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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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