Money Developments (2b) Cash and Security

Cash does not provide people with security from a hostile government, as it still has to be withdrawn from a bank or ATM, and the government can easily put a stop to that for a particular person. The only alternative would be to stash away a large volume of notes and use them as needed, but that is risky because they can be stolen, or destroyed by flood or fire. And of course, inflation slowly erodes the value of stored cash over the long term.

Whatever the form of the money system, modern governments have the power to prevent people from buying and selling. Holding cash provides very little protection. If people really want to store money for their support while living under a hostile government (I don’t see the need at this stage), a cryptocurrency like Bitcoin is probably the safest option because accounts are decentralised, and transactions can be made without anyone knowing and without leaving any paper or digital record of the transaction. However, it might be difficult to find businesses that will trade with a cryptocurrency.

A simpler option might be to store gold coins or gold jewellery, as they retain value, although the risk of theft remains. I read once about a person who travelled through Nazi Germany with a gold chain necklace hidden in their shoe. They used links from the chain to pay for things that they needed.

Jesus told his followers to seek his kingdom and find his security in it. He warned the people not to rely on money for their security.

Do not store up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal. But store up for yourselves treasures in heaven, where neither moth nor rust destroys, and where thieves don’t break in and steal (Matt 6:19-20).

No wealth stored on earth is fully safe, regardless of the form in which it is stored. Cash can be stolen. Notes can get wet and mushy and be destroyed. The only safe place for storing wealth is in the kingdom of God. But only spiritual wealth can get in. Luke’s account of Jesus’ teaching makes the promise clearer.

Seek his kingdom, and these things will be given to you as well. Do not be afraid, little flock, for your Father has been pleased to give you the kingdom. Sell your possessions and give to the poor. Provide purses for yourselves that will not wear out, a treasure in heaven that will never fail, where no thief comes near and no moth destroys (Luke 12:31-33).

The safest place to be in a crisis is part of what Jesus calls a “little flock”, ie a community of people who are committed to following Jesus by serving each other and providing support for each other.

A fellowship of believers can support each other by giving and sharing during a season when the government is persecuting those who stand for Jesus. Their love for each other will be a purse that does not wear out. In Jesus’ kingdom, they will find treasure that will never fail. No powerful, political thief will be able to rob them of the security that they love one another as Jesus commanded.

Money Developments (2a) Declining Use of Cash

Some Christians are concerned that the decline in the use of cash represents the emergence of a cashless society in preparation for the Mark of the Beast. However, the decline of cash is a normal societal change that occurs when technology changes and new needs develop. Cash is disappearing in the same way that cheques have already disappeared. The reason is that they are inefficient and tend to be insecure, so the change is sensible.

• People have stopped using cash. Young people here never use it all. I rarely carry cash. Carrying around wads of cash is risky because it is easy to steal, and notes are almost impossible to trace. Buying with a smartphone is simpler.

• Retailers are not interested in selling their products for cash. Maintaining a stock of cash in every till to facilitate payment of change is inefficient. Paying out change encourages mistakes and pilfering by staff. Taking cash to the bank deposit is risky. Getting out coins in bulk to provide change is also an unnecessary risk. Storing cash overnight is a problem for many small businesses. The choice is to leave it in an unsupervised store or take it home. Neither is ideal. In view of these concerns, it is not surprising that businesses are avoiding cash, just as they stopped taking cheques long ago.

• Retail banks are not interested in handling cash. They have to clean notes and sort out damaged ones and return them to the central bank. Holding large reserves of cash to meet uncertain demand for notes and coins is inefficient and unprofitable because it does not earn interest. Operating ATMs is a significant security risk as they are vulnerable to ram raids and scammers. Loading ATMs is expensive because strong security is needed when cash is being shifted around. Banks get no payment for providing an ATM service, so it is not surprising that they are trying to reduce both the number of sites where cash is available and the amount of cash that people can withdraw.

There are three big users of cash in the modern economy.

• Criminals doing drug deals and funding other illegal activities. It is interesting that the largest volume of notes on issue is $100 notes. These are preferred by criminals.

