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February 12, 2014

The Monetary Cliff: Its the Driver behind Deficits and the Fiscal Cliff - Rethinking our Centralized Fiat Money System

By Paul Krumm

We are told that money is such a complex issue that it isn't understandable by the layman. We disagree and describe the rules of money, and their practical and moral implications, including money's instability and the immanent monetary cliff. This understanding makes it possible to consider alternative money rules that serve the market better, and that promote an economy that is stable, just, resilient, and democratic.

::::::::

Introduction

Government deficits, fiscal cliffs/debt limits and sequestration have been in the news til we get tired of hearing about them for well over a year. 

While


(Image by Paul Krumm (my self))   Details   DMCA
there have been a number of proposals to make changes in our money and financial systems to deal with these issues, there has been little or no analysis of the structure and function of the present financial system that we are working from, and how that structure has caused system instability which we will show leads to a monetary cliff.

Understanding the workings of the present system, and how it relates to other possibilities, can help us consider how alternatives might be structured so as not to require the massive deficits we now have.

First is is necessary to know something about the nature of our money.

  • While the network of money transactions around the world is very complex, the way money is structured and works is really fairly simple, and is understandable by the ordinary person.

  • Our money is simply entries in an accounting system . It is not stuff in the usual sense. Our money is simply numbers that measure who has contributed how much to the market, and who has consumed how much. Our money has no intrinsic value. We sometimes use paper representations and coins, however they are just place holders for entries in the accounting system.i

  • On another level our money is an agreement to use a specific set of accounting rules to keep track of economic exchanges . In recognizing that money is an agreement, we are open to look at the nuts and bolts -- the rules - of that agreement, to consider if they are what we want to live with, and to consider changes to those rules that would make the system serve us better.ii

  • Money is created in the process of making loans, and disappears in the process of repaying those loans. It is created as a negative entry in the account of the buyer when they make a purchase and a positive entry in the account of the seller. It disappears as the negative entry is canceled. In the meantime it is passed around between users.

  • It is trust that other users will keep their commitments that makes an accounting money system possible and workable.

  • The value of money is based on the fact that the public accepts it as a medium of trade, and the government accepts it in payment of taxes.

  • Some money systems historically have uses a commodity as the basis of money. These systems share a number of limitations, the most important of which is that the amount of money in circulation is connected to the availability of the commodity used. The limited amount of gold available was a major incentive for moving from commodity based money to the accounting money we use today. A second issue is that control of the economy simply moves from those who control the creation of accounting money to those who control the supply of gold.

  • Since money is the language of economic interchange we can't underestimate the ways in which its rules effect how we think about ourselves as we relate to other people and our environment.

Once we get our heads wrapped around these basic ideas, it is possible to begin to understand our money. Additionally:

  • We need to stop thinking of ourselves just as consumers. In order to consume it is necessary to also be a producer of goods or services. Combining these two functions, we must instead see ourselves as traders.

  • The term 'trader' has been taken over by people who only trade financial instruments for their profit without doing productive work. In what follows, the term trader will be used to describe individual and group traders in the productive market, rather than financial traders.

  • Unlike consumers, traders have power in the market both in how they earn money and how they spend it. If small traders get together and cooperate, they can become a major factor in the economy.

    Simple accounting money

    First let us look at how simple accounting money works. In simple accounting money systems, money is created by the individuals making trades. Money is created every time a transaction occurs. This is a zero sum game, and every one's balance revolves around zero. Generally, neither large positive or negatives balances are approved. Money created in this way is called mutual money.

    As an example, if I buy some thing or service with simple accounting money, and don't have a sufficient balance in my account, I get a negative entry equal to the amount I don't have. In doing so I make a commitment to bring my account back to zero by providing goods or services to others in my market/trading community. The seller gets a positive entry in their account, erasing part or all of any negative balance that they currently have, and/or increasing their positive balance. As I make sales/receive pay for work I do, I return my balance to zero, or make it positive. Rather than having a distinct loaning process, small loans/negative balances are simply a part of the operation of a balanced system.

    The commitment I make to eliminate my negative balance/debt is called seigniorage in Economicspeak. We will learn more about seigniorage later.

    Trust and trustworthiness are the glue that makes simple accounting money work. Traders have to be able to trust that other traders will keep their commitments. This requires transparency in system operation. On the community scale where simple accounting money has been practiced, transparency and community pressure is sufficient to enforce commitments. In this atmosphere, people are expected to, and expect to keep their commitments.

    In such a system, if a community sees that there would be a benefit in investing in a member or group of its members, the community can give them permission to carry a larger temporary negative balance to complete a project or buy a service or product. This has the same effect as large loans in today's economy, except that the decision of who will be given this permission, and the terms of this permission, are made by the community, rather than a bank.

    Please note that money in this system is not something that has a value for keeping as an investment. It is simply a medium for trade. Investment is made in productive assets rather than in money.

    Since money is created and canceled every time a transaction occurs, the money supply is automatically regulated by the traders in a mutual money system. Costs of accounting system operation are covered by transaction fees, by fixed recurring user fees, or by fees based on account balance. We will see next how this is different from the present situation.

    Our present money system and its history

    Our present system is not quite so simple as the mutual money described above. We will have to consider its workings and history to understand why we have deficits and fiscal cliffs.

    In the present system, the banking industry has taken over the money creation process; seigniorage. Fiat money is the Economicspeak term given to this kind of money. Instead of the trader/borrower being committed directly to the market, they make a commitment to a bank, and traders are required to maintain a positive balance in their bank account, or make a commitment to a bank.

