MONEY, BANKING, DEBT AND LOCAL CURRENCES.
Money is strange stuff. In order to clarify the business of setting up our own currency it is necessary to go into the nature and role of money in an economy. Some of the worst aspects of our economy are to do with the monetary system. Unfortunately most of the critical literature on this topic is not easy to follow. Here is an attempt to make the basics understandable, and to indicate how we might set up our own local currencies as part of the process of building a radically new economy.
In a normal, growing economy the amount of money in use, in circulation, has to be increased all the time. If the Australian economy today had only as much money as it had in 1800 there would now not be enough to enable all the purchasing people want to engage in. So the amount of money in circulation has to increase constantly as the economy grows. Where does it come from, and how does it get into circulation? .
The way it is done in our economy is by the investment banks (not savings banks) lending more money to borrowing corporations who want to set up new ventures. But where do those banks get the money to lend? If you don’t know the answer you will not believe it when I tell you. The banks literally create the new money, out of nothing, just by writing numbers in the borrower’s account. If they only lent money they already had in the deposits people had made with them then it would be logically impossible for the stock of money in circulation to increase wouldn’t it? What the banks do is in effect just create money and lend it to the borrowers. (Only a small proportion of the money in circulation is in the form of notes and coin; most is in the form of numbers in cheque accounts.)
Now there is nothing wrong about the creation of money from nothing; as with bus tickets or other things we need it has to be created. But the process whereby this is done in our economy is incredible, farcical, and outrageous. It defies understanding why the process is tolerated, although the main reason is that very few people realise what’s going on.
The most astounding fact is that after the banks have created the money they are allowed to own it, and, even worse, to lend it and get interest on the loans. This is like getting a printing shop to print our bus tickets and then allowing them to own the bus rides the tickets represent, that is, to sell the tickets for bus rides and keep the money received. It is worse than that because it is as if after getting a ticket you have to pay back more than one ticket. In other words in this economy money takes the form of debt or credit granted by a bank, which must be repaid with interest.
Very few people understand this but there are other systems and there are many monetary reform groups around the world working to draw attention to the system and to have it scrapped. The struggle to get rid of this kind of money system has surged back and forth throughout history.
The money system is fabulous… if you are a banker. It gives you vast opportunities to become rich and to acquire the assets and property of people who have borrowed from you and can’t meet the repayments.
“…allowing banks the privilege of creating money represents a massive subsidy to the tiny minority that own banks, or have shares in banks.” (Pettifor, p. 178.)
Consider the following implications.
The most ludicrous aspect of the system is that our when our governments need to borrow money, which they do all the time, in great volume, they go to those private banks and borrow money from them, and have to pay it back with interest. As a result many billions of dollars of public wealth is continually drained into the coffers of the private banks and then into the pockets of their shareholders…when the entire process is absurdly wrong, unnecessary and could and should be eliminated. In the 1990s Australian tax payers were paying about $18 billion every year to the private banks as interest on the money borrowed by their governments, from the private banks…who got the money to lend just by printing it; i.e., writing the numbers into the relevant accounts. That’s about $5,000 per annum from the income of a family of four. The sums involved are astronomical.
Total US debt in 2005 was $44 trillion, four times annual national income. If interest is only 5% p.a., it would be $2.2 T/y, about one-fifth of GDP. (Brown, p. 6.) Ellen Brown (2011) says, “… US...taxpayers paid a total of $8.2 trillion in interest (on the federal debt.) That’s more than half the total $15 trillion debt, in just 24 years.” The interest paid on public debt alone in 2010 was $164 billion. (p. 47.) “Canada has now paid over a trillion dollars in interest on its federal debt, nearly twice the debt itself.” The government could have been borrowing from its own bank all along.” (Brown, 2012.)
In 2011 UK public debt (i.e., not including private) was around 1 trillion pounds and annual interest was 43 billion pounds, equal to 630 pounds per person. (Robertson, 2012, p. 54.)
Brown (2011, p. 455) and others explain that if the US government issued money there would be no need for federal income taxes! The purpose of establishing the US federal income tax in 1913 was to raise the money to pay interest on the federal debt to private banks, and this is still the main use.
“The government could actually eliminate taxes and the federal debt while expanding the services it provides.” (Brown, 2007, p. 459.)
“The cruel hoax is that governments are in debt for money created on a computer screen, money they could have created themselves.” (Brown, 2007, p. 6.)
Could there be a more incredible, absurd, morally outrageous and ridiculous process? And on such a scale. Many socially important needs are not attended to because of shortage of funds, yet here we have a process whereby billions of dollars are wasted unnecessarily and avoidably all the time.
All new money entering the economy is debt that must be repaid with interest, meaning that it is a loan from a bank, put into circulation by being lent to a corporation. Now consider the logic of a system in which a certain quantity of money enters circulation this year but more than that has to be paid back to the banks at the end of the year. The only way this can be done is if in the meantime the blanks lend even more out during the year. Thus in our monetary system the amount of debt must inevitably increase all the time. And also note that if at a point in time everyone paid off their debts or borrowings from the banks, there would be almost no money left in circulation, because most of it has been borrowed from the bank in the first place. (Notes and coin have not, but they make up little of the money supply.)
It might not be obvious at first sight but if the average rate of return on investment charged is greater than the average growth rate then many borrowers will not be able to earn enough to pay their interest. (Eisenstein, 2012, p. 1205.) The inevitable result is transfer of wealth to the lenders, as indebted people have to sell their assets to them, cheaply. (Eisenstein, 2012, p. 202.) In recent years the average interest rate has been far greater than the rate of growth.
In the present system capital is scarce. There are many socially desirable ventures that can’t be undertaken because people can’t afford to go to banks to get capital at the interest rates the banks are charging. Money is treated as a commodity for hire from private and profit-maximizing corporations. If you want to hire $100 and use for a year you can only get it if you are willing and able to pay maybe $10 for the hire. Consequently many projects that would be very socially valuable but can’t make that kind of profit can’t be undertaken. Thus it is in the interests of the banks that money is kept scarce, because then its price, the interest rate on hiring it from them, is kept high. They would be devastated if governments took on the role of issuing all money and loans, let alone if they set interest rates at zero.
This point is crucial in the discussion of local currencies. At present there are many desirable ventures that could be set up in towns and suburbs which would do miracles for the quality of life of people, but they cannot be undertaken because people cannot get, i.e., cannot afford to borrow, the capital, the money to set them up. This is the absurd log jam we can break simply by creating our own money (see below).
The system gives a few the right and power to provide money and get a “rent” from making it available, just as in feudal times the lords had taken all the land and you had to pay a rent to them to get access to any of it. Central in the current triumph of neo-liberalism is the drive to privatise as much as possible, to transfer public assets and commons, like water supply systems, plant varieties and native lands, into privately owned assets, so that their products can be sold for profit by a private firm… when many things should be publicly owned and freely available. Thus you should be able to get money without having to pay for it; that is you should have to pay loan back but no more (apart from an admin cost.) Hudson points out that student loans for higher education in the US has been made into another lucrative source of interest on the huge $1trillion debt students now have higher education in Australia used to be free.
