Wednesday, July 12, 2017

Money in an economy without banks

by Alex Schaefer
Most of the world's money is currently in the form of deposits created by banks. After the 2008 credit crisis, which instilled a strong suspicion of banks among the public, it became fashionable to ask what money would look like in an economy without these organizations. Burn them to the ground or shutter them, what would take their place? One vision is to pursue pure centralization: have the state monopolize all money creation, say by providing universally-available accounts at the nation's central bank. Positive Money is an example of this. Another alternative, by way of Satoshi Nakamoto, is to pursue radical decentralization: replace bank IOUs with digital commodity money in the form of bitcoin and other private cryptocoins.

I'm going to provide a few historical examples that sketch out a third option for replacing banks; bills of exchange. A system underpinned by bills of exchange is capable of converting illiquid personal IOUs into money using a distributed method of credit verification, as opposed to a centralized method patched through a banking organization. Unlike bitcoin, however, these are IOUs, not mere bits of digital ledger-space. While few people these days are familiar with the bill of exchange, in its hey day this instrument was responsible for executing a large chunk of the Western world's transactions. 


The first story is of cheques, an instrument that while not precisely a bill of exchange gets pretty close. Last week in my homage to the cheque I brought up the Irish bank strike of 1970, described by Antoin Murphy (from whom I steal the title of this blog post). When the nation's banks shuttered their windows for half the year, Irish citizens re-purposed uncleared cheques as personal IOUs, these cheques circulating as a cash substitute. The system was decentralized in that banking institutions no longer served as creators of the medium for making payments; instead, everyone became their own unique money issuer. As Tim Harford recently wrote, pubs and corner shops were able to vouch for the creditworthiness (or not) of each cheque.

Irish cheque money only circulated for six months. After the banks reopened in November 1970, mounds of cheques were cleared & settled and the system returned to normal. Luckily, we have historical examples that lasted much longer than this.


Let's go back in time to Antwerp in the late 1400s. The institution of banking had been present in Europe for a few centuries, but according to Meir Kohn (who I get much of this material from) it began to go into decline at the end of the 15th century as waves of bank failures broke out across the continent, due in part to coin shortages. In Antwerp, the authorities went so far as to ban the practice of banking in 1489. In lieu of bank deposits, coins could of course be used to make payments, but this would have been a step backward since deposit banking had emerged, in part, to solve the problems related to coins, specifically the fact that they are expensive to store, awkward to transport, and heterogeneous, some coins containing more precious metals than others.

Similar to the Irish five hundred years later, Antwerp's financiers adapted to the death of bank money by innovating a decentralized alternative. Where the Irish chose cheques as their payments instrument, Antwerp settled on a related paper-based order called the bill of exchange. A bill of exchange was a popular way to remit money in medieval times. Say you were a citizen of Florence and you needed to get 20 gold coins to a relative in Venice. Rather than incur the cost and danger of transporting the coins yourself, you might try and strike a deal with a merchant who had offices—and gold—in both cities. By paying the merchant some gold in Florence, your home city, he would issue you a bill of exchange. This bill ordered his colleague in Venice to pay out 20 gold coins to whoever happened to be the bill bearer. You'd then send the bill to your relative in Venice, and he'd bring it into the office and collect the money. The merchant would earn a commission on the deal. No actual gold would travel between the two cities, just a secure and light paper instrument. It was a fantastic technology for saving on the costs of shipping and handling heavy coins.

While bills of exchange started out as remittance instruments, they were later used by merchants as a form of credit. A merchant might want to sell some wool to a manufacturer who in turn required three months to convert the wool into cloth and sell it. To finance the purchase of wool, the manufacturer could always turn to a banker. Absent a banker, the merchant himself might provide the manufacturer with a loan by drawing up a bill of exchange. On its face this bill contained written instructions ordering the manufacturer to pay x coins three months hence to the bearer of the bill. The merchant would keep it in his desk, and when the requisite amount of time had passed he would bring the bill to the manufacturer and collect on his debt, earning interest in the meantime.

