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[I’ve recently unearthed this article I wrote in 2002, and thought it worth reprinting, as it remains relevant to recent developments. – BL]

MONEY-Understanding and Creating Alternatives to Debt

 

Many academics, ex-bankers and authors fault the current official money system, but differ in their conclusions about its future, and about solutions. Bernard Lietaer, for example, in “The Future of Money: A new way to create wealth, work, and a wiser world”, views its collapse as inevitable in the near future, and proposes ‘alternative’ or ‘complementary’ currencies to compensate for it, and take over when the collapse comes. He is aware of the past and ongoing attempts at reform, but believes that the ‘powers that be’ are too firmly lodged to be forced to change the system.

Lietaer sees four ‘megatrends’ converging catastrophically, in the next 5-20 years: monetary instability, the ‘age wave’ (the increasing average age of the population), climate change and extinction of biodiversity, and the ‘information revolution’. In seeing the ‘age wave’ as a problem of provision of needs, he ignores the huge increase in productivity over the last century, and the grossly wasteful use made of it, which if better employed would decimate the need for ‘employment’ to meet needs. He sees the ‘information revolution’ as a problem because it is ‘destroying jobs’, but does not consider this as a benefit, denied to society by its failure of distribution, and easily solved by introducing Basic Incomes – if the money system were to be reformed to allow this mechanism to distribute our potential abundance. Discounting the possibility of reform, he sees ‘complementary’ currencies as the means of moving to ‘sustainable abundance’.

Thomas Greco is more concerned with current and potential alternative currencies, and a selection of past ones: their strengths and weaknesses, and theoretical possibilities and recommendations for future systems, several of which are his own proposals. He notes, in “MONEY-Understanding and Creating Alternatives to Legal Tender”, that they start and are most successful at times (and places) when the failings of official money are having the greatest impact, and mostly discontinue when conditions improve. (The Swiss WIR and Swedish JAK, essentially the same system, are the only long-lived examples to quote.) As a book of instruction for those contemplating starting a local or ‘alternative’ currency, the book has much to recommend it.

Greco divides historical money systems into ‘commodity’, ‘symbolic’ and ‘credit’ money, but in declaring as an “essential fact” that “money has a beginning and an ending; it is created and it is extinguished” he exposes the limitation of his thesis. While this is true of all the official and alternative currencies he describes – all of which are ‘symbolic’ or ‘credit’ systems-it is not true of all money, current or past – or, potentially, future.

Both authors identify the interest charged on the bank-loans which are the basis of virtually all modern money as a cause of serious problems; Lietaer lists these three in summary: it indirectly encourages systematic competition;
• it continually fuels the need for endless economic growth; and
it concentrates wealth by taxing the vast majority in favour of a small minority – and both writers view the absence of interest charges as one of the strengths of the alternatives, but neither author looks at debt in itself as a major problem, despite the exponential growth of debt worldwide. Yet debt now far exceeds the total of money in the world.

In the ’30s the movement for reform was rapidly growing until war was used by the financial-military-political global coalitions as the “solution” to the ongoing “depression”. There is never a shortage of money for warfare! Now once again, the fundamental problems generated by the financial mechanism have grown to the point where its instability is widely recognised and the, movement for reform is growing fast. This makes effective challenge much more possible, as well as vital.

The way events have developed over the last few centuries can be explained either as essentially due to the nature of the money-creation mechanism, or as due to the deliberate manipulation of that system. In fact, both must be contributory factors – among other factors, such as the development of corporate power – which is also, more clearly, due to the influence of vested interests, including the banks which funded their development, and their influence on the legislature.

Historically, there has been an ongoing conflict of interest between governments and private interests over the right to create and control the money supply, with the public interest tending to suffer, whichever was temporarily winning. The first money was commodity money: e.g. cowrie shell necklets, iron bars, cattle, or, later, gold and silver, as bullion or coin; which latter was the special concern of governments, and which could be extended by ‘debasement’ with base metal, or supplemented with low-value base-metal coins.

Commodity monies, once spent into circulation, can circulate indefinitely; they do not have to be ‘extinguished’. The main problem with them is that there is no simple mechanism for matching their volume in circulation with the need for them – matching demand with supply.

This is the main reason for the development by both governments and their subjects of ‘symbolic’ money: tally sticks, bills of credit, banknotes, cheques, etc., all until recently exchangeable on demand for precious metal coin or bullion. Its eventual, recent divorce from any commodity-base to become pure ‘credit’, i.e. ‘belief’, makes it possible for the first time in history to create and control its volume, as national currency, for the benefit of society, as proposed by James Robertson and Joseph Huber in “Creating New Money”, among others.

