Weighing alternatives to our current monetary system

Bank of England close up

As the financial crisis starts to unfold, there is an increasing intuitive understanding among curious people that the way our money system works is at the heart of our problems. As a result, there is a renewed interest  in the blogosphere in discussing alternative forms of currencies, either local or global. One particular post that caught my attention is from the TheOilDrum.com (found via Mendo Moola blog), whose most interesting part is actually the long discussion thread on the various options for alternative currencies and their respective merit.

There were a lot of good comments and I’ve tried to organize them a little bit.

My high-level conclusions/understanding after reading this discussion are:

  • We should have two separate currencies, one for speculation and investments and one for medium of exchange.
  • A fiat money for the medium-of-exchange money is not a bad idea. Backing it with anything, even clean Kwh or a basket of commodities will make it the best asset to own, which won’t contribute to its circulation
  • The one used as medium of exchange should depreciate by design
  • its issuance may be based on a decentralized measure of creditworthiness rather than on a relatively centralized banks-based creditworthiness
  • [This subject was not really discussed] A Full Reserve Banking system for the investment one might be a good idea, although a Fractional Reserve Banking system is somewhat more fault-tolerant and may encourage more risk-taking (when faults are limited, it is impractical as we know when faults all happen at the same time)

Here are my complete reading notes.

What is money and why we need it

team10tim says:

The fungibility of money is the sole reason that we, as a civilization, prefer it over barter. It reduces complicated situations down to a single common denominator. […] Money isn’t good or evil, it’s soulless.

ets says:

If you think of money as an extension of the barter system, then money actually represents the incomplete portion of a trade.


There are several perspectives on what the essence of money really is, but one is that a unit of money is a claim on a certain percentage of the total goods and services available in the market (a share, if you will). Another common perception is that “time is money”, or rather, vice versa. While the relation is not really that simple, there certainly is a time element to money.


The fundamental problem with money: Namely, that money is too good of an asset compared to nearly any other commodity.

On the benefits of separation and co-habitation of “medium-of-exchange” currencies and “store-of-value”/investment currencies

One recurring point in the comments was the fact that a currency being both a medium of exchange and a store of value is problematic. Both should exist separately and conversion facilities should exist.
Steve from Virginia says:

In the West, the ‘single function’ currency allows non-productive speculative claims to be made against productive parts of economies. This is a serious flaw in the single function regime. […] The dual currency idea is one I’ve had for a long time; one ‘hard money’ convertible ‘Gold Dollars’ that would be useful for saving and productive investment and a second ‘fiat money’ non- convertible (electronic) currency that would be used for financial speculation.

Doom and Gloom Dad:

I don’t think you want to back up a local “medium of exchange” currency directly with a “store of value” currency

ets says:

Currency should be a transport for value. Using currency to store value would be like using a cargo ship as a warehouse. My opinion is that currency should not act as a store of value, there are innumerable commodities that can serve that purpose. Currency, on the other hand, should be designed to do one thing particularly well: circulate. In my mind, I think a paradigm shift regarding money is necessary. It should not be seen as an asset, but rather a shared resource. By holding onto it you are depriving others of its use.

etc says:

It seems to me that it is often overlooked that the two most commonly cited attributes of money are mutually incompatible. Those attributes being: a medium of exchange, and a store of value. That is, when something is being exchanged it is not stored, and when stored cannot be exchanged. So the more money that is stored, the less is available for exchange (a.k.a. commerce). This is, to me at least, a very important point, and is one reason I prefer demurrage based systems.

On the benefits of money whose value depreciates

This discussion only applies to medium-of-exchange moneys, obviously. The basic idea is that if it does not depreciate, then it is kept and hoarded by those citizens that are most productive, until they own all the money, which they can lend and essentially control commerce.

Jokuhl says:

if your money is quickly depreciating, you would use it to get not only essentials, but in a more long-term frame of mind, to use these earnings to invest in Real long-term assets. Durable Products, things that would retain their value. This should have the effect of minimizing the resource usage we see today, where we buy the cheapest stuff, and as it dies quickly, are constantly replacing our belongings, using up resources at this deadly pace.

ets says

As to inflation being equivalent to demurrage; that is only generally correct. I don’t think inflation itself is the problem, but rather the unpredictability of the inflation rate. Also, the inflation effect varies for different segments of an economy, distorting price signals, and making the “inflation tax” not very equitable.

