A Government Credit Card

The Credit Card system was first introduced into Australia on a national basis in 1974. It operated through a Go ernment appro ed !oint enture arrangement between Australia"s largest ban#s. The scheme$ #nown as the %an#card$ pro ed highly popular and successful throughout Australia$ and in 19&'$ it was e(panded to include )ew *ealand. The %an#card was promoted by an e(tensi e promotional campaign which included the biggest direct mail mar#eting campaign in Australia$ up to that date. +,i#ipediaA dispute arose between the ma!or ban#s in 19&. about allowing the %an#card to be incorporated into the newly introduced /0T123 system. Two of the ban#s opted for adopting the 4asterCard and 5isa Card as their primary credit card pro iders$ both for its /0T123 capability and International acceptance. / entually the %an#card did become incorporated into the /0T123 system$ but was not acceptable for internet purchases outside of Australia and )ew *ealand. As a result$ it"s popularity declined until it was finally phased out in 677.. How the Credit Card system actually works 2nce the system is set in motion$ its basic design creates a system that is entirely self8 financing. In actual fact$ it re9uires no e9uity in estment at all by the operator. ,hen a customer signs the merchant"s credit card charge receipt$ they are creating a :negotiable instrument:$ which becomes e idence of a right to the payment of money. This :negotiable instrument: is deposited electronically into the merchant"s che9ue account$ a special account re9uired 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 :ac9uiring settlement ban#$: which bundles the charges and sends them to the customer"s own ban#. That ban# then sends the customer a statement and the balance is mostly paid with a che9ue$ causing the customer"s transaction account to be debited at their ban#. That is all a straight forward accounting;boo##eeping procedure performed by the ban#ing system as a routine$ minimal cost$ operation. ,hat most customers are unaware of$ is that the Credit card companies charge the merchant a fee of about 6< of the alue of e ery 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 doin! 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 char!e about " "#$ to raise the e%uivalent revenue it now raises from the existin! cumbersome and complicated tax re!ime However, the !reatest 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 !reatly reduce the power of Government in controllin! and monitorin! its citi'ens, while freein! 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 soverei!n nation ( such a system is unnecessary if a nation has monetary soverei!nty )nfortunately, the followin! fact applies to most of today&s politicians and their economic advisors ( "Anyone who doesnt understand the differences

between *onetary +overei!nty and monetary non-sovereignty, doesnt understand economics".

=owe er$ to get bac# to the Credit card system$ the transaction fee paid by the merchants are ine itably built into the pricing of their products$ and li#e all sales and other G3T ta(es$ e entually comes out of the poc#ets of the consumer. The Credit card companies impose a 6< transaction fee on e ery sale made by the merchant. ,hen the credit card customer pays off their balance each month$ which actually applies to most of them$ this 6< fee$ or more$ e9uates to a si>eable annual rate of interest on a fictitious :loan: a eraging only about 6? days +depending on when in the month the charge was made and when in the grace period it was paid-. Two percent interest for 6? days wor#s out to a ''.?< return annually 8 an interest charge that would be considered usury under any other circumstances. ,hilst this transaction fee imposed on the merchant is !ust one part of the chain of charges associated with the Credit Card system$ the annual fee charged for the credit card itself$ and the ery high interest rate charged for any outstanding balances$ plus all the other fees for late payment$ e(tended credit$ balance transfers and cash withdrawals$ add up to a most lucrati e area for commercial ban#ing. ,ut the most incredible aspect of this whole Credit Card system is that it virtually re%uires no e%uity on the part of the bankin! system Timothy 4adden is a Canadian financial analyst who$ in the early 1997s$ built software models to analyse credit card accounts. =e estimated that payouts from the ban#"s own reser es are necessary only about 6< of the time@ and the 6< merchant"s fee is sufficient to co er these occasions. The :reser es: necessary to bac# the short8 term ad ances are thus built into the payments themsel es$ without drawing from anywhere else. Timothy found his spreadsheet computer;software models of the credit;charge8card system #ept :blowing up$: because of the :di ide by >ero: errors related to the return8on8e9uity e9uation. The interest is all gravy because$ the transactions are all funded by the signed payment oucher issued by the card8user at the point of purchase. All the losses resulting from credit card default$ and e en fraud$ cannot be charged against the operator"s e9uity because they don"t ha e any. This is why almost all ban#s$ e erywhere$ ha e to write-off 177< of credit;charge8card accounts in arrears for 1&7 days$ with irtually no impact on the ban#"s bottom line. -ssentially, the Credit Card system is the )ltimate +hell Game /conomist$ =yman 4ins#y$ obser ed that anyone can create money@ the tric# is to get it accepted. The function of the credit card company is to turn the customer"s I2A$ or promise to pay$ into a :negotiable instrument: acceptable in the payment of debt. A negotiable instrument is anything that is signed and con ertible into money$ or that can be used as money.