A few decades ago the way to get richer, create wealth, was to save, and provide funds for investment. Now the way to do it is to go into debt, to borrow in order to buy up property and sell it when the price is higher, which does nothing to increase the productivity of the economy, and leads to an inevitable crash.
The power to control development.
The most disturbing feature of the financial system is that it gives banks the power to determine the ventures that capital is invested in. A society is “developed” by the investment of capital in various projects. In general a firm can invest in a project only if a bank is willing to lend it capital for that project. In a satisfactory society the question would be, “What will we develop next? “ The answer would be in terms of what was thought to be most needed. But in the present society most of the investment decisions are made by the very few who own or control most capital, and they decide what to develop solely by reference to what will make most profit for them and with no concern about what is most needed.
The result is that the development that takes place is almost entirely inappropriate; it is not development of what would most improve welfare or quality of life for people, or benefit social cohesion, or contribute to environmental sustainability. This is one of the fundamental contradictions in capitalism; what is most profitable to produce is never what is most needed...because people in most need are usually too poor to buy the high priced goods capitalists can make most profit producing. (For example no cheap, humble, small but sufficient houses are produced.) It is very much in the interests of the owners of capital that this arrangement remains in place. It is delightful to them that new money comes into circulation only by being created by banks – because via this process they get the money and they can then invest it in what will most benefit them.
Regarding the great power that comes when one has control over money supply… Nathan Rothschild said, “The man who controls Britain’s money supply controls the British Empire...” He controlled the Bank of England after 1820. (Ellen Brown. 2007.)
“The manipulation of market forces by powerful actors constitutes a form of financial and economic warfare. No need to recolonise lost territory and send in invading armies. In the late twentieth century the outright conquest of nations, meaning the control over productive assets, labour, natural resources and institutions, can be carried out in an impersonal fashion from the corporate boardroom; commands are dispatched from a computer terminal or a cell phone.” (Chossudovsky quoted in an article in Monetary Reform, winter 1988-9, from Brown, 2007, p.. 255.)
Contrast this with what would happen if society, e.g., the state or national banks, created all the new money needed and then put it into circulation by investing it in the most needed purposes. This would be a vast amount of investing that the corporations would then not be doing, and most of the purposes would obviously not be high profit ventures. They would be things like more cheap housing for low income families, more hospitals in depressed areas. Yes corporations would still get the construction contracts but these would not be lucrative. The state would make sure the profit made was reasonable but not huge (again, big profits can’t be made in activities like building cheap housing), whereas corporations always want to go for the most profitable business opportunities. The point is that if governments created the money, it would be a disaster for the capitalist class; they could not get so much capital to invest in the most lucrative ventures.
It will be explained below that at the international level the control of money gives the big banks, the IMF, the World Bank and the European Central Bank, the power to control/run whole nations. The can decide what policies will be followed, simply by setting the terms on which credit and loans will be given. Countries in hopeless debt will not get assistance unless they do what these agencies demand, which is always to restructure their economies in ways that enrich the banks and the corporations of the rich countries. The notes on the history of debt below indicate some of the major historical events which have been determined by the actions of banks in providing or refusing loans. This power over finance, credit and therefore policy is now the main mechanism enabling the super-rich to exploit their empire.
As explained above the only sane alternative to the present procedure is for the society (not necessarily the state) to create all new money, and spend it into circulation on worthwhile purposes. But this would be to interfere seriously with the “freedom of enterprise”. If you suggest this to the average economist, or politician, or capitalist, or ordinary person, the response will be...”But that would be (shudder) socialism! Everybody knows socialism/communism has failed and that the best way is the free enterprise way. Governments should not and cannot run things, and the more they keep their hands off the economy the better.”
It is obvious that the (rapidly worsening) global economic situation is largely due to the lack of regulation over finance. The neo-liberal era has significantly reduced or eliminated regulation in most fields, which has simply freed the banks to lend and speculate wildly, increase debt and investment bubbles and collapses, to seduce or drive millions into impossible levels of debt, take over their assets, and orient the national policies of poor countries to purposes that suit the rich. President Roosevelt brought in the Glass-Stegall act to restrict the banks from doing these things but Clinton removed it, later saying this was his biggest mistake. Obviously a satisfactory situation cannot be achieved unless there is a great deal of control and regulation over the finance industry in the interests of society. (The desirable alternative puts most of the control in the hands of local town banks, not the state.)
The system is allows banks to lend the same dollar many times. When a bank creates and lends a new dollar the borrower spends it and the new holder puts it in his bank…and that bank can then lend it to someone else… who buys something and that seller banks it…and the same thing happens again and again. In this way the creation of one new dollar can result in about ten dollars worth of lending, and the banks as a whole get interest every time the dollar is lent. The relending is not necessarily a problem, but the benefit should not be going to private banks; it should be going to society. This is a strong reason for having banks as publicly owned institutions, (again not necessarily by the state but by towns and communities.)
So this issue of money creation poses some of the most stunning and unfathomable questions. How can it be that such a socially important but irrational and obnoxious process remains, and remains unchallenged? How can this be explained? Why don’t the many who research and teach about banking and finance and who understand the situation well never object or try to change it? Why don’t politicians ever make a fuss about it? How can the tiny few who are bankers keep the system in place?
Debt and interest.
Most of these problems are due to the fact that in this economy money comes into existence in the form of credit or debt, i.e., as loans that must be repaid with interest. This inevitably means that a) the economy must grow, because if more money must be paid back at the end of the year than was borrowed at the start then this additional sum can only come from more loans into the economy during the year, b) there is a strong tendency for those who lend to get richer, and for many of those who borrow to be unable to pay their loans back and then lose their assets, and thus c) for the few with most money to lend to dominate society in the long term.
It should not be surprising that given such a monetary system just about all countries have now accumulated massive debts. Most Third World countries will never be able to pay their huge debts off, but many richer countries now also have huge debts, the US being by far the worst in the world.
If you borrow a surfboard how many are you expected to give back? Why do we accept a system in which those with surplus money expect to get back more than they lend? This is a great arrangement if you are rich. Rich people have more money than they need so they can lend some of it, while poor people have less than they need and have to borrow. This means that there is a constant flow of wealth from poor to rich. Rich people do not have to work for this interest income.
If you borrow $100,000 to buy a house at 12% p.a. interest you will pay the lender $333,000. At 8% you will pay back 2.5 times as much as you borrowed. T. Grecco, The End of .Money, p. 222.
