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Monday, April 05, 2010

The Ecology Of Money (FULL TEXT)


by Bernard Lietaer

Four main benefits can be derived from reading Douthwaite’s Ecology of Money:

  1. He introduces much needed clarity in the domain of money. I like the simplicity of the six questions he uses to walk us through different money systems, a process which facilitates comparisons of the nature, advantages and disadvantages of each money system he describes.
  2. He explores these different money systems using a terminology that lay people can understand. This is no minor achievement, as illustrated by economist John Kenneth Galbraith’s quip that “The study of money, above all fields in economics, is the one in which complexity is used to disguise truth, or evade truth, not to reveal it.”1
  3. He forces us to think the unthinkable - the possibility that our familiar national currencies may actually be out-of-date in an age of globalization, information revolutions and planetary ecological hazards.
  4. He presents some ideas for new money systems designed to help us with some of our biggest challenges of today.

In particular, two issues he addresses are highly relevant at this time:

  • The need for a new balance between the global and the local economies;
  • and the issue of carbon-energy efficiency.

Talking about small-scale local currencies in the middle of all the media buzz about globalization may sound parochial or marginal to some. It is not. Community rebuilding is not a contradiction with the trend towards a global civilization, but a necessary complement to it. Precisely because of the globalization trend, strengthening local community is becoming more important. Rather than argue from theory, I will contribute two case studies from Japan, clearly a globally oriented economy.

Japan has decided to introduce local currencies, complementary to the conventional national currency, to tackle two key problems which the West will be facing acutely soon - aging populations and the need for new regional development strategies. Both examples illustrate Douthwaite’s points.

Japan has one of the fastest aging populations of the developed world. By the year 2005, the population over 65 years of age will reach 18.5% of the total (a situation that Germany will face by 2006 the UK and France by 2016.)

A special currency called Hureai Kippu (literally “Caring Relationship Tickets”) has been created by a group of 300 non-profit organizations. The unit of account is an hour of service. The people providing the services can accumulate the credits in a “healthcare time savings account” from which they may draw when they need credits for themselves, for example if they get sick. These credits complement the normal healthcare insurance program payable in Yen, the conventional Japanese national currency. In addition, many prefer to transfer part or all of their Hureai Kippu credits to their parents who may live in another part of the country. Two private electronic clearing houses have sprung up to perform such transfers. One particularly important finding has emerged. Because they have experienced a higher quality of care in their relationships with care-givers, the elderly tend to prefer the services provided by people paid in Hureai Kippu over those paid with the conventional Yen.

The second application is potentially even more impressive. The Ministry of International Trade and Industry in Japan (MITI) has recently concluded that the future of Japan’s development strategy will be based on “Silicon Valley” type specialized regional economies. And that the best tool to stimulate such regional development clusters are local “eco-money” systems. Four pilot projects have already tested this approach, and the results are convincing to the point that by end 1999 no less than forty such systems will be launched. Some of Japan’s largest corporations (such as NTT and Oracle Japan) are involved in these experiments.

The point about these two examples is that theory is way behind practice in this domain. People are innovating in the monetary domain, and are obtaining demonstrably positive results from it, while the majority of the policy makers remain still unaware about the potential of monetary inventions to solve their problems. I would compare today’s non-conventional money domain to aeronautics when the Wright Brothers took their first flights. The first airplane builders didn’t know why their contraptions were flying, but fly they did. And it took the New York Times more than four years to even mention the event (and then only because the President of the US was witnessing a demonstration). Nevertheless, nobody questions that the aeronautical industry has changed forever our way of life on this planet.

Do I agree with all the ideas that are presented here? Even Douthwaite admits that he doesn’t “expect everyone to agree with the conclusions he has reached”. For instance, although I agree with him on the importance of linking monetary issues to energy sustainability, I question the viability of the means he proposes. (Why not include his “Energy-Backed Currency Units” (ebcu) as part of a basket of commodities and services backing the currency - rather than being the exclusive backing of currency? This would dampen the effects of price instabilities of the ebcu due among other things to technological innovations in the supply of energy.)

I am also concerned with his benign view on inflation. Inflation has the positive effects Douthwaite mentions only if it occurs by surprise, i.e. has not been discounted by inflationary expectations. In other words, building inflation into the system may just kill whatever usefulness it has.

However these disagreements pale in comparison with my wholehearted support of two of Douthwaite’s key conclusions:

  • Contrary to what most economists believe, money is not neutral, i.e. different money systems are now possible, and could make a dramatic difference in helping us with several of our most important challenges including ecological sustainability;
  • “Only a widespread debate on the issues, by a well-informed public, will ensure that when changes are made [to the money system] they are along the right lines.” To paraphrase the line about war and the military, money is too important to be left only to bankers and economists…

As the public is remarkably ill-informed about the nature of our money system, as even most experts seem to believe that there is no choice, starting a debate about the effects of different money systems on society is a vital task. In this sense, reading Douthwaite’s contribution may be particularly useful because it is a controversial one.

Bernard Lietaer is a former Professor of International Finance at the University of Louvain in Belgium. He spent five years as head of the Organisation and Planning Department at the Central Bank of Belgium where he was concerned with the electronic payment systems and the design and implementation of the Ecu. He is currently developing inter-trading systems for community currencies. His book The Future of Money was published by Century in 2001.

Introduction and Summary

Most people think that there's only one type of money because one type is all they've ever known. They know about foreign currencies but they see these, quite correctly, as essentially the same sort of money as they use in their own countries. They also know about cheques, credit and debit cards, credit notes, and several of the other forms that money can take but, correctly again, regard these simply as special purpose versions of notes and coins. Money is money, they think, regardless of the form it takes. Only the few who know a little monetary history, or are members of a Local Exchange Trading System (LETS), realise that this is not the case. There are, potentially at least, many different types of money and each type can affect the economy, human society and the natural environment in a different way.

Most economists think that there's only one type of money too. That is when they think about it at all. The profession, to quote two sociologists is: "curiously uninterested [in the topic], restricting itself to discussions of price, scarcity and resource allocation with no specific interest in money as such."1. David Hume, one of the founding fathers of economics, referred to money as "the oil which renders the motion of the wheels smooth and easy" 2 and this attitude persists to this day. Indeed, Paul Samuelson's well-known economics textbook defines economics as: "the study of how men and society choose, with or without the use of money, [my italics] to employ scarce productive resources" 3.

