MONEY, BANKING, LOCAL CURRENCES.

22.7

Why introduce a new currency? What’s the point? How could it help us?

Introducing a new currency can enable extremely important steps towards the new local economy we want, but only if we design it to have the effects we want. There is a tendency to assume that just by introducing one miraculous effects will result. It is essential that we can explain in advance precisely how a new currency is going to have what effects. Unfortunately new currencies sometimes seem to be introduced without a sound rationale It is not unusual to see that a project is not going to have any desirable effects at all.

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. Unfortunately just about all the literature on this theme fails to make the issue clear. Here is a way of getting into it.

In a normal, growing economy the amount of money in use, circulation, has to increase all the time. If we had in Australian economy only as much money as we had in 1800 there would not now be enough to enable all the purchasing people want to engage in. So the amount of money in circulation has to increase constantly. 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 lending more money to borrowing corporations who want to set up new ventures. But where do those banks get the money from to lend? If you don’t know what the answer is 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 lent money they already had 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; it has to be created. But the process whereby this is done in our economy is outrageous, farcical, and incredible. It defies understanding why the process is tolerated, although the main reason is mainly that few understand what is going on.

The 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 just the same as 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.

Very few people understand this but there are many monetary reform groups around the world working to draw attention to the practice and to terminate it.

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 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. Robertson quotes an estimate that in the UK a similar sum is transferred this way, from public taxes. Could there be a more incredible, absurd, morally outrageous and socially ridiculous process? And on such a scale. People struggle to cut government costs, many important needs go unfunded, and here we have a process whereby billions of dollars are wasted unnecessarily and avoidably all the time.

One serious consequence of the system is that all new money entering the economy is debt that must be repaid with interest. 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 the blanks in the meantime lend even more out during the year. Thus the amount of debt increases all the time. And note that if at a point in time everyone paid off their debts or borrowings from the banks, there would be hardly any money left in circulation, because almost all of it has been borrowed from the bank in the first place.

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. If you want to hire $100 for a year you can only get it if you are willing and able to pay $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 hugely 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 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).

How should new money be got into circulation?

Obviously governments should create all the new money needed. From time to time governments have taken on the task, but in general today it is almost entirely in the hands of private banks. The way most monetary reformers advocate is for the government to “spend” it into circulation, by for instance paying for the construction of new roads. At first sight this seems to involve an injustice, or some kind of cont trick. The government gets the roads for nothing, just for adding numbers to the contractors’ accounts. But another way of looking at the process is that in the long run as the new money moves from contractors to suppliers they buy from and eventually to the ordinary people in society as those contractors buy things and people are paid wages, the whole society comes to hold those bits of paper and thus has shared the cost of the roads. All the government did is get the process to occur by creating the money and getting it into circulation. (There is however a question as to how evenly the cost is shared in this process.)

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 Worgel in Germany. Another was the building of public markets in Guernsay which triggered recovery. 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 interest rates 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 misery and into a thriving and immensely powerful economy in a few 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 give heaps of money to people to spend. In 2009 the Australian government gave everyone $900, and urged them to go out and spend it. This did “get the economy going”. (However the government got this money by borrowing it (!), going further into debt, meaning that someday they’d have to pay it back with interest, or accumulate it from taxes and earnings.)

The great merit 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 the money creation process is that it enabled 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 is 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 are available. The crucial question below is how can we create our own new money in our local communities and use it to connect available productive capacity and resources to important needs (as distinct from the purposes the investors usually have.)

Spending (or giving) money created by governments into circulation, avoids having anything to do with banks and having to repay plus interest. But it has a serious limitation. It stimulates the normal economy to do more of what it normally does, which does not and cannot solve 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 of the firms that got the contracts, and only a very 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.

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 of a species which for a decade in the 1930s allowed millions of people to suffer unemployment and extreme poverty and idleness and despair, while all around them there were unused and idle factories and land. It would have been extremely 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 wasn’t it done? Because it would have been identified as “socialism”, and we all know that is evil and does not work. In other words this is a basically capitalist economy and in such a system you interfere as little as possible with the freedom of those who have or can afford 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 is not considered, let alone tolerated.

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, including 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.

We can use the creation of new currencies to help us get around such h uge and intolerable faults in the consumer-capitalist economy.

Creating our own local currency.

Unfortunately there is much confusion on this issue. Some groups seem to think that just introducing a currency of some kind will do great things, without being able to explain how and why. It is essential to be able to see that your scheme will have definite and valuable effects. I am aware of ac number of schemes which I do not think will have any valuable effects.

