The Missing Monetary Element (v1.1)

For over a century, mechanical engineers worked with three fundamental elements: the spring (stores potential energy proportional to displacement), the damper (dissipates energy proportional to velocity), and mass (resists acceleration—force proportional to acceleration). These three elements, combined with levers and linkages, seemed to describe all possible mechanical behaviours.

But in 2002, Malcolm Smith at Cambridge University identified a gap. The mechanical-electrical analogy that engineers used to translate between domains was incomplete. Electrical circuits had four fundamental elements – resistor, capacitor, inductor, and the then-hypothetical memristor – but mechanical systems had only three. Where was the mechanical element analogous to inductance in the force-current analogy?

Smith invented the inerter: a two-terminal device where the force is proportional to the relative acceleration between its terminals, rather than absolute acceleration like mass.¹ The practical implications were immediate and profound. Formula 1 racing teams adopted inerters within years, achieving suspension performance previously thought impossible. The "missing element" had been hiding in plain sight – theoretically predictable, practically transformative, yet invisible until someone asked the right question.

Leon Chua predicted the memristor in 1971 through pure symmetry arguments.² Electrical engineers had three fundamental two-terminal elements relating the four basic circuit variables (voltage, current, charge, flux):

The fourth relationship – between charge and magnetic flux – demanded a fourth element. Chua called it the memristor (memory resistor) because its resistance depends on the history of current that has flowed through it.

For 37 years, the memristor remained a theoretical curiosity. Then in 2008, HP Labs announced they had built one.³ The device exhibited exactly the properties Chua had predicted. Today, memristors enable neuromorphic computing architectures that would be impossible with conventional components – artificial synapses that learn and remember, consuming a fraction of the power required by digital alternatives.

The memristor was always possible. The physics permitted it. But until Chua identified the gap in the theoretical framework, no one thought to build one.

Paul Dirac's 1928 equation describing relativistic electrons had an embarrassing feature: it predicted particles with negative energy. Rather than dismiss this as mathematical artifact, Dirac proposed that these solutions represented real particles – electrons with positive charge.

Four years later, Carl Anderson discovered the positron in cosmic ray experiments, exactly matching Dirac's prediction. The "missing" antimatter had been streaming through the universe all along; physicists simply hadn't known to look for it.

These discoveries share a common structure:

1. A theoretical framework appears complete
2. Symmetry arguments reveal a gap
3. The missing element, once identified, proves practically transformative
4. In retrospect, the gap seems obvious

What if monetary economics has a similar gap?

Commodity money – gold, silver, cattle, shells, Bitcoin – represents value acquired by giving something up. To obtain commodity money, you must sell something: your labour, your goods, your time. The money is substitutionary: you hold the money instead of what you exchanged for it.

This is the money of classical economics, the money of Austrian theory, the money that "sound money" advocates wish to restore. Its supply is limited by physical scarcity. Its value derives from the commodity itself or from what was sacrificed to obtain it.

Credit money – bank deposits, government bonds, commercial paper – represents value created through borrowing. When a bank issues a mortgage, it creates new money by typing numbers into an account. The borrower now has purchasing power they didn't have before, but they also have an obligation to repay with interest.

This is the money of modern economies, created through what Werner (2014)⁴ documented as ex nihilo credit creation. Its supply is limited only by creditworthiness assessments and regulatory capital requirements. Its value derives from the borrower's promise to repay.

Credit money is also substitutionary in a sense: the borrower acquires purchasing power now in exchange for future purchasing power (principal plus interest). They are buying present consumption with future income.

Every mainstream monetary discussion assumes these two categories exhaust the possibilities. Gold bugs versus fiat advocates versus Bitcoin maxis. Commodity backing versus credit expansion. Hard money versus soft money.

But what if there's a third category – one that is neither commodity money (acquired through exchange) nor credit money (created through debt)?

Hypothecation money represents a claim on owned, attested, and insured wealth that the owner continues to possess and use. Unlike commodity money, nothing is given up to acquire it. Unlike credit money, no debt is created.

