The foundation upon which our reforms are built is an entirely new monetary system. Instead of banks creating and recording the existence of most money, Free Money will exist on a central electronic ledger system that can be instantly and freely accessed.

Important Features and Benefits of Free Money

Free of Debt at Creation

Under the current monetary system 97% of new money enters the economy through loans issued by commercial banks, Free Money will enter the economy unencumbered by debt.

The necessary growth in money supply thus will not require a growth in debt. Under Free Money money supply and debt levels become separate issues.

Indestructibility

In our current money system (2012), money can be destroyed and the money supply shrinks when banks make bad loans or investments. Free Money is like gold: the money itself is indestructible.

The distinction about Free Money’s indestructibility, while subtle, has enormous benefits to maintaining economic stability. In our current system the ability of banks to create money is capped by their “capital reserves”. Generally banks must have capital reserves of 10% of the money that they have issued. Therefore they are limited to issuing money totaling no more than 10X their capital reserve. If a bank makes a bad loan and it goes into default and the bank loses money, the bank’s capital reserve is reduced by the amount of that loss. The bank then has to call in other loans or stop making loans until its outstanding issued money is no more than 10X its capital reserves.

Unfortunately for economic stability, such reductions in the money supply through bank loan defaults tend to be highly correlated with times of overall weakness in the economy. Reducing the money supply puts further downward pressure on economic activity, which can then result in more loan defaults etc, etc: a dangerous positive feedback loop.

Free Money avoids this risk entirely. Because the Free Money money supply is unrelated to the wisdom of investments, its growth is tied to the GDP.

Under the Free Money system, if some Entity makes a bad investment or loan decision, money itself will not be destroyed. Only the investor’s expectation to RECEIVE money in the future will be harmed,.

Free Money Doesn’t Drive Asset Bubbles

The current system also has a serious flaw which is the opposite of the destructibility problem described above. During “boom times” commercial banks tend to manufacture money to chase asset bubbles. As prices for a class of assets goes up (say houses or Internet stocks) the bank generally stands willing to loan against the asset an amount equal to a percentage of the asset price – fueling an inflationary cycle.

In the Free Money system commercial banks as such don’t exist. Loans are made by Entities that aggregate Free Money from investors, and lend it out. The rate of Free Money creation remains fixed and doesn’t contribute to asset bubbles via money creation.

Managing the Free Money Monetary System

Managing our current money supply is a difficult challenge for today’s central bankers. Because most money is created by commercial banks when they make loans, managing the supply of money requires a series of indirect actions by the Federal Reserve and bank regulators. Often these actions have significant delays or unintended consequences. Further, essentially all the tools of money supply management today can only address the quantity of money, they cannot, except very indirectly and sometimes not at all, address the velocity of money.

Free Money radically solves the problem of managing the supply and velocity of money. Since Free Money consists of entries in a computer database, the supply of money is known exactly and at all times, as is the velocity.

The Monetary Authority

It is anticipated the Free Money will be governed by a 4th branch of government directly responsible to the people and managed in complete transparency. Obviously, the power of Free Money requires that this Authority be carefully constructed so as to avoid capture or corruption.

Money Supply Growth

To avoid deflation, the money supply needs to grow at least at the rate of GDP growth (or potential GDP growth). Thus new money is always entering the economy.

Today 97% of that new money is created by banks, from thin air, on their ledgers when they make loans.

Since money is a “social” institution, and is truly the property of the people as a whole, the required growth of Free Money, instead of being a vast windfall to banks as it is today, will instead go to the citizens on per capita basis.

If we assume a monetary base of about $11 trillion and an annual money supply growth on the order of 6%, then under Free Money, each month about (($11 trillion x .06) /12) = $55 billion of new money would be created directly in the accounts of the citizens ( approximately $250/month per adult citizen).

It is only right that the fruits of monetary growth should go to the members of that community at large, rather than to a narrow special interest as it does today when the value of 97% of the growth in money is captured by commercial bankers.

Managing the Supply of Money

Money supply refers to “amount of money currently outstanding. Today that would mean the sum of all currency, coin, and bank deposits.

Under Free Money it would mean the total number of $F in Free Money accounts. The growth in money supply under Free Money can be adjusted by changing the monthly “dividend” paid out per capita.

If productivity increases and we need a bit faster growth in the money supply, the dividend could be increased from say $200 per month to $220 a month. On the converse, as our working age population increases more slowly in the future, the dividend can be gradually decreased. The results of these adjustments are instantaneous and precise.

Unlike the current rapidly fluctuating and often arbitrary attempts to “adjust money supply” by the Federal Reserve, under Free Money, people will be able to count on a basically steady rate of increase that tracks the increase in available goods and services. Adjustments to the rate of increase would only be done occasionally in response to real large scale changes in demography or productivity and only after substantial notice.

Managing the Velocity of Money

The velocity of money is how often the supply of money is transacted. In the current economy as of Q4 2011, the average dollar is used in a transaction about 1.59 times per year (GDP/M2) . Velocity has ranged in recent times from a high of 2.1 in early 2000 to our current low of 1.59 which is the lowest velocity of money since the Federal Reserve started calculating it in 1959.