    Banks are a special class of trader; the only ones that can create money. Anyone that wants or needs money has to 'borrow' it from a bank that creates it out of nothing (ex nihilo in Economicspeak). In return the bank receives temporary ownership of the asset being purchased.iii

    To see how we got where we are. . .

    Our banking system is a hold-over from the late Middle Ages when money was based on the value of precious metals, gold and silver. The bankers of the time - the goldsmiths - stored excess gold and silver coins and raw metal for their customers, as well as for themselves, as they had secure vaults. They issued a certificate to the trader who left gold in the vault. Traders found that it was more convenient to keep and trade the certificates rather than take out the metal when a trade was made, so the certificates came to be used as money. The goldsmiths also loaned certificates representing their gold and silver stocks, instead of coins, when traders wanted loans. They charged interest on these loans.

    Then, when there was insufficient gold and silver to operate the burgeoning economy the enterprising goldsmiths realized that they could loan out more certificates than they held in gold and silver, creating seigniorage. This worked as long as not everyone wanted to retrieve their gold and silver at the same time, and resulted in the goldsmiths becoming quite rich and powerful, creating money by loaning receipts at interest for precious metals that didn't exist.

    The work they did to manage these loans was not commensurate with their profits, so they gained phantom wealth as a result. Phantom wealth is a claim against real wealth for which nothing was produced.iv A problem was that there were times when confidence in the goldsmith/bankers was questioned, there were runs on banks, and when the goldsmiths didn't have sufficient gold to back up claims for more metals than they had, banks failed and people lost their money.

    This was the origin of our present banking system.v The system was made more legitimate when King George I of England, who wanted to start a war, and had insufficient funds, borrowed from the bankers, and made the system legitimate for paying taxes. With this act, the tally stick money that had served England previously,vi was replaced by loans from the banks, replacing seigniorage on the part of the crown to seigniorage on the part of the bankers.

    Our money continued in the same way until the presidency of Richard Nixon (with brief interludes before and during the War of Independence and during the Civil War with Abe Lincoln's Greenbacks). As time went on accounting entries far outpaced the precious metals backing the currency. During the Nixon administration the connection between the price of gold and silver, and the dollar, was totally eliminated, completing the conversion of our money exclusively to accounting entries.

    However the practice of charging interest still persists. Those who owned gold insisted that the privilege of having the use of their gold had a time value, and interest was charged as an indicator of that value. However now that money is simply accounting information, that argument is no longer valid. While a portion of interest is necessary to pay the costs of accounting and administration, interest is not a good measure of these costs.

    Fiat money is created in the loan process just as in mutual money systems. It works as follows. Lets say I want to buy a car. I go to the bank for a loan. The bank takes temporary title to the car, and based on its value, creates an entry in my account which I use to pay for the car. As I pay off the loan, the money is canceled and when payment is completed, I get clear title to to the car.

    The bankers create money (make loans) in amounts that attempt to guess the amount of money that will maximize their profit. The banking business is, after all, a for profit business. This is in contrast to the simple money system described above, where the needs of individual traders and their communities are the motivation and measure for creating money.

    As a result of this set of money rules, the banking system controls to whom, and for what, money is created. The system is enforced by the bank's control of assets pledged. A primary implication of this structure is that the whole economy is skewed by the profit motive of the banking community, especially the central bankers.

    Operating within this structure, the only products or services that get through the gate of financing, and that are also in the interest of the users of money, are those that provide profit for the banking industry. The welfare of money's users, and the health of the ecosystems on which we depend are not first priority.

    The casino

    The best way that I have found to characterize the present money system is by using the metaphor of a casino. In a casino, we have three main groups of players. First is the house, the owner of the casino. Second is a group of contract table operators and one armed bandits, which are the interface with the customers. The customers of the casino are the third group.

    In our money system, the 'too big to fail' banks and bankers are the house, local banks and ATMs are contract table operators and one armed bandits, and traders are the customers of the casino. However going to this casino is mandatory, instead of optional, if one is to pay taxes or make trades in the economy.

    Local bankers, who are the banking system interface with the public, often see themselves as a service to the public, and are seen as such, masking the results of system operation. At the same time, local bankers have to deposit reserves with the central bank, the Federal Reserve - also known as the Fed, to the tune of 5-10% of the money that they create. This initial High Powered Money is in turn created by the Fed out of nothing. In this way, the central bankers, who hold a controlling interest in the Fed, get a cut on all loans made by local banks, in addition to their direct interest income from the large loans that they make to the Federal Government and large corporations and smaller loans they make to traders who deal at their branchesvii.

    Interest is the mechanism that provides the profit for the money casino. However interest is treated differently than principal. It is not created as new money. Interest is created only as a debt to the bank making the loan. So interest has to be paid out of money already in circulation. If there is no growth in the economy, not enough money has been created for the use of the Main Street trading community to pay both principal and interest when they both come due, as m ore money is owed to the banking industry than was created.

    This set of accounting rules with central control, interest, and a for profit money creation industry, leads to a number of structural issues; some are very practical in terms of monetary stability, and others are moral implications of the basic practical issues. These results of system operation will help us understand why we are approaching a monetary cliff.

    Practical issues with interest bearing money:

    Because interest isn't created as new money, to pay it as time goes on, one or more of the following three things has to happen.

    • The productive economy has to grow continuously at an exponential rate so that there is sufficient money too pay all of the interest due to the money creation industry.

    • The money has to get worth less so that more money is traded for the same amount of goods and services (which we call inflation or an economic bubble), or

    • A number of traders on Main Street have to go bankrupt, ceding their assets to the banking sector.

    Some of the ramifications of this conundrum:

    Exponential growth

    In the simple money system described earlier, the money supply increases and decreases with the needs of its users. With our fiat money, because of the need for exponential growth, if growth doesn't occur, inflation or bankruptcies are the result.

