Here's what I see as important design principles for mutual credit in the Common Good Economy (in addition to the overall Design Principles):
Duality. The Common Good Economy will handle internal and external finance differently.
Internal. We will use a mutual credit system for transactions among Member/Owners (that is, when one Member pays another) and for financing our initiatives as Common Good Communities (for example, when we as a Community build a power plant).
External. We will use a conventional, FDIC-insured, community bank (Common Good Bank) to manage transactions with non-Members, as well as loans for such transactions.
Hybrid. We will use a combination of mutual credit and conventional bank finance for initiatives that involve both internal and external transactions.
Consistency. All Common Good Commities will share the same fundamental operational principles and infrastructure (outlined here, defined in detail elsewhere).
Reality. As much as possible, accounting in the Common Good Economy will reflect reality. In particular, money will not be treated as an intrinsically valuable commodity to be bought and sold or invested at a profit.
Practicality. Money will be created when and where it is needed. Specifically, individuals and the Community as a whole will spend money into existence by making payments that result in a negative account balance. As much as possible, such deficit spending will consistently be approved to the extent that the spender (the individual or Community) has the capacity thereby to accomplish an agreed-upon socially productive initiative.
Inspirational diversity. Each Common Good Community can, on its own deliberate initiative, creatively augment (but not usurp) the fundamental operating principles, by adopting specific contractual agreements among its members. Successful local enhancements will be considered for system-wide adoption. Such innovation is healthy both for the system as a whole and for adaptation to local conditions. Of course all innovations (like all Common Good Economy operations) must be transparent.
Sustainability. Each local mutual credit system MUST be self-supporting. That is, it must not be a burden to other Common Good Communities. Liabilities (including any mutual credit that the community creates) must be balanced by measurable Assets — either tangible (such as a building) or intangible (such as full employment or public health). That is, ASSETS >= LIABILITIES. The difference (NET ASSETS) can and should be very small, but not negative. The quality of a Community's assets will be reviewed quarterly by a Common Good Best Practices Board.
Money creation. Common Good Communities will create money by allowing both individuals and the Community itself to spend it into existence.
Individual spending. Grants and loans to individual members — whether through the bank or through the mutual credit system — will be structured as lines of credit. That is, the grant or loan will begin when the borrower spends more than the amount he or she has on deposit. (Loans have to be repaid, grants do not.) Ultimately, all loans — even through the bank — will be interest-free (in real terms) or negative interest (the borrower gets paid for taking initiative). This requires the community to have a source of income other than interest on loans (see "Income sources", section #7.4 below).
Community spending. Just like any individual Member, each Common Good Community as a whole will have an account. And just like any individual Member, a Common Good Community can create mutual credit by spending it into circulation, as a line-of-credit loan from the overall Common Good Economy. (The amount of mutual credit that a Community and its members can spend into existence is limited as described below in section #7.3.) For example, a Common Good Community or group of Communities can create mutual credit to purchase saleable or income-producing assets, such as a local power company. Money created in this way is a formal liability and must be balanced by equivalent (or greater) assets — specifically something that has economically measurable value to the Community (such as a building or universal health care) or expected future value (such as a new business), as required by the Sustainability requirement, section #6 above. Ultimately this could even include a general dividend or "basic income" or "Compensated Price" payment to the Members, provided that the resultant increase in economic activity results in a corresponding increase in the quantity or value of the community's assets. (If the Community owns a local transit system, for example, and the general dividend results in people traveling more because they can afford to, then the value of the transit system asset goes up.)
Limits. There are two transgressions that a Common Good Community could possibly make, that would adversely affect other Communities: (a) use up too much external credit or (b) dilute the value of mutual credit in the overall Common Good Economy by making too many bad investments. Problem (b) is handled by the Common Good Best Practices Board, as mentioned under "Sustainability", section #6 above. Problem (a) is handled by limiting the amount of mutual credit created.
Minimum. A Community need not make any mutual credit grants/loans at all, except that every year the Community must spend into existence an amount of mutual credit greater than or equal to its net profits, as grants to local, national, and international nonprofits.
Maximum. How much mutual credit can a Common Good Community and its Members spend into existence? As much as they need, provided that it keeps circulating locally and does not get exchanged for external credit that leaves the community never to return. In addition, the Community can create quite a bit of mutual credit that DOES get exchanged for external credit the leaves the community never to return: up to the amount of mutual credit on deposit (the amount of deposits that Members have explicitly agreed will not be FDIC insured — that is, their membership share, initially 10% of the total deposits).
Increasing basis. In any Common Good Community, the minimum percentage of each Member's deposits held as mutual credit will increase automatically. At the start of each quarter, the actual ratio of mutual credit deposits to total deposits becomes the new minimum (unless it is less than the old minimum). That is, mutual credit creation and Community-wide acceptance of uninsured ownership go hand in hand.