Also, later ets says:

My opinion is that currency should not act as a store of value, there are innumerable commodities that can serve that purpose. Currency, on the other hand, should be designed to do one thing particularly well: circulate.

On interest

etc says:

The idea that money would not be lent without positive interest is based on the perception that money is a reasonably good store of value. If money were to devalue on a relatively short time scale, one might find that the borrower would be considered as providing as much of a service as the lender.

Issues with local currencies and solutions

Doom and Gloom Dad explains that one of the major issues with local currencies is that it is an economic service that is provided for free, and as a result depends on donated time, money and resources and inevitably results in the burn out of the organizers.

Issues related to the backing of money

ets says:

Commodity-based currencies artificially inflate the value of the backing commodities. Additionally, dealing with commodity variety and grades is problematic. An energy unit would surely be my choice for any “single” physical backing. However, I think it would better to back a currency with a basket of all the goods and services produced by mankind in proportion to their marketable quantities. In other words, an arbitrary unit such as “dollar” should suffice. ;-) [In other words] I do not advocate commodity backed currencies, with a basket, or otherwise. My comment was intended as tongue-in-cheek, the basket being comprised of “all goods and services”, clearly an intractable problem.

Gold bugs: gold does not have any significant “intrinsic value”. Its value was declared, essentially by fiat, a long time ago… Its value is determined the same way the value of anything is determined; by what someone will give you for it in trade.

Doom and Gloom Dad says:

The backing commodities tend to be produced for their monetary status rather than their more normal utilities. One cannot really get away from that with a basket of commodities. It may take a bit of analysis to see that. Even a very extensive basket of commodities puts an emphasis on commodities over services.

Issues related to the creation of money

team10tim says:

Whoever controls the money supply will have substantial control over the economy. Whoever receives the newly minted money is going to enjoy primacy. The question is how do we allocate that primacy? How do we enjoy the fungibility of money and retain control over values in the ethical sense?

According to Doom and Gloom Dad, there is no issue of money creation but an issue of creditworthiness of each participant:

Barter credits come into existence when a transaction is performed: One person’s account is augmented by the exact amount by which anothers is diminished. The sum over all accounts is at all times zero. It’s sort of like electrons popping up and leaving oppositely charged holes in a semiconductor.
Thus in a sense, there is no money supply. “How do we create money responsibly?” I believe that this is a responsible way of creating money.

ets replied with a very good point:

how much money is in a LETS system? It is not zero. The net system balance is zero. Simply because positive balances must equal negative balances by design. The money supply is actually the maximum amount of negative balance permitted in the system. If there were no limit to negative balances, the money supply would be infinite.

Gasoline as money

1979 Gas coupon

Ever since I’ve read about the use of prepaid mobile recharge vouchers as alternative currency in some inflationist countries of Africa, I’ve been wondering what could be the equivalent in the U.S. should the dollar currency lose its value.

The obvious took some time to come to my mind, probably because I’m not a big user of it myself: gasoline.

Gasoline comes indeed with several properties that make it a very practical alternative currency:

  • It’s an excellent store of value:
    • consider that the value of being able to drive your own car to work everyday has the same value to you whatever the price in U.S. dollars the gallon is.
    • if you intend to use gas as currency to purchase non-gasoline items, and although oil prices in dollars have recently come down from their peak, the risks to the price in U.S. dollars going up in the next 5-10 years are much higher then the risk to go down.
  • It’s an excellent standard of value: just like most people know what a dollar gets you, most people know the value of 1, 10 or 20 gallons i.e. how many miles i.e. how much mobility they can get out of each gallon.
  • It’s a potentially excellent medium of exchange: unlike gold or U.S. dollar bill, it has intrinsic value for most of us car drivers.

The only problem with the last bullet is that it’s not easy to bank gallons and transfer them from account to account.

