Alpha Economic Model

About Money

Introduction
About Money
About Markets
WIR Economic Model

Introduction

Fiat Money ("Cash") is the most sought after commodity that exits in the marketplace today. But not many people no that much about it.

It is quite clear that no nation can become great, or communities prosper, without an efficient monetary system to facilitate transactions and activate the potential wealth of the community, lifting the gross national product.

Adam Smith once said “The object of the game is not money, but playing the game itself” Although the object of the game may not be money, the game is played with money so it is crucial that if you want to be a player in the game, you must know about, and understand what money is, the many forms of money and how to use them in the market to your advantage.

Monetary Systems

Monetary systems are simply structures we have, to enable us to use money. Money’s purpose is to serve as a medium of exchange. Although money is this straightforward, it is how a monetary system is created that determines how well its use will benefit us.

There are essentially two types of monetary systems, a debt-free monetary system and a debt-based monetary system. 

A debt-free monetary system basically removes money making banks from the equation and allows people to sell and purchase with a privately created money that is free of interest.

A debt-based monetary system allows people to sell and purchase with money that is issued to them as debt by banks.

Many people are now using debt-free monetary systems in parallel or as an alternative to debt-based monetary systems.  

Debt-Based Fiat Money ("Cash")

Fiat money, or more commonly known as Cash is a debt-based money. Cash was primarily invented to fuel trade and commerce and it has for some time, been the most highly sought commodity in the marketplace.

There are two forms of fiat money. One is paper notes and coins and the other is credit money which is created by banks when they extend loans.

Inherent problems with the insufficient supply of this commodity is rendering it increasingly less useful to fulfill the role for which it was originally intended, and also one of the main causes of most countries’ current and ongoing economic dilemmas, creating high unemployment, low productivity and economic growth and business bankruptcy. 

Debt-Free Complementary Currency

In this video Bernard Lietaer argues that the monoculture of money is what creates economic instability, leading to liquidity crises.

He calls for a greater diversity of alternative currencies, citing innovative and enormously successful initiatives like the Lithuanian Doraland Economy, the Torekes in Belgium and Switzerland's famous alternative currency, the WIR managed by the WIR Bank.

Learn More

 Debt-Free Private Issue Money 

One cannot overview the merits in the use of a private issue, debt-free money without referring to Silvio Gessel.

Silvio Gessell was a German entrepreneur who moved to Argentina for business in the late 19th century, he witnessed a massive financial crash in 1890 that convinced him that money was behind the world's economic problems: poverty, inequality, unemployment, stagnation. 

The problem, Gesell believed, was that money served two roles that often came into conflict: It was a way for people to store wealth, and it was the thing everybody needed to conduct business. The fact that money could store wealth meant its holders had a reason to cling to it, especially in crises like the one he saw in Argentina, when opportunities to safely put that money elsewhere looked grim. It was a typical story. When people got scared, they hoarded cash and brought business to a standstill. It led, Gesell said, to a situation of "poverty amid plenty."

Gesell wanted to create a new kind of money — a money that would "rot like potatoes" and "rust like iron" so no one would want to hoard it, a money that was "an instrument of exchange and nothing else." And the crazy part is that he did create it.

Through a series of pamphlets, articles and books, Gesell inspired a worldwide movement that introduced a completely new form of money. It is one of the most fascinating, and largely forgotten, stories in economic history. 

More commonly known proponents in the use of private issue money are Professor F.A. Hayek noble prize winner in economics 1974, and Professor Milton Friedman, Nobel prize winner in economics, 1976

Following is a quotation from Professor Friedman on private issue money, which largely derives from the works of Professor Hayek. 

“Increasing interest has been expressed in recent years in proposals to replace governmental issuance of money and control of its quality by private market arrangements. 

One set of proposals would end the government monopoly on the issuance of currency and permit its competitive issue. Another would eliminate entirely any issuance of money by government and, instead, restrict the role of government to defining a monetary unit.”

Hayek proposed that all special privileges (such as legal tender quality) attached to government-issued currency be removed, and that financial institutions be permitted to issue currency or deposit obligations on whatever terms were mutually acceptable to the issuer and the holder of the liabilities.

