Money Outgrown Pt.2

In part one of this blog post I looked at Tim Jackson’s book Prosperity Without Growth. I argued that, while highly illuminating and refreshing in exploring the incompatibility of relentless economic growth and non-negotiable ecological limits placed on our activity, it fails to provide two things. First, a substantial account of what, in real economic and social terms, prosperity without growth would look like. And second, a proper analysis of a (perhaps the) cornerstone of an economy reliant on growth: its money. Our money.

Attempting the latter (and the stress is on the word attempting here) led me to stumble across the work of Silvio Gesell (1862 – 1930). A German-Belgian merchant, economic theorist and anarchist (who also spent many years in Argentina), he was famously endorsed by Keynes who wrote in his General Theory: ’I believe that the future will learn more from Gesell’s than from Marx’s spirit’. His book, The Natural Economic Order (which had to be dug out of Bristol University’s storage for me) provides an exhilarating insight into how rethinking the design of money could address our addiction to economic growth, and perhaps divert us from our currently perilous path.

So how does money work now? It is a question almost anyone struggles to answer. Despite money being the basic facilitator of everything we need to survive for which we can’t rely on family or friends – or perhaps because of this – we don’t often try to analyse what on earth the stuff actually is, or where it comes from. Well here it is most simply: 97% of money in the UK isn’t stuff at all, it’s virtual – and it is invented by private banks at will, as debt. The remaining 3% of money in the UK is cash, created by the Bank of England, or the Royal Bank of Scotland. In terms of economic activity, the results are more startling still: over 99% of transactions that take place in the UK economy use virtual money. It seems implausible at first that, effectively, the entire money supply is controlled not by government, or an independent public institution, but by private institutions designed and legally required to maximise profits and thus returns to shareholders. Yet that really is the way things are. Positive Money, a financial reform campaign group, do a fantastic job of explaining this – check out their video below.

There are two really important points to retain here. First, pounds sterling are backed by nothing – they are numbers in a computer. When you look at your bank balance online, you really are looking at it. There’s nothing more to it –  no cash locked away in a box with your name on it in the bank, no gold in a vault – just numbers on a screen. Second, and more significantly, this virtual money is created as debt in the form of bank loans. This is how banks make their money: they control the money supply and charge a fee for its creation. This, in turn, has two significant results. First, given 97% of our money is in fact virtual money created in the form of debt, there is always – and can only always be – more debt in the system than money. Even if we tried to pay back all the debt in the system at once, we would fail. Second, in order for the system to remain stable – i.e. for the banks to get their money back – the system has to keep on growing. Debt requires future economic growth to be paid back with interest. Yet, of course, at every point in the future when a debt is repaid more will have been created, requiring yet more growth.

It is this level of analysis that Tim Jackson either doesn’t have the space, time or will to tackle head on. If the picture I have been painting so far holds true we have two basic contentions to deal with. First, growth is incompatible with ecological limits. Second, money designed as debt and fathomed by private banks requires growth to function.

Positive Money, for their part, take most umbrage with the instability (manifested most recently by the continuing economic crisis that began in 2008) and spectacular inequality (amongst the many negative consequences of the control of the money supply by private banks) practically guaranteed by the current system. And their solution fits: create an independent public body, separate from government and the private sector, that has sole legal prerogative to create money of any kind, virtual or physical. This body would manufacture money with respect to inflationary or deflationary pressures on the economy at any particular time. The results? First, greater stability, with profit-driven banks denied from over-creating money to fuel their own wealth. Second, greater equality, with money created debt-free and distributed through public spending bodies that project wealth without demanding it be sucked back in with a vengeance.

Sounds good. And probably this would be a markedly better situation than the one we find ourselves lumped with. But what we’re really interested in is ensuring we can limit economic growth in the face of potentially devastating ecological limits. I’ve claimed that underpinning our obsession with growth is the nature of our money. To remove the relentless drive to growth we would need to redesign money appropriately. I don’t think Positive Money’s proposals do this: instead they redesign the banking system. Even with money being fed into the economy more prudently and fairly, in a system of private property and ownership of the means of production (and don’t forget the profile of ownership would be that which we have now) we would expect to see the control of money concentrated by an economic elite, which would anyway have retained its original assets. Crucially, this money – or capital – could still be lent by those in possession of it, at interest. With interest firmly back in the picture returns the problem of growth. In fact, this isn’t a problem Positive Money acknowledges. They see significant banking reform as a solution to the current debt crisis, and a means to reinstating economic growth. We should, in the longer term, have other priorities.

Creating a monetary system that doesn’t require growth, it turns out, is not something a large number of people have put a lot of time into thinking about. The most prominent example I could find is still the work of Silvio Gesell, who wrote around a century ago. His work has been revisited more recently by Helmut Creutz and Margrit Kennedy, both German authors. Margrit Kennedy’s short book, Interest and Inflation Free Money, is an accessible introduction to Gesell’s ideas and their potential application to contemporary society.

