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BrandonCsSanders, LionKimbro, MarkDilley and TedErnstI? had a heck of a time talking about banks and money and interest in the Wiki Van. So as described by Lion when a new convert to a way of thinking is out trying to convert others and gets lashed around in debates, TedErnst went back to his wise person and this is what he said:

I’m interested in discussions of finance and economics, but I have no formal training and I don’t quite understand the discussion at Omidyar that you pointed to (and I don’t really feel up to participating in the discussion there; mainly because I like to contribute almost exclusively to OpenContent wikis, figuring that text written in those is most likely to be useful). If you ever feel like it, I’d like to read a summary on CommunityWiki. Beware that I am rather pro-bank and will likely argue for them despite my lack of formal training : )

Until then, here’s my thought on that conversation:

  • What exactly is being discussed? Are you discussing whether banks are useful or are parasites in the context of the current system? Or are you comparing the current system with something more alien (where the meaning of money itself is different)?
  • I don’t know about “mutual credit”
    • The only thing I do know about it is what was said on that page, that in the “mutual credit” system anyone can create money by spending it. This leaves me dying for an explanation (namely, if I can arbitrarily “create” money, then why the heck would you want to accept my silly created money in exchange for giving me a good or service?)
  • At one point, someone seemed to say, “why do we need banks when we can provide credit clearing services for each other using modern technology?”. What are credit clearing services? Is that like when you write a check on your bank account, and then the other person can use the banking system to exchange that check for cash? If so, then how could individuals perform “credit clearing” for each other without depositing money in checking accounts with each other? Does “credit clearing” mean something more general than “providing a mechanism for cashing checks”?
    • I guess I can think of one other way we could do this without banks: if you give me a check, I can take it to Frank, and Frank can call his friend Jim, and Jim can call Elise, and Elise lives next to you, and then she can bug you for the cash, and then tell Jim to tell Frank to give me some cash, and then Elise and Jim and Frank can settle up with each other periodically. This is how hawalas work, right? [1] [2]
  • It seems to me that there are at least three reasons people borrow money
  1. Convenience; people often use credit cards instead of cash even if they had enough in the bank that they could have paid in cash if they had wanted to.
  2. They want to spend more than they have, and pay for it later. For instance, a mortgage.
  3. They want to start or grow a business.
  • It seems to me that only the first of these is “credit clearing” (assuming I understood credit clearing right). Even if we had the problem of cashing checks settled without banks, we’d want to find ways to do #2 and #3.
  • The second and third reasons are similar; starting a business with a loan is simply “spending more than you have”, but for a different reason; with a mortgage, you want to enjoy the house in the meantime. With a business loan, you want to spend more than you have because you think that you can make more than the interest rate on the loan (that is, you can “put the money to better use”).
  • I don’t see how the banking system forces the economy to grow exponentially. Imagine that the economy wasn’t growing. Most business would see a 10% interest rate and say, “no thanks, I don’t want a loan right now: since the economy is flat I don’t think that getting a loan would allow me to make enough more money to pay the 10% interest”. So it’s not like they’d be “pressured” to grow, right? They just won’t take the loan.
  • Although, since investing is also a sort of loan, I suppose that if the economy was truly and predictably flat, few people would invest money in firms (if you have money to invest, you would get a better interest rate just by loaning it to individuals who want a mortgage, right?). But that’s what you want to happen; the premise is that the economy is flat, that is, nothing can be done better than it is now, therefore why would you want people to grow their business?

Someone will let me know when this warrents a new page, yes?

Bayle, wow. Lots to talk about here. I’m totally fine having the conversation here rather than omidyar. That info there is just for reference.

First, the premise is not that banks are evil. The premise is that our money system whereby banks create money by loaning it out is unsustainable because it forces exponential growth (there’s always more money owed with interest than exists to pay it back). This is not the fault of banks. It’s the fault of government that gives banks the ability to create money out of nothing, as they do when they make a loan.

So what I’m trying to get to is an understanding of how a community-based money supply could solve some of these structural problems. The way I see it now, we’re like a fish that doesn’t see the water it’s swimming in with regards to our money supply. It undergirds everything, all areas of human exchange.

