Sunday, June 5, 2011

What transition? Part 4: Renewing the framework (Installment #6: Re-thinking money creation and fostering a new "ecology of currencies")

This last post of Part 4 draws heavily on my ongoing discussions and collaborations with my two Belgian colleagues Bernard Lietaer and Marek Hudon. Both of them, and especially Bernard, are recognized worldwide as specialists on parallel currencies, alternative finance (a.o. micro-credit), and "new human wealth." I discovered Bernard Lietaer's ideas -- encapsulated in his well-known and alas out-of-print book, The Future of Money (Century, 2001) and in his remarkable analysis, in German, of the archetypal "mysteries of money" in Mysterium Geld (Riemann, 2000) -- while I was desperately searching for new vistas on how to make money and finance work for the common good and for a renewed economy. (See his website in the sidebar.)

The 2008 crisis has rocked the foundations of the free-market idea according to which private commercial banks are the best agents to allocate capital across economic activities and to decide on who should get loans. Being the remarkable free-thinking man that he is, Bernard generously introduced me to his ideas about an "ecology of money" (some of which he shares, albeit with different accents and emphasis, with other thinkers such as Richard Douthwaite and Tom Greco), and these ideas came as a true revelation for me. I quickly discovered what many, if not the overwhelming majority of citizens aren't even aware of -- namely, that the money that circulates among us today via our bank accounts is privately issued: It's so-called debt money, having its origin in credit loans by commercial banks. Therefore, monetary resources mostly get allocated to ventures that generate a large profit as quickly as possible, and with little concern for sustainability (both with respect to externalities and to internalities). In forthcoming books with Stephen Belgin and Gwen Hallsmith, as well as in his own self-named publications, Lietaer has been expanding and recasting his ideas, in order to refine his advocacy of currency diversification as a major structural tool for change. One of they key virtues of his approach is that -- in congruence with what I have in this blog called "muddling through" and "pluri-economy" -- he doesn't advocate a wholesale abandonment of traditional, bank-issued currencies, and neither does he argue in favor of relocalization or de-globalization as a matter of dogmatic principle. Bernard is a visceral pluralist, and so his take on money creation is truly transitional: World currencies will still be needed for international trade; the dollar and the euro aren't set to disappear any time soon (except perhaps if further financial and banking crises, fueled by inadequate policies and ideologies, drive the last nails in the coffin of the current financial system); local, regional, and municipal currencies are set to become increasingly important -- but as complementary currencies rather than as wholesale replacements for what already exists.

I found this approach to currency circulation and money creation utterly fascinating, and as I was discussing this with Bernard I came to realize how much it coheres with the overall transition project that I want to spell out. Lietaer's, Douthwaite's, and Greco's work (as well as that, for instance, of Frances Hutchinson in a different tradition) has made me realize how very much the future sustainability of our economic system hinges on a new understanding of the role of money and on a new monetary architecture. That's why I have chosen to close this Part 4 with a discussion of these issues, technical and arduous as they might appear at first. So hang in there, you may find some of this stuff pretty technical. But having looked at some of the really technical economic literature on these topics, let me assure you: You ain't seen nothing yet!... I, for one, have tried to keep things very simple. (Bernard, Marek, and I have plans to further develop these ideas in joint publications over the coming months, but here's a first shot at some of them.)


6. Creating and circulating money differently, constructing a plural currency system, and helping people generate wealth in new ways

When I ended the previous post with the idea that capital ought to be seen as a loan from the democratic community to its social entrepreneurs, I wasn't just joking. I do believe that, if the transition to a sustainable pluri-economy is to take place gradually, there needs to be a new worldview where capital, and hence also money and finance, becomes a concern for communities as a whole -- in a democratic manner, and not just in the way it is done today, that is, not just by proclaiming the market-liberal faith that certain private actors (investors, bankers, stock market brokers, traders, etc.) will, by pursuing their private-profit interests, more or less cohere with the common good. This "invisible hand" argument still has some limited validity when it comes to ensuring that there is enough competition and that we can, in the last resort, use "exit" as a way to protect ourselves from cronies, bad suppliers, mediocre workers, and so on. However, to base a whole society and its economy on merely this article of faith has turned out to be a grave error -- and the financial crisis of 2008 has made this rather plain. Private banks have simply not been able to demonstrate what many mainstream economists have so long and so vehemently claimed -- namely, that the profit motive is a sufficient guide for the judicious and efficient allocation of real and financial resources. Significant components of "voice" should be introduced into money and finance (as well as into industrial relations, work relations, customer activism, and so on), and this is what I mean when I say that capital should be considered more as a collective-democratic variable than as a purely private one.

