Technically, we are currently able to realize humanity’s dream of providing for the needs of every person on earth and letting machines do the most unpleasant kinds of work. What is
If we look a little closer, it becomes clear that there isn’t a shortage of money at all. There is actually an abundance of it. What is missing is its equitable distribution, together with an equitable distribution of access to the resources of our world.
Today, only 3% of global financial transactions involve the exchange of real goods and services; 97% of money transfers take place for speculative purposes.
My basic thesis is that the lack of equitable distribution of money is a result of the monetary system itself; therefore, I focus on two questions: How can we create a money system, which in itself would be neutral in respect to its distribution? And what are the practical means for bringing this about? To begin, there are a few basic concepts essential to understanding not only the solution but also the proposal for its realization.
An analysis of the problem
The money we deal with on a daily basis serves two contradictory purposes. On the one hand, as one of humanity’s most ingenious inventions it functions as a means of exchange and is the prerequisite for a functioning division of labor, i.e., it is the foundation for every civilization. On the other hand, it can also be hoarded, and in this capacity as a means of storing value it often inhibits exchange. For example, take two individuals, one who has a bag of apples and another who has the money to buy those apples; the apples will rot within a few months whereas the money will keep the same value. Money’s attribute of permanence and its ability to function as a joker card (it can be exchanged for anything else) provide both the necessary mechanisms for the owners of money to earn interest without lifting a finger.
The fact that we now take it for granted that interest is charged and must be paid can be attributed to three fundamental misunderstandings.
Ever increasing quantitative growth?
The first misunderstanding has to do with differing processes of growth. Human beings, as well as plants and animals, show “natural growth” in the physical realm: we grow relatively quickly during the early phases of our life; then physical growth slows and eventually stops when we reach our optimal size at around the age of twenty-one. From this point on — i.e., for the longest part of our life — we change, with all our subsystems, almost exclusively qualitatively, not quantitatively. Therefore, I want to call this curve, the “natural” or “qualitative” growth curve.
There are two other fundamentally different patterns of growth. One of them, mechanistic or “linear” growth — i.e., more machines produce more goods, more coal produces more energy, and so on — is of minimal importance to our analysis. Nevertheless, I want to emphasize that this kind of constant increase in production cannot be sustained in view of the earth’s limited resources.
On the other hand, it is very important that we understand the concept of exponential growth, which one might call the antithesis of natural growth. The former starts very slowly, increasing continuously, and then enters a stage of almost vertical quantitative growth. In the human body such growth usually indicates a disease. Cancer, for example, follows an exponential growth pattern. At first it grows slowly, one cell splits into two; then its rate of growth increases continuously, splitting into 4, 8, 16, 32, 64, 128, 256, 512, and so on.
Therefore, not understanding the problems associated with this kind of growth results in a serious misconception concerning the function of money, because similarly, interest and compound interest cause money to double in value at regular intervals. In other words, it grows exponentially. This explains why we are experiencing significant problems with our money system.
Joseph’s penny
The famous example of “Joseph’s penny” illustrates that interest as a means of ensuring the circulation of money can function only in the short or medium term. If at the time of the birth of Christ, Joseph had invested one penny and the bank had given him an annual interest rate of 5%, by the time of German reunification in 1990 and at the then current price of gold, the penny would have earned 134 billion balls of gold, each weighing as much as the earth!
This shows that although the continuous accumulation of interest can be calculated mathematically, it is in fact an impossibility; therefore, interest as we know it cannot function in the long term as a means of guaranteeing continually the circulation of money.
Interest actually does behave like a cancer within the economic system and therefore equally so within our society, our “social organism.” If we were able to introduce instead a money system that corresponds to the “natural” growth curve, then the zero-growth or qualitative growth that has long been called for by ecologists and economists would be possible.
Fun was made of those Albanians who believed some investment bankers when they said a so-called pyramid scheme would bring monthly returns of 25%. Because of the exponentially increasing amount of money invested, this was a reality, but only in the short term. As soon as the rate of increase of investments slowed down, however, the system inevitably collapsed. Basically, we are not much smarter, because whoever accepts our current money system runs precisely the same risk, albeit over a longer period.
In high interest countries e.g. in Latin America this collapse happens about every ten to fifteen years. In low interest countries like Switzerland or Germany it happens every forty to sixty years. And then a major breakdown occurs in the form of financial collapse, social revolution or war.
