The Social Credit Monetary System

The Social Credit Monetary System is a sound basis for a monetary system. It completely eliminates the need for a bank, or even a centralized issuing authority.

Suppose that A manufactures and sells shirts for $20 each, and B manufactures and sells shoes for $60 a pair. In a pure barter system, A could trade with B, three shirts for one pair of shoes.

In the current economic system, A and B would never perform a direct barter exchange. With a 50% taxation rate, for example, A would need to sell 6 shirts to get enough money to buy one pair of shoes. A sells 6 shirts for $20, pays $60 in taxes and has $60 left. B needs to sell 2 pairs of shoes to get enough money to buy 3 shirts. The government has stolen half of A's and B's work. Wouldn't it be nice if A and B could barter directly with each other and not report their transaction to red market agents? It's none of the government's business what A and B decide to do in private. Besides, it would be very difficult to enforce unless red market workers spy on everyone all the time. The Social Credit Monetary System has no centralized issuing authority. This makes confiscation via taxation or inflation difficult.

In this post, I ignore the confiscatory effect of taxes. Taxes could be collected under a Social Credit system, by giving credits to the government. This would allow for 100% transparency in how tax money was spent. Even better, under a Social Credit system there might be no involuntary taxes at all. People would only pay for services used.

Instead of quoting prices in dollars, A and B could have quoted prices in silver. For example, A could sell shirts for 1 ounce of silver each. B could sell shoes for 3 ounces of silver a pair. They could quote prices in gold. They could quote prices based on the time spent laboring. For example, it takes A 1 hour to make a shirt and B 3 hours to make a pair of shoes. However, there's a defect in quoting prices based on time spent laboring. Perhaps making shoes is harder than making shirts. Perhaps B is a more efficient worker than A. Perhaps shoes have more expensive raw materials than shirts.

The important thing is that A and B agreed that a pair of shoes is worth 3 times as much as a shirt. The same ratio of 3:1 applies no matter what they agree to use as money.

An alternate monetary system should not use Federal Reserve Notes or any fiat money as its basis. That defeats the entire purpose of an alternate money system. People could still trade for Federal Reserve Notes if they want to. People still need Federal Reserve Notes to pay taxes and purchase pink market services, even if they work under a Social Credit Monetary System sometimes.

People could use anything they wished as money, provided they agree on a method to convert from one to the other. For example, if two people agree that 1 ounce of gold is worth the same as 20 ounces of silver, then they can trade if one person has gold instead of silver. People can convert from silver to fiat money at the current market price.

If I was starting a Social Credit Monetary System, I would organize it so that people could use anything they wanted as money. I'd prefer to do all my personal transactions in silver or gold.

Below, assume all prices are in ounces of silver, but any unit of stable value works. Quoting prices in dollars doesn't work, because the issuing authority for dollars inflates. Using gold or silver makes sense, because they have stable real value and can't be forged. The mining rate of gold or silver is slow enough to not affect things much.

In the Social Credit Monetary System, everyone starts with a balance of zero. There is no central bank or issuing authority. Continuing our above example, A sells shirts for 1 each and B sells shoes for 3 a pair. If A buys a pair of shoes from B for 3, now A has a balance of -3 and B has a balance of +3. If C buys 3 shirts from A, now A has a balance of 0 (he owes B 3 and has a credit of +3 from C), B has a balance of +3, and C has a balance of -3. Suppose that B and C trust each other. Then, B can allow A to exchange his debt for for C's. A's balance is now zero, B has a balance of +3 (owed by C), and C has a balance of -3 (owed to B instead of A).

If B and C did not trust each other, then B would be unwilling to let A swap C's debt for his own. A would have to carry a debt of 3 to B and a credit of 3 from C. If B demanded payment of physical silver, than A would have to call his debt from C. If C defaulted, then A would have to come up with silver via some other means.

Suppose that D has a balance of -1000. D wants to buy a shirt from A for 1. A will look at D's balance of -1000, and may refuse the transaction. He might demand immediate payment in physical silver. On the other hand, B might come to A and say "D is a good guy. He'll pay off his debt eventually." In that case, A would accept a debt of 1 from D, but A would hold B accountable if D defaulted.

There is no centralized issuing authority. When C says he has a balance of -3, he should also cite who has a debt to C and who has a credit to C. This allows others to check C's trustworthiness.

Very little physical silver needs to be delivered. It works as long as most people keep a balance near zero, and the parties mutually trust one another. Further, suppose that B was a very skilled shoemaker. He might have a large net positive balance of payments. In that case, instead of demanding physical silver, he might be content to have A, C, and D owe him potential future favors. Unlike a bank, who would extort via the Compound Interest Paradox, B would extend credit to his friends for future favors. If the unit of value is stable, such as an ounce of silver, then B does not even need to charge interest. In fact, B might be better off leaving some of his wealth with A, C, and D. If B has physical silver, red market bandits could seize his silver. (An IRS seizure is an example of red market theft.) Red market agents can't steal the favors owed by A, C, and D! (However, red market agents could kill or imprison all four of them.)

Notice that in the Social Credit Monetary System, you can't just keep track of the total balance. You also have to keep track of who owes what to whom. Debts can only be exchanged when the parties mutually trust one another. If someone has an imbalance of payments, they can always deliver physical silver or other goods to correct the imbalance. There is no centralized issuing authority. A's debt is backed by A and only by A. If A dies with outstanding debts and insufficient assets, then his creditors are stuck.

This system has no centralized issuing authority. There is no possibility of the Compound Interest Paradox sucking away the wealth of society. People can still make loans at interest, if they want to. In the above example, A could offer to D "I'll sell you a shirt for 1.05, but you don't have to pay me for a year."

The Social Credit Monetary System has a much sounder basis than the traditional financial system. There is no need for a centralized issuing authority. There isn't even a need for people to trade physical silver or gold, if everyone keeps a balance of payments. Everyone keeps track of their own transactions. It is potentially cumbersome and different that what people are used to. However, computers could easily process the transactions. It could be implemented in a way that is easy for the average person to understand.