Several companies have started to work on something close to this “gasoline banking” capability:

  • Fuel Bank‘s Web site says that they will soon offer a “Fuel Card” they can re-load online to lock-in gas prices, and then use this card in participating gas stations, as well as transfer gallons from account to account. When the service will be available is unclear.
  • MyGallons.com plans to also offer the ability to lock-in prices and use them later. The company’s CEO explains that the service’s launch has been postponed.

I’ve also stumbled upon this patent about a Prepaid gasoline transaction platform, which could support the concept of “Gasoline as money”.

The recent decline of the price of oil has probably reduced the interest in these companies, but if the dollar depreciates and/or if the price of oil resumes its inevitable long-term trend, or if other geopolitical events reduce the amount of cheap gasoline imported in the U.S., these projects may get back some of their momentum.

The Color of Money

From cymbolism

a dedicated website that aims to quantify the association between colors & words, making it simple for designers to choose the “best” colors for the desired emotional effect. Cymbolism allows visitors to associate one color for a given word, in order to to track these relationships over time in form of frequency strips.

The color of money is definitely mostly green and a bit gold (paper versus hard asset). The other colors are probably from non-US residents.

Color associated with the word

Banking-related panel proposals for 2009 SXSW Interactive Festival

I searched the SXSW interactive panel picker for “banking”, “money”, “finance”, “financial”, etc. Here are the panels I found:

  • Banking 2.0 – Algorithmically Fixing the Sub-Prime Mess (suggested by Christopher Hughes, PennyMac): Sub-prime debt may be causing the collapse of the worldwide economy. Speculators, investors, banks, mortgage brokers, honest home-owners have all been duped into believing that that the real estate market was a “sure thing”. Can a solution be found with a computing cluster, open source software, and a semi-complex algorithm? Yes.
  • Future of Money: Life after the Fed (suggested by Blake Stephenson, Flow): Ron Paul’s presidential campaign shone a light on the impossibility of central banks to “regulate” the economy and the inherent problems with fiat money (paper money). The internet is playing and will continue to play a critical role in the creation of the future of money. What is the future of money?
  • Mobile Ubiquitous Banking and the Future of Money (suggested by Kyle Outlaw, Avenue A | Razorfish): Nearly half the world’s population now has a mobile device and more than a thousand cell phones are being activated every minute. The ubiquity of mobile devices will make new services available to billions of people worldwide who have not had access to traditional banks or credit cards. In developing countries such as Kenya – where nearly 80% of the population is excluded from the formal financial sector – text messaging is being used to transfer money to friends and family living in other countries. Moreover, new forms of currency are being created – trading cell phone minutes for goods and services, for example. This panel will explore the challenges and opportunities as banks go mobile, and how the revolution in mobile financial services will change the way we think about money.
  • Strategies for Establishing Social Media in B2B Relationships (Brad Garland, The Garland Group | Banktastic.com) Social media in the consumer space is clearly talked about and prevalent. What is barely getting addressed is how these technologies can be implement in the business world and what are ways to do it successfully. This panel will explore that concept and how B2B relationships can be formed using these tools.

About SXSW:

SXSW Interactive Festival features five days of exciting panel content and amazing parties. Attracting digital creatives as well as visionary technology entrepreneurs, the event celebrates the best minds and the brightest personalities of emerging technology. Whether you are a hard-core geek, a dedicated content creator, a new media entrepreneur, or just someone who likes being around an extremely creative community, SXSW Interactive is for you!

The Bankwatch: “Community currency enhances community value”

The Bankwatch has a post about a community currency this morning. The benefits described are in line with my earlier post on community currencies. This is the first time I see a community currency-related post on Bankwatch. I expect to see more of these from the specialized press first, and from the general press, as the trust crisis in national paper currencies, especially in the U.S. dollar, develops.

Community currencies: The future of money?

Did you know that it is entirely legal to print your own money in the U.S., as long as it does not resemble the U.S. dollar bill?I recently learned about this little know fact. Many communities in the U.S. and many in the world have their own local currency that complements the dollar: Ithaca hours, BayBucks, Deli Dollars are several of the most well-known. The stories behind each of these currencies are fascinating and inspiring, as it reminds us of what each bill money truly is: a unit of a trusted social contract.