Is interest paid only on loans?
The second misunderstanding is to think that we pay interest only when we borrow money. That is not the case, because every price we pay includes an interest portion: exactly that portion of interest that the producer of the bought goods or services had to pay the bank in order to purchase machines and equipment.
For example, in Germany the share of interest in waste management fees is around 12%, in the fees for public water supply around 38%, and in the rent for public housing 77%. On average, we pay 40% interest or capital costs as part of all prices we pay for services we need in our daily lives (Creutz, 1993, pp 338-339).
If interest could be replaced by another means of securing the circulation of money, most of us would be able to almost double our income or work proportionally less in order to maintain the same standard of living.
Is interest a fair charge?
The third misunderstanding is to believe that interest represents a fair charge because it has to be paid by all of us for loans and in the prices for goods and services. And we all receive interest on our savings. Only the very few understand to what degree the effect of interest and compound interest causes — completely legally — an on-going redistribution of money from those who have to work for their income to those who receive income because they can afford to lend out money.
If you divide German households into ten groups of equal number and you look at what they each pay in interest and what they get, it becomes obvious that 80% of households pay almost twice as much in interest as they receive, and only 10% of the population receives what the large majority loses in interest.
This means that, upon closer inspection, the “fairness” inherent in the fact that we all receive interest on our savings and investments proves to be deceptive. In reality the system works profitably only for those people with interest-bearing assets worth over 500,000 Euros. In 2001 the sum that was redistributed through the interest system within Germany amounted to approximately one billion Euros per day.
Banks, insurance companies, and multinational corporations are the major parties which profit from the interest system.
In this respect, the interests of mainly small and medium sized business employers and employees are more similar than political parties on the left suggest: there is a bigger difference between those who have to work for their income and those who receive an income largely without working. Interest is therefore the wrong pricing mechanism in a “free market economy”: the “team-mates” — the actors in economic life who take risks and contribute to wealth creation — are punished by interest costs; the “spoilsports,” who can afford to hold on to their money, are rewarded with income from interest, an income inherently void of self-actualized productivity.
In addition to reinforcing pathological economic growth, this money system inevitably leads to an ever more uneven distribution of income and wealth, i.e., to a polarization of society. The attempt of the traditional left to solve this problem by socializing the means of production was not successful because the problem of redistributing wealth through the monetary system was largely unrecognized and still remains a much respected taboo.
Admittedly, the production of goods in the production sphere creates the “added value”, but the distribution is determined in large part within the circulation sphere of money and finance. We know today that state socialism instead of private capitalism is no solution to the dilemma.
Neither socialism nor capitalism has been able to reform the so called “social market economy” towards the direction of greater social and ecological justice. This is because neither type of societal organization is a true alternative; they are more like two sides of the same coin. The current problems in the banking and financial systems and the increasing polarization of society through the redistribution of wealth are not, as is claimed repeatedly, caused by a lack of social laws or the corruption of decision-makers in politics and the economy.
These are admittedly factors that add to the problems, but some of the most important reasons, which are little known and rarely discussed openly, are to be found in the way our monetary system works.
User fees instead of interest
Since 1916 we have known of a solution that isn’t only surprisingly simple and elegant, but is also practical and easy to understand. It was discovered and first published in 1916 by Silvio Gesell, a German-Argentinean businessman.
Instead of charging interest in order to assure the circulation of money, Gesell proposed a fee which would act as a “circulation incentive” or ‘demurrage’, thus largely limiting money to its function as a means of exchange, and as a stable means for storing value. If you have more money than you need, you take it to the bank, which lends it out, returning it to circulation, and then there is no fee.
Not much would have to be changed from our current way of doing things. The incentive to save money would continue. While money in your checking account would be treated like cash and subject to the circulation incentive, money in the savings account would be free of that fee, retaining its value. A borrower would have to pay for the bank’s services in addition to a risk premium, both fees that are currently included as a small part of each loan. These fees usually don’t amount to more than 2% to 2.5% in interest charges, and would not lead to exponential growth as they just pay for the work done and would not accrue compound interest.
