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A problem arises if money sits in a
bank for too long without being spent or put into a savings account.
That money is a claim to goods and services. Somewhere in the
economy they will have been produced, but they will not be sold,
because the money that gives entitlement to them is sitting in a
bank. If the goods not bought are not durables, they will
deteriorate. Thus the claim that the money provides will lose
value.
The problem is that money does not
have a "use by date" attached to it. I can keep a dollar
in my pocket for years and not spend it. However someone has
produced goods which no one has bought. They need to be able to sell
those goods to continue their business. The temptation is for
governments or the banks to lend that right to those goods to
someone else in the mean time. The problem with this is that in the
future my dollar will not be worth as much, as the goods that I am
entitled to have been consumed by that other person.
The solution is to encourage people
to put claims that they do not need immediately into a term
deposit. Then the money can be lent to someone else for consumption
or investment goods. Interest rates should achieve this, if there is
no inflation. They effectively put a time-stamp on the unit of
account, if all loans have a term. It is a date when the claim to goods and services will be returned. Deposits on call
have a current time-stamp attached to them.
A serious problem with notes, coin
and gold money is that there is no time stamp attached to
them. People who hold them do not have to indicate how long
they will hold them. They money system gives no indication of
how long they will defer their purchases to producers in
society. This creates uncertainty among producers. The system described
here puts a timestamp on money.
Those choosing not to spend (save) are forced to indicate how long
they are deferring. This allows another person to get a loan
with the same timestamp on it. In this way, better information
is transferred to producers.
People will always want to have
some cash in reserve for the unexpected. It would be better if this
and other money, which is not required immediately, were put into a
term savings account. Then the money could be lent to some other
person. The spare goods would not deteriorate, because someone else
would have the money to buy them. They will have to pay the money
back at the end of the term that the depositor has specified. To do
this they will have to forgo some of the goods or services to which
they are entitled. This means that goods or services will be there
at the time when the depositor gets back his money or claim.
The depositor would then be able to postpone the purchase of goods
or services until a time that is convenient.
Most people receive money on their
payday. In the period leading up to next pay day it is gradually
spent. This delay presents no problem. However money which is to be
saved beyond the next payday would be better put into an
interest-bearing, term, savings account. This could be done by
simply moving the money from a cash account to a savings account by
an automatic teller or telephone transaction.
Savings allow the purchase of goods
or services to be postponed until a time that is convenient.
However, when a person agrees to a sale of a good or service they
agree to the price on the basis of their knowledge of prices at the
time of the sale of the goods and services they may be interested in
buying. If they postpone their purchase, these is a risk that prices
may change and their money will lose value (they could also gain).
If they are postponing more than a few days, they should lend the
money at interest to cover the cost of the risk.
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