2. Fate of Banks and Physical Currency

The banking industry has been rendered obsolete by the internet.

Once bank accounts are electronically transferred out to customers' own computers (or to customers' cloud storage), banks as we know them would cease to exist. Former banks might become loan companies; risking their own money making loans. Increasingly, however, individuals and companies would lend and borrow money through internet clearinghouse sites. The sites might offer services such as aggregating loans, determining credit ratings, and collection (including foreclosure).

Electronic Currency

A national Bitcoin model would function as a database specifying how the national money supply is divided up. No bank insurance would be required, since there would be no banks lending out the money and therefore no credit risk. Functions which were formally handled by banks would now be handled by regular companies as well as by individuals, and would seamlessly interface with the electronic currency.

No interest would be paid. The purpose of liquidity is twofold: first, to facilitate transactions, and second, to guarantee a safe place to store wealth. If people want a return on that wealth, they would have to invest it in the private, free enterprise economy. Also, the concept of time deposits wouldn't apply in a system that pays no interest.

Everyone would be assigned an account at birth, which would be theirs until they die. Even corporations would be assigned an account, upon incorporation. Each person or entity could have only one account. A person could spend his account down to zero, if he wished, but the account would still be there, when money is transferred back in again later.

The government wouldn't own any of the money. In fact, it wouldn't even have its own account! When government spends money it would automatically create currency (bitcoins), and when it taxes it would automatically retire currency (bitcoins). Taxes would be scalable and automatically adjust to cover spending, with no government borrowing allowed.

This national Bitcoin model would impose a ten percent transaction tax deducted automatically from the account of the party receiving the electronic money in a transaction. For example, if someone were to make a $100 purchase using electronic currency, the seller would be credited with $90 and the government would be credited with $10. The only other type of tax would be one based on net worth; discussed in a later article.

Physical Money No Longer Legal Tender

People would not be required to turn in their coins and paper money, and could continue to hold or spend them as they please. But no one would be forced to accept them as payment, so technically they would no longer be considered legal tender.

Coins and paper money would still be useful for:
(1) Gratuitous payments such as tipping and dropping money in charity boxes.
(2) Those times when people go into stores and the electronic payment systems are down.
(3) When EMP (electromagnetic pulse wave) from atomic explosions or severe sunspot activity causes permanent damage to the equipment involved with electronic money.
(4) Settling small sums between individuals, including reimbursements.
(5) Facilitating a limited underground economy between individuals, and anonymity for at least some transactions made with businesses.

Physical Money Taxed Like Merchandise

Since it would no longer be legal tender, physical money would be traded the same as any other form of barter, such as gold or other merchandise. So when people convert some of their electronic money into physical money, or vice versa, they would pay the same ten percent transaction tax as if they were buying or selling merchandise. Of course, one difference between physical currency and other merchandise is that physical currency would be valued at 1:1 parity with electronic currency, at least in dealings with businesses. 

Physical Money As Tax-Free Barter

Individuals would be allowed to barter items tax free among themselves, facilitating tipping, gifts, reimbursements, and a limited underground economy. For example, trading silver for gold, or trading silver for paper money, would both be considered barter transactions.

Barter transactions would be limited, however, in the following ways:

(1) Individuals with ongoing barter arrangements that were significant enough in size and which became publicly known, would be notified that they were now operating a business, and would be required to open a separate bitcoin account in the name of that business. In addition to keeping track of sales made using bitcoin, the account would also keep track of barter sales, which would be required to be entered into the system generating official receipts for customers. Whereas when operating as individuals they only had to pay the ten percent transaction tax on sales made using bitcoin, when their activities officially become businesses they must also pay the ten percent tax on all barter sales, including those involving physical currency. Barter transactions would only be taxed on transactions that were to occur from that date forward; barter transactions which had already occurred (from when they had been transacting as individuals) would not be taxed retroactively.

As soon as a business is set up with a separate bitcoin account (officially becoming a business), its owners would automatically have limited liability (like owners of corporations have today). Also, the business once officially established would be eligible to receive rebates representing transaction taxes already paid by other sellers earlier in the supply chain (VAT rebates). For those reasons, as well as the convenience of having a business account separate from that of the owner(s), many individuals would voluntarily open a separate bitcoin account for their businesses (and thereby be required to collect taxes on barter transactions) before being notified to do so.

(2) Certain assets could only be purchased with electronic currency. An example would be assets which are registered, such as real estate, motor vehicles, and investments such as stocks and bonds. Also, payments to utility, insurance, and telecommunications companies. In addition, many businesses might choose to only accept electronic currency, since they would no longer be required to accept paper money and coins as payment.

(3) Any contracts involving barter would be unenforceable in the courts. Also, any statutory rights to reverse a payment within a certain number of days, for certain types of transactions. would not apply for physical currency or other types of barter transactions.

