money hacking: the origination problem

This is the second article in a series. The first one is Money Hacking. [a note: this post could easily be a book, or an entire library. My intention here is to point in what I think is a good direction for creative response to current events, not to explore these topics exhaustively.]

So you and your friends have gotten together and want to start your own currency. You have to decide, where will it come from? Within this economy you are creating, how will these amounts be born in the system? How will you acknowledge the value you create for each other? There are a lot of options. It’s important to know about different ways to originate currency, and how conventional systems do it. Here are a few options:

the world we live in–fractional reserve banking

Most of the dollars we know and love are not ‘printed’ into existence, by the government or anyone. ‘Printing money’ is a profoundly misleading turn of phrase. Almost all dollars are loaned into existence.

So, when you go to a bank to get a loan, the amount in your account goes up, but there’s no other account that goes down by the same number somewhere else in the bank’s computers. The bank has its own cash reserves to cover basic operation, so if you withdraw from your account, there’s something there to pay with. Generally, they’re supposed to have enough cash on hand to cover about ten percent of all the deposits. They rely on the trust of the community to continue operation. When that trust is lost, we call it a ‘run on the bank.’ That’s what the FDIC is there to deal with. But the  point is, all currency systems are founded on trust, including the dominant one.

Here’s some information on how the fractional reserve system came into being.

So, for almost every penny in the economy, someone somewhere is paying back a loan with interest on that money. That means that for the economy as a whole, there’s more money needed than exists. So either someone goes and gets another loan, and expands that demand, or someone goes bankrupt. It forces growth, whether or not there’s some other reason for it in the economy. If growth fails for some other reason, it breaks down: people can’t make loan payments, loans start going bad… sound familiar?

Forcing economic growth has good and bad effects. On the positive side, its forced expansion has lifted people’s standard of living, and created a lot of wealth for society, however it’s distributed. Jordan Macleod compares it to a booster rocket, lifting the economy from the ground into the orbit we now enjoy.

But it also means that the economic growth criterion outweighs all others. Depleting natural resources? Can’t stop the engine of commerce. If it stops growing it starts dying.

Fractional reserve banking also makes an economy with two kinds of people: people paying interest and people making money on interest. Remember, you pay interest even if you have no direct debt. Interest payments are a significant component of every consumer expense:

  • the mortgage on the shop you bought that TV in,
  • financing on all the warehouses and boats it occupied on the way from China to your place,
  • whatever small loans the companies and suppliers got to smooth out the bumps in their cashflow,
  • and the loan that originated the money itself.

Here’s a chart from a German website demonstrating the dynamic pretty well:

comparison of interest paid & gained

This is from Germany in the 1980s, but I don’t know a reason why the US in 2010 would be different (worse, maybe, but not a different pattern.) [If anyone can find a more up to date chart, maybe with American data, I’ll post it.] Note how much more interest low income folks pay than they receive, and how much more interest high income folks receive than they pay.

Kinda puts the whole debate about ‘redistributing wealth’ in a new light, eh? It’s a massive transfer of wealth from the poor to the rich designed into the currency itself. You don’t need the Trilateral Commission to explain this. No conspiracy theories necessary, just a basic understanding of how money is created.

There have been a lot of comparisons between Wall Street and Las Vegas lately. But they usually miss one important similarity: the house always wins. And this is how that works.

Other problems with the concept are well documented.

[If you’re paying attention to the news, you know the  Federal Reserve created $600 billion dollars recently through ‘quantitative easing,’ which basically does amount to printing money. That has its own problems, including inflation risk. It’s not common practice, but if it started happening more often, it would not be a good sign either.]

the ‘gold standard’ and commodity-backed currencies

Commodities are the oldest form of currency.  Some are valuable because they’re rare, like gold. Some are useful: the ancient Egyptians used certificates backed by stores of wheat. So, the farmer would bring their wheat crop in to a municipal store, receive a receipt, and those receipts became a medium of exchange.

Commodity currencies have pluses and minuses. Pluses include basis of value: there is a value to the currency that is not arbitrarily assigned. Whether you use wheat as money or not, you can also eat it, so when you’re exchanging your wheat receipt for goats, you have a way to sensibly bargain with your seller. There’s always an element of barter in commodity currencies.

But again, it divides the economy into two parts: the part that produces the commodity, and the part that produces everything else. If you find a new gold deposit, but the rest of the economy doesn’t grow, you get inflation, and the value of people’s savings drop. If someone invents some new product category like computers, but no one finds a new gold deposit, then the rest of the economy suffers when people buy computers instead of, say, repairing the roofs on their houses. For a commodity economy to work well, the commodity has to grow with the rest of the economy. Maybe (maybe) for an agrarian economy wheat can work, under certain circumstances.

For an information economy, gold is probably not a good candidate. Gold’s growth has very very little to do with the production and exploitation of new ideas, unless those new ideas are about how to produce more gold.

Also, in a commodity economy, finding or creating that commodity is the most important thing you can do. If your gold mines use heap-leach mining? If that’s what’s most efficient, then that’s the best way, whatever the cost. If they fail, no economic growth for you, whatever else is going on in the economy.


Barter is great… when I have something you need and you have something I need, and we happen to be in the same place at the same time, when we both have those needs. Otherwise, it doesn’t really work as an operating system for a modern economy.

mutual credit

In a mutual credit system money is spent into existence.

The system begins with every account at zero. Then, imagine someone buys a sandwich for five currency units. The buyer’s account goes down five units, and the seller’s account goes up five units.

The overall balance is zero. Negative balances are not charged interest. And there’s no intermediary to convince that you will repay the debt. Mutual credit systems do not have a ‘bank’ to create money.

In mutual credit, a negative balance is not inherently worse than a positive one. It’s just your balance in the system. If your balance is negative, then you have created money to circulate. If it’s positive, you’ve received money.

By itself, that isn’t enough–because everyone in the system is empowered to issue currency, it requires the trust of everyone in the system. And people could issue a bunch of currency and buy a bunch of stuff and then just walk away. Those flaws can be mitigated with a couple modifications:

  • charging people who walk away from the system–if you run a negative balance and then don’t accept the currency in exchange for your own goods and services over enough time, the agreement would allow the currency operator to bill you in dollars, if the dollar economy still works. If the dollar economy has problems, walkaways are not going to be a problem;
  • limiting people’s negative balance, based on the overall circulation in their account.

One big advantage of mutual credit is flexibility. Because mutual credit is a pure agreement, there are a lot of possible ways to modify it. There are ways to include some of the positive dynamics inherent in the other systems, and add other useful dynamics. That will be the subject of the next post–Money hacking: gamification.

One final note: I need to remind readers, I’m not an authority on currency systems. There are others who know more, and if I’ve missed anything important or there are any other categories of currency systems I should include, let me know. This is about lighting candles, not cursing the darkness. 


Margrit Kennedy: Interest and Inflation Free Money, at



  1. Very interesting post, John! That graph really sealed it for me. Coming from one of the families that is on the right hand side of that graph, I know what it’s like to see that inequality. There’s a great bit by comedian Louis CK ( about the difference between being rich and being poor. It’s funny, but depressing when you really think about it.

    It’s unfortunate that fractional reserve banking has lead to this kind of system. It seems like it’s only set up to get worse as well. I’m interested in the creation of currency among friends, and the mutual agreements, but I have to ask: how does that system play into the greater picture? I guess I’m afraid that it’s fixing a symptom of a disease, and we’re saving ourselves instead of thinking of methods that apply to everyone. Do you have any suggestions about how we might start to recover from this vastly unequal distribution of wealth?

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