For the Money System category

Understanding more about our Financial System and its Instabilities

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Towards a Sustainable Financial System: a conference at the LSE in March 2014  

Opening address by Lord Adair Turner, currently a senior fellow, Institute of New Economic Thinking, in the Centre for Financial Studies in Frankfurt, and a member of the Financial Stability Board  working on reform architecture for the global financial system for the G20; and recently Chair of FSA in UK.

This can be seen on video (45 mins) on the LSE website

He raised 3 inter-related questions and discussed them in the address, summarising some of the errors in basic assumptions used to manage the finance system up to the 2008 crisis:

1. Given that 97% of our money is created by the private sector in the form of credit from private commercial banks, how much is needed and for what purpose is this created?

2. How does this affect the stability of the financial and economic systems?

3. What might be the role of regulation by the state and of control by the central bank?

Money is created in three ways:

(1) Fiat money: The state prints the optimal amount of money needed to stimulate nominal demand, creating a small unfunded fiscal deficit. This puts new money into the system and increases net private financial assets. Can a government create a fiscal deficit responsibly, to an optimal extent, in line with GDP? Can we trust politicians not to buy support and create inflation? Currently this is taboo.

(2) Banks in the private sector create money by loans in the form of numbers or  a figure in a deposit account of the borrower. This is then available immediately as money to purchase with, and then repaid later. This difference in time as the loan matures means that money and purchasing power is created in the economy by credit. Private net assets are not increased as for every bit of money there is a bit of debt. So it increases private debt. 97% of money is created this way now, in the market. Deposit money and actual money are confused in people’s mind.

(3) Funded fiscal deficit. This creates new private assets in the financial sector but not new money, as it has to be offset by a public liability to pay off the debt.

In the late 19th century there was a stable supply of money (nominal GDP) as it was based on gold or metallic money. This was accompanied by a slow decline (downward flexibility) in prices (e.g. through technology increasing productivity) and nominal wages, which in turn could create growth.

In a modern economy where money takes a deposit form, how can we know if just enough credit is created for the increase in nominal demand needed? How are we to achieve stability in the money supply and financial system today?

A sufficient growth in nominal demand (which in itself can be debated as it affects sustainability in all its senses, and reflects assumptions about the mix of economic systems we need for today) may be a 5% money increase: 2½% actual growth and 2½% reflecting increase in prices/inflation.

Will the amount of money created by private credit be optimal for the desired growth in GDP and nominal demand, say 5%?

Will a sufficient proportion of credit be allocated and used for productive or socially useful purposes?

Are the consequences of debt contracts taken fully into consideration?

Borrowers use two different ways of raising money or mobilizing capital in the form of a bond or debt (e.g. from a bank), or in an equity or share form (not through banks). Equity is not certain enough to mobilise sufficient capital. Debt is not contingent on the economy as a whole or the profitability of the borrower’s business. Debt contracts are needed.

Up till recently it was believed that private sector credit creation would be controlled by market disciplines.  Borrowers will borrow at a price or rate of interest that accords with their expected return from their investment, the so-called “natural rate of interest”, derived from assumptions about key economic factors such the natural rate of productivity growth and how much people want to spend and save. The pre-crisis theoretical orthodoxy on the monetary and macroeconomic side was: low and stable inflation was not just desirable but also sufficient as an objective, as then the financial system would be in balance because the money rate of interest would be in line with the natural rate of interest, and so the financial system would be creating the right amount of credit. So money creation by credit from private commercial banks had “no meaningful role” in influencing the amount of money in the economy (Mervin King 2012). On the financial theory side there was more concern that there would not be enough credit rather than too much, as debt contracts were seen to be essential and there was a belief that free markets by themselves would maintain an optimal balance.

But the crisis of 2008 showed that we created too much of the wrong kind of debt. Empirical arguments have since been developed that show the system can be too much credit as well as too little  (on a graph the relation of credit to GDP is an inverse or upside down U curve). We can lend money without a reasonable expectation of return, leading to overinvestment cycles. The securitization of subprime mortgages were a result of neglected risk.

In an upswing of the cycle, risks can be downplayed and banks can lend without due attention to risk leading to an over-creation of credit and debt contracts.

Debt contracts are not contingent on the state of a business or potential of an asset: so it is more possible to lend without a reasonable expectation of return.

In the downswing of the cycle, there can be bankruptcy and default, as debt contracts do not respond to the state of economy in a smooth fashion.

While past equity investment carries on, if something wrong with the lending machine, the debt cannot be rolled over and there is a problem.

With debt overhang as people realize they are at risk or lose confidence, businesses become aware they are highly leveraged they de-leverage and reduce their investment. Households reduce consumption and spending.  Debt overhang leads to a slow recovery.

There are two problems with debt and so two forward indicators of such a crisis: (1) the pace of the growth of debt is high, and once there is a crisis (2) the higher the level of private debt relative to GDP (the right end of the inverse U curve) the bigger the problem.

The facts show that the system created too much debt before the crisis. Twenty years before the 2008 crisis pace of private credit growth was on average 10% – 15% per year higher than nominal GDP, growing at 5% (credit/GDP). In western developed economies the level of  private domestic credit as % of GDP rose from 50% in 1950s to 180% of GDP.

In the pre-crisis way of thinking, there was a policy conundrum: if central banks raised the interest rate when rate of increase in credit was higher than the rate of increase in GDP, there would be a risk that growth would be slowed and inflation drop below the desired target. But if they did not then they feared there would be instability. So there seemed no way of creating conditions for an  equilibrium in a monetary economy needed for economic stability and the desired rate of growth. The monetary system in its current form seemed to be inherently unstable.

To address this there is a need to attend to different categories of credit.

The original assumption about retail banking was that savings by the household sector would be lent to the business sector to finance investment. But the reality is that this has been only 15% of the credit. Instead credit has been used to finance the purchase of existing assets.

Financing consumption can be useful for smoothing across the life cycle when there is budgetary constraint. But lending money against existing assets (such as mortgages for purchasing real estate in the form of an existing building) has been a major cause of financial instability. It drives up the price of the asset – real estate – which validates in the minds of those lending and borrowing that there will be an increase in its net worth and so motivates them to continue to borrow and lend. This can feed through to new investment or to consumption through wealth, but this is not fully proportional to an increase in nominal demand. Every 15 yrs one banking system lends money for real estate without prudence.

In commercial or private real estate, changes in the money lending interest rate for the whole economy do not on their own have a sufficient effect on the credit to asset price boom while credit is easily available the asset prices (e.g. price of real estate) increase. Natural rate of interest is the interest rate in the mind of borrower, how far they expect an asset to increase in value or price, determines how much they borrow. But there is no one single natural rate for the whole of the economy.

The result is that there is more monetary wealth but no increase in nominal demand, which is the indicator that the central bank uses to raise interest rates. So it does not show up immediately. There is a problem then of debt overhang.

Three causes of rising intensity of credit in relation to growth:

1. Lending money against existing assets, especially real estate, creating a rise in real estate prices and an asset boom.

2. Pace of increase in inequality increases and there is more credit for consumption. Richer people have a larger propensity or desire to save but this money is not used for investment as it is lent to poorer people in the form of subprime mortgages to make up for deficiencies in income.

3. Global current account imbalances between surplus and deficit nations.

Countries where surpluses are not matched by equity or real property claims against the rest of the world, then they will be balanced by credit claims against the rest of the world.

We shift leverage between private and public sectors, or between countries, as this is the only way we know to address the excess leverage.

As too much private credit is created and it is not misallocated and not used effectively, Lord Turner suggests we need to go beyond bank regulation and look at the structure of the system and behaviour within it to get stability and equilibrium and address imbalances. Monetary and fiscal policies are needed to prevent too much debt and credit intensity that leads to unstable growth, and control is needed by the central bank.

Current account imbalances between surplus and deficit nations as it drives credit intensity and unstable growth

The central banks need to attend to and manage the level of debt as well as the rate of increase in it. The inverse U can be anticipated.  The limit could be 80% or 90%; it is not possible to be precise. But it is possible to see the shape of an inverse U curve.

The allocation of credit arising as a result of free market decisions can never be socially optimal. There is an externality of lending against real estate that goes up in price; this can never be captured by logical private assessment of risk rates. So higher risk ratings for real estate credit are needed.

There need to be constraints on lending both for the borrower as well as the lender.

There need to be more institutions that dedicate themselves to using savings for investment (as in Germany).





Transforming Finance

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                                       Transforming Finance  

              Fresh thinking on democracy, finance and debt                                                                             

Transforming Finance is a coalition project led by Friends of the Earth,  which draws on the expertise and support of a broad alliance of think tanks, academics, finance professionals and NGOs with an interest in making finance work for people and planet. The coalition includes the New Economics Foundation,, Share Action (formerly Fair Pensions), Civitas,, Respublica,, the World Development Movement,,   Positive Money,,  and Finance Lab, .

The March 2013 conference was generously supported by The Institute of Chartered Accountants,, The Ecology Building Society , Ethex,  and Triodos Bank,

Aims of the Conference  The conference organisers aimed to improve understanding and debate around a range of positive proposals covering banking, investment institutions and alternative financing that were designed to:

  • Avoid another financial crisis; preventing asset price bubbles, debt crises and state bailouts of financial institutions
  • Have Banking work for the real economy
  • Get finance into projects with long-term social and environmental value and financing the transition to a greener economy
  • Explore what democratic financing might look like

Summary  The May 2013 conference, has been summarised and recorded on their website   Click on the Summary tab to download a PDF summary and on the Videos tab to see the speakers’ presentations  and The Guardian’s summary videos. Scroll down to the Themes section below for a quick overview of the 38 short presentations from leading thinkers and innovators from these sectors of the UK and some from other countries.

The Charter that came out of this conference sets out a vision for a financial system that meets the needs of the 21st century rather than trying to fix the old system or protest vested interests – a finance system riddled with short-termism, secrecy, conflicts of interest, intermediaries and unproductive speculation. It reflects the key issues and proposals set out set out by the 38 speakers and represents a voice of growing consensus from inside and outside the financial system on the need for profound systemic change.

These people want to see the system transformed into one that takes a long-term outlook, allows greater competition, thrives on transparency and diversity, and channels more finance into productive investment that delivers for society, the environment and the whole economy.

They believe that the conditions for transforming finance are now in place at European and national level, and that, with sufficient political will, it could start to happen. There are three developments that could together do this:

(1) The combination of banking reform proposals and papers on the need for long term investment in UK and the EU, will provide a great number of political opportunities for change that may not come around again for some years;

(2) A new wave of financial providers, be they ethical banks, new entrants, state sponsored entities, social finance or peer to peer platforms, are being proved in the marketplace; and

(3) A collection of policy ideas that could transform finance is being rapidly developed, in different places, and are ready for mainstream debate.

The Charter is a statement of why, where and how the financial system must be transformed. It sets out a vision of what transformation would look like in three areas: (1) banking, (2) investment in the future and (3) innovation to deliver a truly sustainable finance system.

It has already been signed by the advocacy organisations, academics, finance professionals and public interest groups represented at the conference. Visit the coalition’s website to read and sign their charter as an individual or organization:

The main themes of the conference

The content of the presentations are grouped below to match the three parts of the Charter:

 1. Banking

1.1 Size of Banks:  Centralisation of power in commercial banks in the sector, that are too large to fail – worth over £1 billion, and are therefore implicitly subsidized by the state. There need to be new rules for megabanks. Monopolies in the interbank lending market need to be broken up.

 1.2. Broadening the objectives of commercial banks to make money work for people and planet, not just for private gain. Commercial private sector banks listed in the stock market focus on short term returns on investment.  The two functions of banks, supporting productive activity and financing assets, need to be separated to reduce the risk of bubbles in the economy; and retail and investment banking need to be two separate industries.  Extreme boom and bust cycles can lead to environmental damage in the good times and abandonment of social and environmental regulation in the bad. Society needs the finance sector to allocate a much larger proportion of their credit and their balance sheets to the real economy and productive uses, cost effectively. Policy needs to be used to reduce credit for speculation leading to asset bubbles. The finance sector has been actively creating risk by pursuing short-term profits, and money is not going to the right places, like the green economy and making money work for people and planet.   Parts of the finance sector do damage and are socially useless.

 1.3. Need for a proper role of the state and a well-regulated financial sector to tackle vested interests.  There is a deep misunderstanding of the way the financial system works: the powers that be think that the problems of EU or Japan can be solved by money creation, but that is only part of the issue. The real concern is how the money created by bank credit in the form of loans is spent. Commercial, private sector, banks create 97% of the money supply in the form of credit in deposit accounts. There is no regulation or guidance on who gets the money and for what purpose; the banks decide mainly on the basis of how best to maximize their own profits. Credit creation for GDP transactions into the real economy need to be distinguished from credit for financial transactions that lead to financial asset creation which is not part of GDP. This determines asset prices and so can lead to asset inflation and the cycle of asset boom and then bust when there is not enough credit for GDP transactions. Capital creation through credit for financial transactions is always unsustainable as there is no real generation of income gains to repay the loans. Asset boom and bust cycles are shown in historical data over the last century (e.g. US in 1920’s and Japan in 1980’s), and in the first decade of this one when total credit (and so financial credit) was ahead of GDP.

