We have two systems for moving money—the regular banking system for transferring money for everyday transactions and the financial system for moving Capital.
The regular banking system is efficient, and the cost of moving small amounts of money is remarkably low.
However, the financial system is inefficient and the cost of moving large amounts of Capital is high.
The financial system consists of the movement and investment of Capital. It covers taxation on profits, loans, derivatives, Capital markets, real estate, share markets, insurance, and monetised assets, including the tech giants. In a modern economy, the cost of Capital dominates our investments and is a major cost in all goods and services.
Most Capital is unnecessary, and can be replaced by sharing surpluses at the same time we pay for goods and services.
How do we create new Capital?
Capital is created when a business makes a profit or a surplus. We add up all the income and subtract all the costs; the result is new Capital. The new Capital is distributed to shareholders, stays in the business, or is paid as tax.
Capital is also created when a bank creates a loan. Banks only create loans when the lender has other Capital to secure the loan.
The system turns the surplus money on each sale of goods into a new product called Capital that the wealthy accumulate then trade and exchange.
The share market value of the Australian Financial, Insurance, Rental, Hiring and Real-Estate businesses is about 24% of the total value. These business are in the business of trading Capital.
The Cost of Running the taxation system is about 3% of GDP.
The Gross Fixed Capital Formation is about 25% of GDP, while the increase in GDP is about 3%.
The system works by accumulating Capital into large amounts and transferring those large amounts between entities that already have large amounts. It inevitably results in a mal-distribution of the surplus generated by the economy. In 2021 the wealthiest 10% of the Australian population has 60 times as much wealth as the poorest 10%.
The starting cost of distributing surpluses through Capital Markets is the cost of the Gross Fixed Capital Formation minus the increase in GDP or about 22% of the surplus. The cost of operating the system is at least the profit from the 25% of the the GDP in the share market. The surpluses are distributed slowly and go to a minority of the population to be further distributed expensively through the tax system. It is hard to think of a more expensive way to distribute a surplus.
In summary Capital is the surplus created when a business makes a profit, and the Financial System is the system to distribute the surplus from poorer to richer. It is a Reverse Robin Hood system.
A Cheaper Way to Distribute a Surplus
Community Capital is one way to remove most of the costs of distribution and double the rate of investing from the same amount of surplus.
It does it by sharing future surpluses with each small regular exchange of goods and services. All sales generate income and a fixed percentage of each sale is designated as a surplus. The money transferred for the sale leaves all the surplus with the business where 50%, or more, of the surplus is sold to the buyer as shares in the business. Periodically the amount of Capital in the business is adjusted to match the actual surplus with the assumed surplus. The shares generate discounts and the shares can only be monetised by purchasing goods and services at a discount. Capital gains and losses are shared equally across all the shareholders. Shareholders can sell their shares and discounts to other shareholders.
This approach eliminates interest, transfers capital gains across all shareholders, makes customers and employees shareholders, eliminates the need for Capital Markets to set the price of Capital, and at least doubles the rate of Capital investment for the same value of surplus. Importantly it transfers wealth down the wealth pyramid.
It can be introduced one business at a time and can start with government owned monopolies as it establishes a fair price for goods and services supplied by monopolies.
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