• People active in the black economy, who avoid GST by paying tradespeople and others with cash, or buying cars and other expensive products with cash.

• People keeping a stash of money for a rainy day. It is interesting that there are still $500 million worth of £10 pound notes and $150 of £100 notes on issue, even though New Zealand switched to a decimal currency more than fifty years ago. I presume that many of these pound notes have been stashed and lost.

Here in New Zealand, I see no evidence that the Reserve Bank is pushing a cashless approach. The value of notes in circulation has actually increased, particularly in the larger denominations. The central bank earns good money through the seignorage it gets when issuing notes and coins. In the case of notes, it is almost money for nothing, so the bank is unlikely to push a cashless society.

The reality is that the Reserve Bank would have a great deal of difficulty in gathering up all the notes and coins in circulation if they wanted to do so. Cancelling their status as legal tender would create a great deal of anger, so it would be unlikely to take that action. Rather, the bank is more likely to wait for the use of notes and coins to continue to decline.

Money Developments (1) Digital Money

Because they misunderstand Revelation 13, many Christians become concerned when they read about changes to currencies and the emergence of a cashless economy. They don’t seem to realise that persecution of Christians does not begin with the Mark of the Beast and is not limited to it. The New Testament explains that persecution is normal for Christians (1 Peter 4:12). Actually, the lack of persecution of Christians in the West over during the last century is what is abnormal, perhaps due to our lack of zeal.

As society changes and new technologies emerge and are accepted, changes naturally follow in the way that people use money. This gradual economic change is normal. At this time, several big developments are changing the nature of currencies and the way people buy and sell. These changes are related and happening at the same time, so we need to think about each one in a coherent way to understand how they will affect us. The five big changes that are happening are:

• Banking is digital.
• Cash (notes and coins) are disappearing quite quickly.
• Private payment tools have been developed.
• Cryptocurrencies that are not controlled by governments have emerged.
• Central banks are planning to offer digital currencies.

These changes are related, but I will examine each separately.

1. Digital Money
Fifty years ago, all bank records were on paper. When you entered a bank to withdraw cash, you went to the ledger counter first, and a person checked your identity and your account and recorded the transaction. You then went to a teller with the stamped form, and they handed over your money. That has now changed.

These days, all bank records are digital. The money in our savings and cheque accounts is recorded as digital records on the bank's computer systems. If you go up to a bank teller, they complete transactions by accessing these digital records through a computer terminal. There are no bars of gold backing this money that we have put in our bank account. The payment of wages or salary is recorded as a digital transaction. Likewise, the money that we use to buy food, pay the rent and buy things is a digital record on a bank’s computer. This means that we are already using digital currency.

Banks no longer keep paper records of our accounts and transactions, although they can be printed out if necessary. This change brings risk. Digital records can be hacked by criminals, whereas paper records are hard to change. More seriously, a powerful electromagnetic pulse from the sun or a military weapon might wipe out a bank's electronic records. I am not sure if they have plans to deal with this problem, but it would be an enormous disaster if it occurred.

Cheques
The disappearance of cheques was the last step in the move away from paper transactions. They are quite inefficient because the paper cheque has to be transported from the bank of the person banking it to the bank of the person who had issued it. Here in New Zealand, many retailers will no longer accept a cheque, and many people rarely use them. I can’t remember the last time that I wrote a cheque.

Money and Inflation

Traditional economics taught that when governments print money, inflation always follows. There is plenty of evidence from history to confirm this theory, and many nations have been seriously damaged by government-induced inflation. It does not matter if it is disguised with fancy words like “balance sheet expansion” or “quantitative easing”.

Following the GFC, central banks engaged in the largest monetary expansion that the world has ever known, but the inflation does not see to have occurred. Several things have made this event different. Price inflation is never even. It always affects some parts of the economy more than others.

• Shifting industrial to China and the rest of Asia has brought a massive reduction in the prices of consumer goods. This has eliminated the risk of consumer goods inflation, that is measured by the standard consumers' price index.

• Labour unions are weak, and many workers are in precarious employment with big debts, so they have not been able to push up wages.