In addition to this Banks all too often prefer to offer credit for the real economy and GDP transactions when it is to be used for consumption rather than productive activity. This can create more demand while not directly creating the goods and services to meet that demand, and therefore can fuel inflation. Money creation through credit is good if it is lent for the right kind of production. Credit guidance by the central bank can promote lending for productive activity in the real economy and it can reduce speculative lending for financial transactions. While regulation is important, credit guidance is key in preventing instability and crises in banking. Currently the Basel agreements appear to punish banks for lending to SMEs and to reward them for investing in property.  The banks will listen to their central bank’s credit guidance as they are dependent on it for inter-bank market operations. There needs to be a permanent and legitimate role for the state in banking, at a local or national level, either to reduce the cost of risk capital for socially desirable activities and innovation, or to influence the overall allocation of credit to the economy. Fix the financial system and we will become more democratic overnight: all of our institutions have been corrupted by finance, but in particular our democracies and our parliaments.

1.4. Banking systems with greater diversity of institutions, in forms of ownership and constitution, is another way of governing how money as credit is used:  as in Germany where regional savings banks and co-operatives, which make up 70% of the banking sector, are mandated to provide credit for productive use, the common good and for financial inclusion, and local savings are used for local loans and small businesses, with profits staying within the region. It is in the interest of local banks, constituted in this way, to invest in or lend to local businesses with good prospects. While such banks confine operations within a region they also collaborate across regions by sharing IT centres and funds to cover liabilities. The Government should provide central infrastructure for local banks to overcome cost barriers. Locally head-quartered and mutually-owned banks have a better track record of supporting small business & local economies. There should be increased competition and diversity within retail banking allowing for frequent new entrants, and exits: multiple ownership models including mutuals, co-operatives, credit unions, local savings banks and sector banks. Diversity and more prudential balance sheets and local knowledge leading to a more healthy loan book, create greater resilience in times of crisis. Governments and policy makers can structure the economy to have these different forms of banking institutions, and civil society and progressive finance can be aligned to this to secure big systemic change.  Government can encourage more financial education both for citizens and for professionals in different roles in the finance system so they can participate to mutual advantage.

1.5 Fresh Thinking on Debt and Recoveryfor now and the future.  Since the credit crunch debate has been around austerity versus public and private borrowing. How do we manage debt-cancellation now that there are complicated chains of debt between different players? Could some debts, those seen, through information available to the public, as legitimate, be written off or paid back later after recovery, as part of a transition to a new monetary system? Since the crisis banks have been cautious with loans and people are paying off their debts where they can, so that there is less money in the economy for productive activity. The central bank put money into the bond market through quantitative easing to address this but this has fuelled financial markets and led to loans for speculative, rather than productive, activity.  Should the central bank create money through putting it into the government’s bank account to be spent in the real economy, to tackle climate change and the transition from a carbon economy, creating jobs and enabling people to pay off their debts? This in turn could reduce private bank credit and the bank’s assets (as loans are assets and deposits liabilities), and so the size of the banks.  Or should there be an independent commission to oversee long term investment by the government in the low carbon infrastructure needed for sustainable living in the 21st century? This  would be a loan and the commission would also advise/decide how it is to be paid back:  through general tax, specific taxes, and the expected returns on investment for the economy as a whole that would in turn generate more state income from taxes and reduce state costs in the form of benefits or subsidies. The specific taxes might be on cars & vehicles with carbon emissions or a small carbon tax for the economy as a whole which increases as our international competitiveness moves over to carbon free technology  and energy?

2. Savings and Investment

2.1  Where do our savings go? How to ensure that our pensions and insurance savings serve people and planet rather than fuelling speculative bubbles and climate disaster? Pensions fund destructive activity but there is very little in the system to check this. Moving our money is relatively easy with banks, but much harder when it comes to pensions and insurance savings – though more people want to with their savings.   Does government need to fundamentally change the rules by which pension providers compete? Or should we cut out the mainstream middle men altogether and seek radically new ways of investing our money? Increases in transparency would give savers the information they need to know (and act) if their savings are being invested in environmentally or socially damaging projects.  Financial literacy and bringing economic activity into marginalised communities is vital too.

2.2 Fiduciary duties are the strict legal obligations that apply when one person is entrusted to act on behalf of another. In an investment context, fiduciaries include the trustees of pension funds and charitable trusts. Other examples of fiduciaries are lawyers and the legal guardians of children. Fiduciary duties are interpreted very narrowly as a straightforward duty to maximise profits in the short term, and the law needs clarification  to ensure that ‘beneficiary interest’ is interpreted more broadly to address the issues of today – such as climate change, resource and energy limits, poverty and income equality across the world, security in the face of extreme ideologies linked to terrorism, and the need for strong and resilient economies. The behaviour of institutional investors will have an enormous impact on addressing these, and it is vital that our money contributes to good corporate governance rather than fuelling bubbles and irresponsible practices. Analysis by Carbon Tracker ( shows that the valuation on the stock market of major fossil fuel companies is largely based on reserves which cannot be burned if we are to keep the rise in global temperature below 2 or 3 degrees. This “carbon bubble” threatens investors and pension funds. Pension funds should be engaged owners of the shares they hold with an active role challenging companies, and ensuring much more engagement with issues such as funding the green economy. But it is hard for an individual fund to take a lead; we need to “re-humanise” investment collectively and regulation is needed together with radical new investment mechanisms that shift the mainstream. Fiduciary standards should be applied consistently to those managing other people’s money: this means addressing the conflicts of interest between financial intermediaries and the millions of ordinary savers whose money they invest. Without tackling the role of financial intermediaries and the principle (who has the money)/agent (to whom the investment is delegated) problem through a code of practice, asset mispricing and rent extraction result; the G30 proposals may be a step in the right direction.  Perverse incentives must be taken out of the system. New rules are needed for megabanks, and a change of culture so that they see themselves as fiduciaries. For example: highly damaging food speculation through the increase in trading of derivatives based on the price of food, that leads to massive price spikes with particular impact on the global south. Deregulation is the cause.  The war is cultural, not economic: we need to reclaim money and power from the banks. This can empower governments to bring in the regulation needed. Savers must make the case that social and environmental considerations are the bedrock of financial success, and demonstrate that we value something other than the highest short term financial return.

2.3 Investing as if the future matters Long term savings capital should be deployed in the market primarily as investments in economic activity for the long and medium term, rather than a pool of money to fund short term, speculative trading in equities which has little bearing on the true value of the assets being bought and sold. Investment institutions should understand and take into account the social, environmental and other systemic consequences of their investments. The legal framework must support and encourage this. Investors will be more responsive when the government shows by their policies that climate change will be tackled. The structure of the investment sector must maximise transparency and accountability to savers, and minimise opportunities for rent-seeking. The policy framework and tax system should unambiguously reward equity investments held for long periods over ones sold more frequently.

3. Innovation in raising Finance: 

Alternative and bottom-up solutions aimed at democratising finance and getting it into the right place have increased independently across the globe since the recent banking crisis using the same technology that allowed social networks to grow.  Much of the regulatory and policy recommendations have focused on reforming the financial institutions that caused the crisis, but elected governments need to ensure that the markets for new systems such as these are adequately protected from fraud or poor judgement derived from mass appeal. On the other hand experimentation on a small scale means less damage from failure or the breakdown of user trust. The resurgence of co-operative models of economic and financial collaboration, and peer-to-peer models, which connect people to each other rather than via financial intermediaries who think of their job in terms of transactions rather than as a commitment to the welfare of clients and the society of which they are a part. Finance based around localities is coming back, and finance that aligns with specific values. Timebanks and community exchanges allow people to trade freely and unleash underused resources, to engage differently with society locally and to question the relationship between money and value. Community shares and bonds, crowd-funding and social investment platforms provide new ways of raising finance for popular projects. Crowdfunding creates engaged supporters and democratises finance, and there are many ways to do it – from quasi-equity to loans and even donations. People support crowdfunding not just because of returns but also because of relationships. Could these innovative models ‘disrupt’ the system so that there is a tipping point where consumers demand greater transparency, autonomy and demonstrable social return?
 Allstreet (  ), for example,  has created a map of the alternative finance system, illustrating where new entrants and startups can disrupt or partly take over from mainstream financial services in all the main areas: lending (e.g. through ‘peer-to-peer’ networks),  nvesting, current accounts and savings, payments (e.g. mobile money),  alternative currencies, alternative stock and foreign currency exchanges, advice and guidance, open data etc. Through ‘disintermediation’ everyone could effectively become their own bank. There is a challenge for small  players offering alternative finance to get to a useful scale.

The intellectual power of the finance sector needs to be wholly focused on creating innovations that are socially useful. Regulation and the tax system should reward simplicity, transparency and diversity for the customer, and penalise complexity, secrecy and rent-seeking by the finance sector. Proportionate regulation should be introduced speedily for new finance products and innovative business models aimed at making financial services more inclusive and accessible, or accelerating funding to the real economy, for example peer-to-peer lending or equity crowd-funding. Policymakers and regulators should have to ensure they have the skills and resources to support innovation and competition with the existing system, as well as within it.

Those at the conference signing the Charter:

Organisations in support
 The Finance Innovation Lab,
New Economics Foundation,
Share Action,
Positive Money,
Move Your Money,
Friends of the Earth,
Ecology Building Society,
PRIME Economics,
All Street,
Blue & Green Tomorrow,
Centre for Banking Finance and Sustainable Development – University of Southampton,
Beacon Strategic Communications,
Trillion Fund
Manchester, Energy Generation Association,
Triodos Bank,
Community Forge,
Institute of Social Banking,

Individuals in support
 Paul Woolley, Founder of the Paul Woolley Centre for the Study of Capital Market Dysfunctionality LSE,
Professor Mariana Mazzucato Economist and Professor of Science and Technology Policy, University of Sussex,
Professor Gary Dymski Chair in Applied Economics Leeds University Business School,
Professor Costas Lapavitsas Professor of Economics at SOAS,
Professor Richard Werner Director Centre for Banking, Finance and Sustainable Development University of Southampton.

Transforming our Money System – 1

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Transformation of our Money System: the need and some tested solutions A review and summary of The End of Money and the Future of Civilisation by Thomas H.Greco 2010 Floris Books, UK,             ISBN 978-086315-733-2     2009 Chelsea Green Publishing, US.

You can download this by clicking on the PDF icon at the end of the document.   Also as noted in the comment at the end there are links to each of the other 5 parts at the end of this document and a summary of the topics in each part which are highlighted in that part.

Summary and Discussion of the book by John Bristow:  I have recently read this book by Thomas Greco and summarised it in order to get to grips with the ideas as I am unfamiliar with what money really is and how it has developed, and am interested in this as a key element of possible changes in our way of thinking about and organising our economy, particularly in more developed countries (though the solutions here are very relevant to the less developed and some of them are trying out new ways of doing business with money and with investments and savings). Other relevant and fairly recent books are Niall Ferguson’s Ascent of Money (more of an historical account) and Rachel Botsman and her colleague’s What is mine is yours (“collaborative consumption”) whose recent book has won acclaim for her as a “thought leader” alongside her work as a social innovator.

This book provides the information needed to understand the money system better and the effects of the current system on our lives, as well as practical ideas for possible local initiatives supported by national and international NGOs and research and knowledge centres.

Greco has worked in the area of alternative forms of exchange for 30 or more years as a teacher, advisor and author. This recent book is of practical interest as it describes the real need for a transformative change for the future of civilisation and gives examples of some tried and tested (knowledge based) ways forward in addressing the need. He shows  how a transformation of the kind he points to is in line with both felt needs. The ways forward make economic and financial sense and fit the need for economies that do not grow in ways that destroy our natural habitat and human and other lives on the planet (seeing all life as one life) and that create more social co-operation and cohesion rather than division between the have’s and have nots and the fragmentation of local communities. His suggestions for change also fit the kind of values and guiding ideas that appeal to younger people seeking alternatives and older seeing opportunities for change that they sought but had not seen or formulated in this way before. They seem to reflect aspects of the next step in humanity’s history, though this century is full of drama and uncertainty around how much suffering or cost will be incurred before some transition to a different way of living, thinking and doing things is arrived at. The solutions he puts forward would be supported by and need to be integrated with the emerging transformational change towards a more web-based trading platform world-wide, the technological infrastructure. He sees the main drivers for change being these felt needs and local “bottom up” initiatives, that do not use coercion or become unduly threatening to the current regime, that use the technology for information and communications and fit these values, and are globally networked and informed. National governments and the vested interests of some of the large financial organisations may well resist it and be fearful of not having the option available for borrowing off the central bank to cover spending above revenue from tax and so using the legal tender basis of national currency to pay off their debts or to use deficit spending to counteract deflation. They will need to see viable alternatives. Greco sees this political-financial elite and their world view as having inordinate power over our money system and therefore our economies, a form of what he calls “materialistic feudalism”, a politicised global debt-money regime. But local businesses may well see the advantages as well as financial service enterprises based on more co-operative models, and community groups seeking an economy based on a different mix of values and priorities and more resilient and empowered local communities. With similar successful initiatives in a few local regions, each requiring sufficient “critical mass” to be become stabilised, Greco sees similar changes be adopted elsewhere. So there are many factors coming together to make a key societal change, already under way in terms of 30 years (and more) of learning and in web-based developments. A more thorough analysis of the drivers and context for this change are set out in the last section.

The summary can be used for reference as it is organised with links to  these 4 sections (4 with 2 parts) and the topics within them are  listed here and can be found by scrolling down to the highlighted topic:

1. The Money System: historical development and current problems: the money sytem defined  –  5  Stages in the Transformation of Money –  Barter – Commodity – Symbolic – Credit, Fractional Reserve Banking, Monetisation, Deposits -Cheques – Credit Clearing – Mutual Credit Clearing – Governments, Central and Investment Banks – legal tender status –  Stages in development of Central Banks and Issuing of Money

2. Implications of Problems with the money system    Monopolised credit supply – Debt Imperative –   Concentration of wealth –  Inflation and Government Finance – Lending and high powered money – Issuing money and Inflation –  Interest and Usury defined and distinguished.

