Illustration of a simple money system please

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Illustration of a simple money system please

I've been reviewing the Crash Course section on Money and trying to follow some of the discussions on this site, particularly the current "Austrian and Keynesian" thread.  The data is not easy for me to follow.  The monetary policy and system in this country as presented in the Crash Course, appears to me to be quite insane - complex and convoluted in ways that suggest intentional effort to obfuscate and manipulate.   The "Austrian and Keynesian" thread is over my head;  thoughtful individuals have come to quite different conclusions.   What would be helpful to me is an illustration of a simple monetary system.   I'm thinking an island with 1,000 people, barter economy, who one day decide to have money to facilitate commerce.  What is a simple, fair, system that most of the islanders could likely agree to?  I'm guessing someone in some book or article has already illustrated such a simple, workable monetary system.  Would appreciate any references.   I understand that many on this forum can, literally and figuratively, discuss the "calculus" of monetary systems, but I need to start at a more basic level in order to see how a fundamental system might operate.

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Re: Illustration of a simple money system please

I'm thinking an island with 1,000 people, barter economy, who one day decide to have money to facilitate commerce.

Great short question.  I'll take a stab at it.

Lets start with the good part of barter.

This type of system gave the Producers the benifit of their production. This type of system was fair and honest because it gave the people who drove the economy all of the benifits of their production.

The bad.

Obviously this system had severe limitations.  If you produced something that no one wanted in your town but people did want in other parts of the country trading it would become rather combersome.

The Fix?

A tool to enhance fair and honest trading.....or money.

Lots of things have been used for money.  All commodity items always started out as a wealth to the people, such as beaver pelts, musket balls, land, leather, sea shells, gold, silver, ect.......All of these as were honest forms of money.

What is a simple, fair, system that most of the islanders could likely agree to?

Time has proven that people always preffer the system that is the easiest to use.  This is why people always preffered the paper receipts over the gold and silver coins because it was lighter and easier to use.  This is proven by the fact that if the people preffered to use the metal coins they would have never used the receipts in the first place.  So long as these reciepts were just an evidence of the coins and kept at a one to one basis and not loaned into circulation this was honest money.  The moment the goldsmiths began to loan receipts into circulation, both the quanity and quality of the money changed.  The money now represented Interest bearing debts on gold the goldsmith did not have because as history has proven the goldsmith loaned out many more receipts than he had gold.  This is where 'fractional reserve banking' was born.

For a money system to work properly on this island it would have to be a good medium of exchange plentiful enough to facilitate all the trade and savings requirements of the people.  This was the problem with trying to use gold and silver for a medium of exchange.  There just simply has never been enough of it.  This is proven by the fact that if there was enough of it, people would have never borrowed receipts from the goldsmith on gold that the goldsmith did not have.

So to make a money system work lets cover the basics.

Whatever us used for money must be plentiful enough for everyone to have enough to cover their buying and selling requirements.

It must be accepted by the people.  If there is a better form of money people will reject money that is difficult to use.

It must operate under a certain set of principles.  The principles of wealth based barter are great.  The principles of interest bearing debts.....well look around today.

There is only one problem this island still faces.  How do you move whatever you're going to use for money into circulation so the people can use it to facilitate trade.

If you create new money and spend it in on war,......I wouldn't really want to live on an island where the only way you're prosperous is by how effective you are at killing your neighbors.

If that new money is spent in on things that the islanders need to facilitade trade and on things that benifit everyone, then you've now designed the perfect monetary system.

Numbers are probably the best form of money ever invented because they clearly work, and are more effective at facilitading trade than any other form of money in history.

The problem with our modern money system is that it does not represent the production of the people, it only represents interest bearing debts owed to a banking system who does not produce anything.

 

There is always consequences for every action and how money is created and moved into circulation is no different.   One way will make the islanders prosperous beyond precident and give them a medium of exchange that works under fair and honest principles.

 

To loan any kind of money into circulation always has its own set of consequenses.  To understand this all anyone has to do is look at our society today.

I understand that many on this forum can, literally and figuratively, discuss the "calculus" of monetary systems, but I need to start at a more basic level in order to see how a fundamental system might operate

I recommend that you read Modern Money Secrets to really understand money.

 

I hope you enjoyed my response.

Thomas Hedin

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Re: Illustration of a simple money system please

 

1000 people on an island, if they had any brains they would not use a money system!!!

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Re: Illustration of a simple money system please
JK121 wrote:

1000 people on an island, if they had any brains they would not use a money system!!!