Let me hasten to add that this does not imply a return to centralized planning. I've said this repeatedly in past posts and want to emphasize it again. Decentralized exchanges and the free flow of monetary resources and financial assets is of paramount importance, but the rules and regulations within which this free flow occurs are subject to occasional revision. Postwar social democracies represented a momentous change in the framework rules surrounding the "freedom" of markets. It is my view (as well as that of more and more economists and social analysts) that a similarly momentous revision is called for today. We need a new wave of social democracy, and the status of money and capital in this new wave is absolutely crucial. That prudential rules for banks need to be tightened or made more adequate is certain. Continuing to reform the Basel Accords even beyond Basel III will undoubtedly be a crucial part of the immediate transition. That new financial-regulation institutions need to be created, or existing ones reformed deeply, as claimed in the recent Stiglitz Report on reforming the international monetary and financial systems, is equally certain. That Report even makes forays into participatory ideas when, for instance, it suggests (on page 106) that "Regulatory institutions (...) must ensure that the users of finance -- such as small- and medium-sized businesses, pensioners, consumers, and perhaps other stakeholders -- are given voice." This is, of course, laudable and certainly not to be scorned. However, none of it deals up front with the question of whether the private banking sector's virtual monopoly on money creation through debt finance is the best engine to drive a financial system. The implicit answer to this question seems to be a resounding and uncritical "Yes." But when it comes to the transition to a genuinely pluri-economic world, based on a notion of genuine equality of opportunity for all citizens to choose the economic mechanisms they agree to submit to, perhaps the issues of who creates the means of payment, puts them into circulation, and with what motivation, are more important than appears at first.

Be reassured: I don't intend to engage in any "banker-bashing." (Or maybe some of you will be disappointed. Well, I guess it can't be helped...) What is at stake here is a systemic logic, not the personal motivations, character, or failings of individuals or even of a "class" of economic agents. Private commercial banks are a centerpiece of any capitalist social democracy today. The way they generate money as a sector actually eludes even most of the people working on the branch shop floor. The credit multiplier mechanism, which sends any single loan reverberating across the whole banking system and generates a ten- or twenty-fold mass of scriptural money, is not a mechanism that can be detected at the level of any single banker's decision to make a loan. So there is evidently no conspiracy at work on a daily basis -- except when banks, as a sector, lobby governments in order to cover their risky or losing positions, as was done in most bailout programs throughout the world after 2008, as the German banks did with the Merkel government when it came to Greece's public debt, or as banks may do again if the stratospheric U.S. debt creates a dollar crisis. In today's monetary system banks simply do their business, managing their risks and trying to generate maximum shareholder value like any other private firm.