    It must be understood that the real reason why mainline Economists insist that economic growth is necessary is that with our present money rules, the system will break down if it doesn't grow. Continual exponential economic growth is required by for profit banking with interest. With a properly designed money system, growth is not necessary.

    One of the results of this need for growth is that increasingly over time, more resources, both human and natural, have to be used as collateral for loans by turning them into commodities and monetizing them (by borrowing against their value) to keep the monetary system operational. Thus the operation of our money system drives environmental degradation as well as growth.

    Scarcity and greed

    Another result of the operation of our money system is that even if all traders try to manage their financial affairs carefully, in the long term, some have to fail. In the loan process, remember, only the principal was created as new money. No money was created to pay the interest. T his leads to an underlying dynamic of money scarcity in the productive trading community. This in turn leads to greed - taking care of Number One, even at the expense of others, and the philosophy that more is good, if you can get it.

    Scarcity and greed break down community by making a competitive atmosphere in which everyone is competing to get scarce money to pay off their loans with interest and get more stuff. Scarcity and greed, and the resulting disparities in wealth and power between productive traders and financial and money managers, are a result of interest and profit being a part of the rules of our present money system. They are not a necessary fact of life.

    Short term thinking

    In beginning Economics, students are taught about discounting the future. The argument is as follows: Would I rather have $100 today, or a year from now? If I get the money now, I can either spend it, or put it in the bank where it will draw interest without risk. If I put it in the bank, at the end of a year it will be worth more than $100 by the interest rate, say 5%. So the $100 received a year from now in this example will be worth only $95 since it didn't get interest. Therefore it is better to get my money now, than in the future.

    What is usually not inferred is that if money will be worth less in the future, it is best to think short term. Any investment that doesn't maintain its capital value and provide income greater than the interest rate will have very little value when it does pay off, because the same money could be multiplying without risk if just put in the bank at interest. Thus, a major driver of short term thinking in the corporate realm is the function of interest in the money system.

    Business cycles

    Interest is also the cause of boom and bust business cycles. In boom times, sufficient new money is created to keep up with the need for growth in the money supply to pay accrued interest. However there comes a time when growth outpaces demand, inventories expand, and banks decide not to make as many loans. At this point, borrowers don't have sufficient money to pay their existing loans to the banking system, and some are forced into bankruptcy - the down side of the economic cycle.

    While the US dollar has been immune to breakdown during downturns because of our position of having the dollar be the unit of account for international transactions, numerous countries have seen their money systems break down in the last 60 years as a result of the operation of the current money system.viii Business cycles and potential system breakdown are artifacts of our particular money rules. They are not necessary with a properly designed money system.

    Government deficits

    It is often thought that our Federal Government creates money. No. If the government wants money, and decides it needs more than Congress has decided to take in through taxes and fees, it borrows it from the banking system, by selling bonds to the Central Bank to get those funds, trading anticipated future tax income for money to use now. In more simple terms, the government makes out an IOU, and the central bankers -- the house in the casino metaphor -- use their seigniorage to create money out of thin air to pay it. The cost to the banks of these loans is minimal, and the return is guaranteed by the government. This makes them into a cash cow for the central bankers. Main street traders - us taxpayers - pay the interest on these loans, for the right to have money for our government to spend.

    A complicating factor is that if the private sector doesn't borrow enough money to maintain growth, as happens in the down side of the economic cycle, the government has to become borrower of last resort, and borrow money from the central bankers to put enough money into circulation to keep up with the exponential need for new money so the system won't break down. Again the traders on Main Street pay the interest on this money to keep the system afloat, and to have money to trade with. To expect the government to not run a deficit over the long term with our present money system is simply not an option.

    A number of economists claim that it is possible to put any amount of credit money into circulation without detriment to the economy. This is not so. What is currently being done is diluting the currency, and creating money that ends up in the hands of the banking sector as phantom wealth, increasing the wealth divide.

    The combination of these practical structural problems is the basic driver of our monetary cliff. The politician's and economist's advice in recent years for traders to borrow and spend has been an attempt to put off government borrowing and the day of reckoning when the system will break down. However we are approaching a point where interest cannot be paid, and breakdown is approaching. It would already have happened if China and other countries had not bought our deficits and the Fed had not continually created new money. But breakdown will come, as continued exponential growth is not feasible, and it is indeed a monetary cliff that we are approaching.

    Money - the moral implications

    As a society, we have not really considered the morality of our money and financial systems. Do these systems embody values that are consistent with the values necessary for democracy to thrive? A place to start is to ask what is the purpose of money in a democracy?

    I would propose that the proper purpose of money in a democracy is simply to facilitate the fair interchange of the productivity of the citizens.

    We have already defined the purpose of our present money system which is profit for its owners. The inconsistency between these two purposes is at the heart of both the monetary cliff and the violence in our society. To continue our analysis, we need to discuss at greater length several issues, and how they relate to morality.

    Interest and profit

    If we divide up - disaggregate in Economicspeak - the functions of interest, we find that a portion of it is used to create and maintain loans and cover risk. However a part of interest is profit -- unearned income. The banker is not doing work proportional to the interest charge. This unearned income/phantom wealth is a tax paid to the bank and its owners by the trader that produced that wealth. Ultimately it is a tax on the whole market, because the trader who is the borrower has to cover this cost with their earnings.ix Especially in the case of larger and longer term loans a major portion of interest is unearned income/profit.