Clearly a better use of their brains would be discussing fantasy ideas like the zeitgeist movement.  Smile

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Re: Illustration of a simple money system please
Thomas Hedin wrote:

Time has proven that people always preffer the system that is the easiest to use.  This is why people always preffered the paper receipts over the gold and silver coins because it was lighter and easier to use.  This is proven by the fact that if the people preffered to use the metal coins they would have never used the receipts in the first place.  So long as these reciepts were just an evidence of the coins and kept at a one to one basis and not loaned into circulation this was honest money.  The moment the goldsmiths began to loan receipts into circulation, both the quanity and quality of the money changed.  The money now represented Interest bearing debts on gold the goldsmith did not have because as history has proven the goldsmith loaned out many more receipts than he had gold.  This is where 'fractional reserve banking' was born.

Thomas,

Thank you for your fine start off kicking this discussion.  Up until this point I think we are in agreement.

Thomas Hedin wrote:

For a money system to work properly on this island it would have to be a good medium of exchange plentiful enough to facilitate all the trade and savings requirements of the people.  This was the problem with trying to use gold and silver for a medium of exchange.  There just simply has never been enough of it.  This is proven by the fact that if there was enough of it, people would have never borrowed receipts from the goldsmith on gold that the goldsmith did not have.

I don't see how this is proven.  What if the people were unaware that the goldsmith was creating reciepts he did not have gold for.  They thought they were agreeing to pay extra money in the future (interest) to recieve money today.  As long as the goldsmith does not operate under factional reserve, there is no fraud and the system could continue indefinately.

Thomas Hedin wrote:

There is only one problem this island still faces.  How do you move whatever you're going to use for money into circulation so the people can use it to facilitate trade.

If you create new money and spend it in on war,......I wouldn't really want to live on an island where the only way you're prosperous is by how effective you are at killing your neighbors.

If that new money is spent in on things that the islanders need to facilitade trade and on things that benifit everyone, then you've now designed the perfect monetary system.

Numbers are probably the best form of money ever invented because they clearly work, and are more effective at facilitading trade than any other form of money in history.

Now this is where we part company.  I have several problems with your proposal.

  1. I prefer something more tangible and less easy to dilute than "numbers"
  2. There is no equality in how the money is created.  Those closest to the money creation always do best.  In the current system that is the bankers.  In your system it will be construction workers or members of the government that get to decide spending.  I think this is an absolute reciepe for disaster.
  3. Their is no such thing as a "perfert monetary system".  I think the best we can hope for is one that has a negative feedback loop to changes in its equilibrium.
  4. It requires a central authority (and probably FORCE) to work.  This requirement precludes any hope that society could ever move beyond the concepts of leaders and followers.
Thomas Hedin wrote:

There is always consequences for every action and how money is created and moved into circulation is no different.

On this point we agree, we just disagree upon the outcome of what you propose.

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Re: Illustration of a simple money system please

 

As opposed to adopting time consuming monetary equations that eat up time and holds those 1000 people paralyzed.  If it can't get done within the rules of the money game the Task A won't get done!  WOW brilliant GOES211 

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Re: Illustration of a simple money system please

Hi Ltlredwagon

I'm thinking an island with 1,000 people, barter economy, who one day decide to have money to facilitate commerce.  What is a simple, fair, system that most of the islanders could likely agree to?

Could you clarify exactly what your question is please? Do you mean what should be used as money, how the money is initially allocated amongst the islanders, how the money would work in commerce, whether any small group (tribe leaders?) should have some form of control, or something else? Some questions are relatively easy but others a lot more tricky!

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Re: Illustration of a simple money system please

Little Red Wagon,

Its great to see another thought provoking contribution from you. Same simplification theme, different subject. Awesome.  This should be fun to watch unfold. 

You might like Steve's (Kemosavy) podcast episode:

The Creature From Gilligan's Island

Best...Jeff

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Re: Illustration of a simple money system please

I don't see how this is proven.  What if the people were unaware that the goldsmith was creating reciepts he did not have gold for.  They thought they were agreeing to pay extra money in the future (interest) to recieve money today.  As long as the goldsmith does not operate under factional reserve, there is no fraud and the system could continue indefinately.

Goes211,

Take a minute to think about this.  If you had enough money to pay all of your buying and selling needs why would you want to be in debt to someone and pay them interest?  Who in their right mind would do something so rediculous?

Clearly we can see that no man can be trusted to honor his promise to pay after they begin to see the power of creating the medium of exchage as interest bearing loans.

I need you to think about this next question for a moment.

On this island if the 'goldsmith'  or a combined group of his friends was just able to capture just 10% of the total money supply, if they loaned out their profits at just 10% interest, it would only take them 25 years to own all the money on the island and have everyone in debt to them for more money than there even would be in exsistance.

