The nature of money – Part 4: The alternatives

The year was 1932 and the small town of Wörgl in Austria was caught up in the great depression, just like the rest of the world.

When Michael Unterguggenberger (1884-1936) was elected mayor of Wörgl, the city had 500 jobless people and another 1,000 in the immediate vicinity. Furthermore, 200 families were absolutely penniless. The mayor-with-the-long-name (as Professor Irving Fisher from Yale would call him) was familiar with Silvio Gesell‘s work and decided to put it to the test.

He had a long list of projects he wanted to accomplish (re-paving the streets, making the water distribution system available for the entire town, planting trees along the streets and other needed repairs)  Many people were willing and able to do all of those things, but he had only 40,000 Austrian schillings in the bank, a pittance compared to what needed to be done.

Instead of spending the 40,000 schillings on starting the first of his long list of projects, he decided to put the money on deposit with a local savings bank as a guarantee for issuing Wörgl’s own 40,000 schilling’s worth of stamp scrip. He then used the stamp scrip to pay for his first project. Because a stamp needed to be applied each month (at 1% of face value) thereby devaluing the scrip, everybody who was paid with the stamp scrip made sure he or she was spending it quickly, automatically providing work for others. When people had run out of ideas of what to spend their stamp scrip on, they even decided to pay their taxes, early.

Wörgl was the first town in Austria which effectively managed to redress the extreme levels of unemployment. They not only re-paved the streets and rebuilt the water system and all of the other projects on Mayor Unterguggenberger’s long list, they even built new houses, a ski jump and a bridge with a plaque proudly reminding us that ‘This bridge was built with our own Free Money’. Six villages in the neighbourhood copied the system, one of which built the municipal swimming pool with the proceeds. Even the French Prime Minister, Édouard Dalladier, made a special visit to see first hand the “miracle of Wörgl.”

It is essential to understand that the majority of this additional employment was not due directly to the mayor’s projects as would be the case, for example, in Roosevelt’s contract work programmes. The bulk of the work was provided by the circulation of the stamp scrip after the first people contracted by the mayor spent it. In fact, every one of the schillings in stamp scrip created between 12 and 14 times more employment than the normal schillings circulating in parallel. The anti-hoarding device proved extremely effective as a spontaneous work-generating device.

Wörgl’s demonstration was so successful that it was replicated, first in the neighboring city of Kirchbichl in January of 1933.  In June of that year, Unterguggenberger addressed a meeting with representatives of 170 other towns and villages.  Soon afterwards 200 townships in Austria wanted to copy it. It was at that point that the central bank panicked and decided to assert its monopoly rights. The people sued the central bank, but lost the case in November 1933. The case went to the Austrian Supreme Court, but was lost again. After that it became a criminal offence in Austria to issue “emergency currency.”

Story of Wörgl, as told on Bernard Lietaer’s site

Other types of money

A fact known by few people outside of Switzerland, and I guess maybe even in Switzerland, is that the Swiss Franc is not the only currency used in that country. Next to it they also have the WIR. The WIR started out as a kind of mutual credit system in 1934. Mutual credit systems create the money needed at the time of transaction. Say Mike and Sofie both have an account in a mutual credit system and both their balances are 0. When Sofie does something for Mike and gets payed 10 units for the work, Mike’s balance will be at -10 and Sofie’s at +10. The money has been created at the time of transaction.

The way the WIR works is similar with the exception that all the money is created against the central account of the WIR bank, i.e. by loans. When the WIR was created, these loans were interest free. Since 1950 though they started to charge interest on the loans, making the WIR now susceptible to some of the same problems that our regular, fiat based currencies suffer from. But because there is no interest on accounts, hoarding the currency is not incentivised, which is an advantage over our fiat currency. The WIR is most likely one of the reasons why the Swiss economy is as stable as it is. When there is a downturn in the economy, more WIR start circulating, thereby buffering for the effect of the downturn. When the economy perks up again, the circulation of WIR goes down again.

A couple of other examples of successful currencies that are in use are the Brixton pound in the UK, the Chiemgauer in Germany and the Charrua in Uruguay. The latter is remarkable because people can also pay their taxes with it, which makes it immediately trusted by everyone in the country, a problem that most complementary currencies struggle with.

