MONEY, BANKING, DEBT AND  LOCAL CURRENCES.

25.8.2024.

Money is strange stuff. In order to clarify the business of setting up our own local 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 literature on this topic is not easy to follow.  Here is an attempt to make some of 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. 

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                                    BANKS AND MONEY CREATION.

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 2000 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 simply by the banks lending more money to borrowers.  But where do those banks get the money to lend?  If you don’t know the answer you will not believe it.  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 previously 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 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.)

Here’s the Bank of England stating the process, the way new money is created by the banks every time they make a loan. (McLeahy, Radia and Thomas, 2014.)

“... the majority of money in the modern economy is created by commercial banks making loans.”

“Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”

When you go to the bank officer for a loan he does not go down into the vaults and get the money.  He does not get some of the money the bank is holding and give it to you.  He simply grants you the loan by keystrokes that put money into your account. It didn’t exist before he did that.

The extremely unacceptable thing about the process is that it allows private banks to create money, own it and lend it and get interest from lending it. No wonder they make fabulous profits...around $3,000 per household every year in Australia.  

The wealth involved is enormous. Richardson and Humber (Undated, p. 9) estimate that the process transfers to the banks from the public in the UK more than 47 billion pounds every year, in the USA around $114 billion p.a., in the Euro area more than Ä160 billion, and in Japan more than 17 trillion yen. They say, “These figures amount to 5–15% of annual tax revenues in the major OECD countries”.

All this is astoundingly irrational and objectionable, but there is very little awareness of what is going on and very little criticism. In 1975 J. K.Galbraith said, “The process by which banks create money is so simple that the mind is repelled.”

Obviously the sensible alternative is for the government to do the creating and putting of money into the economy, for instancy by spending it on building a new road, or lending it for a good project.

Note that when the money is borrowed it is eventually spent and the recipient puts it into another bank, which can then lend it out at interest, meaning that a dollar of new money enables banks to go on getting interest on it again and again.

Now there is nothing wrong about the “creation of money from nothing”; as with bus tickets or promises ... 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. 

For many decades many critics and monetary reform agencies have been objecting to the system. A recent critic says it’s “...the biggest scam in the history of mankind”, putting billions of dollars every year into the hands of banks and their shareholders. (Maloney, 2024.) Another one says, “…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.)

In addition to the routine, everyday creation of money by bank lending there is the large scale process known as “Quantitative Easing”. This involves the creation of huge amounts of money by government agencies and in effect given to banks (in obscure ways) to lend. During the Great Financial Crisis the US government put several trillion dollars into the economy this way, to save banks from collapsing and supposedly to “get the economy going again”.

The best way to “get the economy going again” is to resort to “Helicopter Money; that is to drop lots of banknotes from a helicopter. They would immediately be spent, generating lots of production, jobs, income and increased “living standards”. But, surprise surprise, instead they made the money available to banks to lend. It mostly went to rich people who could not use it to invest in producing more goods to sell in the recessed economy, so they invested it is buying up more assets to rent.

“In the UK the Bank of England’s own research has shown that quantitative easing made the richest 5% over £128,000 richer.” (Positive Money, Undated.)

            The absurdity of government borrowing.

The most ludicrous aspect of the system is that our when our governments borrow money, which they do in great volume all the time, they go to those private banks and borrow money from them (and from other sources), 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 totally eliminated. Governments should create and issue or spend the money. Around 2020 Australian tax payers were paying about $26 billion every year to the private banks (and others) as interest on the money borrowed by the Federal government, not including State government borrowing. That’s about $3,000 per annum from the income of a family of four. 

“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.)

“… 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. (Brown 2011 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.”  (That is,” borrowing” with no need to pay interest … just by creating the money to lend.)

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.)

Note that this income stream for the banks and other lenders from interest on unnecessary borrowing is in addition to the stream associated with the creation of money.

            Consider tax.

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.)