A core principle in The Simpler Way perspective (and others) is that the capacity to receive interest through lending money is not morally acceptable. Why should some be able to get money just because they are rich and without having to work, when the rest have to work and large numbers are paid very little and many cannot get work? Of course interest is the main factor which drives investment in this society, and it has produced remarkable results, but for moral and sustainability reasons it must be scrapped.
Kennedy finds that on average interest makes up 35 – 40% of the cost of everything we buy. (Brown, 2012b.) This is a huge amount of wealth that goes to the finance industry and its shareholders. If we had a financial system that returned the interested collected from the public directly to the public, 35% could be lopped of the price of everything we buy.”
In Medieval times charging interest on a loan was regarded as highly immoral and was banned by the church. It is not generally understood that in a just and sustainable society there can be no interest payments. This is because such a society must have a zero-growth economy, and this cannot have a mechanism whereby lenders get back more than they lent.
The transfer of wealth to the super-rich.
In addition to enabling the banks to get interest on the money they have created out of nothing, the system leads to a huge and constant loss of assets by people, firms and nations who fall into impossible levels of debt.
People who can’t meet their repayments must sell their assets to do so, and in that desperate situation they must accept the low price offered, meaning that their assets are acquired cheaply by richer people. For example in the 1929 era huge amounts of US assets were snatched up by the rich as bankrupt farmers and home owners had to sell cheaply. Thus a great deal of property flows from poor to rich all the time.
This process is worst at the level of national assets, discussed below. Indebted nations have to sell their national railway, water etc. systems to pay off debt…sell them cheaply to foreign corporations.
“The bailout recipes – privatisation, trade liberalisation, and other austerity reforms – amount to seizing the target country’s natural and other resources...” ”Bankruptcy is a fairly straight forward way of delivering valuable assets and resources ...and annihilating national sovereignty.” (Brown, 2007, c. p.. 280.)
“…there is a constant tendency for the wealth of the world to pass more and more into the bankers’ hands.” N. Ferguson, 2008, p. 356.
“Since the outset of Russia’s macroeconomic reforms, following the first injection of IMF shock therapy in 1992, some 500 billion dollars worth of Russian assets – including plants of the military industrial complex, infrastructure and natural resources – have been confiscated (through the privatisation programs and forced bankruptcies) and transferred into the hands of western capitalists....an entire social and economic system was being dismantled.” Chossudowsky, M., and G. Marshall, (2010) Eds., The Global Economic Crisis, Global Research. pp. 34-35.
“Indebtedness is an overriding and destructive mechanism. It allows the creditors to shut down productive activities, layoff workers as well as acquire acquire ownership of real productive assets.” (Chossudowsky and Marshall, (2010) p. 24.)
No surprise that,
In 1997-9 the 400 richest people each increased their wealth $940 million, $1.3 million per day. This does not include the super rich on whom figures are not public. (Brown, 2007, p. 281. See also Robertson, 2012, p. 64.)
Debt in history.
Debt has been a most important determinant of world history. Hudson (2011) and Brown(2007) are among many who explain the tendency for the lending class to accumulate more and more wealth and power while the rest become more indebted and must accept the conditions the rich demand (e.g., the unfair terms on which they are forced to work to repay the debts.) This has often led to revolts. Some historians think this struggle over the power to issue money was a major causal factor in the fall of the Roman empire, the rise of the Dutch and British empires, the defeat of Napoleon at Waterloo, and the American war of independence.
The capacity of kings to borrow money has been very important for their ability to wage war. A significant factor in the rise of Holland and Britain was the way they shifted the responsibility to repay loans from kings, who sometimes failed to pay their debts, to parliaments and thus to the whole nation, giving lenders much more security and enabling these countries to raise much more capital.
“The Rothschilds had decided the outcome of the Napoleonic Wars by putting their financial weight behind Britain. Now they would help decide the outcome of the American civil war – by choosing to sit on the sidelines.” (Grecco, 2009, p. 91.)
The break up and civil war in Yugoslavia was due to the IMF structural Adjustment Packages. (Chossudowsky, and Marshall, 2010.) Chussudowsky details the point in The Globalisation of Poverty. 1997. p. 127.
Brown too argues that the collapse of Yugoslavia was caused by the IMF preventing the government from creating its own money. (Brown, 2007, p. 243.) This meant that the central government could not carry out its functions, so the states could not be coordinated by it and began fighting each other for survival. President Tito made the mistake of allowing foreign investment and loans. They fell into impossible levels of debt and had to go to the IMF, which demanded large scale privatisations, etc. About1100 firms ere bankrupted, unemployment went to 20%, inflation to 150%.
Implications for Third World “Development”.
The functioning of the World Bank and IMF since World War II provides a good example of these processes. When indebted poor countries have to seek further loans these are given on condition that the countries adopt free market principles, opening their economies to foreign corporations and thus ensuring that the development that results is what suits the rich countries, as distinct from what increases the capacity to meet Third World needs. Thus debt gives the rich lenders and their agencies great power to determine the fate of whole countries, to reorient development away from doing what is most needed to doing what enriches rich world corporations and shoppers.
It is easy for struggling Third World countries to fall into impossible levels of debt. (Remember the biggest debtors are the rich countries.) Even when corrupt leaders are not siphoning off wealth, banks entice governments to borrow heavily and invest in risky ventures which have to compete for exports in a glutted world market. So often they soon find they can’t meet repayments. Then they are trapped in “debt slavery”, not only having to pay interest forever, but, because they are a bad risk, seeing their interest rates raised. Some European countries such as Greece must now pay 7% p.a., meaning in effect that the original debt will become twice as big in 10 years. Brown argues that most of the Third World’s problems are due to these mechanisms concerning money control and debt...not to their ineptness or corruption.
Through these processes the IMF and World Bank prevent appropriate Third World development, i.e., they decree that heavily indebted economies must be geared primarily to repaying the nation’s debts. Therefore they must not spend on welfare, assistance to the poor, or the development of those industries that would most benefit people in general. They must enable export industries, give favourable terms to foreign investors, compete with low prices to export to rich countries, Third World governments must allow/encourage foreign corporations to come in to use their infrastructures to produce what will maximise their profits, and they must sell profitable state-owned enterprises to foreign corporations to increase the government’s capacity to pay off debt…. The small amount of surplus wealth that is generated can’t be put into developing the local economy because it has to go into paying the interest on the loans. (The Third World pays $700 million every day as debt repayment. Brown, 2007, p. 449.)
As will be discussed below, poor countries could solve their most urgent problems by creating their own currencies to enable production to meet local needs…but the conditions imposed by Structural Adjustment Packages prevent them from doing this. (Brown, 2007, p. 457, Chossudowsky, M., and G. Marshall, 2010) p. 208.) For instance the World Bank will only make agricultural loans for crops that are sold in the market and exported, not for increasing food for direct consumption by hungry people.