The common denominator of a bill of exchange, whether used as a remittance or as credit, is that a private citizen has issued their own personal IOU, to be redeemed for cash after some time has passed. Then Antwerp happened.

In its original form, a bill of exchange could only be used by a small group of people, the initial drawer of the bill, the payor, and the payee. Antwerp's financiers took the bill of exchange and converted it into a fully transferable instrument, or money. They pried open the closed circuit so that if merchant A owned a bill of exchange that was to be paid out in coin by merchant B next month, merchant A could in the meantime transfer this IOU to merchant C as payment, and merchant C could transfer it to merchant D, and D to E etc. These transfers, or assignments, could occur without asking the original debtor, merchant B, for permission. This would have dramatically increased the liquidity of bills of exchange, allowing them to fill the vacuum left in Antwerp by the banning of bank deposits,

To further protect anyone who received a bill of exchange in payment, Kohn tells us that these instruments were granted currency status by Antwerp's merchants. As I wrote here, this meant that even if the bill of exchange had been stolen from merchant B and paid to merchant C (who had innocently accepted it), merchant B could not sue merchant C to get the bill back. This legal upgrade would have further promoted the liquidity of bills of exchange, since merchants needn't bother setting up burdensome verification processes to ensure that bills of exchange presented to them were not stolen. In the eyes of merchant law, all bills of exchange were considered "clean."

There was still one last barrier to creating a truly decentralized medium of exchange; how to overcome stranger danger. Say that you and I are acquaintances and I owe you $20. I tell you I'm going to settle my debt by giving you an IOU issued by another party. Banks are a great way to solve the stranger problem, since everyone will agree to settle debts using the IOUs of a well-known and trusted intermediary like a bank. But say instead I offer you a $20 bill of exchange that I've received from a friend. If you know that person you'll probably accept the deal, but in an economy like Antwerp's with thousands and thousands of actors, you might not know the name of the debtor written on the bill. And without enough knowledge to accept the credit, you'd have probably refused it.

According to Kohn, the final innovation developed in Antwerp solved the stranger problem—the ability to endorse a bill of exchange. I simply signed my name to the back of $20 bill of exchange, or endorsed it, and handed it to you. By signing it, I was agreeing to accept the debt as my own. So if the original debtor failed to pay you for the bill when it came due, you could flip the bill over and pursue the first name on the list of endorsees—me—for payment. And since you knew and trusted me, it was now possible for you to evaluate the credibility of a $20 bill of exchange that had originally been issued by a stranger. Bills could in turn be re-endorsed on by others, a long chain of transactions being made before the bill finally expired. Indeed, Henry Dunning Macleod once remarked that bills might sometimes have "150 indorsements on them before they became due."

From Antwerp, the practice of using negotiable bill of exchange would spread to the rest of Europe, in particular Britain. Below is an example of a bill of exchange from 1815 that ordered Pickford's, an English canal company, to pay £72  11s 1d to Richard Vann. You can see first hand how the stranger problem is solved. The bill has multiple endorsements on its reverse side (pictured below), including that of Richard Vann, William Alcock, T S Marriott, William Whittles, Jones & Mann, Thomas Whalley & Sons, James Mitchell and Richard Williams. To see the front side of the bill, click through to the original link:


Not only did this chain of cosigning individuals solve the stranger problem. It also created an incredibly safe instrument. Bills of exchange were effectively secured not only by the original person whose name was inscribed on the front, Vann, but by all the others who had cosigned the back; Alcock, Marriott, Whittles, etc. The odds of everyone on the list failing would have been quite low. It was an ingenious system.


Another interesting anecdote on bills of exchange comes from the county of Lancashire in north west England in the 1800s. By then, banknotes had long since been invented and were a popular payments medium in England. Typically issued by small private "country banks," banknotes were a centralized payments technology insofar as their value depended on the good credit of one issuer, the bank. Inhabitants of Lancashire were particularly suspicious of these instruments which explains why there were almost no note-issuing banks in the county. T.S. Ashton speculates that this wariness was due to the 1788 failure of Blackburn-based Livesay, Hargreaves and Co, a banknote issuer: "generations after, when proposals were made for local notes, men's minds turned back to the events of 1788."

