3 Jun 2014

Why an IOU based system is better than conventional money systems

Since launching the Owe'm system a few days ago, I've been having a number of exchanges with various colleagues about the relative merits of an IOU-based system compared with more conventional money systems.

I'm becoming increasingly convinced that the advantages of using a pure IOU based system are enormous.

In a conventional money system, you create a fixed number of tokens - coins, notes, vouchers or whatever, and you distribute them among the members of the population. There are a whole range of different ways you can do that initial distribution.

For example, you could decide to simply give everyone a fixed number of tokens. This is essentially what is suggested under a citizens income scheme.

Alternatively, you could distribute the tokens to people who do work that is in the interest of the community - building bridges, repairing roads, teaching children, looking after the elderly and infirm, or whatever.

Another option is to provide the tokens as loans to people and projects that are considered to be of value.

Whatever the scheme, someone has to decide (a) how many tokens to create, and (b) how to distribute them. And even before you get there, you have to decide who gets to decide.

Once the tokens are in circulation, there will be a natural tendecy for the tokens to accumulate with some members of the group. Initially, this may well be because those members are working hard, and earn the tokens that they get. But inevitably, as the tokens accumulate, some people will end up with a lot more than the others. You will tend to have a situation where there are not enough tokens to go round, and the poorer members of the community may end up having to borrow tokens from the wealthiest members - who will be happy to make loans, but will certainly want to charge interest. And before long, you will have one group of people (let's call them the workers), who end up working for another group of people - the ones who have managed to get their hands on the tokens (let's call them the capitalists). 

Indeed, some of the wealthy people may well realize that it is in their interest to restrict the number of tokens in circulation. That way, the poor members will be even more prepared to work hard for them, simply to get their hands on the few remaining tokens that are still in circulation.

Now, compare that all too familiar scenario with what would happen in an IOU based system such as Owe'm. Remember that the idea here is that there is no actual money. You start off with €0. Each new member who joins the system gets an account with a balance of €0. But they are given the right to emit IOUs to other people. If someone does some work for them, they can acknowledge that by sending them an IOU. If someone provides some goods, again they can acknowledge the fact by emitting an IOU.

Importantly, there is no limit to the number and the value of IOUs that any individual can emit. If they can convince someone that they can be trusted, then so be it. But, for every IOU that you emit (and which leaves you with a negative balance), someone else will become positive.  And so the net value within the system will always stay at €0.

I see some amazing advantages to such a scheme. It is impossible for anyone to restrict the amount of "money" that can be used. It's not because one member of the group is very positive, than they can restrict the freedom of others to emit more IOUs.

Secondly, there is absolutely no need to worry about how much "money" to create, how to distribute them, and who should be given the job of making those decisions. In the IOU based economy, everything just works by itself, with no need for centralised control. The only thing that needs to be done centrally is to set up the initial system with all the safeguards needed so that people can trust it. I seriously think that this is already the case with Owe'm.

Maybe I'm wrong, but at least for the time being, I'm very enthusiastic about the possibility that IOU based transactions could be the solution that we are all looking for.

Finally, to explain the difference between Conventional Money systems and an IOU-based one, I've just prepared a short presentation video. I hope you like it.

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