A Government Credit Card

The Credit Card system was first introduced into Australia on a national basis in 1974. It operated through a Government approved joint venture arrangement between Australia's largest banks. The scheme, known as the Bankcard, proved highly popular and successful throughout Australia, and in 1983, it was expanded to include New Zealand. The Bankcard was promoted by an extensive promotional campaign which included  the biggest direct mail marketing campaign in Australia, up to that date. (Wikipedia)

 A dispute arose between the major banks in 1986 about allowing the Bankcard to be incorporated into the newly introduced EFTPOS system. Two of the banks opted for adopting the MasterCard and Visa Card as their primary credit card providers, both for its EFTPOS capability and International acceptance.

Eventually the Bankcard did become incorporated into the EFTPOS system, but was not acceptable for internet purchases outside of Australia and New Zealand. As a result, it's popularity declined until it was finally phased out in 2006.

How the Credit Card system actually works

Once the system is set in motion, its basic design creates a system that is entirely self-financing. In actual fact, it requires no equity investment at all by the operator.

When a customer signs the merchant's credit card charge receipt, they are creating a "negotiable instrument", which becomes evidence of a right to the payment of money. This "negotiable instrument" is deposited electronically into the merchant's cheque account, a special account required of all businesses that accept credit. The account goes up by the amount on the receipt, indicating that the merchant has been paid.  The charge receipt is forwarded to an "acquiring settlement bank," which bundles the charges and sends them to the customer's own bank. That bank then sends the customer a statement and the balance is mostly paid with a cheque, causing the customer's transaction account to be debited at their bank.

That is all a straight forward accounting/bookkeeping procedure performed by the banking system as a routine, minimal cost, operation.

What most customers are unaware of, is that the Credit card companies charge the merchant a fee of  about 2% of the value of every credit card transaction.

In effect, this is exactly the same as the Debit Tax proposal that the Australian Government could place on all financial transactions. In doing so, it would virtually eliminate all other forms of taxation, other than, perhaps, some measures to control inflation. In the case of a national Debit tax system, if it were set up by the Australian Government, it would only need to charge about 0.5%  to raise the equivalent revenue it now raises from the existing cumbersome and complicated tax regime. However, the greatest opposition to a Debit Tax system, from a Government's point of view, is the elimination of the coercive and punitive powers available from the current tax system. A Debit Tax system would greatly reduce the power of Government in controlling and monitoring its citizens, while freeing up a person's income to spend in the way they deem best suited.

The proposition that a Government tax system is necessary in the first place, only applies to a non-monetary sovereign nation - such a system is unnecessary if a nation has monetary sovereignty.

Unfortunately, the following fact applies to most of today's politicians and their economic advisors - "Anyone who doesn’t understand the differences between Monetary Sovereignty and monetary non-sovereignty, doesn’t understand economics".

However, to get back to the Credit card system, the transaction fee paid by the merchants are inevitably built into the pricing of their products, and like all sales and other GST taxes, eventually comes out of the pockets of the consumer.

The Credit card companies impose a 2% transaction fee on every sale made by the merchant. When the credit card customer pays off their balance each month, which actually applies to most of them, this 2% fee, or more, equates to a sizeable annual rate of interest on a fictitious "loan" averaging only about 25 days (depending on when in the month the charge was made and when in the grace period it was paid). Two percent interest for 25 days works out to a 33.5% return annually - an interest charge that would be considered usury under any other circumstances.

Whilst this transaction fee imposed on the merchant is just one part of the chain of charges associated with the Credit Card system, the annual fee charged for the credit card itself, and the very high interest rate charged for any outstanding balances, plus all the other fees for late payment, extended credit, balance transfers and cash withdrawals, add up to a most lucrative area for commercial banking.

But the most incredible aspect of this whole Credit Card system is that it virtually requires no equity on the part of the banking system.

Timothy Madden is a Canadian financial analyst who, in the early 1990s, built software models to analyse credit card accounts. He estimated that payouts from the bank's own reserves are necessary only about 2% of the time; and the 2% merchant's fee is sufficient to cover these occasions. The "reserves" necessary to back the short-term advances are thus built into the payments themselves, without drawing from anywhere else. Timothy found his spreadsheet computer/software models of the credit/charge-card system kept "blowing up," because of the "divide by zero" errors related to the return-on-equity equation.

