Sociocosmic Accounting

December 28, 2003–January 1, 2004

One particular point on which I take leave from the libertarian capitalists is the gold standard for money. According to the gold standard, gold is the most objective standard on which to base a currency. Most currencies have gotten gradually further from the gold standard; whereas a dollar used to be redeemable for a certain amount of gold, it is now just a symbol of the credit of the United States government.

My problem with the gold standard is who starts out with the gold. Historically, gold has been stolen and hoarded by monarchs as a sign of their position. Whoever owns the gold mines owns the gold. It also just doesn't sit right with me that an arbitrary natural resource should serve as a standard on which social interactions are based.

What is the purpose of money? The standard story is that money developed out of the inefficiencies of barter. Without money, if I am a farmer and I want a piece of machinery I could only give the manufacturer so many bushels of wheat, which may not be useful to him. The wheat would be useful to a baker, but he has only bread to trade; but I don't need that much bread, and neither does the manufacturer.

The solution with a gold standard for money is that I can offer some amount of gold to the manufacturer for his machinery, which he and others can then give in smaller parts to the baker for his bread, and which the baker can offer to me for my wheat. Gold is offered as a standard for money because it is durable and divisible, and because it does not grow on trees, as the saying goes.

Money evolved toward credit with the growth of banking. If I put my gold into a bank for safekeeping, the bank will give me a note promising to return the gold on demand. While the paper the note is written on is not as durable as gold, the contractual relationship of the promise is as durable as the force of law, and the paper is more convenient to carry.

Since a promise for gold backed by the force of law is practically as valuable as the gold itself, I can now trade the promissory note for the manufacturer's machinery so that he can redeem the note, save it, or trade it again. At this point we are using the bank's notes as a paper currency, but a currency backed completely by an exact amount of gold.

But the business of a bank is not merely to store the gold of its customers. The business of a bank is to profit from loans. A bank pays interest on deposits to its depositors for the privilege of loaning those deposits out and collecting a higher interest on loans than it pays on deposits. But instead of loaning out the gold directly, the bank may just give more of its promissory notes to its debtors in exchange for their promise to return the principal plus interest over time.

This kind of credit through bank loans is essential for a growing economy, but the effect is that now the bank has less gold in its vaults than it has given out in promissory notes. The difference is made up by the promises of the bank's debtors. But it now becomes impossible for the bank to honor all of its notes if they were to be presented at once. The bank takes this risk, but so do all of its depositors and anyone who honors the bank's notes as currency. The bank must make up enough from the interest on good loans to cover both its profit margin and any amount lost to bad loans, but it is vulnerable to runs as long as it has any amount loaned out.

Now, a government-backed currency is precisely this kind of promissory note, issued by the government's central bank. The central bank keeps the government's gold on reserve, and loans its notes to private banks and individuals.

The death of the gold standard comes when the bank declares that its notes are no longer redeemable for gold at all, so as to avoid the risk of runs. The actual effect of such a declaration is to give the bank virtually unlimited discretion over giving out loans—it no longer has to worry so much about giving bad loans, because its deposits are safe regardless, and it thereby gives itself arbitrary power over the money supply, if its notes are still treated as money.

Of course a truly private bank would not be able to do such a thing. Its notes were given out as contractual promises, which cannot be unilaterally modified. But a government's central bank can, practically even if not morally, and it can do the same for private banks, or at least offer them insurance against runs. And this is exactly what modern central banks such as that of the United States have done.

On this progression of the gold standard's death I agree with the libertarian capitalists. However, the basis of money purely on credit actually makes more sense to me than the gold standard. So I have wondered if a society could arrive at credit-based money more directly, rationally, and morally.

So imagine again the several people stranded on the island, from the earlier discussion of property rights. When they arrive no one owns anything on the island but for one's own mind and its potential. They are aware of the concept and utility of money but they have none; even if they did have money from home, it would not matter much here.

The group realizes that if they are going to establish a living on this island they will develop an economy and will need some form of equity accounting, such as money. They could let it develop by way of barter, or they could intentionally design a money system from the start, since they are already familiar with the concept. (Of course, if the group is small and familial, they may choose to live communally, but for the purpose of this thought experiment they will be participating in the sphere of equity.)

A system of money will be useful for several purposes. Most immediate is as a lubricant of trade, as a more efficient alternative to barter. But also the group will want to account for their usage of natural resources, which as discussed before are an object of common interest, for the group are collectively the stewards of nature on the island. And the group may also want some way of accounting for public works, for common infrastructure and the costs of administration of law.

After contemplating the issue for a couple of weeks, Joe proposes a system that he refers to as "sociocosmic accounting". It starts from the idea of money as credit made public. If Lisa would like Joe to perform a service for her, before either of them has any money, Joe may extend her private credit in the form of Lisa's promise to perform some service of like value in the future. Such credit depends on Lisa's trustworthiness, and is a private agreement between her and Joe. Because it involves only Lisa and Joe it suffers from the same problems as barter: Perhaps Joe is not interested in the services that Lisa may offer, but he is interested in Ed's services and Ed is interested in Lisa's services.

To get past these issues of private credit, Joe suggests kickstarting a money system with a concept of public credit. Specifically, the group would collectively extend an initial amount of credit publicly and equally to each person on the island. This would be accounted as coming from a conceptual "social trust" to keep track of how much credit had been created in this way. The social trust is thus the source of all money in the system. Such money as public credit is durable, divisible, and transferable; Joe and Lisa now need only agree on an amount of credit in terms of the amounts they have received from the social trust, which will be subtracted from Lisa's credit and added to Joe's, and which Joe will then be able to transfer to Ed in exchange for his services, and so forth.

Joe has suggestions for the other purposes of money as well. Since no person is considered to own the natural resources of the island, but the group is considered collectively as stewards of those resources, he suggests accounting for the use of natural resources by deposits into a conceptual "cosmic trust" to be administered collectively along with the social trust. The group would set prices, limits, and other conditions on the use of natural resources, and payment for such use would be deposited into the cosmic trust. This cosmic trust would be a sink for money in the system; once deposited in it, money would be considered untouchable. It is important, Joe points out, to keep the accounting of the two trusts, social and cosmic, separate, so as to maintain the cognitive distinction between their purposes.

As for paying for public works, sociocosmic accounting offers an alternative to taxation by force. Public works—the administration of law at the very least—can be paid for directly out of the social trust rather than requiring each person to give back a certain amount of credit on threat of punishment. However, Joe points out, this does have a similar economic effect to taxation: By issuing additional credit, the existing credit at large in the system is slightly devalued. Therefore the extent to which credit can be issued from the social trust must be constitutionally limited to either truly public works or equally to all citizens, and such issuance must be reluctantly exercised.

One final variable to be determined by law is whether each citizen is issued credit from the social trust in one lump sum upon becoming a citizen, or incrementally on an annual basis. The latter would not be designed as a living income, but merely as lubricant flowing into the economy. It would, however, open up the possibility of different kinds of monetary policy, increasing or decreasing the flow of money into the economy according to economic conditions. In presenting his proposal, Joe expresses a certain distaste at that kind of central economic planning, but he asserts that it is consistent with the principles of sociocosmic accounting.

So they implemented Joe's proposal and lived happily every after. §


Sampson Synergetics

Copyright 2003 & 2004 by Justin T. Sampson