Natural money theory
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The Natural Money Theory was developed by an English actuarial mathematician, Stephen Wheeler, living in Argentina in 2009 and is based upon the following:-
Natural confidence is generated when you can see, feel, investigate, project, understand, transact, communicate and agree. It is not distorted by time, peer group pressure, the media, greed or fear. It has been proved that primary money in the form of cash or deposit is the most efficient way of transacting business because it is a common denominator in that the value of products and services are expressed normally in this form.
The definition of primary money can change depending on the physical location and the necessity of the buyer or seller. An example is that an international transaction will probably be in the reserve currency that currently is the US dollar and a transaction in a remote third world village could be in a currency peculiar to that village. When there is over confidence then many forms of currency would be normally acceptable and vice versa with disconfidence.
When there is a paradigm change in confidence such as in a depression then international currencies or even national currencies may not be acceptable. The definition of primary or secondary monies can change with a primary money becoming secondary and vice versa. What is important is that the money type is acceptable and both the buyer and the seller have confidence in that money at the time of acceptance. In a worldwide depression local money could become the local primary money as long as the users have the confidence of its acceptability, meaning its security and the rules in respect to its issuance. There is no need for this local money if there is sufficient other forms of money and therefore the influences in respect of the requirement for this money are that the people outside of the area do not have the confidence to put sufficient money into the area or the people inside the area do not have confidence in the money outside of the area.
In respect to the control and use of the money it is obvious that this is more possible in mini areas. If the money is used then it has an economic impact. Money saved in the pocket or in the house is dead money and therefore in times of low confidence then the people with confidence have to have the ability to use this money, in a depression this normally means the government. Conversely in times of high confidence this money has to be taken away from the system. Blunt financial instruments such as interest rates or general taxes are not specific enough to allow the good industry to grow and the bad to die. It is exactly the same as in farming where the pesticides have to be very specific and hit classes of unwanted plants such as weeds.
Issuance and control of natural money via Fideicomisos
It is obvious that there have to be different levels of money and control over each level so as not to produce unwanted inflation nor deflation. Confidence is the main determinant in respect of the velocity of circulation of money and hence the amount of money available and is in the control of the people and not the governments and therefore should be treated as a variable. To manage the economy efficiently the total money in each sector has to be controlled and therefore the primary or secondary money available should be printed or deprinted to the extent of the decreases or increases in the variable money and the plans of the government, local, provincial or national.
The ultimate control has to be with the national government and therefore the system has to accommodate this.
Previously it has been the private financial sector that has been responsible for the printing of secondary money in the form of house loans, car loans, credit cards etc within the constraints of the banking multipliers set in the Basle agreements. The reason for the introduction of the banking multiplier was to safeguard the deposits if there was a level of defaults in respect of the loans made by the banking system and this in turn gives some control in respect of the lending ability of the banking system. This control was then completely superseded by the finance houses in respect of securitisation which left the banking system with a continuous ability to increase lending without these increases in loans being shown in the government lending numbers, M4. It was possible to hide this massive creation of secondary or virtual money by expanding the fiscal paradises and stopping the production of the M3 banking numbers.
The initial major problem for the world economy and financial markets in 2008 was not that so much of the virtual money existed but that the economies were requiring increasing increases in virtual loans to stay ahead of a recession in the housing, automotive and service sectors.
In a situation where there is a long and sustained lack of confidence any new monetary system has to be absolutely transparent and for this reason the use of a fideicomiso or trust for the creation of secondary money by the multiplication of primary money is ideal. The 1st world has exhausted its ability to create secondary money because it has used up most of the available security in respect of houses but some countries, especially from the 3rd world, do not have high level sophisticated financial markets are far more flexible if they have commercial surpluses because any increase is likely to promote a demand for imports unless it is concentrated on increasing the ability to manufacture and to export.
To control this type of private sector created money by the very blunt instrument of interest rates is impossible because loans and investments will only be directed to areas that show growth thus causing inflation and more growth that will continue to give returns above the cost of capital and hence economic and financial distortion.
For complete control and transparency the concept is to put packets of primary national money into fideicomisos and multiply this base money by the issue of variable amounts of provincial and municipal money depending upon the local requirements and also the state of consumer and corporate confidence. Inflation is to be locally and nationally controlled by the amount of issue or deissue of secondary money directed to defined areas and also by taxes, subsidios and interest rates. With the creation of new money there is no requirement to charge interest in order to promote programs of social, local and national interest and ecology.
The main differences between this concept and private sector lending is that the private sector requires the confidence in depositors, confidence to lend and confidence to borrow and that only happens when the economy does not require increased lending. It is an inherently unstable system complicated by the mismatching of the short term nature of the deposits in relation to the longer term nature of the loans. A change in confidence in respect of depositors or potential borrowers can cause major pressures in the financial system and a change in confidence to lend, which is under its control, probably results in a further change in the confidence and ability to deposit and borrow. The private financial system also takes away the money when there is no confidence and when the economy requires it. With the public sector money it is provided in areas of need at low cost when it is needed and is taken away when it is not required.
The conclusion of the above is that the 1st world government rescues of the banking system are completely misguided and that money should be put in the economy directly to resolve the problems and the deposits cannot be safeguarded because they were the results of the massive creation of virtual money.
The other conclusion is that there has to be a general change of emphasis in that in order to gain returns on deposits the deposit holders have to share in the risk of investment in order to provide more incentive to the users of money. The new system of the provision of finance for national, public and social needs without the cost of interest will force general interest rates lower and more incentive to produce.