3. Principles to guide reform of the money system and the design of alternatives 

4, Transforming the money system (1) Alternatives:  Mutual Credit Clearing -Alternative Exchange Systems – analysing failure in these –  Commercial Trade Exchanges –  Investment through Partnership Finance –   Equity and Debt Financing compared –   Peer-to-peer lending – Standard Measure of Value –  Basis of Issuing Local Currencies –  Web-based trading platform – Forms of Organisation and Governance – Regional Cooperative Economy: Basque Example –  Organising Credit Clearing Exchanges – Limited Liability Partnerships –  Mutual Companies –   Mutual Credit Clearing the Swiss WIR example –  Social Money and Social Banking –  Role of Central Government in Transformation of the Money System – Local Government – Regional Socio-Economic networks in a country

4. Transforming the Money System (2) Implementing Change:  Disruptive Technology (Christensen) – Force Field Analysis –  Niche Markets – Web-based Trading Platform –  Four key components of Web-based platform –  Bottom up Change and Awareness Raising – Tipping Point, Networks, Design Characteristics and Context

World Future Council: Future Finance

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World Future Council Study Project – Future Finance                                                                        

Introduction on WFC website: (Italics mine) Financial markets and the monetary system are at the heart of the world economy. A new financial system is therefore the core of a new economy that is able to cope with the global challenges of poverty, climate change, and the destruction of natural resources. The current crisis widens the political space for change. Given that the financial crisis is linked to the food crisis and the ecosystem crisis, a fundamental rethink is urgently needed. Starting with a reassessment of the rules of finance, the World Future Council Finance Commission will identify the systemic drivers of our current crises and develop  concrete policy proposals guiding the transition towards sustainable and equitable growth. A coalition of social banks has provided the core funding for policy work on Future Finance over the next three years (till 2013).”         Activities:  Report on best policy practice and mini-brochures on concrete policy recommendations will raise awareness, engage decision makers and support policy implementation Speeches and media work at international conferences will build high-level awareness Strategy workshops with opinion leaders at important international events will encourage debate and provide practical policy advice.   Online policy platform will widen debate and build communities for change,  connecting decision makers with civil society          Future Finance Expert Commission: The Expert Commission on Future Finance includes Councillors Prof. Prabhu Guptara (UBS Bank), Prof. Stephen Marglin (Harvard University), Prof. Manfred Max-Neef (Pioneer of “Barefoot Economics”), Francisco Whitaker (Co-Founder of the World Social Forum), Anders Wijkman (Member of European Parliament), Advisors Prof. Margrit Kennedy (Founder of the Money Network Alliance), Marcello Palazzi (Taellberg Forum), Anthony Simon (World Business Council on Sustainable Development) and Hans Zulliger (Foundation Third Millennium), and external experts like Falk Zientz (GLS Bank).
Background information: For more detailed information on the WFC’s Future Finance proposals, you can download Jakob von Uexkull’s position paper and a presentation by Commission Coordinator Stefan Biskamp.

Transforming our Money System – 6

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Transforming the Money System: (2) how to implement and embed alternatives       As stated already in part (1) of this section on transforming the system, Greco states clearly that design principles need to be applied both to the system itself and the strategies for changing it. These need to be based on an understanding of money and the money system and how it has developed historically, and also of social dynamics, markets and networks in relation to money. The elements of the solutions he is proposing are based on his understanding and on information about what has and has not worked in finding alternatives in the past, what look like promising ideas, and the market and social conditions or context that would enable them to work – or act as forces against them. All his solutions come from ideas, understandings and trial experiments that are already publicly available. He has put this all together in a new and compelling way. Here we are looking at some of the design principles he extracts from studies of societal change as well as his with others from attempts to establish alternatives to some or all functions of the money system. These principles are there to consider in designing strategies for implementing innovations, rather than the solution options themselves, and the contextual conditions that enable them to be integrated into society.

All societal change, based on an analysis of historical examples involves all key social actor groups, and both national and local initiatives, together with networking on different scales and in different ways for innovation and learning. Frank Geehls and his colleagues (to whom Greco does not refer) have attempted to see patterns in socio-technical innovation and change often over a 50 year period. (See for example  and which gives an overview of his work and  publications). They note that different transformations go through similar stages in different ways that may or may not modify or radically change the dominant current cultural and normative rules and formal institutions in a society (this mix of rules Geehls and his colleagues call “regimes”). There are often cycles on different timescales within these stages (like a wave form across time). How bottom up and top down change across social actor groups might work for the money system is an interesting question, given resistances and fears of different kinds.

Greco emphasises the importance of local bottom up change (community and business led) – stating that a political process by itself has not worked. He also sees the key to economic survival and environmental sustainability in the future to be local communities gaining more economic independence and having more control over how their material needs are met. At the same time the changes in the money system he suggests, especially use of mutual credit clearing, would fit well into the emerging global web-based trading platform, a major transformational change in itself. He focuses on creating the conditions for these changes both locally and globally and using the unexpected turn of events as an opportunity where this is possible.

 Greco alludes to what many people see as one of the key guiding ideas (zeitgeist) – though he does not use this concept as such – for the next step in human history and evolution: collaboration or synergy (at the start of chapter 18 on organisational forms). He describes how being different from each other in values, life styles and traditions can create both conflict (in protection or promotion of a group identity) or a rich diversity once differences are respected and transcended through connection with our common humanity. He also stresses how the current problems, opportunities and challenges we are facing can only be addressed through co-operation on much larger scales than in the past. In a complex, more inter-connected global economy, solutions to global problems or advances in human civilisation can only occur through greater collaboration and co-operation, more co-ordinated action. Our increasing connectivity can help here. In nature the forces and capabilities for co-operation are greater than those of competition. Even Dawkins, author of the selfish gene, says he would now rename the title of his book as the co-operative gene. Gregory Bateson said the Darwin’s book should have been called survival of species and habitat, as the one depends on the other. But Darwin too recognised the co-operation in nature. This co-operation Greco sees working at local levels especially, as well as globally at times. In discussing the Mondragon example of a co-operative economy (see below) he quotes Terry Mollner who described Mondragon as an example of the emerging “relationship age society”. See LovingSociety.html

 Major improvements in, and transformation of, the money system are more likely to come initially through the developing web-based trading platform and through private, voluntary and free market use of alternative exchange media – such as mutual credit clearing. These initiatives in innovation are more “bottom up”, applying new technology and forms of business and trade within the business sector or networks of local organisations  across all sectors – business, voluntary, NGO, public sector, research centres in or outside universities – rather than “top down” through new legislation and political initiatives – though these may follow, and Greco points out a role for central government. They also fit an age of synergy and relationship, with more democracy at local as well as national levels. Greco refers to two key authors on societal change – Christenson on disruptive technologies (relevant both to global and local change), and Gledhill on networking and other factors (as well as other authors on network theory).

 In discussing the evolution and development of a web-based trading platform around the world, Greco uses some of the ideas and analysis by Clayton Christensen in the Innovator’s Dilemma  (03 New Yk Collins) as well as quoting the management writer Peter Drucker. See for access to his key ideas and books, including the concept of  “disruptive technologies”.

 Christensen’s two types of technology – disruptive or sustaining are relevant to both local and globally networked change, and their interconnection. Techonology can be disruptive of the current ways of seeing, thinking and acting – the informal cognitive or normative rules and those embedded in formal institutions and rules. This is similar to Kuhn’s distinction between “ordinary science” and “revolutionary” science (new fundamental mindset). It is also similar to Gregory Bateson, and later Chris Argyris’s, distinction between two levels of learning – change within a frame of reference or way of seeing and thinking, and change of  that frame or organising structure (and to Einstein’s saying that a major problem cannot be solved within the mindset that helped create it). The first is cumulative change through improvement; the second is transformational change (change of form for organising thinking and action), which can also have a build up of disconfirmation of current mental models guiding cognition, decision and action. Bateson built on the ideas of Russell and Whitehead – a category (organising concept) cannot be a member of itself; so there are two levels at play here. These sets of rules can form together a “regime” (that has both political and cultural connotations as the regime is embodied in the dominant culture and the institutions and groups of people who enact or follow it).

 Looking at the forces for change and against change (Kurt Lewin’s “Force Field Analysis” see ) is familiar to consultants and managers involved in organisational change (and to others). Greco looks at the strengths and vulnerabilities of the current system of political money and conventional banking (c.f. a SWOT analysis of strengths, weakness, opportunities and threats).

 Against change:

What has made the current political money system so dominant?

Greco sets this out:

Inertia – people are used to it, it is accepted across countries, with ease of foreign exchange.

Above all it is supported and protected by national governments and political privilege. Dominant companies generally can become unresponsive to developments in technology or markets; their focus is on improving current products more than transformational innovation. They can ignore or suppress the competition of disruptive technologies, or be very late in adopting them (Christensen makes this point too). With the money system the power of government has been used to suppress alternative credit systems or currencies. The entrenched position of the money and banking establishment exceeds that of any dominant group of companies in other sectors.

Alongside this there is a lack of awareness of the ill effects of the current system and of viable alternatives.

 For change:

The current money system is unstable, unsustainable, inequitable and over-expensive. Instability in a globalised finance system is shown in the credit crunch. Other destabilizing forces are rising or volatile oil and food prices. Bank-created debt-money drives the need for unsustainable economic growth, the effects of which are well documented in the form of getting out of balance with what can be supported by our natural habitat and resources, and at the same time polluting ecosystems or putting the climate system out of balance as well, potentially destroying more habitats and species, as well as reducing the human population, through drought, famine, and extremes of climate. Inequity shows in the poverty trap and greater income inequality that leads to unhealthy societies (see Richard Wilkinson and Kate Pickett (09) Spirit Level or the 2010 paperback of this Why Equality is better for Everyone see )

 Debit and credit cards are more expensive to users (buyers and sellers) than they need to be. Christensen points out that dominant companies often overshoot their markets, making them vunerable to displacement. They give their customers more than they need or are willing to pay for. The consortia of banks within the two major credit card companies have co-operated to raise interest rates and fees and make conditions more stringent. Those caught in the debt trap feel exploited.

 The technology is now there for a democratically structured global payment system with membership open to all, alongside a complete web-based trading platform; the blocks are political (see above) and vested interests, but this trading platform is emerging and will continue to grow with a greater functionality and range of services. This has what Christensen calls “innovative potential”.

 In summary, while the forces for change may be strong – so also is the resistance in the form of protection of the current system by governments.

 So Greco suggests focusing on niche markets where exchange alternatives are appreciated. In the grass roots, community sector the attraction is often initially ideological – social justice and equity, local self-determination and protection/restoration of the natural environment on which we depend. In the business and commercial sector the attraction has been to be able to have another medium of exchange for trading without recourse to the national currency, especially when it is unstable or scarce, and to be able to sell goods and services to other members of the exchange association. As the performance and reliability of these alternatives improves and they are more trustworthy, others will be attracted. The usefulness of credit clearing for exchange increases as more people and businesses up and down the supply chain are members, and more products and services are included. A “critical mass” needs to be arrived at in terms of scale and scope.

 Money as an exchange medium is nothing more than credit, and credit can be organised more effectively, efficiently and equitably (the 3 “E’s”); and in a way that does not drive unsustainable growth through over-extended debt obligations. Mutual credit clearing associations, supported by the appropriate constitutional rules and agreements and technology (such as mobile phones), is the way forward proposed by Greco, and these associations can also issue their own currency for use by non-members in their economic region, backed by their exchange of core goods and services that are in demand in so far as they cover basic needs. Local businesses, community groups, NGOs and Councils can work together to establish this in a region of a country. This would be a transformational change.

 But alongside these local developments, the progress of a global web-based trading platform since 2000 is the other line of development and potential transformation in the money system. More commerce is being transacted on the internet, and functionality and the range of services continue to improve. Greco lists some disruptive technologies – using Christensen’s definition of technology. Technology in Christensen’s terms is a general term to cover any new ways of using labour, capital, materials and information to transform them into products and services of greater value. So this can include innovative technologies in investment, distribution or marketing and managerial/organisational processes as well as the narrower sense of design and production.  For example: web-based market places on the internet (including consumer to consumer lending and borrowing ( and see Rachel Botsman and Boo Rogers’ book on collaborative consumption in general – What’s mine is yours ), transparency in web-based accounting and exchange systems, strong identity verification, secure encryption of information over the internet, updated reputation rating of suppliers and buyers (e.g. using to find tradesmen in the UK), re-emergence of mutual companies alongside co-responsibility and local web-based markets – and direct credit clearing between buyer’s and seller’s that bypasses the national currency and brings the definition or form of money as exchange up to date. Greco sees a combination of these being able to provide the structures that can mediate the establishment of more effective and equitable exchange processes that enhance more sustainable economic activity.

 Greco quotes the management writer Peter Drucker: profits migrate to the suppliers of the missing component that completes an (evolving) system. The four key components that Greco sees for a completed web based trading platform are: a market place, a social network, a means of exchange or payment, and a measure of value or pricing unit. Market places are where sellers and buyers can communicate what they offer and need and negotiate. These can be business to end-customer (B2C) or business to business (B2B). Social network enables people to become known to each other, personally or professionally; and establish identity, credentials and reputation, and, through supporting and tracking exchange or co-ordination, to build trust and valued co-operation between network members. Amazon and eBay are well known examples of marketplaces, and Facebook or Linkedin or MySpace of social networks.