How a Government could )tilise this +ystem It is imminently feasible for any monetary so ereign Go ernment to fund e ery 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 e ery rational economist #nows$ e ery single to#en of money spent by the Go ernment$ contributes directly to the sa ings potential in the pri ate sector. Thus$ a monetary so ereign Go ernment can pro ide interest free :money: for any appro ed social program to which they are committed. Bather than using :cash payments:$ the Go ernment could issue each welfare recipient with a Go ernment :Credit Card: that is alid for the period applicable to the recipient"s welfare status. The amount of interest free :credit: a ailable would be limited to whate er periodic payments apply$ whether monthly$ wee#ly$ 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 a ailable on the card for the recipient"s future use. As there are no repayments by the recipient in ol ed$ there would not be any o erdue$ or late payments fees applicable$ nor any of the numerous other charges applicable to con entional credit cards. Any costs in administering this system could be compensated by a small ser ice charge le ied on the merchant accepting the Go ernment Credit Card. 3uch a card would be bac#ed by the Go ernment$ and as such$ there would be no alid argument for any business not to accept the cards on presentation. ,ithout calculating the administration costs of such a card$ it can be confidently stated that a ser ice charge on the merchant would be significantly less than the 6< currently charged by con entional credit cards. In effect$ this would represent a bonus to the merchant$ as most of them ha e already incorporated the 6< charge into their pricing. 4ost li#ely$ software modifications would need to be created within the /0T123 system to distinguish between the Go ernment based transaction receipts and con entional receipts. The applicable receipts would be electronically transferred to a Go ernment account for payment. As with the con entional system$ this would be a simple boo##eeping process to transfer the funds to the 4erchant"s account at their ban# and deduct the e(penditure from the recipient"s account with the applicable welfare agency. In essence, this is entirely an accountin!.bookkeepin! process and simply involves the transfer of fi!ures between accounts without the creation of any physical /money/ on the part of the Government -ssentially, it is the same type of /shell !ame/ carried out by the private bankin! system +ome potential problem areas 1ossibly$ 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 in ol e an educational program$ which would ha e to be coupled to easy access for the recipient to chec# the :credit: balance on their card. Ideally$ this would be most con enient if it were a ailable through any AT4 machine$ but as these

machines are owned and operated by the ban#s$ the ban#s would probably insist on a fee. A Go ernment would be in a position to negotiate on this issue. An alternati e is to create the software that automatically prints out the card"s balance whene er it is used to ma#e a purchase. The receipt is for the pri ate use of the recipient and the balance information could be e(cluded from the merchant"s records of the transaction. In the e ent of the recipient wanting to con ert part of their Go ernment Credit card balance to actual cash$ a commission could apply in the same way as con entional credit cards charge a fee when cash in withdrawn. In the case of welfare recipients$ the ast ma!ority of them would use their :credit: for the purchase of goods and ser ices and only a relati ely small proportion would be con erted to cash. There is no reason why the current system couldn"t apply$ where the merchant offers their customers a :cash out: facility o er and abo e the purchases. 2b iously$ the a ailability of a cash con ersion related to welfare payments would need some consideration to ensure it doesn"t in ol e problem gambling$ substance abuse$ or other acti ities deemed inappropriate. 3uch acti ities 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 Go ernment payment$ for e(ample$ rent payments$ Insurance$ possibly child support if applicable$ and arious other such payments that are deemed appropriate. There should not be any significant problems in creating the software to handle these deductions.