The ability to ability to manage the velocity of money is a major new capability that Free Money brings to economic management. Today velocity of money can only be loosely estimated and well after the fact. Today’s method is to divide the current period GDP by the money supply! As we all know GDP change estimates are often wrong in the short term, with accurate numbers often not appearing until months after quarter end.

Since all Free Money transactions occur in a computer database, the velocity can be calculated exactly, at any time. Under Free Money we can know that TODAY, the money supply was exactly $FX while the sum of transactions today was exactly $FY and thus the velocity = ($FY/$FX) x 365.

We can manage the velocity of money through Free Money’s Book Interest Rate.

Book Interest Rate

Since Free Money is very much like currency and checking accounts, the “normal” interest rate for balances kept on the book is expected to be zero. However, by raising or lowering the book interest rate (including to negative values!), the monetary authority can have significant, if not instantaneous impact on the velocity of money.

Let’s imagine that the economy is “heating” up, running too fast, with the velocity of money above the target rate, with increases in prices appearing. The monetary authority could move the book interest rate from its “normal” value of zero, to say 2%. At the same time the monetary dividend would be reduced from 6% to 4%.

The net result is that money supply growth remains unchanged, however, there is an increased propensity to not spend money on the book (to capture the interest) as compared to when the interest rate was zero. In addition, there is less money being created per capita “out at the edge” of the economy, further slowing the rate of transactions, hence the velocity of money slows and quickly the overheated economy cools off.

Now let’s imagine that the economy is slowing, ie the velocity of money has slipped below its target and there are some signs of a slowing economy such as an increase in unemployment. Under a slowing scenario the monetary authority can make the book interest rate negative!

For example there could be 2% annual NEGATIVE interest rate. Thus piles of Free Money would gradually shrink. The 2% annual shrinkage in existing Free Money would be immediately recycled as an INCREASE in the monetary dividend from 6% to 8% per year.

While maintaining the target growth in money supply, the negative interest rate would increase the propensity of people with money to spend it before it shrinks, while the increased amount of Free Money dividend created “out at the edge” where people tend to spend it, will also increase the rate of transactions, thus increasing the velocity of money and speeding the economy back up.

Free Money Functional Description

In the Free Money system, all money is stored in and transferred “On The Book”. The Book can be thought of as an electronic ledger that records the amount and location of all Free Money.

Each Person and each Legal Entity will have an Account On The Book. Each Account can be subdivided into one or more SubAccounts which can each have their own SubAccounts.

When an Entity receives money, it is deposited into their Account instantly, while at the same time it is deducted from the Account of the Entity making the payment. Likewise, when an Entity makes a payment, the money is deducted from their Account at the time of payment, while at the same time being deposited in the account of the Entity they are paying.

All transactions are electronic. There is no paper currency or coin. All transactions are issued via terminal devices at point of sale and/or from secure applications on electronic devices such as cell phones or personal computers.

For Example: Bob wants to purchase $F100 of groceries from Mary’s Grocery Store. At the checkout, the cashier would ring up the purchase as usual, and the total amount would be presented to Bob on a terminal device, perhaps much like the credit card readers now often seen at grocery checkouts. Bob would authorize a payment (see below for detail on various methods to authorize a payment with differing levels of security) of $F100 from his SubAccount “Groceries” to the SubAccount “Retail Sales” of Mary’s Grocery Store. At the time of committing to the transaction, $F100 would be deducted from Bob’s SubAccount “Groceries” and deposited in the SubAccount “Retail Sales” in the Account of Mary’s Grocery Store.

Entities, Accounts, and SubAccounts

In addition to Free Money itself, the basic elements of the Free Money system are Entities, Accounts, and SubAccounts.

Entities

“Entities” are the beneficial owners of Accounts. There are two classes of Entities: Persons and Legal Entities.

Person

A “Person” refers to a natural human person – legal entities are not “persons” under Free Money! Each Person registered with Free Money will have exactly one Account.

Legal Entity

Legal Entities would be registered “On The Book” and would have exactly one Account per Legal Entity. An example of a Legal Entity would be a business: “Mary’s Grocery Store”.

Accounts

Each Entity will have exactly one Account. All receipts and deposits for an Entity will be to or from its Account.

SubAccounts

An Entity may establish one or more SubAccounts under an Account. SubAccounts may have additional SubAccounts under them. Deposits and disbursements may be made from or to specific SubAccounts.

Business could and generally would have larger and more complex SubAccount hierarchies that can be thought of as being similar to the “chart of accounts” used in general ledger accounting systems.

Identity and Security

Obviously identity and security will be key issues in the Free Money system. Each Person in the Free Money system will have a biometric ID card with a second form of validation such as a PIN number or voice print. Also, all point of sale systems will be able to pull up biometric information (such as face picture) from Free Money to work against forged ID cards.