• Banks used a significant chunk of the new money to get rid of bad debts on their books and to strengthen their balance sheets. They did not expand their lending, when the central banks made it easy for them. So, the money did not slop out into the rest of the economy.

• A significant part of the massive increase in money has flowed into the share market and bond markets. Companies have been able to complete extensive share buybacks and other activities that benefit their owners with cheap debt. A significant part of the increase in share prices is the consequence of the expansion of money, just like the increase in consumer price inflation of previous monetary inflations.

• These inflationary effects cannot be identified and quantified. During consumer goods inflation, we do not know how much is the result of monetary expansion, and how much is the result of changes in supply and demand. The same applies to the monetary influence on share and bond prices, except in this case, time will expose the difference.

The difference in this inflation is that the rich benefit from the monetary inflation, and the poor do not understand, because they are blinded by cheap consumer goods, so there is no one to complain about the monetary inflation.

Unfortunately, government-induced inflation always distorts markets in a way that eventually leads to subsequent problems. I expect that it will not be different next time.

Distributed Ledgers (2)

In my study of money, I explained that money is a record of half-completed transactions. It is a debt owed by the rest of the community to the person who has given up something without yet getting something back in return. Money is a record, not a commodity. These days most money is a record on a banks database.

I explained that a reliable system of money could be established by a clerk recording transactions. When a transaction is made, the buyers account would be reduced and the sellers account increased.

If several clerks provided this service, they would need to settle balances to account for transactions between their clients. These settlements would not transfer value, they just shift records from won clerks ledger to the ledger of another.

The weakness with this system is that the clerk must be honest. A dishonest clerk could reduce other people’s accounts and add it to their own. I suggested that competition would make this a risky action, because a clerk who was diagnosed as a dishonest would lose their business.

The distributed ledger provides a better solution to this problem. If all the clerks operated on networked computers, every transaction would be recorded on every clerk’s computer. This would make it impossible for a clerk to commit fraud, as the record would be exposed as different from the records of the other clerks. This is a distributed ledger.

My proposal for money describes a simple system that does not rely on state power. I need to add a distributed ledger to it.

Money and House Prices

The average price of a house in Auckland reached $1 million last week. The largest city in New Zealand is experiencing a property boom. The average price of a house in Auckland is double what it was back in 2008.

The property boom is partly driven by a couple factors.

• Immigration – New Zealanders returning from Australia and other places where economic prospects are not as good as here have increased the demand for housing.

• Scarcity of Land – Zoning laws have limited the availability of land for housing.

These have a small effect, but the main cause is the Monetary Policy operated by the Reserve Bank of New Zealand.

In the past, capital controls and fixed exchange rates allowed central banks to control the supply of money. However, in a modern economy, banks have the power to create money by making loans. They can now create as much money as they like.

The Reserve Bank has given up trying to control the money supply and has adopted a policy of inflation targeting by controlling the overnight cash rate at which banks can borrow from the Reserve Bank. The cash rate is currently set at 2.0 percent.

The measure for the inflation target is the Consumers Price Index, which only measures the prices of household consumption goods and services. Unfortunately, inflation can also affect capital goods and government consumption goods and services. These are not covered by the Consumers Price Index, so the inflation target can be met, while the price of capital goods is rocketing up. (In the United States, inflation has hit the government consumption goods produced by the Military Industrial Complex, costing the government billions of dollars).

In a small open economy like New Zealand, the power of the banks to create money is amplified by their ability to import money from overseas. As long as the central banks of the US, Japan and the EU keep their cash rates close to zero, banks will be able to make a good profit by borrowing at zero interest rate and lending the money in New Zealand for 4%.

The Reserve Bank of NZ’s cannot control the money supply, so we face an infinite supply of money at very low interest rates. This would normally flow into inflation of the prices of household goods and services, but imports of cheap goods from China mean that the CPI has not increased much. That does not mean that there has been no inflation. Instead, the rampant supply of money has flown into house prices in Auckland.

In a normal market, prices adjust to eliminate excess demand. Basic economics explains that during a period of excess demand, buyers will bid up prices. However, when the price of a good rises, producing and importing it becomes more profitable, which increases the supply of the good.

