Briefly: Modern monetary and fiscal system hampers economic development. Addressing the fundamental contradiction inherent in today’s money, combined with modern technology and a new philosophy of money, will have the opportunity to build a strong economy, which in this case will perform a social function. The author offers a new formula for valuation of goods, a new philosophy of money (natural money), and a new algorithm of the fiscal system in which taxes will not exist in the modern sense, as well as current fiscal and regulatory authorities.
Money is the main economic tool, its blood and basically its essence. Modern education provides rather cursory and superficial study of the institute of money, philosophy of money and etymology of modern money, specifically, the notion related to “money” nowadays. The majority of economic and financial sciences are focused on the issue of making more money though it can be much more important to refer to the essence of the notion striven after with the help of these sciences. It is the same as to search for diamonds not knowing what they are and how they form. It is commonly believed that throughout the history of humanity the function of money was performed by absolutely different objects beginning from cowrie shells, pieces of gold and other metals to modern pieces of paper with paint and watermarks.
It should be noted that in historical terms modern banknotes and treasury notes have been playing the role of money for a rather long period of time, thus becoming an unconditional association with “money” for the majority of people on our planet. In addition, money is always associated with the state or states, which issue this money and use it to implement their monetary policy. The appearance of new means of settlement, such as e-money or bitcoins, has definitely made certain adjustments to the general perception of money, which will be dwelt on later. While writing my monograph entitled “Monetary Obligations in Private Law”, I would come to the conclusion that peculiarities of monetary obligations compared to other obligations derive from the specific features of money as the subject of such obligations. However, after I published my monograph, I could not help thinking that money is fundamentally vicious, hindering economic growth and fulfillment of the people's potential. In regulating and systematizing the answer to this question, I was aided by the works and views of Silvio Gesell (1862-1930, German merchant, theoretical economist and social reformist, founder of the theory of “free economy”).
The scholar drew attention of the society to the fundamental contradiction of modern money, particularly, two main functions fulfilled by modern money: turnover means and accumulation. In other words, money acts as an intermediary in exchanging one product for another, thus facilitating economic growth. At the same time, humanity is not interested in losing money as means of accumulation, which results in economic slowdown and drainage. “I might be thinking of purchasing something or making exchange, but the accumulation function prevents me from doing so”.
Moreover, Silvio Gesell drew attention of the scholars to the fact that money although being goods is more privileged compared to other goods. Bun or flower sellers try to sell their goods as soon as possible, as the latter lose their properties over time or simply spoil. Money is not prone to spoilage, it is preserved and, apart from that, it can produce interest, if loaned. In view of the above, the scholar suggested that money should also “spoil” and diminish, the same as the goods on the shelves do. Thus, according to Silvio Gesell, money would begin fulfilling its main function – that of turnover means – constantly developing and feeding the economy.
“The Natural Economic Order”, Silvio Gesell quotes Pierre-Joseph Proudhon: “Proudhon asked: Why do we lack in houses, machinery and ships? And he also gave the answer, the correct answer: “Because money limits the building of them and production of all goods”. Alternatively, to use his own words: “Because money is a sentinel posted at the entrance to the markets, with orders to let no one pass. Money, you believe, is the key that opens the gates of the market (the term “market” means the exchange of products), but it is not true: money is the key that LOCKS them”.
The study of Silvio Gesell might have been lost in history, if the scholar did not launch his money, or demurrage, as an experiment in one of the European cities. In the same way as domestic currency, local currency offered by Gesell proved positive result for economics. According to Wikipedia: “The first practical implementation of Gesell’s views was the experiment held in 1932 in Wörgl, Austria, with the population of 3,000 people. As a result of the experiment, a new bridge was built in the town, roads were reconstructed and investments in public services increased. While many European countries had to fight against the growing unemployment, the annual unemployment rates in Wörgl decreased by 25%. When more than 300 Austrian communities got interested in this model, the National Bank felt a threat to its monopoly and prohibited printing of free local currency. Although the dispute settlement took a long period of time and even was considered in the higher judicial instances in Austria, neither Wörgl, nor other European communities managed to repeat the experiment. However, the prohibitions were related to direct issuing of money by the local authorities not regulated by the National Bank, and not the “Gesell's system principles”.
Certainly, one of the biggest problems of this money functioning was its inconvenience: namely in the need to affix seals or post stamps to the banknotes to confirm their denomination in the specific period of time. As we may see, this fact and the constant struggle of the state with the alternative monetary systems led to closing of such initiatives despite their economic progressiveness. Appearance and global distribution of the Internet, appearance of cryptocurrencies and, specifically, blockchain technology enabling its production allows me to offer a new money paradigm and new money philosophy close to the Latin notion of jus naturale. How does the new money paradigm work (let us call it “Natural Money” as opposed to “free money” by Gesell)?
