LEVEL VIII: The Three Functions of Money

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

a.) Requirements to replace bank-issued money as a MEDIUM OF EXCHANGE

– Availability

IMPROVEMENT: In exchange for a credible promise of consideration, MONEY 2.0 is always available.

EXPLANATION: Anyone offering goods and services can also issue money.

 
– Stability

IMPROVEMENT: With MONEY 2.0, there is no reason for inflation.

EXPLANATION: Since anyone who issues money must bring an equivalent amount of goods or services to the market, the amount of money in circulation can never exceed the value of available goods.

 
– Neutrality

IMPROVEMENT: With MONEY 2.0, the possibilities of market participants are relative to their economic performance – there are no privileges.

EXPLANATION: A neutral medium of exchange cannot favor either side of a transaction. Since MONEY 2.0 is used on a voluntary basis, impartiality is particularly important. Participants who are discriminated against would simply cease to use MONEY 2.0 as a medium of exchange – as a result, however, certain products and services would no longer be purchasable and MONEY 2.0 would therefore lose ground on traditional money.

 
– Convertibility

ON PAR: MONEY 2.0 can be exchanged for traditional currencies.

EXPLANATION: If currencies are seen as commodities, it becomes clear that a medium of exchange that excludes certain commodities from trade is flawed. As a full-fledged medium of exchange, MONEY 2.0 must therefore be convertible to other currencies as well.

 
– Convenience

ON PAR: MONEY 2.0 is administered by a central authority which provides basic financial services.

EXPLANATION: Just because the participants in MONEY 2.0 issue money doesn’t mean that they also have to administer the currency. Establishing a central currency administration is virtually unavoidable as certain tasks (like confirming members’ identities, IT management or legal representation) simply cannot be performed by the members collectively. To ensure that the administration acts in the interests of all participants, it must be bound by clear principles and act transparently.

 
– Privacy

ON PAR: The participants’ transactions are not publicly viewable.

EXPLANATION: Many transactions are private by nature and could, if exposed, get the buyer into serious trouble (for instance, with an employer, a jealous spouse, the tax authorities, or simply potential burglars). Therefore, an alternative currency system that doesn’t honor privacy would hardly stand a chance against traditional money.

 
– Legal Certainty

ON PAR: All money circulating is anonymized, i.e. all money units are of equal value, regardless of the issuer.

EXPLANATION: As the participants are responsible for MONEY 2.0 collectively, individual sellers don’t need to verify if buyers or original issuers are creditworthy before accepting money. This corresponds with the practice in traditional money.

 
– Usability

ON PAR: MONEY 2.0 is digital only – there are no paper bills or coins.

EXPLANATION: Since electronic payments are already the norm in many countries today, the absence of an analogous payment method is no disadvantage for MONEY 2.0. Also, third-party suppliers can circulate tangible coins and paper bills and make them convertible against MONEY 2.0.

 
b.) Requirements to replace bank-issued money as a UNIT OF ACCOUNT

Contrary to common beliefs, traditional money isn’t suitable as a unit of account since it isn’t stable. The value of traditional money is determined by fiscal decisions and typically decreases over time (a deterioration also known as inflation).

MONEY 2.0 isn’t suitable as a unit of account either, not least because it is designed to foster a variety of competing currencies, and privileging one of them as a unit of account would be inappropriate.

A standard, alternative unit of account can, however, be extracted from the existing inflation data. Thereby, it is not the currency which serves as the unit of account, but the part of the equation representing the actual value – the basket of commodities. Based on the value of the commodity basket, it is possible to create a neutral unit of account which is constant by definition, which can be used to reveal the decline of traditional currencies, and which is also suitable to convert alternative currencies. Goods and services can be priced in this constant unit of account and paid with any currency, be it classical or alternative. An example for such a unit of account is the Rigel (www.rigel.de), valid for Germany.

As today’s methods of calculating inflation (substitution effect, hedonic adjustments, geometric weighting, intervention analysis, etc.) are primarily designed to yield nominally low inflation rates, using the available data can only be a first step – in the long term, the formula to calculate the alternative unit of account has to be further improved upon.

 
c.) Requirements to replace bank-issued money as a STORE OF VALUE

As symbolic money has no intrinsic value, it can only adopt the value of the goods and services which it represents. Thus, the notion that a medium of exchange is a suitable store of value is an illusion – this holds true for both traditional bank money and MONEY 2.0.

For traditional money to “keep” its value despite inflation, it has to “work”, i.e. be invested. By default, however, all investments bear an investment risk. In the current money system, the illusion of a stable store of value is created by unlinking the investment risk from the savings deposits and denying any relationship. If a credit bubble bursts, the general public is made to foot the bill even though it’s the money-holders who should pay up as the money that is unrecoverable was simply their investment money.

By introducing an interest-free alternative money system, this illusion can no longer be maintained as it is no longer possible to make risk-free profits by simply lending money.

« LEVEL VII: Replacing Bank Money Summary »