How Money is Created

Intro

As OSE moves forward to create real economies, and therefore real money, it is important to understand what money is. Here are some explanations of how money is created. This is important to understand and view of modern possibilities with distributed Ledgers of the blockchain to create distributed validation mechanisms for money.

[1]

OSE Assessment

1. The Positive Money people above [2] propose than instead of banks reading money out of the thin air by fractional reserve loans - the government should instead perform this function directly. This means abolishing fractional reserve banking and declaring the money supply - by creating and destroying money. From the OSE perspective, both of these approaches are inherently flawed based on their centralization - in the hands of profit motive banks on the one side, and in the hands of monolithic government on the other.
2. To update the logic to the digital age, the distributed Ledger of the blockchain can serve as a distributed Clearing House of economic validation. The question of how to make this work, outside of speculative existing options such as Bitcoin or Ethereum, remains to be determined. From the OSE perspective, the working mechanism must include backing of money with reality or real production and real Goods, just like gold used to back mainstream currency historically. That value can't just be money for the sake of money, even if it's for the sake of more equitable money. As there are no reality checks on its value. Currently, the cryptocurrencies are speculative.

The Structure of Money Creates Wealth Inequality By Design

• See [3]

Solutions

• Right ideas. Identifies a critical element, which is simply the distributed creation of money unlike in the current blockchains. But still misses any in-depth discussion on the backing of the money created. [4]

Comments

From Lex:

When you talk about "backing money" with something, what you're really talking about is "certificate of ownership", basically it's an asset. Purpose of money *is not* to be an asset, it's a means of exchange. If you want to store value then you get an asset; if you want to exchange then you either barter with assets or your sell your asset for money and then use the money for further exchange.

It would be very useful if you could explain why you think money also needs to be an asset and not just money for the sake of money (ie, means of exchange).

From my perspective, if you conflate money with assets then the money part of money is worse (more difficult to use for exchange because the supply can't change to meet demand) and it becomes inherently unfair (primarily first adopters benefit, especially when the asset your money is tied to is finite, which by definition the asset has to be finite in order to meet your "value" argument). Furthermore, if OSE is about post-scarcity, why would its money be tied to scarcity? Makes about as much sense as lead paint in a turkey sandwich.

I believe money != asset and any attempts to conflate them just leads to confusion.

If you change your thinking and accept that money is solely a means of exchange (and not a store of value) then you will start to see what are the components of money:

1. Spendable: It must be convenient and fast to access and spend it.
2. Available: People have to be able to get money in order to spend it.
3. Equitable: Cannot spend or make it available (create it) outside of the agreed upon rules.

The Relative Theory of Money + Blockchain solves the above problems:

1. Spendable: People are still getting used to crypto currencies but slowly the useability is improving and I imagine in a few years it will be as fast and easy as credit cards are today.
2. Available: RToM distributes money by tying together the increasing demand (population growth) with the need to give everyone an opportunity for money creation (inflation based on ~80 year lifespan).
3. Equitable: Blockchain guarantees there are not shenanigans.

In summary, money is not an asset and RToM is a fair way to create money out of thin air so that it's available for people to use... without resorting to arbitrary manipulation of the supply (such as banks/government do, or the arbitrary permanent caps for total supply such as in bitcoin and most other cryptos, etc). RToM rules are super simple: 1) supply tied to number of users participating in the money creation and 2) inflation percentage tied to an average human lifespan.