The state issues e-money (natural money) using blockchain technology; money has negative interest and its amount on the accounts of monetary relations entities constantly decreases. While the amounts are small, the decrease is insignificant and creates no inconveniences, yet stimulating all monetary relation entities to get rid of money. Monetary relation entities treat this reduction as a state tax, which is progressive, as it directly depends on the money amount on the account of each entity. Discontent related to the decrease of amounts on the accounts is balanced out by the absence of any obstacles for trade and production growth due to the absence of any taxes and regulating public authorities. The market is completely free and facilitates free flow of money and goods. The tax system and state budget are based on the following formula: the state annually issues new money (annual budget of the state) in the volume equal to the reduced amount of the entire money supply of the country during the year due to the negative interest. For example, if the entire money supply of the state equals to UAH 1 billion and the state budget equals to UAH 300 million, the annual reduction of money supply enables the state to issue 300 million of new money necessary to cover the budget programs (see Fig. upper).
We may observe a qualitative economic boost, absence of underground economy, growth of innovation and social justice. It is obvious that a split between the rich and the poor in the society does not disappear, and the accumulation will be carried out with money substitutes, including foreign currency, which has absolutely no negative impact on this monetary system. It is even possible that for some time two monetary and tax systems will exist side-by-side and the transfer to the new system will imply only payment of the relevant and logical tax, but it will not be a global trend due to convenience and profitability of new monetary and tax relations. Entrepreneurs will be interested in converting to the new system of monetary relations, as working in it is completely tax-free and implies no inspection authorities. Simplicity and convenience of relations in the new monetary system will be the main guarantee of stable participation and preferring it to any other monetary systems. Moreover, it will not imply administrative expenses. Negative interest will be reflected in taxes “distributed over time” and paid by the entrepreneurs, yet the aggregate tax amount will be less than modern tax burden carried by business, among other reasons, due to making underground business legal, increase of the tax base and absence of tax administrative expenses. Moreover, the speed and initiative capacity of business processes with the advent of new money will likely result in start-ups for the market, with money disposal interest covering that of money depreciation. Readers might want to see specific indexes, figures and algorithms. However, it would be wrong to provide them in this study, as specific figures are linked to economic indexes of a specific country and to the strategy of market entry of the new monetary and settlement system. To take everything into consideration, the “Natural Money” is a cryptocurrency, exchange means (money) issued by the state, whose denomination decreases over the time, thus covering all tax liabilities of the user towards the state.
But let us return to the main topic – the philosophy of money. You might have understood that in this concept “natural” money has other meaning and content, which even differentiates it from Gesell money. Almost all languages in the world have their version of the saying “Time is money”. Yes, it is in this philosophy of money that time becomes money not metaphorically, but literally.
In the blockchain-based system, the settlement is made with time. The economists should forget the eternal question: “What backing does the currency have?” This currency is backed by goods it is exchanged for, which is an approximate assessment of time spent for manufacturing of such goods multiplied by the “quality” of this time. “Natural” money plays a single function – that of exchange. Thus, the value of goods is defined according to the formula S = T*N, where S is for the value of goods and T is for time necessary to manufacture them, and N is for the quality factor of time spent, specifying whether it was spent usefully or uselessly and in counterproductive way. While T is an objective value, N is subjective, making the commodity and service market interesting and unpredictable, especially when culture and art articles are involved.
Consequently, though the “Natural Money” reduces its nominal value on the “Free Money” principle after Silvio Gesell, this reduction has a different background and idea. If the Gesell’s “demurrage” of money was intended only to accelerate the turnover of money, the decrease in nominal value of the “Natural Money” replaces the tax system and all state taxes, creating a free environment for business development. Moreover, the “Natural Money” has a different philosophical nature, as the “Natural Money” essentially means time. Modern Ecumene knows no better subject or category to reflect the value of goods and services than the “time”. Only time spent on the production of goods or services, multiplied by the factor N, can provide equal, as far as possible in the material world, exchange of goods, and simultaneously divide the function of accumulation and circulation.
An important question is whether this tax and monetary system will meet the current legislation and the tax system, and what is the difference between the “Natural Money” and other cryptocurrencies, including the bitcoin. Let’s recall that “Bitcóyn or Bitcóin” (eng. Bitcoin, from bit – “bits” and coin – “coin”) is a peering payment system that uses the same name unit and the same name record data. To ensure the operation and protect the system, cryptographic methods are applied. All information about transactions between system addresses is open.
The operations conducted are irreversible, the electronic payment between two parties takes place without intermediaries. However, there is a possibility of involving a third party – a guarantor with multisignature. No funds may be frozen, even temporarily, except for by the owner. These and other reasonable contracts may be implemented using a special scripting language, but it is not available in the graphical user interface and is partial according to Turing, unlike newer blockchain systems. Bitcoins may be used for exchanging for goods or services from the vendors, who agree to accept them. The exchange for the usual currencies is performed through the online service of digital currency exchanges, other payment systems or exchange offices.
The fee for operations is designated by the sender voluntarily, and its amount does not affect the priority in processing the transaction. As a rule, the client software prompts the recommended amount of fee. The transactions without a fee may also be processed, however, they are not recommended as the time of such processing is unknown and may be rather long.