 The gaps are in the last two, and ways of addressing these are described and discussed in this book, and elsewhere by Greco – mutual credit clearing using an information system (possibly accompanied by local currencies previously used when the national currency and economy is in distress), and a basket of regularly exchanged commodities as a unit of value. PayPal is a trusted intermediary for payments but it uses bank-created debt money. PayPal could set up a mutual credit clearing network amongst some its account holders if it extended lines of credit to them in expectation of return of income from other account holders. National currencies are unstable and “political money” in the sense that their value is determined by the policies of their governments and central bank issuers. Greco sees legal tender laws being abolished at some time in the future. These laws make these currencies the measure of value as well as a means of payment that must be accepted. This will require standard commodities (not just gold or silver as in the past) being used again to create a unit of value. In the meantime buyer’s and seller’s can adopt a non-political measure of value based on a basket of commodities (see Appendix B of this book). This can be deferred as a missing component until first a network of mutual credit clearing systems for exchange is set up.

These two missing components need to be integrated with the market places and social networks of the global web-based trading platform that is emerging. This can take over some of the functions of the physical market place and banks.

Commercial trade exchanges have developed over the last 30 years and provide proof of concept, a key step in the innovation journey. Optimising their internal processes and design and taking the networks to scale will be the next step. Will these be bold enough to develop new markets and extend their membership, up and down the supply chain, business to customer (e.g. employees of members initially) as well as business to business)? Will the small ones be taken over by the big ones, or by market place web-based businesses such as Amazon, for some markets? Or by web-enabled payment intermediaries like PayPal?

 A “bottom up”, locally developed, internationally networked, evolutionary change with a new Role for Governments, national and local is explored by Greco. Using the political process to change the dominant money system has failed in the past. But it might form part of the solution – in raising awareness of issues and needs (e.g. Ron Paul’s candidacy for the US presidency in 2008, and some groups of politicians in the UK, and in national and international policy forming networks such as those reflected in the World Future Council), and then supporting well managed and designed local or regional trials. Attention needs to be given to relations with governments, and often this is best done through some kind of national association (c.f. the IRTA for commercial trade exchanges). Locally initiated alternatives more often fail too – as described in the section on these above. So the learning from this needs to be used for designing both the system and implementation and learning processes.

Greco emphasises the importance of awareness raising as part of getting people to consider alternatives to their existing patterns of behaviour and to systems they have trusted till now, particularly in bottom up initiatives and creating the enabling context.

 Most countries have not experienced serious inflation for long or have reasons to question the current money system. Generally there is little knowledge of what money is for and how it is created and used, with perhaps financial journalists and economists making it sound more complicated than it is by using technical terms.

 These changes will require people to realise how they can empower themselves regarding the money system, and assert that power, reclaiming the “credit commons”. Educating and informing people about the current money system, and the risks and effects of it, in a way can create a felt need; and ideas of solutions to adapt to their conditions, give them the confidence to be part of a growing network of people wanting to do something about it  – without unduly threatening current vested interests (and those who support or only feel secure with a centralised money system rather than a more decentralised, egalitarian, empowering, equitable, resilient and sustainable one).

Greco agrees with Riegel who suggests a “freedom of association” approach to setting these changes going, based on information and education, with government support.

These changes could best come about through private voluntary initiative, in an environment of freedom of association and the right of contract are protected and preserved. Local communities can reduce their dependence on political currencies and on bank-created credit. They can take control of their own credit and organise ways of allocating it directly to people and businesses they can trust. As Riegel says there is no legal barrier to a private enterprise, non-debt, non-interest, mutual money system. As Ulrich von Beckerath stated in the 1930’s: “The extension of exchange transactions without state money is in reality the beginning of a new system of settling accounts and ..  a new economic order”. Any local credit unit or currency would be open to acceptance (and so also rejection or discounting) in a local market or network of markets. Only the issuer of the credit unit would be obliged to accept it. These changes would be developed locally with “local” meaning a viable socio-economic area in which the day to day trading of goods and services that meet common basic needs occurs.

Awareness raising and continuous learning from local initiatives can build local or sub-regional social and economic networks of suppliers of key goods and services and their customers, both citizens and other businesses, a network that sees and feels the need to innovate and try out new forms of exchange, investment and measures of value (the functions of money). Trust and credibility will need to be established within this network and a form of organisation, ownership and control set up that maintains and protects this.

Any learning from action and experience in developing and using a system that works can then be shared in national and international networks, facilitated by the internet.

Through numerous success stories, examples and role models, linked through learning networks and wider multi-local socio-economic exchange, building up trust in alternative money systems that can stand alongside the traditional, and if seen to be successful and secure, supplant it over time.  More and more people can be weaned off the current system, including the key groups in a society – citizens, business, government, science and education and the media.

 This would end a system that forces perpetual growth to one which is more steady and fulfils people’s material needs in a way that respects the human dignity and the need for a fulfilling life, and at the same time nurtures the systems of nature that support all life on this planet. The measures of success would be aspects of the quality of (all) life, rather than the quantity of output and consumption.

 Local trials of alternative ways of fulfilling the functions of money will need to be supported widely to counteract those with vested interests in the current system and threatened by competition from alternative associations. Central and local government can give some initial support while having their concerns addressed, and then when there is wider support from businesses and individual customers, ensure there are the regulatory frameworks and other support mechanisms needed for them to work and to be protected from sabotage.

 In discussing networks and enabling conditions Greco mentions 3 key factors described by M. Gladwell (in his book The Tipping Point 2000 – see also ). Gladwell draws analogies between nature, epidemics and social change processes.

The Law of the Few: a few salient people can make a big difference and help an idea, practice or product spread like a virus. They take on 3 types of role: those who know all about it and want to share what they know (“mavens” he calls them), The connectors who “know everyone” and can bridge the gaps in social networks, sharing the news, and the sales people who can persuade people to adopt, use or buy it.

The Stickiness Factor: characteristics of the alternative (i.e. the design of the money system or a part of it rather than the implementation process) that can make it attract and stick.

The Power of Context: the enabling conditions or factors that create a strong felt need. The Swiss WIR bank he gives as an example of this.

Greco also mentions other studies of social change, particularly of networks such as L. Barabasi’s Linked: the new science of networks (02). He gives an example of the spread of Hotmail which used ease of adoption and signing up (low cost) together with users advertising it by default; there was an offer to the recipient to set up their own free account at the end of each email sent by a user, in this way using their networks.

Transforming our Money System – 5

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Transforming the Money System: (1) what are the Alternatives  Greco emphasizes the importance of design and trialling a transformation of the money system rather than attempting to reform it politically within the socio-cultural mindset that created the current system. He quotes R. Buckminster Fuller’s call for “participation in the design revolution” (The Critical Path 1981). He states clearly that design needs to be applied both to the system itself and the strategies for changing it. It needs to be based on an understanding of money and the money system and how it has developed historically, and also of social dynamics, markets and networks in relation to money. The elements of the solutions he is proposing are based on his understanding and on information about what has and has not worked in finding alternatives in the past, what look like promising ideas, and the market and social conditions that would enable them to work – or oppose them. All his solutions come from ideas, understandings and trial experiments that are already publicly available. He has put this all together in a new and compelling way.

 A key part of this is educating people about the money system – as it is and how it could be, and he quotes Riegel and his essay on Breaking the English Tradition on his reinventing money website.

Mutual Credit Clearing        The use of a clearing process is not new; it seems to date back to the medieval commercial trading fairs, before the establishment of banks. Claims between a group of participants were offset against each other, and “cleared”. It is a development of selling on “open account”, as it is multilateral and allows member’s expected sales (or other income) to pay for purchases up to an agreed limit. Banks have carried this out since using cheques. Associations of banks have been using “clearing houses” to settle claims between their members arising from cheques drawn on one another, with very little cash having to be transferred between them (and before that “runners” liaising between them, who may have started to settle between them to save running, using coffee houses to settle in). What is owed by one may be paid off by what another owes them. Now this is done be transferring deposits between banks in a computerised network, often using a central bank, as the banker’s bank, to hold deposits for them.

This clearing process is not restricted to banks. Commercial trade exchanges and local exchange systems (LETS) have used clearing processes for years too. Balances between what is payable and receivable, if not too large, can be carried over rather than settled, with an agreed limit on the amount of debt or debit. An updated version of this can be part of a new paradigm for the money system that follows the principles stated above. It would provide interest-free turnover credit within the process of mutual credit clearing for exchange between suppliers of goods and services or labour within their market or network, with the total amount of credit within it being the equivalent of the money supply for that system, self-adjusting according to members’ trading needs within it. This would mean off-setting purchases against forthcoming sales within an association of workers, manufacturers, and merchants or distributors, all of whom are both buyers and sellers within that association. This could be done independently of banks. Once this alternative credit clearing association is established between suppliers who sell to and buy from one another it could expand to include everyone who buys and sells within an economic area. The costs of operating this could be covered by a small transaction fee. Alternatively a token or note can be used in conjunction with a mutual credit clearing association instead of having to record each transaction as a seller or buyer and note the balance each time. Members can be given tokens up the limit of the debt they are allowed.

This saves the cost of interest on short term loans (or agreed overdrafts) and of transaction costs decided by the bank, and makes trading and exchange networks relatively more independent of inflation, the monetisation of government debt, bank credit polices and instability in global markets. It would also promote exchange and trade between more local businesses and customers.

 Examples of mutual credit clearing working and not working have been studied by Greco. These show that where there is a strong felt need (in the past through shortage of the official currency or other media for exchange when conventional money is mismanaged or when there is not enough credit for small businesses) and mutual credit systems can fulfil that need then a network of people who trade in key goods and services can come together. The mutual credit clearing systems need to be set up and managed on a sound basis, and to be available for regularly traded goods through having enough members over a wide enough socio-economic geographical area: see regional development and economic networks (below)  for the role of local councils within a region co-operating in this and other solutions and transformations of the money system.

 The design of the system and its rules would be determined by the members. But these can now be informed by the best thinkers on this who have set out the design principles and governance agreements that are specific to non-monetary (in the normal meaning of money) exchange systems, and mechanisms that are sound, effective, economical, –  and honest, fair, decentralised and empowering. Greco sets out a model membership agreement for mutual credit clearing associations in Appendix A. An example he gives is the Swiss WIR bank (originally called the “economic circle co-operative” – see section on implementation of change for description of this) which has been operating mutual credit for 70 years or more for small and medium sized businesses with security provided by a debt limit (related to average sales) and some real estate or other collateral as surety against leaving the system without settling debts. (WIR bank is currently being studied by the World Future Council). Another principle that has been adopted instead of collateral is one of co-responsibility where each member together cover for one member’s default. Or members can create a pool of reserves or insurance for bad debt, which could be paid for out of a portion of the transaction costs, debited to members’ accounts and credited to an administration account. This has been used in microlending (e.g. the Grameen bank) and in group insurance. It can now be supported too by the latest developments in electronic telecommunications that can provide the tools and infrastructure needed. All this exists already; this will entail changes in culture in a group or a society (c.f. shared, largely implicit, cognitive “rules” organising our minds and normative rules organising our expectations of and relationships with one another), and in institutions (formal, explicit rules and ways of co-operating and organising) alongside innovations in technology and the ways of operating and living that are found to be needed to accompany them. All of these can come together as parts of an evolving new system. These local circles or networks could be part of a web of interlinked networks based on the same principles, as they are tried and tested and seen to be working and promoting mutual trust and confidence in the system. These systems need to win widespread support to counteract those with vested interests in the current system.

 Community based Alternative Exchange Systems: Learning from Experience  These are described and discussed more in two of Greco’s earlier publications: Money: understanding and creating alternatives to legal tender. And New Money for Healthy Communities (see his website, reinventing money). There are thousands of mutual exchange alternatives throughout the world (the non-commercial community exchanges such as barter, LETS, time dollars, local currencies etc, alongside commercial business-to-business exchanges described below), the current wave dating back to the 1970s, attracting media interest. With a couple of notable exceptions that he knows of, Greco sees most of these failing and seeks to analyses the cause of failure, so as to learn from them, including system design deficiencies. He sees the commercial part of the movement having much potential that has just not been realised. Most grass roots community initiatives he sees as starting with great enthusiasm on the part of the organising group, with access to sound advice on design of the system and implementation process (money system experts and in some cases also Permaculture design consultants, followed by a rapid growth in participation – and then volunteer burnout, inconvenience factors and slow decline. Even well-designed systems can suffer from this. Relationships and knowhow nevertheless remain in a community and the system can be resuscitated in times of crisis.

The main reasons for failures in mutual credit clearing and community currencies Greco sees as a failure of reciprocity and an inadequate scale and scope of operation.

Anything that interferes with the necessary principle of reciprocity (giving as much as you get and vice versa) – see above in section on principles, or creates doubts about how this is enacted in reality, will lead to lack of support in initiating or maintaining the system, whether currency, credit clearing or investment. This can occur in the system design through lack of a clear agreement or unsatisfactory limits on debt or the improper issuing of currency, and in the operational management of the system in lack of clear procedures and controls or accountability and transparency (sometimes due to over-reliance on volunteers). Also the failure in more strategic management – identifying and responding to internal and external threats – can lead to decline.

The other common cause of failure (see above in section on principles), inadequate scale and scope (c.f. critical mass and tipping point) takes different forms: too narrow a collection of goods and services covered, failure to attract all steps and levels of the supply chain, failure to achieve critical size of participants, and failure to gain acceptance in the mainstream of business activity. He recommends starting with suppliers whose goods and services are in greatest demand and who having a track record of financial stability.

