| Once upon a time there was a small kingdom with no money system. All trade had to be conducted by barter. This had a limiting effect on the economy. The king wanted to encourage trade. He could have decreed that some rare commodity be used as money, but being a wise king, he did nothing and waited to see what developed.
One day one of the wise men in the kingdom, who had a reputation for honesty, began to sit at the gate of the city. Things changed when a group of people who had been exchanging goods with each other fell into dispute. One person claimed that he had not received what he was entitled to. The wise man saw an opportunity and offered to investigate the situation. He tracked down and recorded all the trades that had taken place. Once his list was complete, it became obvious that one person had received more than he was entitled to and another had gone short. When the information was presented to the group, the person who had received too much agreed to give it up to the other.
The other thing that became evident was that some people had given up their goods to cheaply. Some people had gained much better deals than others. The clever man saw an opportunity and suggested that, for a small fee, he would begin recording all transactions. This would reduce the risk of fraud.
People could also see the benefit of having better information about the rates at which goods were exchanging. Better information would support better decisions, so his system was well received.
The clerk began to keep a book in which he recorded all transactions. When deals were being agreed, they would be expressed in terms of the units in which he kept his records (for example, beebles).
For example, if I sold some wool to another person for three beebles, the clerk would record +3 beside my name and -3 by that personís name. I could then go and buy a slab of butter from some one else for one beeble. One would be deducted from my account, and one would be added to theirs.
The clerk did not set prices. The price was always agreed between the two people trading. People would be able to look at the list of trades that have already taken place to determine what their goods or services are worth in terms of beebles. (If a money system already exists, this would not be a problem).
The first trades would have to be for commonly traded goods and services (like bread or a daily wage for a labourer), so that people would be able to estimate the price of their good or services in terms of the beeble. The person selling will be able to get an idea of what he will be able to buy with the price that he agrees to. At first people may build in a margin for getting the price wrong, but this would be outweighed by the benefit of being able to go beyond barter. As people became more familiar with trading in beebles, this margin would reduce.
When a major food producer began to accept the wise manís records, his system really took off. People would be happy to trade using his recording system, because they knew they could always get value in food.
I might buy a handloom for 2 beebles from someone else. Two
beebles would be deducted from my
account, and beebles would be added to the account of the person who made
my loom. Following these transactions, my account balance would be
zero. However I would have exchanged my wool for the butter and
the loom that I needed. (The value of the beebles would not matter
as long as the same beebles were used for all transactions).
At the end of the day a full set
of transactions may not have been completed. In the clerkís book
some people may have positive balances and others would have
negative balances. However, the value of positive and negative
balances would be equal, as every time someone was recorded as
selling something, someone else would be recorded as having bought
The value of outstanding
transactions would vary enormously from day to day.
Some days most people would have completed their transactions, so
the total value of outstanding transactions would be quite small.
On other days when a lot of people were in the market, the
outstanding balances may be quite large. However, this would not
matter, because the total value of positive balances would always
be matched by equivalent negative balances.
The only problem would be if
people who had nothing to sell ran up negative balances. To avoid
this problem, there would be a rule that people with negative
balances would need to clear them within five days. This would
ensure that trade was fluid.
For security, the clerk would
only allow people known to have goods and services to sell and a
reputation for honesty to have negative balances. This would be
based on their previous record of getting back to zero and
building up positive balances. Those with the best records would
be able to go negative by greater amounts than those with a poor
record. (Traders with a good history would be allowed to have
larger negative balances.)
People with negative balances
would have to get them back to zero within five days. If someone
didnít get back to zero in that time, the clerks would refuse to
trade with him. He would be labelled as a thief, because he
has taken goods and
services and made no payment. Most people would not risk this
happening, because if it did, they would be outlawed from the
People with records of theft or
foreigners with no reputation would only be allowed to go
positive. This would mean they would always have to sell something
before they could buy. People with good reputations would have the
choice of buying first or selling first, depending on what was
convenient for them.
This system would allow trade to
develop quite rapidly. The clerk would eventually need to take on
assistants to help him. The only problem would be that trade could
only take place in one place. To expand trade further, other clerks
might start doing the same things in different places in
At the end of each day the clerks would
get together to sort out their balances. If people had a positive
balance with one and negative balance with another they would net
them off against each other. Some of the clerks would have a
positive total in their book and the others would be negative. A
clerk would be up one day and down on another, depending where
trade took place on a particular day. The differences would not
matter because the total balances across all clerks would balance
to zero. (The balances in the books of the clerks are not their
assets or liabilities; they would just be accounting records.)
In practice, several clerks
may set up in this business the same place. If the
first clerk was not serving an area properly, another person with
a reputation for honesty may see an opportunity and start a similar
business. This would not matter as long as all clerks
continued to net off their balances at the end of the
day. Some days a clerk would be up and on
another he would be down. This would not matter as long as
he used the same unit as other clerks and netted his
balances off against theirs.
Having a choice of clerks with
which to deal would benefit the people, as if one started being
dishonest, they could punish him by switching their business to
another. This would be a strong incentive for the clerks to
remain honest. The clerks would watch each other and if one
was dishonest, the others would refuse to work with him.
This would drive him out of business.
If a clerk made false entries,
then the system would break down. For example, a clerk, who noted
that a person with a positive balance had not been in for a while,
may decide to spend it himself, or lend it to another person. He
might presume that when the owner did want to use it, he would be
able to get it back. This would be theft, as he has no right to do
this with another person's balance. It is obvious that the
clerk who spends the money himself has committed a theft. Lending
it to another person has the same effect, so it is also theft.
The other clerks would expose this behaviour and the culprit would
be punished by the people refusing to deal with him.
Provided the people trusted the
clerks to remain honest, the economy would have increasing trade. There would be no need for
the king to control
the money supply. There would be no for him to worry about the balances at
the end of the day, because they would always net to zero.
The only limit would be that
trade would have to take place in close proximity to a clerk. The
clerks could solve this by getting PCs on which to
record transactions. They would provide telephone links to shops and
businesses so that they could record transactions directly without
visiting a clerk. They would also set up booths around the city
where people could do transactions without needing to go to the
clerk. The clerks would issue code numbers so people could do
transactions over the phone.
The kingdom would then have a
fully functioning money system to facilitate trade. However there
would be no need to worry about the money supply, or reserve
ratios, or the velocity of money, because they would be
There may be some people who
would not want to spend their positive balances straight away.
They might want to keep a positive balance as protection against
future calamities or for when they retire. There may be others,
who want to buy things to start a business. Other clerks could set
up in business linking such people, assessing risks and collecting
a fee for the use of positive balances. This would be a separate
role from that of recording transactions. The feature common to
both would be the importance of honest records.
This story shows how a sound
finance system can function without a central bank, gold reserve
ratios, settlement cash, discount rates, and all the other
paraphernalia of modern banking.