In other words, economists see money acting as a catalyst that eases and speeds up economic interactions that would have taken place anyway. Naturally, they are interested in the amount of money reaching circulation because that affects the pace at which the economy can run, consequently determining whether national income rises or falls. However, very few seem to have ever considered the possibility that the particular type of monetary catalyst in use might be affecting the outcome of the economic interaction. Or that if other forms of money were used the results might be quite different. The only economists even to glance in this direction are either Marxists or members of the Social Credit movement who, because of the nature of their beliefs, have cause to analyse and question the nature of money more closely than more typical members of their profession. The last big-name economists to concern themselves with different forms of money and their effects were Maynard Keynes,4 Henry Simons and Irving Fisher in the 1930s, a period in which the money system was quite clearly dysfunctional.

This Briefing will show that history is littered with examples of monetary systems that operated on quite different lines to the one we know at present. If these systems had survived, they would have produced cultures most unlike today's unsustainable, unstable global monoculture. The Briefing will demonstrate that different money systems affect the world in different ways. Ecology is defined as: "the study of the set of relationships of a particular organism with its environment."5 Consequently, anyone who is unfazed by regarding money as an organism can consider this book an ecology of money. Some of the more enlightened economists will probably be happy to do so. Professor Paul Ormerod, whose books have done much to alert the public to the problems within his profession, writes that: "conventional economics is mistaken when it views the economy and society as a machine whose behaviour, no matter how complicated, is ultimately predictable and controllable. On the contrary, human society is much more like a living organism - a living creature whose behaviour can only be understood by looking at the complex interactions of the individual parts."6

Certainly, if we wish to live more ecologically, it would make sense to adopt monetary systems that make it easier for us to do so. Note the plural here. It is not just a case of exchanging a monetary system that emerged as a result of a series of historical accidents for one with a conscious design. As each money system tends to lead to a particular set of consequences, we are likely to have to use three or four money systems simultaneously to produce the combination of characteristics that we want our society to possess.

Questions to ask

Young journalists are taught to ensure they answer six questions in every story they write - Who? What? When? Where? Why? and How? This Briefing asks these same questions of every type of money discussed: commercially-produced money; people-produced money, and government-produced money.

1. Who issued the money? Was it the state, a financial institution, or the users of the money themselves?

2. Why did they do so? Was it as a method of taxation, to make a profit for their shareholders, or simply to provide the users with a means of exchange?

3. Where was the money created? Was it in the area where it was going to be used? Or was it elsewhere, with the result that would-be users had to sell goods or services outside their area to collect enough of money to be able to trade among themselves?

4. What gives the money its value? Is it backed by gold (or another commodity), a promise of some sort, or nothing at all?

5. How was the money created? Was it by people going into debt to a central organisation? Or did the users simply agree to allow each other credit and generate it among themselves?

6. When was the money created? Was it done once, several times, or continuously as part of a system of creation and destruction that caters for people's trading needs?

We'll ask a seventh question too:

7. How well does (or did) it work? Economics textbooks state that money serves three main functions, so we need to assess a currency's performance in relation to them all. In other words, we should check how well each type of money serves:

A. A medium of payment or exchange. A good payment medium makes it easy for people to buy and sell to each other. This means that it must be generally acceptable and have a high value for its weight so that it is easy to transfer from buyer to seller. It must also be divisible, so it can be used for small transactions as well as large ones. And while there needs to be enough of it around (to enable everyone who wants to buy or sell to be able to do so easily), there must be some limit on its availability so people keep their confidence in it and its acceptability is maintained.

B. A store of value. A currency is a good store of value if someone receiving it is able to use it to purchase the same amount of goods and services regardless of when they spend it - next month, next year, or when they retire.

C. A unit of account. Is the monetary unit a good one in which to keep financial records and to quote prices? Normally, people keep their accounts and quote prices in the currency they use most frequently, but in times of uncertainty, or high inflation, they may use another currency instead. During the German hyperinflation in the early 1920s, for example, shopkeepers quoted their prices and kept their records in US dollars although their customers were paying in marks.

There are circumstances in which these three roles can come into conflict with each other. When prices are falling rapidly, for example, the 'store of value' property of money becomes extremely attractive and people begin to hoard whatever money comes their way in the knowledge that they will be able to buy more with it later on. This naturally interferes with the ability of the currency to act as an effective means of exchange. Shortages of money develop and normal trading becomes difficult. In the 1930s, businesspeople even had to invent special currencies - the Swiss Wirtschaftsring (see Box 3) is a notable example - so that they could settle accounts among themselves. If, on the other hand, prices are soaring rather than falling, money becomes a poor store of value and holders rush to spend it as soon as they can. This leads to prices rising more rapidly still. In view of these conflicts, it seems doubtful whether countries that limit themselves to the use of just one form of money can expect all three functions of money to be adequately satisfied.

Plan of action

The first three chapters of this Briefing explain how the characteristics of money are determined by the way it is created and then put into circulation. Chapter One (Commercially-Produced Money) explains that the commercial banks create almost all the money that we use and put it into circulation by allowing us to borrow it from them. It goes on to explore the consequences of this rather odd arrangement, among which are the present economic system's chronic instability and insatiable need for growth.

Chapter Two (People-Produced Money) deals with the amazing monies that people have created to use among themselves. These include American tobacco warehouse receipts, inscribed clay tablets representing quantities of Egyptian wheat, and carved stones in the South Pacific too heavy for anyone to carry. Strings of seashells and today's LETS fall into this category too. The important feature about all these currencies is that they are only created when the society involved has resources, usually of human labour, which it wants to put to better use.

Chapter Three (Government-Produced Money) shows how, down the centuries, this form of money has often caused serious inflation as it has been used as a system of tax collection. Henry VIII, for example, added large amounts of copper to the silver from which he made his coins so that he could make more of them. As a result, prices doubled and a rebellion broke out. Despite this ominous precedent, we discuss a current proposal that governments should create any additional money their countries need and spend it into circulation. If this system were introduced in Britain, it would allow tax cuts of around 16%.

Chapter Four (One Country: Four Currencies) attempts to weave all these threads together by devising a multi-level multi-currency system which would ease the world's transition to sustainability by improving the way which the economy allocates scarce resources between the present and future generations. It proposes an international unit-of-account currency whose value would be based on the right to emit greenhouse gases. This would be linked, through a currency exchange market, to national currencies that were only used for trading and were not expected to hold their value over long periods of time. Special currencies would be launched to fulfil the store-of-value function. Lastly, local currencies would have a strong role to play. as they would not only be used to overcome local shortages of national currency but also to raise funds for special purposes.

No consensus

The most important feature of this Briefing is its insistence on three things.

  1. All monies should be created by, or on behalf of, their users and not by institutions wishing to profit from the activity.

  2. Different types of currency have to be used concurrently if the three key functions of money are to be adequately performed.