Income sources. Each Common Good Community is sovereign. As long as it does not inconvenience the rest of the Communities (or the rest of the world), each Common Good Community is free to decide for itself how much money to create and spend and what to spend it on. Each Community is also free to decide for itself how to manage its income and spending so that its Liabilities are balanced by Assets (see the Sustainability requirement, section #6 above). Here are some of the options for Community income:
Inflation-rate interest on loans. This is not actually income, since the amount to be repaid is equal in value to the amount borrowed. However, it is a hedge against loss and combined with "Demurrage" (see below) it results in a profit. Higher, for-profit interest is not allowed in the Common Good Economy.
Demurrage. That is, paying a sub-inflation-rate interest on mutual credits, just like conventional banks do. [UPDATE: This will not be allowed.]
Surcharges on loans through the bank — that is, on loans to a Member to pay a non-Member. For example, whenever a Member borrows by writing a check to a non-Member, the Member gets charged a flat or percentage fee, say, 2% of the transaction amount.
Voluntary tithes. All member businesses contribute a percentage of their gross income (income before any expenses are subtracted), whether or not they ever get a loan. The business can choose the percentage (0% or more). For income from transactions with other members, half of this percentage goes directly to the customer, as a rebate (this modifies and replaces earlier designs for "merchant rebates"). [UPDATE: This will be encouraged in all communities.]
Tithes for loans. The Community can require businesses to contribute a certain percentage of their gross when they get a mutual credit (internal) loan. The percentage would be set so that the community could recover its investment within a sensible time frame.
Other. The Community's options are not limited to this list.
I haven't been able to find a forum discussion about government rulings, advisements, etc in regard to mutual credits usage and members tax obligations. Is this mutual credit activity under the auspices of the 501-(c)(3) non-profit organization?
Does the CGF use of mutual credit invite a potential "elephant in the room"assuming the banksters objections?
Does Ma DOR follow IRS guidelines for 501-(c) (3) mutual credit organizations like CGF?
I do know that with Timebanking USA, the IRS has issued guidelines for activities that it considers "out of bounds" i.e., selling goods/profit making in a mutual credit system. There are other guidelines as well, but the IRS has never ruled as to whether it considers timebanking a tax-free enterprise ( to my knowledge.)
I'm done for now.
(I must have too much time on my hands to be writing this. LOL)
I have updated the "Limits" section (#7.3) in an effort to make it clearer. However, the whole issue of how mutual credit relates to bank deposits, external credit, circulation, grants, loans, assets, inflation, and risk needs to be expanded and clarified in a separate document, with diagrams and examples.
I agree that we need a separate document that can go into some detail on how money works in an economy. For a long time in American history (basically up until 1913) the entire expenditure of the Federal Government was paid for out of import taxes, custom fees, etc., because the Federal Government was concerned with regulating the US economy by controlling imports and exports. Will the Common Good Bank have a similar role to play between our economy and the rest of the economy? The question not mentioned in William's post is whether a difference in value will arise between the money the Common Good Communities will create and Federal Reserve money. Our challenge will be to create the right amount of money (mutual credit). If we do, and we maintain the value of our money, because it is the right amount (enough to allow the available talent to create sustainable value and not more than is needed to properly represent the value of the available goods and service) then our money will become more valuable than Federal Reserve money and we will have the opposite problem than the one William is addressing. I just wanted to put that out there as a touch stone for the discussion about the how to manage our economy. I also think it will be helpful to consider the different roles of creating money to capitalize projects that use cultural values to create material values and creating money by granting it to projects that consume material values while creating cultural values. Money as means of exchange can be regulated by creating and extinguishing money while capitalizeing and granting. So, the need for real research is made evident.
If you want to help with this research please let me and William know!
I have updated the "Limits" section (#7.3) in an effort to make it clearer. However, the whole issue of how mutual credit relates to bank deposits, external credit, circulation, grants, loans, assets, inflation, and risk needs to be expanded and clarified in a separate document, with diagrams and examples.
Post edited 6:16 pm – March 8, 2011 by Richard Todd Chinnock
In the Limits section 7.3 I am not sure what risk we are wanting to protect us from. Perhaps the question should be: What risk do we see that we would need to protect ourselves from by limiting the amount of mutual credit that we can issue?
Is there a principle that issuing mutual credit is inherently risky? In what way? Is the Common Good Account, the one from which we issue mutual credit for things we decide we want as a community, more risky than individual credit lines?
Are we saying that if we as a community decide through a democratic process that leads us close to consensus that there is something worthwhile that we should fund, that we are placing the entire Common Good Community at risk? Are we saying therefore that the risk can be only 10% at the beginning and that it can increase quarterly as we gain experience? Or is the risk somehow related to the ratio of external (federal reserve) credit to CG mutual credit?
