So do you think we could dispense with interest altogether then?

I'm sure these questions are leading somewhere, Peter Hume. Most intriguing.

First, the riddle.

>>Pericles You can have a license to print money substitutes without fractional reserve banking, but you can't have FRB without a license to print money substitutes.<<

Ye-e-e-e-e-es.

I have also found that you can have a driver's license without driving a car, but you can't drive a car without a license.

Does this help us, I wonder?

Now the question.

>>If you run a shop, and someone comes in to buy something, how can you tell whether he's funding his purchase with money or with money substitutes?<<

If it is in physical form, I would generally hold it up to the light, then compare it to the list taped to the side of the till. If it is in the form of plastic, I'd simply rely on the message "Approved" that comes back from the Bank.

That works in almost every case, and the rest is covered by insurance.

Ok, I'm ready for the next one.

Fascinating.

You can drive a car without a licence, you're just not allowed to. But you can't practise fractional reserve banking without multiplying money substitutes. So if you're in favour of fractional reserve banking, you are necessarily in favour of multiplying money substitutes.

Okay, next one.

If you held it up to the light, and determined that it is a bona fide Australian government-issue 'banknote', so you decided correctly that it was truly money and not a money substitute: still, how would you know that he hadn't withdrawn the cash from a credit account comprised entirely of money substitutes unbacked by money or any asset?

Poor analogy, Peter Hume.

>>You can drive a car without a licence, you're just not allowed to. But you can't practise fractional reserve banking without multiplying money substitutes.<<

You're getting a little carried away with this "money substitute" malarkey, and are getting a little tangled up.

>>so you decided correctly that it was truly money and not a money substitute<<

Indeed I did.

>>, how would you know that he hadn't withdrawn the cash from a credit account comprised entirely of money substitutes unbacked by money or any asset?<<

He may well have done. But it is irrelevant.

Because the fact remains that when he handed it across the counter, it acted in exactly the same way as any other money, in that it was translated into goods. When I take it to the Bank tomorrow, they are going to give it exactly the same treatment as all the other notes in the pay-in envelope.

If I had accepted plastic, those slips of paper that we used to generate from the card imprint machine acted in the same way. Despite the fact they clearly weren't actually banknotes themselves.

Even the zeroes and ones that are exchanged when the machine reads the chip on the card, behave in exactly the same way as any other form of money.

If I had been of a mind to accept cowrie shells, despite their fine history, they would be something of a challenge to turn into money, thanks to the lack of a freely available exchange mechanism. But, if that was all the customer had to offer, I could well be sentimental enough to turn back the clock a little for him.

All of these are money.

Or "money substitutes", as you call them.

And they all perform precisely the same function.

I am sensing, however, that you see some kind of problem with this?.

If we put a tax on the amount of inflation created by the fractional reserve system,then we can limit the inflation and thus the dilution of people's wealth via the creation of too much money.This would also help reduce income taxes.Why not a fractional reserve inflation tax?

Most of the money created by the banks is done so as debt.With the computer age very little cash is created by the RBA and thus debt rather than savings calls the tune.I'm sure our own RBA could create a lot of our credit instead of borrowing OS.Kevin's borrowing from China has created a lot of inflation and we are paying interest on worthless ,wasted money.The stimulus money could have been created by the RBA and inflation controlled by Govts not putting up taxes,power bills etc.

If the economy gets overheated then rates could be raised.I see no reason for rates to raised at the moment.

Pericles and David,

Interest is useful if it is used appropriately. In the changes suggested most loans will continue to be interest bearing because they will be made with existing money.

It is the increase in the total money supply that need not bear interest and it is the use of money for trading that need not bear interest.

Where money represents savings then we want some method of paying people for making those savings and interest is appropriate and we all understand it.

Where money does not represent savings but represents credit for new assets or value for trading purposes it is inappropriate for the money to earn interest because the money does not represent savings. When we start thinking this way many of the suggestions for monetary reform make sense. Things such as Chris Cook's peer to peer credit and Rodney Shakespeare's Binary economics, Paul Grignon's electronic money, calls for community currencies, and calls for alternative currencies based on measures such as kilowatt hours make sense.

I must emphasise again. What I propose leaves the existing system intact. It introduces new ways of increasing the money supply without interest for purposes where interest on money is inappropriate. To understand it it is necessary to imagine the system with these new ways of money creation in place.

It would be easy to try out the ideas on small scale and observe what happens and see if the system will adjust itself as predicted. We can talk about this until blue in the face and we will be none the wiser. If we experiment then we can see what happens.

One such experiment could be the ACT government funding the building of the Cotter Dam with interest free credit that the community guarantees. The residents of the ACT could have a new dam without an increase in the price of water and paid for from the increase in the supply of water rather than savings.