So part of the tax you are paying to the government is sent by the government to the banks and rich people the government has borrowed from.

Many socially important needs are not attended to because governments say they don’t have enough money to pay for them, yet here we have a process whereby billions of dollars are wasted unnecessarily and avoidably all the time.

            The power to control development.

Another absurd feature of the financial system is that it gives banks the power to determine the ventures that capital is to be 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 the society most needs. But in 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 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 cheap, humble, small but sufficient houses are not 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 (most) new money comes into circulation by being created by banks ... because via this process they get the money (... little people can’t afford the interest rates) and they can then invest it in what will most benefit them. 

In some cases the power to decide who gets the loans has determined history. (See below on the battle of Waterloo.)

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 and run whole nations. They 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 (Debt.history.htm)  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.

The deteriorating 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 countries 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 "fractional reserve” system.

If you put a dollar into a bank you might mistakenly think it’s safe in the bank’s vault for you to get out any time you wish.  But the bank is allowed to take most of it out and lend it to someone else.  It has to keep in its vaults only a fraction of the money that has been deposited in the bank, the usual fraction being 10% but sometimes it is much less.

When a borrower puts his loan into his bank this increases the amount his bank can lend by 90% of the amount deposited, because that loan is soon put into another bank which can then lend 90% of it, cand so on many times. So the initial loan generates about 10 times as much amount of lending. Why should banks be allowed to do this?

One consequence is that in bad times there can be a “run on the bank”, when people try to get their savings out but the bank can’t meet these demands because it has lent the same money to many people. It goes bankrupt, and all those people can’t get their savings back. This couldn’t happen if banks were obliged to lend out no more than they held, that is, if there was a 100% reserve system.

Conclusion.

Obviously the money creation process we have is extremely unsatisfactory. How can it be that such a socially important but irrational and obnoxious money creating process, delivering billions of dollars income to banks every year, remains almost completely unchallenged? 

INTEREST

Probably the most fundamental element in the entire money and banking system is that when money is borrowed it has to be paid back, plus interest. That is, money is treated as a commodity that can be hired for a fee. It is no exaggeration to say that this procedure has been responsible for much and possibly most of the wreckage that has occurred in the last about 3,000 years of our history. It has destroyed whole empires. It keeps most people today in difficult and often impoverished conditions. Interest is avoidable, and it would not exist in a zero-growth society.

Firstly, consider the vast amounts of money that interest siphons out from you into the pockets of the rich. Most people do not have much money to lend, but a few have a lot of it. Most people have to borrow, the rich do not. That means that most of the income that is in the form of interest flows to the rich. Kennedy (1995) showed that there is a net flow of interest payments from 90% of the population to the richest 10% of people. It was explained above that governments pay out tens of billions of dollars every year in interest.

Note how interest compounds. The price of bolts put into a motor includes an amount that the bolt producer had to pay for the capital he borrowed to buy inputs for their manufacture. When the motor manufacturer sells them to the fridge maker his cost of production includes the interest paid by the bolt manufacturer, and it also includes the cost of his interest payments on the money his firm has borrowed.  So interest is being paid on sums increased by previous interest payments, adding all the way up to the price you pay for the fridge.

Kennedy estimated that the percentage of what we pay for various things that is made up by the accumulated interest payments along their production chain. For garbage collection it was12%, for drinking water 38%, for sewage services 47%, and for public housing rental an unbelievable 78%. (See also Brown 2012b.) On average she found that about 50% of the amount people were paying for goods and services was made up of compounding interest charges.

Venz and Leggatt, (2024) state much the same proportion for Australian house construction, that is, the amount paid in interest is more or less equal to the loan to be paid back.

Note again the above figures for the national level. Every year tens of billions of dollars are paid in interest to those from whom national governments have borrowed.

It is not necessary to have a form of money in which interest is paid. If you lend me your surfboard how many am I expected to pay back? There are monetary systems in which no interest is paid on loans, such as LETS (below.) Long ago the Christian Church regarded interest as sinful but now we have an economic system that enshrines limitless lending for interest, and accumulation of wealth.


