Why isn’t America a free market? Because there’s no price mechanism for money.
Grand, civilization affecting investment decisions have no coordinating signal to help us know how to coordinate our economic activity. You libertarians know all about this, and all about the corruption and turf-protecting “Progressivism” that is to blame for this.
This is why we don’t have a cure for cancer, why there’s still poverty, and why we don’t live on the Moon.
Most libertarians know the solution intuitively: free money. Right, not free to have, but money free of market distorting constraints. This is why we are so psyched about crypto-currencies. In my opinion, however, crytpos have flaws. I have been mulling over a better idea, and I seriously want to consider an entrepreneurial effort to get it up and running.
This article will present the idea as clearly and concisely as I can manage, and then I will ask for anyone who wants to help pursue the idea to form a sort of online “club” around it. As for myself, I am currently an MBA student at an institution connected to Asia, and I might have some ability to have access to resources for entrepreneurial work there.
Cryptos have flaws
I would propose two categories of flaws for crypto-currencies. First, they aren’t backed by anything. Second, they threaten the government too much.
While bitcoin speculators have caused its price to skyrocket, I think this has more to do with the deep structural flaws and skepticism concerning the current economic establishment. People know that government debt is a problem, and want to be protected from it. However, bitcoin is volatile.
Crypto-currency’s anonymity has benefits, but these in turn cast doubt on the stability of the currency. How do I know the CIA didn’t buy up all the bitcoin, and stand ready to throw the market? Or use it to catch criminals? Big data, and massive surveillance can punch through ostensible anonymity.
What’s the right crypto to buy? Money has to be in demand, in order to have value. Does the public know how to use cryptos? Even crypto users fight over preferred versions.
Finally, cryptos threaten government existentially. Hey, great right? Not if you’re the government and have legions of armed goons, and control almost everything essential in society. I like the idea of cryptos as renegade activism, but I don’t believe the government will ever allow itself to be meaningfully threatened by them. That makes cryptos a bad proposition for “real-life” economic activity, from the get go.
I know Libertarianism is a “remnant”. However, the idea is for us to bring ideas into the mainstream so that – eventually – society evolves in a better direction, isn’t it?
The solution: asset backed cryptos
There is a concept for money in my mind which seems incredibly clear, and I’m not sure why I don’t hear or read about it more often.
The idea is for a large logistics firm to warehouse assets in a contracted, predictable way, and issue currency against a basket of assets. Literally, you drive your truck to the warehouse, and they’ll give you a ton of steel in exchange for one of their notes. That’s the basic idea.
It makes sense for “throughput” firms to be intrinsic to the economy’s financial systems. So why not literally combine the two concepts?
In the most basic example, mines sell their product to the throughput firms in exchange for notes. These money-issuing firms establish contracts upon issuance of a currency. The currency is redeemable for a fixed amount of goods within a window (the firm thus can’t sell out, and doesn’t have to be liable for all the assets in their warehouse). The contract for the note issuance can specify multiple assets, and multiple windows.
What the throughput firms and the mines want to do, then, is schedule a “just-in-time” delivery contract as a single coordinated effort. That is, multiple mines will contract all at once with a throughput firm to determine quantity of materials promised, and total notes to be issued. The mines get paper notes, as a financial asset, and the throughput firm is responsible for making good on the real raw materials being brought to market in a predictable, orderly way. The business of issuing asset-backed notes is the business of coordinating throughput in the most effective possible way.
To back up this scheme, underwriting firms will guarantee the notes. That way, a supply disruption or unfulfilled contract has recourse. Insurance will grant value to the notes, on top of the assets they represent.
What insurance will do, now, is capture the costs of overhead – and effectively provide for them. Does a warehouse have sufficient security or safety features? What if weather interferes with delivery?
These questions represent real factors with real value implications in an economy. Business can’t concern itself with production and transaction alone. Business is all about how production interfaces with transaction.
In this sense, insurance as the backbone of the money paradigm also becomes the legal backbone of the commercial system.