    A note here on profit as it is normally used is also in order. Profit has different functions in different cases. In a very small business, it is the income of the owner of the business, proportional to the risk taken, and the work done. In larger businesses, it takes on a different character. In larger businesses, at least a major portion represents the value of work done by employees that is being transferred to those who control the money of the operation. In the banking industry it also represents the portion of interest over and above conservative costs of the services rendered, transferred from the borrower to the bank and its owners.

    Profit, too, needs to be disaggregated to distinguish between these two functions; productive earned income, and unearned income. This brings us to question the morality of transfer of income and phantom wealth as a result of the structure and function of the money system. It also brings us to ask how much variation in income is appropriate in a democratic society. These are moral discussions that must occur if democracy is to be a part of our future.

    Structural violence

    Our money system constitutes a form of structural violence.x Structural violence is violence that has been integrated into the laws and habits of society. It becomes so normal that it is invisible in its action. The violence of our money lies in the fact that phantom wealth is created, and that this unearned income and wealth is transferred from traders in the real Main Street market to the owners of the money/financial system.

    To be blunt, the unearned income received by the financial industry is functionally identical to the unearned income received by welfare recipients. I know that bankers (and those who live on interest payments) will rankle at being called welfare queens (or kings), however the major difference between recipients of unearned income and government welfare recipients is that the former group has plush offices and large homes, receives a much greater payment, and perceive themselves to be respectable members of the community, who have provided a real service, unlike their perception of government welfare recipients. The problem is that in providing their services, the financial industry, just like a casino, is skimming/taxing the productivity of their clients, in this case the whole economy. The result is the increasing divide between the very rich and the remaining 99.9% of our population.

    What we need to do at this point is consider what kind of welfare system we want to have, and invent it deliberately, instead of living with the inequitable extra-governmental welfare system we now have. This will require rethinking our tax system (a tax system that has been rigged by the financial system for its advantage) as well as major changes in how our money works.

    If the payments that are currently made to the financial sector, over and above conservative reasonable costs of recording and managing transactions, were reallocated to the people who produced the goods and services for that money, it would release an immense amount of energy and productivity in our economy. It would also remove the scarcity element in our money system, and begin to remove the greed motivation from the system structure and allow other motivations, such as caring for our fellows and our environment to blossom.

    I say begin, as there is another major cause that leads to scarcity and greed. This is the fact that business corporations (including the banks) have a pyramidal structure that is the same as a political dictatorship or oligarchy. The leadership in this oligarchy are welfare kings and queens in the same way that the members of the hierarchy of the financial community are.

    As money buys power in the halls of the political system, the political system also takes on the attributes of dictatorship; the dictatorship of those who control money. As Benito Mussolini famously said, "Fascism should more appropriately be called Corporatism because it is a merger of State and Corporate power".xi Maintaining a political democracy in the midst of economic dictatorships is a recipe for losing the democratic nature of the political democracy.

    Demurrage, the Economicspeak term for negative interest, reverses the problems caused by interest. When money loses its value over time, its trader/users want to get rid of it. It is better to invest money in something that will lose less than the demurrage rate, maintain its value, or even gain in value over the long term, than hold on to the money and have it loose its value. As a result, long term thinking and investing are reinforced.

The cyclical effect of interest bearing money created by hoarding during economic downturns, resulting in money scarcity, and investing money in boom times, resulting in an overheated economy, are also reversed by the use of demurrage money, which is counter-cyclical.

Trust, leadership and power

As noted earlier, accounting money rests on the trust of its users. So we need to think about the moral nature of trust, and what kinds of institutional structures are compatible with trust. This brings us to a study of relationships and decision making. We need to distinguish between two very different dynamics, which are commonly characterized as 'power over' and 'power with'.

'Power over' relationships are characterized by asymmetrical power. This power may be wielded by coercion, by manipulation, or by institutions that mandate that more power be given to one individual or group than another. At George Orwell's Animal Farm, some members were more equal than others. Institutional power, which often leads to structural violence, is an especially insidious form of 'power over'. Power over leads to fear, anger and greed. It is an unrecognized driver of the overt violence in our society today.

'Power with' relationships are symmetrical. No one person in the relationship has a unique all powerful position. The interests of all are acknowledged and taken into account in decisions. Sharing, caring and trust are characteristics of 'power with' relationships.

'Power over' is the current practice in almost all institutional relationships. Even voting in representative democracies exhibits the power of the majority, or other portion of a group necessary to elect representatives or create policy or action.

'Power with' is the standard practice in informal relationships where equality is valued. But it is found formally only in the deliberation of juries, in internally consistent forms of the Sociocratic process,xii in institutions using effective consensus and other forms of coming to common judgment. The longest term current example besides juries in Western society is the 350 year plus decision making experience of The Religious Society of Friends (Quakers). It is usual to think that 'power with' leads to anarchy on the larger group scale, however groups have learned how to institutionalize this dynamic. Sociocracy is the study of this technology.

An institution based on 'power over' cannot in the long run operate on trust. This can be seen in current monetary authorities' uncontrolled actions in an attempt to maintain the operation of the current system; protecting and bailing out the too big to fail banks at taxpayer expense, diluting the currency through continued money creation, called quantitative easing, and manipulating the gold market to stabilize the dollar.xiii In so doing, the monetary authorities are violating the trust of money's users.

Pegging the value of money

Since the value of money has been divorced from the value of any commodity, it has become easy for large players to manipulate this value for their profit. This ability does nothing to make the market more efficient, and at the same time is a mechanism for transfer of value from the productive sector to those who control system operation. If we are to continue to use accounting money, and there are many good reasons for doing so, we need to give it a universal value, so that it is not prone to such manipulation.