The conventional view is that interest (and profit) are the rewards to those with capital for risking their capital investing to set up businesses and create jobs.  Yes, people who invest capital do take a risk … but what is the risk they are taking? In general lenders lose little and make a lot.  Much more importantly, they are risking losing their capital and then having to work for an income like the rest of us!  The question here is, is there no better way in which capital can be accumulated and decisions made about where to invest it?

What about the fact that retired people need an income from interest to pay for their aged care etc?  ln this economy that’s the way retirement is provided for, but there are other ways we could provide for older people, and these could be much more secure and fair ways.  Society should guarantee a comfortable old age to everyone, with no need to depend on an income in the form of interest from risky investments, and no chance that their savings or superannuation could be lost through mismanagement or fraud. 

In a satisfactory economic system you would be able to borrow money without having to pay for it; that is, you would have to pay the loan back but pay no more than that (apart from an administration cost.) You would able to put your savings in a bank for safekeeping, but not get any income from doing that.

Interest is morally unacceptable. It is well-described as ”unearned income”. Only the rich are able to get a lot of it. In Medieval times charging interest on a loan was regarded as highly immoral and was banned by the church. 

It is also ecologically unsustainable, because it is only possible in a growth economy.

            The US dollar is the “reserve” currency.

A related massive fault in the global monetary system is to do with the role of the US dollar in international trade.  If a tiny country like Nepal wants to import goods it can’t offer to pay for them in Nepalese rupees. 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. So 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 in real wealth every year, just because it is the source of the international reserve currency.

                        DEBT.

Interest leads to unrepayable amounts of debt. This leads to continual accumulation of assets in the hands of the lenders. This can destroy whole empires.

            The magnitude of debt today.

It is so great that it can never be paid off. In 1970 total world debt was, equal to 100% of GDP but now it’s over 355%, and over $300 trillion. The debt has more than doubled in the fifteen years since the GFC. (McCarthy, 2015.) Most alarming is the accelerating rate of increase. In the 2000-2014 period it increased $7 trillion p.a. (McCarthy, 2015), but in the 2014-2023 period the increase was $21 trillion p.a. In Australia it increased by over 7% in 2021. (ABS. 2022.)

In America between 1970 and 1990 only 40% of the money the US Federal government borrowed went to pay for anything useful; the rest went to pay off debt to private banks. Thus the average American family had to pay $4,000 p.a. in taxes which the government then paid out to those who had lent money to it ... when the government need not have borrowed anything from private banks and could have avoided all these interest repayments. (Hixon, 1992.)

The interest payments due are increasing much faster than the debt. America's total debt has grown on average at 5.8% p.a. for 200 years, much faster than total economic output. Total output multiplied 22 times in that period, but total debt multiplied by 187 times. (Clairmont, 1996, p. 29.)  This cannot end well; see below.

This means that economic growth is largely and increasingly due to the input of money in the form of loans, and not due to increased production and sale of things. More loans constitute more money to spend, and many people are now going into debt to meet basic expenses. But the economic stimulus effect is diminishing. It now takes about 3.5 times as much lending to generate a dollar of GDP as it did a few decades ago. (Macleod, 2021.)

The crucial point here is that debt plus interest can only be paid back if the economy grows. If there is a lot of debt there must be a lot of growth to generate the additional income to pay the debt plus interest.  But the GDP growth rate has been falling for decades and is slower than the rate of debt increase.  In the 1990s the global GDP growth rate was around 5% but now it is around 1%.

(This issue is a bit complicated; there could be interest paid if lenders then spent it all back into the economy.  But the lending/investment needed in a zero-growth economy would only be that relative small amount needed to attend to depreciation, that is to repair and replace old plant. Most lending now goes into increasing productive capacity and buying assets, so there would be no place for that. Surely we would have the sense to enable public banks to provide this; it would be absurd to let rich private owners of capital to do it.)

