Let's all create our own money!

I've been thinking about the new Paym ("Pay 'em") system that has just been introduced by 9 banks and building societies in the UK, and which allows people to transfer money between accounts with a simple mobile phone application. It's been developed by the Payments Council. You just need to link your bank account to your telephone number, and if the person who you want to transfer money to is also on the same system, you can easily transfer money directly with your phone.

On the Paym website, there is a bit about how many people in the UK have IOUs - and that the average person is owed about £21 a month. When people end up owing someone else some money, this is effectively like money creation. Thus, if you do some work for me, and I agree that I now owe you £50 (say), this is a bit like creating some extra money.

So, that got me thinking.

Suppose that we modified the Paym application so that in addition to being able to transfer actual money from one account to another, you could also emit an IOU to another person. The App on your phone would not just keep a track of the payments you have made. It would also keep track of the IOUs you have emitted to someone else, and the IOUs that other people have made to you.

So, I might end up with the following scenario.

IOUs (I owe them) Total : €45

• Chris : €20
• Michèle : €15
• Ursula : €10

UOIs (they owe me) Total : €45

• Stefan : €5
• Tasmin : €5
• Kieran : €15
• Jonathan : €20 

Current Balance (UOIs minus IOUs)

• €0

This is really just the equivalent of the Tally sticks that were used very succesfully in the Middle ages for centuries before the Bankers discovered how they could control money creation, and charge interest. But note that while there is a total of €90 in "circulation", I'm actually with a net debt of €0 because I am owed as much as I owe.

Now, here's the amusing thing. Let's suppose that there is a server somewhere that is keeping a track of who owes IOUs to who, and that the system notices that while I owe Chris £20 and Jonathan owes me €20, Chris also owes Jonathan £20. In that case, there is a loop, and all three debts can be written off.

These loops can be much longer than 3 of course. Wouldn't it be a pleasant surprise to discover that your list of IOUs and UOIs just got shorter because of a linked list involving tens of other people, many of whom you have never met!

Of course, what really makes the idea so attractive is the fact that the "money" that is being used in the system is entirely interest free. No bank will need to lend me the money that I use to post an  IOU to someone. And no bank will get interest payments for loaning me their "money".

Some people may complain that this is just a sophisticated way to avoid paying tax. Obviously, there will be no VAT to pay. And if, when someone does some gardening for me, and I add €100 to my list of IOUs, it would be effectively a way to avoid paying the social charges. But as you know, I would be in favour of scrapping all those employment charges anyway.

And, if the system became official, I would see no problem in having all such transactions taxed using exactly the same universal FTT that would apply to all the other Euro denominated transactions.