What I have argued here may sound extreme, however it is the logical conclusion that comes from the data. It doesn't lead to a dead end, either. It simply tells us that we have to reorder rules of the institutional structures and relationships that govern our financial system. It will also make us think twice about our political structures. In terms of money, it leads us back to the simple democratic money system that was described at the beginning of this piece, and lets us start thinking about how to organize the nuts and bolts of that system on a larger scale.

Who really creates money?

Lets go back. Remember the definition of money; an agreement to use an accounting system to facilitate exchange? It was the trust of traders and their resulting willingness to use the agreed upon money that gave it its value, not the bank or financial manipulator. In our economy, the banks and financiers have made it seem that they are the necessary creators and managers of money. In fact, they only mediate and control the process. It is the traders on Main Street who have committed to producing value that guarantee the system.

This becomes especially obvious viewing the savings and loan bailout, and the more recent bank bailouts. If the central bankers (the house in the casino metaphor) make loans or investments that aren't payable, they claim they are too big to fail. They get bailed out. Their phantom wealth gets preferred treatment over the real wealth that traders in the market have earned.

And who bails them out? Us taxpayers -- the traders on Main Street. Members of the financial system have made sure that they pay little in taxes through their influence on the tax structure and their use of offshore tax havens. So it is ultimately the 99% Main Street traders that guarantee the operation of the money system by our bailouts as well as our faith and trust in the system.

The situation in Europe is an example of where our banking system is headed. If the banks get paid by the governments that owe them interest money, the governments will fail. If the governments don't pay the banks, the banks will fail. The phantom interest wealth created by the European bankers must be unwound, and to be just, not at the expense of the traders who created real wealth for themselves and their communities.

We are headed in the same direction here in the US. We have a greater ratio of debt to Gross National Product than the poorer nations in the European Union. As noted earlier, the only reason that the US dollar has survived as long as it has is because it has been used as the standard for international trade by all countries. That situation is rapidly changing. Just as the wars in Iraq and Libya were about protecting the dollar and its banker owners as well as about oil,xiv the present activity in Syria is related to Iran and other nations that are not members of the Bank of International Settlements (BIS), and have their own banks which are independent of the dominant currencies of the casino owners.

And now China is promoting the Yuan as a standard for foreign trade. The BRICS countries Brazil, Russia, China and South Africa are negotiating to create a development bank that will compete with the World Bank, controlled by the US, British and European too big to fail bankers that control the BIS.xv We are not in a favorable position to push back at China and its friends, as China holds a sizable amount of our foreign debt, which they are now backing off on.xvi

The present tack is to continue to pay off the central bankers, either through taxing Main Street to pay interest owed instead of providing the normal services of the government, or by privatizing the commons - government assets - giving them to the bankers instead of money payment, as is being done in Greece and elsewhere. Either way Main Street looses, and the central bankers win. The structure of the system by its nature creates phantom wealth and in so doing systematically moves real wealth from Main Street to the central bankers.

The latest technique of the BIS group, used as a test in Cypress, is to tax the holders of savings accounts to cover the phantom claims of the central bankers. The same tactic is being attempted in the Detroit bankruptcy, but has at least been partially thwarted by a recent judge's decision.xviii The house of the casino will not easily give up its grip, even attacking its contract table operators, as well as their Main Street trader/depositors.

And now Bloomberg News has acknowledged that Iceland, which let its banks fail in 2008 is better off than other countries that have continued to support the dominant banking system.xix

The above discussion of the operation of our present money points out the structures and functions of the system that are inconsistent with democratic values. We can see that the market operates in very different ways according to what values and rules it is it is based on, and which it promotes.

Questions

Following are questions that need thought and debate.

What changes in the money creation rules would make the purpose of money consistent with democratic and sustainable values?

How can we move away from the monetary cliff?

More specifically:

    • In a democracy, is it appropriate for the money system, the basic mechanism for trade, to be a cash cow for a private group, or should the money system be a not-for-profit service for its users? Please note that the distinction is not whether money should be controlled by the government or private institution(s), but whether it is a not-for-profit, or for profit operation.

    • Who should authorize the creation of money and who should receive money created through seigniorage. For what kinds of products and services should seigniorage be promoted/allowed? In other words, who should receive loans, and for what? Who should make these decisions?

        • Should money get worth more over time? Less over time? Simply maintain its value?

        • What institutional structures are consistent with promoting trust?

        • How does our tax system relate to this issue. Is it appropriate for the government to use the tax system to represent us in supporting the welfare of our brothers? If so, at what level of government should this occur? What services or level of support are to be included in welfare?

        • What should our relationship be toward property, the earth and its natural resources?

        • How should phantom wealth, which is not payable, be unwound?

      Lessons for action

      The problem at hand is succinctly described by Bernard Lietaer in the following.xx

      Aligning Moral and Economic Incentives

      There are three main ways to induce nonspontaneous behavior patterns: moral pressure, coercion, and economic incentives. For example, recycling glass bottles can be promoted by education, by regulations, or by incorporating a refundable deposit in the purchase price. A combination of all three incentives is obviously the most effective strategy.

      When these incentives conflict, problems will arise. For instance, when there is an economic incentive to do something a regulation or law prohibits, we need costly and permanent enforcement systems. Even in the presence of such enforcement systems we expect . . imaginative forms of cheating to occur. More evident are cases where moral pressure is supposed to overrule economic interests. . . However, this moral pressure is diametrically opposed to the concept of receiving interest on money, which provides a built-in incentive to hoard currency. Whenever there are such structural contradictions many people are unable to afford, or simply do not care enough, to follow the moral advice.