At the same time, the increase in price of the good means that some people who wanted to buy it, can no longer afford it, so they spend their money on something else that is cheaper.

A rising price generally increases supply and reduces demand. Combined together these effects of the rise in prices eliminate the excess demand. Sometimes, producers and importers will supply too much and the price will fall back a little.

In a housing market with unlimited money creation by banks and low interest rates, the market mechanism no longer functions. When house prices rise, no one is priced out of the market, because banks are willing to lend more, because the value of the asset used as security has increased too. Even if they have to take on greater debt, the purchaser does not worry, because they can count on an even bigger capital gain, as long as house prices keep rising.

The supply of houses changes slowly, because developing new suburbs and building new houses takes time.
Prices go up an up, and banks lend more and more, without the restraint of the normal market mechanism. While interest rates are low, the capital gain from rising prices more than compensates for the extra repayment burden.

Of course, this cannot go on forever. Eventually the whole thing gets out of kilter and the grossly inflated housing market will collapse. That is what happened in the United States in 2008.

Various things could cause the house price spiral to collapse here.

• A shock to the NZ economy that destroys confidence.

• A sharp increase in interest rates (unlikely while central banks around the world are clinging desperately to zero rates.

• An increase in unemployment that affects the ability of people to make house repayments.

• A shock from the international economy that causes a flight of capital back to the safety of the US and Europe.

Shifts and Shocks

At the end of last year, I read Shifts and Shocks by Martin Wolf. He is chief economics commentator at the Financial Times. He has also worked as an economist at the World Bank, so he part of the economic establishment.

I get frustrated with these establishment economists. They acknowledge that the monetary system is seriously flawed, and that the monetary authorities were unable to foresee, or prevent the Global Financial Crisis from occurring. They have no confidence that the monetary authorities will be able to prevent any future crisis. Yet they are unwilling to recommend serious changes to the monetary system.

I presume there are two reasons.

• Many members of the economic establishment have profited from the system, so they are unwilingl to eliminate future opportunities for their families and friends to prosper from the system in the future.
• They understand that the monetary system gives inordinate power to the state. As part of the establishment, they do not want to lose that power.

Martin Wolf is typical of the economic establishment.

There is a simple and telling reason why, notwithstanding all the regulatory reforms, the system is bound to fail again and again; it is designed to do so. The reason for this is that the fragility is built in. The financial system makes promises that, in certain states of the world, it cannot hope to keep. The reason for this is that institutions finance long-term, risk and often illiquid assets with short-term, safe and hilly liquid liabilities. The people who provide the funds regard their deposits and other loans as a very close substitute for ―if not exactly the same thing as—money. But the assets held by the institutions to which they have lent are not in the least like money; they are subject to significant solvency and liquidity risks. At a time of trouble, providers of funds will panic: it always makes sense to try to be among the first to leave a burning theatre or even a theatre that might burning. In withdrawing their funds, providers will trigger what they fear. The assets held by institutions will be dumped at fire-sale prices turning illiquidity into insolvency.

This is the world’s Faustian bargain. Some argue for a drastic solution: abolish it. Make term transforming finance, in general, and conventional banking, in particular illegal.

Wolf then quotes Charles Goodhart, whom he called the doyen of British analysts of finance as saying this solution is not wanted by anyone

The problem with proposals of this kind is that they run counter to the revealed preferences of saver for financial products that are both liquid and safe, and of borrowers for loans that do not have to be repaid until some know future distant date. It is one of the main functions of financial institutions to intermediate between the desires of savers and borrowers, ie to create financial mismatch. To make such a function illegal seems draconian.

Wolf makes the following assessment of Goodhart's response.

Goodhart is right in saying there is a strong preference for a financial system that mismatches maturity, not to mention riskiness. But one must ask: at what price?

Wolf seems to accept this argument, and concludes that the benefits outweigh the risk.