  3. The international unit-of-account currency, to which all other monies would be related, has to represent, and thus protect, a truly scarce resource. In other words, when we save money, we should also be saving something vitally important, like the integrity of the natural world.
This Briefing is not, therefore, a judiciously balanced, middle-of-the-road report on some emerging consensus in the currency-reform area. Such a document would be impossible to write as, apart from the widespread and long-standing agreement that governments rather than banks should put money into circulation, monetary reformers don't seem to agree about anything. Instead, this Briefing is an attempt to discover why the present economic system breaks down catastrophically if economic growth fails to occur. It also suggests how the monetary system could be reformed to remove this defect, which obviously stands in the way of our achieving a sustainable world.

I don't expect everyone to agree with the conclusions I've reached. One friend, whose opinions I value, wrote, "this looks like being an extremely stimulating and thought-provoking Briefing." I understood this to mean "You've gone too far," particularly as his letter went on "You may be running a risk if you publish firm proposals, as presented in this draft, [that you will] find quite soon that you want to change them significantly." In other words, I'd gone much too far and might want to retreat. I've decided, however, to accept the risk of this happening and not to water things down. However, all the ideas I discuss are under development and if they change as a result of a debate provoked by this Briefing, their publication will have been worthwhile.

No reader should feel that they need to understand every paragraph completely before moving on, though I hope that they will be able to do so. If, when they reach the end of the book, they accept the urgent need for a radical restructuring of the money-creation system and have some sort of feeling for the general direction the restructuring should take, that should be quite enough.

I greatly value the comments and suggestions received from those who read a draft of this paper. All of them gave considerable time and thought to their responses, which helped me to make significant improvements. In particular I want to thank: Alan Armstrong; James Bruges; David Fleming; Frances Hutchinson; Nadia Johanisova; Brian Leslie; Bernard Lietaer; Barbara Panvel (and her friends Bill, Andrew and Elizabeth); James Robertson; Emer O Siochru, and Alex Wilks. I would now welcome comments from other readers.

Richard Douthwaite,
Cloona, Westport, Ireland.
October, 1999.

Chapter One: Commercially-Produced Money

Let's start by asking the first of the questions identified in the Introduction about the type of money we know best: a typical national currency. Many people will be surprised that the answer to the first question "Who creates it?" is not "the government", or "the country's central bank", but "the commercial banks". Yet there is no conspiracy to hide this fact. In his well-known economics textbook, David Begg states: "Modern banks create money by granting overdraft facilities in excess of the[ir] cash reserves" 7. He adds: "Bank-created deposit money [the money that people can draw from their bank accounts] forms by far the most important component of the money supply in modern economies."

Dishonest goldsmiths

So how did money creation come to be privatised? This query takes us back to the late Middle Ages when gold and silver coins were the main form of money. During this period, if anyone obtained a large amount of coins (more than they felt safe with) then they would deposit them with the local goldsmith, the only person in the area with a reliable strongroom or safe. The goldsmith would give a receipt in exchange. The oldest surviving British record of money being deposited with a goldsmith is dated 1633.8 Initially, depositors called at the goldsmith's to reclaim their coins whenever they wanted to make a payment, but as time went on some of them found it more convenient to transfer the goldsmith's receipts instead. Thus, by 1670, receipts frequently had the words 'or bearer' on them as well as the depositor's name. As coins were heavy and risky to carry around, the new receipts quickly became the preferred method of settling bills.

Shortly afterwards, the goldsmiths would have noticed that they had many coins in their vaults which were never taken out. History doesn't record the name of the first goldsmith who was both smart and dishonest enough to realise that, as it was unlikely that all his customers would present receipts and demand their coins at once, he could make money by lending out a proportion of the coins entrusted to him and charging the borrowers interest on them. Indeed he might not actually have to part with any of the coins at all because if he gave borrowers receipts with which to make their payments (instead of cash), it would be rare for those who had received the false receipts to bring them in and ask for real money. However he had to decide how many such receipts he could issue without being found out if receipt-bearers did actually want to collect coins in exchange. If several receipt-bearers came in a short period, and there wasn't enough gold and silver money in his safe to pay them, he'd be disgraced and forced out of business.

This piece of sharp practice by a long-dead goldsmith laid the foundations of modern fractional reserve banking, the system under which banks maintain reserves of coins and notes in their vaults worth only a fraction of the cash they would have to provide if all their customers came simultaneously to demand the money they were entitled to withdraw. . The goldsmith had created purchasing power (in other words, money) by issuing receipts that, in total, involved him in promising to pay out more gold and silver money than he had in his safe. Modern banks create money in the same way, by promising to pay out more paper notes and coins than they possess.

How banks create money

Begg explains how modern banks create money in the following way. He assumes that there are ten banks, each trying to maintain its lending at the point at which the amount of cash held in reserve in its vaults, or with the central bank, is equal to 10% of the amount that its customers could draw out from their accounts. The total amount that account-holders could withdraw (in other words, the bank's liability to its customers), not only consists of their deposits, but also of any loan and overdraft facilities that they may have been granted but which they have not yet drawn upon.

If one of the ten banks receives a lodgement of £100 in cash, both the amount of notes and coins it holds in its safe, and the total of its liabilities to its customers, rise by that amount. However, the bank's liability-to-cash-reserve ratio is no longer the 10:1 it wants to maintain. It has £90 too much cash and if it increased its liabilities by lending £900 to its customers, its desired ratio would be restored. But should it make the £900 loan? What would happen if the person granted the new overdraft drew all £900 out as cash and spent the money in businesses that deposited their takings in rival banks? In this case, the bank's liability-to-cash-reserve ratio would be greater than 10:1 and there would be a risk that the bank might be unable to cash its customers' cheques if an unusual number of them came at the same time, perhaps just before Christmas when a lot of cash enters circulation.

The only safe course for the bank to take is to lend out £90 rather than £900. Then, if the entire amount gets withdrawn as cash and ends up in other banks, its cash reserve ratio will still remain within the desired limit. In his explanation Begg assumes that the £90 is withdrawn and spent in such a way that all ten banks have an equal amount (£9) deposited with them. He could have equally, and more plausibly, assumed that it ended up with the banks in proportion to their size. No matter, the outcome would have been the same. If each bank now lends out 90% of whatever deposit it has received, that will create further deposits throughout the banking system. And if 90% of that money is lent out too, through as infinite number of lending rounds, then the banking system as a whole (rather than the bank which received the initial deposit), will have generated £900 in loans. This occurs just on the basis of the original reserve surplus of £90 in cash. In other words, the original £100 cash deposit allows the ten banks to increase their loans to the public (and hence the money supply), by £1,000.