Entitles will be able to add additional security features that inevitably reduce ease of use, such as “two token” system like RSA’s SecurID system, or multiple layers of passwords and/or biometric identity verification.

To be able to trade off ease of use and security in a sensible way, an Entity will be able to have different levels of security on different Subaccounts. For example: A user might choose basic security on his “pocket money” SubAccount, while selecting a higher level of security for their paycheck deposit SubAccount. They could periodically move funds from their ultra-secure paycheck SubAccount to their somewhat less secure “pocket money” SubAccount. This would be analogous to, but more secure than, making withdrawals from an ATM .

There will be technical features built into the Free Money system that will make it very difficult for any successful penetrator to spend Free Money without being traced.

Illegal Immigration Control Through Free Money ID System

Because all participants in the USA economy will require Free Money ID, Free Money should make it much more difficult for an illegal emigrant to participate in the economy.

Short term legal visitors will be issued temporary Free Money ID and Free Money Accounts. When a visitor leaves or when their visa expires, their Free Money status could be changed so that their ID is not valid as a general purpose ID and their Account can only be used to disperse funds, not receive them.

Visitor Accounts would also be blocked from receiving wages or other work related compensation. Without the ability to get paid for thier work illegal immigration would quickly dry up.

Legal Entities Requirements

Under Free Money the various classes of limited liability Legal Entities today (C Corporations, S Corporations, Limited Partnerships, LLCs, etc) will be collapsed into a single class called “Legal Entities”. They will look much like today’s LLCs.

SubAccount Structure

For Legal Entities beyond a small size (for instance, size, defined as total Account transactions plus average Account balance, is greater than $F100,000) the SubAccount architecture will require the approval of a CPA as providing a reasonably accurate and fair picture of the financial affairs of the Legal Entity.

Larger Legal Entities (say with size above $F10,000,000) will require annual recertification by a CPA of their SubAccount structure.

Ownership Transparency

The Account for a Legal Entity will provide a complete listing of all owners, with ownership amount, investment made by each owner, and the complete documentation for the securities that define the various forms of ownership n that Legal Entity.

Depth Limit

To cap needless complexity in the structure of Legal Entities, no hierarchy of Legal Entities may be more than 5 levels deep. That is all branches of the ownership tree of a Legal Entity must terminate on a Person no later than level 6.

Real Transparency

In a major stroke to reduce information asymmetry between Persons and Legal Entities, all transactions, balances, and the ownership structures for Legal Entities will be visible to all parties who have Free Money Accounts.

Transactions between Legal Entities and Persons will disclose the Legal Entity side, but will anonymize the Person. Thus a transaction entry in Corp XYZ’s payroll system might show:

9/12/2012-14:25EDT – Payroll Check: From Corp XYZ TO A Person – $3412

In addition to large amounts of viewable data, the Free Money platform will provide basic computational capabilities to allow participants to do significant analysis of transactions and balances of their own Accounts and SubAccounts or across and among any of the Accounts or SubAccounts on the Free Money system.

The infrastructure will provide for the ability to “Publish” the results of an analysis. For example: Joe Smith might create an analysis showing the three day rolling average sales for all the gas stations in his home town. He could then “Publish” this result such that it is automatically updated daily and available for anybody to view.

Small scale use of the analytical and publishing infrastructure will be free, while large scale usage will priced at a “cost recovery” level. See Amazon and Google cloud computing for examples of “limited free and charge for more” pricing models.

In addition, for those who need to do analyses beyond the scope or scale of the built-in analytical infrastructure, there will be a published API to allow the creation of analysis on computers outside of the Free Money infrastructure. We would expect that this would result in a significant industry of people discovering and publishing valueable insights into the behavior of Legal Entities.

Anonymous Money

While we see the vast preponderance of legitimate transactions using the standard network transactions, we believe it is beyond the scope of these reforms to eliminate private transactions – so Free Money will permit a small amount of anonymous money suitable for “personal use” but in a way that prevents a large scale build up of ill-gotten gains outside the system. Nor will it be on a scale suitable for large scale political corruption. We call this limited amount of untraceable money “Anonymous Money”

Anonymous Money Features

Any Person (but no Legal Entities) may create Anonymous Money from the money they have in their Account. Each Person can create Anonymous Money up to a monthly limit. A reasonable limit would $1000.

There will be a fee of 10% for the creation of Anonymous Money. That is, if you want to create $F100 of Anonymous Money you will be charged $F100 for the actual Anonymous money created, PLUS $F10 fee.

Anonymous Money will have a limited “Time to Live” of 45 days. If a piece of Anonymous Money has not found its way to an Account within 45 days of issuance, it will disappear and the funds will be redeposited in the issuers account. The 10% fee will not be refunded.

Anonymous Money will be in the form of a many digits numeric token such as:

89598438328540585485430843843098439058905843908930489043890586765887658796.

The system will provide the ability for anyone to “look up” the remaining Time to Live of any Anonymous Money token, to assure themselves that it is still valid so that they can consider whether the token has sufficient Time to Live for their purposes.