A democratic money system is agreed upon and enforced by following the Elinor Ostrom principles for the commons and using algorithms from complex adaptive systems to distribute wealth through communities.
This article outlines the difference between
- the current system of undemocratic sovereign bank loans.
- democratic Permanent Housing Market (PHM) algorithms, where the Ostrom principles govern the PHM.
Complex Adaptive Systems Algorithms
Today’s financial systems assume the world operates under fixed machine-like rules. Natural systems and human systems are not machines. There is uncertainty, rules depend on context, and systems adapt to changing circumstances. The systems are built from the bottom up in a cellular-like fractal structure.
Complex adaptive system algorithms are built around the bottom-up aggregation of cellular small-group structures. These structures generate the most value from the least amount of money. This is achieved with governance that rewards cooperation, trust, and sharing and preserves wealth within the cellular bottom structures.
The algorithms are summarised as tit for tat with forgiveness.
Sovereign Top-Down Money
Today’s money system is sovereign, where the wealthy control the money supply. In totalitarian states, “strong men or women” replace the monarch, and the ultra-wealthy replace the barons. In democratic states, rulers can be replaced through elections. Unfortunately, in all countries, the financial system drives the increasing disparity in wealth with the inevitable rise of monarchs like Putin, Chi, Ayottolays, and Trump, with their acolytes of loyal followers financed by the ultra-rich.
Financial algorithms are built around maximising profits and minimising costs for rulers and their followers. This is achieved by having two sets of rules for bank loans and using them to move wealth from the poor to the rich. The rules on loans have always existed but were constrained until the 1980s implementation of fiat currencies and the rise of electronic money, including cryptocurrencies, in the 2000s.
Today, the ultra-rich have mutual credit arrangements with banks that remove their need to pay interest on money. Most borrowers, including the state, pay interest twice: once as a capital gain to the bank and once as interest. The capital gain occurs when banks debit loan accounts with interest and fees and keep the resulting new money for themselves and some high-net-worth individuals (HNWI).
We can change the banking rules, create new money, and provide it directly to people, including HNWI. Old money is distributed according to the same rules for all.
What Happens When We Change to a Democratic Finance System
Before looking at a group of houses, we will show a buyer of a home and a superannuant with an allocated pension and compare a borrower and an investor. The Regular Bank Loan uses sovereign money, while the Permanent Housing Market uses democratic money.
Home Buyer
Income per year after tax of $150,000. Deposit of $200,000 wishing to buy a house with a loan of $800,000 for 30 years at 6%. The buying and transfer costs are 5% of the house value.
With a bank loan, the buyer pays 41% of their salary for 30 years.
With a PHM, the same buyer paying 41% of their salary would own the house after 13 years.
With a PHM, the same buyer without a deposit would pay 25% of their salary and own the house within 27 years.
Superannuant Looking for a Pension
The superannuation-allocated pensions take a capital amount and give an inflation-adjusted pension of 10% for 10 years.
If the superannuant invested in a PHM, they would receive a 10% inflation-adjusted pension for 20 years.
With a PHM, a pensioner can sell part of their home to supplement their pension while still living there.
Savings
PHMs remove the costs of interest, inflation, real estate, transaction costs and insurance. Taxation remains about the same.
A PHM of Nine Houses in a Suburban Street
A suburban street has nine houses that, for different reasons, wish to join a Housing Commons. Three are paying off a mortgage, three are renting, and three own their homes outright.
Of the first three who own their house, one wishes to find money to make needed repairs and fix their fences, two is looking for a better investment than a super-allocated pension, and three is looking for a place to deposit their self-managed super fund money.
The three paying off their mortgages wish to eliminate the cost of interest, and the three renting wish to pay half their rent to acquire equity in the house they occupy.
They approach a bank with the following proposition.
The nine families will form a company in which each family has one vote and shares equal to the value of their houses minus any loans. The landlords of the rented houses will have shares in their homes and a vote as they will own shares in the company. All houses will be sold to the company, and the owners will receive equivalent shares in the company. The title to the home will be held by the person with the most shares in the house— usually the occupier.
The company will take over all the loans on the homes, amalgamate them, and make a 5% single-interest loan with the bank. The return to the bank is adjusted for inflation by changing the loan's value.
All home occupiers agree to open accounts with the bank and deposit their incomes. All occupiers agree to deposit 25% of their income into the company each month. Those who do not own all the shares in the house they occupy will receive shares equal to half the money they pay. Those who own all the shares must purchase shares of value 25% of their income. Investors and occupiers will be invited to buy shares if the outgoings exceed the income.
