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Balancing social and financial capital to create better money

7 min reading

Let's take a look on how to create better money and build a capital in a safe and secure method.

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Money is in our heads. But what will that look and mean in the future? Before we think about the future, let's first look at what money means and its history.

Textbook explanations about money are a medium of exchange, store of value and unit of account. While this definition is accurate, it does not explain the human perception of money. Money is a social construct that we all agree to use. It is desirable to add confidence to your lifestyle, influence others and signify its importance.

Barter system (or is it?)

A common story they tell us is that the money comes from a lack of barter deals. The exchange known as the "double willed deal" problem was too restrictive and required more flexible means of exchange. According to anthropologist David Graber in his book Debt: The First 5,000 Years This Story Is Not True. To summarize his discoveries in ancient society, what was discovered as "money" became suspended barter. For example, I don't need item A right now, but I might need it in the future. I'll give you item B and ask for A when I need it. This is the creation of the first credit.

However, to work with foreigners outside your community, bartering is necessary as it is not possible to get credit from foreigners. This is a weakness that limits foreign trade. Another drawback is the scalability of trust; in the case of tribes, the number of people interacting with each other is small enough to control. But in the case of a country, the trust network limits the countries with which it can trade. In order to be able to trade within a country, the currency used must allow trading with members outside the close circle of trust.

Also read: 5 reasons why crypto is grateful

Commodity money

What is needed is a “universal” set of values that allows people to do business without knowing each other. The array consists of many things like salt, cod, and tulips, but the most memorable is the use of gold. The problem with goods is their inability to keep up with the economy. Limited supplies of growing population and productivity lead to instability and deflation. In other words, if the offer stays the same because more people need it, there is less bypass. It hinders economic activity because there is not enough for trade. The demand for money increases the purchasing power of the currency and lowers the prices of goods and services, which reduces production. Reduced production means job losses.

Paper Money

After deviating from the gold standard, the state forced national banks to monitor money creation by commercial banks. Cash bills issued by the government; However, most of the money in today's economy is managed digitally by commercial banks. This money is listed in law as legal tender, which in practice generates as much money as the government. This type of money is called "fiat money", comes from the Latin word fiat, which means "let it be done".

The problem with this arrangement is the centralization of economic power. Banks should use it to determine the creditworthiness of citizens and create money responsibly. Because these institutions benefit from lending, there is a strong incentive to continue lending and compete with risk. These incentives led to systemic problems and mismanagement, as the 2008 financial crisis demonstrated.

Since social capital does not go hand in hand with financial capital, risk can only be captured by interest compared to the deferred barter mentioned above.

The effect of interest rates has a significant negative impact. When it comes to loans, customers have to be in constant debt. This stimulates the growth of wealth inequality, complicates interest rates on debt, and creates money only for those who can already afford it.

Also read: In Singapore, two MAS-regulated Bitcoin funds have launched

Future money

If we envision the future development of money, we can first highlight the desired properties and then build on the experience of the previous system:

  • Currency stability through flexible money supply: Prices of goods and services are less affected by a shortage of money. All previous monetary systems mainly focused on this feature.

 

  • Collectively, it is regulated by a public mandate: The implementation of the circulation of money must belong to the people. That is, the ability of citizens to act economically can also be maintained.

 

  • Pluralistic and adapted to local conditions: In the case of raw materials, certain areas are supplemented by large deposits, which leads to an uneven distribution. In the case of a credit-based system, the system must be able to match the actual exchange rate of goods and services in the distribution area.

 

  • Decentralized and transparent: To avoid mismanagement, centralization must be reconciled with transparency to allow for adequate oversight.

What if we had a system that allowed liquidity to be created/destroyed on demand with democratic oversight? Instead of money flowing through a chain of institutions, what if we could "print" it as long as we followed the rules that everyone had chosen - a truly decentralized system empowered to empower anyone?

As it turns out, there's a name for it:

Mutual Loans

Mutual Credit Systems (MCS) is a common IOU network used as a medium of exchange. One example is Alice, who pays Bob for bread. Alice's account is debited with 20 (balance = -20) and Bob's account is credited with 20 (balance = +20). Note that no banknotes are used here; it was "created" by the trust between Alice and Bob. In MCS, members receive money made between Alice and Bob. That means Bob can spend Alice's credits on other goods and services. No bank is required here, and loans made here are interest-free to prevent the debtor from using the debt to accumulate wealth. The community trusts its members to keep promises and take risks together.

Co-credit systems have historically had their drawbacks. They have not been adapted for the 21st century through the use of the Internet, communications and cryptographic technologies. At Koru, we are building the future of the monetary system by enriching credit together with modern technology. But what about bitcoins? It would be too easy to call Bitcoin "digital gold". It artificially creates a lack of value and exists in a hopeless network. In many ways, Bitcoin has a lot in common with strengths and weaknesses. Bitcoin allows transactions between unknown members; however, the supply is not dynamic enough to keep pace with the economy, leading to deflation.

Other altcoins have a more dynamic supply, but we've seen the same problems with deflation and speculation, which make them unsuitable for stability. Algorithmic stable coins are very promising; however, they are tied to the local currency, making them unsuitable as a substitute for money unless they find a better solution. Bitcoin sees trust as a problem and uses supply management algorithms to allow pointless payments. Coru sees trust as a human quality, but the distribution of trust needs to be decentralized rather than being held and managed by institutions. In fact, there is a tool to fit every job, which is why Koru is designed to work with other cryptocurrencies to cover cases where trust is impossible.

 

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