Reinventing money

All aspects of human living are now tied to money. The measurement of productivity, success, wellbeing, influence, living standards, power and authority of a society are all interlinked with money. That is our modern society of today, is it not?

But how is money created? Perhaps it is time for us to understand the basics of the process of money creation.

The history of money tells us that the “Mesopotamian shekel “, the first known form of modern currency, emerged over 5,000 years ago. And the earliest known mints date to 650 and 600 B.C. in Asia Minor, where the elites of Lydia and Ionia used stamped silver as well as gold coins to pay armies. But since then, money has obviously evolved and taken a more complex form since its early days.

As society grew more complex, the idea of money also changed and evolved with time. Today, the central bank of a nation state is the authorised and empowered authority to issue money on behalf of that society. And in this system the money is supplied through commercial banks.

For example, in the case of the U.K., over 80% of the money supply is created by commercial banks as debt out of thin air in the form of electronic money. Only 3% of the available money is basically printed by the central bank in the form of cash & coins. So, the majority of the money is in the form of debt.

In the current economic system, most money takes the form of bank deposits. Having said that, how those bank deposits are created is not well understood. Generally, the central bank does not fix the amount of money that is in circulation. Also central bank money is not ‘multiplied up’ into more loans and deposits.

It is the commercial banks that create money through lending following a set of rules and guidance issued by their regulators. Under the commonly acceptable practice, most of the money supply is created through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. So the newly created money is backed by the asset that is the underlying loan, and as the loan is paid, that new money is destroyed.

Since money created by central banks is no longer backed by anything tangible, the entire system is based on trust and confidence. The central bank reserve currency, aka real money, is backed by nothing but faith and confidence. If people stopped believing in money, then the value of that money system would simply evaporate instantaneously.

The current design and architecture of money is based on the premise that a society has to fully buy into it.In other words, all the individual members of a society who are part of an economic system need to become completely dependent on money, and the idea is based on the concept that these individuals will have to earn their living in the form of money. Without it, their living in a modern society becomes extremely difficult. Therefore, humans spend a large part of their lives trying to earn as much money as possible so that they can pay for their living and get further in life.

Clearly, the value of money gets derived from people. The idea that somehow money is a store of value is no longer true.To understand the real intrinsic value of money, it is important to ask, what is the value of a dollar, gold without people ? And the answer is zero. So, therefore, the value of money is underpinned by people.

Money isn’t very efficiently designed, it is still a work in progress. And it is already undergoing a change.Whether you like crypto-currency or not, society is now already exploring new ideas about money, and rightly so.

I believe perhaps it is time for us to consider money as an essential basic resource that should become part of universal basic human rights. As I see it, for people today, having access to money is as essential as having access to clean water and air. And we have already established that the value of money is devised by people. Therefore, it is only natural that people should have the right to an essential resource like money. Some would rightly argue that poverty today is a design flaw of money and the larger economy.

So are there ways to re-invent money in a way that it is a better fit for purpose ? I would start the re-invention process of money by underpinning it to people using a universal citizens’ charter that sets up a framework whereby each member of society could agree to allocate each other a sum of money annually in the form of a universal digital credit, an amount that will be enough to fully cover the yearly cost of living of a person in a specific society.

The central bank acting on behalf of the people and the government could allocate an annual universal digital credit to people every first day of the year or, in other words, the 1st of January of every year. This digital credit could be converted into money by the nominated commercial banks holding people’s bank accounts for a small fee. And governments could be allowed to deduct a fixed amount from the money every year to pay for healthcare costs as well as other public services, including basic education.

In this design concept, universal credit will not be a government’s fiscal responsibility, unlike a universal basic income structure. So, people will be guaranteeing each other and allocating each other enough credit as a resource to fund the basic annual cost of living of an individual.

To avoid any confusion with the word credit, the universal credit that we are talking about under the universal citizens’ charter is simply an allocation of resources termed as credit that will be converted by the central banks into regular money to help people fund their annual cost of living. It is not a credit or loan. This is not a liability, it is simply an allocation of resources by society. This will enable the governments to withdraw their inefficient social security and other public spending.

Everyone will be issued their own digital credit ( universal citizens credit ) by the central banks in their own dedicated digital wallet under control of the central banks, and linked to a nominated commercial bank account. So, people will be free to save that universal digital credit, or use it to pay for goods and services. For transactional payment, this credit will get converted into regular money, so intermediaries, especially the payment processing companies, could also make money.

A secure digital wallet managed by the central banks attached to people’s national identity cards, passport or driving license linked to their nominated bank account and their unique taxpayer number will give the central banks and society a better control over the entire process.

In a world where AI will replace hundreds of millions of jobs. The government’s ability to create more jobs through policy initiatives will be extremely limited. This will lead to the widening of the income inequality gap, and the strain on society will only grow deeper. Also, to a large extent, jobs will become pointless in the future.

According to the UN’s latest human development index, overall living standards have declined steadily across 90% of countries. People in jobs are increasingly struggling to make ends meet.

If we accept the premise that the new money is to be underpinned by people, then central banks could create their new digital currency, also known as CBDC, backed by people.

The intrinsic value of the underlying currency could be linked to overall well-being and other human development indices, including life expectancy, education, the environment, tolerance, innovation, among other things. Inline with the universal citizens charter that will be regularly updated.

In the end, an economy is worth nothing without people. The current system is no longer fit for purpose, so it needs an update.