The owner holds both the wealth and the money simultaneously, until either:

• The owner redeems the money (releasing the hypothecation), or
• Someone presents the money and claims the underlying wealth

This is fundamentally different from both commodity and credit money:

Consider the fundamental economic relationships between money, obligation and wealth (and a claim against it, such as an insurer's lien):

The last row – converting existing wealth into money while retaining the wealth – is the "missing element." The relationship exists in principle (hypothecation is a well-established legal concept), but no monetary instrument makes it available to ordinary economic participants.

Here is the peculiar fact that reveals the gap: commercial banks already use hypothecation money.

When a bank creates a mortgage, it doesn't lend existing deposits (the "loanable funds" theory that textbooks still teach). Instead, it:

1. Accepts a claim on the borrower's property (the mortgage lien) and creates an Asset (their promise to repay + the insured value of the asset)
2. Creates new money (the deposit Liability) backed by that Asset
3. Retains the ability to seize the property if payments stop

The bank has created money from the borrower's wealth and income, not from any pre-existing funds. This is hypothecation money. The "loan" is really the bank monetizing the borrower's own assets – and charging interest for the privilege.

Werner (2014)⁴ empirically demonstrated this process. The Bank of England confirmed it.⁵ Yet this capability is restricted to licensed banks through regulatory privilege (exemption from "Client Money Rules" that would make anyone else's created deposits illegal).

The missing monetary element isn't missing from the economy. It's missing from civilians.

Hypothecation money isn't entirely new. Throughout history, people have regularly interacted with certificates representing claims on stored assets:

• Cheques: Claims on bank deposits, circulating as payment until presented for settlement
• Grain elevator receipts: Certificates for grain stored in elevators, sometimes used in trade
• Warehouse receipts: Claims on stored commodities (metals, inventory, goods)
• Bearer instruments: Certificates representing ownership claims on various assets

These instruments functioned as a form of hypothecation money – the owner retained the underlying asset (in storage or custody) while holding a certificate that could circulate as payment. The grain sits in the elevator; the certificate changes hands. The balance stays in the bank account; the cheque circulates until cleared.

But these historical forms never became viable broad money substitutes for several critical reasons:

The most successful historical example of hypothecation money wasn't commodity certificates – it was the gold-backed US Dollar.

From 1879-1933 domestically (and 1944-1971 internationally via Bretton Woods), USD represented a claim on government-held gold reserves. Dollar holders could present their currency and receive gold at a fixed rate ($20.67/oz initially, $35/oz under Bretton Woods). The government retained the gold; the currency circulated as a claim on it.

This was genuine hypothecation money operating at scale:

• Fungible: All dollars identical regardless of which gold bar backed them
• Discount-free: Traded at face value due to guaranteed convertibility
• Liquid: Instant settlement, accepted everywhere
• Stable: Gold's scarcity prevented inflation

The gold standard worked far better than grain receipts or warehouse certificates. It powered the most dramatic economic growth in human history (1879-1914), supported international trade, and provided monetary stability across decades.

Yet it had a fatal limitation that ultimately destroyed it: centralized issuance.

When workers can only access money through sale (wages) or debt (borrowing), while capital owners can access money through hypothecation (bank lending against assets), a structural imbalance emerges.

A worker who improves their skills, builds a business, or increases their property value cannot access that increased wealth as spending power – unless they sell it or borrow against it. Both options have costs: selling means giving up the asset permanently; borrowing means paying interest indefinitely and (most striking) risks loss of the property on "default".

A capital owner (or bank) facing the same situation can hypothecate the increased value directly, accessing spending power without sale or debt. The returns to capital thus compound in ways that returns to labour cannot.

This isn't a moral failing or policy choice. It's a structural consequence of civilians lacking access to the third monetary element.

If credit money is the only mechanism for creating purchasing power beyond commodity exchange, then economic growth requires debt growth. Every dollar of GDP not covered by commodity money (gold flows, trade surpluses) must be created as someone's debt.

Global debt now exceeds $330 trillion – over 300% of global GDP.⁶ This isn't profligacy; it's arithmetic necessity. A credit-money-only system must accumulate debt to function.

The interest on this debt (approximately $15-20 trillion annually at current rates) creates a further impossibility: the money to pay the interest doesn't exist until more debt is created. The system requires exponential debt growth merely to service existing obligations.

Hypothecation money breaks this trap. Money created against existing wealth requires no repayment and generates no interest obligation. Economic activity can expand without corresponding debt expansion.