Do you really believe that is a sustainable system when simple math proves that in less than one lifetime 100% of the money will be transfered to the hands of a few men, with the property being transfered after that?

I prefer something more tangible and less easy to dilute than "numbers"

Are you trying to say that right now today you only use U.S. Coinage for your buying and selling needs because you preffer something more tangible than numbers?

I've yet to meet a person alive who likes to use coins to purchase items.  Everyone I know prefferes using cash / checks / electronic payments way over the coins.  I hear a lot of people say they preffer to operate this way but none of them do this in practice.

In your system it will be construction workers or members of the government that get to decide spending

I could care less who manufactures the money.  It really doesn't matter.  What matters in the principles under which the money functions.

Their is no such thing as a "perfert monetary system".  I think the best we can hope for is one that has a negative feedback loop to changes in its equilibrium.

Can you please explain what a negative feedback loop is?

It requires a central authority (and probably FORCE) to work.  This requirement precludes any hope that society could ever move beyond the concepts of leaders and followers

Why would people reject something that they readily use (such as numbers today) when there is no law requiring its acceptance.  If anything using numbers for money is exactly what you're advocating for because the absolute bulk majority of people preffer it and I can assure you if the bulk of them did not preffer it, check book entry would have the same fate as using coins for money.

The only reason we even started using numbers for money is because the people preffered to use numbers.  What they didn't realize is that bank credit has always represented interest bearing debt.  This is what seperated commodity money from debt money.  Commodity money always started off initally as an asset to the people with no debt attached.

On this point we agree, we just disagree upon the outcome of what you propose.

Are you trying to tell me having your entire medium of exchange only borrowed into existance is the best way for a society to function?  What happens when the lenders of money decide to shut down the money supply?

Why should a society be faced with ever growing money shortages, increased poverty, moral decline (having a society based on the idea of the only way for you to get ahead is to screw your neighbor more effectivly that he screws you), ever increasing workload forcing both parents to work outside of the home in an attempt to stay ahead of the unpayable interest that is created, ect.....???

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Re: Illustration of a simple money system please

uh oh

I see the non usury thread rearing its terrible head Smile

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Re: Illustration of a simple money system please

On this island if the 'goldsmith'  or a combined group of his friends was just able to capture just 10% of the total money supply, if they loaned out their profits at just 10% interest, it would only take them 25 years to own all the money on the island and have everyone in debt to them for more money than there even would be in exsistance.

Hi Thomas

I get the impression (correct me if I'm wrong) that you believe the banks own most of the money supply. This is not the case, bank deposits are a liability of the banks whilst loans are an asset. They basically act as middle men making a profit on the difference in interest rate on money loaned vs money deposited. If you believe banks cannot go wrong then try speaking to a few shareholders of RBS or Lloyds or US equivalents who have seen most of their wealth evaporate over the last couple of years.

Banking is a business that serves a useful function in society just as other businesses do. I for one find it incredibly useful to not have to carry bags of cash around and to have in the past been able to get a loan to buy a house. Maybe banking has got too big but it still has fundamental value to society.

And when it comes to debt let's not forget that people do have a choice whether or not to borrow. As far as I'm aware although there have been some sharp practices enticing people into mortgages no-one has actually put a gun to their heads and forced them to do so. Or would you prefer people not to have the option to buy houses and for the housing stock to remain with the original wealthy landowners? Because that has social implications as well. 

And what about private enterprise? The ability to borrow to fund enterprise revolutionised business and was fundamental to increasing the wealth of Nations. Maybe resource constraints mean it is time to review the system but to consign it all off as evil debt slavery is a bit silly IMO.

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Re: Illustration of a simple money system please
Thomas Hedin wrote:

Take a minute to think about this.  If you had enough money to pay all of your buying and selling needs why would you want to be in debt to someone and pay them interest?  Who in their right mind would do something so rediculous?

Thomas,

Maybe there is something different about you than most people because you can not seem to understand the concept of time value of money.  When most people want something, they would prefer to have it sooner than later.  This is because most people are impatient.  Interest serves as a bridge between different peoples time preference of money by compensating savers and penalizing spenders. 

NOTE: I am talking about interest in an honest money system, not one where money is debt.

Your example of goldsmiths owning all the money in 25 years only can happen if everyone else decides they want to consume now and pay later.  If that happens, everyone lived larger than they deserved and the goldsmith (a saver) lived below his means for those 25 years.  When the future comes, the debtors should not complain that they are living on less than they would have because they moved their consumption forward in time.  Hopefully it will teach them that they should only take on debt for something that will give a greater return than the interest payments.  Taking a loan to start a business is good assuming the business turns out to be profitable.  Taking a loan out to go on vacation is bad because vacations do not earn a return and they could have went on a vacation for less without paying interest, merely by saving for it first.