Managing risk is a design principle, but is using a percentage a design principle? Since risk is a fairly well understood principle is it not only necessary to include the risk assessment in the way we evaluate a project. It seems to me that even an increasing percentage places an artificial limit. It is as though we are saying that we can't trust each other to make good decisions. Perhaps the limit should come from a discussion with more people, and perhaps the reasons for the limit need to be discussed more thoroughly.
I like it and have modified the proposal accordingly.
The cost of processing transactions is unrelated to the amount of the transaction.
Yes. Nonetheless, I think Communities should have the option of providing a strong incentive for spending within the Common Good Economy (rather than external spending). Of course a flat fee should also be an option, so I have modified the "Surcharge" line accordingly.
I have also added (in green) in the "Limits" section (#7.3) a way for the minimum "at risk" percentage to steadily increase as Communities choose to accept a greater ownership stake (and the concommitant responsibility and risk) by creating mutual credit. That minimum percentage begins at 10% (when the proportion of mutual credit in the system is 10%) and approaches 100% as the proportion of mutual credit in the system approaches 100%.
Sustainablility: Review is an excellent idea. It has to do with transparancy and learning as we go. It has to do with governance and citizenship. What we need to remember is that the attitutude is not that the Oversight Board has power over your Common Good Community and you should be afraid of what they might do to you, but rather, the attitude needs to be that we are all in this together and we want to develop best practices that will allow us to get what we have decided we want in a way that takes as much of the consequences of doing it that way into account. The CGB is a bottom up organization based on our capacity to make the transition from consumer to citizen. Citizens want to know. I suggest that we call it the Common Good Mutual Credit Best Practices Board.
Surcharge: The cost of processing transactions is unrelated to the amount of the transaction. Why a percentage? This is what it costs per transaction, the more transactions you do the less we will charge per transaction.
Rick and I spoke yesterday about the need for clarity about what happens when most of the money in the Common Good Economy is mutual credit rather than external credit. That's where we want to go, so we had better be prepared for it.
While driving home I realized that we simply need to adopt the insured/atrisk (FDIC insured deposits vs. Common Good Bank stock) duality into our mutual credit system. Members will hold the at-risk portion of their deposits (the minimum being 10%) either as Common Good Bank stock or as at-risk mutual credit. The at-risk mutual credit is an ownership share in the mutual credit system. The Member gets an inflation-rate return on that portion. In fact, from the Member's point of view, that portion of mutual credit will be indistinguishable from stock.
Interestingly, the amounts that the Member does not explicitly put at risk were put at risk by some other Member — either as stock or as at-risk mutual credit, since the amount of mutual credit created is limited to the total amount explicitly at risk. In other words, the "insured" part of the Member's mutual credit is insured by the other Members.
It is very difficult to image what the consequences of money being scarce are. Unemployment, for example, is a consequence. There is an awful lot of work that needs to be done to create the kind of community we will be deciding we want, but there is only a tiny fraction of the money needed to pay for all that work.
What happened to craft work? We can't afford it. Why? Not enough money to pay for it, even though we would like more art and craft in our lives. There are not enough community activities in our lives, all the public spaces are private, the mall is the social center, and there are no "community" activities there. We could spend many tens of millions of dollars in Great Barrington creating and maintaining a commons, many available spaces for community celebrations, and the community cohesiveness, the relatednedss that would evolve from that would be the community spirit and resilience most of us long for. If our Common Good Community were to decide to spend the money into existence to create that common space and do it almost entirely with our ability as a community to replace what would otherwise be imported, the standard of living in Great Barrington would go way up! We can trust the Common Good Community to decide to do things for the common good that are off the charts in our current scarcity thinking, but which are entirely reasonable and supported by the human potential. For example, it has been calculated that during the middle ages, when market money meant that there was never a shortage of money with which to trade real goods and services, people spent about 14 weeks a year on providing for their material needs, the wealth differential was about 11 to 1 and people spent most of their time celebrating, going on pilgrimages, building cathedrals and creating a high culture we still admire today!
Hmm. If I understand correctly, you do not agree with me that the buyer and seller should get some of the surplus. They should get some of the surplus, because the transaction itself is a service to society. We WANT the transaction to happen. So there is no shame in rewarding that activity. In fact, if we removed the entire surplus, there would by definition be no motivation for either party to engage in the transaction and the transaction would simply not happen. So that question is moot.
Wrong Time and Basis
You are proposing that we recognize a higher standard of living due to the surplus and create some additional money to represent that increase. This would be partly sideways and partly backwards.
Sideways. There is no need to monetize a higher standard of living. Money is a medium of exchange not a measure of societal wealth. We need more money to facilitate more transactions. Will people want to produce and consume more stuff as the standard of living goes up? Will we want to engage in more and more transactions with each other? I don't know. But my intuition is that we will want to maintain a steady balance of interaction and time alone. So a rising standard of living is no excuse for creating money.