All investors must sell 10% of their shares each year, 5% of which is a Capital gain. When occupiers sell shares in their homes, they do not pay capital gains.
Each year, the members will randomly appoint members to govern the company and hire the bank, accountants, lawyers, and other professionals to operate it. There will be three members on the governing board, and each year, one will be randomly selected to resign and replaced by another randomly selected shareholder.
All shareholders will discuss and agree upon all company decisions with mechanisms for handling disputes.
The company is expected to handle rates, taxes, insurance, and other typical costs. These costs should be covered by income or new share purchases to replace loans.
Investors and occupiers can buy and sell shares anytime for no transaction costs. Rules will be associated with selecting new investors and occupiers. Occupiers can leave at any time for free and take their shares with them to become investors.
All houses will be revalued yearly, and the number of shares will be adjusted if there are any capital gains or losses.
It is expected that Occupiers will hold the title to the loans.
By removing the cost of transferring shares, share accounts become equivalent to 5% interest trading accounts. They also eliminate the need for credit facilities and long-term savings accounts for all members.
One Year of Operation
The company is organised so that the returns to investors are capital gains. When investors own all the houses, the loan costs are removed, and the profits are from capital gains and funds transfers. From the point of view of homeowners, they have all the advantages of homeownership with no debt costs and the ability to use the capital in their homes if needed without selling their homes.
The benefits are substantial to all participants and vary according to their circumstances.
House 1
The occupant is asset-rich and cash-poor. They will save the costs of insurance and the cost of ongoing maintenance. Insurance would be about $4,000 and a Reverse Mortgage of $100000 repaid over ten years would be $15,000 a year. This compares to the yearly cost $7,000 (half of $14,000) with the Company.
House 2 and 3
Their payments will go into investments in other houses, and their return on investment will be capital gains of double the return of a long-term interest-bearing loan treated as income.
House 4, 5, 6
Their repayment costs are 25% less than the equivalent mortgage. There are no buying or selling costs and they receive the same benefits of no insurance, lower cost repairs and maintenance.
Houses 7,8,9
The renters turn 50% of their rental payments into equity in the house they live in. Investors receive a 10% annuity for 20 years and will get any capital gains. 50% of their income is treated as capital gains.
The Future
It is expected that democratic housing companies will spawn many other democratic companies for other purposes.
- Aged Care Services, where the buyers of the services share ownership with investors in the aged-care service company.
- A renewable energy company where a group of homeowners behind the transformer share ownership of a mini-grid.
- The customers of a supermarket part share ownership with supermarket investors.
- Suburban residents share ownership of the parking spaces in the central shopping district.
- Car drivers share ownership of the streets and roads on which they drive.
- Students and alumni share ownership of their university.
- Water consumers share ownership of their water supply with the government.
- Consumers of local services like repairs, cleaning, trades, and medical will own part of their suppliers' businesses.
The Future of Money Creation
In the future, governments will stop using loans to increase the money supply. Loans will still exist, but they will use existing money. The government will use grants to commons groups like Permanent Home Markets to build new community assets. These grants will replace most taxes on profits because profits are shared with buyers.
Elinor Ostrom Principles
The following principles define the governance of small groups that collectively share the resources available to the group and transfer resources to the next generation of users. The group size can be small, like a family farm or occupiers of houses in a street, suburb, or country town.
Clearly Defined Boundaries
Define the physical boundaries of the resource and who has access rights. This prevents misuse and ensures clarity on who is part of the group.
Congruence Between Rules and Local Conditions
Match the rules for resource use to local needs and conditions. This ensures that regulations are both relevant and effective.
Collective-Choice Arrangements
Allow resource users to participate in decision-making. When users have a say in the rules, they are more likely to follow them.
Monitoring
Ensure that users or assigned monitors actively track resource use and compliance with rules. This keeps usage sustainable and deters freeloading.
Graduated Sanctions
Impose penalties for rule violations that increase in severity depending on the offence. This discourages misuse without being overly punitive.
Conflict-Resolution Mechanisms
Provide accessible, low-cost ways for users to resolve disputes. This will help maintain cooperation and prevent conflicts from escalating.
Recognition of Rights to Organize
Allow communities to self-organize and create their own rules without interference from external authorities.
Nested Enterprises (for larger systems)
For larger or interconnected resources, organize management activities at multiple levels. Local groups manage smaller areas, while larger areas have overarching governance structures.
Governing the Commons — Cambridge University Press — Elinor Ostrom
