[PAA-Discuss] A Better Way to Make Money

[Ron and Kris Graham]

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A <http://www.monbiot.com/archives/2009/01/20/a-better-way-to-make-money/>
Better Way to Make Money 


Posted January 20, 2009 

Here’s how we could solve the credit crunch without giving anything to the
banks.

By George Monbiot. Published in the Guardian, 20th January 2009

In Russell Hoban’s novel Riddley Walker, the descendents of nuclear
holocaust survivors seek amid the rubble the key to recovering their lost
civilisation. They end up believing that the answer is to re-invent the atom
bomb. I was reminded of this when I read the government’s new plans to save
us from the credit crunch. It intends - at gob-smacking public expense - to
persuade the banks to start lending again, at levels similar to those of
2007. Isn’t this what caused the problem in the first place? Is insane
levels of lending really the solution to a crisis caused by insane levels of
lending? 

Yes, I know that without money there’s no business, and without business
there are no jobs. I also know that most of the money in circulation is
issued, through fractional reserve banking, in the form of debt. This means
that you can’t solve one problem (a lack of money) without causing another
(a mountain of debt). There must be a better way than this. 

This isn’t my subject and I am venturing way beyond my pay grade. But I want
to introduce you to another way of negotiating a credit crunch, which
requires no moral hazard, no hair of the dog and no public spending. I’m
relying, in explaining it, on the former currency trader and central banker
Bernard Lietaer. 

In his book The Future of Money, Lietaer points out - as the government did
yesterday - that in situations like ours everything grinds to a halt for
want of money(1). But he also explains that there is no reason why this
money should take the form of sterling or be issued by the banks. Money
consists only of “an agreement within a community to use something as a
medium of exchange.” The medium of exchange could be anything, as long as
everyone who uses it trusts that everyone else will recognise its value.
During the Great Depression, businesses in the United States issued rabbit
tails, seashells and wooden discs as currency, as well as all manner of
papers and metal tokens. In 1971, Jaime Lerner, the mayor of Curitiba in
Brazil, kick-started the economy of the city and solved two major social
problems by issuing currency in the form of bus tokens. People earned them
by picking and sorting litter: thus cleaning the streets and acquiring the
means to commute to work. Schemes like this helped Curitiba become one of
the most prosperous cities in Brazil. 

But the projects which have proved most effective were those inspired by the
German economist Silvio Gesell, who became finance minister in Gustav
Landauer’s doomed Bavarian republic. He proposed that communities seeking to
rescue themselves from economic collapse should issue their own currency. To
discourage people from hoarding it, they should impose a fee (called
demurrage), which had the same effect as negative interest. The back of each
banknote would contain 12 boxes. For the note to remain valid, the owner had
to buy a stamp every month and stick it in one of the boxes. It would be
withdrawn from circulation after a year. Money of this kind is called stamp
scrip: a privately-issued currency which becomes less valuable the longer
you hold onto it.

One of the first places to experiment with this scheme was the small German
town of Schwanenkirchen. In 1923, hyperinflation had caused a credit crunch
of a different kind. A Dr Hebecker, owner of a coalmine in Schwanenkirchen,
told his workers that if they wouldn’t accept the coal-backed stamp scrip he
had invented - the Wara - he would have to close the mine. He promised to
exchange it, in the first instance, for food. The scheme immediately took
off. It saved both the mine and the town. It was soon adopted by 2000
corporations across Germany. But in 1931, under pressure from the central
bank, the ministry of finance closed the project down, with catastrophic
consequences for the communities which had come to depend on it. Lietaer
points out that the only remaining option for the German economy was
ruthless centralised economic planning. Would Hitler have come to power if
the Wara and similar schemes had been allowed to survive? 

The Austrian town of Wörgl also tried out Gesell’s idea, in 1932. Like most
communities in Europe at the time, it suffered from mass unemployment and a
shortage of money for public works. Instead of spending the town’s meagre
funds on new works, the mayor put them on deposit as a guarantee for the
stamp scrip he issued. By paying workers in the new currency, he paved the
streets, restored the water system and built a bridge, new houses and a ski
jump. Because they would soon lose their value, Wörgl’s own schillings
circulated much faster than the official money, with the result that each
unit of currency generated 12 to 14 times more employment. Scores of other
towns sought to copy the scheme, at which point - in 1933 - the central bank
stamped it out. Wörgl’s workers were thrown out of work again. 

Similar projects took off at the same time in dozens of countries. Almost
all of them were closed down as the central banks panicked about losing
their monopoly over the control of money (just one, Switzerland’s WIR
system, still exists). Roosevelt prohibited complementary currencies by
executive decree, though they might have offered a faster, cheaper and more
effective means of pulling the US out of the Depression than his New Deal. 

No one is suggesting that we replace official currencies with local scrip:
this is a complementary system, not an alternative. Nor does Lietaer propose
this as a solution to all economic ills. But even before you consider how it
could be improved through modern information technology, several features of
Gesell’s system grab your attention. We need not wait for the government or
the central bank to save us: we can set this system up ourselves. It costs
taxpayers nothing. It bypasses the greedy banks. It recharges local
economies and gives local businesses an advantage over multinationals. It
can be tailored to the needs of the community. It does not require - as
Eddie George, the former Governor of the Bank of England, insisted - that
one part of the country be squeezed so that another can prosper. 

Perhaps most importantly, a demurrage system reverses the ecological problem
of discount rates. If you have to pay to keep your money, the later you
receive your income, the more valuable it will be. So it makes economic
sense, under this system, to invest long-term. As resources in the ground
are a better store of value than money in the bank, the system encourages
their conservation. 

I make no claim to expertise. I’m not qualified to identify the flaws in
this scheme, nor am I confident that I have made the best case for it. All I
ask is that, if you haven’t come across it before, you don’t dismiss it
before learning more. As we confront the failure of the government’s first
bail-out and the astonishing costs of the second, isn’t it time we
considered the alternatives? 

www.monbiot.com

References: 

Bernard Lietaer, 2001. The Future of Money. Century. London. 

 

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