Click here to read BOX 1: How the Bank of England controls the money supply

So the answer to question one, "Who creates money?" is that almost all of it is created by commercial banks, although, as Box 1 explains, central banks limit the extent to which they are able to do so. Most people find this answer quite staggering. Even bankers do. Lord Stamp, a director of the Bank of England at the time, commented in 1937: "The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented." As the economist J. K. Galbraith remarked:"The process by which banks create money is so simple the mind is repelled. Where something so important is involved, a deeper mystery seems only decent."10

Let's move on to answer our other questions:

Question 2) Why do commercial banks create money? To make profits.

Question 3) How do they create money? By granting loans on which interest is paid. This means that almost all the money in a country exists because someone, somewhere, has gone into debt and is paying interest on it.

Question 4) When do they create money? Whenever there is a demand for loans at interest rates above that at which they can borrow from the central bank. .

Question 5) What gives the money its value? This hasn't been mentioned yet, but the answer is purely its acceptability to other people. The value is not guaranteed. No one is standing by prepared to supply a fixed amount of something tangible in exchange (as they were in the days when paper currency could be exchanged, on demand, for a definite weight of gold). The value of modern money is constantly eroded by inflation. It is backed by nothing at all.

Question 6) Where is the money created? In the banks' head offices wherever those may be. For although decisions on individual loans are made in hundreds of bank branches around the country (and the book-keeping side of money creation is done there too), each branch works within limits and to policies set by its head office. The profits generated by the lending also flow to the head office. Places using bank-created money for trading locally can only obtain money if they are prepared to borrow it on the same terms as other bank customers, or if they can sell goods and services to the outside world to earn money that people in other communities have borrowed. The fact that there is a branch bank in the community means nothing.

A little more discussion is needed to answer the intriguing problems posed by Question 7, namely "How well does this sort of money fulfil the three functions of money?" and "What are the consequences of allowing commercial companies to create it in this rather odd way?" The first thing to note is that as bank-created money only exists because people have borrowed it, it will cease to exist if they pay their loans off. This is because when borrowers assemble the funds they need to repay their loans and lodge them with their banks, those funds cease to be available to other people to use for trading unless the bank lends them out again. The money supply therefore contracts. Consequently, people need to take out new loans to maintain the amount of money in circulation.

Circumstances could easily arise in which they would not be prepared to do so, however, and the economy could plunge into a depression. For example, suppose a crisis overseas caused exports to fall sharply. As redundancies at home increased and people lost their confidence about their future prospects, they might be unwilling to take out new loans. However, if they continued to pay the interest and capital payments on their existing debts, thereby reducing the total sum they owed, then the amount of money in circulation in the country would fall. Unless 'the velocity of circulation' of money increased (in other words, money moved from hand-to-hand fast enough to compensate for the fact that there was less of it about), then the volume of buying and selling going on in the country would also fall. Indeed, this would be bound to happen at some point when the rise in the velocity of circulation of the money became unable to counteract the diminishing supply. There is nothing remotely contentious about this. After all, it is the reason why central banks put up the interest rates at which they lend to commercial banks at the first sign of inflationary pressure. By doing so borrowing is cut, the money supply is reduced (or at least its growth is moderated), and excessive demand is reduced.

Moreover, even if the velocity of circulation did increase to make up for the fall in the amount of money, the ability of businesses to make profits would be reduced. Profits are recorded by businesses that have more assets at the end of a year than at the beginning. These assets can either be goods (finished stock, work-in-progress, raw materials, capital equipment) or cash and accounts receivable. If the amount of money that businesses have in their bank accounts and on their premises falls because the money supply has been reduced, the value of their other assets has to increase by more than enough to offset these falls if profits are to be made. But if firms place tight limits on the amount of raw materials and finished goods they carry in stock, and on customer credit (usual measures taken when their bank accounts are low) they will find it impossible to make profits. Many businesses will start to run at a loss. As a result, few will carry out investment projects the following year. Instead, rather than expanding, firms are likely to attempt to restore their profits by reducing staff. Job losses will become widespread, not just in the companies that would have built and equipped the new developments had the investments gone ahead, but also in the firms that would have invested themselves.

Against this background, the public's aversion to further borrowing will grow especially as, with reduced earnings, many people will be having problems servicing their existing loans. "Neither a borrower nor lender be" will become a popular maxim again. Even those with money to spend won't rush to do so in view of the uncertainty of the times and the fact that because firms in distress will be cutting their prices, anyone with money will be able to purchase whatever they need more cheaply later on. This reluctance to spend will slow the circulation of money, effectively reducing the money stock even more. A severe depression will develop, exactly as happened in the 1930s and for the very same reasons.

Fundamental problems

Creating money on the basis of debt therefore makes the economic system fundamentally unstable. The system is always balanced on a knife-edge. If bank customers borrow too little, the economy moves into recession and, unless corrective action is taken, the positive feedbacks just discussed (such as people's natural reluctance to borrow and spend) will kick in and produce a catastrophic depression. Indeed, the main reason that a serious depression has not developed in Western Europe and North America since the 1930s is that semi-automatic corrective mechanisms have been unwittingly incorporated into the system. One of these, unemployment pay and the social welfare system generally, has been a particularly important means of preventing crashes. It has ensured that, whenever the rate of joblessness has increased, larger amounts of money have automatically been transferred to the people who spent all of it immediately. This is a very effective way of compensating for the loss of spending power. Another corrective mechanism is that whenever the economy has turned down, many people and firms have been forced to increase their bank debts involuntarily, simply to survive. This has increased the money supply to everyone else. However, if an economic shock was sufficiently severe, these twin buffering mechanisms would be overwhelmed and a serious depression would develop.

Another fundamental problem with the debt method of creating money is that, because interest has to be paid on almost all of it, the economy must grow continuously if it is not to collapse. Perhaps the best way of explaining this is to use the question asked when gold was the main currency. Since the gold being borrowed did not increase itself and very little was being mined, where was the extra amount of gold to come from to pay the interest when both principal and interest had to be paid at the end of the year? Obviously, as borrowers could only obtain the extra gold they needed by bringing about situations in which others had less, lending money at interest necessarily meant that borrowers either had less gold themselves after paying interest, or that they had impoverished someone else. As either outcome was socially undesirable, both the Roman Catholic Church and Islam condemned usury - all forms of money lending at interest no matter how low the interest rate - as immoral.

Just because we now use paper currencies doesn't mean that the problem of "where is the interest to come from?" has disappeared. Borrowers can only obtain enough money to pay their interest bills without reducing the amount of money in circulation if they, or other borrowers, borrow an adequate amount more. As a result, under the current money creation system, the amount of money in circulation has to rise, year after year, by a sum at least equivalent to the amount being removed from circulation by the banks as a result of interest payments. The amount removed is equal to the profits left to the banks after they have paid dividends to their shareholders in the country concerned, invested in new equipment and premises and met all their wages, salaries and other operating costs there. These profits will be held in accounts in the banks' own names and unless they are put back into circulation (by being spent or lent), the amount of money in circulation will fall. As a result, the business sector will show a loss and cut back its investment and borrowing, thus pushing the whole economic system into decline. The only thing to prevent this from happening would be that, by chance, the country's foreign earnings or capital inflow rose by enough to compensate for the interest lost.