The hoarding of cash can be prevented in a variety of ways. For example, there could be a color series of bank notes, which are devalued (6-12%) once a year or continuously (0.5-1% monthly) or which carry expiration dates (similar to those on perishable food items). This is even easier to implement now with the increase of monetary transactions by means of chip cards or smart cards, which are capable of accepting up to twenty different payment options.
All that is lost within the new money system is the compulsory exponential growth in savings and the distortion of the “free” market that results in the accumulation of money in the hands of a few. Until now, the economy has been dependent on capital (Hans-Martin Schleyer, the former president of the German Industrialists Association once said, “Capital must be served”). With the new system, money has to make itself available to the demands of the economy in order to avoid a loss in value. This means that capital would finally serve us.
In this sense a sustainable economy and prosperity for all are possible for the first time because we can create a money system that follows a natural growth curve. In other words, it stops quantitative growth at an optimal size and allows for more qualitative growth.
That could signify gradually: instead of excessive consumption, more quality of life; instead of resource depletion, more environmental protection; instead of individual travel, more car-sharing; instead of ever cheaper clothing, more quality garments; instead of cut-backs in social and educational institutions, their expansion.And all this would be possible in part because there would no longer be any pressure from the money system to demand exponential growth from the economy and ultimately from the people. Perhaps we would then even find time again for our parents and our children, for art and culture as integral components of every human life.
People had a different attitude toward culture, art, and time during the historical periods when money was based on a circulation incentive. For example, during the High Middle Ages the “Brakteaten” money which was recalled every third or fourth year and devalued by 20 to 30 percent – which was also the way the “mint sovereigns” (bishops, kings, dukes) collected their taxes —was the basis for the grand cathedrals we still admire today. They were financed through contributions from the surrounding communities, and they represented also public works programs.
It was clear to everyone that their construction would create employment over a period of two hundred years – and some of them (Chartres, Bamberg, Regensburg, among others) retain this function up to the present day. Today, investments are made only if they amortize in five years at the most, and what do we leave to our children? Depleted oceans, polluted rivers and lakes, radiating waste dumps.
If we were to introduce a new monetary system, the majority would have much to win and nothing to lose.
Combined with a new system of land tenure based on the communal ownership of land, that passes to one’s children the value added to the land (Gesell, 1949) by each generation, these two major causes of poverty as well as the increasing gap between poor and rich could be greatly diminished or eliminated.
It is easy to see how historical and systemic defects in our monetary system — namely, the mechanisms of interest and compound interest — are responsible not only for the ongoing redistribution of the common resources of this world for the benefit of a small elite but also the imposition of an artificial need for permanent compulsory growth, which nobody can escape.
Neither debt relief for the countries of the Third and Fourth worlds that are paying more than $350 million a day in interest to the rich industrial countries nor the development aid from industrial countries can get to the root of the problem. The total amount of aid collected by welfare agencies world-wide for the poorest countries merely offsets the interest payments of these countries for approximately fourteen days a year.
Even more dangerous and destructive than interest itself is one of the unavoidable results of the exponential growth of our monetary system, the unrestricted mobility of capital, which allows and in many ways forces the production sector to locate and relocate wherever the cheapest labor and lowest environmental standards are to be found.It compels all nations to take part in the socially and environmentally destructive race to the bottom.
Bringing about change at the regional level
(The term ‘regional’ here is used to define a level in between the local and national level not to include several nations as it may be used in another context.)
This brings us to the most important questions that must be asked: How might we realistically introduce and test a money system, which proves to be a viable solution to the problems addressed above? A system that would balance the negative effects of globalization, that is durable, sustainable, and fair?
The local level seems too small to make a difference. For example, in the LETSystems (local exchange and trading systems), the share of goods and services, which the average individual participants can usually obtain, does not exceed 3-5% of their needs. Transaction costs — or the time it takes to receive the desired product or service — are normally too high to advocate this solution on a large scale. (One possible way to eliminate these disadvantages would be to establish clearing-houses that would connect local exchange systems to form larger units and to professionalize the book keeping. This is currently being developed in the Austrian region of Vorarlberg.)
We know that in theory those economic transactions which occur within a region can be made with a regional medium of exchange. If this special currency could be designed to include a circulation incentive this would substantially invigorate exchange within a given region. Obviously, not all regions are equally equipped to adopt this solution. Economic autonomy is more easily attained in regions with greater diversity of production. Such a region would therefore be a better candidate than those where the majority of people work in the same factory for one dominant employer.