The control of money creation at a world level constitutes the ultimate instrument of economic and social domination.” 207. “Since the 1980s, it is mainly the Structural Adjustment Programs (SAPS) of the World Bank and the IMF that act as the enforcers of neo-liberalism. These programs are levied against countries of the south which can be enforced due to their debts.” (Chossudowsky, and Marshall, 2010, p. 126.)
“...under the brunt of IMF economic medicine...national central banks are prevented from expanding the supply of money...the only way to finance public and private investment is through dollar denominated foreign loans. (Chossudowsky, and Marshall, 2010, p. 208.)
The system assures “…that no nation will ever be able to create its own indigenous currency for internal commerce.” (Ferguson, p. 356.)
It is predation, warfare and plunder.
The account so far is to do with the inevitable, normal functioning of a global financial system which is highly de-regulated, that is in which banks are free to go after as much profit and wealth as they can get. The picture becomes even worse when we become aware of the grossly immoral but legal things that are done in this quest. The giant banks etc., have vast funds with which to speculate and manipulate. They can use these to deliberately destroy the value of a stock, a company, a currency or a whole nation. A good example of what can be done is “short selling.”
An example; I borrow money to buy shares in a company, and then sell them off, meaning that with a lot of shares flooding onto the market their price drops. I then buy them back at the lower price, meaning that I have the shares back to return them to the broker who lent them to me, but I pocket the difference in price. The big sell off of shares was a speculation, gamble I took, and the more access you have to finance the easier it is to engage in such ventures. Maybe in the process I ruin the firm, and can then buy it up cheaply too.
At the global level big speculators can cause a fall in the value of shares or currencies or assets, just by selling a lot of them. When the firm’s or the country’s value hits the bottom they can buy it up cheaply.
“...the speculative attacks waged by powerful banking conglomerates in the currency, commodity and stock markets are acts of financial warfare. “ These...”speculative instruments have been used to appropriate and accumulate vast amounts of money wealth.” (Chossudowsky and Marshall, 2010, p. 182.)
“The primary strategy…has been to encumber countries with debt that is supposed to be for development projects; when they are unable to repay the International Monetary Fund imposes “structural adjustment programs” that favour western banks, wrest away control of national resources, and create hardships for the local population.” Grecco adds that they are also made to give up their national currencies, meaning their capacity to lend to worthwhile national purposes. (Grecco, 2009, p. 47.)
The book by John Perkins, Confessions of An Economic Hit Man, reveals the deliberate organization going into trapping poor countries into unrepayable levels of debt.
My real job….was giving loans to other countries, huge loans, much bigger than they could possibly repay…So we make this big loan, most of it comes back to the United States, the country is left with debt plus lots of interest, and the basically become our servants, our slaves. It’s an empire.” Quoted in N. Ferguson, p. 310.
George Soros made billions this way on one day in 1992, collapsing both the UK and the Italian currencies. Brown says that in the US this process has ruined 7,000 firms, transferring trillions of dollars in value to the speculators. (Brown, 2007, p. 186.)
The US dollar is the “reserve” currency.
A related massive fault in the global monetary system is to do with international trade. If a tiny country like Nepal wants to import goods it can’t offer to pay for them in Nepalese money; no one wants much of that because all you can use it for is to pay for things you buy from Nepal. The currency all will accept is US dollars, so Nepal and everyone else has to earn or borrow these to be able to pay for imports. The US puts huge amounts of US dollars into circulation in the international economy every year…just by “printing” them and using most of them to pay to China, i.e., to pay the debt resulting from importing so much from China. The US is functioning like a bank, creating money and getting interest and goods … for nothing. Robertson (2012) says countries which borrow money from the US must pay up to 18% interest, but when they lend/invest their savings in the US they get 3%. China accumulates such vast surpluses from exporting that it has little choice but to lend/invest in the US, buying government bonds…at very low interest rates. Robertson estimates that the US gets $400 billion p.a. just because it is the source of the international reserve currency.
“Imbalances” in the global trade system have often been a major source of trouble throughout modern history. The basic cause is the fact that in a free market economy the richest and strongest are free to take all the export opportunities, meaning they accumulate surpluses that fuel speculative investment, while the poor majority can’t win many export sales and thus can’t earn much and thus remain in debt (paying high interest all the time.) A satisfactory global economy would make sure all countries were able to earn enough to pay for important imports by being allowed to export enough. (…just as a satisfactory economy would make sure all people had a “livelihood”, the capacity to work, contribute, and earn enough.) So again we can see that in the GFC Greece has no chance of earning its way out of debt because the German and Chinese economies have taken all the export markets. Again it is obvious that a satisfactory situation cannot be achieved unless there is a great deal of regulation making sure outcomes are desirable. This is not possible unless the richest and strongest economies agree to allow weaker ones to do more exporting and refrain from taking all the business they could.
As has been noted above, Keynes saw the need for such regulation of international trade to make sure that the strongest didn’t take all the export opportunities….but at the Bretton Woods conference the Americans would not accept such a system, because they could see that they could win all the export sales in a free market system.
Don’t forget the fees!
The banks also make astronomical amounts of money from the fees they charge, in addition to the interest payments and asset acquisitions. Even at the savings bank level they charge you outrageously for everything they can think of. But it is at the big deal level that they really rake it in, for instance in arranging bailouts and loans for governments. Goldman Sachs charged the Greek government over $250 billion in fees for one debt rearrangement.
The Global Financial Crisis.
Consider the debt situation of Greece and Europe in 2009-2012. Greece is under great pressure to cut spending on pensions etc. in order to pay some of the debt it has to European banks, and pressure to sell off its national assets cheaply to do so. It has been forced to borrow more, at much higher interest rates, to pay previous debts. This will further depress the economy, making the country even less capable of earning enough to pay off its debts. And in a winner-take-all trade world where Germany and others have won all the export markets, Greece has no chance of earning enough money from exports to pay off its debt. It will remain in this “debt-slavery”, having to go on making large payments to banks. Because these countries are struggling they cannot produce well to meet their own needs, let alone win export sales, so they have to import…from rich world corporations…more good business for them. Again they could get production of basic necessities going if they could create their own currencies for internal use…but the EU and the IMF prohibit this…if they want money they have to borrow it from the big external banks, increasing debt further.
When the big banks get into serious trouble as in the GFC, governments immediately bail them out, that is, take on their debts or give them lots of money to pay their debts. In the Third World governments take on the obligation to repay the debts racked up by private banks. Thus the overriding purpose behind the efforts to solve the GFC, such as providing billions in loans and the printing of trillions of dollars, as well as imposing “austerity” measures on the struggling countries like Greece, is to rescue the banks. The idea in a free enterprise economy is supposed to be that if you gamble and win you get rich but if you gamble and lose you go broke, but that does not apply to the banking sector (although some big players have been allowed to fail.) The ordinary Greek people are being savagely impoverished to extract the funds to pay the banks, when it is the banks who should pay the price for speculating wildly in their lending to Greece, Ireland, Spain, Portugal and Italy.