Some currencies that are in use are very domain specific. In Japan for example, they have the Fureai Kippu, a currency that can be earned by and spent on elderly care. It’s use has improved the lives of both the elderly and their caretakers by creating meaningful and lasting bonds between them. At the same time it creates an incentive for younger people to tend to the elderly and it saves on cost in Yen for the services provided.

These are just a few examples of the thousands of complementary currencies in use today. Of these systems, LETS is probably the most widespread in use in local communities.

And the there are the complementary currencies almost every single one of us uses without even realizing it. These are your frequent flyer points, the stamps you collect on your loyalty at the local butcher, eco cheques issued by the government, coins on Swarm, … All these currencies are designed in a way that is different from our main currency system … and they all work and they are all used by millions of people. They also seem to be avoiding the problems of our main currency system. Ever heard of a financial crisis with your frequent flyer points? You could argue that it has to do with the scale of its use but looking at these statistics, that scale might be way bigger than you think.

Digital currencies

The first successful player in this field was BitCoin, which got created in 2008. Initially many thought of it as the future of currency but it’s not there yet and I believe it will never get there in its current form due to some serious problems it has.

The big advantage of BitCoin is that the system is owned and regulated by no one. Anyway, that’s the theory. It is very different from any other, centrally managed, monetary system though. BitCoins are generated by verifying transactions. This means that there is no central bank that is issuing new coins. Transactions are peer to peer so there is no middle man. Due to the block chain, a public ledger containing all transactions, it is also very fraud resistant because in order to alter the ledger one would have to hack into every copy of the ledger simultaneously. And there are a lot of copies out there. On top of that, the hacker would also have to alter it in such a way that it remains cryptographically intact. Considering that the ledger is in constant flux due to ongoing transactions, this is an impossible feat. And yet, someone may have found a way around it.

So, why is it not taking the world by storm? That has more to do with our human nature than with BitCoin itself. We are addicted to our current monetary system and instead of using BitCoin as a currency we started using it as a trading commodity. People will often, before buying something with BitCoins, first calculate what the equivalent value is in their government issued currency and then pay the equivalent amount in BitCoins. That would be the equivalent of me going to buy a coffee here in Australia and negotiating the price of that coffee based on the exchange rate with the Euro. That’s not how accepted currencies are used. And that is the first big problem BitCoin is dealing with.

The other problem I see with BitCoin also has to do with us being human. By definition, the amount of BitCoins that can be generated is limited to 21 million. That means that once the limit has been hit, that’s it. No more BitCoins to be added, ever. This means that, should we start using BitCoin as a real currency instead of a trade commodity, the price of products expressed in BitCoin could be pretty volatile. This depends on the size of the economy, expressed in value assets.

Take this simplified example. Say there is a production of 100 cups of coffee a day and we have 100 BitCoins available. If that were the entirety of our economy then a cup would cost 1 BitCoin. If we increase the production to 200 cups, the price would to down to 0.5 BitCoin since we don’t have 200 BitCoin to spend. That means that, depending on the size of the economy, what we pay for a cup of coffee or anything else might be fluctuating all over the place. And psychologically that’s hard to deal with for us humans.

The block chain that is behind BitCoin has big promise though and it is a solid technology to build next generation currencies on.

Sustainable money

Often people will say that money is the root of all evil. This is not true. The problem lies not with the fact that we use money in our day to day lives as a way to make trade easier, it lies in the fact that it is badly designed. If we make a car that guzzles 50 liters of fuel every 10 km and which needs to be turned off every 10 minutes, it doesn’t mean that all cars are crap, we just designed one that is crap. The good news is, we can design a better one. The same goes with our monetary system.

As explained before, our current mainstream monetary system is not sustainable. It works very well in one aspect, making financial traders rich. Enrichment of the few was also the goal of the original founders of our current banking system, the Rothschild family. And somehow we got lulled to the point that we now think that this is how money is supposed to work. I think we should have had enough financial crises by now to realize that there’s something wrong with it. But addictions can be hard to give up, especially if everyone around you is suffering from the same addiction as you are and we are all in deniance of the fact that there is even something wrong.