Backwards. Our standard of living can rise because there is already enough money in circulation to facilitate transactions (giving rise to the surplus). We need to create the money first, BEFORE the transactions happen that give rise to the higher standard of living. We can do this if we always create money when and where it is needed, rather than after the fact through some semi-arbitrary channel (such as a grant or general dividend), in reaction to some perceived overall trend.
Next Question(s)
So now the question is how to identify the surplus.
If we agree on who gets the surplus and if we agree on when and where money will be created, then yes this is the next question. It becomes important mostly as a wonderful opportunity (rather than a necessity), since the surplus is already properly represented and improperly but not horribly distributed.
Actually there are two next questions. The other is: how to get part of the surplus away from the buyer and seller. I think we need to answer both questions together, because once the transaction is complete the surplus is already completely monetized and distributed. Part of the surplus is in the pocket of the seller (the overpayment). The rest is an unspent amount in the buyer's account (the underpayment). It is too late to monetize the surplus some other way. But perhaps not too late to redistribute it.
All of the possible ways that come to mind, for how to transfer the surplus from all the buyers and sellers to the community as a whole, boil down to the same thing: taxes. The questions are just: who pays and how much. Ideally, I believe, we want the buyer and seller each to sacrifice a little of the surplus, as much as possible, but little enough so that they are both still quite content.
The Real Issue
But backing up a step, the real issue here is who should decide who pays and how much. I believe that these questions should be decided by the only people who have the relevant information: the buyer and seller.
Structure
But how can we make that easy, so that we don't have to make an altruistic judgment every time we buy or sell something? Here are two ideas:
Experimentation. Set different official tax percentages for different goods and services, starting small. Keep increasing the percentage until people squeal.
Laziness and Trust. In our First World economy, where prices are generally set rather than haggled, let the sellers make a voluntary contribution to the community, structured as an ongoing percentage of their gross. Let each seller adjust that percentage so that the seller is happy about what the seller is giving to the community and receiving as compensation, and so that (in the seller's informed judgment) the customers are optimally happy both because they are getting a good deal and because they are patronizing a business that supports the community financially. Of course the buyers participate in setting the percentages indirectly by choosing where to shop.
I think that in any case we will want a combination of these two systems, using official tax percentages to at least to diminish temptation toward consumption that carries a high societal cost, such as consumption of alcohol and oil.
So now the question is how to identify the surplus.
My thinking is
that the surplus is only quantifiable over time. The Sovereign account
would account for the surplus. If you want to know how big the surplus
is now, then the mortgage is a good starting place. The surplus is the
total of the interest, the 50% + going to the time value of money.
What I am thinking, and what I like about this new situation in which we
are on the same page, is that we get to puzzle this out together. My
thought is that the surplus is due to human nature, the complexity of
the economy, and the increase in intellectual capital (spirit)
continuously being incorporated into the economy. I have thought of it
as resulting from the fact that we are all together in a complex economy
in which we all do for each other. In other words the increase is due
to all of us and should go to benefit all of us. The reason I think
this, is that the transactions that give rise to it are all satisfied as
individual transactions. Trying to quantify the surplus in each
transaction introduces a negotiation into it which would rightfully be
part of the original consideration: at this price will I be better off,
but I am satisfied at the stated price, so why see the specific surplus
then? What I am getting at is the aggregated effect of the surpluses
from each transaction is the source of the rising standard of living,
the continual improvement in the economy that one can so easily
observe. In order to keep prices stable one would need to increase the
purchasing power of the people with a dividend. What has been served
by savings and investments — and what gives rise to the justification
for the time value of money — can be done by the common good community,
and eventually by all of them together. The transition is the hard
part! Eventually we all enjoy the fruits of our being together in a
complex economy in which we do things together and we can get away from
wage slavery and being compensated for our labor. WE ARE HAPPIEST WHEN
WE ARE WORKING FREELY OUT OF OUR INSPIRATION. WE ARE HAPPIEST WHEN WE
ARE RECOGNIZED FOR THE WORK WE DO. LETS GRANT EACH OTHER OUR
LIVELIHOOD. ISN'T THIS IS WHERE WE WANT TO GO? Because I am a human
being and have a need to consume goods and services to live a dignified
life, I should be given enough money to take care of my basic needs.
Because my work has made a wonderful contribution to the common good
that is recognized (and quantified) by my community, I can accept a
grant that takes me a little to a lot above basic needs. The McArthur
Genius Grant is a good example.
I would distribute a good part of the surplus as GRANTS recognizing special contributions.
I would also put out there that the surplus arises because of us and we decide what to do with it to benefit all of us.
HOORAY, I am really happy to be able to write all that!
About the "surplus from exchange". Something exciting happened yesterday as I was talking with Rick. We were agreeing that neither of us understood that crazy concept (which we know is somewhat central to your view of the reality that monetary accounting must reflect) and the idea continued to seem completely bonky and irrelevant. We also noted that you usually turn out to be right.
