To summarize, I take you to a village in the middle of nowhere, perhaps up in the mountains. I am the village elder and I can see that my people have problems trading. They have difficulty exchanging goods because the items offered are difficult to store or they perish or they do not match their needs. I invent tokens and issue them into society. I deem them to be approximately equal in value to an egg, a carrot or an onion. Business activity increases. Individual growers increase their production and traders increase their turnover. I have to increase the volume of tokens in line with the increase in business activity. I certainly need to increase the volume of tokens to match the increase in trade. However, I am not sure if whether the increase in business activity drives the need for more tokens or whether the increase in tokens causes an increase in business activity. It may be a combination of both. I have no way of calculating how many extra tokens are required. The issuing of tokens appears to be somewhat of a black art. There does not appear to be a formula. As the population increases, I need to increase the volume of tokens. When the next village started to trade with my village, I had to increase the volume of tokens as the inhabitants of the other village started to use my tokens among themselves because they had value in my village. I can find no set of rules that dictates the volume of tokens required.

In my village, the tokens are moving fairly quickly. People only hold on to the tokens for a few days. My village has a velocity greater than 52. The egg seller is the only person with chickens and appropriate knowledge and his trade increases significantly. The egg seller starts to hoard tokens. I detect a shortage of tokens available for trading. I issue more tokens equal in volume to the volume of hoarded tokens. When a quiet season arrives, the token hoarder gradually releases his hoarded tokens. I need to remove tokens from the token supply to counteract this. If I do not reduce the token supply, there will be a surfeit of tokens thus diluting the pool of circulating tokens causing their value to fall. If the token hoarder releases tokens rapidly, the daily turnover will be affected. This is effectively the GDP on a daily basis. Inflation and loss of confidence may occur. I need to stop the egg seller hoarding tokens or prevent him spending them too rapidly. The hoarding of tokens becomes exceedingly problematic in my society. I did not invent tokens for people to hoard. I invented tokens to enable transactions. Tokens only do their duty when they are moving. The faster they move, the more wealth creating transactions occur.

I develop a way to curb the hoarding. I charge a 1% fee on money holdings each month, thus making it uneconomic to hold tokens. Each token is numbered and must have a stamp affixed monthly. This is effectively the cost of belonging to my money system. My preferred way would be to tax tokens that are idle and not touch tokens that are transacted. I could tax tokens at 1% each month reduced significantly for tokens that have completed one or more transactions. I still have problems limiting the volume of Hoarded Money.

Although my small society is significantly more prosperous with my token system, is still has a weak area. Tokens are only available to persons who earn them or sell goods or services. Villagers wishing to start a business are handicapped because that they cannot obtain capital to start a business. I want these entrepreneurial villagers to start their business for the benefit of all in the village. I cannot have a pizza shop in the village if none of my citizens can afford a pizza oven. My current method of introducing tokens into society is by creating them and spending them into society. I introduce a new method. I lend tokens for a very small fee. This enables villagers to borrow for certain purposes. I lend for business startups, house building, and farm purchase. I refuse to lend for speculation. I find that farms that are in debt tend to produce plenty of food for the village. I find that citizens in debt tend to work hard. I find that ten percent of my loans default. However, the other ninety percent of businesses thrive and are a benefit to the village. I risk a few defaults so that my village gets developed. The money cost nothing for me to produce and the ten percent of failed businesses still managed to introduce money into the society. Ninety percent of the business start-ups were successful and the benefit from these businesses far outweighed the failures. The money that went into failed ventures was not lost anyway. It went into society and the various business assets and skills made themselves useful elsewhere in other projects. I learned that spending money into society is not enough to operate a thriving society. Small-time business entrepreneurs need to borrow to start a business. A business needs money before it can make money.

The next problem I encounter is with the onion seller. Some villagers are short of money and the onion seller offers to lend them money. This, in itself, is not an issue. However, the onion seller does not give the borrower my genuine tokens. He gives them a certificate that states that he will give a genuine token when requested. He gives them a certificate representing a token. This has the effect of increasing the effective number of tokens quite dramatically. I later learned that he did not have the tokens to back the certificates that he was creating. This lending by the onion seller makes the money system quite flexible in that: villagers can obtain money whenever they need it. My village develops quite remarkably. But something strange happens. The onion seller’s certificates become more numerous than my bulky tokens. I no longer get the benefit of spending new tokens into society building bridges and roads. Over the first year, the villagers borrowed 1000 tokens from the onion man. At the end of the first year, the villagers owed 1000 tokens plus ten percent. Over a few years, the villagers owed more tokens to the onion man than there were tokens. The system still worked remarkably well for quite a few years. The onion man started to own almost everything in town. After a few years, there was so much owing and the citizens were in no position to borrow more token certificates. People could not pay the interest, let alone the principal repayments. One big debtor defaulted and the whole system collapsed and starvation ensued. Part of the problem was with land. My administration had drawn lines on the map creating individual plots. These were highly sought after. People borrowed from the onion seller to purchase land. They would borrow as much as the onion seller would lend. This made the land very expensive. The land price simply rose to whatever the onion seller would lend and that was determined by the villagers’ ability to pay. So the onion seller received a healthy proportion of the villager’s income. Land prices in the village were almost totally dependent on the volume of token certificates issued by the onion seller.