He envisaged a system in which institutions would in fact issue obligations expressed in terms of purchasing power either of specific commodities, such as gold or silver, or of commodities in general through linkage to a price index. In his opinion, constant-purchasing-power moneys would come to dominate the market and largely replace obligations denominated in dollars or pounds or other similar units and in specific commodities …

As Hayek has put the case: “There is no reason whatsoever why people should not be free to make contracts, including ordinary purchases and sales, in any kind of money they choose, or why they should be obliged to sell against any particular kind of money. There could be no more effective check against the abuse of money by government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence….

… There is no hope of ever again having decent money, unless we take from government the monopoly of issuing money...

… I am more convinced than ever, that if we ever again are going to have a decent money, it will not come from government. It will be issued by private enterprise, because providing the public with good money which it can trust and use can only be an extremely profitable business, it imposes on the issuer a discipline to which the government has never been and cannot be subject. It is a business which competing enterprise can maintain only if it gives the public as good a money as anybody else.”

“I am convinced that the hope of ever again placing on government this discipline is gone …

…..My conviction is that the hope of returning to the kind of gold standard system which has worked fairly well over a long period is absolutely vain. Even if, by some international treaty, the gold standard was reintroduced, there is not the slightest hope that governments will play the game according to the rules… We must hope that some of the more enterprising and intelligent financiers will soon begin to experiment with issuing private money. The great obstacle is that it involves such great changes in the whole financial structure that, and I am saying this from the experience of many discussions, no senior banker who understands only the present banking system can really conceive how such a new system would work, and he would not dare to risk and experiment with it. I think we will have to count on a few younger and more flexible brains to begin and show that such a thing can be done.”

Hayek and Friedman's theories on money are reinforced by privately created monetary systems adopted in the past, when conventional money was either non-existent or short in supply. This is reflected in many instances throughout the history of many growing nations. 

Past Use of Private Issue Debt-Free Paper Money

In 1851, a Scottish immigrant to New Zealand, arrived in the settlement township of Dunedin, in the province of Otago, and established a general store.

Macandrew had brought with him bank notes he had produced prior to his departure from England, with the intention of establishing a local bank upon settling in New Zealand, to be known as the 'Bank of Otago'.

This forward thinking merchant knew there had been no arrangements made in Otago to establish a local bank, like settlements in the North had established. Nor was there any existence of an efficient currency system in the Otago Sovereign. 

On 30th April 1851, a letter appeared in the Otago Witness, the province's local newspaper, where the writer emphasized the benefits and need for the establishment of a local bank and currency system for Otago.

Letter Published on April 19th, 1851 in The Otago Witness, Dunedin, New Zealand.

"I am sure it cannot be necessary for me to descant at any length as to the effect which would be produced by the circulation of £5,000 or £10,000 judiciously distributed among the honest and industrious tradesmen and agriculturists of the colony. It would be to industry and labour what fuel is to the steam engine, --- setting all its wheels and parts in motion".
Reference: https://paperspast.natlib.govt.nz/newspapers/otago-witness/1851/04/19/1 (Column 3 and 4)

However, under the conditions of existing New Zealand Bank Ordinance at the time, Mac Andrew’s Bank of Otago failed to get permission to form. Otago was left with the problem of having no bank or currency system and eventually had to wait for over nine years for a formal banking facility to become available.

On October 30, 1852 the Otago Witness published the following request from 40 Otago settlers, addressed to James Macandrew & Co., requesting that the business issue "Promissory Notes redeemable for goods or produce" at Macandrew's store.

Advertisement Published on Oct. 30th, 1852 in The Otago Witness, Dunedin, New Zealand.

To Messrs. James Macandrew & Co.,

Gentleman,

We the undersigned applicants for shares in the Otago Banking Company, and others interested in the Settlement, feeling that there is little chance of the Otago Banking Company obtaining a Charter until the sitting of a popular House of Representatives and seeing that, in the meantime the Settlement is suffering serious injury from the want of a circulating medium in some degree proportionate to the actual wealth of the colony, and to the requirements of industry, beg respectfully to suggest, that in the meantime, and until the proposed Bank is fairly started, your firm might to a great extent obviate the depression which industry is now suffering under by adopting the system which has been found to work well in other settlements.

