The Ripple Effect - Money but not as you know it
The P2P lending sector is growing all the time with the main companies starting to increase custom and size. The rise of P2P lending is helping bring money and its nature into the wider consciousness. Alongside this sits other proposals for fully distributed money systems. Many of these revolve around traditional and tested complimentary currencies such as LETS, Time$ and other locally based systems.
One proposal is Ripple. It’s been around for a few years and there is some good information on the site including the initial paper from Ryan which I have posted up in the research section. There’s plenty of commentary around about it which is worth a look at. Essentially it proposes to replace bank created debt money with personally created credit through a fully distributed network based system. What is good about this proposal is that it takes the concept of local currency systems to its logical conclusion which is a globally based one with servers finding the right path to the appropriate relationship or network.
The most important part of this is identifying that most of what we think of as money is in fact simply an IOU. So why should banks create this? Well the main reason is trust. What Ripple proposes is the creation of that trust through networks, which as we know are already widely in use.
Jamesey proposes a further layer on top of this adding in microfinance structures and leveraging off the Paypal system.
We also have very well embedded and established credit card systems (Amex and Visa) who already have the distribution systems. So the trust system is going to be a key issue. Who is in your network? Who can you trust? I’d suggest and I hope that VortexDNA will play a role in helping this kind of global protocol to develop.
The main problem is the control of supply. One would like to think that a complex system, such as proposed, would regulate itself constantly adjusting to feedback. We know that the current system is close to imploding because of rampant money creation. So cculd it be any worse? Could governments participate also?
It’s open season and anything is possible.
Hi Raf,
My original idea after reading about LETS was to develop an alternative currency for my local community incorporating the principles developed by Sivio Gesell, but faced with the problem of how to establish trust in such a new notion that we had to, first of all and could, establish our own currency, which is when I thought of developing a system that takes advantage of trust in the standard money system, but allows for the utilisation of bank created money to serve the needs of the community.
My idea is that rather than the Ripple Projects’ plan for the system to issue a new IOU for every transaction through the chain of their virtual trust network, instead what I envision is for the intermediary to act as a clearinghouse between the bank accounts of the participants so therefore there would be no prospect for out of control of money growth and the resulting inflation..
A prospective borrower would tell the intermediary program the quantity of money he needs to borrow, the intermediary program would then establish put out a query out to every person on the borrowers’ virtual trust network if they would be willing to pay for the borrowers loan, which he would pay back over a set period of time, a certain number accept and if the number and value is sufficient to pay for the product the program would then process the loan and ensure its payment over that stated period of time through automatic payments. If the payments are not kept, penalties in the form of interest will be incurred. The borrower may instead given the option of passing on a debt obligation that someone else on his virtual trust network has incurred with him if he so wishes, rather than paying the money himself.
For that privilege the borrower would pay a set percentage of his loan which will be shared with the lender, but this doesn’t have to be a large amount, because most people utilise the banking system not for profit, but for security and convenience. The system could incorporate a user interactive reputation system where people could establish whether a prospective borrower is trustworthy or not.
What do you think?
Hey Raf. Thanks for posting about Ripple. It’s been slow in coming about since I’ve been working on it mostly alone, and in fits and starts since I have other interests as well. But this fall a few people have committed to spending some time to really launch the network properly. We’ll be gathering for a few months starting in February and hopefully we’ll have the next generation ripplepay.com ready for its first users by May. That service will be a marketplace where people can use Ripple to exchange goods and services.
As far as inflation goes, Ripple is essentially free banking, so it’s up to the participants to manage that themselves. One excellent way is to denominate obligations in commodity-backed units. A bigger problem with monetary systems is the risk of cascading defaults locking up the system. I think a decentralized system like Ripple is potentially much more resilient against cascading defaults than centralized/hierarchical systems.
One hypothesis I have is that past free banking systems required a certain degree of centralization of credit for payment-routing purposes, since it isn’t practical to manually route through an arbitrary network. In other words, people would keep accounts at one of the big banks in town because most everyone would accept cheques on those accounts. This forced partial-centralization means greater instability when it comes to defaults and bank runs. A Ripple network would enable much smaller local issuers to be on a level playing field payment-routing wise with the largest banks, so there wouldn’t be the same pressure to keep accounts with the dominant players.
Jamesey’s idea is interesting. It is orthogonal to Ripple in that it would work equally well in Ripple or in other monetary networks.
Thanks guys for this. You should keep this dailogue going because i think out of this something will come. Where are you both based? Have either of you contacted Richard Douthwaite at FEASTA (www.feasta.org). He has done alot of work in this area as well as publishing the Ecology of Money which explores the EBCU (energy backed currency unit) and the Growth Illusion which exposes the nonsense that economic growth is the holy grail.
If you have any links or other information I’ll be happy to post them up and please stay in touch on any developments you make.
Regards
Raf
Hi Raf,
Yeah I have read the Growth Illusion by Richard Douthwaite, but I preferred Michael Rowbotham’s book, Grip of Death. Have you read it?
