Olympic champion money – The ideal monetary system, part 14

Bitcoin was the first money in history invented by the private sector and based solely on trust, for example, it is not backed by gold deposits. The initial scepticism about bitcoin was in fact due to the fact that since no one had seen anything like that previously, there were doubts about its viability. No one believed bitcoin. Its creation opened the road for the geniuses of the future to construct a monetary system that works much better than the one currently in place, while providing cutting-edge technology in its services.

The monetary system we are using today is much more the result of historical development than the product of intelligent design. Over the centuries, we have tried this and that, and we used a particular type of money as long as it worked. When we realised we were heading down a cul-de-sac and hit the wall, policy makers tried to keep the prevailing system operational by making various degrees of changes to it. But they never rethought the whole thing from scratch.

Recently we ended up in another cul-de-sac, and as usual, central banks have been trying to get out of it by merely adjusting the old framework. All over the world, they have taken to the printing press, combined with a policy of zero interest. That is how each of the developed countries has been trying to secure a crippled and continuously depreciating currency for itself in order to gain some advantage in international economic competition. By comparison, the private money of the future could be a real Olympic champion. Today, the chances of creating a monetary system through intelligent design are better than ever before.

The government is opposed to the creation of such a system as it may sense a threat to the treasured monopoly of printing money. There is still no way to prevent it from becoming wide-spread. If money printing as employed today were to result in yet another economic turmoil, a carefully elaborated private monetary system could play a more prominent role in the future. Even by the government’s adoption of its ideas.

It may turn out that the government would ultimately benefit from allowing the productive creativity of the private sector to play its part in the construction of the monetary system. The private sector could propose innovations that even the government could implement, were it not prevented from even considering such innovations due to its characteristic indolence. For example, linking the systems of payment and settlement.

Currently, trade in any product typically involves the customer transferring the purchasing price and the seller issuing an invoice (and of course delivering the product, but that is not relevant here). The two operations are carried out in systems perfectly separated from one another. The transfer is processed in the banking system, whereas accounting is typically done in independent software at the level of individual companies. Payments and settlement/accounting are completely ignorant of each other.

Fort that very reason, the greatest task of the tax authority is to verify whether what has occurred in the system of payments also exists in the system of settlements and vice versa. They undertake the Sisyphean task of examining companies’ books and comparing them to their account statements. They check whether the two are in sync. And obviously they are often conned and deceived in the process, they are late with their inspections or even fail to carry them out.

But then why don’t we connect the systems of payments and accounting? In practice, the seller would issue and send an electronic invoice to the buyer through his e-bank. The buyer would receive an alert and could settle the invoice with a single click. Settlement and payments would be linked, which would eliminate the opportunities for fraud.

In this way, VAT would not even be required to flow through the buyer. Based on the invoice, the amount of the VAT could be transferred directly and automatically to the bank account of the government (on a side note: this could make progressive VAT viable). VAT reclaims could be fast and accurate, and could even be done without human intervention, without the involvement of accountants. VAT fraud could be eliminated from the system.

And there is more. Nowadays the Monetary Council meets every few weeks to try and formulate some kind of hypothesis about the current state of the economy by interpreting the statistics gathered previously. The data are delayed, incomplete, and afford multiple interpretations, and there is no guarantee that the Council will be right. In any case, when they have come up with a hypothesis, they will use it as a basis for their decisions on the policy rate and money printing.

However, if the systems of payments and settlements were linked, all statistics would be available immediately in the desired detail. Inflation, retail trade, capital flows, demand for money, etc. could be measured real time, together with their exact structure and composition. Several magnitudes more information would be available without any delay. That information would then be processed automatically by our really intelligent monetary system, which could adapt to the changing economic environment continuously even without human intervention. The automatism would have a better understanding of the reaction function of economic operators than anyone else, which would eliminate the need for a Monetary Council, and thereby the possibility of human error.

The above are only viable of payments are made electronic. However, this is a realistic goal today—a number of developed countries have virtually become cashless, with only a minor percentage of their payment volume transacted in cash.

In summary, my monetary system would look like this. Money exists only in electronic form and cannot only be stored in banks, which means that it is not necessary to undertake the risk of potential bank failures, i.e. we are not forced to take risk. Still we are not excluded from the system of payments, as transfers do not necessarily need to be transacted via banks. The supply of money is not increased by lending out the deposits taken, which prevents a savings crisis (or credit crisis) from emerging. Due to the enormous stocks of debt, zero interest is no longer effective; the interest era has come to an end. However, due to severe inequalities in the distribution of wealth, neither is helicopter money very helpful in stimulating the economy. New money has to be pumped into the system in a better distribution, for example in the form of monetary basic income, which is efficient in boosting consumption. Price stability can be ensured by adjusting monetary basic income rather than interest. Its applicable size is determined by an intelligent program incorporated in the monetary system based on the real time analysis of all transactions occurring in the economy. This helps avoid human error and eliminate monetary socialism. If in order to avoid inflation, money needs to be withdrawn from the economy, the program controlling the monetary system can deduct the required amount from the VAT revenues transferred automatically to the government, which are soaring anyway due to the overheated economy. Or, once it is introduced, from fiscal basic income. Which means that two-tier basic income can be applied. The inflation-driving shocks potentially caused by money hoarded both nationally and internationally are avoided by means of progressive VAT.

We have found a solution to all problems. In theory. Without any doubt, in reality the system would work far less neatly than that, and would be full of unexpected side effects. Never mind, we have not been looking for the perfect solution. In the first part of the series, I wrote:

“Aside from the fact that I’m now joining the camp of the worriers, in the following posts I will consider what shape an idiot-proof monetary system designed to prevent even experimenting central bankers from causing too much trouble could take. It needs to be developed so that – similarly to modern nuclear reactors – it contains a form of automatism based on the system’s operating principle that makes a correction if the monetary system veers to an unsustainable course. It will be a matter of brainstorming and providing food for thought, rather than a scientific result that has been considered and modelled in every respect. The aim is to try to go beyond the dogmas, thought to be unquestionable, of the current monetary system and to wonder at its in-built contradictions from a bird’s eye view.”

In all probability, we have not found the ideal monetary system. Nevertheless, I do hope that I have been successful in achieving the original goal of providing food for thought about the operation of the monetary system.

Previous part of the series: The missing element

Kapcsolódó tartalom

Smarter money printing

The missing element – The ideal monetary system, part 13