Silvio Gesell

Gesell developed his theory for a new money having observed the boom and bust credit cycles caused by an interest based system. Those who accumulated capital were able to hoard, as money’s value did not decline (discounting inflation) over time. Without degradation in value over time only the positive incentive of future interest accrual could encourage those with excess capital to lend. The less money in general circulation, the higher interest rates could be charged. As more money entered circulation however, fewer people needed to borrow further; interest rates dropped and lending became less attractive, meaning less was lent. Demand would eventually rise again, and the cycle would continue.

Three things are worth noticing: first, interest plays a role in incentivising money being returned to general ciruclation and thus – despite potentially adverse effects – facilitates economic activity. Second, because money does not degrade rapidly, interest is necessary if money is to be returned and not hoarded. Third, those who have excess money play the role of ‘gatekeepers’, charging a toll (interest) to others for access to needed capital.

Beyond the tendency to exponential growth we have already associated with an interest based monetary system, other pernicious effects arise. First, economic elites consolidate positions of wealth purely by virtue of having more money than most others in the first place. Second, goods and services are more expensive than they need be: capital costs (interest payments) make up a staggering proportion of basic services that, if eliminated, would make life for the vast majority of us (who receive little – if any – interest profit on balance) much cheaper – 50% cheaper according to Kennedy. The two graphs below give you an idea of this dynamic: in the first, the grey sections of the pie charts represent the proportion of the cost of a service or good made up purely by capital costs (see 4. in particular). In the second, the re-distribution of wealth upwards by interest payments is made clear.

Only the two highest income household groups in 1980s West Germany (a significantly more equal place than present day Great Britain) received more interest than they paid, with the richest income group receiving almost all of the interest the others pay. Kennedy points out that if we wished to analyse the top 0.01% of the population we would have to enlarge the income column 2,000 times. So even within the top 10% you see an internal exponential wealth pattern. Interest then, according to Kennedy, makes the rich richer, the poor poorer, and everything more expensive than it needs to be. Throw in unsustainable economic growth and you’re confronting something quite clearly not ideal.

Gesell’s solution is simple. Instead of incentivising lending through interest, disincentivise hoarding through ‘holding fees’. A holding fee creates the artificial degradation of money’s value needed to make spending it now, and not hoarding into the future, rationally attractive. Let’s say you have a tenner. Each month (perhaps), in order to be able to use that tenner, you would have to pay 50p (5% of its value) to maintain it as legal tender. Failure to pay this would mean the money could not return into circulation. So: the longer you hold onto the money, the less valuable it becomes to you as you pay cumulatively more and more to preserve its validity. The upshot is that you are incentivised into spending the money quicker, returning it to general circulation and facilitating economic activity. All without interest and, hopefully, the inequality, instability, expense and ecological madness attendant to it.

The system was trialled in the Austrain town of Worgl in 1932, with fascinating results (until the Central Bank got wind of the idea and outlawed it). This dubiously produced video tells the story:

In fact, the ordinary Schilling circulated on average 21 times, compared to the Free Schillings which made it round 463 times. The superior utility of the ‘free money’ in doing what money is supposed to do – facilitate economic exchange – is clear to see.

Kennedy lists six main benefits to Gesell’s system:

1) the elimination of inflation

2) the increase of social equity

3) decreasing unemployment

4) lowering of prices by 30%-50%

5) an initial economic boom

6) and thereafter a stable economy

Key to the goal of remaining within ecological limits are 1) and 6), though the scale of 5) would have to be carefully considered if we were approaching (just imagine!) ecological tipping points.

If we wished to apply this system today, we would find the technical barriers to be far lower: remember 97% of money is computerised, meaning it would be very simple indeed to cause its value to fall as time progressed.  Once enough money has been introduced into the system to service needed goods and services transactions, no more would be added. Goodbye QE. What you might do with the holding fees will depend on your political preference: within the context of a state and government the fee would return to the public purse (and reduce the tax burden). In an anarchist or intentional community with no government another mechanism would have to be found.

There is, of course, lots more to this. Whole-scale monetary revolution is never going to be straightforward. What role would banks (or their equivalents) play in this new world? Would people save enough? What other changes would have to be made alongside (Kennedy mentions both tax and land reform as prominent candidates)? Let us be clear though: what we have is not working, even on its own terms. Debt follows more debt in a crisis that will be with us for years. People suffer, democracy weakens. Emergence from this slump will only throw our ecological collision course into greater relief.

Radical solutions are called for in desperate times. It is exciting to think that in Gesell’s theory might be the seeds of a solution. If not: let us at least learn from his example and start thinking about the roots of our discontent, instead of scanning madly for the next ‘green shoots’.

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