“Permit me to issue and control the money of a nation, and I care not who makes its laws”—a quote attributed to Mayer Amschel Rothschild the founder of the Rothschild banking dynasty.
Most new wealth in Australia is given to the wealthiest 1% of Australians. This article shows how we can evolve the existing system so that all Australians get equal access to new money.
It is achieved by evolving inefficient and inequitable debt-based money creation into low-cost community asset loans administered by banks but controlled by local communities. Banks change to a system of community-based lending secured by shared assets like housing and water supplies, generating new money through asset appreciation rather than debt. The approach reduces government reliance on taxes, mitigates inflation risks, and fosters greater economic participation and fairness by distributing risks and rewards more widely.
The approach explores using cellular mini-monopolies to manage natural monopolies like utilities. It promotes competition and innovation while maintaining the benefits of shared access. Finally, it emphasises the importance of capital sharing and community-building to ensure equitable economic participation.
Before reading the article, it will help many to read the Google NotebookLM generated FAQ at the end of this document.
Money Creation with Loans
Today, banks create government money by making a loan with a corresponding deposit of new money.
The bank opens a loan account with the borrower and debits the loan account, creating a debt the borrower must repay. When the debt is repaid, the money is taken from the economy. The money debited to the loan account is deposited in an account the borrower specifies. This is new money in the economy.
The bank makes a profit by charging more interest for the money it lends than it pays depositors. The bank mitigates its risks by requiring borrowers to have collateral, and depositors require banks to have collateral to protect their money.
The government uses banks to introduce new money into the economy because that is what banks have always done.
The good thing about using banks to inject new money into the economy is that most of it should disappear when a loan is repaid, and banks must keep lending to stay in business. This creates an automatic feedback mechanism that keeps money in the economy to satisfy investment needs and leaves money in the economy as assets that are purchased but not sold.
The government takes back some money from the profits from banks and businesses as taxes. Governments spend the taxes on government services and transfer payments to other members of the community who need money but do not have investments or other income sources.
This system was suitable for economies without computers and instant communications but is outdated and can be made more efficient. It will reduce finance costs, the need for many taxes, and the unnecessary destruction of money through loan repayments. Instead, most money will leave the economy when community assets depreciate. We move from a money system to an asset system.
The existing system will remain in place with private loans, private profits, and government taxes alongside parallel community loans and community-shared profits and assets. The community assets bring much-needed competition to the financial system, where most money is introduced with bank loans and bank risk. The loans will still look like bank loans, but the community will provide the collateral and take the risks.
An Example of Money Creation with Permanent Asset Markets
A bank makes a loan free of interest capitalisation to a group of existing homeowners, buyers, and renters to buy mortgages and houses. The government guarantees the loan, meaning the bank does not take on the risk of default. All occupants pay rent. How much they spend is up to them, but it must be a minimum of the depreciation cost of the property. They can pay more and the extra to buy equity in their place or when their place is purchased equity in the remaining houses in the market. They get a return of 5% on their equity in the form of new shares in the remaining houses.
They must sell 5% of the shares. This provides a liquid market for shares, as there are always buyers and sellers. People can adjust their payments and investments as they see fit. The 5% gives investors an annuity of 10% for 20 years, making it an attractive investment for many in the community.
The money remains invested, so it has not increased the money supply and is not an inflation risk.
The community itself takes on the risk and responsibility of maintaining the houses. All individuals gain equity at the rate they can afford, and the government tax needs are reduced as the government does not need to supply rental, first home buyer assistance, or other benefits similar to those with little capital.
Housing costs will reduce the cost of living and help stimulate the economy.
A Permanent Water Supply Market
City water supplies are an example where consumers build capital each time they pay for water; they buy shares in the water supply. In Canberra, about 20% of water supply expenditures are on interest and other financial costs. The community of water users could take over the bank loans and acquire shares with their payments. The return could be similar to housing of a 10% annuity over 20 years. There would be no difference except that the water authority board would be composed of elected community members rather than government-appointed representatives, and most of the expenditures on water would stay with the community.
Rationale for Selling Public Assets
Governments often sell public assets because selling assets stimulates economies and increases economic activity. The funds held by oligarchs or governments are stationary money and no longer contribute to economic activity. Monetising assets and keeping the ownership in the community that benefits from them increases economic activity and adds to GDP. It reduces costs because the income from the continuous selling of the asset finances other investments, including maintenance and repairs of existing assets.
Permanent Asset Markets of large assets can be divided into cells of assets, such as an asset market covering a natural water catchment of a natural stream or a lake. These markets can be subdivided into streets or suburbs, providing competition, variety, and movement of people and ideas between markets.