Specific principles are set out in Chapter 14 for making complementary currencies work in four key areas: system design and system management – the two dealing with design of the strategies for implementation of the change will be described in the “how to change” section below, and these can apply to implementing alternatives in all 3 areas of the money system as well as to social and technical innovation and change more generally.

 Business to Business or Commercial Trade Exchanges and the IRTA   These have been growing in number across the world over the last 40 years but remain small in their local economies, limited by the number and diversity or their members, their geographical coverage and their failure to include all stages of the supply-consume-dispose chain or cycle. The International Reciprocal Trade Association ( ) said that in 2007 there were 40.000 businesses who were members of one of these, mainly small and medium-sized companies, enabling trades worth around 10 billion US dollars.

The mission of the IRTA is to provide all industry members with an ethically based global organization dedicated to the advancement of modern trade and barter, and other alternative capital systems, through the use of education, self regulation, high standards and government relations, and to raise awareness of the value of these processes to the entire Worldwide Community. 

Greco sees trade exchanges to have arrived at a consolidation stage and plateau with larger corporations like IMS, ITEX and Bartercard taking over small ones which in his view have much unrealised potential. Extending the scale and scope of their membership is part of realising this potential, especially to include more manufacturers and commodity suppliers to match the retail members in size, by members inviting their own suppliers to join as well as their business customers. Linked to this is the need to communicate better the benefits – in addition to member-to-member marketing, where members become preferred suppliers to fellow members as they accept payment in the form of exchange credit – of mutual credit clearing (e.g. ease of admin and interest free credit to cover the delay of receiving payment and to be able to use their later sales to pay for their immediate purchases); the value of this increases geometrically as the number of members increases, as with any other such network. To protect the value of the trade credits and confidence in the system, trade exchanges need to have contracts and operating rules to protect members in case of conflicts of interest (e.g. some using insider information to cherry pick what members are offering to the disadvantage of their fellow members) or to guard against failure to repay debt or keep it within agreed limits related to their average quarterly sales, with an agreed way of covering for bad debts, while these are kept to a minimum. As 3rd party record keepers of their members collective credit (with some members in debit for others to be in credit –they should be in balance), trade exchanges have a professional responsibility to their members, but in some cases these rules and agreements are not established or adhered to. Operating agreements can ensure members make their offerings clear to all before selling to other members, for example (transparency principle). If unable to discipline themselves they may be subject to government regulation or the operating rules of larger networks of trade exchanges in the future that allow for members of one to trade with members of another by following the same standard procedures. Making joining a trade exchange as easy as possible (with lines of credit being interest free, while some admin and insurance fee is chargeable) is another way to increase membership (as with any network or on-line exchange medium). As the number and diversity of members (including employees as customers) increases the financial value of the exchange is much more apparent as the range of goods and services exchanged this way increases. Tax would be collected annually by the government on the basis of the association sending a report of their members’ barter or exchanges for the year to the inland revenue. Greco sees cashless payments based on mutual credit clearing between buyers and sellers as an innovation as important as the printing press freeing people from dependence on one group or elite (scribes and scholars).

 Investment for Future Provision of Goods and Services: Partnership Finance    Most of us save through some form of investment in shares or bonds or pension schemes, though money on deposit in banks, for which we would normally gain some interest, is used by the banks themselves to make more money by investing it in stocks or bonds elsewhere, apart from money held in reserve to pay depositors seeking to withdraw. Savings as investments are financial claims that can be converted or liquidated into money by selling them. We meet our security needs this way (emergencies or unusual expenses) and save during the productive period of our lives to have money when we are no longer able to work and earn, either privately or through paying the government for a state pension. Our savings in the form of investments then can help finance future productive capacity through capital formation in this form; saving and investment are two sides of the same coin. To save we, and the economy as a whole, needs to produce a surplus over our consumption needs, represented by our collective savings and investments. But banks and credit unions (member savings lent to other members) often lend money for consumer spending rather than investment in future capacity. 

What is needed is a form of loan or equity that does not itself involve currency as this creates money that does not always follow what is currently being produced and sold or likely to be in the future. The loan or bond needs to be paid back when the borrower has earned the currency from labour or sales to do so, rather than through regular interest payments. There are ways of converting investment credit into turnover credit and vice versa. People who have excess turnover credit may want to save and those needing investment credit for future turnover can borrow from them, a capital formation process. In this way future investment credit is based on reallocating money that already exists, rather than creating more money by debt. Money will no longer be created to finance government debt or for consumer credit (which would need to be financed out of savings too) or for capital formation that does not put goods and services into the market in the foreseeable future.

This can be done within mutual credit clearing associations, the other key change suggested, and with any local currencies that these associations may issue on the basis of their productive turnover of goods and services within a local economic region. This can be done in the same way as with conventional money but using local currencies or the credit in the balance of a member if a clearing system. Savings for retirement or major purchases n the future can be accumulated and invested within this system once it has developed and there is a way of denominating the value or purchasing power of the currency in a concrete, objective basket of commodities (rather than by a national currency issued as legal tender). Surpluses can be accumulated as credit and then saved by lending to or investing in another member of the credit clearing exchange or of the community – for their own private purchases (e.g. for a new energy efficient car or for building insulation and solar panels, which in themselves may or may not produce savings or increase the value of a property) or for investing in their business or social enterprise. If the borrower then purchases from other members of the credit clearing exchange or a local business or supplier than the money is increases productive local exchange as well as gaining a return for the lender/saver. The risk would need to be assessed. There can be a number of forms of debt or equity or mixed arrangements.

Temporary Equity– rather than Debt – Financing: Partnership Financing There are two types of financial claims – debt and equity. Lenders of money on interest with often some collateral security have a debt claim on the borrower as their creditor. With an equity claim there is partial ownership with no fixed returns, obligatory repayment schedules or demand for collateral. In the securities market, debts take the form of bonds, notes and bills. Equities are represented by preferred or common stocks (shares) or shares in a limited partnership or other form of incorporation. Corporations and mutual funds often have a mix of bonds (loans) of different kinds (e.g. mortgage bonds or debentures raised against assets) and equity, preferred and common stock, to raise money for investment. Bondholders have priority over shareholders in making financial claims. Debt contracts mean that entrepreneurs take all the risk and have to pay back loans regularly even before they start making profit (if they are just starting). The relationship with lenders can therefore be adversarial, with creditors calculating whether they want to call in their loan or allow the business more time to succeed. An equity investment is based on a partnership sharing risk and reward and allowing time for the returns on the investment to materialise. It is consistent with the move towards greater collaboration in societies and world-wide and with religious traditions that forbid usury.

 For the finance function of money that does not create money through debt Greco recommends a shift from interest bearing debt financing to temporary equity financing in which risks and rewards are shared for finance (savings and investments for the future), making the interests of both parties congruent rather than opposed. This is a practice that already exists, in different forms, and was used in the middle ages when usury or interest was outlawed – as it is today with Islamic forms of finance. He compares a debt and an equity financed mortgage (in the Islamic community called a “halal” mortgage transferring the term from meat to finance!). This is relevant to making housing more affordable and also to all forms of loans to people and enterprises in a locality, for example: an investment in solar energy for heat or electricity in a house or commercial property for example, a local food growing or distribution initiative or a resource recycling business and so on.

With an equity mortgage the co-operative bank or financing organisation buys a temporary share of the property. The key factors are the down payment for a share of the equity, the amount of rent (rather than interest) paid each month by yourself or your tenants to the partners in the ownership (including yourself as the person(s) seeking the finance), the time period or term of the mortgage and the agreed arrangements for failure to pay the rent. You can calculate how long it would take to buy out the bank’s share if you use the rent paid to you each month to do this. When comparing an equity mortgage to a conventional loan mortgage the reduction in cost increases as the interest rate of the conventional increases (from 7% on) and as the level of rent deemed to be fair decreases (while your monthly payment can still be the same as the conventional mortgage would have been, meaning that you can buy the full ownership quicker). With an equity share mortgage if you are unable to pay the rent your equity share will diminish and if this continues beyond an agreed limit then you will have to let out or sell the house. If selling, then both partners want the best price as the bank’s claim does not have legal priority over yours as it is an equity rather than debt claim.

Varieties of Partnership Financing       See for an example of partnership financing through sharing of risk (through mutual guarantees within a credit union or guarantee society) and reward (through co-ownership by investors and investees of a productive asset). The shares pertain to revenues, not profits, and the sharing arrangement is temporary.

Peer to Peer or Citizen to Citizen Lending, Investing and Borrowing in the UK is currently a successful example of this, part of what is called the “social lending” movement. The equivalent in the US, is currently having its hands tied by legal registration processes. With Zopa, the system authenticates the identity of the loan applicant which is then given a risk rating. Borrowers can say what is the maximum interest they are prepared to pay, and lenders state the minimum rate of return they will accept. The system matches up lenders and borrowers. The request is then posted on the website as an offer for prospective lenders who can then offer an amount of their choosing. The risk of default is spread among many lenders. Lenders can diversify their investments among different borrowers. Typically savers have a higher rate of return and borrowers a lower rate of interest than they would get from a bank or other intermediary. Zopa states clearly that it is no party to the contract between lenders and borrowers; its function is to operate the lending platform. Zopa USA operates through a credit union which is mainly for consumer finance and at the usual rates, and is therefore just a marketing device for that credit union. It is not offering a solution then to linking all financing to savings or all lending as investment in future capacity, future goods and services.

 A Standard Measure of Value and Unit of Account    This would be based on a basket of regularly and widely traded commodities would fulfil this function in the place of national currencies that can be manipulated by governments, central banks and investment banks, a political-financial elite. This, together with a means of credit clearing and payment, enables exchange to take place particularly between mutual credit clearing circles, business-to-business trade exchanges and alternative currencies, private and public. Without legal tender status an inflated currency will be discounted in relation to an objective standard of value.

An Alternative Pricing Unit or Measure of Value    To be less tied to the national money system, local economies will need to be able to develop an alternative pricing unit or measure of value when they need to.

Whatever the local credit unit is, people will initially need to translate it into the national currency as we value what we buy or earn using that as a standard, probably being equated one to one (e.g. £1 = 1 local credit unit). With a mutual credit clearing system credit is not held long enough for any loss of value of the national currency to have any effect. Only when credit is more long term or there is double digit inflation would there be a need to define a local credit unit in objective terms – namely relative to a “basket” of commodities that meet basic, regular needs. A national currency was valued initially in terms of a specific weight of silver then gold, but this was abolished when it became legally enforced as tender. After that a national currency would lose value in so far as government and banks issued money that did not match goods and services in the market (see above). Rather than seeing gold and silver and other basic commodities as having a price in terms of the legally enforced currency, people need to think of this the other way round – the value of the currency in terms of these commodities, and the price they are traded at. (The US dollar lost 58% of its value in silver between 2005 and 2008.). To have a stable standard unit of value a basket or group of commonly traded commodities is suggested (and how to do this spelt out in an appendix and an earlier book by Greco on Money and Debt: A Solution to the Global Crisis, with criteria for selecting and weighting 15 or more commodities). This is based on earlier real life experiments or test cases by R. Borsodi in 1972 Inflation and the Coming Keynesian Catastrophe – the story of the Exeter Experiment with Constants.

 Looser Links to the National Currency; Greater Separation of State and Money    This means finding alternatives to the national currency as a medium of exchange and as a measure of value or a pricing unit.

To empower a local economy and community in the process of exchange a credit unit (or currency) can be issued on the basis of goods and services in everyday demand that are changing hands regularly within an existing socio-economic network and area around a group of towns or a city. Such a unit amounts to an IOU or credit instrument that is accepted voluntarily by some other provider (a supplier or employee).  This is redeemed in kind by the original issuer. In this way community members “monetise” the value of their own production, based on their own values and criteria, without the involvement of the government or banks and without the need to have any official money at the start. This liberates the exchange process and creates a “credit commons”, bringing this under local control; the community has a measure of independence from the official currency and the policies of the central bank. The “commons” refers to any resource that is open to the public and not owned privately or by a government organisation.

Issue of Local community currencies these have been issued till now on the basis of payment of a national currency. This is similar to a local traveller’s cheque. While encouraging buying locally, it may not mediate many local transactions before being redeemed or changed back to the national currency. Local currencies need to maintain their value and be widely used quite quickly. Principles are needed to govern the qualification to issue money, the basis on which currency is issued and how much currency is sent into circulation by each issuer. Greco sets these out in chapter 14, in summary:

Anyone putting goods and services into the market is qualified to issue money on condition that the goods and services offered need to be in everyday demand at prices that are competitive and published. Greco quotes E.C.Reigel who said: “He would create money to buy goods and services must be prepared to produce goods and services with which to buy the money” (principle of reciprocity and equity).  (See for this 1978 publication on Flight from Inflation.).

If regional networks of local mutual credit clearing between businesses supplying goods and services in demand become established, these associations can issue a currency or credit on account that can enable non-members who buy from members to exchange goods independently of the national currency and non-local banks (see regional development networks below).

