The Liquidity Network proposal – a quick guide.

by Richard Douthwaite : Feasta Liquidity Network

The Liquidity Network proposal – a quick guide.

1. The Irish money supply is contracting rapidly. The value of the notes and coins in circulation plus the funds in bank accounts to which people and firms have instant access has fallen by about 14% over the past year. This is extremely serious. It limits the amount of buying and selling that can go on and cuts employment. It reduces the taxes people are due to pay. It also makes it much more difficult for borrowers to get the funds together to pay their taxes and to service their loans. If the contraction goes on, the banks’ bad debts will soar, and, as a result of the guarantees it has given, the government will have to borrow the funds to make their losses up. At some point, the banks’ losses may exceed the state’s ability to raise more funds and the nation would default.
2. The contraction in the money supply has therefore to be reversed. There are only three conventional ways that this can be done. One is that the money could be borrowed, whether by government, business or private individuals, and spent into circulation. However, this road seems blocked because firms and individuals are reluctant to increase their extremely high borrowings in present circumstances while the state is already borrowing so much it would be unwise, even if it were possible, for it to borrow more. The second and third ways are also blocked. One is to earn more money from overseas by exporting a lot more than the country is importing. The other is to attract in foreign direct investment. Neither presents good prospects in view of the global recession.
3. An unconventional way to get more money into circulation is therefore necessary. One such way would be for the government to announce that it was starting an emergency currency to be used as a supplement to the euro and that it was proposing to proceed on the following lines:
   1. A trust will be set up to operate the new exchange system which will be owned and controlled by the participants as it is they who give its units their value. An elected management committee will run it under a trust deed setting out the basis on which it is to do so. The commercial banks will operate the system under contract to the Trust.
   2. Each person with a Personal Public Service (PPS) number will be asked to nominate a bank to operate their account. Once their account is open, it will be credited with the equivalent of €1,000 in the system’s unit, the quid. The banks will also open quid accounts for their business customers but these will not be given an initial float.
   3. Quid will only exist in electronic form. It will be possible to transfer them by a laser-type card with a PIN, via a mobile phone or by computer.
   4. It will be up to employees to agree with their employers how much of their wages they will take in quid. Similarly, shops and other suppliers will state what percentage of the price can be paid in quid. Taxes due on payments in quid will be paid in quid.
   5. It will be impossible to prevent an unofficial exchange rate developing between the quid and the euro but there will be no recognised exchange rate between the two currencies. The Trust will not sell quid for euros nor euros for quid but some participants undoubtedly will. Although there will be no target exchange rate between the quid and the euro, it might be advisable to manage the number of quid in the system for the first few months so that the price of a quid is roughly one euro.
   6. The quid in an account do not belong to the accountholder – they are only there as a measuring tool. The velocity of circulation in each account will be monitored by the system’s software and, if an account’s velocity is tending to rise, more quid will be assigned to that account. If the velocity is falling, quid will be removed. Accountholders will be provided with information so that they can know when to expect quid to be added or removed. The overall number of quid in the system will be adjusted each month to keep them scarce in relation to the total amount of trading going on. This will maintain their value.
   7. Quid must not be used for capital investment. Funding for that must be sought in the conventional money system. The quid is only intended to provide liquidity to allow trading to take place, not investment capital. People should not save quid because the units should not be expected to maintain their value and, in any case, if the quid in their account are not moving, a percentage of them will be taken away each month.
   8. No credit will be extended in the system. Accounts will not be allowed to go into deficit. A participant dispatching goods or providing services to another member of the network will issue an invoice immediately the goods are dispatched or the services performed and enter the charge against the customer’s account in the way hotels sometimes do with credit cards to ensure that their bill will be paid. The quid involved will be placed in escrow and will no longer be available to the accountholder for other trades. When the goods have arrived and been checked, the recipient will notify the system that the sum held in escrow should be released to the supplier’s account.
   9. Accountholders will pay a monthly fee in quid based on the turnover in their account to cover the operating costs of the system.

This arrangement would inject the equivalent of €3 billion into the consumer economy, about a quarter of the amount that has been lost to the M1 money supply since it peaked. More quid would be given into the system each month to the accounts with the highest velocity and those with a low velocity would have quid removed. People would quickly realise that if they did not spend their quid they would be gradually taken away. If the amount of trading going on in quid was increasing, the total number of quid in the system’s accounts would increase too. However, if the euro ever became abundant again, the use of the quid would fall and units would be removed from circulation. At some point in the decline, businesses would begin to refuse to take quid and the system would quickly run down to nothing. This is what makes the quid a true emergency currency. On the other hand, if the euro remains scarce, the quid will stay in use.

The advantages of the system for the government are:

*  Increased tax income.

*  Lower unemployment

*  More competitive economy because a proportion of all costs would be payable in the new currency which, unlike the euro, could fall in value relative to currencies used elsewhere.

*  Much reduced bad debts for the banks and therefore for the taxpayer because borrowers would be able to conserve their euros for debt service.

*  Seignorage gains: If it ran its accounts so that the velocity stayed high, the state’s high turnover would mean that, while the system was expanding, it would be given, and be able to spend, a lot of the new units being put into circulation.