The problem with this is what most bankers themselves don't see unless they take a big step back, or attend a "Modern Money and Banking" course in an economics department -- namely, that the criteria used by private commercial banks as a whole to make loans have a significant macroeconomic impact on the overall orientation of economic activities and on their substantive content. In a nutshell, debt-money is only created when some bank, somewhere on the planet, decides that the economic project X or Y is likely to generate sufficient profit (or, more generally, to be backed by sufficient future net income flows) so that interest payments will be forthcoming over the whole duration of the loan. And these interest payments, of course, along with the bank's own proceeds from speculative or longer-term investments, make up the bulk of the profits to be redistributed to shareholders (after wages, as well as some huge bonuses, have been paid to employees). One way to look at the world economy is to see it as a huge beehive in which everyone is busy raking in sufficient profit so as to pay back loans over and above functioning costs and other financial expenses. All trade in goods and services all over the planet, as well as the production that precedes it, has as its ultimate goal the generation of numbers on bank accounts -- so that employees and suppliers can be paid, contributors remunerated (among which, shareholders), and profits kept for reinvestment or mere accumulation. But interest and capital have to be repaid to lenders, too. That is also a big component of the money that needs to be obtained through trade. Thus, it seems plainly obvious that the amount of interest to be paid, the lenders it needs to be paid to, and the criteria these lenders use to make loans, have a powerful impact on the orientation and intensity of world trade. For instance, if you need to pay a lot of interest charges (while already having to pay your employees and your suppliers), you will necessarily be inclined to want to sell (a) on the most dynamic markets, (b) producing whatever products or services will get you a quick buck, and (c) in a currency that will make it possible for you to hedge against risks of future loss of value. This is, in a nutshell, the portrait of today's trading system with its indiscriminate exports and imports of whatever sells (regardless of environmental or working-conditions content), its massive transportation networks (which have long relied on cheap fossil fuels) and its equally massive financial mechanisms designed to channel, say, dollars, euros, and yuans to where they can generate the largest and quickest profits.

One can't say that this system hasn't worked. In fact, it has functioned brilliantly. The whole postwar period, which saw the advent of the Bretton Woods institutions and all manner of regulation designed to foster trade flows and to create efficient institutions to transfer capital -- this whole period contributed to an amazingly dynamic trade and investment environment unlike any the planet had ever seen. After a half-century of butchering and horror, "making globalization work" for all and replacing nationalism and war with free trade and investment certainly was a noble and humanistic project. The achievements of the builders of Bretton Woods and of the European Community should not be diminished by the fact that, as it has turned out, the industrial-financial-capitalist brand of social democracy which Roosevelt, Keynes and many others envisioned generated massive bio-environmental externalities and equally, if not more, massive anthropo-environmental internalities. I emphasize this because I truly believe that the whole project of transition today has nothing to do with wanting to move backwards to some "good old time." None of the past systems worked better than the one we still have today, and most likely all of them were worse. That's not the issue. But neither can we use the great achievements of the past seventy years to now just stop further progress. That the post-WWII world has been able to build up a trade and financial system unlike any other doesn't need to imply that we can't, in the 21st century, build an even better one. It's ironic that many of those who have -- quite rightly -- hailed industrial-financial capitalist social democracy as a major progress of humanity are among those who accuse today's progressives -- who seek to overcome some of the major defects of the incumbent logic by ushering in a new logic -- of being regressive. In pure logic, just because today's system is better than any that preceded it doesn't imply that it's also better than any that might come after it. Sure enough, this needs to be argued and demonstrated, and there are also powerful interests at work today to discredit further progress -- but this has always been the case, and was the case as the structures of capitalism were being ushered in by 18th- and 19th-century progressives. It's in this spirit that I write this blog, and that I now want to discuss monetary reform.

One of the wellsprings of the transition model is the emergence of enterprising citizens who, with the help of the Economic Transition Income and supported by a whole new vision of what entrepreneurship means, would gradually emigrate as type-3 social entrepreneurs (see installment #5) to the sustainable niches opened up by the slow demise of the "brown-and-gray" economy. Clearly, all the framework conditions we've been discussing up to now are, each in its specific way, going to provide essential support -- in more or less direct fashion -- to these enterprising citizens. However, hard-line realists might brush all this aside by demonstrating that these pioneers and social entrepreneurs who gaze out towards the "frugality frontier" will, at the end of the day, succeed only in creating small and ephemeral pockets of alternative activity. These precarious ventures would, so the realist argument might go, last only as long as enough of their members still earn enough money in the dominant economy or can draw sufficient surpluses from existing capitalist investments. Such realists could even claim -- and they wouldn't be wrong -- that a viable but modest (and hence frugality-supporting) Economic Transition Income (ETI) would never suffice to finance all the costs connected with launching activities within the sustainable niches, such as the purchase of a plot of land and the construction or bio-climatic refurbishing of real estate in the case of an ecovillage, or the borrowing of funds to build up capital in order to launch a small organic farm, an industrial or craft micro-enterprise, or a larger-scale cooperative, and so on. Isn't this what, even today, explains why the "alternative" landscape is so sparsely populated and littered with the remnants of failed attempts, and why so many "downshifters" who have little money in the bank (and most of them aren't that rich, precisely because of their life choices) simply can't start or stabilize their projects?

