The main functions of money are as a medium of exchange; a unit of account; and a store of value

Today’s endemic inflation means money is failing as a unit of account.  Inflation means that money as a store of value also becomes problematic and it reduces the utility of money as a medium of exchange, particularly where the exchange takes place over a period of time.  Inflation means it is difficult for people to gain an understand of value because the measure of value keeps changing. Changing the measure of value is like each year changing the measure of temperature so that this year’s 100 degree centigrade is tomorrow’s 105 degree centigrade.

This paper takes the position that general price inflation is undesirable and results in unnecessary risks and costs.

To find a technology to remove general price inflation the paper also assumes that:

  • The existing monetary system is going to remain as is.  
  • The unit of account will remain as national currencies.
The challenge is to invent money technologies that fit within these constraints while removing general price inflation.

The historical record as guide

In the middle ages in England there was no endemic price inflation even though the currencies were routinely manipulated. The likely reason for this was the widespread use of wooden tallies for the exchange of goods and services on credit.

Tallies cost nothing to produce and they are destroyed or recycled after use.  The tally tokens represented a specific credit contract but were not a store of value and hence were able to be created as needed.  They were replaced with modern day loans which are the equivalent of tallies but where the tokens have value.

The 18th Century had a period of price stability which changed in 1913 when the gold standard was effectively abolished with the creation of the USA Federal Reserve.

In the 18th century there was a limited supply of gold but there was enough of it, as a store of value and with the authority of Central Banks, to act as a reference for value.  This meant general price inflation did not occur.

These two cases suggest two technologies that were successful in combatting general price inflation.  In one the medium of exchange for many transactions was zero cost and was created on demand and the tokens in themselves had no value. In the other the medium of exchange had value but its value was anchored in a known value that was kept stable. Extra money tokens were created by issuing more tokens as loans that were destroyed when the loans were repaid. The tokens have value outside their use as a loan with interest. This means the tokens earned interest on interest.

Tallies were replaced as a means of exchange when they were burnt on the orders of the Bank of England and replaced with loans of gold backed money tokens.

Gold was replaced in the USA when the Federal Reserve took over the issuing of currency. It was completely abandoned when Nixon replaced Gold with Oil as the commodity backing the USA dollar by getting OPEC to agree to only sell oil in US dollars.

Without Gold as a reference it became profitable for lenders to get banks to issue new money tokens as loans that were zero cost but earned interest. Without the gold reference point the creation of money tokens as loans and derivatives has exploded. The total value of money tokens is estimated to be several quadrillion dollars which is much more than the total value of tradeable goods and services in any year and more than the value of all assets.

This expansion of money tokens inevitably leads to general price inflation and the Central Banks of the world have recognised this and now argue that endemic inflation is a virtue. Recently they have dropped interest rates so that money tokens themselves have little value. This in turn reduces inflation because there is less interest on interest.

We need a money technology to stabilise the value of money. One way of doing this is to remove the ability of money tokens to earn interest on interest.

Crypto Currencies like BitCoin

Matching pairs of PKI keys are a modern day version of Tally Sticks.  BitCoins are special PKI pairs that have value when they are created whereas pairs of PKI created for a transaction only have value associated with a particular transaction.

BitCoins creates pairs of PKI keys that have value because there is a limit on the number that can be created because of the method of creation. At one level they could be seen as an alternative to gold as something that retains value and hence can act as a reference value.  Unfortunately like gold there is a limit to the number of tokens and they must go up in price if used as a store of value. Like gold they are unsuitable as the basis for a stable currency because there are not enough to be a credible backing for other currencies.  They cannot take the place of Tallies because they are expensive to produce and are not created on demand and they survive the transaction for which they were created. They are expensive to use because when BitCoins are transferred their history of use is also transferred.

Their main attraction appears to be their deliberate scarcity value which – like all scarcity – leads to an increase in price.

PrePayments with Discounts

Prepayments with Discounts is where a buyer PrePays for goods and services of an organisation or individual and receives a discount on the price depending on the length of time the PrePayments have been held.

They have the same characteristics of Tallies. They cost nothing to produce. They are produced on demand and they go out of existence when they are used. Importantly they have no value except as agreed by the issuing organisation or individual.

They have other properties beyond Tallies that make them attractive as a form of money.  They have high liquidity because they can always be sold to people who want the goods and services produced by an organisation. They are backed by real output of goods and services and must be exchanged for those goods and services on redemption. Each PrePayment has its own terms and conditions so they are flexible and can easily adapt to changing circumstances. For example the value of the PrePayment can be increased by inflation or decreased with deflation. Also when the PrePayment is for a high risk purpose the Discount Rate can be set high to reflect the risk. They use the existing accounts payable systems and can be thought of as negative accounts payable. This means there are no new laws or regulations needed for their introduction.  Each PrePayment can be for any amount and hence they are suited to Crowd Funding of asset construction.

They are different to loans because no new currency tokens with value are created.  This means the risk of money creation is not present and this saves the cost of interest on interest over the period of the loan.  The interest on interest of a 5% loan over 25 years is double the cost of a PrePayment with 5% Discount over 25 years. The cost of supporting loans using interest bearing money is high and the fewer such money tokens we have the lower the cost of transfer of value.

Likely Development of PrePayments

It is hypothesised that the wide spread use of PrePayments with Discounts will eliminate general price inflation because they are lower cost than loans to achieve the same credit outcomes. They are lower cost because they do not require the creation of new money tokens in the currency in which the transaction is valued. These currencies can be controlled by the Central Banks limiting the number of new money tokens to the number needed to support PrePayments.  Governments could use PrePayments to introduce general purpose money tokens with discounts depending on the length of time the funds have been held.  This is done by entities purchasing Tax PrePayments with Discounts which means that PrePaid tax gets a discount when used.

PrePayments are introduced entity by entity and each prepayment system stands on its own. Exchanges of PrePayments will arise where the risk and reward associated with each PrePayment can be evaluated and a market developed.

Loans will operate in parallel and will be used to regulate the price of money through the market in loans.  This will act as a control on the price of government issued Tax PrePayments.  They will form the same role as the gold standard as they can act as a reference point for national currencies.  Because they are distributed they are more difficult to game.  We could end up with two credit systems both of which regulate the other.


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