Yes, you have the idea about mutual credit. I print money to buy somthing from you. You give that money to someone in exchange for goods or services. They do the same, etc, until it gets back to me and someone uses it to pay me for goods or services and the money is thus destroyed. Why would anyone accept this money? Trust, same as with the US dollar. This is one reason why reputation systems are important as we move forward. It’s easy in a small group where everyone knows each other, gets harder as the system gets larger. Your description of what happens when a check changes hands repeatedly before getting back to the issuer is the same thing. No need for conversion into US dollars at any point. Might be easier to think of this as numbers in a ledger than cash. And we can develop technologies that mimic credit cards for this as well so no need that has to be done by banks or with fiat currency either.

I am not going to try to tell you that we can replace mortgages with community money or mutal credit. It might be possible, but I don’t understand it yet. Same with starting a business. Except there are currenly ways for businesses to buy on credit, and they often do this with inventory. The vendor then sends them a bill, payable in the near future. This type of system could be expanded to include large capital purchases, I suppose, though the longer-term nature of durable goods might change things a bit. For an example of a business to business mutual credit system that’s been running for a long time, check out the Wir in Switzerland.

As for banking not forcing the growth, your argument might have been true had we stared from zero, but today there are billions (trillions) or dollars outstanding in loans. To pay these back people are going to have to borrow more (or sell to people that have borrowed to get started). The current loans are enough to have us in the exponential growth scenario and it’s hard to see a way out of that.

Another point that we didn’t discuss in the van was about the different uses for money. Money is a store of value, a unit of account and a means of exchange. A currency good at one of these cannot be good at all 3 as they are fundamentally opposed purposes. We can, however, design currencies that specialize in just one of these areas, with ways to convert among them. This will mean, of course, that I don’t need to invest my cash or get a return on it, because I’m not going to hold it very long, I’m going to spend it to get the things I need. The cash I don’t need for a while, I can convert into store of value currency where it can wait for when I need it. And if it’s true that inflation is a by-product of the money-supply problem I describe above, then I don’t need a return on investment at all; I just need back what I put in. Exchange currency, on the other hand, could have demurage built in that encourages people to exhange it rather than hold it as it loses value over time.

I don’t have any training in this either so we’re all in the same boat, so to speak.

Cool, thanks for the explanation. I feel like reading some econ textbooks in preparation for this discussion – but of course i’ll never get around to that.

As for banking not forcing the growth, your argument might have been true had we stared from zero, but today there are billions (trillions) or dollars outstanding in loans. To pay these back people are going to have to borrow more (or sell to people that have borrowed to get started).

Yeah but those loans will expire in a few years – so it’s only a temporary effect. If people thought the economy would slow, they could stop taking out new loans – provided that the economy’s stagnation is predictable far enough ahead of time.

I search for the “wir” and I found that it seems to work better to search for Google:wir+barter. I found this quick summary of some alternative currencies:

So it seems to me that the main problem that these systems try to solve that conventional currency doesn’t is, what if you have a coupla hundred people none of whom have much money, none of whom can get a well-paying job for whatever reason, but all of whom could do useful things for one another with their time?

They mention mutual credit and I still don’t quite see how it could work. So say there’s a centralized registry keeping track of everyone’s “balance”. Anyone is allowed to spend themselves into enormous debt. So Bob is $1 trillion in debt. Do I have any reason not to accept further payment from Bob? No, because I still get credited in the central registry for doing something for him. Therefore I don’t think this system can punish freeloaders.

Or, instead of a registry, everyone prints their own currency. The problem here is that if you want to give me Bob-money, then I have to go check out Bob’s money’s reputation before I accept it – making it majorly complicated to do any exchange, especially if you want to pay for one item with multiple currencies. It’s like if you wanted to buy a bagal from me and pay in Kenyan currency; in theory that should be find, but in fact it’ll be a pain for me to check its value – and this is even worse if we have one currency per person. Although I see how this could work if Bob’s money only circulates between people who are in social proximity to Bob. And I guess if we had some awesome social network computing then maybe it would be possible for your computer and my computer to negotiate and figure out something like, “OK, you want to pay in Bob money, but I don’t know Bob, but I do know John who knows Bob, so let’s ask John’s computer if John is willing to promise to exchange Bob dollars for John dollars real quick”.