A common but not very desirable way it is when a town council “prints” new money and get it into circulation by paying (part of) the wages of its employees. This would not achieve much if it is just substituting some new money for some of he old money that was being paid. It would be different if the council used the new money to increase its staff by paying the new recruits in new money (or paying all a small proportion of their wages in new money), and thereby increasing its service provision.

Another mistaken notion is that introducing our own currency, which can’t be spent outside the town, is a way to increase town 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 miss the point. Anyone who understands the situation does not need to be penalised for holding money and not spending it. In any case it’s wrong-headed to set out to encourage spending; people should buy as little as they can, and any economy in which you feel an obligation to spend to make work for someone else is not an acceptable economy. 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 good quality of life.

Lets emphasise the crucial point about this money creation business. This is simply connecting available but idle productive capacity with the needs it could be meeting. Money should be thought of as stuff which enables productive capacity (land, timber, labour…) which were not being used to be brought into production. Note again that when a local council spends new money on things like roads, or even gives new money to poor people, the economy might be stimulated, but no significant difference is made to the form of the economy, which will still include a rich few and a poor many and still have unemployment. It will also still be an economy which is heavily dependent on imports and therefore very vulnerable to recession in the global economy Above all it will be an economy that is not under the control of local people. We can get around these problems easily, if we focus on those unmet needs and that unused productive capacity…and just bring them together. Here’s how.

A group, which could be a council, church or just a few friends, organises a productive venture such as a community garden or bakery or workshop, in which people previously idle 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 can hour in the garden l receive a piece of paper saying I have put in that much time and have the associated claim on the goods produced. These pieces of paper are a new currency. lf we have set up several ventures then the money I “earn” in one of them, say the garden, could entitle me to an appropriate share of the output from the garden, or the bakery, or the sandal making cooperative.

Obviously the introduction of the currency is not the most important element in this process; organising the cooperative “firm” was the key factor. Also obvious is the way the currency works; you can see what its desirable effects are and why they occur.

What we have done 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 is entitled to what. This new economy is extremely radical. Firstly, all the money we have created benefits those in most need. Benefit for them is not confined to the small proportion that trickles down from the road contractors who got the government contract. Secondly, the money is not debt. The piece of paper I receive for an hour’s work in the garden is only a record of the fact that I have provided that input and thus that I am entitled to the associated share of produce. And the money does not earn interest; it does not allow anyone to receive an income they didn’t work for. In addition the system increases local self-sufficiency. It enables more local needs to be met without any imports. Most importantly, it is an economy which we totally control; we are able to decide what to produce and who is to get it etc. This is the crucial condition for satisfactory local economies in the coming post-oil era of intense scarcity when communities will have to largely provide for themselves.

We can then use our new currency to start trading with firms in the old economy (Economy A.). We can find restaurants for instance 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. But note that the normal shops in the town cannot accept our money and we in Economy B cannot buy from then, 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. Nothing significant can be achieved unless people acquire the capacity to produce and sell things that others want. Obviously, unless one produces and sells to others one can't earn the money with which to purchase things one needs from others. So the crucial task here for the Community Development Co-op and those concerned with increasing town self-sufficiency is to create productive opportunities and roles for those impoverished because they don’t have them, not to create a currency. Note again that if a council creates money to pay for the building of a swimming pool it will only be creating jobs for a very small proportion of the town’s unemployed people.

Councils could facilitate this process, for example by accepting our new money in part payment of their rates—but again only if there is something they can spend the money on, that is, goods and services they need that we in Economy B can provide. Therefore the CDC must look for these possibilities. But this is far from the most effective thing councils could do.

By far the most powerful thing a council could do in this realm is simply to take on the above role of the Community Development Co-op. That is, it could organise the gardens, poultry, aqua-culture, fruit bottling, baking, etc. co-ops to enable poor and unemployed people to start producing for themselves many of the things they need. As I have explained at present they won’t do this, because they’d see it as voodoo economics, and because the local chamber of commerce would protest fiercely about “social engineering” and interfering with market forces. It will not be done in consumer-capitalist society… because it contradicts some of the fundamental principles of such a society.

But let’s see if Councils don’t change their tone 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 bit more inclined to resort to unorthodox strategies.

Anyway, regardless of whether Councils choose to assist us, we can do it ourselves; 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 survival.

Mason, C., (2003), The 2030 Spike: Countdown to Catastrophe, Earthscan.