NOTE: I am talking about interest in an honest money system, not one where money is debt.

Also their is nothing magic about what the goldsmith (a saver) is doing in this case.  Anyone that has extra money that they don't need to spend right now can loan out that money to someone else for interest.  In other words the service provided by the goldsmith can be done by anyone that so chooses and can be compensated in the same way.

NOTE: I am talking about interest in an honest money system, not one where money is debt.

wikipedia defines a negative feedback loop as the following

Negative feedback occurs when the output of a system acts to oppose changes to the input of the system; with the result that the changes are attenuated. If the overall feedback of the system is negative, then the system will tend to be stable.

In this monetary system, because money is not loaned into existence, the money is not destroyed when it is paid back.  If there is a high demand for money right now, the interest rate will be high to compensate the savers for loaning out their money and if there is a very low demand for money right now, the interest rate will be low, because there will be no competition for loans.  These rates will tend to keep savers and borrowers in some sort of equilibrium.  Money will act like any other commodity and respond to supply and demand.

Also important to the system is the concept of loan default.  If a loan cannot be paid back and default occurs, the person that made the loan must eat the loss.  After all one of the reasons the lender receives the time premium (interest) is to compensate for the risk of loan default.  When the loan defaults, some or all of the principle is not repaid, the loan is negated, and yet the money lives on in the system to pay for other goods or debts.  This also works to keep the system in equilibrium.

If money is scarce because there are too many savers, the effective value of money will increase, and those with goods to trade will probably have to lower prices ( ie. 30% off sale ).  If money is to abundant, and goods are scarce, prices will probably be raised.  Once again this all works to keep the system in equilibrium.

NOTE: I am talking about interest in an honest money system, not one where money is debt.

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Re: Illustration of a simple money system please
Johnny Oxygen wrote:

uh oh

I see the non usury thread rearing its terrible head Smile

Ain't that the truth.  Hopefully I will finally get on a plane tomorrow so you can all have a break from my responses.

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Re: Illustration of a simple money system please

Ltlredwagon,

An example of a simple system would be a LETS (Local Exchange Trading System) whereby each transaction is mirrored in a computer system as follows:

A sells something to B for value of 1 credit : A now owes the system 1 credit and B is owed 1 credit by the system

B nows sells something to C for value 1 credit:  B's credit is extinguished and C is owed 1 credit by the system

C sells something to A for value of 1 credit : C gets credit which extinguishes the credit it was owed and A's obligation to the system of 1 credit has been met

All money has been extinguished and the LETS facilitates the transactions.  You could scale this up to 1000 people.  I don't know if LETS can be used in the U.S. but they are in use in Canada.

To improve on the ease of trading I'd like to see script or fiat money (made to be hard to counterfeit) used to faciliate the customer to customer transaction.  Each person could be issued 10 credits and owe the system 10 credits. 

Later after a series of individual transactions A might have 5 credits, B might have 15 credits, and C might have 10 credits in hand and each still owe the system 10 credits. 

Now B might turn in 5 fiat credits and keep 10 credits for future transactions and the system owes B (10-5) 5 credits. 

A might withdraw another 5 fiat credits to have 10 fiat credits for future transactions and now owe the system 15 credits. 

This would be net B selling to A 5 fiat credit worth of goods.

My suggestion would be though that trading would be done within group sizes of 150 people maximum.  In the afterword of a later version of Malcolm Gladwell's "The Tipping Point" that this is the maximum number of human connections that our current level of consciousness can track.  Thus those that wouldn't honor the liabilities in the system above would be excluded from the group - or each person would feel the pressure to comply.

The above is an example of a complementary currency.  Since it is complementary that means that it needs to be used with a patriarchal currency - the national currency - in a yin yang or duality concept.  Our world is heavily out of balance because of a lack of local currencies and because our national currencies arrive from a debt based system requiring continuous growth - and I believe we've hit the limits of continuous growth so the system must evolve.

I hope this helps.

Cheers,

James

 

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Re: Illustration of a simple money system please

Oh dear!  Is this thread being hijacked by the Austrian-Keynesian debaters? 