What accounts for such failures? Aren't they blatant proof that frugalists and transitionists are, on average, poor entrepreneurs and that, on the whole, there's little redemption to be found outside of the great circuits of world trade and of global finance? Well, in the current state of affairs with the system as it is, the answer is actually: Yes. Alternatively-minded people can't get bank credit easily, and existing alternative finance institutions certainly don't have the critical mass or the donations or deposits that would make them capable of offering financing to a large enough number of enterprising citizens for it to make a difference. So it does look as if these alternative, sustainable niches are a hopeless case. As I explained above, most entrepreneurs, even the micro-entrepreneurs in the Third World who might have access to micro-credit, end up depending more or less directly on existing world trade and global finance. And that's why, indeed, I'm more and more convinced that little is served if we try to become enterprising citizens too early and start too quickly to focus only on the creation of alternatives for whose durable success the structural conditions aren't yet present. That sounds harsh but it is, in my view, an absolutely crucial aspect of a genuine transition: Sure enough, behavioral changes are indispensable and a deep change in worldview has to be brought about, and this can only happen through individual shifts in consciousness. However, a significant part of today's citizen activism ought to be devoted to creating the right framework conditions rather than rushing to realize one's dreams of "another world" in an actual world that's still too structurally hostile to them being realized... In other words, a lot of transition activism today has to pass through pretty classical channels of political militancy and advocacy. This might be sobering for the would-be ecovillagers among us, but I believe that a minimally detached analysis of the current situation shows it to be true nevertheless. Being "right" too early often leads to our alternative vistas not being able to become fully-fledged political projects.

One of the areas which transition activists need to invest in urgently is the area of money creation and the circulation of currency through bank credit. Sure enough, as many alternative economists from Herman Daly to Douglas Booth and Tim Jackson have emphasized, today's growth imperative is intimately connected with the allegedly insatiable desires of consumers. However, as many analysts of monetary mechanisms have argued (among whom Michael Rowbotham from the social-credit movement, whose book The Grip of Death I very warmly recommend despite its unappealing title, and also Margrit Kennedy, Richard Douthwaite, and Bernad Lietaer), in today's economic system the consumer is, after all, only the last link in a chain that has its roots in the necessity for all firms to make profits (over and above natural and human resource costs) in order to remunerate their shareholders... and their banks. According to an estimate by Margrit Kennedy in her book Geld ohne Zinsen und Inflation (Goldmann, 2006), interest payments on the private debts of firms make up between 15 and 25 percent of total "production" costs. Because of this logic of interest-bearing debt, there's a permanent inflationary pressure written into our system. But as Michael Rowbotham argues persuasively, since households are also deep in debt (especially in the U.S. where consumer spending makes for nearly two thirds of annual growth), in part because of increasingly exorbitant mortgage payments on their own or their landlord's real estate, their purchasing power is constantly being eroded and they become completely dependent on the wage-earning employment that the unsustainable mainstream economy is still able to offer them -- although it is less and less able to do so, since sizable chunks of profit are being used up to pay back creditors rather than to create new jobs. (Add to that the drive to economize on labor costs by creating less and less jobs that pay less and less well, and the picture of self-defeating wage dependence is complete.) Under such adverse macro-structural conditions, contemplating leaving the dominant economy in order to explore sustainable alternatives (as an employee or as an entrepreneur) is, for most citizens, akin to madness. They can't be blamed, because actually, it is.