The lack of regulation of financial flows leads to speculative bubbles and busts. When Ireland joined the EU Irish firms got access to lots of cheap (low interest) loans from European Banks. There was a wild inflow of capital to invest, creating a boom economy. What typically happens is that most of the money is invested in real estate and other property, which does nothing to increase the productive capacity of the country. People think they are getting richer, investors, speculators and agents make a lot of money as the rush to buy assets drives their prices up and the assets are sold and resold. Banks can make much more lending to this frenzy than lending for investment in increasing production. Before long the Ponzi bubble bursts and there is vast wreckage…the Asian meltdown, the dotcom bubble, the tech-wreck, the collapse of Iceland and of the Irish economy. Then the banks appeal to the government to take over their debts and governments do this to prevent further collapse of access to finance. Of course governments never consider nationalizing the banking system so that governments can issue credit to desirable ventures, get all the interest, and control/prevent speculation…that’s anathema according to the dominant neo-liberal doctrine.
All this is another consequence of the neo-liberal triumph, the dominance of the doctrine that market forces must be as free as possible from regulation. Those in control of finance now have enormous freedom to move capital to where quick profits seem most likely, to withdraw it when that suits them, and to exploit debt to squeeze the highest interest repayments out of debtors and to take their assets. The bonanza has led to the situation where the finance sector makes about 40% of all profits. Most distressing is the fact that the finance industry now drives the world; it determines what is developed, on what terms, it siphons vast wealth out of potentially productive activities and into its profits, and as a result it prevents the development of desirable ventures, it plunges whole economies into chaos and devastates the lives of millions. If there is one thing that should be glaringly obvious it is that it is absurd to allow the finance sector this power and freedom. Society should be in control of the processes that make capital and loans available, and the terms and conditions, and above all it should create all new money either charging zero interest or putting the interest into state revenue.
Just imagine the difference that could be made if states started creating and issuing their own money, for use within their own countries. Greece is desperately in need of production of basic goods and services, and it has all the labour, land, timber, knowledge, sunlight etc. it needs to produce many vital things. The government could easily set up a system of IOUs enabling people to establish small enterprises and provide each other with many basic goods and services, with no need to borrow the money from banks or depend on foreign investors to set up these ventures. (This is discussed in more detail below.)
In a satisfactory society capital would be lent by public banks, mostly by our own town banks run by us, and lent for purposes the town approves…and borrowers would be expected to pay back only as much as they borrowed (plus administration costs.) Firstly this would get around the argument that the owner of capital should receive interest to compensate for the risk he takes (i.e. the risk of losing his capital and then having to work for an income like you and me!) But much more importantly, in a satisfactory society there must be no economic growth, so there cannot be any interest paid. (This is an essential point in The Limits to Growth analysis.)
Few people seem to understand how appalling the financial system is, going far beyond the absurd way money is created and the massive transfer of wealth to the rich that represents. Much more important is the way these financial systems determine what is developed, and thus guarantee that what most benefits the super-rich is what is developed and that the things that would most benefit most people are not developed. Even more importantly, the system increasingly drives us towards debt slavery, and towards catastrophic global breakdown.
Obviously it is of the utmost importance to move to very different money, banking and finance system. There is a simple and sensible alternative way.
THE ALTERNATIVE; HOW SHOULD NEW MONEY BE PUT INTO CIRCULATION?
From time to time communities and governments have created their own new money. Most monetary reformers want governments to “spend” new money into circulation, for instance by “printing money” and using it to pay for the construction of new roads. There are many impressive examples of this kind of process in the monetary reform literature, cases where entire economies were lifted out of depression by a government creating money which enabled economic activity to commence and thrive. A much-discussed case was the town of Worgl in Germany. Another was the building of public markets in Guernsey which led to recovery of the entire economy. During the American civil war Lincoln desperately needed money for the war effort. The banks were quite happy to lend it to him, but at a 150% interest rate that would have bankrupted the government. So Lincoln printed his own money. Possibly the most remarkable case was the way Hitler jumped Germany out of economic misery and into a thriving and very powerful economy in four years, basically by printing the money that enabled large numbers of unemployed workers to be put to work.
When governments use “stimulus packages” to get slow economies going they sometimes just create and give money to people to spend. The Global Financial Crisis has seen the governments of the rich countries create and give away trillions of dollars in an effort to get their economies going, but most of this has been given to banks in the hope that they will lend and stimulate business. Most of the money was used by the banks to pay off their debts, and invest… and pay their higher staff big bonuses! In 2009 the Australian government was more sensible in its approach, giving everyone $900, and urged them to go out and spend it. This did help to “get the economy going”, and helped Australia to get through the GFC in better shape than all others.
The great merits of governments creating the money and spending it into circulation is that the money does not have to be paid back, and no interest needs to be paid to the government which issued it. The government just facilitates the building of the new roads, built by society and paid for by society. The most important thing about such a money creation process is that it enables productive resources that were available but not being used, to be brought into production. Obviously you can’t build much with money in the form of bits of paper, they rot in the weather, and even less with electrons in bank accounts. The money has to be thought of as just a device used in the process of connecting available productive capacity to needs it could be meeting. Note that if the needs are there but there are no bricks nor workers available then it doesn’t matter how much money the government prints to pay contractors, nothing will or can be built (and inflation will result.)
When banks lend to investors they are enabling the investors to put into production resources that were there all the time. The crucial question below is how can we create our own new money in our local communities and use it to connect available but unused productive capacity and resources to important needs?
It is often objected that printing money leads to inflation. This is a misunderstanding. Why would it be that when government banks print andissue money it will lead to inflation but when private banks do it inflation doesn’t result? What matters is whether the increase in money in circulation stimulates increased production and consumption; only if it does not will more money be chasing the same amount of goods on sale causing inflation.
Spending (or giving) into circulation new money created by governments avoids having anything to do with banks and having to repay loans plus interest. But it has a serious limitation. It only stimulates the normal economy to do more of what it normally does, which does not and cannot eliminate problems like poverty and unemployment, and it does not help us move to a different kind of economy. When the government pays for the new roads with newly created money, that money will mostly go to the people who build roads. Most of it will end up in the bank accounts of the executives and shareholders of the firms that got the contracts, and only a small proportion of it will go to workers who were unemployed but got jobs building the new roads. The result will be a slightly bigger economy of the same form as before, that is a form in which many are unemployed and many are poor, and an economy in which there is still huge unmet need and many unused resources.
The crucial question is, how can we introduce our own new money in a way that will help to radically transform our local economy.
