LEVEL II: Creating Interest-Free Money

Share on FacebookTweet about this on TwitterShare on Google+Pin on PinterestShare on LinkedInShare on StumbleUponShare on RedditEmail this to someone

QUESTION D: On what basis is money issued, i.e. which conditions must be met for market participants to obtain money for circulation?

Yes OPTION 1: In exchange for an equivalent service in the future

If the medium of exchange has no intrinsic value and money is purely symbolic (e.g. in the form of paper bills or as numbers in a digital account), it assumes its value through the goods and services it can buy. Symbolic money is effectively a voucher: As long as a voucher is redeemable, its value reflects the value of the available goods or services. A voucher which cannot be redeemed, on the other hand, is just a worthless piece of paper.

If one considers money creation as part of an abstract barter deal, adequate consideration is both a logical and unavoidable precondition. The money issuer obtains a good or service in exchange for a voucher for a service to be rendered in the future. Just like barter is impossible if one of the parties involved has nothing to offer in return, it is equally impossible to issue money without an equivalent promise of consideration.

In fact, current bank money is already issued in exchange for a promise. The bank only issues a loan if the designated borrower makes credible that he can repay the credit amount, or in other words, render an equivalent service in the future, with which he can earn back the outstanding money at a later time.

It is actually quite astonishing that, to verify this promise, the bank levies a fee that goes beyond the purely administrative work of the bank’s employees, as it is the beneficiary’s promise to repay that gives the money its value and certainly not the bank’s contribution. Also, the most recent money crisis has made it clear that, when push comes to shove, it isn’t the bank which is liable for defaults, but the general public – at least, once the issues assume serious proportions.

In other words, today’s banks lend money to their customers that these have issued themselves and to which the banks haven’t contributed anything other than paper or computer cycles. It is therefore only logical that an alternative currency attributes to the market participants the money they have actually issued.

No OPTION 2: For free

If the market participants are supposed to receive their money without consideration, there are only two possible options:

Either the money is backed by a donor, who is liable for the service promises which it represents – then, however, the donor is the actual issuer of the money since he provides the backing which gives the money its true value.

Or there is no or only a disproportionally small actual value to reflect the money – then the money itself is of no or only lower value since abstract money (in the sense of paper or a digital balance) can only ever assume the value of the real goods and services which it represents.

Typical examples for such a constellation are the internet “currencies” Bitcoin and XRP (“ripples”): The fact that people may be willing to perform real services for inherently worthless units which aren’t backed by a promise of consideration (or at least by any adequate one) is no contradiction. As long as a steady flow of new participants does the same, the illusion of stability remains intact. Stability, however, is thereby reduced to a matter of collective faith: Once the belief that the unsecured units will be accepted by others at equal or higher value is upset, the Ponzi scheme fails, as there is nothing else to ensure the units’ asserted value.

QUESTION E: When must promises be redeemable?

No OPTION 1: At the issuer’s discretion

Issuing money based on a promise that is redeemable only in the distant future is fairly problematic. While money is brought into circulation immediately, additional goods and services are made available only at a considerably later point in time.

As the amount of money in circulation grows in comparison to the goods and services that are actually purchasable, the money supply is inflated and the value of each unit is reduced. The consequences can be illustrated with an example. While the voucher for a chicken, which is redeemable immediately, actually has the value of a chicken, the voucher for a chicken which is only redeemable in a few years, is worth considerably less – not only due to its lower practical usefulness, but also because of the higher default risk.

This inflationary spiral most benefits those who issue the most money since it erodes the amount of goods and services owed by them. A medium of exchange favoring the few by allowing such inflation, however, is neither impartial nor fair.

Yes OPTION 2: In the near future

For money to maintain its value, it needs to be issued in exchange for service promises which are actually redeemable in the near future. Therefore, only those products and services that are either already available, or will become available soon, can be the basis of money creation. On the other hand, the period that may pass between money creation and due date must also give the issuer enough time to actually complete the necessary transactions. Both necessities combined determine the timespan which defines the overall issuing limit. If market participants can issue money up to their economic abilities, then money creation is limited by the equivalent of the goods and services they can bring to the market from the moment of issuing to the point at which they must provide consideration.

With MONEY 2.0, the most time that can pass between money creation and adequate consideration is three months. This timespan can be adjusted in practice – the leeway, however, between practicability (requiring a long enough timespan) and currency stability (requiring a short enough timespan) seems reasonably small – and the fact that banks typically calculate overdraft limits based on three months’ worth of income is hardly a coincidence.

As is common in market economies, the value of a service is determined by supply and demand and therefore matches the price at which the transaction is eventually completed.

QUESTION F: Which market participants can issue money?

No OPTION 1: Only certain market participants – those, for instance, who are particularly well-known or who produce goods that are in everyday demand

If the bulk of participants are barred from money creation, the outcome is similar to today’s banking system. Privileged participants can effectively assume the role of banks, which puts them in a position to extort interest from anyone who isn’t eligible to issue money.

Granting the monopoly of money creation to mass producers also discriminates against niche businesses (i.e. those businesses not offering goods which are in everyday demand) and leads to a substantial distortion of actual professional opportunities.

Yes OPTION 2: All participants

If market participants can’t issue a medium of exchange themselves, they depend on borrowing money from other participants. This, however, creates the very imbalance of power which is the breeding ground for interest.

Only granting the right to issue money to all participants ensures that the medium of exchange remains interest-free and is always available where needed.

QUESTION G: Should MONEY 2.0 be anonymous (i.e. all currency participants issue identical money), or individualized, in the sense that money shows the issuer and can only be redeemed with them?

No OPTION 1: Individualized

Individualized money is only ever fit for circulation if the money recipients know the issuer and regard them as trustworthy. Allowing all market participants to issue individualized money would therefore pretty much restrict transactions to everyone’s own circle of acquaintances, and payments to strangers would only be possible at a severe risk discount – if at all. As a result, the practical value of MONEY 2.0 would mostly depend on the issuers’ public reputation, rather than their actual creditworthiness.

Yes OPTION 2: Anonymized

In a system too big for everyone to know each other, money creation is really only possible under a common, anonymized brand, as individualized money simply wouldn’t be fit for circulation.

If all money is equal and cannot be traced to individual issuers, the damage of defaulting promises cannot be pinned on any individual participants either. The consequences of defaults must therefore be borne by all currency participants collectively.

The homogeneity of the money issued lends stability to MONEY 2.0, as all units have identical value. Anonymous money also leads to a substantially shorter time of circulation. Unlike individualized money, which must eventually return to the issuer to be redeemed, in MONEY 2.0 all units can be used to satisfy any promise to repay.


– To create an alternative money system in which all market participants can issue money under a collective brand, and which doesn’t require a higher authority for implementation.

– To limit money creation with each participant’s ability to render equivalent service in the near future.

– To ensure that the alternative system is used instead of the current money system, therefore REPLACING it.

« LEVEL I: Basics LEVEL III: Administration »