Piquod, what I had first envisioned was something like this.  (I’ll probably say something stupid here, but help me out a bit.)  So the people decide they want money (I’m just trying to get a simple illustration going here – I get that 1000 people on an island don’t need a monetary system).   Someone says, let’s use cowrie shells – we can mark them in some way so they can’t be counterfeited.  Okay, how many shells are we going to put into circulation?  Does each person get so much?   Bill is a hard-working genius who has made these fantastic carts for everyone and through exchange he now has a beautiful cart factory, a ranch and house.   Bill is, justifiably, a “wealthy” person.   Betty does a great job of coordinating communication and activities on the island.  Al’s art has improved the culture, lifted spirits and inspired.  Sue, Tim, Ann - their farming has provided food for several families. Joe repairs cart wheels – but he’s always out swimming so he’s very unreliable.  But his repairs are not bad.  Sam, Ed, Alice - they just don’t do much at all.   So how do the shells go into circulation fairly?   And what if there is a later boom in production of valuable goods and services – does the shell supply increase, and how?   Does there need to be some central coordinating authority?

Can these people have a simple money system?  And, yes, I am assuming for the purpose of this illustration that all the people on the island are honest, fair and rational. What does the system LOOK like on the ground, in operation, at it’s first, most basic level?  How does it work?

I think it was Einstein who said, "If you can't explain it simply, you don't understand it well enough."

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Re: Illustration of a simple money system please

Hi lrw

So how do the shells go into circulation fairly?

OK, so the first question is the intial allocation of the money. Which is IMO quite a tricky one if only because it's not something usually covered in standard texts.

One way would be to give an equal initial allocation to each islander - if there were 1,000,000 shells then they would recieve 1000 each. 1,000,000 is in some ways arbitrary but at the same time there should be enough units to make sure even the smallest transactions can be represented as well as the largest. As an aside this is one of the reasons precious metals are so good as money - they can be divided up without damage and into indistinguishable units.

What are the consequences of equal division?

Initially everyone would have the same amount of money but pretty soon those with assets to sell would end up with more than those without assets who wished to purchase them. Which is fair enough given the labour that will have been put in to build/acquire the assets in the first place. Eventually an equilibrium might evolve with people trading goods and labour to ensure they had sufficient money to sustain their desired lifestyle. Prices would reflect values the community placed on different goods and market forces should operate with some degree of efficiency to allocate labour according to these price fluctuations.

A boom in production does not neccessarily require more money but this is where I suspect opinions will diverge. The natural consequence of productivity increases and fixed money supply would be deflation. Basically more goods being chased by the same amount of money so individual units of money go further. Not neccessarily a problem but it may be neccessary to sub-divide the money supply to cater for the lower prices. Which is where precious metals (gold, silver) score over shells because they have the property of divisibility.

An alternative might be to introduce more money into the community. This is a bit more controversial because of the unequal consequences associated with devaluation of the money stock already in existence.

Well that's my top-of-the-head thinking as a starter for 10.

It would be interesting to hear others thoughts about this!

rgds

Mark

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Re: Illustration of a simple money system please

Little Red Wagon,

Thomas:   " So long as these receipts were just an evidence of the coins and kept at a one to one basis and not loaned into circulation it was honest money.      The moment the goldsmiths began to loan receipts into circulation both the quantity and quality of the money changed."

To finish where this left off  - - - -

  As the goldsmiths issue more receipts than the coins they represent,     they are exposed.             They now have  a mismatch between their assets   (loans that pay off over time)    and their liabilities   (receipts they issued convertible upon demand).        If enough customers go to the bank to convert their receipts for the real money in the vault,  the bank cannot cough up the customers coin deposits, and shuts down.  This is what's  called a bank run.

Question: 

 (1)     Was the bank run the customers fault?

 (2)     Is the reason it occurred because      (a)   there was not enough coins   

                                                                               (b)   the goldsmith issued far more receipts than the coins they represent   

See if you can match common terms used today to a or b above:    Not enough gold(coins);    inelastic currency;  debt deflation;   fraud.

Don't let the jargon fool you.    Most of the raging debate regarding our monetary system today boils down to  (a)   or  (b)

 

Now then,    should the solution be to   (a)   Force the goldsmith to honor his obligations to his customer.

                                                                       (b)   Confiscate all coins and   forcibly replace them with receipts

 

 

 

 

 

                      

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Re: Illustration of a simple money system please

How to have a simple workable sustainable money system. 

We have an Island or a small country whose people have decided that they want a money system.  They decide this because it as just become to difficult to work with straight barter. 

They know from experience that with barter if one does not produce any thing he has nothing to trade with.  They have also learned that in order to trade thing after they have been make that they need a transportation system of some kind to move the production for one place to another.  In other words they need some roads.