During the late 80s, Taft Farms couldn’t raise money from banks to go through the winter. To solve their cash issues, they issued their own money, notes worth 10 US dollars on which you could read “In Farms we Trust” with a cabbage in place of Lincoln. People would buy for $9 in the fall and that would give them the ability to buy $10 worth of produce in the spring. As you can hear from the owner himself in this archived video, the scheme worked because customers fundamentally trusted that these notes would have value in the spring, because they knew they would enable to farm to survive the winter.The Taft Farms note was simply a unit of that trusted social contract and as such had a much higher value than 9 US dollar note. Nine U.S. dollars in autumn gets you ten U.S. dollars worth of produce in the spring.

Taft Farm note

Depending on how you look at it, that’s a 11.11% interest rate over 6 months (23.45% annualized, which is a very good deal, even if you assume 5% yearly inflation rate of prices in U.S. dollars), or a 10% rebate.Fast forward almost 20 years later with this NetBanker post that describes the value of the social contract in the context of Prosper.com’s peer-to-peer lending community:

Prosper has found that people who receive at least one bid from friends or family have significantly lower default rates than those who only borrow from strangers. By leveraging this social capital, the entire community acts more honestly, even if lending to friends and family is a small part of the overall equation.

In other words, money lent in this way, has more value, then say a zero downpayment, brokered, securitized, and sliced package of hundreds of thousands of loans made to poor credit, zero downpayment buyers of houses in the booming housing market of the 2000s. No one who hasn’t been living under the rock for the last year should be surprised of that. Now, some of you may be surprised to learn that the money bank lend us is very different than the money that you may lend on Prosper.com: most of the money lent by banks does not exist, and they create it from thin air. As John Kenneth Galbraith puts it:

The process by which banks create money is so simple that the mind is repelled.

I encourage you to read JKK’s fascinating book on the history of money Money: Whence it came, where it went, but to keep things simple, bank lend more than they actually have in deposits at the central bank, while charging an interest on all the money they lend. This is known as fractional reserve banking and this is how most of the money is created and why the interest rate set by the Fed is so important. In comparison, Prosper.com and other peer-to-peer lending communities can be seen as a 100% reserve banking system. Like Taft Farms, bank take promises to pay (i.e. provide value) in the future, and exchange it for promises to pay now and charge an interest for it. While Taft Farms did it in the form a currency that can be redeemed for vegetables, banks do it in the form of currency that is legal tender nationwide. Why would the bank not lend Taft Farms money at this rate? because that money is not a reflection of the trusted social contract between the farm and its customers, but simply between the farm and the bank.

Banks are useful simply because they have a given right to issue contracts that become legal tender. Which leads to my guess: in difficult times and declining trust, community money, and community currencies have very likely a much higher value than national currencies like the the dollar, because they are based on a very tangible social contract that minimizes moral hazard.

SmartyPig: socializing savings accounts

NetBanker has an interesting post about a new banking service called SmartyPig, which socializes savings.

Essentially it combines:

  • A interest-bearing FDIC insured savings account with a specific goal can be shared with friends and family
  • An easy way for friends and family to contribute money to your goal directly from a checking account or a gift card
  • Rebates from partner companies.

SmartyPig screenshot

So, for instance, a teenager can open an account with the goal to save x thousand dollars to buy a car, have his family contribute directly to the account on this specific goal, and get a rebate from one of the retail partners on the purchase of the car.

I like this idea for multiple reasons:

  • It’s what a product should be: not technology, but very well-done integration.
  • It comes at a perfect timing: Americans probably will have to learn to save more and get in debt less as we enter recession and the rest of the world becomes less and less interested to finance them.
  • It really comes back to the essence of money: a trusted promise between multiple people that increases collective wealth instead of moving it from the havenots to the haves. The manufacturer gets the promise his product will be bought at a certain point of time and can plan production accordingly. Friends and family who contribute get the promise that their money is used for what they intended.

In a nutshell, SmartyPig can be viewed as a small attempt at bringing back the social role of money.