One of the main features of the system is full decentralization – there is no central administrator or any its counterpart. A necessary and sufficient element of this payment system is the basic client software (it is open source). Launched on a set of computers, the clients software are interconnected by a peer network, each node of which is equal and self-sufficient. The public or private management system is impossible, including the change of the total number of bitcoins. The scope and time of new bitcoins issuance are known in advance, but they are relatively randomly distributed among those, who use their equipment for computing, the results of which are a mechanism for regulating and verifying the eligibility of transactions in the system.”
The principle of bitcoin operation lies in the fact that “Bitcoins exist only as entries in a distributed basis – Blockchain, storing, in public open (unencrypted) form, all the transactions indicating bitcoin addresses of senders/recipients, but containing no information about the real owners of these addresses.”
As you can see, the peculiarity of this system consists in the absence of any control over the movement of money and complete anonymity of payments. That is why some states see in bitcoin the basis for the development of the shadow economy, tax evasion and illegal transactions. Understanding of the absence of mechanisms to fight cryptocurrencies forced the most progressive countries, in one way or another, to recognize cryptocurrencies as means of payment. The “Natural Money” involves the use of the best ideas of modern cryptocurrencies and a blockchain technology, but at the same time, the “Natural Money” works for the society and performs a social function. The state, instead of fighting cryptocurrencies, starts their production, using their advantages for the development of a legal sector of economy, reducing the shadow economy and solving social tasks.
These cardinal changes will make the existing world better. Finally, the money will cease to be a goal in itself for the economy. Not people will “follow” the money, but money will “follow” the people. The new monetary paradigm elevates new ideals of man standing and new idea!
In conclusion, we note:
- The current monetary and fiscal system is the main problem of the modern economy, which hinders its development, prevents the development of human potential and creativity.
- A contradiction is inherent in today’s money, which lies in the fact that money simultaneously performs two mutually exclusive functions: circulation and accumulation. The function of money accumulation washes money from the turnover, “dehydrates” economy and makes it unstable.
- Science and history have already seen the attempts to separate these two functions. One of the most interesting doctrines is the doctrine of Silvio Gesell about the money with the “demurrage”, the money, which “becomes spoiled” just as other goods eventually get spoiled, thus eliminating the accumulation. In this regard, the practical application of Gesell money in Wörgl, Austria, is quite interesting. The practical experience of such application has demonstrated a positive impact of money on circulation of goods, payment of local taxes and reduction of unemployment.
- The scientific and technological revolution, the development of the Internet, the emergence of cryptocurrencies and a blockchain technology, enable the author to offer a new approach to solving this problem. Creating a free market without restrictions and barriers, nonexistence of taxes and a fiscal system, absence of costs for administering the tax system, are provided in the use of the “Natural Money.”
- The “Natural Money” is a cryptocurrency issued by the state and a means of exchange, which over the time reduces its nominal value, thereby covering all tax obligations of the user to the state.
- Reducing the money in the account replaces all the taxes. The Annual Budget of the state is a difference between the total money supply at the beginning of the year and its balance at the end of the year, due to the reduction of the nominal amount. Reduction enables the State to annually issue a new cryptocurrency amount needed to cover the budget programs. Reducing the money in the account of users represents the “taxes smeared in time”, the burden of which will be much smaller because of increase in the tax base, reduction of the shadow economy and absence of the cost management. The tax will be progressive because it will be noticeable to users of large amounts of money and negligible for users of small amounts.
- The “Natural Money” philosophy consists in the fact that the calculation is made by the Time. The cost of goods is determined by S= t*n, where t is an objective value of time spent on the production of goods or services, and n is a ratio, a subjective value, by which the market assesses the “quality” of the time spent, its efficiency and productivity. The concept of “time – money” gets specific practical implementation.
- The “Natural Money” does not require any security because it only performs the function of exchange. The Natural Money reflects the time spent on the production of goods and services multiplied by a factor, and they are secured by this time at the exchange of goods.
- The “Natural Money” system does not prevent the parallel operation of usual for us monetary systems and financial systems of other states as compared with Bitcoin, which operates today simultaneously with the existing monetary systems. Finally, the state will be able not to fight cryptocurrencies, but to direct their advantages to the service of the economy and solving social tasks. The transfer from the “Natural Money” and free economy to a conventional model stipulates only the payment of a tax and the renewing of work on the complicated and confusing old system of taxes and regulatory authorities.
- The absence of barriers and restrictions, ease of movement of the goods and services in a tax-free space, and nonexistence of the money accumulation, will solve many economic problems. The Blockchain Technology provides an incredible level of trust to money and the tax system with no external administrator. The money will finally cease to be a goal in itself of the economy and become its tool, instead. Not people “follow the money, but money follows the people”. Cutting-out of the accumulation function in the “Natural Money” will result in a permanent search of the money use and a situation, in which a Reputation and a New Idea will be the main criteria of the economy!