There is a better way though. We can construct monetary systems that work for us instead of us working for the monetary system, as is the case today. To do that we need to create them mindfully, with the intended goal of the monetary system in mind.

  • It has to be mathematically sound in a way that it is not designed with explosion build in. Compound interest inevitably leads to explosion.
  • It must not fight itself. Currently we have the hoarding incentive fighting the need for money to circulate in order to create a healthy economy.
  • There should be enough for everyone without creating insane inflation.

The system Wörgl created is good for creating a trade currency. Hoarding is disincentivized due to the demurrage fee and the speed of the economy can be regulated by how big the demurrage fee is. The demurrage fee also incentivises interest free loans. When I have 100 000 units in my account and you need 50 000 for a project, I’d be happy to lend those 50 000 to you interest free because that way I safeguard that money from the demurrage fee. This also increases the incentive to invest in long term projects, something that is disincentivised in our current monetary system. The fee could be brought to 0. People would then be able to save without fear of losing money but would still not be rewarded for it. It would lessen the incentive for interest free loans and long term investments though. Maybe a better option is to define a demurrage free amount everyone can hold on to.

Money creation – current implementations

The crucial point in any currency system is how it is created. There are a couple of options for this.

The LETS system, which has no demurrage fee, creates the money at the point of transaction. The balance between money and debt in this system is always 0. So in a way it works a bit like our current system by creating money out of debt but without the destructive compound interest on the debt and it is not issued by a central authority. Say the system is starting up and you and me are the first people making use of it. There is no money in the system at this stage. When you do something for me and we decide your work is worth 10 units of currency, let’s call them LETS dollars, I will pay you 10 LETS dollars. Now you have 10 LETS dollars and I have -10 LETS dollars. So I am in debt to the system, not to you, for 10 LETS dollars. If I do nothing for a year, I will still be in debt for 10 LETS dollars, my debt will not grow. Neither will your wealth if you don’t do anything. The money/debt balance always remains 0 and does not run out of hand. LETS systems are transparent to its users in order to keep people accountable. So everyone can see what you have in your account. When someone’s balance is heavily in the red, people will know. In LETS communities these people are not punished though. It creates an incentive for others to enlist their services to help them to get out of debt. This happens because there is no scarcity in currency. Because of this, there is also no real incentive to hoarding. The system’s success can actually be measured by how often people cross 0 in their account.

The Brixton pound is backed by the British pound. You can buy Brixton pounds on a 1 to 1 exchange rate and the British pounds are then held at the London Mutual Credit Union. So the number of Brixton pounds in circulation equals the number of pounds that have been bought by people. They are destroyed again when they are re converted to British pounds. Note that the Brixton pound does not have interest on its accounts, thereby making the real difference with the British pound and creating a higher incentive to make the currency circulate and make the economy work.

The stamp scrip in Wörgl was created in the same way as the Brixton pound, being backed by the 40 000 Austrian Shillings that were placed in the bank. Every time money exited the system through the demurrage fee, an equal amount could be injected into the system while still being backed up by the money in the bank. In essence, the Brixton pound can be considered as a currency with a demurrage fee of 0%.

Money creation – a new method

A system could be designed where money creation is coupled with a basic income. It would work like this:

Everyone who enters the monetary system is assigned a new account with money already on it, say 1000 units. At this point money has been created and the amount of money in the system automatically scales with the number of participants in the system. The number of people in an economy is one way to have a rudimentary measure of the size of the economy. Of course, this system needs to be protected against fraudulent behaviour like one person opening several accounts under different names and enriching themselves that way. I would propose to use Estonia’s e-residency, or a similar system, for identification purposes in order prevent this from happening.

In order to make sure that there is enough money supply, I’d also set up a central reserve. For every account that is added to the system, money would also be added to the central reserve, for simplicity, say this also equals 1000 units. Anyone can lend money from the central reserve interest free.