The power and profit banks derive from their privilege must be removed, and the sole power to create or destroy national money should be in the hands of a ‘credit-creation authority’, under democratic control and mandated to monitor society’s needs and maintain the money supply at the level needed to allow trading, saving and investment, without such oversupply as to cause serious inflation. (It has to be recognised that, apart from the dubious meaning of the term ‘inflation’, it is a complex phenomenon, with a variety of causes.)

New indicators need to be developed to determine the optimum level of money supply; GDP is useless for this. (The New Economics Foundation has done some work on the alternatives.)

A vital point, however, is that all the money in circulation should have been spent, not lent, into circulation, just as commodity money enters circulation. It should be free to circulate indefinitely, without any matching debt, interest-bearing or not.

This means that all the new money should be credited to the Treasury’s account, so that the ‘seigniorage’ on it is gained by the nation, not by any individual or business. The common claim is that ‘fiat money’ is ‘inflationary’ – in fact, the cause of inflation, because it is not ‘backed by debt’. This is where the failure to note that commodity-money is also not ‘backed by debt’ limits vision; any money is accepted as a medium of exchange either because of its ‘inherent’ value as a commodity or, more fundamentally, because of its ‘credit’ value – the ‘belief that others will accept it equally, as a medium of exchange. This latter is the reason behind acceptance of all current national monies. The claim made by some that being ‘backed by debt’ is what gives money value is false; its acceptance as ‘virtual wealth’ – the expectation that others will accept it in turn in exchange for real wealth – is the basis of its value, and as it is exchanged, neither participant can be aware of its source of origin – whether it has been spent or lent into circulation.
The debts created along with it when, as now, it is created by banks as loans, are not necessary to give money value, and are destructive, even without the interest which grows on them. This is perhaps most clearly shown in the example of the pre-independence American ‘Colonial scrip’, used to such good effect to relieve the problems due to the shortage of coinage. This example also supports the contention that, with a sound money system, a moderate excess of supply has little effect, and it is much more important to see that the supply is large enough. (See, for example, www.monetary.org/briefusmonetaryhistory.htm).

What gives the national monies special advantage over ‘complementary’ currencies is the fact that only they are acceptable for payment of taxes, or legally recognised settlement of debts, as well as their convenience and general acceptance for all purposes of trade within the national boundaries. As long as they function tolerably well for individuals, they remain the preferred medium of exchange. The exponential build-up of debt, climaxing over recent decades, cannot be eliminated with any complementary currency – and is the reason why money must be kept in short supply, to curb inflation. (Inflation reduces the value of the money owed back to banks, so is unpopular with them, while high interest rates, used to ‘curb inflation’, increase the wealth being transferred to the banks and their shareholders, so are welcome, despite their devastating effect on debtors and the economy. In the long run, in fact, they are a major cause of inflation.)

As debts are repaid to the banks, they decrease the money in circulation. The only way to eliminate these debts without collapse of the system is through reform of the national systems, creating and issuing debt-free (and therefore necessarily interest-free) money enough to retire all the debts created along with the ‘credits’, and replace these credits as medium-of-exchange, without creating further debts.

With this reform in place, especially if it is combined with the issuing of Citizens’ Incomes and the switch from income tax and VAT to land-value-, pollution- and resource-taxation (the nature and source of money is not the only source of the world’s ills, though it is a major one) there should remain little need or demand for local or alternative currencies; but until then, or in the absence of reform, these currencies are likely to become of increasing importance to survival.

Lietaer envisages the development of multi-level currencies: a Global Reference Currency (the Terra); three main Multinational Currencies: the Euro, a ‘NAFTA dollar’, and an ‘Asian Yuan Currency’; (just) some National Currencies; and Local Complementary Currencies. But he sees both the national and the multinational currencies as continuing to be based on bank-debt. I see this as a serious shortcoming of his thought-provoking book.

Various alternatives to “the money market” and floating exchange-rates have been proposed in the past – and others operated, notably gold as an international currency, before the era of floating exchange-rates; I believe Lietaer’s “Terra”, backed by a basket of commodities and incurring a demurrage charge to offset storage costs, is one of the most promising as an international exchange medium, not least because it would be independent of governments, and based on a “basket” of real traded goods. Among others are Keynes’ ‘Bancor’, rejected at Bretton Woods in favour of the American proposals for a gold-backed dollar and creation of the IMF and World Bank; and the Global Commons Institute’s proposal for energy-based currency units, the SER – Special Emission Right – and the EBCU – Energy-Backed Currency Unit. These all deserve serious study and comparison.

The need for an international currency is indicated by the increased volume of barter occurring throughout the world by transnational corporations. Lietaer claims that up to a quarter of international trade is currently done by barter. Use of a national currency as a global one is clearly unsatisfactory. It grossly distorts the trade balance between the originating nation and all others.

Brian Leslie, March 2002
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