However, there is a flaw in Goodhart’s argument. Borrowers prefer long-term loans and they do not mind risk, because time is on their side. Savers want short-term and low risk. The system gives borrowers what they want, but it only gives savers half of what they want. They can get short terms, but not security. This is wrong. The money belongs to the savers, so they should be able to decide what they want. However the banks and financial authorities refuse to let them have it. Instead they give the borrowers what they want, because there is more profit in it for them.

There are plenty of other avenues for savers who want high risk and high return. We need banks that will provide savers with an deposit account that meets their requirements.

FM on Money (7) Equity

Felix Martin says that money is a social technology which depends on people. This is a good insight, but I have a problem with his view that money is debt. He argues that and notes are a circulated IOU and that money was originally created by the sovereign going into debt and issuing paper debt instruments. People were will to accept these notes as a settlement if debts, because the assume that the sovereign is creditworthy and that others will trust them to back their debt.

The argument that money is created by a debtor issuing debt gets things the wrong way round. Money is not created by a debtor. Money is validated by a person selling something in a half completed transaction. They have given up something, but have not received anything back yet. They are willing to accept the money (whether cash or bank record) because they trust the people in the community that they live in to honour it.

The person accepting money gives the community credit. They believe that someone in the community will give them goods or serviced in exchange for their money. Money is created by a community respecting money claims.

If I sell something for $10.00, I do accept it because I trust the bank, or think that the government will give me something. I trust my community to honour it.

Taking money as payment gives the person holding it equity in the output of the community. They can’t guarantee what they will get, but they will get a share of what is available in the immediate future. I have an equity in the goods that will be made available by them in the next period of time. I explains this in Trade.

Sovereigns do not decide the value of money. Businesses decide the value of money when they set the prices of goods and services offered for sale. The community decides the value of money when they agree to buy goods and services. The government does not decide the value of money.

FM on Money (6) State

The problem I have with Felix Martin is that he assumes a role for the state in money.

What matters is only that there are issuers whom the public considers creditworthy, and a wide belief that their obligations will accepted by third parties.

He claims that the sovereign is the only viable issuer of money, because only the sovereign can be trusted to always meet its obligations.

The sovereign’s credit worthiness rests on the strength of its authority and on the sovereign’s willingness to deploy it to accumulate credit from its subjects via taxation. More than its dominant size in the market, it is the sovereign’s dominant power outside the market that makes its IOUs effective as money. So long as the state is held to be legitimate, its money enjoys the trust no only on command or legal ground, but on ideological and even spiritual grounds (p.74).

This is a bit odd. We trust the money issued by a sovereign, because he has the power to tax us to back up his money if it fails.

The problem with this view is that the sovereign was not creditworthy. Kings were always fighting wars that they could not afford. They were always running up huge debts to fight stupid wars. When their debts got unbearable, they would default on them and the people who trusted them would lose out. Sovereigns were well known for defaulting on their debt, so it is unlikely that their debts would be trusted.

FM on Money (5) Origins

Felix Martin gets into a debate about the origins of money. The original idea that is expounded by economists is that money was originally a commodity. God or silver were the most common, because they were portable and divisible into coins. The first banknotes were receipts from bullion warehouses for gold and silver in storage. It was often easier to exchange the paper receipt than to exchange the gold or silver. According to this theory, proper money got under way when governments took over this role by holding gold and silver and issuing bank notes.

The other theory is that money began as debt issued by kings. When the king borrowed from his citizens, the person making the loan would get a written IOU from the King. These began to circulate as paper money.

Felix Martin prefers the latter explanation. He argues that the commodity money theory held back the development of monetary policy. He blames John Locke for this development.

I don’t think it matters too much which explanation is correct. I suspect that both occurred, and it is not clear which came first. It probably does not matter.

The debt theory is interesting because it shows that money is a social phenomenon.

At the centre of this alternative view of money- its primary concept, if you like – is credit. Money is not a commodity medium of exchange, but a social technology composed of three fundamental elements. The fist is an abstract unit of value in which money is denominated. The second is a system of accounts, which keeps track of individuals’, or the institutions’ credit or debt balances as they engage in trade with one another. The third is the possibility that the original creditor in a relationship can transfer their debtor’s obligation to a third party in settlement of some unrelated debt.

