Money difficulties

The following is my response to an article on natural money posted on Medium.

Dear Christopher

Thank you for your article about money.  I believe money is a major problem in our economy and it is urgent for us to have this discussion.  There are a couple of things I liked in your proposal, however I have some serious concerns.

My qualifications to write on this topic are that I did a degree in economics at the University of British Columbia with an informal specialization in money and banking.  I think I have a good understanding of how the financial system works and an even better understanding of some of the problems. And I have written a book about money.

My first concern is with the six properties of money.  I recognize this is conventional economic thinking and is based on the traditional use of commodity money but I prefer to define money as a tool which facilitates the exchange of goods and services.  It is important to note that tools get their values from how well the do the job.  It is unfortunate that money has a history of values as a commodity.

Another concern is with the idea there are two varieties of money – precious metals and fiat money.  A third type of money is fractional reserve money and is based on loans made by the financial system.  Believe it or not when bankers make loans they are creating money and adding to the total money supply in the economy. If you do not know how this process works there are lots of explanations on the internet and I urge you give it some priority.  It can appear complex but I think it is easy to understand if one takes it slowly.  Approximately 90 per cent of our money supply is this type.

I believe the major problems with fractional reserve banking is that the quantity is not flexible downwards when economic activity decreases and the interest charged on the loans.  If all the loans upon which our money supply is based had to be repaid on the same day there would not be enough money because of all the interest which would also need to be paid.

I am also concerned with the idea of basing money on a commodity – any commodity or even a group of commodities because this limits the total money supply.  When money was based on gold there were some severe recessions because there was not enough money for the quantity of goods and services people wanted to exchange.  Deflation can be a serious problem which limits economic activity. Please do not forget a lot of economic activity is based on services.

Your suggestion that CBC units should be destroyed when redeemed is very important as money units can keep piling up until they cause problems.  A big problem with fractional reserve money is that it does not get destroyed until we have an economic crisis and lots of people lose lots of money.

Your concept of countercyclical is also important because the money supply needs to be flexible in both directions.  If it is not flexible then we have either inflation or deflation both of which devalue people’s  saving.

There is a rather obscure concept called local exchange trading systems (LETS) (https://en.wikipedia.org/wiki/Local_exchange_trading_system) which a few groups around the world have tried.  These groups have not met with much success because they are small and do not include all the goods and services we need to live.  However, they create credits which are in effect money which avoid the problems of fractional reserve money.  If only we could establish a national exchange trading system (NETS) we would probably have fewer economic problems.

This commentator has written an ebook about money, its problems and NETS as a possible solution. You can get a free copy from Smashwords by following this link and using this code:

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Money is extremely important in our economy and causes a lot of problems.  I encourage you to keep thinking.

(FREE! The author of this comment has written an Ebook Funny Money: Adapting to a down economy. Information is on my weblog:https://economics102.wordpress.com/