 They also know that if one is working on building a road all day it is very hard for him to produce other things.  Suddenly they see the way to make the perfect money system work.  They already have lots of sand and they already have people blowing hard glass utensils.  So they agree to have him make some specially marked disks that they will use for their money.  Then pay that person a wage that they all agree is a fair wage for making those disks.  Then they all agree to pay the people, a fair wage, who want to work on building the roads that they all need and will benefit from having.

 This will give them a way to produce the money they need.  It will insure that every one has to work and produce something to get the money into circulation.  It will insure that no one will get an unfair benefit from the creation of the money.   Then those people who build the road and make the money disks will go forth and buy things that they need but are not producing for them selves.  This will move the money into circulation so that everyone will soon have  money and they will all get it the same way.  They will earn it by producing something that some one else wants.    

 There will be no need for taxes and there will be little or no need to borrow.  Besides no smart person would loan any money, that he had to work hard to earn, to any one that didn’t want to work anyway. Therefor they would not be able to pay the loan back any way.

The money supply will grow as the nation grows.  There will be no booms because the money supply would only increase as people produced more and there would be no recessions because there will be no way to put back the money supply.  Like the banks do now.

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Re: Illustration of a simple money system please

Ltlredwagon said;

"Sam, Ed, Alice - they just don’t do much at all."

Thats because eveyone else is already working for them.. You see Sam,Ed and Alice are part of the 50 or so people that represent the "psychopaths" out of the 1000.. They will take what they want by force and violence.. Then once they are in control Sam and Alice murder Ed.. The rest of the psychopaths are employed by Sam and Alice to enforce the powers of the newly formed kingdom.. Sam and Alice rule over their subjects using fear and violent repression.. Everyone is afraid because they are witness to many beheadings.. Sam and Alice have a baby and the power is passed on to the next generation..

"Joe repairs cart wheels – but he’s always out swimming so he’s very unreliable." It dosnt matter that Joe is out swimming because he is good friends with Sam and Alice.. After they become King and Queen Joe suggests that he build a temple.. Say to worship the ocean or something.. Joe is now the priest and people bring him food and other comforts because he has the power to appease the sea and "save all their lives".. Nice work Joe..

"Al’s art has improved the culture, lifted spirits and inspired." Al paints beautiful pictures of the King and Queen and their offspring.

"Bill is a hard-working genius who has made these fantastic carts for everyone and through exchange he now has a beautiful cart factory, a ranch and house.   Bill is, justifiably, a “wealthy” person.   Betty does a great job of coordinating communication and activities on the island."

Bill and Betty are dead because they were terrorists..

The shells were confiscated and re-issued..

Sam and Alice still dont do much..

 

 

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James Wandler
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Re: Illustration of a simple money system please
ltlredwagon wrote:

(I’ll probably say something stupid here, but help me out a bit.)  

Only stupid question is the one not asked.  However I invite you to consider a fascinating read of power through 5,000 years of empire is The Lost Science of Money by Stephen Zarlenga available here:  http://www.monetary.org/lostscienceofmoney.html   

ltlredwagon wrote:

So the people decide they want money (I’m just trying to get a simple illustration going here – I get that 1000 people on an island don’t need a monetary system).  

Money is essential for running an "economy".  I put economy in quotes because "economics" is bandied around when we should be talking about monetary theory. 

I mention 150 people in my post above - this would be the maximum number of people in a group that could keep track of each person's contributions without money (there are 11,175 two person connections (149+148+147+...3+2+1)) - however most of us do "services" rather than be primary producers so we would need to start local economies off with money in such small groups.

ltlredwagon wrote:

Okay, how many shells are we going to put into circulation?  Does each person get so much?  

Yes.  Each person is equal to another regardless of abilities so to begin the system you would give each person the same amount to start the system.  After that all money would circulate amongst the population.  If it was felt that additional liquidity was required (i.e. the supply of money was insufficient compared to the trade taking place) then again an equal amount of money would be issued to each person.

ltlredwagon wrote:

Betty does a great job of coordinating communication and activities on the island.  Al’s art has improved the culture, lifted spirits and inspired. 

These are two good examples of the difficulty of monetary systems.  There is real value provided by Betty and Al but how can a monetary system capture the essence of the value?  Much better that we recognize that we live in a world of abundance and live in small groups so that we can give away locally to those providing real value and we all get back more in return.  Above the 150 person level a patriarchal currency would be the answer and in this case the output of Bill's factory provides the export in order to import goods.  Under our current dysfunctional world view Bill would then hoard this to himself or perhaps hiding some of Al's art in his basement where no one can ever see it again. 

