It’s a slow day in a little country village. The rain is beating down, and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day, an emergency services employee drives through the village, hoping to stop at the small hotel for the night.
- He lays a welcome $100 note on the desk and goes to his room.
- Gleefully the hotelier grabs the $100 note and runs next door to pay his debt to the butcher.
- The butcher takes the $100 note and runs down the street to repay his debt to the pig farmer.
- The pig farmer takes the $100 note and heads off to pay his grain bill at the produce store.
- The store holder takes the $100 note and runs to pay his meal bill at the café.
- The cook takes the $100 note and runs to pay the gardener for his vegetables.
- The gardener takes the $100 note and runs to pay his wine bill at the tavern.
- The publican slips the $100 note to the local prostitute drinking at the bar, who has also been facing hard times.
- The prostitute then rushes off with the $100 note to the hotelier and pays his room bill.
No sooner was the $100 note back on the counter than the emergency services personnel re-entered the hotel office to return his key, saying he had just received a call requiring him to move on to another emergency. With goodwill, the hotelier offers to refund him the $100 note.
This single $100 note allowed many in the village to escape debt stress and feel good about their future.
Here’s monetary economist Jeffrey Rogers Hummel’s discussion of the lessons in this story:
There are several ways to think about this intriguing example. But they must recognize that these transactions have made no change in any of the parties' NET wealth. True, in the beginning, each resident has a $100 liability. But each also has an offsetting financial asset of $100. In the end, they all have neither. So the $100 bill acts as a clearing mechanism.
This is a task normally done by banks. If there were a bank in town, it would do the same job and charge transaction fees. If it took a long time for some people to pay, it is reasonable for the bank to charge a fee (interest) for the Credit of $100 it supplied.
This economic system of banks issuing credit and charging fees is expensive, and the banks are unnecessarily compensated for the delays in money movement.
We don’t need banks to operate clearing houses. We need banks to transfer and store money, but other organisations can operate clearinghouse operations.
Two ways to compensate people for not receiving money immediately.
- Give the compensation as more money (interest).
- Give the compensation as discounts (less money) on their purchases.
With (1) the banks receive the money. With (2) the buyer.
There are two ways to compensate for the effort and risk of transactions.
- Accumulate the compensation and pay periodically.
- Provide it at the time of transactions.
With (1) the banks and owners of Capital receive the money. With (2), the seller, buyer and other stakeholders receive the money.
Bank systems assume that money in a Bank generates more money while it is in the Bank. This makes Bank systems expensive because they make money by storing and generating money. Removing the need for extra money and the need for Capital Markets to distribute profits result in substantial cost savings. The economic system operates with less money and is more productive (same service for less money).
Village Clearinghouses
With modern computing and communications, the clearinghouse functions of a Bank can be handled with the village’s own clearinghouse while using the Bank to transfer the funds electronically. The costs of the local clearinghouse are close to zero.
The village can run its own clearing house and protect the money using the same techniques as Banks. The Village can have a zero-interest mortgage over the member’s assets or transfers the asset value to a Village Company or Cooperative that owns the assets. It then issues the equivalent of titles to give members security over the assets they use.
Importantly it gives a return on loans with discounts rather than interest, and it uses some of the returns and transaction fees to pay for the clearing house operations.
When transferring money, profits or discounts are shared between parties to distribute earnings. The approach eliminates the need for money markets and monetised asset markets like housing and share markets.
Community Banks are expected to want to operate Village clearinghouses because their member customers own them, and they can outcompete private banks. However, any ad-hoc community can set up Village clearinghouses for any collection of assets while using Banks to store money and transfer it securely.
People can move freely between communities, and markets are set up for specific products and services. The specialisation of markets reduces costs further. Products and services can seamlessly move between communities meaning community markets will stabilise around the lowest cost. Introducing innovations and new products and services will change the clearinghouses incrementally, allowing a non-disruptive introduction of innovation.
There will be clearinghouses for groups of clearinghouses to transfer assets between clearinghouses.
A New Economy
An economy built around clearinghouses rather than Capital is a New Economy.
The New Economy eliminates the need for interest; when interest goes, so does the need for Capital Markets. Capital itself is an artefact of double-entry bookkeeping. It is the money left over, or the profit, on each transaction. Accumulate all the profit for a set of transactions over a given time frame for an organisation, and the result is Capital. Hence Capital Markets are a way of distributing the profits.
Operating local clearinghouses where the profit is distributed to all the stakeholders at transaction time removes the need for interest and Markets to distribute Capital. The removal of Capital Markets makes for an efficient, productive economy. However, local clearinghouses will coexist seamlessly with existing Capital Markets as the clearinghouses are entities that fit in both the old and new economies.
The New Economy will evolve from the existing Capitalist Economy. It is made possible by computing and communications technologies, and the infrastructure to make it scale has only existed in this century. It will prevail because clearinghouses are based on sharing relationships to distribute profits rather than price-competitive Capital Markets to win profits.
Market Economies
Economists believe market economies are better than centrally planned economies because they are:
- Efficient as resources are distributed according to the laws of supply and demand, which theoretically leads to optimal efficiency.
- Innovative because a competitive market environment encourages innovation.
- Free as they typically offer high levels of economic freedom.
- Responsive as they can adjust to changes in conditions more quickly than planned economies.
- Decentralised that better reflects the diverse preferences and needs of the population.
Unfortunately, modern markets are increasingly centralised, unplanned and dominated by global oligopolies, so we have the worst of both worlds. With globalisation, market economies have evolved towards unplanned and undirected centralisation.
Local clearinghouse markets will reverse the trend and lead to the benefits of free markets. The difference is that there are multiple markets for multiple products and services, and consumers and assets can move between markets with little friction and low cost.
Within each local market, resources are distributed to maximise the value to buyers and minimise the amount of money in the market. This compares to the existing markets that maximise the value to owners by maximising the amount of money in the market.
Local community-owned clearing house markets will reverse the trend towards globalised oligarchy-owned, centrally controlled money markets. They will increase output for less cost within environmental constraints and satisfy most needs for the least effort.
Market Structures
Competitive Markets are more expensive because they are more complex. Each entity in the market is meant to operate independently. A measure of complexity is the square of the number of connections.
The Competitive Market has 5 connections and a complexity of 25. The Local Community Market has 2 connections in the green market, 3 in the grey and 1 between the green and grey markets for a complexity of 14. The more complex, the greater the cost.
To overcome the complexity of large free markets, humans invented interest and Capital. The cost is transferable, and the Capitalist system favours moving the cost to those who do not incur it. Owners take all the profits. Banks keep all the interest on new money. A solution is to share profits and interest proportionately to the effort to produce the interest and profit.
Sharing profits and interest is harder the more entities involved. The current Capitalist system does it by having more wealthy individuals than poor, so there are fewer people and companies to share at any level of wealth.
A better solution is to have cellular fractal networks. A free market of independent entities is expensive. A cellular structure of intersecting markets costs less and evolves into more efficient markets.