Money in its current form is no more than credit but not all credit serves the exchange function. The basis for issuing money should be that it is for the circulation of short-term turnover credit as a counterpart to goods and services about to enter the market, enabling suppliers to buy what they need in order to supply what they give or produce. This should be distinct from long-term credit, investment in future production capability, a second function of money. What this amount is can be determined by the time it takes from delivering to being paid – the rate of turnover varying by business, the average being around 3 months. The rate for each business can be based on the average of its sales over such a period. This will determine the amount of currency they can issue, its debit balance in a mutual credit clearing association. The rate at which a currency returns to its issuer (normally a daily rate of 1%) needs to be fast enough to prevent its devaluation or rejection in the absence of legal tender status. So the goods or services need to be in everyday demand. It needs to be accepted by suppliers of what people need and want most (such as energy, telecommunications, water– utilities, food and transport. These can also be the main contributors to carbon emissions as well as being core needs that need to be met enough locally for local resilience). Then the issuers can be sure that their suppliers will also accept it. The currency needs to be used and to attract or pull people in rather than pushed onto people; for this the basis of issuing it needs to be in line with these principles. Otherwise it will stagnate in pools, not used enough and so exchanged back into the national currency.

 Using the Internet for Trade with Businesses and Direct Collaborative Exchange between people       Greco sees the emerging global web-based trading platform as an essential development with which his suggestion for reforms of the money system would need to be integrated, especially mutual credit clearing to provide temporary free credit and bypass the use of money for exchange. This is described in Part 2 on implementing change.

Forms of Organisation and Governance   Greco sees the key to economic survival and environmental sustainability in the future to be local communities gaining more economic independence and having more control over how their material needs are met. He also sees that where this has worked it has been based on an ethic of co-operation in which people come before profits. His examples then of organisational forms – Bali and Mondragon – are of this. His other discussion of organisational forms is about what is applicable to mutual credit clearing associations.

 For more economic independence he sees that any organised action needs to enhance the social, economic and political solidarity of the community, restore the “commons” – resources open to everyone and not owned privately or by the public sector (including the credit commons), support localisation of economic activity (in sourcing inputs, in production, distribution and consumption and in local savings and investments), and provide a degree of independence from the conventional money system, banking and finance. All this requires local organisation on a human scale, and personal responsibility alongside empowerment.

The Bali example is about the form of organisation for the civic community (a “Banjar”), a form that has lasted over a thousand years. Almost everyone belongs to a Banjar, with this playing a part in forming their identity. Their size varies between 50 people in small villages to more than a thousand in towns or cities in which there may be several of them. The scale is small enough for self-determination, with heads of households acting as representatives – as Gladwell points out any group bigger than 150 finds it difficult to reach agreements together, Everyone is expected to provide a service (time) or money to specific projects in their Banjar. They operate democratically and co-operatively. This maintains power at a local level and preserves a sense of community by mobilising resources independently of the monetary system and providing opportunities for families and neighbours to work together. Being egalitarian in nature it minimises differences in class and social status. See

 Regional Co-operative Economy in the Basque region of Spain: the Mondragon Example     This has been built up over 60 or so years since the late 1940’s. It is based on human and co-operative principles, putting people above profits, without ignoring making it work economically either. The Mondragon Co-operative Corporation is now the overall governing body. The priest who initiated the founding of this made economic development and education the priorities as the Basque people were suffering repression from the Franco regime following their support of his Republican opponents in the civil war. So there was a real felt need in terms of economic survival, a measure of local autonomy and maintenance of a cultural identity. Starting with a Polytechnic school, its ex-students later formed a worker’s co-operative and then a few years later a Credit Union, a People’s Bank, was formed to provide start-up funds, business advice and financial services to workers’ co-operatives in the region. This crucial third step enabled the growth of a co-operative economy. The priority here was regional self-reliance, production and sales, with RandD being part of co-operatives over time to make them less dependent on paying royalties to innovators elsewhere or being obligated to export to them. The principles of this whole development are expressed in a Mandala type symbol with education and the sovereignty of labour at the centre, and capital as supportive of it (a means rather than an end), alongside democratic organisation and participation in management and wage solidarity. The broader aim is to support inter-cooperation outside the region and be an example and driver of social transformation (following “be the change” principles). From the start they worked for the common good rather than confronting the Franco regime directly. There are now 250 companies in around 12 countries, with some of them moving towards the implementation of the complete organisational form. The corporate centre encourages and co-ordinates networking and the promotion of the values and principles. The aim here is to find a balance between efficiency and democracy, economic and social concerns, private and general interests, living the cooperative model and co-operating with other business models, equality and hierarchical organisation (for this last polarity or dilemma see and the book by John Buck and Sharon Villines We the People available there and on ). The elements making it a success included: whole movement starting with a clear vision and strengthening the existing strong social network, developing  a set of balanced values including business like efficiency and re-investment of resources generated, and organisations, systems and a network infrastructure for co-operation and co-ordination for education, finance, health and welfare and innovation and R&D in the region and for handling conflict and mutual support in crises, continuous education and ongoing adaptation to changing external conditions. The support in crises across between organisations in the region seems key. See  

Organising Credit Clearing Exchanges      There are a number of viable ways of doing this. Up till now the commercial exchanges have been for-profit or limited liability organisations and the community grass roots ones informal by sponsored by non-profit organisation to act as a legal or fiscal umbrella. Greco argues that it would be useful for find forms that fit local economic democracy and relocalisation. The key aim would be to retain power and control locally while being globally networked. As for-profit organisations get larger and shares more widely dispersed they risk becoming self-serving to far too great an extent, internalising profits and externalising costs. Existing laws for corporations encourage this by defining fiduciary responsibility as the maximisation of profits at the cost of putting social and other objectives aside. Peter Barnes in his book Capitalism 3.0: A guide to reclaiming the Commons (Berrett-Koehler 06) suggests that Trusts are set up to control access to the commons and to charge a rent to corporations for access to them, which then binds them into internalising costs that they have externalised and provides a dividend to citizens, Governments have failed to protect the commons. Greco suggests that Regional Development Trusts (with representative membership), something he is trying out in a project in India (see also regional development section below). To be locally controlled while being globally useful mutual credit clearing exchanges need to be small yet networked regionally and globally. (c.f. Gladwell).

 LLP: An Organising Form for both Complementary Exchanges and for Partnership Finance for Communities – e.g. for local Renewable Energy      Limited Liability Partnerships (with partners representing all the stakeholders) might be a way of setting up complementary mutual credit clearing exchanges in the future and also of providing finance for local energy generation and the greening of technology and the economy. Chris Cook is promoting the idea of combining risk guarantee, revenue sharing and temporary equity under the name of “Open Capital” . See for an example of partnership financing through sharing of risk (through mutual guarantees within a credit union or guarantee society) and reward (through co-ownership by investors and investees of a productive asset). He sees the interests of the provider and user of capital being aligned this way. The shares pertain to revenues and not profits and the arrangement is temporary.

 Mutual Companies   These cover not just mutual savings banks or insurance societies or credit unions but also guarantee societies and savings and loans associations. They have no shareholders; they are owned by their depositors, policy holders, clients and members. The conditions may be right again for more of these again as they could not survive the investment and interest rate conditions of the early 1980s.

 Mutual Credit Clearing: the Swiss WIR Bank example (This is written up by Tobias Studer in 1998 with an English translation – see for an electronic version. Also the World Future Council is conducting a study of it as part of its wider project on future finance – website and see note at end)

This started over 70 years ago and is the longest surviving example of this kind of system working. It was founded as a self-help organisation to enable its members, mainly middle class entrepreneurial business men, to trade between themselves during the Great Depression in 1934 when there was a shortage of official currency. An account credit was created at first by a deposit made by each new member in the official currency. Then later this credit was created by a “loan”, effectively making an “economic circle co-operative”, separate from the national currency and money system, existing in parallel with it. In one year it had 3000 members and one million Swiss francs turnover; it clearly met a felt need as the economies and currencies of the western world where in crisis, and there was much less credit available to finance the gap between purchasing of supplies or labour and income from sales. It continued to grow between 1952 and 1988. Then it became more like a conventional bank, making its ownership in the form of stocks, open to all, and accepting in 1996 Swiss francs as deposits and making loans in Swiss francs. Now Swiss law forbids banks being organised as co-operatives. In 2008 the Swiss franc portion of its business was twice as large as its credit account portion (see ). The total amount of credit cleared remains the same as in 1997 – around $1.5 billion, but the number of accounts is slowly decreasing from 77000 or so in 2003. Greco wonders if the success of WIR was a threat to the conventional banking system. Whether this is true or not, WIR showed how mutual credit clearing can be sustained if there are enough members and transactions.

 Social Money and Social Banking      The term “social money” can be used in different ways – including finding ways of funding the not-for-profit sector. But “social banking” is closer to the theme of this book.

The Institute for Social Banking ( ) promotes a concept of finance and banking that specifically orients itself towards a perception of and responsibility for the development of both people and planet. For this purpose, its members want to contribute to a change in paradigm. They see that this will be possible if more and more people develop a new – ethically and socially-ecologically oriented – understanding of the monetary, banking and insurance sector. So training and research is a key part of their activity, including training for internal and external change agents. See also International Association of Social Finance Organisations ( ) aimed at the financing of social and environmental projects. and Oikos International ( ) which sees itself as the international student organisation for sustainable economics and management and a leading reference point for the promotion of sustainability change agents.

Social money in Argentina, described by Greco: again in a country in financial crisis trading clubs formed around Buenos Aires in the mid-1990’s initially for barter and then with some issuing their own currencies or credit notes, many of which were accepted in a wider network. Despite counterfeiters and others issuing currencies of their own without social and economic backing, these continued. There was a Social Money Conference in Santiago, Chile in 2001, convened by professor H. Primavera, with representatives from all over the world. In 2002 during the financial crash in Argentina when the peso lost two thirds of its value, these trading clubs became a means of survival for thousands. But by August that year it all collapsed due to mismanagement and fraud or counterfeiting destroying all trust in the system.

The Roles of Central Government: its part in the Transformation of the Money System    While he advocates the separation of money and the state, Greco does see obviously a role for government eventually in this, although the initiative is more likely to come from businesses and community groups at local level supported by a global network of other groups and an emerging web-based global trading platform. There are two key sets of actions needed from governments:

 The first is o give up borrowing off central banks to support the over-spending of tax revenues and so abusing its power to issue new money, using the legal tender of a national currency, to pay off their debts. This is technically unsound and increases inflation. Governments will not want to do this and others will argue that deficit spending is needed to counteract deflation (following Keynesian ideas). But if credit can be issued in the ways Greco suggests he thinks that the extremes of the business cycle will be ameliorated or removed. It is almost as if governments are addicted to deficit spending and subservient to the vested interests of international finance who collude with them in deficit spending. The central banks of different countries are closely linked enabling a few individuals to control national and global economies and exploit people through their monopolisation of credit. By alternating credit liberalisation and restriction they bring about a boom and recession cycle in economies.The global interlinking of banking and finance and the institutions and procedures that encourage chronic indebtedness have enabled the banks of the more developed countries to dominate the economies and governments of the less developed countries.

 Public finance will then have to be managed differently, to balance their budgets, and government borrowing through bonds and other financial instruments will need to stand alone in the market place like other bonds and instruments. Long term government debts in the form of interest-bearing bonds would not have any special privilege affecting their acceptance in the market. Outstanding government debt will need to be gradually reduced over time, and not monetised by open market operations or other means. If the government seeks to meet short-term needs for credit it can issue its own currency or no-interest bonds in proportion to the anticipation of tax to be received (and redeemable as payment of taxes), and this currency would circulate on its own merits in the market, with no legal obligation to accept it. The Rentenmark and the conditions set for its use in Germany during their hyper-inflation in the late 1930’s is used by Greco as an example here. (see and for background )

 The second is to support community-based and private exchange mechanisms within a free market through legislation that establishes the necessary conditions: (1) Protection –  against inflation and deflation, involuntary unemployment, international financial and economic instabilities, the interference of foreign economic and political manipulation, and (2) Legislation supporting, and neither subsidising nor using taxes to discriminate against, the emergence of efficient and effective means of exchange of goods, services and financial instruments, sound practices, openness and transparency within them. These private exchanges can encourage the resilience of local economies free from the restrictions of governments, and the interference of national or international finance and banking organisations. They freedom of reciprocal exchange can lead to the matching raw materials supply with productive labour, products and customer needs, without using conventional money; and so foster local employment and prosperity. There can also in this be fewer losers within the supply chain – as currently with food growers or farmers in some areas.

 Inflation comes about when there is a monopoly in issuing money and that money is supported by legal tender laws that mean that it has to be accepted and traded without any discount. So for this to end legal tender laws need repealing and the value of money determined by an objective accounting unit based on a basket of commodities, and that there needs to be competition in the market between currencies and exchange mechanisms. So legislation is needed to end legal tender status and to establish a unit of account based on a defined and agreed value standard (e.g. specific weights and volumes of a basket of core commodities).It is also needed to protect against any monopoly control of the issuing of money and credit (money is credit) by any government, cartel or private organisation, and to encourage local private voluntary credit clearing utilities that conform to agreed standards of transparency and honesty and local currencies issued on a sound basis and to similar agreed standards.

 As noted above, initially politicians (not governments as such) can raise awareness of the issues, governments can support safe trials and protect them from sabotage once there is enough interest in the wider community and key interests are not threatened (including their own) and then hard-wire different systems in through formal institutions and regulations, once they are more widely trusted, accepted and wanted both by business and the community, and underpinned by valid knowledge (the scientific and research g networks).                                                                                                                                                 Local Government     Local government can support local complementary currencies by issuing, within their legal authority, their own currency to pay employees and suppliers after the Rentenmark model, and then redeeming it by accepting it back as payment of local taxes or fees. They can also support local currencies, mutual credit clearing associations, and community banks in the private sector, especially in the form of mutuals or co-operatives, initially encouraging inquiry and dialogue locally and bringing in expert advisors and those with practical experience. Greco gives an example of the monetisation of credit outside the banking system by a company in the US over 100 years ago that made rail track. It issued certificates as a currency acceptable to local shops based on bonds from customers who had ordered the product in order to pay their employees at a time of local disaster when there was no money available. This saw them through the crisis after which all the currency was redeemed.