Not So Crazy
So I pushed us a little harder in the conversation to understand. And suddenly there it was! I saw the truth in it. I see now how there is an inherent surplus in every transaction. I see how that surplus has been stolen in our conventional economy in the form of investment income (the German economist Margrit Kennedy calculates it as around 50%). And I see why that surplus needs to be understood and recognized in the way we manage financial accounting in our society.
The key to my epiphany was the concept of sales tax. Every time you buy something in Massachusetts, you pay 6.25% more than the seller actually gets. (Figuring in the 50% or so that needlessly goes to investors, it's actually about 56% typically.) This means that the goods or services are worth at least that much more to me than they were to the producer. Another way to look at this is to recognize simply that the social cost of production is less than the consumption value. The difference is, in some sense, surplus value.
Haggling
In the absence of sales tax and investment income, a buyer and seller can agree on a mutually satisfactory price that is anywhere between what the seller is happy to accept and what the buyer is happy to pay. Sometimes the bulk of that difference goes to the buyer, sometimes to the seller — depending on how the haggling goes. The whole purpose of haggling, from a societal point of view, is to set the price near the middle of that range, so that the buyer and seller split the satisfaction (surplus) evenly.
It's Already Accounted For
The next question, then, is how should the surplus be properly represented in the ideal economy (so that our financial accounting reflects reality). You have suggested that the whole surplus be monetized by creating that much new money by spending it into circulation as a community grant to some non-economic endeavor. I disagree. I think that the surplus would be properly monetized by the buyer paying the maximum that the buyer is happy to pay and the seller receiving the minimum that the seller is happy to receive. Set aside, for the moment, the difference between those two amounts. THAT is the surplus and it is already monetized.
Who Gets It
The final question is what should happen to that surplus. I like the idea of some of it going to each of the three parties: the buyer, the seller, and the community. That's right in line with our overall Design Principle #I(I)(5). It is also roughly what sales tax does. But we cannot expect that every product carries the same surplus. For example, when you have a hard time deciding whether to do something for yourself, you know that the surplus is close to zero. When you buy something produced locally and think "holy mackerel what a great deal, maybe I should get two!", then you know that the surplus is probably pretty big. So the size of the three shares will vary quite a bit from one transaction to the next.
I propose that the seller decide what percentage to give the community (based on the seller's community-spiritedness and desire to look good) and what to charge the customer (based on production costs, personal satisfaction, and perceived demand). That is exactly the system that I have proposed in the rewritten Mutual Credit Design Principles.
My point was to find a way to interface with the existing that allows
the new to unfold. I am not objecting to the design principles that you
wrote, I am only wondering about putting the idea of the "surplus from
exchange" into the design. I am not actually advocating anything
different than what you wrote, but I am wanting that insight to show up
in some way.
I think that what was prompting me to question what you wrote is the
not explicit but implied similarity between loans and grants. What I
wanted was to see more clearly how the "real money' or permanent money
supply comes about. I still have the feeling that we haven't seen eye
to eye on this yet, but I am not sure, because I think we have. I can
usually quickly recognize the principle behind the example, I am not
sure that I see real money in your description of the design
principles. Perhaps it is all there in 7.2 Community Spending and that
is fine. OK, it is there!
Now we have to come up with various ways of representing it!
I think we agree that individuals can spend money into circulation (with the obligation to pay it back) if they get a credit line loan from the bank or the Association. And we agree that the community as a whole can spend money into circulation with NO obligation to pay it back. And we agree that there are limits on how much of this can be done (both by individuals and by the community as a whole) in any Common Good Community. So what's your point?
Ok, we are almost there! There are two descriptions of real money that I find particularly helpful in understanding real money. One is from Abraham Lincoln and the other is Henry Ford and Thomas Edison.
Here they are:
ABRAHAM
LINCOLN
Abraham
Lincoln on the subject of Constitutional Money; from an address to
Congress in 1865i
“Money
is the creature of law and the creation of the original issue of
money should be maintained as the exclusive monopoly of national
Government.
Money
possesses no value to the State other than that given to it by
circulation.
Capital
has its proper place and is entitled to every protection. The wages
of men should be recognized in the structure of and in the social
order as more important than the wages of money.
No
duty is more imperative for the Government than the duty it owes the
People to furnish them with a sound and uniform currency, and of
regulating the circulation of the medium of exchange so that labor
will be protected from a vicious currency, and commerce will be
facilitated by cheap and safe exchanges.
The
available supply of Gold and Silver being wholly inadequate to permit
the issuance of coins of intrinsic value or paper currency
convertible into coin in the volume required to serve the needs of
the People, some other basis for the issue of currency must be
developed, and some means other than that of convertibility into coin
must be developed to prevent undue fluctuation in the value of paper
currency or any other substitute for money of intrinsic value that
may come into use.
The
monetary needs of increasing numbers of People advancing towards
higher standards of living can and should be met by the Government.
