Money System Thought Experiment

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Try this simple thought experiment: Imagine a New Economy living wealth money system that roots the power to allocate money in people and democratically governed communities of place.

Managing Savings and Investment

Consistent with the principle of shared prosperity, all jobs pay a family wage, with no more than a modest differential between the highest and lowest paid. Because current income covers daily expenses, there is no need for consumer credit except for the largest purchases like a major appliance, car or home, for which credit can be arranged at a modest interest rate through a local credit union.

Some people choose to consume less than their incomes allow. Generally they put these savings into a term savings account, the equivalent of a certificate of deposit, in a community bank, local mutual savings and loan association, or credit union, most of which are organized as nonprofit member owned cooperatives. Community banks specialize in loans to local businesses. Savings and loans specialize in financing mortgages for home ownership. And credit unions specialize in providing consumer credit for major purchases.

In return for agreeing to leave their money in the account for a minimum specified time, member depositors receive a modest interest of between 2 and 3 percent and borrow at 5 or 6 percent, which provides an interest spread adequate to cover administrative expenses and a reserve for bad debts.

Any surplus at the end of the year not needed to augment reserves is distributed to the members as a dividend. Thereby money received as interest continues to circulate in the community and is available to future borrowers to make both interest and principle payments as they come due, thus avoiding artifical pressures to expand borrowing solely to meet interest payments.

Over time, everyone participates in the local financial institutions as saver and borrower in relatively equal measure. This mitigates the tendency for money and real wealth to concentrate in the hands of lenders. Temporary imbalances are resolved by progressive tax policies. A relatively stable money supply and the continuous recycling of interest pretty much eliminate business cycles and inflationary pressures. Debts are modest and associated with real purchases to meet real needs.

Creating and Contracting Credit

In the New Economy living wealth money system, most credit money is created at the state and local level. Community banks can create credit within modest limits based on a combination of their deposits and equity capital as required to respond to changing local needs and opportunities for productive business investment. In addition, each state government has its own state bank, which allows it similarly to create its own credit, within strict federal guidelines, to support public investment and maintain essential services and employment in times of economic downturn.

Responsibility for overall national money suppy management resides with the Federal Reserve, which in the New Economy operates as a transparent publicly accountable federal agency in service to the public interest. This gives the federal government the ability to expand and contract the overall national money supply as needed with a few simple accounting entries.

If there is need and opportunity for environmentally and fiscally responsible expansion, the federal government can expand the money supply and increase public expenditures with no need to borrow from private financial markets. If there is need to shrink the economy and overall consumption to reduce inflationary pressures and restore ecological balance, it simply reduces its spending relative to its tax receipts and extinguishes a portion of tax receipts by reversing the accounting entries by which it created that money in the first place.

The whole system operates as a well-regulated, transparent, publicly accountable public utility responsive to the needs and opportunities of the real-wealth economy rather than to the whims of financial speculators.

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Adapted from David C. Korten, Agenda for a New Economy: From Phantom Wealth to Real Wealth. A Declaration of Independence from Why Wall Street (San Francisco: Berrett-Koehler Publishers, 2010), pp. 280–2.