This is the Wizards of Money, your money and financial management series…with a twist. My name is Smithy and I’m a Wizard Watcher in the Land of Oz. This is Part 6 of the Wizards of Money Series and it is entitled “Democratizing the Monetary System”.
Introduction: The Activism-Money Paradox
In this sixth edition of Wizards we are going to take a look at the growing movement to democratize money – that is people creating their own monetary systems and making credit creation and distribution a democratic process, which is a radical change from the US dollar based mainstream monetary system. In this edition we will hear some excerpts from a BBC interview with a reformed currency trader, and we also interview the administrator of a small but democratic version of the Federal Reserve, where a currency called “Bread Hours” is growing in circulation in California.
Let’s start this edition of Wizards with a paradox. Paradoxes make for excellent exercise for the brain. A paradox is an apparent contradiction – a conclusion arrived at through logic but whose end result doesn’t seem to make sense. The resolution of a paradox often results in new thinking about an issue and a head on challenge of the underlying assumptions.
Suppose you are a non-profit organization that opposes income inequality and, in particular, you oppose the structure through which that inequality comes about – namely contemporary capital (or stock) markets and the international monetary system. The people you think you are helping the most are those at the low-income end of the spectrum. You probably acquired the status of, or are sponsored by, a 501 c3 organization that can accept tax-deductible contributions primarily in the form of national currency, or simply US dollars in this country.
Why does your organization need to raise US dollars? Because they need to trade – they need labor, supplies and services to conduct their activism and advocacy activities. Much of the labor might not require any US dollars, for those people that donate their time. But usually there will be some positions and tasks for which US dollars are required, else the task will simply not get done. Supplies and services that might be needed might come in the form of travel expenses, stationary, computer equipment and so forth. The proper method for acquiring such goods is through trade and certainly the quickest way to complete these transactions is to exchange US dollars for the goods and services desired.
So then your organization has to decide how it will raise US dollars from the markets of would be philanthropists. These people would have to agree with the organization’s goals of fighting income inequality brought about by contemporary capital and money markets.
Your organization will be most successful and have the most outreach in the shortest period of time if it can raise a lot of money from a few people. But how did these people get so much excess money that they can support you? Well, they are unlikely to be any of the people you claim to be helping – that is the low-income people who probably don’t have too much extra to spare. They are most likely to be higher income/wealth people who have benefited greatly from contemporary capital and money markets – the very thing your organization opposes.
So then, if you are very successful and raise lots of money to meet your goals – do you think you will smash the system you oppose and destroy the system that made your major funders wealthy enough to be able to contribute excess cash to you?
No way! All you did was change the path of the flow of money. The money bought the goods and services you needed and then ended up back in the same system of capital markets and the international monetary system you oppose. The same for the money you spent on the people you were helping, which also ended up back in the same old monetary system. Nothing fundamentally has changed – you might have raised some awareness of the problems, and caused some headaches for the authorities – but that’s all. No doubt if your motives were genuine your organization will have made some positive change, but the underlying structure of the system – the mechanics of the capital markets and the international monetary system – have not changed.
The contemporary monetary system depends on inequality for its survival. Importantly it also depends on confidence that such inequality can be increased to bring in desired return on capital. By participating in the monetary system and accepting funds originating from, and going back to, the capital markets and international monetary flows, you support this structure. By continuing to support the same monetary system you oppose, you haven’t really challenged the root of the problem.
Break: “Working for the Enemy” Baby Animals
Whose Monetary System?
Whose monetary system is it then? Not yours!
We already discussed this in Wizards Part 1. The basic building blocks of contemporary capital and money markets is just plain money – that legal tender that can be used in the trade for all goods and services and in the repayment of all debts. Plain money is first created by the Federal Reserve – who just makes it up “out of thin air”, first as bank reserves, and then later as currency or Federal Reserve Notes as the public demand more cold hard cash. Secondly, and where most money is created, the private commercial banks make about 10 times this amount as deposit or check account money simply through the loan creation process, and again, “out of thin air”. The public has no input into either of these money or credit creation processes.
Ultimately the decisions on who gets access to credit and who gets it on reasonable terms is decided on the basis of what loans will bring in to the shareholders of banks a return on their invested capital at a level of around 20% in recent years. By this I mean that for every 1 dollar of stock or equity capital that a shareholder invests in a bank they will get back 1.20 after a year. This is called a 20% return on equity. While this is simply an accounting profit – which is a purely abstract notion – these profits will translate into wealth in the real sense of potential to buy goods and services, because everyone accepts the US dollar as legal lender – good for all trade and in the repayment of all debts. Therefore, in no way shape or form can the creation and initial distribution of the money we so depend on be considered a democratic process. It is ultimately driven by the profit targets desired by the major shareholders of banks, which is a very small segment of society.
On top of these money or basic debt markets sit more complex debt markets (outside the banking system) and, of course, the rest of the capital markets (or stock markets), where shareholders invest the US dollars they’ve accumulated in return for more of these dollars in the future. In the case of all entities that raise money on the public stock exchanges (known as publicly traded corporations) all company decisions will be primarily driven by the need to meet shareholder expectations in terms of required return on capital. Meeting shareholder expectation is necessary in order to retain access to the capital markets. Access to the capital markets is the “make or break”, the very requirement for survival of a publicly traded company, and meeting shareholder expectations therefore drives all decision making. Consequently the other main parties of a corporation – the employees and the customers and other effected public – only have say in the corporation to the extent that they can influence the shareholders. The shareholders are mostly concerned with percent return on investment.