Hmm that last proposal is sort of like a monetized reputation network, which I think is interesting.

Here’s another link that I haven’t read yet:

I’ve heard an idea going around that money is a reputation network. I haven’t fully thought it through yet, but it sounds like there may be something there, to me. (One thing that concerns me, is the transferability of money. Can people transfer trust? No. Trust definitely does not transfer.)

As for mutual credit – I can’t be sure what’s meant, from the outside, but I ran into this problem once when trying to make a net-zero monetary system. The idea is this: Everyone has $0 at the start. The sum total of money in the entire system, at any given time, is always $0. So, how does any spending happen? Simple: Everyone is granted the ability to go to -$100.

“What if someone wants to buy something expensive, like a house?” Let’s say a house costs $5,000. Simple. Either (A) they aquire enough merit, by getting 50 people to give them their $100. (Bloody unlikely.) Or, instead, they say to the community, “Community, I am trustworthy. I’ve been here since the day I was born. You all know me, and I am of impeccible character. I have participated in a billion trades. Please, lend me $5,000.” The community then authorizes spending to -$5,000 for this person. No money has exchanged hands, yet. Merely, the debit has been authorized.

Mr. Impeccible Character than makes arrangements with the relevant contractors, and pays them, going -$5,000 into debt.

Note that the books all still balance, and the net sum of money is always $0.

It is entirely plausible that different people will have different credit ratings. Respected debt would likely be a function of prior trades, community relationship, etc., etc.,.

VirtualMoney, MoneyMoney. Let’s merge that somehow.

On every dollar that exists in real-life there are - I think - 17 dollars that only exist on lists, databases, stockmarket-systems, etc. On banks. Nobody knows how much there is. This is a suicide-system and it can easily be done better. Can be hacked. Lion’s 0-idea is interesting.

Yes, Lion’s got the idea for mutual credit. That’s it exactly. Now bringing that into real-world takes a bit of effort, as Bayle is trying to do. Bring it down to a human scale and there’s no central registry. We each just have a 3x5 card and we’re all in one room when the cards get our names and signatures on them for the first time. Then every time we trade, we each sign each card, one balance goes up and the other down. We have an established credit limit like Lion says (so Bayle’s satisfied, yes?) and to exceed it, we have to figure out how to do it. To further complicate things we could assess fees on positive and/or negative balances from time to time. Positive balance people need to spend more so negative balance people can sell their wares and negative balance people need to provide something of value to the community (maybe they need more education or coaching on what to make or sell) and negative balance people also need to be encouraged not to be lazy and stay negative all the time.

And I think Bayle has it exactly right when he describes 100 people that have skills they could contribute to teh community and none of them has money to buy goods or services from teh others. Mutual credit solves this problem.

As for simply not taking any new loans from banks, seems to me that’s the way to go as we start using mutual credit more, to such a level that we can even fund capital costs of business expansion this way. I’m not sure how we pay back the interest that’s currently owed to banks, however. It’s complicated.

This is such an interesting topic but I really do feel silly discussing it without reading some books first. Nevertheless, some thoughts of mine:

  • We should move this to a page; how about AlternativeMonetarySystems (or just AlternativeCurrencies)?
  • I am mentally reorganizing my thoughts about this around few central points:
    • Money has different functions which may be conflated in our traditional currency-centered thinking
    • One problem with the current system is: if you have a coupla hundred people none of whom have much money, none of whom can get a well-paying job for whatever reason, but all of whom could do useful things for one another with their time?
    • In the current system, you can loan out more money than you actually have, which creates “phantom money”
    • How loans work seems to be one of the central issues that changes most in different monetary system proposals
  • More on loans
    • loans are one of the ways that the status quo system uses to deal with the problem of a bunch of people who don’t have money to start out with.
    • another way to do this in the current system is for the government to take out a loan, spend the money on the poor, and then print money. This causes inflation, essentially reducing the wealth of everyone else and giving some to the poor, but it has the additional cost of the instability that inflation causes.
    • the current system is pretty good at keeping people from freeloading (you can’t arbitrarily “get a loan”)
    • the current system is pretty good at decentralization; no central authority gets to decide who is worthy of loans. On the other hand, one central authority (the government) has control of the money supply and hence can cause inflation or deflation at will.
    • the current system is bad at dealing with the fact that different people have different amounts of money. On the one hand, you might have a community too poor to effectively participate in the money system, even if they have goods and services that they want to trade amongst themselves. On the other hand, when a significant proportion of total wealth is concentrated in the wealthy, rich people can cause capital to be misdirected into luxury item production.
    • both the current system and the alternative system seem to be pretty good at handling small, temporary, “loans of convenience” (credit clearing?). The current system has checks and credit cards. Alternative systems have various methods of passing money along through a social network, or of a central authority serving as a bank.
    • in order to eliminate “phantom money” you must make loans impossible (rather, the very concept of a loan must not exist). Otherwise people could still “loan” more alternative currency than they have.
    • alternative systems proposed so far seem to be good at:
      • dealing with the extremes of wealth inequality
    • alternative systems proposed so far seem to be bad at:
      • decentralization. Many of the proposals require either a central registry, or a central “community organization” that decides who is allowed to get a loan
      • OR freeloading. If the system is not centralized, then many of the alternate systems allow an individual to effectively decide for themselves that they deserve a loan.

Therefore, so far, the central question to be solved in alternative currencies boils down to this:

Without any sort of central registry or centralized authority on who gets a loan, how do we have a system in which the poor and the rich have an even chance at getting loans without allowing an arbitrary amount of freeloading by any individual?

Tangentially related: The Economist magazine currently has a collection of articles on extending traditional banking services to the world's poor. Note that their main recommendations seem to be:

  • Non-profit microfinance organizations should try to turn into for-profit banks
    • because this will allow them to grow more and serve more poor people
  • Banks for the poor shouldn’t shrink from charging high interest rates, say 80-100%
    • because this is what has been shown to work in previous projects to lend to the poor; and also because it is still lower than the rates than informal lenders charge the poor; they give an example of informal lenders in the Philippines who charge 1000% interest
  • Credit rating agencies that rate small banks that lend to the poor should be established
    • because then big banks will lend to these small banks, which helps the small banks
  • Legal institutions that let loans be re-sold
    • because this helps small banks, who can sell their loans to bigger institutions

The reasoning for 100% interest is a bit disturbing. “It’s been shown to work” has weight, but the argument is undercut when it says 100% is okay because that’s less than what the mob lends at. That kind of reasoning betrays the idea that the mission is to help people. As a reader, that’s not clear to me any more.

Note that I’ve only read the summary here, not the original article.

I don’t have access to the full articles right now but i’ll try and post the parts that talk about that.

I think what were are saying is that right now many commerical banks aren’t getting into the business loaning to the poor AT ALL, because they are worried about making a profit without charging such high interest rates, and they feel bad about charging so much. So, they are saying, go ahead and lend at whatever rate you need to, it’s better than not having banks at all (clearly so, because otherwise, people who need money are borrowing from informal lenders at even higher rates).

I think they go further then that; they are saying, go ahead, make as much profit as you can, charge as high rates as you can, treat loans to the poor just like any other area of business; don’t cut interest rates out of “charity”. Because if you treated it as charity, then you’ll find yourself investing in other, more profitable areas of your business instead of building out your capacity to loan to the poor. The more profitable it is to lend to the poor, the more banks will do so, and the more that the availability of credit to the poor will increase. Once there is a large, competitive market of lending to the poor, other banks will try to undercut you if you charge high interest rates anyway, so it’ll fix itself.

Your basic pro-capitalism argument.

I think this makes sense.

I overheard someone mention the ejido system. As far as I can tell, it’s an alternative to buying land with money. And so perhaps tangentially related to alternative money systems. I’m seeing a bunch of hits for Google:"protect the land" ejido, so apparently there is some sort of environmental aspect.

the discussion continues on

money from scratch



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