Despite it's tiny size, Iceland experienced the third largest financial collapse in history, and largest by GDP, during the 2008 Global Financial Crisis (GFC). Nationalisation of the country's three major private banks followed, and constitutional reform has been on the agenda and progressed since. One of the major outcomes of this disaster has been a serious inquiry into reforming the country's monetary system. Most notably, who should have the power to create money?
Who creates the money now?
In the vast majority of cases it is commercial banks that create most of the money in circulation around the world. They do this via a unique and frankly extraordinary privilege they have amongst corporations - the ability to literally magic money into existence at a keystroke, and then earn interest on it. The act of loaning money (created as debt) literally creates new money.One argument in favour of this system is that it keeps money creation out of the hands of politicians. Something we can probably all agree is a good thing. However, there are significant downsides to this system. By leaving the vast majority of money creation in the hands of a relatively small number of private corporations, we cede a lot of control over how much money is created and where it is spent in the economy. This presents an inflation risk, and leads to bubble creation. And equally concerning is that it is potentially impossible to pay off world debt. Because each new unit of money that enters circulation requires even more money to repay the interest charged on it, we are always playing a catch up game.
What others methods can we use to create money?
Central banks, like the Federal Reserve in the US or the European Central Bank, have the ability to create new money, and indeed they do this from time to time. Most notably when they engage in what's called Quantitative Easing (QE). Keep in mind what is going on here. A central bank is literally creating "free" money and putting it into circulation. This goes against what many of us instinctively think as to where money comes from and how it is used. Remember the common maxim - "Money doesn't grow on trees"? This is supposed to represent the fact that money is scarce and holds an almost mystical set of properties (if it doesn't come from a reliable source, where the hell does it come from, right?). But the reality is that money (metaphorically) does grow on trees. It's not necessarily scarce. It can be created at will. The only reasonable constraint is what effect any new money has on already existing money (i.e. inflation).When we realise that money isn't some mystical creation from who knows where, and that we are in fact in total control of the process, we are better able to consider more rational approaches to its creation.
Iceland and Cryptocurrencies
So what exactly is Iceland proposing? Among other things, they are proposing to remove totally the privilege commercial banks hold to create money (and charge interest on that money) and return it to the independent central bank. The proposal is known as the Sovereign Money System, and would see the Central Bank of Iceland solely responsible for money creation, leaving commercial banks to fulfil the role of safekeeping and transacting money for a fee, and lending out already existing money via a Full Reserve Banking system. And again, this isn't a novel idea. In the 1930's the economist Irving Fisher proposed this in what was to become known as "the Chicago Plan".
A consequence of this is that commercial banks will no longer be the prime determinant of where new money is spent in society (currently 50% or thereabouts of most banks assets (i.e. loans, i.e. new money) are supporting real estate bubbles). To account for this, the proposal suggests various methods be considered for getting money into the economy, and these include funding certain government spending (similar to Jeremy Corbyn's "People's QE" proposal) and what's known as "helicopter money" (i.e. direct deposits into citizens bank accounts) as first proposed by Milton Friedman.
Direct deposits into citizens accounts... Does that sound familiar?
When applied universally and unconditionally, this is exactly what a Universal Basic Income (UBI) would be. And while most UBI models envisage either savings or taxation (or a combination of both) as a means to fund the payment, as we can see from the realities of cryptocurrencies and the proposals from economists and public figures as diverse as Fisher, James Tobin, Milton Friedman, Jeremy Corbyn and the parliament of Iceland, it's not the only way to potentially fund desirable projects. And remember, money derives its authority to represent value from what the people who hold it themselves value. If we as a society value the concept of a UBI, there's nothing to say that money can't be created to represent and store this value in the same way that money is currently created by private banks to represent all sorts of worthwhile (and a lot of arguably worthless) value.Can a UBI be implemented (in part) via a cryptocurrency?
Like any currency/monetary-system, as long as it can store value in a stable and accountable fashion, there's no particular reason why a cryptocurrency can't function in this role. And indeed we are already seeing cryptocurrencies move into this space. Most notably Grantcoint. Grantcoin offers a feature of independence in that the amount of new money created each year is set in stone (3.5% inflation). This removes the possibility of an authority getting greedy and pumping money out at an excessive rate, although it does remove one simple method of being able to manipulate inflation levels in the economy.The Grantcoin project will be a fascinating one to watch, as it will provide a real world experiment regarding the simplification of the monetary system. Will its holders continue to value it? Will inflation become a problem? Will it gain wider traction in the retail world? I can't authoritatively answer that. But I'm glad it's happening, and I will be watching keenly to see how this project progresses.
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