We mean that of issuing Promissory Notes for small amounts at short dates, it being generally understood that they would at any time be taken as Cash in payment of goods or produce at your store.

We feel assured that you could carry out the proposal with perfect safety yourselves, and to the great advantage of the public. Should your views on this subject lean you to adopt our suggestion, we need not say that you will have our perfect confidence, and we believe that of the public generally.

Trusting that you will give this matter your best consideration.

We are, Gentlemen,

Your most obedient servants.( Here Follows 40 Signatures)

NOTICE: In terms of the foregoing Requisition, and until the establishment of the Otago Banking Company, the Undersigned are prepared to issue Promissory Notes for small amounts at short dates, against produce, stock, or other available securities, which Notes will be taken in payment of goods at their Store at any time.

James Macandrew & Co.
Reference: https://paperspast.natlib.govt.nz/newspapers/otago-witness/1852/10/30/2 (Column 3)

Supporters of the system considered Macandrew's notes would "obviate the depression which industry was suffering" and, therefore, would "be of great advantage to the public of Otago".

There were some local business owners who objected to Macandrew's Promissory Notes being in circulation.

However, as the Otago Witness rightly stated on 6th November 1852 (as per following extract of article), "the issuance of Promissory Notes redeemable at Mac Andrew's general store was a private matter and the public could refuse to accept them if they had no confidence in their worth.“

Extract from The Otago Witness, Dunedin, New Zealand Saturday, Nov. 6th, 1852.

“A Requisition to Messrs. Macandrew & Co. to issue Promissory Notes, published as an advertisement in our last number, has called forth a document from other parties, who consider themselves aggrieved.

For our own part, we cannot see that it is anything but purely a private affair. If Messrs. Macandrew chooses to issue Promissory Notes, and the public chooses to take them, we do not see what we have to do with the matter.

All persons may conduct their commercial transactions upon the footing that suits their own views or convenience; and any persons advertising that he will not take his neighbor’s notes is rather a gratuitous piece of information, and, if generally practiced, would become a singular method of conveying censure. For our own part, we can see many advantages to be derived from this increase of a circulating medium.

It is quite true that such a system might be stretched to an injurious extent, and we should have preferred seeing the notes of the Otago Banking Company in circulation; but as the Governor seems determined to pay no attention to the wants of the community in this respect, the next best thing is for them to help themselves; and Messrs. Macandrew, after having in vain endeavored to carry the first object - being parties most eminently concerned, as pretty well the only buyers and exporters of produce, - have taken the second course as a remedy, - a course which has for many years been adopted in Nelson with beneficial effects.

It is quite clear to us, that no country can become great without a system of banking, which will facilitate mercantile transactions and enable men to work upon the full extent of their capital, be it in goods, houses, lands, stock, or cash.

As matters at present stand, if it costs a flock master £100 to shear his wool or a farmer £100 to gather his harvest, he must retain that amount idle from seed-time to harvest to meet his expenses at the end of the year.

Place fifty men in this position, and they must, in the aggregate, have a large sum useless which might otherwise be advantageously employed in raising produce for exports, or you compel them to hurry their produce into the market after harvest, and take such prices as a wily speculator may choose to offer.

We are decidedly of the opinion that a system of mutual credit, within legitimate bounds is essential to the development of the resources of the Colony. That credit may be carried to an evil extent, is no argument against its legitimate use. In this matter we speak upon principle; we do not advocate one man's notes or another's; the public are the best judges of such a matter.”
Reference: https://paperspast.natlib.govt.nz/newspapers/otago-witness/1852/11/06/2 (column 3)

The Otago Witness further pointed out that the issuance of Private Issue Promissory Notes at the province of Nelson over several years had produced "beneficial results to fuel trade".

James Macandrew enjoyed the confidence of the majority of Otago settlers, and his promissory Notes were acceptable to most of the public as a method of payment.

By August 1853, Macandrew claimed that he had provided nearly a third of the circulating currency in Dunedin, since his notes had been issued some ten months earlier. Between 1848 and 1860, some six private issues of paper money were issued in the provinces of Nelson, Otago and Poverty Bay.