The third element is vital. Whiles all money is credit, not all credit is money and it is the possibility of transfer that makes the difference. An IOU which remains for ever a contract between two parties is nothing more than a loan. It is credit, but it is not money. It is when that IOU can be passed on to a third parry, when it is able to be “negotiated” or “endorsed”, in the financial jargon – that credit comes to life and starts to serve as money. Money, in other words is not just credit – but transferable credit.

This is good stuff. I have described a system of money that can meet these elements that does not need gold and silver or the intervention of the sovereign in Bank Deposits and Loans.

FM on Money (4) Banks on Strike

Felix Martin tells the story of a strike by the bank officials union that shut down Irish banks for more than six months.

Business carried on without too much disruption, while the banks were closed. Most bigger payments were made by cheques, although it was impossible to clear them at a bank. It seems that the owners of pubs and shops knew the people whose credit could be trusted. Businesses knew which business, they trusted, and accepted their cheques. Businesses would buy cash from large retailers, to make up their payrolls.

When the banks finally opened, it took them three months to clear all the cheques.

While they Irish banks were closed, the Irish made their own money.

FM on Money (3) Tally Sticks

Felix Martin records some interesting stories about the history of money to support his theory that the conventional view of money is wrong. The Exchequer tally sticks were an interesting portable means for recording receipts and payments.

For more than six hundred years, from the twelfth to the late eighteenth century, the operation of the public finances of England rested on a simple ingenious piece of accounting technology: The Exchequer tally. A tally was a wooden stick – usually harvested from the willows that grew along the Thames near the palace of Westminster. On the stick were inscribed, always with notches in the wood and sometimes in writing, details of payments made to or from the Exchequer. Some were receipts for tax payments made by landowners to the Crown. Others referred to transactions in the opposite direction, recording the sums due on loans by the sovereign to prominent subjects. Even bribes seem to have been recorded on Exchequer tallies.

Once the details of the payment had been recorded on the tally stick, it was split down the middle from end to end so that each party to the transaction could keep a record. The creditors half was called the stock and the debtors the foil, hence the English use of the term “stocks” for Treasury bonds, which survives to this day. The unique grain of the willow wood meant that a convincing forgery was virtually impossible, while the record of the account was portable, rather than just inscribed in the Treasury account books at Westminster. Exchequer credits could be passed from the original holder to a third payment in payment of some unrelated debt. Tallies were what are called: bearer securities” in the modern jargon.

Historians agree that the vast majority of fiscal operations in medieval England must have been carried out using tally sticks; and they suppose that a great deal of monetary exchange was transacted using them as well.

Although millions of tallies must have been manufactured over the centuries, and we know for sure that many thousand survived in the Exchequer archives up until the early nineteenth century, only a handful specimens exist today. The ultimate culprit for this unfortunate situation is the famous zeal of England’s nineteenth century advocates of administrative reform.

By late eighteenth century if was felt that it was time to dispense with it. An Act of Parliament of 1782 officially abolished tally sticks as the main means of account keeping at the Exchequer , though because certain sinecures still operated on the old systems, the Act had to wait for another half-century, until 1826, to come into effect. However, in 1834, the ancient institution of the Receipt of Exchequer was finally abolished, and the last exchequer stick was replaced by a paper note.

The irony is that when the redundant tally sticks were being burnt in a stove in the House of Lords during 1834, the intense heat set wood panelling alight and the houses of Parliaments were burned to the ground and had to be rebuilt.

Felix Martin on Money (1)

I have just finished reading Money: The Unauthorised Biography by Felix Martin. He has an interesting comment about the disconnect between the disciplines of economics and finance.

From the moneyless economics of the classical school, there evolved modern orthodox macroeconomics: the science of monetary society taught in universities and deployed by central banks.

From the practitioner’s economics of Bagehot, meanwhile there evolved the academic discipline of finance, the tools of the trade taught in business schools, used by bankers and bond traders.

One was an intellectual framework for understanding the economy without money, banks, and finance. The other was a framework for understanding money, without the rest of the economy. The result of this intellectual apartheid was that when in 2008, a crisis in the financial sector caused the biggest macro-economic crash in history, and when the economy failed to recover afterwards, because the banking sector was broken, neither modern macroeconomics nor modern finance could make head nor tail of it.