The fact that the amount of money in circulation usually has to increase each year to enable interest to be paid means that the total value of sales in the economy has to go up too if the ratio of the money supply to the volume of trading is to stay constant. The required increase in sales value can come about in either, or both, of two ways: inflation and expansion. If there is no increase in output during the year, the increased amount of money in circulation could simply push up prices, or allow firms to increase them. This inflation would provide businesses with enough additional income to pay their increased interest bills. The alternative is that the output of the economy grows by enough to require the monetary increase. This is the expansion. Of course the most likely outcome is a combination of inflation and expansion to restore the balance between the value of trading and the value of money.

This analysis means that, due to the way money is put into circulation, we have an economic system that needs to grow or inflate constantly. This is a major cause of our system's continuous and insatiable need for economic growth, a need that must be satisfied regardless of whether the growth is proving beneficial. If ever growth fails to materialise and inflation does not occur, the money supply will contract and the economy will move into recession. Politicians naturally do not want inflations and recessions occurring during their periods in office so they work very closely with the business community to ensure that growth takes place. This is despite the damage that continual expansion is doing both to human society and the natural world.

The impossibility of perpetual growth

Continuous economic growth is impossible in a finite world. True, some people believe that growth can be made environmentally harmless ('angelized' to use Herman Daly's term) by being stripped of its energy and natural resource content, so that it is capable of being continued indefinitely. But this is a pipe dream. The energy and resource content of many activities can certainly be reduced so that we can increase them without increasing our environmental impact but that impact cannot be reduced to nothing. Sooner or later, angelizing efforts will reach a point at which the amount of energy and other resources saved by further improvements in technology have become minimal. This will make further significant increases in the volume of production impossible without causing additional environmental damage.

So could growth continue endlessly if it was the value of production that increased, rather than its physical volume? Technological optimists suggest that people might be prepared to pay more for goods and services of superior design or performance but the same resource content. But even moving everything up-market has its limits. After a time consumers would be unhappy paying extra for increasingly minor improvements.

No part of the economy has been angelized already, not even parts of the service sector. Indeed, once the inputs required (vehicles, buildings, copying machines) are taken into account, this sector might not be much less environmentally harmful than many industrial activities. "That most services require a substantial physical base is evident from casual observation of a university, a hospital, an insurance company, a barber shop, or even a symphony orchestra," Daly says.11 In any case, who would want angelized growth if it was not required to keep the economic system from breaking down? It would certainly do nothing for the poor, as Daly points out: "If the ... expansion is really going to be for the sake of the poor, then it will have to consist of things needed by the poor - food, clothing, shelter - not information services. Basic goods have an irreducible physical dimension." 12

The fact is that, if we want to build a sustainable economic system, - one that has the potential to continue unchanged for hundreds of years, without consuming the social and environmental resources it needs to operate - we have to give high priority to scrapping a money supply system that collapses if it is denied continuous expansion and not permitted to inflate. Sustainability requires a money supply system that can run satisfactorily if growth stops. Consequently, we need to add an eighth question to our list: "Is this money supply system compatible with the achievement of sustainability?"

We can now sum up the performance of the present dominant form of money by answering the last two questions:

Question 7) How well does bank-created money work?

A. As a means of exchange? Since the end of the First World War, it has been extremely rare to have long periods in which the supply of money has been just right for the volume of trading. Either too much money got into circulation and inflation threatened, or too little, resulting in recessions or even a depression. Governments and central banks have devoted a great deal of effort to trimming the monetary controls and, because of the long response times before the results of their adjustments appeared, they were very likely to over-correct. A money supply system should be fundamentally stable rather than fundamentally unstable as this one is.

Money supply increasing faster than incomes
Britain's M4, the supply of money created by commercial banks plus the amount of notes and coins already in circulation, has grown by twice as much as the country's national income since the early 1980s. The only part of its money supply on which no interest is paid, the notes and coins, has fallen from 7.4% to 3.6% of the total supply in the same period.

B. As a store of value? Since 1918, most of the attempts to control the money supply have been intended to enable the monetary unit to serve as a reasonable store of value by preventing, or rolling back, inflation. These efforts were not notably successful and resulted in frequent large fluctuations in the value of one national currency in relation to another, within the space of a few weeks.

Fluctuations of the Dollar against the Pound
The exchange rate of the dollar in terms of sterling is now so unstable that it is of little use when planning for the future.

A good store of value?
British consumer prices have gone up by over 600% since 1974.

Safe for One's Savings?
For most of the 42-year period between 1935 and 1977, anyone hoping that investing in shares would enable their savings to keep pace with inflation was likely to be disappointed.

The record is poor even in terms of what a currency unit could buy within its national borders. The best that money-holders have come to expect within the past decade has been a loss of purchasing power of 3-4% a year. The reason for this gentle, but appreciable, decline is that monetary functions A and B conflict. Thus, if a central bank ever ensures that the store of value function is maintained perfectly, too little money gets into circulation to provide easy trading conditions. This causes profits to decline, investment to fall and the rate of unemployment to rise. Monetary supply management is therefore reduced to securing the least-bad compromise between two incompatible objectives.

C. As a unit of account? The record here is poor in two respects. One is that, because inflation has had to be allowed to take place continually (to enable there to be adequate supplies of the means of exchange), it is difficult to make meaningful comparisons between financial results several years apart. The usual method is to convert them all to a common unit (1990 pounds, for example). These conversions are not always simple to make because the prices of various components of output, or cost, will almost certainly have changed by different percentage amounts. Even comparing one year's results with the next can be misleading. As a result, retail businesses' annual reports frequently correct a year's sales figures for price changes before comparing them with those of the previous year.

A more fundamental, and serious, problem with the use of modern money as a unit of account is that, as its value has no fixed, guaranteed relationship to anything tangible, it can lead to a gross misuse of resources. Cost-benefit analysis, a technique widely used to compare alternative ways of achieving the same objective over a period of time, shows this well. Suppose the objective is to meet an increasing demand for electricity. For instance, in Finland, two alternatives for meeting an increased demand for electricity were being compared in 1999. The first was to build another nuclear power plant. The second was to employ people to turn the waste wood left in the forest after timber extraction into wood chips to be burnt in combined heat and power plants.