(4) Further limiting the use of physical currency as barter would be the cost of acquiring and disposing of it. For example, if an employer buys physical cash for its own use using electronic currency, it would automatically pay a ten percent transaction tax. Then, if the employer decides to pay his employee using physical cash (rather than using electronic currency), and the employee sells the physical cash for electronic currency, the ten percent transaction tax would again be paid; this time by the employee. If the employer had simply paid the electronic currency directly to the employee there would have been only one transaction tax instead of two.

Even with these limitations on the use of barter, a limited tax-free underground economy would be allowed between individuals, and this exchange of barter could become more significant between people who trust each other; the overall numbers not being large enough to significantly interfere with the system of electronic currency (and its ten percent transaction tax). Now, if it was becoming publicly accepted that individuals were building up large barter businesses, and paying employees physical cash on a regular basis that was generated by those businesses, then that is what the rules restricting barter would be there to protect from happening.

The Paper Money Maze

Examples of how paper money might move in a national Bitcoin world can become quite technical. Fortunately, most of the complexity occurs behind the scenes:

(1) Let's return to the $100 purchase mentioned earlier, but this time payment is made using physical currency. If it is made at a store (and the store accepts payment in physical currency), the $100 physical currency becomes merchandise owned by the store, and the store owes the government the $10 transaction tax. Under the old system, the store would normally deposit the money at a bank, usually within one day. Since there would no longer be any banks, the store can resell the physical currency to a retail customer, or transfer it to another store, and the $10 owned to the government from the earlier sale would be deducted (and paid out to the government) from the electronic money it receives on the resale or transfer.

If the $100 physical currency that it originally took in has not been resold or transferred during a one week period it is assumed that the store is now buying it to use as petty cash (it would no longer be inventory). In this case, the store tentatively incurs a transaction tax. But since the store already owes the government $10 from when it had originally taken in the physical currency, the government would now collect both taxes out of the store's account. The amounts of physical cash that businesses take in and resell or transfer could be automatically traced (assuming proper checkouts for transactions producing official receipts for customers) allowing automatic collection of taxes.

(2) A customer uses electronic money to buy $100 of physical currency at a store. The cost would be $111, because $11 of it (10% of the $111) would be credited to the government, and $100 would be tentatively credited to the store. But if the store already owes the government $10 from when it had originally taken in the physical currency, the store would actually receive only $90.

(3) A customer sells $100 of physical currency to a store. The store electronically transfers $90 into the customer's account. The $100 physical currency becomes merchandise owned by the store, and the store owes the government the $10 transaction tax, as explained in example 1, above.

(4) An individual sells $100 of physical currency to another individual in return for electronic currency. The transaction is entered into a computer or cell phone and takes place through the internet. The price (in electronic currency) that they agree upon would determine how the transaction tax is allocated between the buyer and the seller. For example, if they agree on a price of $105, the transaction tax of $10.50 (10% of $105) is credited to the government, and $94.50 is credited to the seller's account. So if an individual wants to buy or sell physical cash (in exchange for electronic funds), he may be better off doing it with another individual because if he does it with a business he would always be paying the full amount of the transaction tax. Better yet, individuals could buy and sell goods and services among themselves for physical currency, and not owe any tax.

Maintenance Of Physical Money

Companies would collect commissions from the government when they exchange physical currency for electronic currency (and vice versa) as a service for the retail public. Commissions would be a percentage of the amount of transaction taxes generated. Companies wouldn't collect commissions on transaction taxes collected from the sales of regular goods and services. Unlike companies, individuals wouldn't be able to earn commissions.

No transaction taxes would be imposed on transfers of physical currency between stores, but whichever store initiated the transaction may be asked by the other store to pay a handling fee. When a store received a transfer of physical cash, it would become inventory and subject to the one week rule, as in example 1, above. Note that stores would be taking over money handling functions that used to be performed by banks. Money "in inventory" would be easily transferred among stores (analogous to a banking system), and money "in inventory" would be treated differently than the store's (as were bank's) own money.

The largest private dealers handling physical currency inventory would be allowed to transfer it to and from the government in exchange for electronic currency without having to pay a handling fee. These transfers would cause the amount of physical currency in circulation to change. Physical money held by the government related to these transfers would be inventory, meaning it couldn't be used for government spending. The government would replace worn or damaged money, and could change denominations, so that at some point, $1 might become the smallest unit of physical money, even though one cent might remain the smallest unit of electronic money.

Physical money would effortlessly flow out of the system as people use it to purchase from businesses, while at the same time there would be resistance to new physical money entering the system as people may balk at having to pay a transaction tax to acquire it. Therefore, after the new economic system is adopted, the current large supply of physical currency would most likely shrink significantly over time, and so would related barter issues.

(Content from this page appeared in my published article)

Next, read the PieEconomics essay titled Government Restructuring.

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