During this time, the onion seller had modified his procedures. Instead of issuing certificates, he kept a register of how many tokens he owed to people and how many tokens people owed him. What was fascinating was that the number of tokens that people owed him vastly exceeded the volume of tokens in existence, but nobody was smart enough to spot the problem. I am not sure that even the onion seller realised that more tokens were owed to him that there were tokens that existed. Provided the onion seller kept issuing more tokens, there were few problems. Everyone was in debt to the onion seller, which made them work very hard. The village was becoming highly developed and everyone was working very hard to pay their interest. The onion seller was collecting as much in interest as I was collecting in tax. From time to time, the onion seller would inexplicably cut back on lending. This random cutback coincided with a serious fall in business activity. As the village chief, I had not reduced the volume of my original tokens. Often, I increased the volume of my tokens, but business activity fell, unemployment rose and hunger became common. Houses were taken by the onion seller. A while later, the onion man would resume lending and the business activity would resume. It was difficult to predict when he would pull the stunt. Every once in a while, he would refuse to lend and businesses would cut production. During this shortage of onion certificates, many businesses would fail and people would go to be hungry.

There are some big differences between my lending of money and the onion seller’s lending. I was lending for the benefit of the village. I directed money to where it would benefit the village. There was no benefit to me in the lending as I had the authority to create money on an as-needs basis. Debt did not become unpayable because I could create and spend money into society in a manner to ensure there was sufficient tokens available to pay the interest. There was a two way movement of money between villagers and my village administration. When the onion seller lent certificates or balances in a register, he would lend for a wider range of activities. The onion seller also lent for speculation in land. He would allow people to borrow to purchase numerous homes that they would rent out to others that could not afford the loans. The onion seller could make a profit on land because the speculator-landlord took the risk. A good proportion of the poor people’s meagre income went to the landlords who passed it to the bank as interest. The loans that the landlord-speculators took out constituted a business so they received a tax deduction on the interest. This enabled the speculators to outbid the ordinary villagers who could not discount the mortgage interest against their tax. A high proportion of the village became renters rather than house and land owners. This created social problems as the renters became less included in the ownership of their village. They became more dependent on handouts. They lived a precarious life where they could be evicted at any time. Their behaviour started to mimic their insecurity. They were unable to support themselves in later life. The speculators had engineered further concessions. Unlike regular businesses where assets are evaluated at the end of each year, their asset appreciation was only evaluated at time of sale. The speculators were then given a concession masked as a capital gains tax. This enabled them to pay only half the tax on the sale compared to a wage earner. This increased the wealth gap dramatically. The speculators got a three part advantage. They could charge mortgage interest against their income. They could defer the income from asset appreciation to a future date. If they kept the asset indefinitely, the unearned income indefinitely. If they did sell the property, they received a tax bonus by only paying half the tax. This was masked as a Capital Gains Tax which was a disguise for a tax concession.

The smarter villagers had learned how to make money from land by purchasing land and obtaining a tax deduction. This had distorted land ownership towards those in a position to borrow. Nature or god had created land for all living creatures to share. This then encouraged a trend of making money from money rather than earning a living in the real economy. As the villagers realised that they could make money from money, a whole new ethos developed. Villagers were putting greater effort into making tokens from tokens than they were in creating food, products, and services. I declared this an evil. The making of money from money is an evil. But those partaking in the practice of making money from money were very skilled at manipulating the political process and engineered laws and procedures to assist in holding onto money made by this means. The volume of money that was hoarded increased. So much money was hoarded that tokens were changing hands, on average, less than once a year. This meant that around 93% of tokens were being hoarded. By this time, the volume of the onion seller’s certificates outnumbered my physical tokens by a ratio in excess of ten to one.

One bad winter, on one of the occasional times when the onion seller refused to lend money, business activity fell and some big debtors failed to make repayments. There was simply not enough money available to pay. When others saw the big debtors unable to pay, they also ceased to pay. One person asked for his certificates to be converted to tokens. A few others followed suit and the onion seller had to lock his doors. Everyone started to get rid of certificates and purchase anything that they could. Suddenly money was changing hands very rapidly and prices were rising rapidly. All the Hoarded Money came out to play. Hyperinflation had started. The hyperinflation was triggered by a minor panic but has escalated very rapidly because there were so many hoarded certificates. The onion seller’s certificates had caused the monetary collapse of my trusty token system.