There is little in the way of research or data that can be used in this context because our definition of “region” emerges only once the new regional currency itself is established. Where a respective region begins and ends depends on the willingness of the majority of people to use the currency.
Obviously, nobody can be forced to do so. Willingness to participate may be determined not only by geographic boundaries like a valley surrounded by mountains or a watershed, but also by economic, cultural, and historical factors. The development of complementary regional currencies enables us, for the first time since the introduction of national currencies in the nineteenth century (the departure from regional currencies wasn’t that long ago), to support the regional production of goods and provision of services, and – if identifiable as such —to make a point of purchasing regional goods and services preferentially.
Regional currencies bring new potential for economic growth for the small and medium sized enterprises, which are responsible for creating most of the jobs and profit primarily by means of production, not investment. The cost of creating workplaces for regional production is a fraction of the costs of workplaces that serve international markets.2 So why shouldn’t banks be willing to collaborate with local and regional governments in order to offer a regional currency within their portfolio?
The goal is to create another means of payment that is feasible and operational in order to test whether or not the model of a stable currency based on a circulation incentive works in this context.
Components of a fully-fledged regional currency
In order to achieve this goal, a regional currency must not only be legal, but should realistically be introduced in stages, and should be able to quickly gain legitimacy through the trust of the population. On the basis of the current legal system in Germany and the experiences with complementary currencies in recent years — this is possible only if three partial models are combined. Together, these models embrace all the functions which the present international money system fulfills, but on a regional level:
• Firstly, a voucher system — used today by many commercial enterprises to enhance customer loyalty — can be used as a means of payment to further the economic development of a region.
• Secondly, a cooperative barter system increases the liquidity of small and medium-size businesses through a system of accounts and the establishment of credit lines for each participant. It combines the professional features of a commercial barter club with the non-profit features of a local exchange and trading network, and offers the inhabitants of the region an opportunity to exchange skills among themselves.
• Thirdly, a member bank, serving long-term large-scale credit needs. Members receive interest-free loans linked to an interest free savings plan.
This amalgam of various regional currency mechanisms performs virtually any function of the current money system. The voucher system is used, like cash, for everyday payments of small amounts. The cooperative barter system allows for the exchange of goods and services, as well as granting lines of credit between individuals and between small and medium-size businesses. The member bank provides for credits based on savings deposits — both in the national currency and in the specified regional currency — for individuals and entrepreneurs.
This combination has several advantages: all of the components can be introduced separately, but together they allow for an orchestra of synergetic effects.
All three can be depended upon because they have either a history of success in another context (i.e. commercially, geographically or culturally), or they have already been in use for many years.
Differences between national and regional currencies
A regional currency has the following characteristics:
• It is not an “official” means of payment, which means that nobody has to accept it, its acceptance is entirely voluntary;
• Its use is limited only by geography and in each region the currency bears a different name;
• Exchanging it for other regional currencies or for the national currency imposes an exchange fee;
• It does not earn interest.
According to Gresham’s Law, these characteristics make the regional currency “bad” money — in other words, everybody will always be eager to get rid of this means of exchange before spending the “official” national currency. This, however, is exactly the intention. We are essentially turning Gresham’s Law on its head, because in terms of optimizing the exchange function, the regional currency is inherently “superior” money. It would be more correct to say that the two currencies — the national/international and the regional — are individually designed to fulfill different functions.
The national currency is well suited for international exchange, competition, and the accumulation and redistribution of wealth through savings and investments that claim exponentially growing interest or dividends. In contrast, the regional currency is suitable as a means of exchange that intentionally promotes social, cultural, and ecological goals.
• The regional currency can also be used to promote the efficient use of non-renewable resources within the defined geographic areas that people relate to personally and emotionally. The regional currency is, so to speak, a trademark, which ought to have — and perhaps even guarantee — a certain quality. With the development of quality standards, the regional currency deliberately distinguishes itself from other complementary currencies.