The answer to the Queen’s question - why did no one of the economist see it coming - is simple. Their framework for understanding the macro economy did not include money.

And by the same token, the question that many were keen to put to the bankers and their regulators – why didn’t they realise that what they were doing was so risky – also turned out to be simple. These frameworks for understanding finance did not include the macro economy.

It would have been comical, had it not ended in such a cataclysmic disaster (pp.225-256).

Stockman (8) Money

The way that banks create demand deposits is to first issue loans credits to their customers. In the modern world, money supply follows credit, and rarely do central bankers inordinately restrict the growth of the latter.

In other words, money grows mainly when commercial bank credit expands, and no amount of Fed bond buying can force member bands to lend into a debt-saturated marketplace.

David Stockman

Bitcoin

Bitcoin has become a bit of fad. It a form of electronic money that grows slowly over time, in an imitation of the way that the volume of gold grows as more is mined. I don’t think bitcoin is the future, but it points to a few issues with modern money systems.

1. Money is a record of payments and receipts. Most of the money that people use these days is electronic. That will continue to be the case unless international communications completely breaks down (but that would be a huge economic disaster).

2. Money is a record of a “partly completely transaction”. The volume of uncompleted transactions can increase and decline over time, depending on what people are doing. More on this here.

3. Recent events in Cyprus have made people think again about the security of money in the bank. Depositors have had the value of their deposits arbitrarily reduced. Here in NZ, the central bank has announced a process for taking a haircut from deposits in a situation where a major bank is in danger of collapse. These events are not reassuring. People are beginning to realise that we need a better system of money.

4. Modern banking processes make international money transfers quite expensive. I have to pay $5.00 to bank a check issued by a major international business. This seems excessive, given there is almost no risk of the check bouncing, and the bank demands the right to reverse the payment and charge another fee if the check does not clear. People are looking for better ways to make international transactions in an electronic world.

Community-based Banking (11) Trust

A Christian community should be full of trust. This is a huge advantage, as money functions best when people trust the other people in their community. When people accept money, they are trusting other people in their community to accept it in exchange for goods or services. They do not have to trust everyone in the community, but they will need to know there are enough trustworthy people in the community to give credibility to the community-based money. They also need to know that the record-keepers in the community can be trusted.

Money represents a debt of the community. The value of money depends on the people of the community honouring its obligation. There is a strong biblical basis for honouring community-based money. Paul said,

Give to everyone what you owe them… Let no debt remain outstanding, except the continuing debt to love one another (Rom 13:7-8).

These are commands to the Christians community to honour its obligations. They are the basis for a money recording system.

The transactions recorded by record-keepers are the obligations of the community. They are not the obligations of the record-keeper, or the bank. The record-keeper just records the debts and obligations of people in the community. If the community breaks down and ceases to honour its obligations, or fobs them off to someone else, the obligations that have been recorded may prove to be worthless.

The leaders of a community will want to protect the reputation of their community. They will ensure that all debts of their community are met. The stronger the community, the greater will be the trust in money records of the community.

Community-based Banking (7) No Contract

Money is a debt obligation of the entire community, not a particular individual, so there is no formal contract as is the case with a debt owed by one person or business to another. Money records are a commitment by a community. The right to receive goods in return for money is personal, residing with the person who holds it, but the obligation to provide goods in return for the money is not belong to a specific person, but rests with the entire community.

A particular person will supply goods in exchange for money, if they are confident that other people in the community will give do the same for them. At the time when they give up something in return for money, they probably do not know who in the community has the goods or service that they want to buy with it. They rely on the fact that most people in their community are willing to accept money and presume that someone one will be willing to receive money for goods or services, when they are ready to buy something. If individuals stop trusting their community, they will be unwilling to give up for goods and services in return for the money that circulates in the community.

Community-based Banking (6) Created by the Community

Money is not created by the government. Money is created by the trust of the people in the community in which it is issued and accepted. The value of a currency only extends as far as the authority and reliability of the group that accepts it is trusted.

