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CMI, and then?

Idea 28 August, rough draft 29 August, finished 5 and 7 September 2013

Introduction

In the previous article I looked at how promissory obligations, as proposed by Mike Montagne, the originator of MPE (Mathematically Perfected Economy), could be used as money. I concluded that they can’t, not in old-fashioned paper form. One problem is the necessity to split up the original promissory obligation to adapt it to the value required for a payment. Such splitting involves three parties, the original issuer being one of them.

But perhaps it could help to implement promissory obligations in a CMI (Common Monetary Infrastructure), using modern computer and communications hardware and software.

Below is my idea of how that could work. It is not based on descriptions I found on websites or in videos by MPE adherents, simply because I didn’t find any such detailed descriptions. MPE proponents themselves do not seem to know very well how the CMI should or could be implemented.

Data to be stored

Who, by whom, what, how much, when?

The CMI should contain registrations of all account holders that make use of that infrastructure. That involves practically all households and companies.

For each account holder, there should be records of what others promised to them: the nature of the promised product or service, its quantity, its scheduled time of delivery. Also it must be known who promised it: the holder of one of the other accounts in the CMI database.

Worth how much?

One of the many problems of using promissory obligations as money, is that they are tied to specific products or services. Suppose you buy various supermarket articles, and want to pay with part of a promise to have 2000 chickens delivered. That was the situation in Mike Montagne’s parable I discussed in the previous article.

How much is a chicken worth and how many chickens must be promised, to cover the value of what is currently in the trolley / shopping cart at the checkout?

Answering that question requires detailed knowledge of the chicken market. The next customer in the queue will want to pay with a promise of something else than chickens, so the required value assessment requires insight in the market for that product too.

Clearly that is impractical. A shop is not a valuation consultant for products it itself normally sells nor buys.

So I’d expect that for practical reasons, the CMI would also assign a dollar value to each promissory obligation, established as it is created. For example one chicken may be worth 1 dollar 50, and the promise of 50 chickens can pay for 75 dollar worth of spending in a store. (Don’t know if these are realistic values, it’s only to get some idea of what happens.)

So when the chicken raiser from the previous article goes to the CMI and has his delivery promise of 2,000 chickens registered, the CMI must assess a price and then note in the database, that these chicken will be worth 3,000 dollars. Those dollars themselves do not exist, because it is the promissory obligation that is to serve as money. The dollars however are used here as a unit of account, not as a medium of exchange.

Efficiency

MPE/CMI proponents are keen on claiming that a CMI is so much cheaper than a bank, which is one of the reasons why the CMI need not work with interest. To quote Mike Montagne: [...] and maintains our accounts, [...], at virtually no cost whatever.

However, just above we noticed the reverse: the CMI must interfere in every business transaction, even small and frequent ones, if they involve the creation of ‘money’ in the form of promissory obligations. The CMI must have or obtain detailed market knowledge, in order to assess what the promise is worth, expressed in dollars used as units of account.

Registering the promissory obligation to be created also involves checking the obligor’s creditworthiness: will he really be able and likely to fulfil his promise? To quote Mike Montagne: [...] we can issue our promise to do so through the common foundry [later called: CMI; RH], which certifies our creditworthiness and maintains our accounts [...]

Compare the above to a traditional bank. They too need to know markets and market opportunities, so they can assess the risk of granting credits to their clients. They too must be aware of creditworthiness. But these checks happen perhaps once every few years, not several times a day as would be the case with a CMI and larger companies producing many different products of many large production batches.

A bank also needs to know if the prospects are good for the business of its clients, but it does not have to have detailed knowledge of prices of every single product its business clients manufacture or trade.

That means a CMI would have to employ a lot more workers than banks employ today, and it would interfere much more in people’s business and lives than banks do today.

To cover its significantly higher costs, the new CMI would have to charge more than traditional banks (either as interest, and/or as other types of charges or commissions), AND it interferes more with people’s lives. Exactly the opposite of what MPE believers hoped to achieve.

Divisibility

Back to the shop. Suppose the doctor in the previous story, when arriving at the checkout, has 60 dollars worth of purchases in his shopping cart. To be able to pay for those purchases with the promise of 50 chickens (worth $75), which he obtained from the chicken feed grower, that promissory obligation needs to be split.

With the help of a modern digital communication infrastructure and cheap yet powerful computers, that is no problem. The original promise of 50 chickens (derived from a larger promise of 2000 chickens, see previous parable), is now split into a 10 chicken / 15 dollar promise that the doctor keeps, and a 40 chicken / 60 dollar promise, the possession title of which is transferred from the doctor to the shop.

Fortunately, in the age of computers and routers, this can be done without having to bother the original issuer of the original promissory obligation.

Transferring value means payment, much the same as how in the existing economy, passing banknotes, using a debit card or writing a cheque results in shifting ownership of a financial claim to a bank.

Splitting of existing promissory obligations results in divisibility: not only the full, original value can be used as payment, but also smaller fractions.