      It is possible, however, to design a coherent and operational currency system so that this apparent structural contradiction disappears. In other words, by questioning some traditional implicit assumptions, we can realign the moral and economic incentives so that they are in harmony.       (Emphasis added)

      Lietaer gives examples of how money worked, and still works in a number of settings.xxi An important example is ancient Egypt, where there were two kinds of money. For exchanges outside the country, precious metals were used. For internal exchange, grain was the commodity that created the currency.

      The system worked as follows: The government had grain storage bins. If a farmer had excess grain he took it to the government bin, and was given a receipt, carved on a piece of soft fired clay, that gave the date and amount of grain received. This clay receipt circulated as money. Whoever came back to turn in the clay receipt for grain received less, depending on the storage time. The time charge was used to pay for the costs of storage. Unlike the Greek and Roman empires that used interest bearing money, the Egyptian empire continued for more than 1,000 years with this money system, and ended only after the Romans took over and introduced their currency, which was similar in its function to ours.

      We see here a historical use of a demurrage currency, an idea reinvented by Silvio Gesell about a hundred years ago.xxii As a side note, John Maynard Keynes noted that Gesell had more of value to say about money than Marx.xxiii Keynes' proposal for a post WW II world monetary order took advantage of a form of demurrage, but was sidelined by the bankers of the winning countries.

      The issue at hand is to design a kind of money that is stable over time, and is consistent in its values with the values of trust, justice, democracy, and sustainability/resilience. With design criteria in hand, we can consider experiments to transition in that direction.

      Lessons we can learn from this analysis are the following:

      • If we want a society whose purpose is democratic, the structure and decision making of our money system will have to be based on trust and 'power with', not 'power over'.

        • Ultimately borrowers (traders) are the functional creators of money, rather than the banking system, a nd ultimately the market is the guarantor of those funds, not the banks. Therefore the rightful holders of seigniorage, the collateral pledged for loans, and the decision makers concerning who should create money and receive loans, (the holders of seigniorage) are the members of the market, not the banking system.

        • Demurrage promotes long term thinking.

        Suggestions for possible characteristics of a sustainable monetary system

        • Embodies local democratic control, putting decision making at a level where people know each other, are capable of making decisions that are consistent with the dynamic of 'power with' and are based on their individual interests and the interests of their community.

          • Local democratic control also takes away the structural incentive for accumulation of centralized power.

          • Non profit. So that money can be exclusively a service, it is imperative that the organizations that manage its creation are not-for-profit. Profit becomes a driver for greed and concentration of wealth. This sets the tone for all transactions using it to do the same.

          • Incorporates mutual credit, rather than managed money creation. This puts seigniorage where it belongs, in the hands of those who are making a commitment to their fellow money users. The money supply is self regulated by trades being made. Self regulation is much more immune to manipulation than central control, and automatically reflects the money supply needs of users. The money supply is free to increase or decrease according to need rather than have to continually grow, as in the present system, or to be second guessed by a central monetary authority. Community members can be much more effective in deciding what their needs are, and how to maintain solvency and economic balance than are profit oriented banks.

          • Locally based. Any new system needs to be prototyped on a small scale, and operated at a local level. Communities are like businesses, individuals, and national governments, in that they have to have balanced budgets in order to remain healthy. With local money creation, this becomes possible to do.

          • Growth can occur by multiplication and connection, rather than by biggerization. This makes for a much more robust and less fragile money system.

          • Promotes maintenance of balances close to zero, not always keeping a positive balance. The principle of assuring that all budgets stay balanced (all account balances remain near zero, or return to zero) must be built into the structure of any monetary system, if it hopes to be stable over time.

          • Uses a participatory budgeting process for large community improvements.xxiv When a community using such a system sees that it would benefit from a project or purchase that would require a large sum of money, it can commit itself as a community to one or a group of its members, or its government, granting them seigniorage (permission to temporarily operate with a large negative balance) to complete a project or buy a product or service. This is what banks do now in making loans and governments do in issuing bonds. Under a democratic system, the decision making simply moves from a financial institution to the community, and there is no unearned income interest liability.

          • Larger needs of individuals and groups can be dealt with in a similar manner with general criteria for creditworthiness being used by the money coordinators for larger yet routine transactions. Communities will have to develop criteria for deciding in what amounts, and for what kinds of projects to allow negative balances (loans) and how to handle possible defaults. With the need for profit removed, criteria centered on the needs of both the human and physical community can define when money creation will occur.

          • There will be a need for regional, national and international clearing houses to manage transactions between communities. These clearing houses will also need to be not-for-profit operations.

          • The same criterion of balancing payments needs to occur between community systems as well as within them. In other words, each community needs to maintain a balance of payments with other communities. The disappearance of small towns in rural America is a good example of this issue. More money goes out of most small communities than comes in as a result of the siphoning of money to the banking system and outside corporations that supply inputs. This leads to their demise, and the sale of their assets to ever larger economic units. Local currency allows a community to measure and control its imports and exports and maintain a balance of payments.

          • Independent organization separate from government. Having independent entities manage the money creation process puts the government business on an equal playing field with other businesses and individuals. It requires government, like any other business or person, to go to the community for authorization for deficit spending.

          • Competitive. For non-profits, competition becomes a force to compete for quality of service. This makes competition a healthy factor in the economy, rather than a reinforcement of greed. Competition can also be balanced with cooperation between groups and institutions to take on larger projects, for instance.

          • Includes demurrage. It may be advantageous to have small fees on negative as well as positive balances. Demurrage forces traders to want to get rid of money and therefore speeds up the velocity of money transactions. Less money can thus serve the economy.

          • Includes some mechanism for payment of expenses of money system operation. Transaction fees have been shown to slow down the rate of trading.xxv Demurrage can cover system operation. A monthly charge for banking services is another alternative, however it is a regressive tax, hitting small users harder than large ones, and does not give the positive benefits of demurrage.