No, we suffer from collective insanity.  The way out of collective insanity is understanding that we are in a world of abundance (such as my spending a couple hours writing this for a few people to read and what I get back is a reflection of my thoughts for future consideration).  Thus Bill gives away to his community in the same way that he reaps the benefit of Betty and Al's efforts.  We all win.  Do we not teach our children to share?  Why as adults do we not do the same?  This is because there is something wrong with us and we have been deluded by our egos.  To understand my comment you'd have to consider Eckhart Tolle's "The Power of Now".

ltlredwagon wrote:

Sue, Tim, Ann - their farming has provided food for several families. Joe repairs cart wheels – but he’s always out swimming so he’s very unreliable.  But his repairs are not bad. 

Ok, Sue Tim and Ann are the heavy lifters and I'll accord them more prestige than Bill.  I quit my service job to be a primary producer and I know what hard work is.  As a side note, in our real lives we need to look around and find local producers and buy from them.  Go up the food chain.  Stop eating edible foodlike substances. 

Good for Joe - knows how to enjoy life. 

ltlredwagon wrote:

Sam, Ed, Alice - they just don’t do much at all.   

They would be hungry on my island.  Don't do anything - you don't get anything.  Why should you? 

On the other hand you might say, well, they are children, or elderly, or mentally/physically ill.  No matter, give them work they can do, at their own pace.  And treat them equally. 

ltlredwagon wrote:

I think it was Einstein who said, "If you can't explain it simply, you don't understand it well enough."

Did I pass your test?

Cheers,

James

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Re: Illustration of a simple money system please

Hi BD

This will give them a way to produce the money they need.  It will insure that every one has to work and produce something to get the money into circulation.  It will insure that no one will get an unfair benefit from the creation of the money.   Then those people who build the road and make the money disks will go forth and buy things that they need but are not producing for them selves.  This will move the money into circulation so that everyone will soon have  money and they will all get it the same way.  They will earn it by producing something that some one else wants.

Interesting alternative to my suggestion of an initial equal allocation. I can see pros and cons to both approaches;

Equal allocation - suffers from the fact that everyone gets money regardless of their productivity and without the need to work for it. However this would be mitigated if there was a relatively high velocity of the money, i.e. the money supply was small compared to the rate of turnover. If this were the case then the intial unfairness would quickly be removed as everyone would need to pull their weight in the society within a short period of time or risk running out of money and therefore the ability to purchase stuff.

Roadbuilder payment - benefits from money only entering the system on the back of labour carried out. My concern is that it is still unequal - why should the roadbuilders be the only ones to benefit from their labour initially? Also how do you withdraw the money creation process without detriment to the roadbuilders who have no other way of earning it?

However the roadbuilder question may not be resolved by my system either because there is the question as to who would pay the roadbuilders? And without payment no roads would get built. 2 solutions spring to mind;

1. Roadbuilders charge a toll.

2. Establish a tax for the funding of roadbuilding and other functions (education for example) that benefit the whole society.

The more I think about it the more I think this question of initial money introduction is worthy of being the sole topic for this thread. It's a difficult enough problem in itself without complicating things further by asking what happens after the money is circulating! If answered equitably then IMO it would also go a long way to resolving later issues.

More ideas needed?

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keelba
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Re: Illustration of a simple money system please

There are others out there that have answered this question very well but since no one has referenced any of them I'll start.

A great, well thought out, easily explained and illustrated version of a sound monetary system can be found in the video "Money as Debt 2: Promises Unleashed" by Paul Grignon. I'm sorry I cannot provide a link since most video sights are blocked by my company's firewall but a quick Google search should find it for you. Watch that video and let us know what you think.

In part one, "Money as Debt", he explains very well how the current system works and how we got here but offers no real solutions. I'd watch this one first if you do not understand the current system very well.

--Kevin

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Re: Illustration of a simple money system please

 

Piquod, Byron, James – as a student this is very helpful. Thank-you.

Keelba, I watched Money as Debt I and II, and they are excellent, but seem to be about the current monetary system and thus not on the point of this thread unless I’m missing something - ??

JAG, heard Steve’s podcast - great analogy.

Piquod – I agree, focusing on how the money is moved into circulation would be great.  And can we just state, for the purpose of this illustration, that the divisibility problem, denominations, has already been worked out – different shells have different values.

Piquod and James are giving the same amount of shells to everyone at the start.  Byron has a different approach.   From my uneducated perspective I like the idea of everyone getting the same amount.  The in-place barter system has already established the value of the products and services of the islanders.   It doesn’t seem that giving everyone 1000 shells would substantially change the comparative wealth of the islanders (and the reasons you gave James seem sound).  If I’m the “wealthy” cart maker I can still get tools from the tool maker, only now I can either pay him with carts or with an agreed upon amount of shells.  The people who produce almost nothing (who have somehow been given food/clothing by generous other individuals) will now presumably be asked to use their shells to buy food/clothing.   If they continue to produce nothing their money will all flow to the productive members of the society and they will soon be back to where they were.

