrastructure. Let the money be paid back from taxation on the income that derives directly or indirectly from the use of the community facilities.
To give an example. 
A community organisation could be established to stimulate car pooling to work, shops, recreation and all other car trips. A voluntary system is set up where people join to be both riders and drivers in shared road trips in private cars. Because the system is voluntary then if someone abuses the system they are excluded from participating both as a rider and a driver. Each time someone drives or rides in a pooled car they are given a zero interest loan or Reward. This Reward must be invested in public transport infrastructure (including roads) such as financing a light rail system, building the system itself, improved traffic control system, a toll way etc. It is estimated that in Sydney alone there is a notional value of $100 billion in empty car seats each year. If a  fraction of these seats were filled and the money earned spent on public transport infrastructure then Australia would be much better off – and it would not cost the country anything as it was paid for from using an existing asset. The system is non inflationary as Rewards are spent on creating a new productive asset.

3 thoughts on “A Different Way to Make Money – Australia

  1. Your proposed solution doesn’t prevent inflation. It also doesn’t prevent bubbles. In your car pooling example, the money loaned would still be inflationary… because you can’t control what the money is spent on after it is loaned to the person. It length of existence is not controlled either. And the persons ability to repay isn’t required either.


  2. Geoff the proposal does prevent inflation of the regular currency and it does prevent bubbles.

    Rewards may be inflated in value if too many are issued. However they are “outside” the money system at zero interest until they are spent on an asset of value. When they are spent regular currency comes into existence but it is covered by the new asset. Inflation is caused by too much money chasing too few goods and that does not happen except to Rewards itself.

    Rewards are negotiable and they will sell at a discount to real currency. This discount reflects the inflation of Rewards and reflects the rate at which the investment returns value. As Rewards will always be at a discount bubbles will not occur because of the existence of Rewards.

    The reason the system works is that we control how Rewards are spent – that is the purpose of having Rewards – and that is “new” thing in the system. Until five years ago we did not have the technology to make it practical.

    As a group Rewards holders “repay” loans from taxation on earnings of the investments they make. We can prove this by keeping track of the earnings on investments.

    The way to see that it works is to think of the Rewards like new shares in a Company where the new shares are spent producing assets to increase the production from the Company. Do the calculations as you would for an investment in a Company. The system works as claimed because Rewards are invested on something that has greater value than the amount spent. It may take awhile before it returns the value but it will return the value. Not all Rewards will return as much but in total they will all return more than is spent because that is the nature of investment.

    By removing interest payments on Rewards we have taken away the time component from the equation.

    The critical part of the system is controlling what Rewards is spent on and compliance is enforced through the social aspects of the market. This is the same social behaviour and systems that makes EBay work. If you do not obey the EBay rules you are not allowed to trade. That will be the same with Rewards.

    Rewards are another currency and like any currency it can inflate but the inflation of one currency can be isolated from the inflation of another currency.


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