A decentralized money supply: Solving the scarcity of money

A major problem with all currencies we've had so far is that varying amounts of currency are available in different parts of an economy. This leads to sharp depressions in the prices of products and services in parts of the economy which are transactionally far from the sources of money, and sharp price increases in other parts of the economy which are close to the sources of money. There is no greater fundamental cause for this than simply that there's more money near the source, than there is farther away from it. These leads to injustice as parts of the economy that are transactionally far from the money sources struggle along with the paltry amount of currency that they can get, while people who are closer to the money sources can effectively exploit the rest of the economy, since they live in an environment where money is abundant.

The cure for this is to decentralize the supply of currency, and the most effective way to decentralize is to let every person be their own bank.

What I am describing would be a virtual monetary system, reliant on information technology, where instead of hauling gold or carrying cash, people would have accounts not with other people's banks, but directly with a single central bank.

The sums on those accounts would start at zero, but could be positive or negative. People could borrow from their future income without requiring anyone's blessing. Your debt would be not to anyone in particular, but to the economy at large. This solves the problem of the initial distribution of money - everyone starts with zero; then some people go into minus, and some go into plus. I would propose that there's no unnecessary interest, neither on positive nor on negative amounts, to avoid people spiralling into debt. Instead, to avoid people running up infinite debt, there would be a maximum amount of debt that they can have, and this amount would decrease towards zero with age, to avoid people running up debt as they approach their deaths. If someone exceeded their permitted maximum debt, they would be arrested and sent into forced labor until their balance returns to zero - i.e., they pay off their debt.

There would have to be some minor systemic adjustments to maintain a system-wide balance of zero as some people will die prematurely with negative amounts. Such systemic adjustments could take the form of a small interest rate on negative balances to further motivate repayment, as well as a small deflation of positive balances to motivate investment rather than hoarding currency.

Since money could be originated by everyone, there would be sufficient supply in all parts of the economy, and prices in different parts of the economy would cease to differ as much. This is assuming an absence of banks, which would be achieved by prohibiting interest-bearing loans, requiring all non-charity lending to take the form of equity investment. (See Without banks, in particular the ensuing discussion with Wei Dai.)

This might be an all-around better monetary and financial system than any we have now. The absence of interest-based lending emphasizes equity-based investment, which leads to better supervision of the investment process, no wasteful boom and bust cycles, and better results in the long run. A currency that slightly deflates stimulates everyone to invest, while the ability to borrow from one's future income up to a point guarantees a way out in the case of an emergency.


Scott said…
What you're describing has been attempted in the form of LETSystems and various other complementary currencies. Unfortunately they seem to fizzle after a while, like a lot of community efforts. I don't have the background to comment on why, but I suspect that the difficulty of intersystem trading would be a big factor.

Personally I like the idea of having not only a decentralised currency but a decentralised data store: each participant could have a smart card with their account details and balance encoded, card readers could perform the transaction at POS. This would limit the central store to information about participants e.g. provide a notice board for good or dodgy dealers; it would however depend on cheap smart card technology to get it out into all communities.
denis bider said…
Scott: difficulty of intersystem trading - you mean too difficult, or too easy?

I suppose you mean too difficult, which I imagine would be a problem if only a few people or a small community adopts a system like that. I don't suppose that it would be a problem if adopted by a whole country.

With regard to a decentralized data store, unfortunately that's unworkable. Or, to put it more accurately: it would work if we had a magic material that could only be assembled and disassembled by an authorized person, and no one else could penetrate it. If, however, the proposed smart card is to be made out of existing materials known to man, then it can be hacked, and if it can be hacked, people would do so.

People have gone to greater lengths to get free money.

Also, the system I'm proposing only works if the community has a way of knowing whether your balance is above or below your maximum debt. This is so that, if you spend too much, with no apparent intention to repay, the police can find you and send you into forced labor. (The offence is similar as if you, say, robbed a bank.)

Any system that decentralizes the data store would have to solve the associated security problems, which are very difficult indeed.

It would be easier to implement all sorts of mitigations that can make a central data store less of a problem.

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