Perhaps Byron or someone else could expand on why the road building is necessary/helpful.

As an aside,  whenever I read about money or listen to video/audio I always pull out some vitamin bottles (representing people, banks, govt) and coins and try to demonstrate what is being said.  (My kids old Star Wars figures are also helpful - and you can't beat Decepticons to show the current crew in Washington).  Personally, I find it utterly impossible to follow or understand what is being said without some sort of physical/visual representation. It’s just too complex for me – my mind can’t grasp it.  Perhaps this will help others; this is not an easy subject to get a grip on.  The video Keelba referenced has this quote from John Kenneth Galbraith:  "The study of money, above all other fields in economics, is one in which complexity is used to disguise or to evade truth, not to reveal it."

Finally, surely someone has already worked out the fundamental technology of introducing a simple monetary system, right?   I would have thought this is the first thing a basic book on economics would have dealt with.   There must be a technology to it that has been developed by someone in the past 5000 years right?

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keelba
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Re: Illustration of a simple money system please

90% of Money as Debt II is just information about the current money system. It is only at the very end that he talks about the different solutions people are working on. I just watched it again to make sure I wasn't high when I brought it up and the ideas are there. The ideas presented in the video are not hypothetical type scenarios but real world solutions and he provides information on where to go to join the cause of monetary reform. Go back and watch the last chapter again to see what I mean.

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Re: Illustration of a simple money system please

The reason roads are important is because its impossible to have commerce without transportation.

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ltlredwagon
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Re: Illustration of a simple money system please

Regarding roads, correct me if I'm wrong, but I believe Byron was discussing the roads project as a means of moving the money into circulation.  I guess my question is:  is a new project of any sort (roads or, if adequate roads already exist, some other project) needed or advisable as the most optimum way to move the money into circulation.   I'm just trying to understand the fundamentals.  All the islanders agree they want money, so why not just pass out 1000 "units" (in easily usable, un-counterfeitable, "shell" denominations) to each adult person (whatever their "adult" age is - I don't think we're talking about 6 year-olds, right?) on the island?  Does this get the ball rolling?  might work?  flawed?  hopelessly flawed?  okay, but better is.....   

Put another way, assume the island has just approved your fabulous "Kala Island Introductory Monetary System" program.  You've gone to the island with a film crew to watch the implementation.   You're no longer thinking about how it might work  - you're on the island looking through the lense.  What's happening?  What do you SEE?   I know - it's a hopelessly unfair question for a forum - I'm asking for a damn novel/feature film;   so how about the Reader's Digest/youtube version?   Get your feet in the sand and tell me what's going on?  Did you get lei'd or tossed into the volcano?   Yeah, maybe both – you brave SOB.

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Thomas Hedin
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Re: Illustration of a simple money system please

What your proposing is just gifting money into circulation not matched with any production.

Putting money into circulation under those principles would destroy the islanders motivation to produce.

There is an upcoming audio interview where Byron discusses this, and I'll link it here once it's available.

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James Wandler
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Re: Illustration of a simple money system please

One more note - I wouldn't give any money to non-producers because they won't be in the circulation of transactions. Money is lubrication of the system not to have "value". This isn't covered in economics because we were meant to understand "Empire" until now (although we are still just on the bleeding edge of understanding. Once the deception becomes clear it will be like an avalanche and you will be a leader to help others. Cheers, James

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Thomas Hedin
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Re: Illustration of a simple money system please

One more note - I wouldn't give any money to non-producers because they won't be in the circulation of transactions.

Yes James,

We can clearly see what happens when the non-producers get to create all of the medium of exchange as a free gift to themselves.  Just look at our society today.  It's mind boggling.

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James Wandler
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Re: Illustration of a simple money system please

Thomas, Yes - an endless supply of funds to keep us in the dark. I meant to say above "we were NOT meant to understand until now" By this I mean that we must solve all problems at the same time. Cheers, James

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Re: Illustration of a simple money system please

Thanks Thomas.  Okay, so if I got this right from Byron's example, the money (created by someone who gets paid a wage) should go into circulation through some form of production - in Byron's example, the roads project.   I suppose this could be followed by another project, but always the money enters the realm as payment for production and the supply only grows as production continues.   Am I on the right track?  Initially, then, the new money system runs parallel to the barter system.   Over time, it could replace it as more money enters the system, is that right?

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