What if someone doesn’t make good on a contract? Send goons to smash their gates done and take what’s yours right? Smash their factory, in spite? No!
Go to insurance. First, get compensated, but then see the offending firm’s rates skyrocket. They go out of business, their assets get liquidated into a special bankruptcy management throughput firm. For a period of time, old notes can be transferred to new notes.
Insurance price is a market mechanism that will incentivize good behavior. It would, in theory, nullify the necessity for governmental legal oversight of finance and commerce.
Finally, the money itself. Sure, a throughput firm could issue paper certificates with hidden inkblots and all that. Crypto-currency technology, however, is ideal. The purpose of money is to act as a neutral lubricant of commerce. It’s supposed to hold abstract value, and flow freely, far and wide. You don’t want to manage “contracts” for asset exchange. You want a “thing” with its own inherent substance, which can be unambiguously possessed, which is not attached to any given owner, which is easy to exchange.
Crypto technology provides a means for a trustworthy and cheap exchange medium. Even so, other than some overhead cost reduction (relative to costs of printing paper notes, or investigating counterfeiting), what’s the real advantage of cryptos?
Dynamic redistribution into higher-level currency baskets. More on this in a second.
What I have described so far is the basic first building block of such a money system. Now, I will discuss the consumer end of the system.
A currency made of currencies
If you have an unassailable crypto-currency share of a right-of-exchange for real, essential assets, then you have something with inherent value. Imagine now that you take these shares and build a higher-level currency out of them. In many ways, these currencies would work just the same as the lower-level raw material notes.
Imagine “Visa Bucks”. Visa takes steel, tuna, kilowatt/hour, railroad tonnage, and Northwest region warehouse sports sneaker notes, and baskets them into the “Visa Buck”. 1 million shares of “Visa Bucks 2018.2” are issued. The contract specifies a fixed, immediately redeemable exchange rate for a fixed total number of the goods notes in the basket. Visa would want to set the price so that, hopefully, they redeem all the notes in their windows by the end of the set time period. When “Visa Bucks 2018.3” is issued, at a set time (next quarter), a certain number of 2018.2 notes will automatically transfer into 2018.3 – specified in the 2018.2 issuance. However, 2018.3 will feature a different basket at different exchange rates.
All that matters is that retailers and distributors will need some of these notes. If the Visa Buck is managed well, it will be in demand by these firms. If the Visa Buck is managed very well, intertemporally, people will want the “Visa Buck” brand.
The goal is for a commercial currency firm to do such a good job managing their baskets and issuance, that people trust the name of the firm alone. The economic acumen of the managerial team will give medium-term value to the currency. That’s the keystone of building an in-demand currency. It’s also a great recipe for a well-managed economy.
For the retailers and distributors (and middle tier of production), they’re not going to directly manage what notes they get or not. They will hire brokers to trade a variety of notes and currencies from the firms ledger to the throughput firms for the goods needed. The brokerage firms will look at speculation, rates, and trends, and optimize the sale of currencies from a distribution or retail firm’s “wallet” so they get the most value at all times.
Consumers will also have crypto-wallets which consist of any variety of said consumer currencies. Banks will now have actual real work to do, to make money, in terms of managing these wallets. Consumers will not have to remember complex passwords. Banks will technically own and manage consumer wallets, and contractually owe the value therein to the consumer. Nevertheless, any person can simply create a crypto-wallet of their own, and manage it if they want.
At the retail counter, transaction information is exchange much like it is today. You give them a bank card, and their broker will deal with your bank on the transfer of all of the various currencies.
It’s possible that consumer banks will issue an abstract third level of currency which is simply a promissory note representing a contractually guaranteed value.
What would that value be?
The banking industry could form a trade associate which sets a “market average” price measurement scheme. Take the 10 most valued raw material notes, set the lowest valued to 1, find the average value of them all relative to that 1, divide by 1 million. That equals “One Dollar”. Now, if you have 50 Visa Bucks and 5 Columbian Coffee notes in your wallet, the bank can use its preferred brokerage’s numbers for how they’d exchange your account for those top 10 raw material notes, and boom! You can read a temporary “dollar amount” of your account.