When banks create money through hypothecation but civilians can only access that money through debt, a transfer mechanism activates: any failure to repay results in asset forfeiture to the money issuer.

Consider: the bank created the mortgage money from nothing, backed by your house. If you fail to repay, the bank seizes your house. The bank has acquired a real asset in exchange for numbers it typed into a computer.

This isn't fraud – it's the legal structure of credit money creation. But it's a structure that only functions because civilians lack the alternative of hypothecating their own wealth directly.

If you could create money against your house yourself (paying insurance premiums rather than interest), "foreclosure" would be impossible. There would be no lender to foreclose. The worst case would be the insurer claiming the asset upon its loss – but the insurer actually paid for that claim through years of premium collection and reserves, unlike the bank that created the mortgage from nothing.

The most visible consequence is the systematic destruction of generational wealth-building. In 1970, the median Canadian home cost 3-5 years of annual income. By 2024, that ratio exceeds 10:1 in major cities – often 15:1 or 20:1.

This isn't a supply or speculation problem. It's a monetary mechanism problem. When home purchases require debt, and debt carries interest exceeding the asset's productive yield, housing becomes a wealth transfer mechanism from buyers to lenders rather than a wealth accumulation tool for families.

Interest payments on a $500,000 mortgage at 5% exceed $125,000 over 30 years – often more than the original construction cost. That $125,000 builds nothing. It's pure seigniorage extracted because civilians lack access to the monetary mechanism banks use.

The consequences accelerate: birth rates collapse (Alberta: 1.41 children per woman, 34% below replacement⁷) as family formation becomes economically impossible; generational wealth transfer fails; institutional confidence evaporates. Housing policy and affordability programs address symptoms, not the monetary structure that causes them.

The missing monetary element has been absent from civilian life for three reasons – two structural, one technical. The technical barriers have now been solved.

The inerter completed mechanical systems by providing force proportional to relative acceleration. The memristor completed electronic circuits by relating charge to flux. The positron completed particle physics by providing antimatter.

Hypothecation money completes monetary theory by providing a mechanism to convert wealth to money without sale or debt. Like its predecessors, it:

1. Was always theoretically possible
2. Was partially present (banks use it) but incompletely recognized
3. Has transformative practical implications
4. Seems obvious in retrospect

Engineering disciplines celebrated the discovery of missing elements. Formula 1 teams adopted the inerter within years. HP Labs invested billions in memristor development. Particle physicists built ever-larger colliders to explore antimatter.

Will economics celebrate the recognition of hypothecation money? Or will regulatory capture and bureaucratic inertia suppress a transformation that threatens incumbent interests?

The answer may depend on whether jurisdictions exist that are willing to implement what theory demands – places where citizens can access the full monetary framework, not just the two elements that benefit existing institutions.

The jurisdiction that first provides civilian access to hypothecation money will experience something remarkable: capital formation without debt accumulation, asset security without foreclosure risk, and labour compensation commensurate with labour's contribution to value.

Workers will migrate to where their efforts can compound. Capital will flow to where it isn't slowly siphoned through interest payments. Economic growth will decouple from debt growth for the first time in modern history.

The first mover advantage is substantial. The jurisdiction that acts first will attract:

• Workers seeking to monetize the value they create
• Entrepreneurs able to build without debt burdens
• Capital seeking returns unconstrained by extractive intermediaries
• Innovators building the next generation of economic infrastructure

This advantage is available to any jurisdiction willing to see what has been missing and provide what theory predicts must exist.

The missing monetary element is hiding in plain sight. The only question is who will be first to make it available to everyone – and seize the transformative advantages that follow.