          • With money management institutions being democratic not-for-profits, any surpluses from the money operation are available to the community for distribution, making every member of the community a philanthropist. Everyone becomes involved in sharing.

          • Limits must be put in place to prevent unauthorized large negative or positive balances. With electronic payment systems, stops can be put on payments if balances get too far out of line, just as occurs now with credit and debit cards.

          • Betting on the exchange value between different currencies for personal gain adds nothing of social value, is immoral and must be made illegal. It is for good reason that Jesus threw out the money changers and that for 18 centuries the Catholic Church decried the payment of interest. The Muslim faith still maintains this practice.

          • Money must have a value related to something. Commodity based money systems (such as that of ancient Egypt) have intrinsic value built into their commodity base, but have the limitation that the money outstanding is determined by the supply of commodities, not the need for economic exchange. The natural base for money is the hour of work, as willingness to work and trade that work for the work of others is the basic engine of commerce.xxvi The hour of work is therefore a natural measure of economic value, and one that is universal the world over. Having all currencies based on the same criterion, an hour of work, gives equal value to all people for their productive work. In so doing it obviates the need for exchange rates, and the inequalities that they promote. Some small allowance may need to be made for undesirable, dangerous, or skilled work. The market will as a result be bound to the social value of labor for each product or service.

          • The proper role of government is to set the definition and operational rules of money, to accept money in payment of taxes, and make it legal in payment of contracts. The proper place for money creation is at the local community level instead of in a private for profit-bank board room or National Reserve Bank.

          • Until mutual trust in the larger system is established, it may be at times be necessary to use commodity based money for trade between communities which are not well known to each other.

          • No part of the system should be allowed to grow to a point where it is considered too big to fail.

          • We need to consider alterations in our tax system so that both its charges and payments support and promote trust, justice, democracy, and health, both for the natural world and all of its people.

          • Finally, we need to acknowledge that the earth's resources are a legacy that we all have an interest in, rather than commodities that accrue to the individuals or groups that can gain the rights to control and exploit them. This will require rethinking ownership and use patterns that have been accepted since the beginning of the industrial era. The place of the commons as well as both real and intellectual property in the economy will need to be reconsidered. The concept of the for profit corporation may have to be scrutinized.

          Transition

          Current initiatives

          Some groups, including the American Monetary Institute, propose that the Government put 'credit' money into circulation. It needs to be understood that this kind of money doesn't come for free. It is a one time tax on the market by the government which issues it. It is a loan to the government by the taxpayers, creating seigniorage - a commitment on the part of the government - to provide services to the population. If the money thus created is used for the general welfare, this may not be a problem, however money thus created can also be used for military/corporate imperial projects as is being done by our current government.

          An additional disadvantage of such a system is that it perpetuates central control and management of the money supply, rather than having the money supply self regulate at the local level, as occurs in a mutual credit system. On the other hand it may be appropriate for the national government to have a bank to deal with catastrophic events, for instance. In this case money creation can be seen as seigniorage/commitment by all of the citizens to help out those in need and repair infrastructure. Use of this bank must be limited so that it is used only for the general welfare. In order to maintain fiscal balance, these loans should be paid back through taxes over time, not left in circulation as is proposed by the AMI and others, just as other loans are.

          Another group, exemplified by the upcoming book by Thomas Pikettyxxvii, Capital in the Twenty-First Century, suggests that progressive income taxes and taxes on wealth can stabilize the present system. This proposal doesn't meet the criteria of value consistency noted in the quote from Lietaer earlier. Instead of making a system that is stable, it tries to offset the instability with tax policy. This tactic has historically been one that over time is reversed, and the instability and movement of wealth toward those who control the money system resumes.

          A third group, characterized by the Public Banking Institutexxviii, comes closer to the mark, with their program to move banking to the local and regional level, and make it not for profit. This effort can be seen as a part of the transition toward a more just and democratic money system, however it does not yet deal with a number of issues raised here which must also be dealt with. These include the issue of mutual, democratic creation of money, and the issue of an international standard of value, which makes unnecessary exchange rates between currencies. So while it is a step in the right direction, it should not be seen as the ultimate goal.

          A fourth group, those promoting community currencies, represented by the International Journal of Community Currency Research (IJCCR)xxix, is free to innovate in ways consistent with the new economy. Many of the existing community currency systems use mutual money. However many of these systems are up against a major blockage, because they are not accepted in payment of taxes, and, under the law in payment of contracts. Where community currencies have had this support from the local government, they have had major inroads on the economy. A proposal for making money more stable through the use of complementary currencies has been written by Lietaer et alxxx However this proposal does nothing to deal with the problems in the structure of the existing money system.


          Future challenges

          It is easy to say that the vision described here is all well and good, but it is pie in the sky -- not attainable from where we are now. This brings up the issue of transition.

          Transitioning to an economic system based on trust, sharing, and community rather than greed, fear, and anger will be filled with problems. One of the most pernicious will be the resistance on the part of those who benefit the most from the status quo to loosing their preferred status and power. Also knowledge of how things currently work may make those who have been on the short end of the stick very angry. We will have to relearn how to relate to each other in institutional settings.

          Those who will lose power in the money, corporate manufacturing, corporate media, military, and political spheres need to look at the alternatives for their children and grandchildren. Helping these people recognize the unsustainable nature of the present money system can hopefully help convince them that change is necessary, and that to bequeath their power in the present system to their children and grandchildren is to bequeath them a society in chaos. Either we can move toward fair and just money, economic, and political systems, or we will move toward economic and social breakdown and fascism.xxxi Everyone needs to recognize the basic humanity of everyone else, and try to move creatively from where we are to a place that is resilient and sustainable for us all. It will of necessity be a world without war, and great differences in personal wealth. The commons may be expanded, as the necessity for privatizing resources to accommodate the need for growth in the money system is no longer an issue. Property rights will likely be redefined.