It is then fair to say that contemporary money and capital markets have built into them powerful driving forces that must undermine democracy for their very survival. Capital markets, which depend on accumulated money, could probably never be democratic because they are necessarily driven by the demands of shareholders. But what about money or credit – the basic medium of exchange? Can that be created democratically and would that lead to a more democratic society, and a fairer society where people really did have closer to equal opportunity? This is the subject of today’s Wizards. But before we discuss democratic money it is perhaps best to discuss why we might need money at all.
Why do we Need Money?
The primary reason we need money is because human societies have found it desirable to run themselves using division of labor. In this way some people can occupy themselves providing the things necessary for survival for the people in the society, such as food and shelter, leaving others free to invent and produce things to make life easier and more enjoyable in the material sense, such as electricity, transportation and so forth.
Without division of labor people would have to produce their own food, shelter and warmth within their own family unit or small community. This would keep people busy all the time occupied in these basic activities. Humans have achieved remarkable progress through division of labor, which has been facilitated through some commonly accepted medium of exchange, known as money. Money accepted for trade in all goods and services facilitates trade with people outside of your immediate neighborhood. Without money, and wanting to trade goods and services with a broad range of people, humans would revert back to barter, which tends to result in very slow trade, small amounts of trade and very slow technological developments.
The availability and flow of money seems well correlated with pace and direction of technological development. Today, availability of money will depend on Federal Reserve and commercial banking decisions, as well as the desires of the capital markets. Both availability and flow will depend greatly on public confidence in the monetary system, and the capital and debt markets built on top of it.
Ideally, in a democracy, the people would decide what pace and in which direction technological development should go, and what activities should be encouraged and what shouldn’t. Then they could design their monetary system consistent with these values.
At one extreme is the system of limited trade and little technological development. If people wanted this they could have no monetary system and everyone could go back to agrarian-like barter societies. They could alternatively have no money and centralized planning to force division of labor and development, but this tends to concentrate power in too few hands, which is very dangerous and ends up being undemocratic.
At the other extreme they could have maximum technological development and the “fast money” and fast pace of today that will accumulate lots of money if invested in such development. However this will also tend to concentrate power in too few hands as human activities get oriented around ensuring that return on capital is achieved to maintain confidence in the system and its underlying monetary system.
Most likely the majority of humans in the present time would like a system somewhere in between. One that provided a more advanced life than the agrarian societies and so needed some division of labor, and perhaps some monetary system to facilitate such development and avoid centralized control. But many would also like a system that wasn’t so driven by, and dependent on, rapid advancement and rapid consumption, but rather tended to promote a more sustainable future.
People all over the world are in fact starting to design such monetary systems of their own to help achieve the goals of their own societies. We will now listen to some excerpts from the November 11, 2001 edition of the BBC’s Global Business Report where the growth in democratic money was being discussed. In this segment the BBC interviews Bernard Lietaer, a former and reformed currency trader, who understands why we need better money. We mentioned Mr. Lietaer in Wizards Part 1 as the author of the book “The Future of Money”.
Excerpt: BBC Global Business Report. November 11, 2001 Interview with Bernard Lietaer.
Design and Implications of Democratic Money
There is absolutely no reason why a group of people who wanted to trade goods and services amongst themselves couldn’t create their own monetary system. After all, money is just an arbitrary accounting system of credits and debits that we have let the Federal Reserve and the private banks design for us, rather than having any input ourselves. Using a democratic currency designed for a local, or similarly ideologically inclined, group the benefits of the division of labor and trade in the group in that new currency would accrue entirely to that group and would not be sucked into the mainstream capital markets. Furthermore this kind of resistance to mainstream money, if conducted on a large enough scale, has potential to put significant pressure on the mainstream monetary system and its associated capital markets to change its ways. That is – it has the potential to force fundamental structural changes.
Contrary to some beliefs, it is not money that makes for the practical implementation of capitalism – it is positive return on capital. The argument behind having positive return on capital is “compensation for financial risk”. The capital holder could have realized the full value of their capital today by spending it on a real good but instead they invested it in something else where they might lose the value of that investment, and so the argument goes that they should get compensated for this risk. One of the main places where this argument fails is that the only risk considered in this equation is financial risk to the capital investor. Completely ignored are social or environmental risks this investment created which, if factored in and charged to the investor (i.e. public risks charged back to the source), might make the properly risk-adjusted return unattractive to the investor so as to discourage such investment.
A group of people might choose to create their own currency with zero interest to remove the incentive and ability to accumulate excess capital over labor and goods input into the system. This would provide for more equitable distribution and access to the medium of exchange, and would remove incentive for excessive appropriation of natural resources. Then they may also decide to create money through various means such as loans and grants made through some democratic decision making process. A new currency could be created for trade within a local community, or even across a broader geographic region with some other association – such as members of a national coalition of NGOs working on similar issues.
We discuss all these issues and more in the following interview with Dina Mackin, the main administrator of the Bread-hours currency. No – she’s not the equivalent of Alan Greenspan for Breadhours, because this money is created democratically and it has no duty to please Wall Street. The technical and social challenges of implementing alternative currencies are not insignificant and should not be underestimated. Also as we shall see in the following interview, where such “currency independence” is most needed – that is, the developing world – it has not only been successful but seen as a threat by the national central bank and government. As we learn in the following interview this was the case with a successful local currency that flourished after the 1997 attack on the Thai Baht (see Wizards 2 and 5 on this) and was shut down by the Thai government in 2000.
Interview with Dina Mackin of the Breadhours Currency.
