There have been many types and ways money has been created in the past. With the change in society, a new way of money has always been emerging. Sometimes there has been a fixed supply of money, sometimes there has been an inflationary money supply.
In this article, I want to explore a new type of money, which is based upon the time preference of people and expands based upon the demand for money. This method emerges when you start to think of money as a product that has a special purpose and that is to make trade efficient.
so how do we go about creating such monetary system?
Problem with current Monetary system.
The current system is being controlled by the central authority and has no clue what are the preferences of savers and borrowers, it arbitrarily set the interest rate. They have pre-defined inflation targets no matter what the underlying realities are they just have to achieve this target.
rather than the interest rate being influenced by the people’s preference, it is people who are being influenced by the interest rate.
MAP money as product a solution for better moentary system.
Allowing money to adjust based upon the demand for it. Now the lets see how it can be achieved. goal of this monetary system is to increase money supply based upon demand for it and it is said that we can’t know the demand for money.
but I think there is a way.
Imagine a smart contract as a bank, it knows how much total money is there and how much of the total is deposited within the bank and how much is outside the bank.
This smart contract bank increases the money supply within the bank and gives it to those who kept a deposit in the bank.
Now as the money is being increased and given to depositors the total supply of money is increasing and the money that is outside the bank makes a small portion of the total. This affects the interest rate that the bank was paying since the interest rate is equal to the percentage of money outside the bank thus it gets reduced.
Now how much does it pay?
It creates money in the same percentage as the percentage of money outside the bank. So if say 10% of the money is outside the bank then it will increase the money supply by 10%. Note: this increase is per year, so you will need to divide this 10% by month, or days to know interest rate for a day or a month.