In the absence of a system of banks providing transferable deposits or notes, bill of exchange circulated in Lancashire, even dominated, so much so that they were often "covered with endorsements" and become famous for their dirty appearance. Indeed as late as the 1820s, Ashton tells us that some "nine-tenths of the business of Manchester was done in bills, and only one-tenth in gold or Bank of England paper." Bills were used even in small denominations, say to pay piece workers. This is surprising because bills of exchange had typically been used by merchants and wholesalers, and therefore tended to be issued in large denominations.

Alas, according to Ashton the Lancashire bill of exchange was done in by the increase in stamp duties, which effectively made it more cost-effective to use bank-issued forms of payment that didn't require a stamp.


Just a few random thoughts in closing.

While Ireland, Lancashire, and Antwerp all provide a sketch of an alternative, distributed form of converting personal IOUs into money, do we really need a replacement for banks? While the U.S. banking system certainly had its difficulties in 2008, Canadian banks skated smoothly through the crisis. Maybe banks only need a face lift.

Even if we need to burn the suckers down, a paper-based backup like bills of exchange or cheque just won't cut it—we need digital money. But is it possible to digitally replicate the features of a bill of exchange? And even if an online bills of exchange system could be built, we live in an age where money transmitting is a highly regulated industry—how legal would it be for individuals to take over the role of money creator, transmitter, and verifier? (I once thought that Ripple was the answer to digitally replicating bills of exchange. But they decided to serve banks instead. Maybe Trustlines fits the *ahem* bill?)   


  1. Lovely clear explanation.

    I can see the safety angle of multiple endorsements. But I think I can also see the danger of a domino effect, without a centralised clearing house adding up all the offsetting assets and liabilities (net of defaults) at once.

    1. Good point. Banks can easily track how much credit has been extended to any given person, but with a bills of exchange system this would be tough. A register to track how many bills someone has issued and how many endorsements they've added would help.

    2. You can do the same thing with national credit standards. There was a gigantic push for this in the late 19th and early 20th century by the "National Association of Credit Men"""The largest organization of capitalists during the Progressive Era was one that most

      American historians have never heard of. Motivated primarily by overproduction and ruthless

      competition, many of the nation's largest manufacturers, distributors, and commercial banks

      formed the National Association of Credit Men (NACM) in 1896 to reduce the supply of

      credit available to retailers and consumers. The story of the Credit Men confirms many

      standard assumptions regarding the rise of corporate America to economic power and cultural

      legitimacy while challenging others. Advances in technology and salaried organization made

      possible their mobilization, yet more important was the significant lag in the development

      of mass retail institutions and consequently mass consumerism behind mass production and

      distribution. The NACM deployed standardized methods and hungered for administrative

      efficiency but used these modern tools to instill order and ethical discipline in the nation's

      business, not to secularize the economy and culture of the new century. America's corporate

      capitalists seized power by promising moral regulation for unbridled individualism."

      "The crux of this effort became standardized financial statements that the NACM created. Generally referred to by members as "uniform statements," they designed these documents to make retailers provide a full account of their assets and liabilities to creditors before receiving credit."

    3. "A register to track how many bills someone has issued and how many endorsements they've added would help."

      The Bank of England was keeping such a register of the bills that passed through the Bank. See Flandreau & Ugolini here: . Furthermore, W.T.C. King (1936) makes it clear that Bank actively sought to make sure that it had the opportunity to review a representative set of bills that traded on the market.


    4. Nathan, thanks for the interesting link. I liked this about Dunn and Bradstreet: "The mercantile agencies R. G. Dun and Company and the Bradstreet Company emerged in the 1840s and employed networks of correspondents throughout the nation to create information about the credit standing."

      The paper mentions James Cannon, head of the NACM. Coincidentally, I just tweeted out a clipping from one of his books:

      Carolyn, interesting link. The Bank of England's set of ledgers described in the paper would have done the trick, especially if they could be synced up with the records of all other owners of bills, thus achieving a complete credit record.