Okay, so shouldn't there be more public assistance to remedy this situation? For instance, couldn't the government step in and finance a sufficiently substantial ETI (partly in replacement of existing conditional social transfers), as well as subsidizing the investments of the transitioners (for instance via zero-interest long-term loans)? Well, perhaps, but the bottom line is that taxes will have to levied -- since in our monetary system governments aren't allowed to issue by themselves, even under stringent democratic control, the money they need -- or, alternatively -- since prevailing rhetoric has it that taxes put a "stranglehold" on the private economy and create capital flights -- there will have to be an increase in the public debt in euros, pounds, or dollars, ultimately implying rising indebtedness with private commercial banks (since the money to buy government debt is itself created through banking debt somewhere in the system). If the government doesn't stimulate real and/or nominal growth by attracting investors and boosting the competitiveness of the country's capitalist firms, it won't be able to pay back its creditors and its credit rating will be degraded by (private) rating agencies such as Fitch, Moody's, or Standard & Poor's. This will ultimately compromise its longer-term capacity to finance the ETI and the transitioners' investments in sustainability infrastructure.

So here's the inconvenient truth: The monetary logic of capitalist debt which rules the day makes any collective transition project towards a pluri-economy based on a broadened equality-of-opportunity principle virtually impracticable. As it stands, our monetary system will get in the way of any "muddling through" process of gradual transition. This has nothing to do with any sort of conspiracy theory. Commercial private bankers aren't any more "anti-transition" or reactionary than any other agent in the economy. In fact, on an individual and personal level, they may be all in favor of a transition. But the systemic logic which their activity reinforces de facto makes a transition difficult. That's the reason why re-thinking the financial system is so crucial today for transition activists.

Now, status-quo realists may counter that States should simply be forced to extinguish their debt altogether: pay back past public deficits, create no new ones. Wouldn't that solve the problem? Not at all. In fact, another part of the inconvenient truth of this system of ours is that, if there were no longer any outstanding debts (public or private), there wouldn't any longer be a single dollar or euro in circulation in the economy! (This was one of the main reasons why the Fed encouraged a boost of mortgage debt in 2007 and why many institutions went soft on supervision, because public and consumer debt was all but saturated already, meaning that liquidity had to be created through other debt mechanisms -- one of them being household debt linked to real estate purchases. Many of the loans were sub-prime, but for a short time they sent credit multipliers rippling through the banking system. This created new money and the hope was that the whole economy would thus be jump-started and the bad loans paid back thanks to the rising housing bubble and a new surge in macroeconomic growth. The Fed's gamble was lost, as we now know.) The dollar and the euro are privately created currencies emitted by the commercial banks, under the "control" of a central bank whose main roles are (a) to ensure that the banks will keep enough reserves so as to be able to face potential cash withdrawals and (b) to look out for "too high" inflation so that debtors (households, firms, and the State) don't get away too easily with nominal rises in asset values -- since inflation basically benefits debtors and the owners of real assets and hurts the owners of financial assets. In such a system, there is a constant pursuit of debt rollover (i.e., new debts being reissued as outstanding ones are being extinguished) and, therefore, a constant pressure for growth, if possible in real rather than nominal terms.

Although perhaps needlessly polemical, Nobel laureate Maurice Allais's quip that the money creation mechanisms embedded in bank debt are akin to "counterfeit" does capture a crucial aspect of what's going on. In her remarkable book The Web of Debt (Third Millennium, 2008), Ellen Hodgson Brown recounts the pronouncement of one U.S. judge who, on behalf of a house owner who had been dispossessed by his bank, ruled that the bank had in fact been guilty of counterfeiting because it had lent and created money (through a mere scriptural operation) for which no prior wealth existed, not even in the form of deposits (since banks routinely lend more than the deposits entrusted to them). Moreover, the principle of interest-bearing debt generates a strongly competitive, rather than cooperative, economy. Here is how Bernard Lietaer describes the process:

"...interest is woven into our money fabric, and (...) it stimulates competition among the users of [the] currency. (...) When the bank creates money by providing you with your £100,000 mortgage loan, it creates only the principal when it credits your account. However, it expects you to bring back £200,000 over the next twenty years or so. If you don't, you will lose your house. Your bank does not create the interest; it sends you into the world to battle against everyone else to bring back the second £100,000. Because all the other banks do exactly the same thing, the system requires that some participants go bankrupt in order to provide you with this £100,000. To put it simply, when you pay back interest on your loan, you are using up someone else's principal. (...) In summary, the current monetary system obliges us to incur debt collectively, and to compete with others in the community, just to obtain the means to perform exchanges between us."