The costs and benefits of these alternative solutions naturally occur at different times in the future. For example, the nuclear plant would require very heavy spending in the ten years it would take to build. For 30 years after that, however, the operating costs would be very low and the benefits, in terms of the power produced, high. But after closure, the benefits would stop while the costs of dismantling would continue for over a hundred years and the costs of safe waste storage for centuries. The wood waste alternative would involve less capital investment and give a more rapid start to the flow of benefits but because of the wages of the workers involved, it would have much higher annual operating costs for as long as power was produced.

Analysts attempt to compare such projects by calculating for each cost and benefit the sum of money which, if invested today, would grow to be equivalent to the estimated amount of the cost or benefit in the year in which it occurs. These sums are known as the 'present values' of the benefits or costs. Analysts add up all the present values of the costs of a project and deduct them from the total of the present values of all the benefits. The project that has the greatest surplus of benefits over costs is the one they recommend for adoption.

The interest rate at which the money invested today is assumed to be able to grow is obviously crucial to the outcome of these calculations. Many firms use a rate of 10% which means that a benefit of £10 million in 25 years' time has a present value of only £1 million today while£10 million in year fifty is worth only £100,000. In other words, at such an interest rate, the costs of dismantling the nuclear station and storing its waste indefinitely have almost no impact on the result of the calculation. So projects that deliver their benefits soon and their costs far into the future always win. The mathematician, Colin Clark, was able to show this in a famous article.13 He worked out that it was economically preferable to kill every blue whale left in the ocean as fast as possible rather than to wait until the population of the species had recovered to the point at which it could sustain an annual catch. With the nuclear power example, it is even conceivable that dismantling the station and disposing of its waste might consume more energy than the plant gave out during its operating life, but that a cost-benefit analysis wouldn't reveal this.

That's why we need a money that acts as a proper unit of account. Present value calculations are only possible because our money means nothing. If, instead of pounds sterling, the unit of account for long-period calculations represented kilowatt-hours of electricity or even blue whales, people doing cost-benefit analyses would not be able to blithely reduce the value of costs and benefits arising years in the future in the cavalier way they do. To be a satisfactory unit of account, a money has therefore to represent something of real and lasting value. Its value cannot be set, as is modern money's, on an infinitely compressible scale. The values that a good unit-of-account currency might represent are discussed in Chapter 4.

Question 8: Is the money supply system compatible with sustainability? No, because it requires the value of production to rise constantly if the ratio of debt to output is not to build up and create loan-servicing difficulties that might possibly tip the economy into depression. Only economic growth can maintain the debt-to-output ratio on a permanent basis, while simultaneously allowing investment to continue, and thus avoid the crisis that would follow if investment stopped. However, as we discussed, continuous growth is incompatible with a sustainable world.

A second reason for regarding the current money supply system as a barrier to sustainability is that, as it is an inadequate unit of account, it is difficult, if not impossible, for the economic system to allocate resources properly between present and future uses.

Click here to read BOX 2: Why does our present money system lead to a long-term misuse of resources?

The problems with the present system of money creation can be summarised as follows:

  1. The system creates a highly unstable economic climate.

  2. The system requires continual economic growth if it is not to collapse. It is therefore incompatible with sustainability.

  3. The system is pre-disposed to competition rather than co-operation as, with a limited amount of money in circulation, people and firms have to compete for it in order to survive.

  4. The system's money is created outside the communities in which it is used. So money has either to be earned by the export of goods and services from those communities, or borrowed by them. This undermines local self-reliance.

  5. The money supplied by the system is not created by the users as, and when, it is needed. Instead, it is created for them by profit-seeking organisations whenever the central bank thinks that inflation is under control. Shortages that prevent people meeting their needs can therefore arise.

  6. The money created by the commercial banks does not represent anything real. Thus, an economic system based on its use is an ineffective way of allocating resources in short supply between current uses and those likely to arise in the future. A money system should be developed that represents the world's most critical scarce resource at the present time. People's natural, and constant, efforts to save money would then automatically involve them in saving the resource.

Chapter Two: People-Produced Money

If an economic system is to move towards sustainability, and to maintain it once it has been achieved, it needs to establish what is the scarce resource whose use it seeks to minimise. Then systems and technologies can be adjusted to bring the least-use solution about. Unfortunately, the present economic system regards money as the scarce resource when, as we have seen, it can be created at will by a few account entries. The idea that money is the scarce resource is a relic from the days when money consisted of gold and silver coins. At that time, the world was essentially on an energy standard because the amount of gold produced in a year was determined by the cost of the energy it took to extract it. If energy (perhaps in the form of slave labour rather than fossil fuel) was cheap and abundant, gold mining would prove profitable, and a lot of gold would go into circulation enabling the economy to expand. If the increased level of activity then drove energy prices up, the flow of gold would decline, slowing the rate at which the economy grew.

Gold was often a people-produced form of money, rather than a governmental or commercially generated one. Theoretically, it was possible for anyone to pan for it in a stream or sort through a bed of gravel containing nuggets, thus converting their time and energy plus some bought-in supplies, into something exchangeable for goods and services all over the world. Gold rushes were all about the conversion of human energy into money. They were, and are (as the thousands of ordinary people mining in the Amazon basin show), a democratic form of money creation. Obviously if supplies of food, clothing and shelter were precarious, people would never devote their energies to finding something that they could neither eat, nor live in, and which would not keep them warm. In other words, gold supplies swelled whenever a culture was producing a surplus. Once there was more gold about, the use of the precious metal as money made more trading possible and thus catalysed the conversion of whatever surpluses arose in future years into buildings, clothes and other needs.

There are plenty of historical accounts of this type of conversion. Before transport systems improved and money became widely available, rural people in many parts of the world had a potential surplus in the form of spare time. They could have easily increased their agricultural, construction or craft output, but didn't do so as there wasn't a market for the extra produce. Instead, they used some of their surplus by helping their neighbours through mutual-aid systems that they used like banks, confident that they would be repaid. "The giver, by giving, guaranteed that he would be the receiver in the future" Hugh Brodie writes in his study of Irish rural life.14 He continues: "In that way, the giving of surplus to friends and neighbours is not very far from the giving of surplus to the cashier in a bank. The quality of integrated society, like the legal rules of banking, guaranteed that the gift would not be forgotten and a future claim ignored." But when money became available and the surplus could be converted to it, people saved actual cash for a rainy day rather than storing up favours with their neighbours.

Creating currencies from unused resources

Rather than converting a surplus into gold to use as money, the inhabitants of a group of islands in the Pacific Ocean converted theirs into carved stones to use as currency. According to Glyn Davies' mammoth study, The History of Money :15

The peculiar stone currency of Yap, a cluster of ten small islands in the Caroline group of the central Pacific, was still used as money as recently as the mid-1960s. The stones known as 'fei' were quarried from Palau, some 260 miles away, or even the more distant Guam, and were shaped into discs varying from saucer sized to veritable millstones, the larger specimens having holes in the centre through which poles could be pushed to help transport them. Despite centuries of at first sporadic, and later more permanent, trade contacts with the Portuguese, Spanish, German, British, Japanese and Americans, the stone currency retained and even increased its value, particularly as a store of wealth.