    5. I have a lot of materials on antebellum credit bureaus I can forward if you want. Dunn is very interesting.

  2. Solution is to use mutual assurance via a Protection & Indemnity (P&I) Club/Service Provider architecture. With the 140 year old shipping risk P&I Clubs the broker (Thomas Miller) does not take the risks Lloyds won't take but rather manages what is essentially an associative (not collective) guarantee society.

    If local businesses were to club together to mutually assure credit risk from local credit P&I Club members then both they and their customers could pay for the use of the mutual guarantee rather than credit.

    The outcome is essentially mutualised local Visa credit card systems operating at cost rather than giving massive rents to bank shareholders and/or management.

    1. Interesting. Have you written about this somewhere else? Any links?

    2. This seems to be an effective type of insurance, and reminds me of how USAA was started "USAA was founded in 1922 by a group of U.S. Army officers as a mechanism for mutual self-insurance when they were unable to secure auto insurance because of the perception that they, as military officers, were a high-risk group."

      This could of course be expanded to create a credit score system that was backed by the group (as last resort) should a member fail to pay their debts.

    3. This is fairly easy reading

      You might be interested in this lecture I made at a Summer School in Volos, Greece

    4. Is a default pool needed, would it be better to share out the cost of defaults between club members when they happen.

  3. I've been going back and forth with Oscar Gelderblom ( ) on bills in Amsterdam and am finding that it's important to get some fairly nitpicky details clear when discussing bills and their negotiability.

    First the go-to source on this issue is van der Wee 1977:

    Second, it was the "bill obligatory", a northern European IOU that is much simpler than a bill of exchange (initially a southern European instrument), that was made negotiable in Antwerp. Only in the 17th century was the law with respect to negotiability extended to the bill of exchange.

    Third, discount banking (the practice of banks standing ready to purchase bills at a discount before they were mature, thus providing liquidity to creditors) was born almost simultaneous with negotiable instruments and was well established by the start of the 17th century. This applies to Lancashire as well: while note-issuing banks were scarce, discount banks were not (Pressnell 1956).

    Finally, checks are as a legal matter simply bills that are immediately payable. (See James here: ) That is, checks piggyback on the law that was created to make bills negotiable.

    Apologies for nitpicking. Very happy that you're drawing attention to these matters. They are important!

    Carolyn Sissoko

    1. Carolyn: Google isn't helping me much. A "bill obligatory" differs from a bill of exchange in that only the original debtor is liable (it cannot be countersigned, like a bill of exchange)??

    2. A "bill obligatory" is really just a simple IOU (two parties) that was used for payment in northern Europe around the same time that bills of exchange were being used in southern Europe. There are four parties to a bill of exchange, so its a pretty complicated instrument. At the fairs and in Antwerp to support the circulation of the bill obligatory (and based on the legal requirements of the time) a clause was typically added to the IOU stating that debtor/writer would pay anybody who brought the bill to him. This turned it into a bearer instrument that could be passed around and later endorsed.

      Bills obligatory are also sometimes called writings obligatory or notes obligatory. My impression is that virtually any IOU qualifies as a "bill obligatory" under the law of the Low Countries. (Hence the requirement for a bearer clause in order for them to circulate.)

      Herman van der Wee gets deep into the weeds on these matters, especially with respect to Antwerp. His piece in the Cambridge Economic History of Europe 1977 is a key reference for historians when they discuss these issues, but he's been pretty prolific on these matters.


    3. Nick, my understanding from Kohn is that a letter obligatory was a promise to pay (like a bond or a banknote redeemable in gold) whereas a bill of exchange was an order to pay (say like a post-dated cheque). I think this is mainly a legal distinction... in practice they seem like pretty similar instruments to me, both are IOUs.

      Carolyn, thanks for the comments and links... as for the nitpicking, I love that sort of thing. I got my information about the negotiability of bills of exchange from the first Kohn link above. He says:

      "By the 1530s, it became the practice instead to make bills of exchange payable to bearer and to assign them directly just like letters obligatory."

      I must confess that I did not read Van der Wee in the original but he is quoted widely in Kohn.