(Bernard Lietaer, The Future of Money, pp. 51-52, © Century, 2001)

Basically, we're living under a system where debt-money, as the only legally sanctioned means of exchange, is created and circulated by commercial private agencies (banks) under supervision of frequently semi-private agencies (central banks, many of which aren't public institutions, despite what their names seem to indicate) so as to create an optimal "business climate" for investors in financial capital and for providers of capital-driven private and public employment. Money is not fully anarchic, we do have institutions that "manage" it and that steer the current monetary system (from national or regional central banks all the way up to the International Monetary Fund and the Bank for International Settlements), but these institutions are mainly designed to uphold and maintain industrial-financial capitalist social democracy -- precisely the system which is getting dangerously close to unsustainability because of the persistent externalities and internalities it generates by its very logic. If we really want a transition towards a sustainable pluri-economy, with the help of all the framework conditions discussed in the previous installments, we need to address the alternatives that exist to this monolithic, private-monopoly money system.

The basic idea is that means of payment should exist in proportion to expenses that we deem adequate -- not just in order for miscellaneous private actors to reap maximum profits, but in order to reduce the multiple instances of crippling environmental and human stress produced by the economic system. Since the global de-growth compact (or economic Kyoto protocol) would require developed economies to become much more selective in the way they trade with each other, local currencies would quite likely become relevant again. As the spectrum of local economic activities becomes broader over time, locally earmarked means of payment would gain in stable and durable purchasing power, making it more and more rational for local economic agents to hold part of their money balances in local currency. One way this could occur, as Michael H. Shuman has suggested in his fine book Going Local (Routledge, 2000) [see his website in the sidebar], is for banks to have local branches that commit to dealing with local actors and not to siphon off the money of local depositors towards national or international investments. There are instances where this has worked, but usually it means some sort, and probably a substantial dose, of public intervention. Why would any private commercial banker in his right mind accept to forgo profit opportunities outside the local community? In other words, most local currencies are likely to be emitted either by the democratic community itself (as is the case in most Transition Towns -- see Rob Hopkins's blog in the sidebar) or by locally anchored non-profit financial institutions, which may either be private (as part of the Social and Solidarity Economy sector) or public.

In all cases, however, such local currencies would have the same status as the local currencies of European countries prior to the euro had with respect to the dollar as a world currency: They would be complementary local currencies, coexisting with the euro and the dollar, not replacing them. This is, in fact, sensible because we saw that selective relocalization and reasonable de-globalization are not abrupt, revolutionary moves -- they have to be compatible (via the crucial notion of subsidiarity) with a plurality of trade regimes, with most regions or municipalities developing both a stronger local economic fabric and lasting commercial links with other regions located as near to them as possible (or as far from them as necessary). As fossil fuels become more expensive, as climate change impels more and more countries to look for new options, and as local economies get revitalized as a result, increasing volumes of trade may stop being global and there might be a partial return -- for bioregional reasons of sustainability rather than for opportunistic reasons of nationalism or dogmatic regionalism -- to more restricted trade agreements. Bilateralism and its opaque power plays should, whenever possible, be avoided, but a "bull's eye" logic in trade, where you get what you need as close by as you can get it rather than scanning the whole planet for the very cheapest bargain (even if it implies a negative return in terms of net energy), is likely to be a new reality. Still, none of this would imply a disappearance of world trade. There should certainly still be a world currency, though more and more numerous voices are calling for the U.S. dollar to stop assuming that perilous function. Lietaer's and Douthwaite's idea of an "ecology of currencies" doesn't imply that there would only be local currencies. There should be, roughly speaking, as many currencies as there are legitimate trade areas: There is localized trade within a city, localized trade within a region, inter-regional trade within a broader but still circumscribed area, and international trade. In each of these cases, there are difficult technical issues as to how to actually delimit the optimally-sized trading area in an operational way. Whatever the case may be, there would be several complementary currencies, each performing a specific role in irrigating trade (and hence also production, work, investment, etc.) at the appropriate bioregional level. Each currency would need its own emission and regulation institutions, but there would be absolutely no reason why these should all conform to the current private-monopoly principle whereby commercial banks create money under the supervision of a (more or less private) bankers' bank, the central bank. In fact, as I explained above, there are good democratic as well as ecological arguments why such a monolithic logic should not prevail.