Such needs can be served by the issue of National Currency and Credit
through the operation of a National Banking system .The circulation
of a medium of exchange issued and backed by the Government can be
properly regulated and redundancy of issue avoided by withdrawing
from circulation such amounts as may be necessary by Taxation,
Redeposit, and otherwise. Government has the power to regulate the
currency and credit of the Nation.
Government
should stand behind its currency and credit and the Bank deposits of
the Nation. No individual should suffer a loss of money through
depreciation or inflated currency or Bank bankruptcy.
Government,
possessing the power to create and issue currency and credit as money
and enjoying the right to withdraw both currency and credit from
circulation by Taxation and otherwise, need not and should not borrow
capital at interest as a means of financing Governmental work and
public enterprise. The Government should create, issue, and circulate
all the currency and credit needed to satisfy the spending power of
the Government and the buying power of the consumers. The privilege
of creating and issuing money is not only the supreme prerogative of
Government, but it is the Governments greatest creative opportunity.
By
the adoption of these principles the long felt want for a uniform
medium will be satisfied. The taxpayers will be saved immense sums of
interest, discounts, and exchanges. The financing of all public
enterprise, the maintenance of stable Government and ordered
progress, and the conduct of the Treasury will become matters of
practical administration. The people can and will be furnished with a
currency as safe as their own Government. Money will cease to be
master and become the servant of humanity. Democracy will rise
superior to the money power.”
iThere
is no reliable source for this quote. The leading author on
Lincoln's economic views, Gabor Borrit, who wrote “Lincoln and the
Economics of the American Dream” has reviewed it and declared that
it accurately represents Lincoln's views.
EDISON
AND FORD
Henry
Ford and the inventor
Thomas Edison visited the Muscle Shoals nitrate and water power
projects near Florence, Alabama. They used the opportunity to
articulate at length upon their alternative money theories, which
were published in 2 reports which appeared in The New York Times on
December 4, 1921 and December 6, 1921.
Objecting to the
fact that the Government planned, as usual, to raise the money by
issuing bonds which would be bought by the banking and non-banking
sector — which would then have to be paid back with money raised
from taxes, and with interest added — they proposed instead that the
Government simply create the currency it required and spend it into
society through this public project.
Thomas Edison made
it plain in the following excerpt from The New York Times, December
6, 1921 issue ("Ford Sees Wealth In Muscle Shoals"). Here,
the reporter is quoting Edison:
"That
is to say, under the old way any time we wish to add to the national
wealth we are compelled to add to the national debt.
"Now,
that is what Henry Ford wants to prevent. He thinks it is stupid, and
so do I, that for the loan of $30,000,000 of their own money the
people of the United States should be compelled to pay $66,000,000 –
that is what it amounts to, with interest. People who will not turn a
shovelful of dirt nor contribute a pound of material will collect
more money from the United States than will the people who supply the
material and do the work. That is the terrible thing about interest.
In all our great bond issues the interest is always greater than the
principal. All of the great public works cost more than twice the
actual cost, on that account. Under the present system of doing
business we simply add 120 to 150 per cent, to the stated cost.
"But
here is the point: If our nation can issue a dollar bond, it can
issue a dollar bill. The element that makes the bond good makes the
bill good. The difference between the bond and the bill is that the
bond lets the money brokers collect twice the amount of the bond and
an additional 20 per cent, whereas the currency pays nobody but those
who directly contribute to Muscle Shoals in some useful way.
"
… if the Government issues currency, it provides itself with enough
money to increase the national wealth at Muscles Shoals without
disturbing the business of the rest of the country. And in doing this
it increases its income without adding a penny to its debt.
"It
is absurd to say that our country can issue $30,000,000 in bonds and
not $30,000,000 in currency. Both are promises to pay; but one
promise fattens the usurer, and the other helps the people.
If the currency issued by the Government were no good, then the bonds
issued would be no good either. It is a terrible situation when the
Government, to increase the national wealth, must go into debt and
submit to ruinous interest charges at the hands of men who control
the fictitious values of gold.
"Look
at it another way. If the Government issues bonds, the brokers will
sell them. The bonds will be negotiable; they will be considered as
gilt edged paper. Why? Because the government is behind them, but who
is behind the Government? The people. Therefore it is the people who
constitute the basis of Government credit. Why then cannot the people
have the benefit of their own gilt-edged credit by receiving
non-interest bearing currency on Muscle Shoals, instead of the
bankers receiving the benefit of the people's credit in
interest-bearing bonds?"i
What
is particularly interesting about the article is that if you read the
whole thing (at the link in the appendix) you come away with the
impression that it is about whether Henry Ford should manage Mussel
Shoals because he could do it better than the government. The
article does not emphasize the monetary issue and somehow one is
given the impression that the monetary issue is irrelevant. I find
it fascinating that this continues to this day. How does the news
media continue to obfuscate the obvious?
i
This article can be downloaded as a pdf from the NY Times website: http:
What I found interesting is that only when you extract the quoted
parts do you get the full impact. The article tilts the whole issue
towards whether or not Henry Ford should lease Muscle Shoals when it
is completed because he would be able to run it better than a
Government Agency!