Regional Development – Socio-Economic Networks in regions within a Country:   While globalisation has benefits, local economies and small local businesses can suffer from external forces driven by the decisions and actions of central governments, transnational businesses and central banks and international investment banks. Greco uses the analogy of a small boat harbour that provides protection from the sea and ocean while remaining open to it. Healthy economies in his view require both free trade and protection. Sustainability, relocalisation (enough for resilient and prosperous local economies) and more devolution and balance of power are now more often seen as linked. Local governments independently or together in a region have in the past offered large companies business opportunities in order to create employment opportunities, provide business to local suppliers and tax revenue – while it is recognised that smaller businesses can contribute more to job creation, productivity and innovation (OECD). Governments can create the environment and “metasystems” for local buying, selling, investing and saving. While not threatening or antagonising political forms of money and large banks, more local control over exchange and finance (investing and saving) can be enabled. Greco sees regional mutual credit clearing associations as one of these “metasystems” and enablers of local control leading to a more sustainable and higher quality life in every sense. These associations will include businesses that supply core goods and services and support from local governments or councils so that alternative exchange and investment media are part of a regional plan. This is all part of attaining critical mass of core goods and services, users and turnover. In this way a different kind of mix of global and local can be encouraged than that being shaped by the IMF, the World Bank and the World Trade Organisation. The boundaries of these “regions” within a country can fit the socio-economic, administrative (local government) and natural ecosystems or “bioregions” boundaries.

In addition to supporting a payment medium independent of the political currency and big banks (mutual credit clearing, commercial or community based), local governments can co-operate within a region to promote import substitution, a supplemental regional currency, structures to support local economies (especially local saving and investment) and an independent value standard and unit of account. In supporting “buy local” local councils can bring together key groups – local businesses and social enterprises with other sectors – to support network formation, create or enhance a local business data base, start mutual credit clearing and find “brokers” to bring suppliers and customers together and form “micro-lending” agencies. The businesses within the mutual credit clearing association can then use a voucher, gift card or credit in an account on a central server accessed by debit cards and point of sale readers –  or a regional currency note, to buy from non-members who can in return use these notes to buy the members – as their goods and services are in demand. This provides solid base to the use of this currency as it is linked to the productive capacity of the main businesses of the region. This currency together with the mutual credit clearing can protect and insulate (but not cut off or isolate) the region from the wider economy nationally and globally; the currency supplements the political, national currency.

For localisation of saving and investment independently of non-local banks who move such money around the world, structures can be created to channel surpluses of national currency or mutual exchange credits into local enterprises that add to production capacity and the quality of all life (see example of the Mondragon network in the Basque region of Spain that provides finance, education and research in support of its regional co-operative economy, motivated by the Basque people’s wish for more autonomy and for preservation of their cultural identity – see next section on Implementation).

Saving and investment by locals for locals can include, for example, pension schemes and financing of refurbishment loans for energy efficient buildings, with local suppliers providing the assessment, advisory and technical services for this.

With political currencies being vulnerable to continuing inflation and as regional networks becoming more interlinked nationally and internationally there will be a need to establish a unit of account and measure of value that is linked to a basket of valued and commonly traded commodities. This will make foreign exchange (between national currencies) unnecessary, and protect against exchange rate risks. The monetary science and the major systems components for this are now readily available.

Transforming our Money System – 4

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Principles to guide reform of the Money System              Separating the 3 Functions of Money in today’s System    He has separated out the 3 functions of money in setting out principles for each. In the same way he sees solutions being developed in each area separately, that have a combined effect, as they inter-relate. While traditional commodity money could serve all 3 functions, modern money credit money cannot without destabilising effects.

The exchange function of money entails short-term credit to cover the time between the delivery and the sale of goods or services. The finance function (investment and savings) requires long term credit.

The principle that should govern the issuing of money as credit for exchange is that this should represent goods or services that are in the market and in continuous demand (c.f. the “real bills doctrine” attributed to Adam Smith).

The principle for long-term credit for investment to renew or increase production capability is that it should be matched to savings, the sources of credit, a key principle for sound money. If more money is put into the economy but goods are not, then a currency is devalued and prices rise. (As R.Borsodi says in his 1989 book on inflation, “most present-day money is backed by loans that should never have been made – to monetise government loans and the securities of large corporations and to finance speculation”), This leads to inflation when the currency is enforced legal tender. Such loans do not support productive enterprise or the creation of real wealth in all its senses.

In designing a system (such as mutual credit clearning), and the implementation and management of it, there should enough controls to ensure the principle of reciprocity and freedom of reciprocal exchange is realised in practice – giving and getting, supply and demand, can come into balance, and participants feel and know this. This links to trust in the system and people running it.

This links to another key principle – and condition – of success, adequate scale and scope: for mutual credit clearing, getting a critical mass of goods and services, participants and supply chain members within the scheme, and winning the support of mainstream business.

These last two principles are derived from studies of failures.

 Greco implies other principles for governing relationships in his recommended best practice. These can stand alongside the principle of reciprocity:

Collaborative rather than adversarial relationships in carrying out exchange and investments, for example the principles of shared risk and reward and of co-responsibility. For collaboration in organisations they need to be units of human scale (e.g. 150 or so people) for participation in policy decisions alongside hierarchically structured or self-managed teams for operations (c.f. the principles of sociocracy or dynamic or collaborative governance ). Corporations and their ownership need to be constituted to represent in a balanced way the interests of all key stakeholders in these policy decisions. The technology of communications and information management enables small locally owned organisations to be globally networked.

He also states the necessity for competition to guard against the concentration of monopoly power.

He also advocates and demonstrates throughout the use of valid knowledge informing good design derived from the study of practice and experience, for both the system itself and also the implementation and establishment of it. Principles derived from this can reinforce the norm of reciprocity and at the same time help achieve the participation and support needed for scale and scope. He shows how to use the learning from this for further improvements and developments. He quotes key thinkers who know the aspects of the system they are talking or writing about, and describes case examples as well as historical developments. Specific principles are set out in Chapter 14 on how to make alternative exchange systems or currencies work and convenient to use, and to attract the people and the goods and services they supply to get the buy in needed to make them a core part of people’s economic activity and have the scale needed to make them sustainable in every way. See “alternative exchange systems” in the solutions section.

 Greco does not state this as a principle as such, but as a key element of the way forward or solution: the separation of money and state. He draws an analogy between this and the separation of church and state (and the effects of not separating them, but having a collusion of political and financial or religious power). Just as the US bill of Rights precludes government from establishing any one religion or from forbidding any religion, so the government should be precluded from establishing any one currency as legal tender or legislating to support any particular banking cartel. This would prevent there being a monopoly of credit or central authority for issuing money and no forced acceptance or circulation of a currency. The allocation of money as credit would also be less centralised. This will leave buyers and sellers free to design, test and select, partly through market forces, efficient, cost-effective and trusted mechanisms for reciprocal exchange, investment or saving and an objectified measure of value, building on the rights of voluntary association and contract. R. Somers in his book The Scotch Banks and the System of Issue wrote in 1873 that the “tendency of a state or central form of issue is to autocratise banking. The effect of a plural issue is to popularise this powerful lever of both moral and material improvement.”

 Greco uses these principles, derived from the analysis of problems with the current money system in conjunction with the positive innovations in the money system (such as electronic credit clearing) to suggest a way of reforming it and making it easier to live in a way that is more fulfilling economically and personally, and more socially equitable, cohesive and liberating, while, crucially, remaining environmentally sustainable.

Transforming our Money System – 3

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Implications of Problems with the Money System                        What are the implications of centralisation and the effects of the collusive arrangements between governments, central banks and private investment banks?

The government extends its spending power beyond current tax revenues, and can give business to favoured suppliers; private banks have monopolised credit supply and can charge interest (actually in the form of usury) and exorbitant fees. This collusion has been called a “vicious alliance” (Riegel). Sometimes the government has more power, at others the private investment banks. Governments increased regulation following the Great Depression and then over the last 30 years until the financial crisis of 2008, financial institutions have gained freedom under the banner of free trade and belief and trust in the market. Either way it results in an undemocratic centralised, almost unseen, control. Money today is created by banks through credit, loans with interest creating debt, not by mining, trading or plundering gold and silver, what Greco calls “debt money”. The money system embodies a “debt imperative” that results in a “growth imperative”, an increase in economic output, to pay it off (c.f the video on u-tube “money as debt”). The compound interest governing debts results in the exponential, accelerating growth of debt. Over the past 20 years public and private debt in the US has quadrupled. This growth imperative leads to destruction of the environment, to greater difference between rich and poor and to inflation and economic instability, with more extreme booms and busts. Growth itself can be beneficial but growth of this kind and at this cost, Greco argues, is destructive. Greco sees the money system as a root cause of these current world problems.

There is the risk that the system runs out of control rather than maintaining a more stable equilibrium between forces for growth and decline.

The supply of money to repay the loans plus compound interest can only be maintained by the banks making loans to others.

Capital wealth becomes concentrated in larger organisations that are driven to expand and dominate the market, gaining power that cannot be restrained by national governments alone, often increasing their economic wealth at the cost of other forms of wealth or capital (natural, social, human).

To repay loans wealth is transferred from debtors to lenders, and we all pay the cost of interest in the price of what we buy. Poorer people are net-debtors. Richer people, net-lenders, are able to live off the returns of capital rather than relying entirely on earnings from their labour.

Money as credit can be misallocated by banks to (1) governments for weapons or their favoured corporate suppliers, or for those in receipt of subsidies or (2) those with collateral in the form of inflated land values or of real estate to build more hotels, resorts or up market residential property – creating a lack of affordable housing.

Financial and economic transactions are more impersonal and ethics are more easily separated from economics, removing constraints on the charging of interest. Financial markets have become increasingly deregulated too.

One of the key effects of the current system is ongoing inflation. How does inflation come about? It is not just supply and demand – except where there is a single commodity that is a basic input to all production, like oil and its derivatives. Then all prices are affected by its price (and so the risk of not managing the depletion of oil resources and increasing costs of extracting it). When there is “too much money chasing too few goods” there is inflation. So how does “too much money” come about? Apart from counterfeiters, who issues money and on what basis? Issuance is under the control of central and commercial banks and central governments.

 As the Yale economist I. Fisher observed in 1928: “the extreme variability of money (its purchasing power) is chiefly man-made due to government finance (especially war finance) as well as to banking policies and legislation…..When a government cannot make both ends meet it pays its bills by manufacturing the money needed.” (The Money Illusion p177). This is made possible as people are enforced to accept it due to its legal tender status (unless they revolt – as in times of hyperinflation). This is inflationary where the money exceeds expected short term tax revenues. An extreme example of this was the German government after the first world war who created money to pay for war reparations as it could not do this as a weak government taxing a weak economy – resulting in hyperinflation. More recently Ron Paul has reminded the US Congress of this. Central banks create the money (“out of thin air”) to buy government bonds (loans to the government) and add to its supply, an expenditure that does not put additional goods and services into the market, and then the new money goes into the banking systems reserves which in turn enables banks to lend many times that amount. This is what the Fed calls “high powered money”. The inflation created by loans to the government has been called the “hidden tax” mainly on savers (see essay by E.C.Riegel on Breaking the English Tradition on website above).

Commercial banks can also issue money through loans. When these loans do not put goods and services into the market immediately or in the near future, they cause inflation.

Banks can either lend out money in the deposit accounts of savers to be used for consumption or investment in production capacity. They can also issue money in the short term to enable the delivery of goods and services. But often banking policies do not make a clear distinction between lending out depositors funds and lending new money. Loans to take goods out of the market (consumption) or finance the future are inflationary if they do not put more goods and services into the market, and loans to buy government bonds or to finance speculation can be inflationary when they exceed savers’ time deposits.

The core purpose and function of money is as a credit instrument for reciprocal exchange representing a claim against current and future production. Currency is accepted back as payment for goods and services. Currency buys goods and services, and goods and services buy currency: the issuing and redemption of money in a cycle of reciprocity based on trust in the currency – which can be eroded by excessive inflation. Any kind of issuance of money that expands the total supply of money without a matching expansion of goods and services available in the market is inflationary. This way of creating money adds no value to the economy.

 Where the currency is hyperinflated there are examples of private currencies until a new currency is established. These are issued against the guaranteed, non-speculative supply of core goods and services – utilities, transport (see Zander – railway on the reinventing money website), or in other concrete, physical terms such as gold units. This is self-regulating as the acceptance of the currency is voluntary, and issuers seek to avoid their currency being discounted.

 Inflation makes it necessary for savers to have some interest on their deposits. Interest is defined as compensation for loss (as distinct from usury which is a higher rate of interest).

 There is a risk of increasing oscillation in economies between recession and growth as oil and energy prices and food prices rise.

Transforming our Money System – 2

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The Money System: Introduction to the Author Greco, a former engineer, entrepreneur and professor, is an international authority and adviser on free market approaches to monetary and financial innovation that empowers local economies and makes it more possible to live in a sustainable way and be more resilient to future crises that threaten security and stability.