Consumers would understand that dollar value is a floating thing, that their accounts consist of discrete notes which vary in value, and so forth.
What banks would do, then, is let consumers “fill their wallet” up to a maximum dollar amount daily, weekly, or whichever. I could say that I want fifty spending dollars today, and the bank will pull out my Visa Bucks etc. once, and then guarantee me fifty dollars at the retail counter irrespective of market changes throughout the day.
Obviously, banks would press the losses back onto their customers, so the idea would be to only convert money to spending purposes when needed. Yes, this would represent a subtle change in consumer habits. It would be similar to the old idea of having to go to the ATM and take money out, before getting to spend.
Credit cards would still work. You’re basically borrowing against a dollar amount, so you might actually owe more value to the company in the future, or less. Credit card companies could also make contracts which stabilize price changes, insulating both you and and them against potential loss due to market changes. For example, if you have Visa Bucks in your bank account/crypto wallet, and a Visa credit card, Visa might let you denominate your debt in either Visa bucks, or dollars*. Dollar relative to Visa buck will fluctuate, but Visa bucks owed would be a fixed amount which corresponds to what’s actually in your wallet.
*reminder: dollar here represents a calculated price measurement based on market averages, with trade associations developing the formula to calculate this value. Dollar is not a cash asset in this sense.
Here’s a summary of the market structure:
- Raw material notes issued by throughput firms.
- Currency basket notes issued by commercial financial firms.
- An abstracted measurement value, non-existent “dollar”, which some consumer and retail financial firms can guarantee against.
Here are the players:
- Raw material “factors”
- Throughput/financial firms
- Insurance/legal firms
- Commercial finance firms (Visa Bucks, baskets of asset-redeemable notes)
- Brokers (optimize trade of commercial and asset notes for commercial firms, to facilitate access to resources at the best value)
- Consumer banks (homogenize price measurement for retail-consumer transactions, facilitate consumer savings and spending)
- Technology management – cryptos, mesh-nets, preserving the substance of money mediums
Finally, finance and capitalization, how would that work?
Simply, we see the financial players already. The throughput firms would work with the factors to capitalize big projects. When a raw material note is actually issued, its contract can incorporate long-term planning. A steel throughputter can plan on continuing to offer 20 tons of steel per note, for 50 years. It can increase the currency’s issuance by expanding supply, and vice versa. But, their note is underwritten for 20 tons per note, period.
What the firm can do is promise “issuance rights”. Thus, though a note only applies to the window in which a good is offered for exchange (the warehouse can run out, and so can the notes), a mine can be promised 20% of all newly issued notes, in exchange for a continuous supply.
This promise of notes can be leveraged, contracted with a commercial finance firm. West Cappodocia Mines can promise X tons per quarter to “Global Steel” in exchange for a long-run 20% of “Global Steel Notes” with every issuance. In turn, WC Mines can trade half of the share of that promise to Visa Bucks. Thus, Visa Bucks is backed intertemporally by a fixed amount of the international steel supply. This makes the Visa Buck more valuable to brokers, and increases its long-term demand as a capital asset. Construction firms, payroll fulfillment, raw material throughputters will all value Visa Bucks intrinsically.
Commerical currencies, then, can promise shares of issuance. The long-term structure of the currency (consistent, predicted exchange for certain raw materials), plus its “brand” (management skill), plus time preferences, will all contribute to a futures price for shares of future issuance.
In other words, real economic activity, contracted promise of delivery of real goods is the foundation of financial activity. At the heart of this system is insurance, which prices in the risk of disruptions to economic activity.
Pricing in the risk of disrupted production and trade would inherently stabilize the financial system, and incentivize real growth as the key to economic expansion.
As for the economists’ beloved “time value of money”, well, this could be sussed out by looking at averages between commercial notes. Include current real economic value, and relative brand value, in the regression, and the leftover is time preference.