So, real money is issued to increase the common wealth. If the project is successful then it will continue to increase the common wealth and new money will need to be granted into the economy to represent that increase!
In 7.2 Spend
money into circulation means to me no debt or interest. Not drawing
down a line of credit, but issuing the money directly. Those
two passages were instrumental in developing my understanding of what
real money is. Real money is the means of exchange that does nothing
but facilitate exchanges, the permanent money supply. The science of money is keeping
the right amount of money in circulation to represent the real value of
all the goods and services and keep prices stable. Too much money in
circulation and you get inflation and not enough and you get
unemployment. Issuing money to increase the common wealth is what
Common Good Communities do! They are, after all, the new Sovereign.
Money = Commonwealth; or Liability + profit/Loss = Assets
I
had also proposed a hybrid loan and equity stake, which I recognize in
your description in the new design principles. So, apart from lines of
credit in the mutual credit association as the way we account for the
transactions, I have been wanting us to distinguish between capitalizing
for production and granting for consumption. The biblical idea of the
Jubilee is perhaps something that we can introduce, but not on the basis
of every 50 years, but as it becomes possible due to the increase in
wealth. Rather than a guaranteed income we could just write down the
individual's line of credit to correspond with the increased wealth.
Post edited 3:29 pm – February 28, 2011 by wspademan
Rewritten proposal:
Here's what I see as important design principles for mutual credit in the Common Good Economy (in addition to the overall Design Principles):
Duality. The Common Good Economy will handle internal and external finance differently.
Internal. We will use a mutual credit system for transactions among members and for financing our initiatives as Common Good Communities.
External. We will use a conventional, FDIC-insured, community bank (Common Good Bank) to manage transactions with non-members, as well as loans for such transactions.
Hybrid. We will use a combination of mutual credit and conventional bank finance for initiatives that involve both internal and external transactions.
Consistency. All Common Good Commities will share the same fundamental operational principles and infrastructure.
Reality. As much as possible, accounting in the Common Good Economy will reflect reality.
Practicality. Money will be created and destroyed as needed.
Inspirational diversity. Each Common Good Community can, on its own deliberate initiative, creatively augment (but not usurp) the fundamental operating principles, by adopting specific contractual agreements among its members. Successful local enhancements will be considered for system-wide adoption. Such innovation is healthy both for the system as a whole and for adaptation to local conditions.
Sustainability. Each local mutual credit system MUST be self-supporting. That is, it must not be a burden to other Common Good Communities. Liabilities (including any mutual credit that the community creates) must be balanced by Assets.
Money creation. Common Good Communities will create money by allowing both individuals and the community to spend it into existence.
Individual spending. Grants and loans to individual members — whether through the bank or through the mutual credit system — will be structured as lines of credit. That is, the loan will begin when the borrower spends more than the amount he or she has on deposit. Ultimately, all loans — even through the bank — will be interest-free (in real terms) or negative interest (the borrower gets paid for taking initiative). This requires the community to have a source of income other than interest on loans.
Community spending. A Common Good Community or group of Common Good Communities can create mutual credit by spending it into circulation, subject only to the Sustainability requirement (#6 above). For example, the community can create mutual credit to purchase saleable or income-producing assets, such as a local power company. Money created in this way is a formal liability and must be balanced by an equivalent (or greater) asset — specifically something that has economically measurable value (or expected future value) to the community. Ultimately this could even include a general dividend or "basic income" payment, provided that the resultant increase in economic activity results in a corresponding increase in the quantity or value of the community's assets.
Equity. The community has an equity stake in every business it funds. (This reflects reality in that every business depends on the community for success.)
The community's stake is structured as a percentage of gross income (income before any expenses are subtracted). This percentage will be set so that the community can recover its investment within a sensible time frame. The percentage may be reduced at that time, but not eliminated.
For hybrid funding (partly internal and partly external), part of the percentage goes to the bank and part to the community's mutual credit account, according to the terms of the loan or grant.
All member businesses contribute a percentage of their gross income, whether or not they ever get a loan. The business can choose the percentage (1/10% or more). For income from transactions with other members, half of this percentage goes directly to the customer, as a rebate (this modifies and replaces earlier designs for "merchant rebates").
Limits. A Common Good Community can create no more mutual credit than the amount of deposits that its members explicitly place at risk; that is, the amount of Common Good Bank stock they own. Note, however, that a lot of the created money will come back to the community as new deposits and stock purchases, so the practical limit will increase.
0. Shared Systems Platform: fundamental operating principles that incorporate an accurate understanding of money as accounting and that, by their very design, reflect the reality present in the economy at any given time, will be universally available and applied throughout the new Common Good Economy by each individual Common Good Community. Each CGC, however, on its on deliberate initiative, can creatively augment this universal mutual credit management system by the adoption of specific agreements between its own members. These unique local enhancements will be considered for universal system-wide application if proven beneficial but will in no case be permitted to alter any essential universal system design or in any way disadvantage any other CGC or the Common Good Economy as a whole.