Debt enables the rich to acquire assets.

One of the most disturbing consequences of the system is that debt enables the lenders to acquire assets, especially property. When borrowers find that they cannot repay the loan the lender can enforce a sale of the assets that were put up as “collateral”, enabling the lender to buy them up cheaply. This is the mechanism that Hudson describes as eventually ruining whole nations. In 2024 Warren Buffett is sitting on about $200 billion in savings and not investing any of it, because he foresees a collapse that will enable him to then buy up many failed firms cheaply. As Ferguson says, “…there is a constant tendency for the wealth of the world to pass more and more into the bankers’ hands.”   (2008, p. 356.)     

A massive instance of asset acquisition took place when the Soviet Union collapsed.

“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 and Marshall, 2010)

“Indebtedness is an overriding and destructive mechanism.  It allows the creditors to shut down productive activities, lay off workers as well as acquire ownership of real productive assets.” (Chossudowsky and  Marshall, (2010, p. 24.)

           

The historical wreckage.

Hudson’s works (2015, 2022) detail the way monetary systems in which interest is charged have destroyed societies, including the Greek and Roman empires. Lending requiring interest payments enabled elites to gradually acquire land, assets and slaves as borrowers defaulted, for instance when bad seasons prevent them from paying back the loan they used to buy seed. Many ancient kings saw that this would weaken their realms, undermining their capacity to collect taxes and raise armies, and therefore imposed the periodic ”Jubilee” cancellation of debt. Hudson is one of the many now saying that debt is driving the global financial system to collapse.

The capacity to lend brings immense power to make and break nations. Grecco says, “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.”  (2009, p. 91.)

The break up and civil war in Yugoslavia was due to the IMF structural Adjustment Packages.  (Chossudowsky, and Marshall, 2010.) The conditions imposed for debt relief meant that the central government could no longer distribute resources to the states, leading them to break away. Chussudowsky details the process in The Globalisation of Poverty. 1997. p. 127..

Brown also explains that the collapse of Yugoslavia was caused by the IMF preventing the government from creating its own money. (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.

The country fell into impossible levels of debt and had to go to the IMF, which demanded large scale privatisations, etc.  About1100 firms were bankrupted, unemployment went to 20%, inflation to 150%.

Similar forces contributed to the chaotic situation leading to the Rwandan genocide.

            The debt trap poor countries have been engineered into.

Conventional/capitalist development takes it for granted that development has to involve poor countries in trying to climb up the “uni-dimensional” slope to be like rich countries. They must enter the global economy to compete in selling resources and cheap labour to earn export income to pay for the infrastructures that foreign investors want if they are to invest. Thus large loans are taken on to build the power stations and railways from the mines to the ports. Because many countries are competing to sell raw materials prices are low. Before long they find themselves in impossible levels of debt.

As noted above, the IMF and the World Bank enable them to meet repayment needs ... by providing more loans ... on condition that the national economy is made more favourable to foreign banks and corporations for instance by deregulating, cutting expenditure on welfare, holding wages down, and enabling foreign purchase of struggling firms. They must sell profitable state-owned enterprises to foreign corporations to increase the government’s capacity to pay off debt.

But poor countries could solve their most urgent problems by creating their own currencies to bring unemployed people and unused resources together to enable production to meet local needs…but the conditions imposed by Structural Adjustment Packages prevent them from doing this. 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. (Brown, 2007, p. 457, Chossudowsky and Marshall, 2010 p. 208.) 

Again debt enables acquisition of assets and wealth. Through these processes the IMF and World Bank prevent appropriate development.

Grecco explains that, “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.”  (2009, p. 47.) Grecco adds that they can also be made to cease use of their national currencies, meaning they lose their capacity to create money to lend to worthwhile projects within the country, and can only get money from foreign banks, meaning more debt. 