          A second, related, cohort that will resist change is groups that are accustomed to fatherly 'power over' leadership. This will equally effect groups in the political, economic, religious, social and family spheres. Groups that practice the fatherly mode of leadership are accustomed to having the initiation of decision making be concentrated in the father/leader, and the leaders often expect that those who relate to them trust them, and their decisions. However if a proposal by the leader is not in the best interest of those affected by it, or favors the leader, we are observing another case of structural violence, where a leader expects to be the decider for the group. This will be an especially difficult dynamic to change, as both leaders and followers are accustomed to this way of operating. This dynamic can be especially pernicious in religious groups, where the leader claims moral leadership.

          In this context it must be seen that raising children is the process of leading a child from dependence, through independence to interdependence. Adults who relate interdependently relate in 'power with' mode.

          Another cohort that will be resistant is that group of middle and upper class people who have made investments and are expecting to have this money for income for their retirement, and for passing on to their descendants. Fear of not having this income, and justification of the system that they used to get their nest egg makes them resistant to change. Mechanisms to deal with this issue will have to be worked into the transition. Treatment of earned income saved may be different than income from interest and other unearned income. Proposals for those who have just accumulated funds necessary for their retirement can and should differ from proposals for those who can never reasonably spend themselves what they have accumulated through earned or unearned income. This process will involve unwinding the phantom wealth that has accumulated.

          While plans to deal with personal accumulation of wealth must meet the value criteria of the new economy, they must also respect those who have gained from the present system. These people are human too, even though they have been involved in the structural violence of the present system. On the other hand, they will have to give up their excessive power and become equals with the rest of us. To the extent possible, decisions on such issues as this should be made at the local level. However in the interest of justice, some rules and regulations are appropriate at higher levels. Balancing wealth between communities will necessarily be a function of larger governmental units. As noted earlier, the tax structure will of necessity be involved in this evolution.

          As we remove the possibility of building a nest egg with interest on money, we have to develop new ways to invest, and to support those who need support, that build our communities and ecosystems, rather than destroying them. With a money system that includes demurrage, such investments won't be fighting the short term profit motive and the growth imperative that are major motivators in the present negative sum money economy.

          Society has many issues that have not been dealt with well in the present economy based on profit, greed and power over. Freeing the economy from the necessity for greed and the resulting war economy will open many new possibilities for curiosity, caring and sharing -- toward our fellow humans, toward our earth and its many forms of life, and toward the cosmos. The greening of the earth will become a natural outcome, as respect for people and the earth become major motivators.

          There will definitely need to be programs for retraining those whose industries are phased out. A guaranteed income utilizing the dividend currently being paid as interest is one mechanism to help smooth the transition. Reallocation of funds currently spent on war is also a major potential source of money for social programs.

          Epilogue

          While this study has concentrated on the economy, and specifically how money works, it has to be seen as only one aspect of a greater transition that is required in our society. This situation is described by Huston Smith in his book Why Religion Matters.xxxii

          In different ways the East and West are going through a single common crisis whose cause is the spiritual condition of the modern world . . . The nature of that loss is . . . ultimately quite logical. When, with the inauguration of the scientific worldview, human beings started considering themselves the bearers of the highest meaning in the world, and the measure of everything, meaning began to ebb, and the stature of humanity to diminish. The world lost its human dimension, and we began to loose control of it. . .

          (W)hat is obvious to me?

          First, that the finitude of mundane existence cannot satisfy the human heart completely. Built into the human makeup is a longing for a "more" that the world of everyday experience cannot requite. This outreach strongly suggests the existence of the something that life reaches for in the same way that the wings of birds point to the reality of the air. . .

          The reality that excites and fulfills the soul's longing is God, by what ever name. Because the human mind cannot . . . comprehend . . . God's nature, we do well to . . . think of God as a direction rather than an object. That direction is always toward the best that we can conceive. . . With (that direction) and the world categorically distinguished but nowhere disjoined, other things fall into place. . .

          The relationship of 'power over' is an artifact of seeing ourselves as "the bearers of the highest meaning in the world". So is violence, especially structural violence. As Gandhi is reported to have said, "anytime some people use others to make money, there is violence -- external and internal.xxxiii" To acknowledge this fact is to acknowledge that the kind of profit practiced by big business and big finance is structural violence and as such is immoral.

          So we have to redefine the role of the entrepreneur in a way that allows for the creative spirit to bloom, without using that creativity to gain power over. Doing so implies learning how to organize ourselves with relationships of power with. It also recognizes that entrepreneurship does not necessarily require the value of getting rich in terms of money. The essence of entrepreneurship is creativity and problem solving that improves the lives of community members and the community as a whole. Seeing entrepreneurship in this light will require the study, the development, and the consistent use of Sociocracy and consensus in formal institutions. Non-violence will replace violence in formal relationships.

          The obstacles to transition are high, but the stakes are immense. The questions before us are do we want to follow the model of the Roman empire which led to the dark ages, or do we want to transition to a society and economy that is resilient and sustainable? Are we willing to do what it takes to get to a just and democratic economy that respects everyone -- each with their own cares and gifts to share?

          Further Resources

          What is said here only scratches the surface of what needs to happen. Many organizations and people are already out there working on the transition. A few random resources that come to mind (in no particular order of importance, just the order that I thought of them):

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