Local "economic communes" could, eventually, use the local currency to collect local taxes, which would give all local economic actors an incentive for holding at least a minimal amount of that currency, hence for trading locally with the people who have some of it to spend. (I am indebted to Bernard Lietaer for this idea, which is linked to the so-called "Chartalist" school of monetary theory, represented a.o. by L. Randall Wray's book Understanding Modern Money, Edward Elgar, 1998.) As a result, a fraction of the Economic Transition Income could end up being labeled in local currency, and thus spent on local goods and services, further contributing to a local revitalization. This would not imply that a citizen would lose his/her right to a full ETI if he/she moved to another place. The corresponding fraction of the ETI would simply be relabeled in the new local currency.

But how would local complementary currencies be put into circulation? I emphasized in the previous post (installment #5) that capital should increasingly be seen as as a loan from the democratic community to its social entrepreneurs, who in turn will use it to produce and sell as locally as possible, to employ local labor whenever feasible, and so on. (To repeat once more, local citizens would also hold national and/or world currencies, and would perform trade accordingly at higher levels, too. Local currencies are to be complementary, not exclusive.) This in itself implies that the criteria for financing investments would have to be modified substantially, since as we saw, the current logic almost forces all innovators and investors to skim world markets in the hope of reaping sufficient wealth (labeled, if possible, in dollars or in euros) so as to honor their own interest-repayment obligations. One way to have the democratic community decide is to replace private by State monopoly. Let me say immediately that neither I nor Lietaer really believe in this option. But it has an audience within alternative circles. The idea would be to snatch money creation completely back out of the hands of the private banking sector -- for instance, by imposing a 100% obligatory reserve rate or by making lending more than one's deposits illegal. Money creation would become a State prerogative again, under tight democratic control (so that no one here is advocating a discretionary right for government to use the printing press whenever it feels like it). The quantity of money would be calculated so as to correspond closely to the needs of the real economy, not the needs of private banks for profit (nor the central-bank mediated needs of financial-asset owners for low inflation). Economic activities would be financed through public credit institutions, or the equivalent of public banks. There would still be interest payments -- so that the growth imperative wouldn't be completely eliminated -- but they would accrue to the community rather than to the private banking sector. Rather than being the late counterpart of bank credits that were lent out while never even having been deposited, these interests would be sort of a tax that would allow to publicly finance a "social dividend" or social credit, an equivalent of the ETI. The State might therefore even be able to correspondingly lessen fiscal pressure on incomes, to the extent that both the ETI and transitioners' infrastructure investments could be financed through the social dividend. (For a discussion of social credit and basic income, see chapter 14 of Rowbotham's Grip of Death.)