The book by John Perkins, Confessions of An Economic Hit Man, reveals the deliberate process of 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, 2008, p. 310

            The coming debt-fueled collapse?

The global debt situation cannot be resolved. Try finding someone who believes the debt can be paid.  As Hudson says, “Debts that cannot be paid will not be paid”. (2015, 2020.)  Macleod says, “A banking failure almost anywhere, must be bailed out for fear of triggering a global banking collapse the likes of which have never been seen before.” Bloomberg (2024) says regarding the current magnitude of the debt, “We have never seen anything like this before.” Many now see the debt problem having generated a coming collapse of the global financial system. (E.g. the many statements on Youtube by Warren Buffett, e.g. 2024.)

“Financialisation”

Over the last few decades the economic system has undergone a remarkable change. Previously the finance sector was a small part of the economy, confined to providing loans to firms wishing to set up new productive ventures. But now it is huge. In a recent year it generated 40% of the profits made in the US economy. What is does now is basically lend money so that recipients can acquire assets to rent. Sometimes the items are newly built, such as freeways funded by the government, but often they acquire existing operations that enable rents to be drawn. A major category of assets acquired is debt, for instance a bundle of home mortgages that will yield repayments as time goes by.

This activity generates no new goods and services; it is only about getting hold of existing provision. It can be seen as due to an extremely serious problem that has developed, the failure of the economy to grow by producing and selling more goods and thereby providing new outlets for the ever-accumulating volume of capital. Note the above reference to the declining profit rate. So because the owners of capital can’t make good profits producing lots of new goods they have turned to getting hold of activities that enable rents to be siphoned off.

The mania for privatization has provided many lucrative opportunities for getting hold of rent-yielding assets. Governments have sold to private firms lots of roads, prisons, power stations, water supply systems, postal services, transport systems, hospitals, airports, shipping terminals and government services. An example consequence is the enormous trouble caused by the inability of students in the US to pay the fees for their courses; they have had to take out a trillion dollars worth of loans requiring crippling interest payments. Here's a better idea; let’s sell all the public parks and beaches to private corporations who can then charge you to enter them.

The advent of financialization can be seen as an indicator of the coming collapse of capitalism. The system is decreasingly able to provide opportunities for the investment of the accumulating quantity of capital, so the owners of capital are having to cannibalise the existing system. It’s like a hardware shop that can only make good profits if it starts selling its own roofing iron. It’s like the Mafia who don’t produce anything new but just tap into existing wealth streams.

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 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 $600 million in fees for organising a debt rearrangement.   (Wikipedia: 2024.)

            Conclusions.

Few people understand how appalling bad the financial system is, going far beyond the absurd way money is created and the massive transfer of wealth to the rich that process involves.  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 funded. Even more importantly, the system increasingly generates debt and debt slavery, and drives us towards catastrophic global breakdown.

Obviously it is of the utmost importance to move to very different money, banking and finance system.  There are simple and sensible alternative ways.

THE ALTERNATIVE: CREATING A SENSIBLE FORM OF MONEY.

Firstly, the purposes of money should be simply to facilitate economic interaction, to keep track of what your previous work entitles you to get (your savings), and especially to connect available but idle productive capacity with available resources to produce things. It should not be a commodity, something that can be hired out for a fee.

There are many simple ways a community or nation can set up a system for paying for things. Consider the LETSystem. You agree to buy some carrots from me worth $1. You write an IOU and give it to me, and I take it to our system’s registry where it is recorded that my account has increased by $1 and yours has been decreased by $1. The bit of paper is a form of money, which we created. If on the way to the registry I saw a bread roll for $1 I could use the IOU to buy it, if the seller was a member of the system. There is no concept of interest involved.

There are many communities operating in this way. (The problem with most LETS is that there are relatively few things the members of a small community can produce and trade, but there are versions of the system involving big corporations who provide industrial inputs to each other; see below.)