The interest is all gravy because, the transactions are all funded by the signed payment voucher issued by the card-user at the point of purchase. All the losses resulting from credit card default, and even fraud, cannot be charged against the operator's equity because they don't have any. This is why almost all  banks, everywhere, have to write-off 100% of credit/charge-card accounts in arrears for 180 days, with virtually no impact on the bank's bottom line.

Essentially, the Credit Card system is the Ultimate Shell Game

Economist, Hyman Minsky, observed that anyone can create money; the trick is to get it accepted. The function of the credit card company is to turn the customer's IOU, or promise to pay, into a "negotiable instrument" acceptable in the payment of debt. A negotiable instrument is anything that is signed and convertible into money, or that can be used as money.

How a Government could Utilise this System

It is imminently feasible for any monetary sovereign Government to fund every one of their national social welfare programs using a modified Credit Card system. As the system would be used entirely within the nation's boundaries of it's currency system, there would be no need to consider international acceptance.

As every rational economist knows, every single token of money spent by the Government, contributes directly to the savings potential in the private sector. Thus, a monetary sovereign Government can provide interest free "money" for any approved social program to which they are committed. Rather than using "cash payments", the Government could issue each welfare recipient with a Government "Credit Card" that is valid for the period applicable to the recipient's welfare status. The amount of interest free "credit" available would be limited to whatever periodic payments apply, whether monthly, weekly, or any other period.

The recipient would be free to spend all or part of the "credit" as they choose, and any unspent amount would remain available on the card for the recipient's future use.

As there are no repayments by the recipient involved, there would not be any overdue, or late payments fees applicable, nor any of the numerous other charges applicable to conventional credit cards.

Any costs in administering this system could be compensated by a small service charge levied on the merchant accepting the Government Credit Card. Such a card would be backed by the Government, and as such, there would be no valid argument for any business not to accept the cards on presentation. Without calculating the administration costs of such a card, it can be confidently stated that a service charge on the merchant would be significantly less than the 2% currently charged by conventional credit cards. In effect, this would represent a bonus to the merchant, as most of them have already incorporated the 2% charge into their pricing.

Most likely, software modifications would need to be created within the EFTPOS system to distinguish between the Government based transaction receipts and conventional receipts. The applicable receipts would be electronically transferred to a Government account for payment. As with the conventional system, this would be a simple bookkeeping process to transfer the funds to the Merchant's account at their bank and deduct the expenditure from the recipient's account with the applicable welfare agency. In essence, this is entirely an accounting/bookkeeping process and simply involves the transfer of figures between accounts without the creation of any physical "money" on the part of the Government. Essentially, it is the same type of "shell game" carried out by the private banking system.

Some potential problem areas

Possibly, one of the most significant problem areas for recipients of this sort of Credit Card system will be in managing and budgeting the periodic allowance. This would probably involve an educational program, which would have to be coupled to easy access for the recipient to check the "credit" balance on their card. Ideally, this would be most convenient if it were available through any ATM machine, but as these machines are owned and operated by the banks, the banks would probably insist on a fee. A Government would be in a position to negotiate on this issue. An alternative is to create the software that automatically prints out the card's balance whenever it is used to make a purchase. The receipt is for the private use of the recipient and the balance information could be excluded from the merchant's records of the transaction.

In the event of the recipient wanting to convert part of their Government Credit card balance to actual cash, a commission could apply in the same way as conventional credit cards charge a fee when cash in withdrawn. In the case of welfare recipients, the vast majority of them would use their "credit" for the purchase of goods and services and only a relatively small proportion would be converted to cash. There is no reason why the current system couldn't apply, where the merchant offers their customers a "cash out" facility over and above the purchases.

Obviously, the availability of a cash conversion related to welfare payments would need some consideration to ensure it doesn't involve problem gambling, substance abuse, or other activities deemed inappropriate. Such activities could be restricted by setting a limit on the amount of cash that can be drawn from the card in a specified period.

It would also be possible for the recipient to arrange a range of automatic deductions from each Government payment, for example, rent payments, Insurance, possibly child support if applicable, and various other such payments that are deemed appropriate. There should not be any significant problems in creating the software to handle these deductions.