So moving toward a just, sustainable and resilient economy will require rethinking our money creation rules.
Alternatives
There are three major alternatives to the present system; money based on the value of goods produced, central government control of the creation of seigniorage money, and a system based on the mutual money system described at the beginning of this paper. Strengths and weaknesses of each of these possibilities are as follows.
While money based on gold or other precious metal has intrinsic value based on the work to mine, smelt, and coin it, its use as money has two major counter indications. First, as noted earlier, the amount of money in circulation is necessarily based on the amount of physical commodities available for trade. Services have no physical residue that can be used as money. It is therefore not feasible to regulate the money supply so that an appropriate amount of money is available for necessary trade.
In addition commodity money has shown itself to be prone to manipulation by those who control the supply of precious metals, and for this reason is not in the best interest of a democratic society.
Assuming that we want a money system that is capable of money supply management, two basic alternatives are left. The first is to have some government or not for profit agency create and manage the money supply. This was done by the individual American Colonies before the War of Independence, by the Colonies to wage the Revolutionary War, and again by President Lincoln with his Greenbacks to wage the Civil War. It was also done by towns and private groups during the 1930's depression when there was a shortage of dollars.
This history has shown that such initiatives work, but have downsides. To the extent that the money created by Government fiat is used to provide services to the citizens in its territory, it adheres to the principle of fulfilling its commitment to its effective issuers, the citizens. However if the central monetary authority is not democratically managed with the best interest of the citizens as its primary directive, the monetary authority can abuse its position, for instance spending on itself, on citizen control and on imperial projects.
This alternative is also open to subversion as happened after the Civil War, when the private for-profit banks, which had been left in place, saw to it that Lincoln's Greenbacks were recalled and the private bank's control of the financial system was again put in place.
The second alternative is to completely reinvent the monetary system as a not-for-profit service to the market under credit clearing rules. The downside of this alternative is that since it is a complete reinvention of money, the transition/replacement process is more involved. However with this alternative, central management becomes less of an issue. Money creation decisions are made democratically at the level where the money is to be spent, whether it be local, regional, or national.
For this alternative to work, three prerequisites are necessary. 1) All local and regional systems are required to operate under a set of basic democratic rules, using the same units of trade. 2) Setting these basic rules is a national issue, while the creation of money is better handled by the users themselves, through their local and regional cooperative banks, with limits on money creation based on the commitments of their users. 3) A clearing house system to handle trades between local banks, as is now provided by the Federal Reserve will be required.
General considerations in developing alternatives
First we need to understand that the basic function of money is to provide a vehicle to grease the trade of time and energy between persons and groups, so that the limitation of barter; simultaneous trade of equal value for equal value, can be overcome. Other functions such as interest and making money with money are secondary, and skew the market toward those who control money.
A case can be made that the Hour is the appropriate unit of trade, as the basic driver of trade is peoples willingness to trade their time and expertise for that of others. The hour is a basic leveler of economic justice. It treats equally those who provide services, including management, and those who provide goods. While some adjustment can be made for dangerous, and highly specialized work, differences in income would have to be justified in the market.
I would propose that new money not have any interest bearing capacity. Since money is a medium for transactions, it should be left to physical investments to provide any gain, rather than having money itself provide income. In an economy where the welfare of all of the members of the society is primary, having money itself grow in value is inappropriate. Mutual credit clearing systems already do this.
There are various methods of covering the cost of administration that can be looked into. Fees for service are one method that has been tested. A small negative interest, making money depreciate, just like other commodities has been tried. Where a surplus is produced by this charge, it has been utilized for community needs chosen by the members of the community, making all of its users philanthropists.
We need to be discussing how we want our money to work, and be prototyping alternatives, so that when the next banking crisis comes, more democratic alternatives can be called on, rather than simply continuing to bail out the present banking system.
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