      On the law surrounding cheques, have you read "Early English Law of Checks" by James Rogers. Very intersting. Here's a link.

      "This applies to Lancashire as well: while note-issuing banks were scarce, discount banks were not."

      Good point. Perhaps I am pushing too hard on the theme of bills being pure alternatives to banks. However, I don't see how Antwerp could have had discount banks if banking was banned.

    4. JP, I don't think Kohn gets his details right. Van der Wee (p. 328) is explicit that adding a bearer clause to bills of exchange did not solve the transferability problem in the same way as for bills obligatory. The solution for bills of exchange was the development of endorsement "to order" (i.e. of a particular individual) and was not fully resolved until early in the 17th century.

      The timing of the banning of banks in Antwerp and the development of the law of negotiable instruments do not match up. Banks were banned repeatedly in the late 15th century, but the law developed over the course of the 16th century when especially in the latter half of the century "kassiers" were active (pp. 324, 336). 17th century Amsterdam (which banned banks, not necessarily successfully, from 1609 to 1621) developed discount banking even more fully than Antwerp -- and the system reached its apogee in 19th century England.

      I was not familiar with Rogers' work on checks, only his book on the law of bills and notes. Thank you for the reference.


    5. JP, btw I was surprised to see that Rogers, as foremost expert on the topic, views the law of bills of exchange as having evolved "for a world of payments without banking facilities."

      Personally I would argue that this is because our models of banking are so impoverished relative to the 19th century mental model of banking, and that this affects how historians, lawyers, etc. "see" money and banking. But I haven't managed to convinced many of this yet.


    6. Carolyn, thanks for your comments. I will probably have to read Van der Wee in the original if I'm going to write more on this topic. The quote I pulled from Kohn...

      "By the 1530s, it became the practice instead to make bills of exchange payable to bearer and to assign them directly just like letters obligatory." attributed by Kohn to Van der Wee, so I am a bit confused. It implies that by that point, bills were directly assignable, or negotiable, just like letters obligatory. The technique of endorsement, Kohn points out in the next passage, which first appeared on bills in 1570, was just a technical way to implement the principle of negotiability.

      "...but the law developed over the course of the 16th century."

      Which law? I've waded through early monetary law a bit on this blog, and there always seems to be two sets of laws: the earlier system of private law developed by merchants, and then civic law (or common law in England), which came after. Figuring out when the latter issues a certain edict seems to be a lot easier than ferreting out when the former adopts a certain set of rules.

    7. Kohn is referencing a book by van der Wee that only available from the "depository" at my library, so I'm not going to be able to chase down the reference. My read of the whole passage would be the following: to the degree that bills of exchange were transferred in 16th century Antwerp, the means of transfer was a bearer clause + assignment. Based on the discussion below the riskiness of this meant that letters obligatory were the preferred instrument, until the development of endorsement late in the 16th century.

      In the continental European context, I'm not sure it's precisely correct to speak of "private law" rather than of customs of merchants condoned and enforced by local law (often due to lobbying by merchants) that later gets adopted into civil codes. (Legal scholars get very excited debating the existence or non-existence of "private law.") Van der Wee 1977 wades through the law. Roughly:
      Antwerp 1507 judicial precedent enforces bearer clause on letter obligatory which 1537 Imperial edict applies generally to Netherlands (p. 325).
      Antwerp 1541 Imperial Edict legalizes assignment (p. 327)
      Letters Obligatory not endorsed through 16th century (id.)
      Bills of exchange grow more common in northern Europe over course of second half of 16th century. Formally the law of bearer clauses/assignment applies to them, but is considered risky. Endorsement arises to address these concerns and is formalized in Antwerp 1608.(p. 328)
      Antwerp municipal ordinances from 1560 to 1600 provide evidence of kassiers discounting bills obligatory during times of stress (p. 331).
      Antwerp financial law was applied elsewhere in the Netherlands, esp. Amsterdam (p. 336 and other sources).