To repeat, no fault is more glaring in the present economy than the failure to attend to needs. The purpose of production is to make as much money as possible, it is not to meet needs. Reflect with despair on the stupidity which allowed millions of people to suffer unemployment, extreme poverty, boredom and despair for a decade in the 1930s, while all around them there were unused and idle factories and land. It would have been easy to take steps to connect the two, to enable those workers to use those resources to produce to meet some of their own needs. Why this wasn’t done has been explained above --- “Because it would have been identified as “socialism”, and everybody knows that is evil and does not work.”
In other words this is a capitalist economy and in such a system you interfere as little as possible with the freedom of those who have (or can afford to borrow) capital to invest in what will maximize their profits. Enabling unemployed and impoverished people to produce for themselves what they need contradicts the capitalist way, so it is not considered. (During the Irish potato famine not only was enough food being produced to eliminate the problem, Ireland was exporting surpluses. The ruling class and their economists decreed that intervening to assist would be to, as they say now, “…distort market forces”.)
Again, this explains why the Third World festers on and on in dreadful but avoidable poverty. Any poor country has vast but idle productive capacity, in its unemployed people, soils, forests etc., and it also has extreme unmet need. Appropriate Development by definition connects the two. But the agencies which control the global economy, especially the World Bank and IMF, will not tolerate this and expressly prevent it. The policies they make Third World countries accept before they provide debt relief require reliance on free markets and competing in the global economy, meaning that labour and resources must be available only for use by profit-maximizing corporations and therefore must not be made available to people to use to meet their urgent needs. They can enforce these policies because Third World countries are in debt and must accept Structural Adjustment Package conditions.
We can use the creation of new currencies to help us get around all these inexcusable faults and evils in the consumer-capitalist economy.
How will money creation and interest be organized in the zero-growth economy we must move to?
There won’t be any new money created or any interest! It is utterly impossible to have a sustainable world if we have a growth economy (See The Limits to Growth Case.) If there is no economic growth, no increase over time in the amount of producing and consuming going on, then there is no need for any increase in the amount of money in circulation. There will be no need for more money to be created all the time.
Similarly there can be no interest paid in a zero-growth economy. If more money is to be paid back at the end of the year than was borrowed at the start, then there must be more lent into the economy during the year. Those who borrowed must increase production, sales and income to earn some of this additional money in circulation and thus be able to pay the loan plus interest.
Thus we could not have a zero-growth economy without completely restructuring the economy. Among other profound changes this would mean that banks would do little more than hold savings, and cooperate in the processes whereby communities decide what to invest in to maintain, or revise their local productive capacity. Their enormous present role in getting new money in to circulation, by lending it for interest, and thereby deciding what it will be invested in developing will cease.
This means capitalism will have to be replaced. It cannot exist in a zero-growth economy. Capitalism by definition is about constant accumulation of wealth in order to increase investment, in order to make greater profit, in an endless spiral. Factories could be privately owned in a zero-growth economy, with their owners drawing a constant income, which would be like a rent, but increases in their income over time could only come from small productivity gains, and these are likely to diminish if not disappear in an era when energy is very scarce. In the coming circumstances of post-globalisation localism and frugal community self-sufficiency it is not likely that people will tolerate a small owning class living on rents they do no work to earn. (For more detail on the capitalism and a zero-growth economy see The Case Against Growth.)
Creating our own local currency.
Unfortunately there is a lot of confusion about local currencies and some people seem to think that just introducing a currency of some kind will do wonders, without being able to explain how and why. It is essential to be able to see that your proposed scheme will have definite and valuable effects. There are famous schemes in use which cannot have any valuable effects, apart from on publicity and morale.
For instance a common approach merely involves substitution. New notes printed by the town can be purchased by using old/national money. This seems to be the nature of most of the schemes being set up within the Transition Towns movement, such as “Berkshares”. The websites give no explanation of how this system is supposed to improve anything. Just substituting one note for another can’t create or change any economic activity, let alone get unused resources and unemployed people into production. (Eisenstein calls these “proxy currencies” and sees that they can do little or nothing to improve a local economy: 2012, p. 303.)
Similarly a town council might “print” new money and get it into circulation by using it to pay (part of) the wages of its employees. This would not achieve much if it was just substituting some new money for some of the old money that was being paid as wages. Yes if the council created and put into circulation an amount of new money, having persuaded many businesses to accept payment in it and being willing to have rates paid in it, this could enable the council to start up new/additional services. Much would depend on what the new money is spent on and unfortunately councils are not likely to set up ventures that will make a radical difference to the local economy. At best they will just stimulate their economies to do more of the things they normally do, creating a few more normal jobs but not doing much if anything to increase town self-sufficiency, to permanently eliminate unemployment, or to enable the town to take control over its own affairs.
Another mistaken notion is the idea of introducing a currency which can’t be spent outside the town, in an effort to increase local economic self-sufficiency. But anyone who understands the importance of buying locally will do so regardless of what currency they have. Anyone who doesn’t understand will buy what’s cheapest, which is typically an imported item. Obviously what matters here is getting people to understand why it’s important to buy local; just issuing a local currency will make no significant difference.
Similarly, adopting a currency which depreciates with time misses the point. This is supposed to encourage people to spend and not hoard money, generating economic activity. But it’s wrong-headed to encourage spending; people should buy as little as they can, and any economy in which there is a need to consume in order to “create jobs” is a silly economy and should be scrapped. In a sensible economy there is only enough work, producing and spending and use of money as is necessary to ensure all have sufficient for a frugal but good quality of life.
LETSystems take us in the right direction. They are good in enabling individuals to start producing and selling to each other when they had been unable to do so because they had little or no normal money. People create their own money when they write receipts, IOUs, for goods. The Time Dollar system is similar. In both cases you can see immediately how desirable effects will result. Both enable previously idle productive capacity to be put into action to produce things people need. However these systems typically only involve enterprising individuals with marketable skills becoming active. Much more important is the establishment of collective “firms”, co-operatives, enabling many unskilled people to join in more complex productive and mutually beneficial activity, for example a co-operative bakery or a poultry collective. That requires organization to set up group ventures, and LETS tends not to produce this.
Another sensible approach is “pre-selling.” In one famous case someone sold meal vouchers with dates on them, used the money to rebuild his restaurant, then weeks later provided people with the meals they had paid for. He didn’t have to go to a bank to get the capital and he didn’t have to pay any interest for it. His vouchers were a form of currency, which he printed. They could circulate to pay for other transactions. For instance a buyer might exchange one for something and the receiver would know he could “redeem” it by going for a dinner at the restaurant some day. The newly printed money just enabled economic activity to take place where the necessary resources, producers and consumers already existed. Note that in these good approaches the money takes the form of a simple IOU, and that’s the core idea to keep in mind.
Now that can easily be scaled up to where a council gets the money to build a new swimming pool by selling entry tickets in advance. Everyone will accept the tickets as money that can be used for purchases within the town because all know that they can get the value the tickets represent by going for a swim some day, or using it to buy something from someone who will. Again the council has created money by printing IOUs, avoiding dealing with banks or paying interest, and economic activity has been enabled.