Davies adds that shell necklaces, individual pearl shells, mats and ginger supplemented the stone currency but quotes from a book published in 1952 when fei were still in use, to the effect that the stones were "the be-all and end-all of the Yap islander. They are not only money, they are badges of rank and prestige, and they also have religious and ceremonial significance."16

It is often said that gold makes a good currency because of its 'intrinsic value' but this is nonsense. Gold is no more or less intrinsically valuable than hundreds of other commodities. True, it is an attractive metal that doesn't tarnish, but satisfactory substitutes can be found for most of its uses. Fundamentally, it has no greater intrinsic value than did the Yap islanders' stones or any of the other many things that people have used as a base for their money systems. These have included salt, silk, dried fish, feathers, stones, cowrie shells, beads, cigarettes, cognac and whisky, and livestock. - The word "pecuniary" comes from "pecunia," the Latin for "cow" and "fee" is a corruption of the German word "Vieh," meaning cattle. In 1715, the government of North Carolina declared seventeen commodities, including maize and wheat, to be legal tender.

In ancient Egypt, grain was the monetary unit. The farmers would deposit their crops in government-run warehouses in return for receipts showing the amount, quality and date. These stores suited the farmers because they protected the grain against theft, fire and flood and also saved them the cost of providing their own storage facilities (or selling their crop immediately after harvest when prices were low). The stores also enabled them to pay their rent and to buy goods simply by writing what was effectively a cheque, to transfer grain from their account in the store to that of someone else. People using another grain store in another part of the country could be paid with these cheques. The various stores would balance out their claims against each other just as banks do today. This meant that the grain would only be moved if there was a net flow of cheques from one area to another and if it was actually needed there for consumption. In other words, the weight of corn was merely a basis for accounting and the corn itself was not a standard barter good.

Tobacco stores in the New England states operated in much the same manner and enabled the crop to serve as legal tender in Virginia and Maryland for almost two hundred years. As Galbraith points out 17 this was longer than the gold standard managed to survive. An important feature of both grain and tobacco as currencies was that whoever made a deposit was not only charged for keeping it in the warehouse but knew that it would deteriorate there. Consequently people used the commodity themselves, or spent the receipts, as soon as reasonably possible. As a result, money was not hoarded but circulated well.

Shell money performed well

The earliest account of the use of wampum (the shells of a clam, Venus Mercenaria) as money in North America dates from 1535. Both native Americans and the European settlers used the shells and they were made legal tender for payments of up to a shilling in Massachusetts in 1637. This limit was raised to £2 in 1643, a substantial sum at the time as it was equivalent to three week's wages for a skilled man. Although wampum ceased to be legal tender in the New England states in 1661, the last factory drilling the shells and putting them on strings for use as money closed as late as 1860. In the early days, several coastal tribes such as the Narragansetts specialised in making up the strings and exchanging them for goods with settlers and inland tribes who wished to have the convenience of a means of exchange.

The essential feature of all these commodity currencies is that they were open to anyone with time and access to land or seashore to produce. This didn't mean, however, that they could be produced without cost and that the money supply was therefore unlimited. If that had been the case, the monetary unit would have had no value. The currencies worked because people would only spend their time making tokens to serve as money if that was the best way of satisfying their needs. In other words, whenever they could get their needs (food, clothing, shelter) more easily by growing them or collecting them themselves instead of growing tobacco, or collecting wampum shells to trade, they would obviously do so. As a result, money was only produced and spent into circulation when its exchange rate with real goods was favourable, a feature that generally guaranteed that it would maintain its value. There were exceptions to this, of course. The value of gold in terms of the goods it would buy fell in Europe when the Spanish conquistadors brought in plundered supplies from South America. Similarly, the exchange rate of wampum against commodities such as beaver pelts dropped sharply when the European settlers began using steel drills to bore the stringing holes. This was because they could produce them much faster (and therefore with a reduced opportunity cost), than the Indians using stone-tipped tools.

Click here to read Box 3: Businesses organise their own currency to overcome money drought

A non- commodity currency

Although the value of their units is not based on any commodity, Local Exchange and Trading Systems (LETS) are a modern equivalent of wampum and the other types of popularly-produced money because they enable people to create spending units for themselves. They are generally set up by a group of people living in the same area who have time on their hands and too little national currency to meet their requirements. The first system was set up in the early 1980s in British Columbia by Michael Linton as a response to the unemployment caused when a local air base closed down.

Between 1-2,000 communities throughout the world have LETS systems and many variants on the original model have been developed. The common feature of every LETS, however, is that members trade with each other using a monetary unit of their own devising (often called odd names like Hags, Bats, Bobbins and Reeks) and that records are kept of all transactions. This makes it possible to spot members who are taking more value out of the system than they are putting in.

In a LETS system, members create spending power by going into debt, just as with WIR (see Box 3). When a system starts up, all the participants have a zero balance in their accounts. The first trade between members means that the balance in the account of the member who made the first payment becomes negative, while the account run by the member who supplied goods or services in exchange for that payment becomes positive by the same amount. The member with the positive balance can then spend these units with other members, while the member with a negative balance will have to supply goods or services to someone else in the system to return their account to zero, or to get into the positive zone.

In most cases, payments between members of a LETS system are made using cheques that are then sent to the system's book-keeper who credits and debits accounts. In some systems, however, payment information is simply telephoned to the book-keeper or their answering machine. In a few systems, fixed-value tokens (i.e. scrip) circulate between members to cut out the book-keeping that would be entailed by a lot of small cheque transactions. Just as happens with national currency, members get these tokens from their system's bank and their accounts are debited with the amount involved. If members earn tokens they don't want, they can lodge them to their accounts for credit. The use of scrip is very common among LETS systems in Argentina.

Perhaps the best system for keeping LETS accounts evolved in Germany in 1997. In exchange for their annual membership fee, members receive a record book. When they go to work for another member, or sell them something, the other member writes the details and the amount of the transaction in their book, and signs it while they write in the other member's. This means that the balance of each member's account is constantly up dated. The record books are exchanged for new ones at the end of each year and they are checked by the managing committee to ensure that no fraud has occurred.

LETS systems' major weakness

Besides eliminating centralised account keeping, the German-style record books have the potential to ameliorate a major weakness in most LETS systems. Linton's original philosophy was that it should be left to each member to decide how much indebtedness they could take on. If other members, knowing the state of the member's account, then sanctioned the decision to take on more dent by selling him or her more of their goods and services, that was all right.