  4. Banks don't go away in the crypto world, what is happening is naive bitcoiners are discovering the pricing function, which needs banks. They never figured out how trade books settle trades. Noe do they understand fair queueing in the trade pits, That was why we have the flash Eth crash, just naive ignorance by the coin exchanges.

    The issue of a central clearing vs distributed clearing is a non issue. Either one works just fine, the distributed queueing needs a protected protocol code in the bank computers to guarantee honest clearing, but that 'chip' should cost more than a few hundred dollars, all it does is exactly simulate counterfeit proof paper money.

    what the crypto world cannot have is High Frquence Traders who work off of synchronous trading by the early look. HFT is completely gone when all trades revert to trading bots, each bot having a fair look at the trade book, each bot operating with the owner' risk profile. Killing HFT and ensuring no bank monopoly licensing are the goals.

  5. > JP Koning
    What do you Think of PayPal Credit.

    1. Interesting, didn't know about it. Not quite bills of exchange, since it seems to be a bank-provided line of credit.

    2. What do you think of the credit based trading system of community trading sites like

    3. Is that a local exchange trade system, or LETs? LETs are very much akin to bills of exchange. In both systems, there are no banks and anyone can create money.

      However, with a LETS, a member can automatically spend money with anyone else in the system (as long as the spender doesn't exceed their spending limit). Bills of exchange were a little different in that people would only accept a bill if they knew the payor, the endorser of the cheque, or anyone else on the list of guarantors. So the ability of a participant to spend is a little more prescribed than a LETs. One might argue that this also made the bills of exchange system more secure. I could be wrong, but I don't think we've ever had a LETs that lasted more than a decade or two.

    4. PayPal Credit. Maybe a bank is part of it , i do not know. However the credit can be repaid with a positive PayPal balance.

  6. See Alternative Currency Movements as a Challenge to Globalisation?: A Case ... as a book specifically talking about these issues.

    The LETSystem and related LETS schemes in particular:
    o equate the system currency with the national currency
    o turn IOUs into currency - the simplest form of micro-banking
    o allow for net-zero balancing of accounts as long as IOUs are eventually redeemed
    o unredeemed IOUs are effectively written off across the system as a whole
    o credit-worthiness is assessed not privately, through banks, but publicly, through inspection of the central register

    1. " is assessed not privately, through banks, but publicly, through inspection of the central register."

      Correct me if I'm wrong, but the only measure of credit-worthiness in a LETs system is whether someone is at the mandated limit for accumulating negative balances, no? Otherwise, there is no basis for excluding people based on credit-worthiness?

  7. Did you pay the artist who did this painting to use this image? Or did you just steal it and give him credit? I'm quite sure there's a bit coin ATM in l.a. where he lives and could obtain payment.

    1. I assume it is an homage to the BofA that was burned in Isla Vista close to the University of California at Santa Barbara during the student riots in 1970. Obviously it would not have had the modern logo.

  8. Banks provide liquidity to producers and consumers, while your examples of bills of exchange and obligatory bills are designed for producers only. LETs are on the other hand combining local producers with local consumers.
    But i thought that the best example of the complementary currency is WIR credit in Switzerland since 1936 and still ongoing is a best solution to economic downturn.

    It is the solution to unsold production providing a credit in WIR that is charging interest rate of 1% at all times. It is a solutio that makes a Swiss economy the most stable of all, depending on needs it goes from 7% to 15% of the economy and 75 000 firms are participating. One WIR bank is doing clearing and crediting transactions between firms. Firms that have an excess of WIR can print flyers and give them to their workers as bonuses with which they can buy from those participating in WIR system.

    WIR is an excellent solution to those needing the credit to start a new cycle of production while having unsold supply. It is an add onto economy of main currency when it slows down but also it has ecnomy of its own.
    WIR is a slight developement from Hjalmar Shachts Mefo Bills in 1934 Germany.
    I believe it is a perfection as an add on, not as a replacement of banks. Only replacement of banks viable is government printing money instead of banks. Cryptocurrencies are latched onto main currencies and need to be exchanged first before being used. That puts an interacting relationship and gives volatility.
    WIR is limited only by rules strictly enforced by a single bank that issues it as needed. The supply of WIR varies as needed.

