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MyCHIPs Digital Money

Content Illustration

Adding More Parties

Once you understand this basic flow of value from credit issuance to redemption, it is easier to extrapolate to a larger economy. The flow of value always travels in a circle. In our first example, it was a very small circle, only involving you and Wal-Mart. As we add more players, the circle gets bigger.

Imagine we also have a Subway Sandwich store where the employees of Wal-Mart and Home Depot can enjoy their lunches. And we also have DR Horton busily building homes for the employees of all four businesses. Subway can buy groceries for its sandwiches at Wal-Mart and get its kitchen equipment at Home Depot. DR Horton can get their building materials from Home Depot and their uniforms and other supplies from Wal-Mart.

What’s more, assuming DR Horton has enough credits built up, they could build you a house in exchange for your promise to pay for it over time. In other words, maybe we don’t even need a bank to establish your home loan. Instead of paying for your house with central bank notes, you can just use your regular Wal-Mart notes. Instead of promising to work for 20 years to earn enough old money to pay the bank off, you just promise to keep working for the same 20 years, presumably at Wal-Mart. And as your credits are passed along to DR Horton each month, these gradually redeem the total amount you owe on your home.

In a real economy, money can circulate through 10, 20 or more different hands before it is eventually redeemed. In most cases, the money is issued by the act of private borrowing, such as with your home mortgage. And it is redeemed when you attend work, earn money and use it to pay down the balance of your mortgage.

This example also shows us, there is a need for different kinds of credit: short term and long term. Short term credit is the kind you employ to make sure you do enough work each month to pay for the groceries you need that month. Long term credit is for big, expensive things like a house or car where you might pay for it over a much longer period of time.

Those who hold your long term debt will need to be a lot more patient in getting repaid. So they will deserve a reward for that patience. We call it interest, or the “time value of money.”

They also need to be a lot more trusting. More likely, they will require a claim to some kind of collateral such as the house itself, to make sure you honor your promise of repayment.
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