Money is a human construct

Entry #641
Tuesday, July 8, 2003

Last week Abi and I went to a community forum about creating a local currency in Seattle. It was well attended -- I guesstimate close to two hundred people showed up. The owner of the Essential Baking Company was a heading up the effort and, after two presentations on how the federal reserve system works, we got into a Q and A where it became apparant that this project is in its beginning stages.

Since that meeting I've been thinking a lot about the local currency idea and, in specific, creating a person-to-person, no-interest monetary system using smart cards. Before I explain my idea, let me briefly explain how our money system works.

First off, please assume that paper money has no value. If you truly understand that, you'll have a much easier time thinking about replacing federal dollars with some other value measurement. The value in paper money comes from the trust we have that others will accept that paper in exchange for goods and services.

Humans have used various money systems throughout history. The barter system doesn't work well because one must have something that another wants and if one doesn't have something another wants, one can't barter with another. The token system (that's not a technical term), which replaces goods and services with tokens -- precious metals and bank notes being quite popular -- work pretty damn good. Nobody is left out of the trading system because everyone uses the same currency.

American dollars are "lent" into the financial system by the central banks -- large corporations headed up by extremely rich men. The US government authorizes certain banks to essentially create money by lending it out to their clients. In exchange for the ability to create money, the central banks must pay interest (to the government) on the money they create.

Say the bank loans me $100 at 4% interest. I now owe $104, but I only have $100. How do I pay back the principal plus interest? I have to borrow more money. This is our debt is always increasing -- it has to or else the system starts to collapse.

So the central banks are authorized by the government to create government-backed money and reap huge profits off the interest. One percent on one billion dollars makes you pretty rich.

Greenbacks are not the only form of legal tender -- almost anything can act as legal tender. Greenbacks have an advantage in that one must accept them as legal tender. Several communities have created "local currencies" which are generally only accepted by individuals and merchants in a particular city. The value of the currency is in the trust people have that others in their community will accept the currency. If I wanted, I could accept "Ithica Hours" but I don't because I don't know of any place to spend them outside the Ithica, New York region.

Most of the local currencies rely on paper dollars. Many of them are called "hours" to remind people that the value in money is in our labor. In Ithica, an "hour" is worth $10 and nobody paid in hours receives less than one hour ($10) per sixty minutes of their labor -- in effect raising the minimum wage in the community. Another idea behing local currency is that the money doesn't leave the community because, as mentioned above, why would I want Ithica Hours if I don't live near Ithica. Greenbacks have a way of filtering out of local communities into the bank accounts of large, profit-motivated companies.

There are two currency systems up in Vancouver, BC that use smart cards. These particular systems are geared towards nonprofit fundraising, with money getting into the system via business donations to nonprofits.

The system I envision also uses smart cards, though its not at all focused on fundraising. There's a lot of details I haven't completely figured out, but I think the idea deserves more research. Any questions or comments would be appreciated.

At it's most basic, here's my system. You get a smart card and it's balance is $0. If I want to transact with you, say I buy $10 worth of groceries from you, we put our cards in a card reading device and transfer $10 from my card to your card. Your balance is now $10 and mine is -$10.

The decision to transact is left up to the individual parties, and each card could be programmed with a set of rules to determine levels of trust. If you have -$1,000 on your card and you've never accepted a payment, my card won't transact with you. The rules will be more intelligent than that, taking into account the card's balance, transaction history (preferably with all personally identifiable information removed), and hopefully a key-signing type system like PGP's web of trust.

If someone tries to spend credits without ever accepting credits, nobody will accept their credits. If you have a new card, nobody will accept it unless they actually know you. So you have to build up your trustworthiness.

There are a number of hacks the system needs to defend against. Any monetary system will have fraud, but we should work to eliminate such tricks. Suppose person A and person B spend money then offload all their debt onto a third card, card C. The rules for accepting transactions should look for things like this. I think key signing could help as well. Maybe a balance limit should be imposed on all cards.

Suppose you don't have a way to accept payments -- your employer doesn't pay you in local currency and you don't hold garage sales or babysit or anything like that. Then your local currency smart card can act as a 0% interest credit card. You simply pay your debt down every so often by giving greenbacks to someone in exchange for local currency.

What I really like about this idea is that there's no central authority and no interest. Theoretically, it should be faster than credit cards because you don't need to contact Visa to complete every single transaction. All you need is a smart card reader, which cost as little as $20 though you'd probably need a custom dual-card reader which might run $50-100.

One of the guys working on the local currency project said that this system would work well but you'd need to replace the smart card with a device that contained a screen and keypad, because there's nothing to stop someone from snooping the card reader and grabbing your PIN or from displaying false information on the screen. That's a bit of a bummer because it makes the system not doable at this very moment. With the smart cards it can actually be done right now for pretty cheap.

I'm wondering if it might be possible to use crypto to get around the screen requirement. I don't know too much about how things like pgp work but I know that person A can sign something with their private key, send it to person B and person B can be certain that person A sent it. There might be a way to do soemthing similar with the smart card transactions -- the card won't transact unless the transaction signature is correct.

I don't know about getting around the keypad requirement...

Comment on this entry

Hehe, cool ideas.

On a side note, the Koran forbids interest rates on loans or anything else. I forget the rationale behind it exactly but it was something to do with making money by doing no real labour, or something. Kind of interesting stuff. Interest sucks.

It might be because interest transfers wealth from those that have no money to those that have money -- from the poor to the rich. Interest is pretty ingrained in our society; I felt revolutionary the other day when I decided that my credit card company should apply all of my payment to my principal.