Making this happen
It all sounds complicated right? It sure is! If you look at business in the 1840s, it was a mess! A tremendous amount of complexity, in terms of human capital, has gone into the wealth our economy produces today. Functional, efficient economic systems are complicated.
The government has tried to reduce overhead with its central banking and regulatory schemes. You’re libertarians, right? You should know how that has worked out.
What matters with complexity is whether the complexity is structured properly into the system. Consumers need minimal complexity. Brokers can deal with substantial complexity, that’s what defines their value to the economy.
Even so, this system represents a huge change, and would require a complete rewrite of modern economics, finance, law, and accounting. Let alone consumer and retail habits.
Still, the principle of change is: start small.
I imagine there are emerging markets with less access to capital finance. In these markets, there would be a very high demand for market infrastructure: insurance, security, contract enforcement, etc.
I imagine a developed market could easily manage to provide human capital to serve less developed markets. A firm in L.A. or Hawaii could oversee accounts in Malaysia or Papua New Guinea. With the internet, these developed nation firms could provide brokerage services to far away places, and so forth. Until those markets can sustain these services themselves.
A developed market would need the tech. Cheap computer tablets, biometric devices, this sort of thing. Crypto-currency systems designed to “simply just work”. All to handle exchange, transaction, and so forth.
There would have to be some interface. Insurance would have to be able to visit a warehouse and check on security. Still, the price of webcams is cheaper than ever, right? I’m sure an insurance firm could find an economy of scale for security risk reduction measures.
Finally, a developing market would need backbone industries to support financialization. Maybe the local fishing industry, if fish is a huge food staple, can serve as a backbone for a micro-financed crypto-currency system. Villagers can literally press their thumbprints to tablets to exchange hand made crafts between each other, even get investment cash, all backed by the local fishers and the local demand for fish. Totally independent from outside cash. Sure, it helps if the fish can be sold in bulk for foreign “normal” currency to help pay the salaries of the brokers and underwriters overseas.
I’m sure markets like this must exist. The idea is to make these money systems a “good deal” on the small scale, so they “infest” some of the medium scale. Then, you have a formula for change.
Naturally, these smaller-scale implementations would be significantly less complex.
In the end, such a scheme could be taxed by government. However, taxes would apply directly to the real economy. Government wouldn’t have the same financing options, nor monetary tools available. Great! But they wouldn’t necessarily (necessarily) feel existentially threatened.
The profound significance of this system is that it frees money. Commercial finance firms can be bypassed. Individuals can have shares of asset-backed notes in their own self-managed crypto-wallets. Currency becomes a service, not an asset.
That old thing of JP Morgan sitting on his gold, then lending it out freely, then sitting on it, in order to consolidate his shares of national wealth – that’s done for. That’s called a currency which is not meeting consumer needs. A competitor would wipe the floor with that kind of nonsense.
Sure, there are still a few structural problems. Owning all the resource firms would give one a strong market position. Then again, monopoly behavior is wasteful, and never seems to work out very well for the guys doing it. You could buy steel from the throughputter, and stick it in your own warehouse, and wait for the next time Mr. Moneybags tries to jack up the market price to release your product.
Arbitrage, speculation, it all works much better when there are no command-and-control monetary features.
What I want to do
I’d love to do the following:
- Model this system in a computer and play around with it and produce data.
- Develop simple accounting and basic contractual paradigms to support this system.
- Develop or implement low-cost technological tools to implement the system (cheap bitcoin transfer tablets)
- Help an ideal developing market adopt the technology and see how it works.
- Encourage the spread of the idea, and who knows, maybe make a few bucks?
So, if anyone has anything here in their skill set (particularly the cryptos), let’s talk!
Preferably, drop me a comment and link to your favorite website related. Or, just think about this idea for a bit. Talk to your crypto buddies about it. Seriously, why doesn’t anyone ever talk about this?
In the end, how else do you change things except by doing it?