So scale it up again and you have a government printing money to enable a nation to start producing and consuming using its own resources, where the banks will not do this unless you agree to pay them back more than you borrowed. How incredible that this kind of thing has been so rarely done!
Consider the Swedish JAK, begun in the 1930s and now an official bank with $167 million in assets, 35,000 members and 30 town branches. (Lewis and Conaty, 2012, pp. 65 - 74.) It takes savings from members and lends them at no interest but for a small fee to cover administration costs. On a $20,000 ten year loan the repayment would be $3,167 but if the loan had been obtained from a bank at 8% interest it would be $9,709. (…and far more on a house loan, where you can pay back 150% more than the amount borrowed.) Thus many socially valuable projects can be funded where people could not afford bank loans to undertake them. Again, how is it that this is not the norm?
The JAK system is a simple credit union approach, and these involve people who have savings and can expect to repay the loan plus the fee. Credit unions are banks people put savings into and can get loans from at low interest. They are very desirable “mutuals”, but they can’t help to get impoverished unemployed workers into producing and earning, because they have no savings. More importantly, they fit comfortably within the existing economy; they are not helping us to replace it.
The Grameen Bank is much the same, providing very small loans to very poor people but aimed only at enabling them to prosper as a private entrepreneur within the existing competitive, profit-driven consumer-capitalist system. That’s better than not being able to get the loans (although often when one recipient “prospers” he just takes sales from a less “efficient” competitor.) So how can we use the credit union’s cooperative or mutual or self-help nature to connect idle poor people with available but idle productive resources…in a way that does set up a radically new economy?
How to do it.
Firstly, the crucial point about this money creation business should be re-emphasized. It is simply to connect available but idle productive capacity with the needs it could be meeting ... to enable production to meet needs to get started. Money should be thought of as only a device, procedure, which enables previously idle productive capacity (land, timber, labour…), to be brought into production. So we must focus on those unmet needs and that unused productive capacity…and just bring them together. We don’t need (normal) money to do that…we just need to organise. Here’s a simple way.
A group, which could be a council, a church, a charity or just a few friends, organises a productive venture such as a community garden or bakery or workshop, in which previously idle people can come together to produce some of the things they need, using cheap or costless local resources. Time contributions are recorded and these entitle people to the associated proportion of the output at a later date. When I work an hour in the garden l receive a piece of paper saying I have put in that much time and thus can have the associated proportion of the goods produced. These pieces of paper are a new currency. lf we set up several ventures then the money I “earn” in one of them, say the garden, would entitle me to an appropriate share of the output from the garden, or the bakery, or the sandal making cooperative, or the fish ponds, or the home help co-op, etc.
Those bits of paper are new money and their role is simply as a recording device. Obviously the introduction of the currency is not the most important element in this process; the key factor is organising the cooperative “firms”. Also obvious is the way the currency works; you can see what its desirable effects are and why they occur, and how they create/enable increased contributions and incomes. (…which substitution currencies like Berkshires do not.)
What we have done here is create and add on a new economic sector, an Economy B, involving economic activity, producing, buying and selling that previously could not take place, and we have created a simple form of “money” to enable us to keep track of who contributed what and who is entitled to what. This new economy is extremely radical.
We can then use our new currency to start trading with firms in the old economy (Economy A). For instance we can find restaurants willing to sell us meals which we can pay for with our money. They will accept payment in our money because they can then spend that money buying vegetables and labour from us in Economy B. Note that the normal shops in the town cannot accept our money and we in Economy B cannot buy from them, unless there is something we can sell to them. They can’t sell things to us, accepting our money, unless they can use that money and the only use they can put it to is buying things from us. So the crucial task here for the Community Development Co-op is to look for things we can start producing to sell to the normal firms in the town. If we can’t find anything they need to buy, we can’t buy anything from them. Again the crucial element is finding or creating the production capacity and the outlets, not the creation of the currency, essential though that is.
If a council (or state government) thought like this it could do miracles, setting up a large scale Economy B, immediately organising all unemployed and homeless people into livelihoods to meet many of their own needs … but that contradicts the capitalist way so they won’t do it … so we will have to. But let’s see if councils don’t change their attitude as the 2030 Spike (Mason, 2003) draws closer…the coincidence of extremely serious and insoluble scarcities of oil, water, food, forests, phosphorus, minerals, land and soil, and the impacts of greenhouse and other ecological problems, and the collapse of Third World states under these impacts…and the social consequences in rich countries as discontented and panicking masses realize they can’t drive to the supermarkets, whose shelves will be bare anyway. As all this approaches, councils might be a little more inclined to resort to unorthodox strategies.
So, regardless of whether councils choose to assist us, we can start doing it ourselves right now; we can just create our own bits of paper to get our own co-ops going among those in most need, and thereby take the first steps to the creation of the new Economy B that will soon be crucial for our welfare if not our survival. There is no more important thing to do for anyone concerned to help solve global problems than to work to set up these new local economies, with a view to eventually enabling communities to control their own economic fate.
Developing Economy B will require some, but very little capital, e.g., to buy garden tools and poultry fencing wire, but most people in your neighbourhood are heavily involved in Economy A and can provide these inputs (being paid with eggs.) As Economy B gets going it can accumulate the normal-money capital it needs to import such items from Economy A.
Over time we expand Economy B, until it becomes the bulk of the local economy. There might be a remnant Economy A for a long time, but people in our town or region will have the capacity to more or less provide for themselves even if the global economy self-desteructs.
Again think about Greece and the Third World countries with lots of productive capacity, such as half the workforce unemployed, but prevented from printing money to enable them to be put to work because this is not allowed under the conditions the World Bank or the European Union enforces. If they do manage to borrow from the normal banks this capital must be put into the most profitable ventures, such as using local resources to produce exports, because high interest payments have to be made. Therefore there is very little investment, and what there is does not go into the most needed production, and debt and interest payments increase. Why doesn’t the government borrow the money, as distinct from corporations, and set up desirable basic productive activities? Because the rules of the IMF, World Bank and European Central Bank prohibit lending to governments!
The longer term future.
For some time, maybe ten years or more, our focus will be on expanding Economy B, towards being capable of providing and guaranteeing many/most of the basic things we need for a good quality of life for all. Then, regardless of what happens in the national and global economies, to the price of oil, or to global food supply etc., we will be able to produce most and in some instances all the needed basic food, house repairs, clothing, footwear, home care of aged and ill people, preventative health care, basic education, hand tools, maintenance of parks and commons, and entertainment etc.
Meanwhile the town will take on more control of its own affairs, through the town meetings, especially running the town bank and making collective decisions about what we need to develop. (Will we plant the newly dug-up parking lot into apple orchard or a woodlot?) We would probably have town taxes, payable in new money or time given to working bees. We would do much of our own construction and maintenance via working bees.