Private Issue Money notes were circulated because of the lack of sufficient *Bank Notes, either since no bank existed in these districts, or because trade demanded more currency than was issued by existing banks. Because of the shortage of currency in the early settlements, and the lack of banking facilities, the issuance of promissory notes, also known as private issue paper money, by reputable local merchants was in many instances a matter of necessity rather than choice.

Prior to the creation of New Zealand Reserve Bank in the early 1930's, local banks issued their own Bank Notes. * Bank Notes were defined as paper money originally convertible to gold on demand from the issuing bank.

For the first time in New Zealand's history, the new Reserve Bank Decimal notes issued in 1967, with the introduction of Decimal Currency, no longer promised "to pay on demand", but simply stated that "This Note is Legal Tender for $….." (It’s denoted value).

The pretense that Reserve Bank Notes were convertible to gold or silver was finally abandoned. The decimal notes recognised the situation which had in fact existed since 1914, namely that **Legal Tender is taken on trust and has no backing of either gold or silver. Legal Tender is defined as a currency which, according to the law of the country of issue, must be accepted in payment of a debt. (Indeed, this law is the only variable that really gives it any value.)  

The Guernsey Debt-Free Money Experiment

Below is a tale of the simple, but effective, action taken by an unsophisticated and isolated community to solve its money problems. They just used their commonsense - something which eludes modern 'financial wizards'.

In 1815 the Channel Island of Guernsey was in a sorry plight. The roads were nothing more than deep cart tracks and the town was poorly paved and unattractive. The public marketplace needed attention, but worst of all, the sea was fast encroaching onto the land due to the poor state of the dykes.  

At that time, the States (Parliament) debt of £19,373 carried an annual interest charge of £2,390, but the annual revenue was only £3,000. While a hefty sum was needed to save the island from the sea and make it fit to live in, the net income was only £600! The dyke project alone was estimated to cost over £10,000 and the market at £6,000.  

A committee was appointed to investigate the matter. Fortunately, there were no financial experts among them, just ordinary commonsense people. They found that further tax on an already impoverished population was impossible.

To borrow money from the mainland banks would incur heavy debt charges, and it was abundantly clear that whatever sum they may borrow, although they paid interest on it for years, the debt itself would never by repaid.

The following year the committee reported and made an historic recommendation - that property be acquired and a covered market erected; the cost to be met by the issue of States notes to the value of £6,000. The first issue of notes was made that same year for the purpose of coast protection - an amount of £4,000. The report stated, "In this manner, without increasing the States debt, it will be possible to finish these works, leaving sufficient money in the Exchequer for other needs.”

By 1829 the States note issue in circulation was over £48,000, and by 1837 it was over £55,000. By means of the note issue, not only were all necessary works accomplished, but the island was not a penny poorer in interest charges. Also, the increased money in circulation stimulated employment and trade to a degree of prosperity undreamed of. Attracted by this new real wealth on the island, two banks saw the opportunity to cash in, and did so, opening their doors in 1827 and 1830. These banks soon flooded the island with their own bank notes (distributed by way of private loans).

The States, fearing that its own note issue would be prejudiced if this continued, appointed a committee to confer with the banks. Truth is stranger than fiction, for as a result it was the States which eventually withdrew £15,000 of its notes from circulation, not the banks. Furthermore, the States had to agree to limit its issue in future to a total of £40,000. Thus, the banks effectively stifled all further States note issues.

This agreement remained in force until 1914, when British Government restrictions were imposed on all banks. The States, however, were under no such limitation and were able to increase its circulation so that by 1918 it had risen to over £142,000. Since that time, Guernsey has never looked back. Her note issue has risen in measure with her prosperity, and in 1958 there were £542,765 value of notes in circulation. In 1937, the States notes valued at £175,000 cost only £450 for printing and handling, yet a loan of the same value would have cost some £11,383 annually.

During the entire period of issue there has never been a threat of inflation and one crude attempt at forgery. This is one of the few recorded successful attempts by a community to stand up to and outwit the banks. It could still be done today!  

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