Othe notes: don't think it necessary to mention "internet-based." Like the phrasing relative to seemless integration – think also that "conventional economy" is the right way to refer to what I' want to call the 'regular economy"
1# I've obviously spilled over here … I take issue with most of this on several levels. Again, you start off with "local" implying greater prerogatives for design than CGCs should have; "need not" should be "will not" (we're creating the alternative here); "rules imposed on banks" suggests that if banks were just left alone (neo-liberal economics) everything could be fine; let's be consistent with "conventional economy" (not regular or current) From the Campaign (communication) perspective, we will be appealing, generally speaking, to those who want CHANGE, therefore "conventional" is our best contrast.
#2 I've largely addressed this already; "handle its local economy" is too vague
#3, #4 & #5 Look good
#6 "Default" not a good word to be depended upon for a bank to describe something (other than a bad loan); you know by now I don't like "suggested" rules. See my earlier post for concerns about this revenue suggestion (it appears to be one proposal, by the way – so suggestion(s) plural seems inapt.
Well, if money is accounting we had better all learn some accounting principles.
# 5 re #3
Assets = Liabilities + Retained Earnings (or Net Assets)
So if the Common Good Community creates money it spends on infrastructure – buying the local power company in Williams example – the money it created and spent is the liability and the Power Company is the Asset. That relationship Liability = Asset will become over time Liability + Profit = Asset; or Liability + Loss = Asset
I am hoping that it is possible to recognize that Liability + Profit means adding more money, the Profit, to the economy or removing money from the economy, the Loss. So that the mutual credit system keeps its books balanced.
The account from which the money it spends comes and into which the assets go, needs a name that lets us know what we are doing. I suggest that we call it the Sovereign Account. The Sovereign Account is the source of the permanent money supply. It will mostly increase, but it must be clear that it may need to decrease, because of the harsh reality: Assets = Liabilities (money in circulation) + Profit/Loss
Citizens who are doing business as the "Local" Common Good Community" need to think like the sovereigns they are becoming and the BANK they are, having assumed the issuing power!
By the way Assets depreciate, but Liabilities (permanent money) = Assets remains true
Managing the money supply is a matter of practical administration, because it is transparent, easily graspable, and evident, in the Sovereign Account!
Rick and John, I have incorporated some improvements to this proposal, following your recommendations. Specifically, I have added #0 and #5, with some minor clarifications and adjustments to other points.
Post edited 9:53 am – February 24, 2011 by wspademan
I certainly agree with Rick about #2. I really want to create one mutual credit system for the Common Good Economy that is used by all the local Common Good Communities, but with the flexibility for the local community to make decisions about issuing money as capital or grants to suit their sensibilities and keep track of the consequences (good and bad) so that we all benefit from all of our experiences.
# 3 Of course, each local Common Good Community will need to be sustainable. As we learn how to be citizens with the issuing power that rightfully goes with being sovereign citizens we will learn how to create the material values necessary to enjoy the fruits of our efforts as a community.
During the Middle Ages when self issued credit or market money was the norm the differntial between the richest and poorest was about 11 to 1 and people spent about 14 weeks of the year providing for their material needs and the rest was spent building cathedrals and going on pilgrimages and creating elaborate celebrations!
#4 An equity stake in profitable businesses will likely provide more income than interest would and the local community and the Bank are a much more reliable partner in assuring the succes of a business than a traditional bank could ever be. Ultimately the CGB will only be able to move from creating money as interest bearing loans to creating money as equity investments when there is enough experience and understanding to support that. Having the profits of the CGB from interest return to the community to be granted is certainly sufficient for the beginning, but mutual credit being interest free from the beginning will give us the experience and understanding we will need to take on the issue of interest head on.
If we made a distinction between funding infrastructure improvements with money we issue debt and interest free for that purpose, and issueing money as an equity stake in for profit businesses which meet our common good criteria, we will probably find that we can issue money as a grant to all the member/owners of the CGB so that they have the buying power to spend on all the resulting benefits of our investments.
Our robust accounting systems (the CGB's and the Common Good Community's mutual credit system) will let us know when we can grant everyone a dividend for their participation in the wealth creation process our understanding of money and collective decision making provided.
#6 I competely agree with Rick. We need to be creating a genuinely reliable system for mutual credit. A system that allows us to create mutual credit and issue money as such. This distinction between mutual credit and money as such is crucial to bringing money into proper relationship to reality. In the current system the permanent money supply, money as such, is the Federal Debt. If all loans were repaid there would be no money and the iterest would still be owing. When should we create money as debt and when should we issue money as straight forward means of exchange? This is what the mutual credit system we design will need to do.
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