The divisibility of promissory obligation is however limited in comparison with traditional money: the smallest unit is the unit of the promise, in this case one chicken. The smallest unit of euros and dollars is a cent, of pounds it is a penny, and yens are already a small amount by nature.

With, for example, one chicken-worth as the smallest unit, promissory obligations are probably still practical for use as money, where divisibility is concerned. If at the checkout, the doctor had not 60, but 50 dollars worth of articles in his trolley, some sort of rounding or other arrangement would have to be devised.

In the example, 50 dollars corresponds to 50/75 * 50 chickens. That equals 33.33 chickens. Live chickens, mind you. You can chop a dead chicken into three parts…

Perhaps the shop can solve this by issuing a new promissory obligation to the doctor, that is worth the difference. The doctor can use that later to buy other products in that shop. But which ones? He doesn’t know yet. So maybe he gets a generic promissory obligation, with the dollar value (dollar as unit of account) already filled in, but the promised product (medium of exchange) left blank. The CMI equivalent of change. Or of a credit note.

Promissory obligations, when issued, can be tied to any sort of product or service. If the promise involves future production of a batch of cars, there is a bigger problem than with the chickens. A new car is worth several thousands of dollars. So promissory obligations of this type could only be used to buy something the value of which can be expressed as a multiple of the value of one car. A house maybe. Not very practical.

Traditional money does not have this problem. It is always generic, has a value of its own independent of any commodities, and is fully divisible and combinable.

Combinability

Suppose the doctor needed to pay not 75 dollars, but 95. The promissory obligation for 50 chickens is not enough to cover it. No problem, the doctor also has a promise to a pile of firewood, worth 150 dollars, obtained from another one of his patients. The CMI (Common Monetary Infrastructure) can easily split off enough firewood from that one to cover the missing 15 dollars. So the doctor’s happy and so are the shop people.

Fragmentation

From the above examples, we see that nearly every payment transaction results in further fragmentation of existing promissory obligations. That’s because it is rare for the amount to be paid to correspond exactly to the value of one or more promissory obligations.

Technically, such fragmentation is no problem in this day and age. Modern computer programs and databases can easily handle the many splits, even if there are millions of account holders and billions of transactions a year.

Fragmentation IS a problem, however, where the actual collection of the promised products or services is concerned: instead of one company collecting 2000 chickens at once, there could be hundreds of different account holders in the CMI, each entitled to a few of those chickens. Some of those account holders will show up, around the pre-agreed delivery date, to collect their rightfully owned chickens. But some don’t. The chicken raiser is not allowed to deliver any uncollected chickens to somebody else. Yet another practical problem.

Also, because of the sheer number of product collections in a short period, the chicken grower won’t have any time for his regular work. He has no choice but to be a chicken retailer during the period of delivery. The split-off promissory obligations that the collectors present as evidence need to be checked and cancelled (taken out of circulation) at the CMI, using a payment infrastructure similar, but different to that a retail shop uses for payments. A lot of hassle and costs for the chicken raiser.

Collection traders

What I expect would happen to solve this problem and avoid the hassle, is that specialised traders would emerge, who buy up the complete batch of chickens promised in the original promissory obligations (POs). That trader probably resells those chickens to a slaughterhouse or egg production farm.

The trader then compensates the many holders of the fragmented PO parts, you waive their chicken delivery rights, by promising them something else instead. That is, the trader creates new POs for all of them. But what products or services should those compensatory POs promise? The trader doesn’t know what the PO holders want or need.

But in practice, PO holders do not really care what they get promised, as long as they are duly compensated for the corresponding value of the original number of chickens in the partial PO they hold.

So I expect a new kind of PO to emerge. POs that promise an as yet unspecified product or service, but with a specified value expressed in ‘unit of account’ dollars. Similar to the POs issued by shops as the equivalent of change. Everybody’s happy.

Compared to banks

Now let’s compare this with the current situation where banks provide the infrastructure for payments.

The holders of the fragmented POs pay with promises, and are compensated for waiving the delivery right by new promises from special traders. So in the end, in fact everybody is paid, directly of indirectly, by promises from special traders. Because actually collecting the products yourself is too much of a hassle, too impractical and too costly.

In the existing economy, everybody pays with promises too: money is a claim on the bank, so also a promise by the bank to pay. That promise (arbitrarily dividable into parts) can be transferred to a different account holder. Such transfer is payment.

In fact the same thing as what PO collection traders would do.

Conclusion

POs (promissory obligations) and a CMI (Common Monetary Infrastructure) are unsuitable as a payment system. If they were introduced anyway, sooner rather than later their problems would be spontaneously overcome by traders who would in fact function as banks do today. Eventually, we’d have the same payment system that we already have now. The whole effort of introducing POs and setting up a CMI would have been futile!!

As John F. Kennedy is said to have said: “if in ain’t broke, don’t fix it”. (Or was it Bert Lance who first said that in 1977? Never heard of him until today.)


See also Buying a house with a promise.


Copyright © 2013 R. Harmsen. All rights reserved.

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