None of this seems difficult; it’s just about how the town’s members organise to input contributions and keep accounts re who needs to pay how much, in town dollars or time or goods.
We will probably always need two currencies, firstly the one for use within the town economy, including its surrounding fields and forests etc., and secondly the normal national money used now in Economy A to pay for items the town needs to import from further afield. The town’s shops would in general sell imported and locally produced goods, and accept payment in both currencies. Some will need to accumulate normal Economy A money to pay for the imports but firms selling only goods produced within the town could operate with only new town money. A shop might request that 80% of your payment be in town money and 20% in national dollars, depending on how much of it they needed to pay for imports to the town.
A crucial function for the (small, remnant) national and state governments would be to make sure all regions and towns had a sufficient share of the industries producing things to export from and import into towns or regions, within the national economies. Every town would need a few factories in it or within cycling distance to enable the town to earn enough national money from exporting, to do the importing it needs from the national economy.
Hopefully this sketch indicates that it would not be very difficult to organise a currency system which enabled the building and functioning of new local economies that would not only enable the meeting of many urgent needs but would be the first steps to the building of the new economies needed to solve global problems. Remember that the whole problem would be made far easier by the fact that Economy B would be focused on basic needs and thus not complex, there would be no growth, no interest paid (thus eliminating almost the whole of the financial industry), only a small and diminishing role for the market system, and by the fact that the present obsession with wealth, income, property, getting rich and affluent consumer-lifestyles would be understood to be irrelevant in Economy B.
A simple way of explaining the absurd nature of our money and banking system.
There was a shipwreck. The passengers managed to get onto two neighbouring islands, where they organised the production of different kinds of food and shelter and entertainment. Some collected firewood, some fished, some specialised at building shelters.
On the first island they decided that one hour’s work contributing something important would earn the right to get goods or services that took one hour’s work to produce. They organised cheque books with which they could record their individual accounts, for instance when Mick bought firewood from Pete he would write an IOU saying in effect I owe something that would take X hours to produce. These pieces of paper were then exchanged as a form of money, so that Pete could use that IOU from Mick to pay for some fruit he got from Mary.
At the end of each week a small committee tallied up the IOUs held, to make sure no one was just writing IOUs and getting goods without producing any. The IOUs were obviously just a convenient way of keeping account of who owed what to whom.
They then made the committee into a kind of bank where a person could store the IOUs they had earned, and when they bought something they could write an IOU that the seller could take to the bank and have that amount moved from the buyer’s to the seller’s account.
On the second island people also quickly realised that they needed money to be able to buy and sell things from each other. The survivors included a banker. He drew up a lot of notes with $1 on each and lent them to people, but only if they agreed to pay him back a bit more than they borrowed.
So Alf borrowed some dollars from the banker and was able to pay for fish Andy had caught, but he had to collect mushrooms worth more than the fish and sell them so he could pay back the loan plus the interest. Meanwhile the banker didn’t have to produce anything because he just collected the interest on the money he had printed and lent.
You can see how this system would quickly gum up unless ever-increasing loans were made. If the banker only lent a fixed amount of money it would not be possible for him to be repaid that amount plus interest. People were able to repay his loans but only because they could earn from their work and trading more than they borrowed, as new borrowers were getting more money and spending it into the economy. The system therefore had built into it a need to grow without end. All the money in circulation was a debt to the banker, and the amount of money grew all the time.
One day the banker raised the interest he demanded. Dan found he couldn’t meet his repayments, so the banker told him he would have to sell his hut to the banker. The price offered was very low, but Dan had no choice. Millie was a rather silly person, so the banker easily talked her into taking out a big loan that she couldn’t repay, and so she had to sell her wedding ring to him, cheaply. Fred was hard working and sensible, but a storm destroyed the little raft he had used to fish with and he couldn’t meet a repayment deadline, so had to sell his fishing gear, cheaply. In this way the banker became richer as time went by, eventually owning most of the property people had worked hard to build up. He never had to produce anything, but he had the power to create money, own it and lend it and receive the interest, and to manipulate interest rates and actually ruin people and plunder their wealth.
This system on the second island seems to be so ridiculous that it is difficult to believe that anyone would ever set it up, or tolerate it. It is in fact the money system we have.
Abandon money altogether? The Gift Economy.
Some people argue that we should work towards an economy that has no money or payment for exchanges but functions as a good family does, with people producing and giving to each other. This is the kind of economy in many tribes and communities, and is obviously an ideal. It would involve nice relations between people, whereas the present economy requires competition and selfishness and produces brutal exploitation and neglect on a large scale
In my view it is best to keep this theme on the agenda as a very long term future goal, but not to give the impression that it is the kind of alternative we will be trying to build in the coming decades of transition from consumer-capitalism. It would be much too big a jump to attempt, and we need to be careful not to give people the impression that our proposals are unrealistic.
A gift economy clearly requires very different ideas and values to be held among people, i.e., a culture that contradicts what has been the focus of Western society for several hundred years (although it was the norm in the Medieval period; see.)
Even then I think it would be desirable to have an accounting system for keeping track of contributions and consumption. I would want to be able to check whether I was contributing enough, at least as much as I was taking from the production of others. If my hobbies required more materials than others I would want to make sure I was putting in goods or services that covered these costs. Similarly communities would probably find it easier to make “investment” decisions if they had ways of calculating the costs that we now talk about in dollar terms, not that these would be the only costs considered in a good society.
Many who want a gift economy see money as an evil thing and I think this is a mistake. Certainly the kind of money we have in our present society is extremely faulty, but it is easy to imagine a kind of money that didn’t have those faults. I can’t see anything wrong with retaining a form of money that enables accounting. It does not have to be accounting of dollars; time contributions might be more sensible, and individual and community decisions could always take in other than these accounts; e.g. moral or ecological considerations could be given greater weight.
Advocates of abandoning money, notably Marx, see it as causing “alienation”, making relations between people impersonal and calculated and narrowly focussed, leaving out considerations such as the welfare of the other. Again I see this as a cultural problem that can be overcome in a nice, post-capitalist society that does not pit people in competition against each other and has structures which require and reward friendliness and concern. I don’t think that in such a society there would be any harm if some of our interactions took into consideration our monetary situation, i.e., a numerical account of our contributions and receipts. This would be a relatively unimportant issue as most of our interactions would take the form of mutually beneficial work and play with friends who have a strong collectivist outlook and to whom monetary income and wealth was of negligible importance for a good quality of life.
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Grecco, T., 2009. The End of Money and the Future of Civilization,
Hudson, M., (2011), “Debt Slavery; Why it Destroyed Rome. Why It Will Destroy Us Unless It’s Stopped”.
Lewis, M. and P. Conaty, (2012), The Resilience Imperative, Gabriola Island Canada, New Society.
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