This has not worked well, however. Indeed, a major factor in the collapse of Linton's pioneering system after a few year's trading was the high level of indebtedness of Linton's personal account. Nevertheless, many systems have continued to adopt this approach. True, some do impose credit limits but none seems to have found a satisfactory way of ensuring that members do not stay permanently in deficit. As a result, members whose accounts are in credit frequently find their units are difficult to spend because indebted members see little reason, apart from mild group pressure, to go out of their way to earn them. The members in credit consequently become disenchanted with the system and leave. With the German-type record books, however, it would be a simple matter to prohibit members from selling to people whose account-books showed them to be overdrawn beyond an agreed figure. Requiring overdrawn members to get back into credit within a certain time would still be a problem though.

Because of their reliance on these lax informal controls, very few LETS systems have been able to recruit and retain more than 200 active members. This has meant that their economic effects have been small but they nevertheless play a very valuable social network-building role for people on the social and economic fringes of their communities. Bigger, more economically effective systems would require legally enforceable agreements backed by collateral, similar to those adopted by WIR.

By allowing people to trade using monetary units they have generated themselves, LETS systems meet the need that wampum strings, or wheat deposit certificates, met in earlier times. But there are important differences. For example, wampum shells allowed their holders to trade beyond their communities, while LETS systems are used to enable people to trade within them. In addition, LETS systems, like the WIR, have no need to establish the value of their unit by requiring people to do a certain amount of work to produce them. They normally use the value of their national currency unit as their measuring stick, although some systems have experimented with units based on time (for instance, Time Dollars, a community currency system in which people provide each other with care in which everyone's hourly rate is the same ). ). This saves the effort that has to be wasted on producing, (in the case of gold, Yap stones and wampum), commodities that would be unnecessary but for their monetary use. The downside, however, is the fact that indebtedness levels need to be policed, as we have just discussed.

So let's answer our eight questions about popularly produced currencies:

Question 1) Who creates the money? - With the commodity-based currencies, anyone with time and access to resources. With LETS and WIR, it is the members.

Question 2) Why do they create money? - To facilitate their own trading.

Question 3) How do they create money? - With the commodity-based currencies, by producing tokens which embody a fixed amount of labour and resources. With LETS and WIR, by granting each other the right to borrow up to a certain amount. No interest is charged on these borrowings. Only a service charge to cover the costs of running the system is paid.

Question 4) When do they create money? With the commodity-based currencies, whenever it is more advantageous to produce more currency than to produce other goods and services. With LETS, whenever a member wishes to trade and other members, or the committee, allows them to create the units to do so. With WIR, whenever the management thinks that the demand for loans can be satisfied without putting too much extra spending power into the system. If the latter happens then members with positive balances in their accounts will be reluctant to accept more Wir as they cannot find attractive ways of spending it.

Question 5) What gives the money its value? With gold, Yap stones and wampum, purely their acceptability to others. Their exchange value for other commodities or labour is not guaranteed. Wheat, tobacco and other consumable commodity-based currencies are backed by the amount of the commodity the receipt represents. Their exchange value for the purchase of other commodities will fluctuate quite widely from year to year, according to relative growing and harvest conditions. With LETS and WIR, the value of a unit is determined by the readiness of other members of the system to provide their goods and services in exchange for it at its nominal value in the national currency. The range of goods and services available in exchange is also a consideration.

Question 6) Where is the money created? Within the group of people or the territory using it. It does not have to be earned or borrowed from outside first.

Question 7) How well does the money work?

A. As a means of exchange? Gold does not work well as a means of exchange unless it is turned into coins, something that is discussed in the next chapter. Moreover, the supply of coins has often been inadequate for the amount of trade desired, forcing people to barter, or use a range of gold-substitutes. Yap stones seem to have played the role of large denomination notes, only useful for major purchases, which is why mats, ginger and shells were required as small change. Wampum strings were designed to make counting easy and obviously performed well since they survived in use in competition with other currencies for hundreds of years. The Egyptian grain and the New England tobacco receipts also worked well and sophisticated money transfer systems developed for them. It would, however, be a mistake to establish commodity-based currencies in economies that were not dominated by the production of that commodity and that were consequently not prepared to allow all price relationships to vary according to its level of production. LETS units perform poorly as a means of exchange because of the lack of pressure on those in debt to earn them. Their use is also restricted to a small group. Wir are better than LETS but still work significantly less well than the Swiss franc, as they are only acceptable among a particular group. As a result, users frequently want to exchange their Wir for Swiss francs and, breaking their system's rules, sell them at a discount to do so.

B. As a unit of account? Only the Wir scores highly here. It functions as well as the Swiss franc since, unless a firm wishes, there is no need for it to distinguish between the two in its books. LETS units are never worth as much as the national currency they shadow, and the gap between the two is variable (depending on a system's membership and its attitude at the time). The gluts and shortages caused by differing harvests, gold rushes and technological change mean that the value of the commodity-based currencies in terms of other goods and services is too erratic to provide a good accounting base.

C. As a store of value? Gold proved an excellent store of value between 1658 and 1798, fluctuating by no more than a third during this time. The discovery of the cyanide method of extracting it from crushed rock in 1887, coupled with major finds between 1847-97 increased production enormously. This damaged it as a store of value. The world's gold stock is estimated to have doubled between 1890-1914 allowing prices in Britain to rise by 25% during this period, and in the US by 40%. Doubtless if powered equipment had been used it would have lowered the value of Yap stones too, and as we have already seen, steel drill bits devalued wampum. All commodity-based currencies have the defect that their value will fall if the commodity on which they are based becomes cheaper to produce. The Exeter Constant19 was an experiment currency used in New Hampshire, in the US, for a year in 1972-3 whose value in dollar terms was based on the current market price of specific amounts of thirty commodities. It would have lost almost 20% of its purchasing power in terms of other things between 1990-99 because of the rate at which commodity prices have fallen. LETS units are a hopeless store of value, since one cannot predict if the system will still be in operation in a few years. Like LETS, the Wir is also money that should be spent quickly, although it holds its value reasonably well from year to year. The drawback with it as a form of saving is that, as no interest is paid on accounts in credit, people with a lot of Wir usually want to convert them to Swiss francs to take advantage of the much wider range of investment opportunities in that currency.

Question 8) Is popularly produced money compatible with sustainability? Yes, in all cases, because the availability of these monies only increases when the systems in which they operate have underused resources, particularly those of human labour. In other words, these monies tend to keep the level of economic activity in step with its technological and resource base. And, because these monies are spent into circulation, the constant payment of interest on almost all the money stock entailed by the present system is avoided. This means that the economic systems they would produce would not depend on continual expansion in order to avoid a collapse.

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