Bernard Lietaer, former head of the Organization and Planning Department at the Central Bank of Belgium and author of The Future of Money, is working on a similar project, which he calls the Terra.
http://www.planetwork.net/terra/
He also said this in an interview that was published in David Korten’s Yes Magazine, “Furthermore, I believe that greed and competition are not a result of immutable human temperament; I have come to the conclusion that greed and fear of scarcity are in fact being continuously created and amplified as a direct result of the kind of money we are using.”
http://www.yesmagazine.org/article.asp?ID=886
If your interested in the unfair balance of international trade that currently favours the developed nations, particularly the US you might be interested in this article, which explains why this is so and how it came to pass.
http://www.financialcryptography.com/mt/archives/000070.html
Have you heard of the monetary theories of Silvio Gesell? He claimed that because money does not have a carrying costs unlike other commodities it has an unfair advantage, particularly when interests rates are high, and thus rewards and encourages the hoarding of wealth.
http://www.pulsethebook.com/index.php/index.php?tag=silvio-gesell
There are both credible and convincing academic analysis of the work of Silvio Gesell and emperical research on how his theories worked in practice something that neoclassical economics and neoliberalism lacks.
http://www.transaction.net/money/cc/cc04.html
Irving Fisher, Professor of Economics at Yale University visited Worgl after reading the writings of Silvio Gesell to witness the theories being successfully demonstrated and wanted to apply the same theories in the United States, but was opposed by FDR, because it would threaten Federal centralisation of economic planning and therefore his power.
Jerome Blanc, The American Journal of Economics and Sociology
http://www.encyclopedia.com/doc/1G1-53449308.html
John Maynard Keynes wrote admiringly about the economic theory of Silvio Gesell (who influenced the designer of the currency of Worgl, Austria that I alluded to earlier) in his book General Theory of Employment, Money, and Interest, but his only disagreement was on the nature of interest when he said in his liquidity preference theory is that since people prefer to spend their money and those who decide to save should be rewarded for foregoing spending it.
http://userpage.fu-berlin.de/~roehrigw/keynes/engl.htm
Jamesey,
Have you been hanging in the same places as me? It was Michael’s book or rather a talk he gave about it that started me thinking about all this stuff and ended up in me leaving the financial markets completely. If you liked that try reading John Kutyn’s paper in the research section. It’s very very good.
I was a member of the Forum for Stable Currencies in the UK where most of these guys came and spoke about their work and ideas.
Thanks for putting the links up.
Hi Raf,
Ha ha. I read Michael Rowbotham’s book after stumbling across it in my local library alongside, Amory Lovin’s Natural Capitalism, David Korten’s the Post Capitalist World, and Jonathan Porritts books.
I’ve been concerned about environmental and social justice issues for some, particularly since doing the Natural Step course through the Open Polytechnic.
I’ve always wondered why people starve and have no clean drinking water in one part of the world whilst in the West people are able to accumulate sufficient capital to have million dollar mansions and private jets. I finally know why and can be best illustrated by this comment by one of the United States’ premier crony capitalists.
The competitor is our friend and the customer is our enemy…There isn’t one grain of anything in the world that is sold in a free market. Not one! The only place you see a free market is in the speeches of politicians. People who are not from the Midwest do not understand that this is a socialist country.
Dwayne Andreas, then-Chairman, Archer Daniels Midland (slogan: ‘Supermarket to the World’), in a 1995 interview.
Are you familiar with the endogenous theory of money? There was a really good description on Wikipedia, but its been altered and replaced by a far inferior one in my opinion.
I don’t know if you read this article that I referenced in a comment on Ben’s blog that not only explains the design of our banking and monetary system which also contains this gem of a comment, which I found side splitting hilarious considering even the BIS doesn’t know the true extent of the losses from the subprime mortgage crisis.
“Yet in a recent extensive review of the academic literature Joao Santos of New York University’s Solomon Center concluded:
“The justification for any regulation usually stems from a market failure such as externalities, market power or asymmetry of information between buyers and sellers. In the case of banking, there is still no consensus on whether banks need to be regulated and if so, how they should be regulated.”
http://www.rbnz.govt.nz/speeches/0104984.html
Have you made any ground on explaining the true nature of our economic and monetary systems and its negative consequences to the public?
Someone that you might want to touch base with is Deirdre Kent, political and health activist, who published the book Healthy Money, Healthy Planet. She too was influenced by Richard Douthwaite, but it was after reading Michael Rowbotham’s book that she decided to set up an organisation to investigate New Zealand’s monetary and banking system, which was called the New Zealand Banking Reform, which disbanded when their goal was met, for the Reserve Bank to confirm that only 2% of the nation’s money supply was created interest free by the government (bank coins and notes) and the rest is interest bearing debt created by foreign owned private banking institutions.
Theres a link to her email address on her blog if you wish to contact her.
http://www.blogger.com/profile/17292501635604712493
Yes I know Deidre and have spoken to her.
This is such a tricky subject that breaking through into the mainstream has not been possible. No politician will touch it. The Greens have been particularly disappointing in their unwillingness to promote it. The Democrats for Social Credit have done the best work.
The answer may not lie with politicians but with the market and networks. Social capital at its best. At some point there must be a legal challenge against the banks and the government over the issuance of money. John Kutyn’s paper explores that.
Where do you live?
Hi Raf,
I’ve recently moved to Alexandra in Central Otago for work. Seasonal fruitpicking at the moment. The open ended nature will probably suit me.
Is the Sustento Institute your employment? Or….?
Must be hot down there.
No this is a sideline for me but something I’m hoping to develop. A space for independent thinkers and researchers to promote their work and ideas as well as develop work I’ve already done and take it further.
I’d been warned that it would be hot, but the temperature been suprisingly comfortable recently.
Its certainly a worthy goal and about time something like this was started in New Zealand. I guess the country’s intellectul vigor has disappered thanks to the “There is no alternative” rhetoric of the New Right or perhaps its been diverted to unproductive avenues? But then those who have offered the most credible economic alternatives have been easily marginalised by those in power, often with willingly complicity by the intelligentsia. (Silvio Gesell, Henry George, Major Douglas, Hermann Schulze-Delitzsch) etc.
What your current line of work if you don’t mind me asking? I understand that you are formerly an investment banker until becoming disillusioned by its fraudulent and extortionate nature?
You have my email address if you wish to further discuss things.