If we don't just want to replace a private monopoly by a public one, we need instead to think up bottom-up solutions so that money gets created more or less endogenously when it's needed for specific types of transactions. One obvious solution is so-called mutual-credit currency, such as is being used in Local Exchange and Trading Systems (LETS) or in the Swiss inter-firm trading system known as the WiR (in German, Wirtschaftsring-Genossenschaft). There, without any intermediary and with a minimal amount of administrative coordination, non-interest-bearing credit lines are automatically opened and extinguished as individuals or firms engage pairwise in transactions. There are currently researchers and practitioners developing large-scale mutual-credit networks with elaborate compensation mechanisms so as to be able to broaden the scope of trade beyond small neighborhood or city communities (see Lietaer has thought up, and actually contributed to implement, other complementary currencies in municipalities or regions desiring to further specific environmental or social priorities. (See, for instance, his "C3" or Circuito de Crédito Comercial scheme experimented in Uruguay, designed to boost employment when there is a dearth of mainstream currency in times of financial or banking crisis. Website: See also Lietaer's contribution to the WAT system in Japan, where a parallel currency is used to foster environmentally sustainable activities and ecological restoration by local NGOs. Website: See also: Another relatively decentralized and bottom-up way of creating non-banking currency would be to foster cooperative -- private or public -- financing networks within the Social and Solidarity Economy. (In Belgium, there is a Réseau de Financement Alternatif that studies and implements such solutions. The New Economics Foundation in the UK -- see website in the sidebar -- has also been very active in this area.) The idea here is that not-for-profit financial institutions would offer a service to the community and could charge much lower interest rates than the commercial banks who are being strangled by the disproportionate profitability demands of the investors who place their funds with capitalist financial institutions.

If you think I haven't really spelled out a very coherent picture here, you're quite right. I haven't. Research on parallel, complementary currencies is still in its infancy. After so many decades of private-bank monopoly on money creation, and after just as many decades of misleading most citizens into believing that money is created by the State, re-thinking money creation as a plural, decentralized, citizen-driven and democratically controlled activity is really difficult. We're struggling to discover the right mixture of top-down and bottom-up for each instance of a currency. Much will depend on the transition-related objectives -- better care for the fragile and elderly, more humane employment opportunities, greener production, more cooperatives, more "voice," etc. -- that we wish to assign to our various currencies. Lietaer and Douthwaite are both insisting on the fact that the more diverse our "ecology of money," the more resilient will be the various subsystems of our sustainable pluri-economy. I agree with them. And this means that monetary reform is most probably -- along with the global de-growth compact discussed in installment #1, with its fair and differentiated growth guidelines -- the most urgent framework condition in favor of which transition activists should militate, even before we engage in any actual transition initiative, which under current conditions is likely to remain almost invisible and to miss its full potential. The first steps of the transition will be political, to be sure.


CONGRATULATIONS! You have just arrived at the end of a long and grueling Part 4. We've spent six whole installments on some of the main framework conditions that I believe would be needed for a genuine transition to a sustainable pluri-economy to get off the ground:
  • "De-growth" and an economic Kyoto protocol
  • Fostering new governance through the creation of a World Transition Organization
  • Fostering new governance through participatory coordination and communalism
  • Introducing an Economic Transition Income
  • Deepening economic democracy and encouraging new forms of entrepreneurship
  • Re-thinking money creation and fostering a new "ecology of currencies"
These six conditions seem to me to be components of a desirable and not unreasonable worldview. Still, to believe they could be introduced next Monday morning would be madness. Well, okay, it's probably the case that to believe that anything at all could be changed next Monday morning (such as the kids starting to clean up their rooms by themselves) would be madness... But you know what I mean.

What, given the horizon traced out by these six central framework conditions, might be things we could start changing soon? What are the actual next steps we might take, not in order to instantly implement these six conditions (as if they could be suddenly couched into a new economic and social constitution), but in order to create changes which, although perhaps still far removed from the ideal, might put the needle of our compass in the right position or, at the very least, might help us not to forget that these conditions are the ones we're ultimately aiming for? Those are questions we now need to ask ourselves. Part 5 will deal with them as well as possible.

This means, however, that we're (finally) going to be moving into a different time frame for this blog -- and I suspect most of you will be relieved. Part 5 will extend over months, with regular eclipses as I also now look at, and debate with, other people's ideas encountered in books, in articles, or in comments sent to me. After this mad period of piling up long posts, we're now going to relax... breathe... take our time... I hope you enjoy the coming ride. I, for one, sure am looking forward to it. (I can't promise, though, that I won't ever again be posting long entries. Alas, I'm too long-winded to be able to commit to that.)

Thanks for having gotten his far, and for now embarking on the "Next-Step Economy" journey.

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This post from the "Eco-Transitions" blog by Christian Arnsperger is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.

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