I was able to understand this book as he explains the functions of money and how money has developed since the founding of the Bank of England. He shows how the control of the creation of money and the institutions that regulate the functions of money, for exchange, for saving and investment and as a measure of value, has increasingly been in the hands of national governments, central banks and private investment banks, a globally networked political elite. This is not only non-democratic and disempowering, making us all dependent on this elite and these dominant institutions, with the money system and the control of money shaped by their world view and the values and interests; but it also undermines the soundness of money and the sustainability of our economy and way of life, economically, socially and environmentally.

Current Money System: its development and problems The three core functions of money are (1) exchange through a payment medium, (2) saving and investment for the future, a way of storing value, and (3) a measure of value. Money as a device for this, and the institutions that support it, can be called the “money system”. Greco shows how instructive it is to understand how money has developed historically as a way into understanding current problems and the need for and the direction of change, the next step perhaps in its development, suggesting another transformational or paradigm shift.

Greco found that the book by Hartley Withers The Meaning of Money (7th edition 1947, clearly a valued work) clarified the transformations that money had gone through in the last 300 years. More recently the historian Niall Ferguson has written The Ascent of Money (08 and Penguin 09), a best selling book (see ). Ferguson brings out the positive functions of banks as well (such as channelling money from savers to those who can use it, fulfilling the investment function of money), whereas Greco, while acknowledging these, focuses more on current problems with the money system that play a major part in the crises and challenges of our age and times.

Greco focuses primarily on the transformations of money as a means of reciprocal exchange and payment, looking particularly at the basis of its value rather than its forms only (coins, paper notes, cheques and so on). Greco sets out the stages identified by Withers: (1) Barter trade (2) Commodity money (3) Symbolic money (4) Credit money (5) Credit clearing.

Money overcomes the limitations of barter (two people each having something the other wants) and enables the need of the buyer to be met when, wherever, and with whoever,  the goods or service can be found, any time and any place – and requires sellers also to find what they want elsewhere. A useful commodity that was in general demand could act as payment and the exchange medium. A valued commodity could in itself fulfil the 3 functions of money as a payment medium and as a store and measure of value (and gold is still used as a way of storing money in times of inflation or instability in the financial markets). Cattle for instance has served as a payment medium (heads of cattle being the derivation of the word for the concept of “capital” from the Latin for head, c.f capital punishment and city). The word money comes from the Latin “Moneta”, the surname of the God Juno in whose temple Roman coins were “minted”, precious metals in the form of coins, being another valued commodity which was more practical as it was durable, easy to carry around and physically divisible into smaller amounts, with specific standard weights and purity arrived at through a trusted and certified minting process and establishment, a trust that could be abused by the authority issuing it – a king or government, by debasement of the coinage. But the supply of gold and silver is limited.

An early and simple form of symbolic money was the receipt for commodity in a warehouse – a “warehouse receipt” or “claim cheque” – such as a farmer’s receipt for grain delivered which could then be exchanged for goods elsewhere (as used in Ancient Eqypt). Those with these receipts could then exchange or redeem them for grain. Paper notes redeemable by gold or silver coins are another example of symbolic currency. So commodity money and symbolic (claim cheque) money coexisted at this stage.

Credit money, a key step opening up both efficacy and potential abuse, is an IOU, a promise to pay – either in the form of paper money or cheques drawn against demand deposits. Money supply did not have to be limited by the supply of gold or silver. Withers saw this as a key step towards “manufacturing credit” – giving notes not only to those who had deposited metal but to those who came to borrow it, the beginning of modern banking. Withers described this as a mutual indebtedness between the bank and the customer. In return for a mortgage note, his debt to the bank, the customer would receive notes from the bank (the bank’s debt to the customer) which could be exchanged for gold. Money was still seen in terms of coins and banknotes merely as claim cheques. The bank found it could issue notes to a greater amount than the gold or silver in its vaults, while notes were still redeemable on demand. Issuing notes that could be backed up by only a fraction of gold held in reserve (and the rest by collateral) came to be called “fractional reserve banking” (first developed in Stockholm in 1657).

There were now two different kinds of paper money: (1) claim cheques for gold on deposit (symbolic money) and (2) a credit instrument with a promise to pay backed up by some kind of collateral, merchandise or property, against which credit is monetised. But both symbolic money and credit money were redeemable for gold (probably to establish confidence in the new credit money), which led to confusion between them. If there was a drop in confidence in a bank and a rush to claim back the deposits then what was in collateral could not be reclaimed. This becomes a problem when paper money is issued on the basis of unsound collateral. This happened with the subprime mortgage crisis in 2007-8 when banks lent money initially at a low interest rate to low qualified borrowers on the basis of inflated property values and then when the rate was raised many could not pay. Credit money is a great invention if properly issued. The trouble arises when the power of issuing is centralised in a political and financial elite which cannot be controlled when their creation of money is unsound. The proper basis for credit money is not fully understood by most people.

Now virtually all the money in circulation is credit money, as by stages it was no longer redeemable for gold or silver. Banknotes were secured against collateral assets and government obligations or bonds. This credit manifested in the bank’s ledger as a promissory note or mortgage from the borrower ( a loan as a bank asset) and as debt-money in the form of paper notes (the bank’s IOU) or credit in the borrower’s account, a bank liability. In lending money secured by collateral, the bank creates a “deposit” that is credited to the account of the borrower. This is called “monetisation” of the collateral assets, making them “liquid” and spendable – as money. The bank’s assets are its loans (for which it charges interest) and its reserves; and its liabilities are (but not exclusively) the deposits of savers on which it pays interest.

The word “deposit” is confusing as it is anachronism harking back to the time when deposits were in gold and silver, with paper banknotes originally as deposit receipts. But now the balance on an account is called a deposit, that can be in credit. As Quigley states (in Tragedy and Hope, 1966) banks confusingly use the term “deposit” to refer to two quite distinct transactions and kinds of relationship between banks and customers: (1) deposits lodged by savers with the bank, real claims on the bank. They can be used by the bank to lend out – and so be a loan to the bank and a debt by the bank to the customer that can earn interest for that customer and (2) deposits created by the bank”out of nothing” as loans to a customer who paid interest on this debt to the bank. Cheques can be drawn on both kinds of deposit as payments to a 3rd party. Both form part of the money supply, as Greco emphasizes.

By the mid 19th century cheques (an order to pay money rather than money as such, to a specific payee) and checkable deposits (account balances) began to take the place of banknotes as the British government sought to restrict the issuing of banknotes representing credit money by banks other then the Bank of England (Bank Act of 1844). Cheques depend on the credibility of the drawer and the bank as they can of course bounce. The use of cheques and deposits (or account balances) represented the introduction of the clearing process in the banking system. Money was created as account balances, without needing banknotes (the issuing of which was then restricted in the UK). The Amsterdam Exchange Bank had in 1609, nearly 250 years before, enabled merchants to set up accounts denominated in a standardised currency in order to address the problem of multiple currencies in the United Provinces at that time. This pioneered the system of cheques, and then direct debits and transfers. Transactions could occur without being materialised in coins.

The 3rd stage in the transformation of money from commodity money Greco, following Withers, sees as the emergence of credit clearing. Money becomes an abstraction, a score, a way of keeping account, in the give and take of transactions and exchange. The role of retail banks is the vetting of credit requests and the clearing of credit using electronic information and communication systems. Account holders can receive payment of their wages or salaries by electronic transfer and purchase with their debit card or online by computer or smart phone.Your purchases are paid for by your sale of goods, services or labour; “clearing” is offsetting purchases with sales or wages. Notes and coins are used for small purchases only, by some, and cheques now only occasionally. Money here ceases to be a just a “thing” for payments or loans; it is the sum result of a set of relational processes (exchanges) over a day or longer period, as information, a variable number. But banks and society generally still think of money as principally coins and notes, a thing. The fact that the unit of account or the amount of a loan is measured in terms of the amount of currency contributes to the confusion as a note and a unit of value are called the same thing (see W. Zander A Way out of the Monetary Chaos 1936 – available on the reinventing money website). In fact money is both a thing and an account balance based on a relational agreement; Greco uses the analogy of light being seen by physicists as both a particle (thing) and a wave (relational process). In fact the relative difference between accounts payable and receivable over time can be plotted on a graph and the point of difference, above or below the line between the two (above as a positive balance, below as negative, on the vertical dimension), can be joined to look like a wave along the horizontal dimension of time. In 1914 H. Bilgram and L. Levy noted (in The Cause of Business Depressions) that any system of crediting sellers and debiting buyers could be used to perform the function of money as a medium of exchange. But this has not been taken advantage of – whereas now with the advance of electronic information systems this is all the more feasible.

With the current system of the banks offering credit as loans on interest to pay suppliers until it can be paid back by customers, suppliers need to sell more in order to pay back the interest as well as the loan, leaving probably another person or business in the supply chain in debt as there is not enough money in circulation to pay off bank loans. But Greco shows how this chain or network can use credit as self-issued IOUs without the need of a bank as an intermediary, as long as their suppliers accept this. These IOUs can be paid off as the supplier(s) issuing the credit as IOUs themselves get paid. No loans and no interest are involved, and if no notes or coins, then only money as a balance of account. Banks, credit instruments and money as we know it are not needed for the exchange of goods and services carried out this way. The companies do their own credit clearing directly by settling what they buy and sell amongst themselves. It becomes a more organised, and protected, way of selling to customers on credit. Greco calls this mutual credit clearing within a network of suppliers and customers. Traders can be free of the limitations imposed by monopolised bank credit and government money, within a national, and the international, global economy. It promotes local business and more self-reliance around regularly traded goods and services available more locally, and protection and resilience in uncertain times (e.g. food and energy security and risks to the economic and financial system). This needs implementing on the basis of sound financial principles and implementation strategies of course, and needs an established or growing local economic network of suppliers and customers between whom there is trust in relationships and the system they design and create, a network that recognise sthe needs, advantages and practical possibilities, to make it work.

Greco sees the creation of central banks and the collusive relationship between them (together with investment banks) and national governments as key to the main problems with the money system today, alongside unsound loans and/or unsound collateral. In 1694 the Bank of England was founded as a depository for government funds and income from taxes – mainly to enable the king to borrow money for a war. The government could now spend beyond the current income from tax revenue. In return bankers had the privilege of creating credit money – originally as banknotes to pay taxes. The use of credit to create payment out of nothing had been developed earlier. But this took it further. The Bank of England, the central bank, came to have a virtual monopoly in issuing banknotes from 1742, a distinctive form of promissory note that did not bear interest and did not require the parties in the payment both to have current accounts. The currency created by them was later given legal tender status. This gradually became the prototype for central banks around the world, as other countries faced the same pressures and were served by the same international investment banks. President Jackson of the US fought against it as it gave inordinate power to an elite and created more inequality of wealth (the “bank wars” in the US in the 19th century between elitists and egalitarians). This led to free banking for 26 years from 1837 when each bank issued its own currency notes and the evaluation of their soundness was through the market. There were some bank failures with losses to noteholders. Notes were redeemable by gold still, and this could be faster at a distance now with railways and telegraph. When Congress passed the national bank act of 1863 (mainly to pay for the civil war) it allowed free entry into the market of banking and credit, and collateralised bank loans, learning from the free banking experience. In 1913 the Fed was created in the US. As A. Rothbard (History of Money and Banking in the US) states: “the financial elites were responsible for putting through the Federal Reserve System that created and sanctioned a cartel device to enable the nation’s banks to inflate the money supply in a co-ordinated fashion”. President Wilson was aware of this concentration of power, especially in the control of credit. The 2008 presidential candidate, Ron Paul spoke of this power to change the value of the stock market in minutes challenging the principles of freedom and sound money –  as the basis of an economy that remains dynamically stable in a self-correcting way. Greenspan, the Fed chair then, said that as soon as money based on a commodity standard (gold or a bundle of basic commodities) is replaced by money that is legal tender by fiat then the producer of the money supply will have inordinate power. This collusive arrangement enables the economic demands of modern centralised power and of defence in the face of threat of war and other forms of attack to be met. Governments will not give this up unless there is some alternative or these needs are not so great.

Prof H. Ritterhausen (History of Central Banks, in German) sets out the evolutionary steps or stages in the development of central banks and their issuing of money:

  1. The exclusive licence to issue notes (paper money) is given to banks by the government as state privilege
  2. The state discovers that the bank is a source of credit for state expenditure that exceeds current tax revenues
  3. Government tax offices accept these still private notes for paying taxes instead of metallic money.
  4. The bank cannot refuse loans to the government in times of emergency.(such as a war).
  5. The issuing of notes becomes excessive so that notes cannot be redeemed for metallic money. Redemption is abolished by law.
  6. The notes are given legal tender power in case they are not accepted or are discounted in the market. Notes are no longer a private bank currency note.
  7. Forced acceptance of the notes and the abolition of note redemption make the metallic standard inoperable; precious metals no longer play a monetary role. The measure of value becomes the paper currency itself. The regulation of note supply by market forces comes to an end. There is no operational measure of value independent of these politically controlled currencies.

C. Quigley writes (in his book Tragedy and Hope,written around 40 year ago but still relevant): “The world’s chief investment (international, merchant) banks –were the agents of the dominant investment banks in their countries……This dominance ..was based on the control over the flows of credit and investment funds in their own countries and throughout the world … through bank loans, the discount rate and the rediscounting of commercial debts…They could dominate governments by their control over current government loans and the play of international exchanges.” Their interests were mainly in (government) bonds (loans) rather than goods, and so in deflation, and in influencing public policy. While exposing the system Quigley supports their goals. Money is politicized; conrolled by an elite.

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