At the end of each month, money is deducted from each account as a demurrage fee. Say this demurrage fee is 1%. The fee could be calculated in terms of the average amount you had in your account in that month. All this money could then be collected by the central system and re distributed to every user in the system, essentially creating a basic income for everyone. People with negative balances on their account would not be charged demurrage fees because there is nothing to charge it on. On re distribution, an adjustment can be made in order to account for rounding errors so that, when the money is re injected in the system, the total amount would be the same, thereby keeping prices stable.

When people leave the system, the initial 1000 units that were created in their account and in the central reserve are removed from the system. If they have more than 1000 units in their account, the surplus is re distributed together with the collected demurrage fee. If they had less in their account, the difference is subtracted from the amount that is re distributed after collecting the demurrage fee. In order to avoid people to drain their accounts under 0 and then leave the system a penalty could be implemented. As long as our current monetary system is still the ruling one, a monetary fee equal to the negative balance could be an option. This money could then also be distributed amongst the users of the system.

The numbers used are for illustration only. Upon real world implementation of the system they would have to be looked into. A decision would also have to be made whether or not a demurrage free amount is to be defined. In case this is so, more money than the demurrage free amount needs to be created in order for the re distribution system to work.

Also note that, even though there is a central reserve, that does not mean the currency system needs to be managed by a central authority. It could be implemented as a distributed system like BitCoin and have its security based on a block chain.

Co existing currencies

As Bernard Lietaer describes in his book Rethinking Money, we do not necessarily have to design just 1 currency. We can have multiple currencies co existing next to each other. In fact, we already do. There are all the national currencies, Switzerland has its WIR and there are all the complementary currencies that are already being used. As the WIR in Switzerland proves, multiple co existing currencies provide the diversity needed to buffer the shock of one of these currencies failing. For that they need to be designed differently and each with their specific goals, otherwise they will just all fail together, as the crises in our financial world prove so well. So we could have a currency for global business to business trade, local currencies, domain specific currencies (education, health care, …) all co existing and when one should fail, the others would be unaffected and act as a buffer against meltdown.

Moving forward

The question many of you probably have by now is: how could we make this happen? The real beauty of it all is that we don’t need to wait for our governments to implement these currencies in order to use them. We can do this all by ourselves. It is admittedly harder to do it without government backing but so was getting voting rights for women. Hard does not equal impossible.

What is needed for a currency to work is getting enough people on board. In essence, enough value needs to be accessible through the currency. This can happen in local communities or in active, connected networks. Imagine a network of service providers starting to accept an alternative currency in their network, at least partially. That would mean that network can now use that currency to access each other’s services, vastly increasing the productivity of the network (through a higher circulation of currency) and reducing the dollar cost (read broken money cost) of hiring someone in the network.

Will this attract the scrutiny of governments? I’m pretty sure it will as soon as a currency becomes successful enough. But that is not a problem, it would be an opportunity for dialogue and the start of some real restructuring of our society by changing the destructive system we have now into something that would work for all.

Non quantifiable currencies – a philosophical addendum

After talking to Bree Gaudette, a friend of mine who manages the School of Life next door to the place from where I work when I’m in Melbourne, I got the inspiration to write this addendum.

Apart from the quantifiable currencies that have been described in this series about money there are also a whole lot of non quantifiable currencies we use on a daily basis. Trust, companionship, sex, service, … could all be seen as a sort of currency. We use them in our social exchanges and they pay for strengthening relationships, one of the most valuable things we have in life. They can not be expressed in numbers, yet they matter enormously to all of us. In a society where there is a strong tendency to quantify everything I believe that we need to realize quantification can not and should not be applied to everything. That what makes us truly human can not be expressed in numbers. It can only be expressed in heartfelt compassion and love, which I believe are the true currencies of life.

Conclusion

It would be great if we could live in a world without money. A world where we share the available resources and all take care of each other. I think this might be possible but to create the necessary mind shift for that on a global scale will be nigh impossible in the short run. There is just too much fear of not having enough. Maybe one day we will get there but in the meantime I believe the solution lies in better monetary systems which create more collaborative and compassionate behaviour by the ones who use it.

And I am not the only one who believes this. There are organisations out there who are campaigning for this today. Here are some of them:


Also published on Medium.

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1 Comment

  1. Great ideas! Economies only serve those with interest in keeping it the way it is.


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