The IOU is the building block of our financial system. Money is an IOU that the government sells to us so we can pay our taxes. Because we can be confident the government will allow us to use their money to pay taxes, government IOUs become a general purpose currency.

When we want to issue an IOU using government money, we take out a loan with a bank as debt. Banks are licensed to sell us government IOUs. Banks charge us interest on the IOUs to cover the cost of them buying IOUs from the government or other banks plus a commission to the bank to cover their risk and to pay for their operations.

Banks issuing government IOUs outsources the creation of government money to a third party. The interest charged needs to cover the cost of us defaulting on our IOUs. When we repay IOUs, we first pay the accumulated interest creating compound interest.

Instead of using government money for our IOUs we can bypass the banks and sell IOUs directly. We can agree to repay the IOU with goods and services we produce. To cover the risk of the IOU buyer, we can give them a discount on the goods and services they receive. Discounts do not compound. To cover the cost of inflation we increase the value of the IOUs outstanding by inflation.

The buyer of the IOU gets the interest equivalent paid to the banks and the government and has inflation protection. The IOU seller has the same costs. The IOU buyer has little risk if they need the goods and services and if there are many other sales. Accounting treats IOUs as long-term unsecured liabilities and assets, and they appear on the Balance Sheet.

For the total system, it removes the cost of interest and the cost of inflation and increases the productivity of capital.

Governments can do this themselves and can spend money into existence instead of issue debt.

Local and State Governments can do this by selling their IOUs for their services and taxes.

Doing this saves their respective communities the cost of interest and the cost of inflation.

To see how to do this in a fair and equitable way to raise funds to build water infrastructure see the description of Water Rewards. 

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