Providing Choice in Monopoly Markets
Many natural monopolies exist, such as water, roads, electricity, communications, language, money, and governments. We call them "natural monopolies" because we want everyone to access them and have the same rules for accessing them. We know society works better if we can share, and sharing is easier if we all follow the same rules.
However, monopolies have difficulty evolving and becoming better and more effective. Monopolies stagnate, becoming autocratic, where a few control the many. This makes them vulnerable, less resilient, inefficient and liable to crumble from new challenges, both internal and external. They do this because the people controlling them can set the rules to favour themselves. When groups in control work together, they can ensure the narrative that justifies the rules works in their favour, perpetuating the biases.
One solution is to divide the monopoly into smaller mini-monopolies. A mini-monopoly can be considered an autonomous cell of people and assets. Each cell follows compatible rules with the others in the monopoly, which means a person or asset can easily move between cells.
Cells can evolve their rules and operations, providing compatibility and allowing the transfer of a person or an asset between cells.
When an individual and assets can move freely and independently between cells and assets, control is distributed, and it becomes difficult for an individual or a group to abuse others, a trend in monopolies. It becomes easier for innovations to arise and to share new knowledge as there is no economic advantage in competing for members of a mini-monopoly.
Each mini-monopoly is easier to control, so no group or individual can take advantage. If they do, the group can exclude them, or individuals can move to a group with whom they can work.
The ability to choose and move is the attraction of markets. Standardisation and predictability are the attraction of monopolies. We can provide both by breaking monopolies into cellular mini-markets.
Providing Choice in a Monopoly Market
Humans survived as a species by learning to work together through social connections. Family units worked with other families to form tribes; tribes worked together to become towns, and towns worked together to become nations.
We cooperated, so those who could not contribute at any point in their lives were socially obligated to contribute when or if they could, and we evolved to share when we could. The introduction of money accelerated sharing, making it possible to share with more people and more efficiently. In the last two centuries, developments in computing and communications have made sharing more sophisticated, quicker and likely with more people.
However, sharing has broken down along the way because we have made our groups too large too quickly without building the social infrastructure to continue "fair" sharing.
An obvious issue today is the lack of capital sharing. We do not deliberately work out how to share capital, yet we have built our systems NOT to share capital, even within families. But we know it is wrong. How many TV series and dramas are built on the inability of people to share wealth, giving rise to cautionary stories that we will continue to create? How nice it will be, knowing there may be a happy ending after all.
Community-Based Lending and Asset Markets: An FAQ — Generated by Google NotebookLM
1. How does the current system of money creation work?
Currently, money is primarily created through bank loans. When a bank issues a loan, it creates a corresponding deposit in a borrower's account, injecting new money into the economy. This system relies heavily on debt and interest payments, with banks profiting from the interest rate differential and capitalisation of interest and fees. Governments use taxes to recoup some of the profits from the loans and redistribute it through services and social programs.
2. What are the drawbacks of the existing money creation system?
The current system is inefficient and inequitable. It relies heavily on debt, leading to financial instability and concentrating wealth in the hands of the already wealthy. It also necessitates high taxes, which can stifle economic growth. The reliance on debt for money creation limits competition and innovation in the financial sector.
3. What is the proposed alternative system of money creation?
The alternative is a system of community-based lending secured by shared assets like electricity distribution, housing, roads, R&D and water supplies. New money would be generated through asset appreciation rather than debt. For example, residents could collectively purchase and manage housing, with rent payments contributing to shared equity.
4. How would community-based lending be more equitable?
Community sharing reduces wealth disparities and empowers communities by distributing ownership and control of essential assets. Instead of banks profiting from interest, residents collectively benefit from asset appreciation and reduced living costs. The approach broadly emphasises sharing risks and rewards, fostering greater economic participation and fairness.
5. How would the proposed system address inflation risks?
The proposed system would mitigate inflation risks because the money generated would remain invested in the community's assets. It would not increase the overall money supply like traditional bank lending. Instead, it increases the assets of a community.
6. What are cellular mini-monopolies, and how do they relate to the proposed system?
Cellular mini-monopolies are smaller, self-governing units within a larger system. The concept can be applied to manage natural monopolies like utilities, promoting competition and innovation while maintaining the benefits of shared access. For example, a city water supply could be divided into smaller, community-managed units.
7. How would community-owned assets be managed?
Community-owned assets would be managed by elected boards composed of community members. This would ensure local control and accountability and allow communities to tailor management practices to their needs.
8. How would the transition to community-based lending and asset ownership occur?
The article suggests a gradual transition, with the existing system parallel to the proposed community-based system. This would allow for a smooth transition and provide individuals with choice and flexibility. As communities demonstrate the success and benefits of the new model, it is envisioned that it could eventually replace the current debt-based system because it is more economically efficient.