Alberta stands at a unique convergence of circumstances that may occur only once in economic history. No other jurisdiction combines:

1. Massive attestable wealth: $1.6 trillion in real estate, $50+ billion in agricultural assets, centuries of oil and gas reserves, and a population wealthy enough to own substantial capital
2. Constitutional authority: Under Canada's Constitution Act, 1867, Section 92(13), Alberta has clear provincial jurisdiction over property and civil rights, including contracts and insurance – the exact legal mechanisms required for hypothecation money¹²
3. History of financial innovation: Alberta Treasury Branches (ATB Financial) has operated since 1938 outside federal banking jurisdiction, demonstrating Alberta's capacity to create provincial financial institutions that serve public purposes¹³
4. Economic necessity: Alberta sends $23+ billion annually in interest payments to external financial institutions, draining wealth that could be retained locally if Albertans could hypothecate their own assets instead of borrowing against them
5. Technical capability: The blockchain, smart contract, and oracle infrastructure required to implement hypothecation money at scale now exists and has been proven in production systems

This convergence is rare. Most resource-rich jurisdictions lack constitutional authority. Most jurisdictions with legal authority lack attestable wealth. Alberta has both – and the urgency to act.

The theoretical framework described in this paper is not hypothetical for Alberta. A complete implementation specification exists: the Alberta Buck.

The Alberta Buck discusses the high-level implications of wealth-backed vs. debt money.

The Alberta Buck Architecture provides the technical design¹⁴:

• Blockchain-based tokens (BUCKs) backed by attested, insured claims on private wealth
• NFT-based credit limits (BUCK_CREDIT) scaled by stabilization factors
• Parametric insurance integration to mitigate default risks
• PID controllers and oracles for dynamic supply management
• Valuation against diversified commodity baskets (energy, agriculture, metals, labour)

The Alberta Buck Legal Foundation establishes constitutional viability¹⁵:

• Provincial authority over property, contracts, and insurance (s 92(13))
• Non-competition with federal currency powers (s 91(14)-(15))
• Precedents in Colonial American Land Banks, Swiss WIR Bank, and MakerDAO/DAI
• Regulatory pathways through Alberta Securities Commission and Superintendent of Insurance
• Asset retention through Personal Property Security Act (PPSA) liens

This isn't theoretical speculation. It's an implementable system with defined architecture, legal foundation, and operational mechanics. The missing monetary element can be made available to Albertans – the question is when, not whether.

If Alberta implements the Alberta Buck, making hypothecation money available to its citizens, the transformation would be immediate and profound:

If Alberta does not act, the consequences accelerate:

Economic: $23+ billion annually draining to external lenders; asset owners losing property to foreclosures on debts that need never exist; labour undervalued relative to capital; economic growth coupled to debt growth; first-mover advantages accruing elsewhere.

Demographic: Youth exodus as brightest minds flee to affordable jurisdictions, losing generations of human capital. Fertility (1.41 children per woman, 34% below replacement⁷) continues collapsing toward demographic catastrophe. Aging population death spiral: shrinking tax base, exploding healthcare costs, financial unsustainability.

Political: Institutional legitimacy evaporating as each generation sees home ownership and family formation as impossible. Social cohesion fractures. Radicalization follows.

Strategic: Alberta remains locked in commodity extraction while human potential drains away. The province becomes cautionary: wealthy in ground, impoverished in opportunity.

Meanwhile, competitors move. Switzerland's WIR Bank demonstrates 90 years of viability. MakerDAO has tokenized $5+ billion in RWAs, proving civilian demand. Wyoming authorized state-backed stablecoins with RWA pathways. Singapore and Estonia actively examine wealth-backed systems.

The question isn't whether hypothecation money will emerge – it's whether Alberta leads, follows, or watches its future depart for jurisdictions that acted.

Alberta: you have the wealth, authority, technical capability, and economic necessity. More urgently, you have a generation watching, deciding whether to build their futures here or elsewhere.

They understand the mathematics: 10-15 year housing income multiples versus parents' 3-5; decades of interest payments building nothing; family formation economically impossible. They're making rational decisions: leave for jurisdictions where labour creates wealth, or accept childlessness and asset poverty.

The missing monetary element can be made available. The architecture is designed. The legal foundation is established. The technology exists.

Will you complete the monetary framework – demonstrating labour can compete with capital, growth need not require debt, citizens retain assets, young people form families?

Or will you cede this advantage and watch capital, talent, innovation, and youth flow to jurisdictions that saw what you could not – or would not – see?

The missing element is no longer missing from theory. It's missing only from implementation.

Your young people are making irreversible decisions about where to build their lives. Your birth rates are collapsing. Your future is departing.

Alberta's moment has arrived. The only question is whether Alberta will seize it – before the generation that could build that future chooses to build it elsewhere.