The regional currency has its own distinctive features within this diverse landscape:
• Regional currencies connect different partners within the region and benefit all participants
• Regional currencies function within the context of regional economies
• Regional currencies are complementary to the existing national currency
• Regional currencies reduce the long term risks of inflation and deflation
• Regional currencies systematically promote circulation with incentives
• Regional currencies are non-profit as well as professionally organized
• Regional currencies are democratically controlled and function transparently
• Regional currencies serve individual community members, small and medium-size businesses, and institutions
• Regional currencies encourage ecologically sound thinking i.e. inter-community and regional relationships and create shorter, more efficient transportation routes
• Regional currencies embolden regional communities by reinforcing traditional identities and/or forging new ones.
The question is whether or not the value of regional currencies should be equivalent or calibrated to that of the national currency. This might — at first — be useful, because it does not require the calculation of exchange rates when shopping or paying bills, it also makes it easier to calculate income taxes in the regional currency.
But it is very important to include a clause in the by-laws of the issuing association that permits a transfer to other monetary units — in case the national currency should undergo galloping inflation. In this case, for example, the average hourly wage could instead be used as a unit of measure. The price of a kiloWatthour of electricity or a cubic meter of drinking water could also be used as units, especially if vouchers were issued as a means to pay for such services.
A practical example in Chiemgau
One of the first attempts to introduce a regional currency in Germany is the “Chiemgauer.” Initiated as a complementary currency by the Waldorf School in Prien near Lake Chiemsee, it uses an Australian voucher plan as its model. In this model, all participants benefit. When somebody in Australia exchanges $100 in one of the “clubs” that have been started for that purpose, he or she receives vouchers with a value of $110. Someone who exchanges $500 receives vouchers worth $600.
In contrast to the Australian model, with its 10% and 20% discounts, a discount is not given for purchasing Chiemgauer vouchers, however, the buyer can choose a non-profit organization to receive the 3% bonus that is granted if Euros are exchanged for vouchers.
The first buyers of the new currency were Waldorf School parents, who bought vouchers to support construction of an addition to the school. Since then, five non-profit projects have also become involved, and participants come from different parts of the region. Buyers accept an annual fee of 8% to guarantee circulation: four times a year a stamp worth 2% of the value of the voucher has to be attached in order for it to retain its nominal value.
The businesses that accept the vouchers in payment can exchange them for the national currency at a five percent fee, or they can use them for payment to other businesses, to employees, or to the publisher of the local newspaper, etc. If they pass the vouchers on, they won’t have to pay the fee. For the majority of businesses, accepting vouchers is a matter of cultivating customer loyalty. This usually creates costs up to ten percent of their gross turnover. Thus accepting a small fee, which is tax deductible, to pay for a regional currency does not entail any additional expenses. Customers are motivated to go to stores where they can pay with the regional currency.
More and more, businesses are realizing that they too can make payments in the regional currency — afforded of course the advantage that they don’t need to pay the 5% fee for exchanging the vouchers for Euros.
When students from the Waldorf School go to stores at the end of the month to change their accumulated vouchers into Euros, the shopkeepers are more and more unable to facilitate such an exchange because they have already spent them. In Australia, 70% of the vouchers were exchanged for the national currency during the first year, during the third year only 7%. Thus, the vouchers are being used as a complementary currency, and the exchange fee serves as an additional incentive for circulation.
Adapted from Regio Complements Euro: New Paths to Sustainable Prosperity, a paper presented at the “Local Currencies in the 21st Century” Conference of the E.F. Schumacher Society, Bard College, New York in June 2004.
About the author: Prof. Dr. Margrit Kennedy is an architect with a Masters Degree in Urban and Regional Planning and a Ph.D. in Public and International Affairs. She has published books, articles and reports for UNESCO and OECD on community school planning and building. Her work on women and architecture, urban ecology, permaculture, money, land and tax systems has been recognized internationally. Projects in ecological architecture for the International Building Exhibition Berlin in 1987 led her to the discovery that it is virtually impossible to carry out sound ecological concepts on the scale required today, without fundamentally altering the present money system or creating new complementary currencies.
Her book “Interest and Inflation-Free Money, Creating an exchange medium that works for everybody and protects the earth” was first published in 1987, and has since been translated into twenty languages. A second book, together with Bernard Lietaer “Regional Currencies -A New Path to Sustainable Abundance” (translated title from the German publication) will be published by Access Foundation, Boulder Colorado in 2005.
Kennedy can be contacted through her website: http://www.margritkennedy.de/english/