    1. Why does the Interest have to be paid in CHF.

    2. I do not know about that, but any firm joining the WIR system can not operate solely on wiR. I believe that is the condition to participate.
      So, paying interest in CHF does not make a differnece from firms operational standing even though i am not aware of it. WIR is a prevention of cascading illiquidity in slowdowns so only firms can participate with occasional inclusion of flyers for people to use.

      The reason could be that some firms can completely get out WIR funds and then that can be a problem. But also that WIR bank needs CHF to operate and pay expenses.

  9. Since the main problem with banks is their power over economy planning and the private debt incurred in that.
    The problem of banking is the debt burden that is recognised in recessions.
    But state can play a significant role in removing that problem of private debts. And doing so without going into debt which then is a base for stimulus in overheated economy from income from interest on stte debts that can not be avoided. Public debt acts as a boost to overheated economy because of high IR giving high income from debts. That is where public debt is undesirable it acts as a cyclical force countering countercyclical acctions of CB.

    My idea of PILL which is abreviation for Payment In Lieu of Loans and which i was able to communicate to Varoufakis when he became a Finance minister.
    Since Greece is banned from printing Euros and not having control of their own Central Bank, PILL would work around it to enable Greece print the equivalent of Euros.
    The Treasury can order printing of PILL certificates that only banks can accept in lieu of loan payments. Since banks create money as they issue credits, they also destroy money as they receive the payment for principal loan and only interest survives as the income of the bank.
    PILLs can be printed and spread to citizens in any ammount say €300 which banks would receive as payment for loans and destroy it instead of real euros. PILL would be very short lived and can be usable only within a specific month. Each month new PILLs are issued.
    Those with bank debts could pay off the principals and those without could using PILL open a new line of credit to pay off other bills while only interest will be paid in Euros.
    This operation is easy to set up and it can turn electronic fully but with an additional bank that would handle it electronically.

    This idea came from multiple sources but the major one is Mefo Bills from Hjalmar Schacht. Communist countries used many variations of it in dealing with illiquidity of some firms.

    But the fact that banks destroy money which was created on the beggining of the credit must be used to avoid debt problems. I notice that money destruction is completely ignored by all economists of any kind.
    The solutions are easy.

  10. Interesting, but didn't history show us that the limitations of bill of exchange led to in fact a better and broader means of payment? (which then helped and fomented the development of banks and the banking system? Hmm, I’m not entirely not sure but the discussion above sounds a little bit counterintuitive. Further, the discussion reminds me of the barter one in which the collapse of a payment system was temporarily replaced by a type of barter system only because there was already a system of payment/measure of value previously in place...but not the other way around.

    1. "Interesting, but didn't history show us that the limitations of bill of exchange led to in fact a better and broader means of payment? (which then helped and fomented the development of banks and the banking system?"

      Since we don't have bills of exchange today but only banks, I think that's a fair assumption; maybe banks provide people with a set of services that bills can't and thus outcompeted them.

      In the case of Lancashire, however, bills weren't replaced because of competition. It was the stamp tax. Who knows, maybe if the stamp tax hadn't been increased, bills would still be popular in Lancashire. Certainly part of the reason for the dominance of banks is that they have received a boost from governments.

    2. "we don't have bills of exchange today"

      Bankers acceptances -- which are bills of exchange -- were in use at least until 2008:

      Another explanation for the decline in the use of bills is regulatory arbitrage -- deposits grew in an environment where the quantity of deposits (and therefore of the money stock) was not regulated. Now that deposits are heavily regulated the banking system is turning back to off-balance-sheet instruments (which is how bills were accounted for in the 19th c.).

      Arguably non-financial and asset-backed commercial paper is just another incarnation of the bill of exchange. CP conduits are supported off-balance-sheet by credit and liquidity facilities provided by banks.

      Carolyn Sissoko

    3. "Arguably non-financial and asset-backed commercial paper is just another incarnation of the bill of exchange."

      Yep, good point. Things like rehypothecation look very much like what bills did.