Trust fosters trade. If trust in is limited to immediate neighbours and friends trade will be almost impossible. If trust extends to larger communities, trade and specialisation will increase. If trust spreads across many communities, trade will expand.

State money only has value within the boundary of the state. Most coins have a picture of the king on them. People assume that the king’s coins have value anywhere that the king has control. This is an illusion. A coin is only of value as far as the king is trusted and most kings are not trusted, because they have frequently debased their coins.

A king cannot make money valuable. A king cannot force a people to trust his money. All he can do is demand that people pay taxes using their coins. This creates some demand for the king’s coins, but it does not establish trust in the king’s money. A king’s money will only be used throughout a nation if the people know that other people within the community will accept in exchange for goods and services. If that trust disappears then the money will stop being used as people find safer ways to trade. A king cannot stop this from happening.

The fiat money that we currently use is backed by the government. Most people assume that it can be trusted because the laws require everyone to accept it for the settlement of debt and for the payment of taxes. Trust in fiat money is really trust in the government. Unfortunately, governments cannot be trusted. Throughout history, they have debased their currencies and their people have suffered terribly.

The truth is that money only has value, if people of the community accept it as having value. It will only be trusted, if the people of the community trust it. They will only trust it, if the key traders in their accept it. If people stop honouring the obligation it represents, its value disappears, regardless of whose picture is on it or the laws behind it. If traders stop accepting money, then its value will disappear, regardless of who has issued the money?

When I have a hundred dollar note in my pocket, I feel confident, but what am I trusting? I am not assuming that the paper has value. I am not trusting the bureaucrat who signature is on it. I am trusting the people in my community. I am relying on some in the community to exchange the note for something that I need.

Community Based Banking (4) Money Records

The task of the record-keeper is to keep a record of who in the community is owed something and who owes something to the community.

In an act of charity, one person gives and another receives. There are no outstanding debts.

In barter, both people give and receive at the same time. The transactions are reciprocal, so there is no outstanding obligation.

In a market transaction, giving and receiving are not reciprocal.

• After a sales transaction, the seller has given, but has not received.
• The buyer has received, but has not given.

The record-keepers will record that the buyer has received, but not yet given. The buyer has taken on an obligation to give something to someone in the community. More likely, they will have had a previous obligation from the community wiped out. The seller has given, but has not yet received. The community now has an obligation to give something to them. More likely, he will have had a previous obligation to give someone to the community wiped out.
If someone has a positive record, they have given things to other people in their community without receiving anything equivalent in return. They are not someone wanting something for nothing, so people in the community should be willing to supply them.

The person who has given but not received will be recorded as plus x. The community has an obligation to that person. The person who has received, but not given will be recorded as negative x. They will have the agreed to the price of the purchase that they have deducted from their account. They have an obligation to the community that can only be settled by giving something of similar value to someone else in their community.

The unit that debts are recorded in does not matter, provided everyone understands it and uses it. It can relate to a particular commodity or to a currency that has existed in the past. People can look around and see goods and services priced in the units adopted, so they can see what the unit is worth.

Historians record that pounds, shillings and pence were used as units of account in Western Europe hundreds of years after these coins had stopped circulating. Coins in these denominations did not exist, but people still used these units for recording debts and other market valuations. When I was growing up, guineas were used at stock auctions even though these coins have not existed here for more than a hundred years.

Community Based Banking (3) Auditors

The various record-keepers in a community would be competing with each other to have the most trust. If one lost a bit of trust, people would quickly shift their business to another recorder. To maintain trust, record-keepers would need to allow anyone who wanted to examine their records to do it. Most would not have time to do it, so someone with spare time might regularly go round and check the records of everyone undertaking this business in the community. These record-auditors would regularly add up the net balance on each record keepers books and check that they netted to zero. This would quickly expose any fraud. The auditors would support the community by publishing their findings.

At first, record communicated would be very simple an manual. As the economy expanded, the record keepers would develop electronic systems. They would eventually develop distributed and mobile systems that would record transactions anywhere in the community. The result would be a fully functioning money system.