The financial system today could be more efficient. It creates more money than an economy needs. The funds used to build and operate most infrastructure are about twice the amount required. The extra money is unnecessary as it serves no useful purpose, and removing it will not affect the outcome except to reduce the cost. It can be summarized as removing the cost of capital and estimated as the cost of interest and unnecessary monetisation.
The government introduces money into the economy by allowing banks and other licensed financial institutions to deposit new money into bank accounts for loans. Money goes into a savings or trade account, and at the same time, the bank creates a loan account that keeps track of the amount owed. With double-entry accounting, debiting the loan account means new money goes into the other account. The debiting of the account creates the new money — not the loan repayment.
Banks charge interest fees and other fees to operate loan accounts for the government. The bank has to keep some reserves, and it pays interest on those reserves, so that is a fee. The bank must worry about the loan not being repaid, so it charges a separate fee. It has to investigate the loan, keep track of repayments and account for the devaluation of money and possible theft from the bank. There are many fees, and they are expensive. They are costly because it is easier to steal money than it is to steal a physical asset — like a house- or a road — or the Opera House.
Banks pretend that money generates new money by changing the rules of loans so that interest is paid twice. They pretend that the money created generated the interest, so they debit the loan accounts with interest but do not generate a matching amount in the borrower's account. By paying interest once, the speed of repayment drops, typically decreasing the repayment time by about 30%.
We can do much better. Today, when the government wants to spend money on infrastructure that everyone uses, such as education, health, roads, electricity, water, communications, etc., it funds it with loans. The loans are repaid by collecting taxes on profits made by businesses that created assets with the loans they repaid. Allowing governments to build new infrastructure directly with new money eliminates the total cost of the round trip of making loans, making profits, and collecting taxes. It leaves the price as the cost to build the infrastructure.
The problem is using money fairly so everyone benefits from the infrastructure. One solution is to fund or buy local community assets with the government’s currency, similar to local currencies, but for a specific set of assets and give ownership/custody to the asset users. The difference is that there is no need to monetise assets. We use an existing currency to measure the value but do not convert the asset into money to transfer it. Instead, we divide the asset into shares of $1 each.
Any financial organisation can use the approach if it has a license to create new money and a group of locals to take possession of the asset.
Canberra Light Rail Commons is an example the government could implement tomorrow and save the interest and repayments it is currently paying.
FairGo Housing is an example of how to make housing affordable.
Is your bank charging you interest and fees twice? This is an intermediate step you can discuss with your bank.