That’s the basic model that communities can set up to get a local “monetary” system going, and expand it to apply to quite big regions and numbers. The Catalan Integral Cooperative in Spain involves thousands of participants in such a scheme. (See below.)

Here’s the basic approach.

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 unemployed 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 I receive a bit of paper saying so and I am then entitled to the associated proportion of the goods produced.  These pieces of paper are a new currency.  (Best done electronically of course.) 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, or the poultry sub-section 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 activities, the “firms”, that enable idle productive resources and idle people to be put together.  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.

What we have done here is create and add on a new economic sector, a Needs-Driven Economy 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 very different to the old one.

We can then use our new currency to start trading with firms in the old profit-driven economy.  For instance we can start selling vegetables to local restaurants, and paying for meals in them with our currency. They can use some of their new income to pay for the vegetables.

The remarkable Catalan Integral Cooperative in Spain now involves thousands of people producing food and many other things, including legal and health services, and an employment agency making sure all members can get a job. They steadfastly refuse to have anything to do with the market and profit-driven economy, or with the state. They organize and run their own alternative economy.

Here's a way of paying for development when you don’t have any money. A New York restaurant printed vouchers entitling holders to a meal ... when the extensions were built. The money they got by selling the vouchers paid for the renovation, the holders then came in for their meal, and the vouchers were burned. The vouchers were a form of money that enabled the process. They were money created by the owner.

Consider a council that might build a swimming pool, paying for it by selling tickets entitling buyers to a swim when it was built.

In these cases use was made of a form of money, which was just a bit of paper that documented agreements that enabled economic action.  Now consider the stupidity of people being unemployed when surrounded by resources that they could be putting to work to produce things they need, when the “money” needed to bring them together could just be printed. Lack of money is not the problem here; it is the lack of sense to see how to create and use a sensible  form of it.

There have been cases where larger schemes have been implemented. Much-discussed cases have been the Wara currency set up in Germany, the Worgl in Austria and the Wir in Austria. Some of these were so effective that the banks got their governments to ban them! But a form of the Wir still functions in Europe enabling exchanges between large manufacturing firms without them having to borrow money or pay interest for orders of inputs. A similar system is still operated by the Swiss WIR-Wirtschaftsring, and the Danish and Swedish JAK systems provide countrywide interest-free savings and loans schemes.

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.

In all these cases a group, of people in a town or collection of firms just arranged forms of payment that did not involve borrowing or debt or interest, by creating a form of money.

            Mistaken approaches.

           

There are famous monetary 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, and just issuing a local currency will make no significant difference to this.

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.

We will probably always need two currencies, firstly the one for use within the town economy, including its surrounding fields, farms and forests etc., and secondly the normal national money which we will use to pay for items the town needs to import from further afield. The town’s shops would in general sell locally produced goods along with items brought in from the normal economy, and accept payment in both currencies.  Some will need to accumulate normal money to pay for their imports from outside the town, 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 the shop needed to pay for imports to the town. 

In the long run 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.  Therefore every town would need a few factories in it or within cycling distance to enable the town to earn enough national money from exporting, so it can do the importing it needs from the national economy.

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 attractive.  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 possibility, but I don’t think it is the kind of alternative we should 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 would require 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 ReligionandtheMarket.html.)

 

Even then I think it would be important 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 producing enough goods or services to covered these costs.  Similarly, communities would probably find it easier to make “investment” decisions if they had ways of calculating the costs of various options.

Above all, I don’t see any workable way of keeping accounts for production and flows of goods within a national economy without some kind of monetary measure of the “value” of things and where they are going. Is housing taking more resources than health care, how big has the demand for steel become compared with that for cement or glass and how do we assess adjustments?

Many who want a gift economy see money as an evil thing but 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 focused, 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 monetary values, solely as an accounting device, to enable us to make sure we were contributing as much value as we were taking out. This would be a relatively unimportant issue as most of our economic 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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