Special Issue “Monetary Plurality and Crisis” in the Journal of Risk and Financial Management (JRFM)

 

In addition to our commitment to the implementation of innovative currency ideas and the ongoing educational work on money and monetary reforms, it is above all the academic treatment of these two fields of activity that will ultimately pave the way for a new monetary and economic order in the long term. Especially in the young scientific field of complementary currencies research, the linking of practice and science was considered from the beginning. Thus, since the early 2000s, the international conferences on this topic have seen themselves as a forum for both activists and academic researchers. Under the auspices of leading universities in France (2011) and the Netherlands (2013) these conferences lead to the establishment of RAMICS, the “Research Association on Monetary Innovation and Community and Complementary Currency Systems”, founded in 2015 during the conference in Brazil. Since then, the specialist journal IJCCR, which has been published since 1997, has also been taken under the wings of this association.

However, it takes time for a new field of research to establish itself, both in the academic discourse and institutions, and in the awareness of academics and students. Publications in one’s own circles help, but full recognition in the discourse of the scientific establishment cannot be fully achieved this way. Therefore, it is a great achievement to place the rather unknown topic of monetary diversity in a conventional and broad-based business journal such as the Journal of Risk and Financial Management. The recently completed special issue on “Monetary Diversity and Crisis”, made this possible. This has not only motivated established scholars to consider new topics and share their thoughts on monetary theory and the practice of complementary currencies, but it has also given young authors the opportunity to publish the results of their work.

To ensure that these articles are not only accessible to a specialist audience with access to institutional libraries, it is of particular value that this journal operates according to the “open access” principle. This means that every article can be viewed in full by anyone at any time, and downloaded free of charge. Since such an approach eliminates the retrospective funding of publishers via subscriptions and “pay per view” fees, their editorial effort and costs of publication are commonly be paid in advance by the author or their institution. Unfortunately, for young and independent scientists this is often an insurmountable financial hurdle, even for many scientific institutions outside the industrialized nations. Therefore, it was a stroke of luck that for this special issue we were able not only to gather the interest of the journal, but to gain the financial support of the editorial team’s organisation. The funding of most of the publishing fees, for articles that passed the rigorous scientific review process, were financed in equal parts by Prof. Georgina Gomez’s research group at the University of Rotterdam and monneta.

Most of the articles now published deal with the economic benefits of monetary diversity. These are examined, on the one hand from a theoretical, macroeconomic perspective (see the articles by Simmons et al. and Kuypers et al.), and secondly on the basis of practical local examples – supported by data from established complementary currencies such as the REC in Barcelona (see Martín Belmonte et al.), the Sardex in Italy (see Fleischmann et al. and Simmons et al.), the Chiemgauer in southern Germany (Zeller) and Sarafu in Kenya (Ussher et al. and Zeller).

Historical examples with parallel currencies are also examined (see Kokabian and Sotiropoulou), as well as lesser-known monetary practices such as the obligation clearing in Slovenia (see Fleischmann et al.). And beyond the economic advantages of complementary forms of currency, some articles examine more fundamental issues, such as the legal definitions of “money” and “currency” as a basis for a sustainable and more equitable monetary order (see Bindewald), the effects of profit-oriented creation of currency on the stability of the financial system (see Kuypers et al.), and the influence of economic inequality on the diffusion of innovations and the importance of cash (see Srouji).

What all these authors seems to have in common is that their research questions are formulated with a concern for social justice and ecological sustainability. The monetary innovations here examined are not evaluated solely in terms of their micro- or market-economic efficiency but are seen in the light of their contribution to a sustainable world.

[The author of this article is also co-editor of the special issue described, and author of one of the articles published therein.]

 

 

We talk a lot about the ‘money system’. In what sense does money form a ‘system’? Does it have a function or purpose? Does it have interconnections? Does it have identifiable elements?

1. Elements of a money system

The elements of a money system include the structures and institutions that create it – governments, central banks and commercial banks – the ‘players’ who use it – individuals, consumers, traders, savers, investors, employers and employees, businesses, voluntary organisations, government agencies – and the processes that manage it – creation of loans, designation of currencies, transaction mechanisms, debt collection procedures and many others.

2. Interconnections in a money system

The simplest money system we might imagine would have three people who agree to use some object to ‘keep score’ of exchanges between themselves. At this level the purpose, the elements and the potential interconnections are relatively simple. Once we scale up to a nation state with millions of people using the same medium of exchange for myriad purposes with multiple elements and uncountable interconnections, it is no longer possible to analyse its complexity and feedback loops. This is why oversimplified economic ‘models’ and theories so often fail in their prognoses and predictions. Unforeseen or unintended consequences of economic or financial actions are common.

The money ‘system’ embraces multiple, often conflicting, purposes. For instance, when we use money for trade, we are not saving it for future use and when we save or invest, we take money out of general circulation, which can affect the state of the economy for everyone else. Add interest payments into the mix and investment can become a risky medium with big winners and losers. Irresponsible banks and governments can quickly corrupt the medium of exchange that everyone else depends on for exchange.

Depending where you draw the line around the ‘system in focus’, it may even be appropriate to talk about multiple money ‘systems’ serving different purposes for different users, all interacting with each other through multiple feedback loops. Clearly, money means very different things to a beggar on the street thinking about the next meal and to an investment banker looking for the next deal. Yet these two actors are part of the same money ‘system’ if they both use the same monopoly national currency to do their business.

3. Reforming the money system

The complex of these multiple purposes, elements and interconnections can lead to great crashes in which a lot of people get hurt. The 2008 financial crisis was just the latest and most spectacular in a long line of crises stretching back decades. An International Monetary Fund Working Paper identified147 banking crises, 218 currency crises and 66 sovereign debt crises between 1970 and 2011. This is ‘systemic’ – or in-built – instability1.

In the long history of money, there have regularly been calls to reform it from one group or another for whom it was not working well. Some want to keep money scarce and valuable to protect their wealth. Others want a plentiful but stable medium of exchange so they can eat or plan for the future. Money must serve many masters. You can read some of the history of monetary reform in the UK in my previous blog post.2

There has been a small but largely ignored monetary reform movement in the UK for decades. It sponsored a handful of Early Day Motions in Parliament with proposals for reforming the national money supply that gathered little support. Since the 2008 crisis, however, a new force has arrived on the scene in the form of the Positive Money (PM) campaign. It has made smart use of modern social media with short videos and bite-sized information to reach a much wider audience with messages of monetary reform.

Positive Money’s analysis and proposal

Positive MoneyPM clearly divides its website into three areas: The Issues; How Money Works; Our Proposals. Each section gives a clear overview of that theme, then breaks it down into detailed sub-sections followed by lots of helpful links to explanatory videos, books and articles.

1.The issues of our money system

The first issue raised by Positive Money is how many individuals and businesses are trapped in debt because most money in the UK is created by banks when they make loans. The only way to get extra money into the economy is to borrow it from banks. House prices have constantly been inflated by the hundreds of billions of pounds of new money that banks created in the years before the financial crisis. There is persistent inequality because our money is issued as debt and the interest that must be paid on this debt results in a transfer of wealth from the bottom 90% of the population (by income) to the top 10%, exacerbating inequality. Environmental destruction is accelerating because there is a direct link between the perceived need for continuous economic growth and damage to nature through exploiting natural resources for monetary profit. Money creation is undemocratic because banks create 97 per cent of the money supply when they make loans, so they control where newly created money goes and have the power to shape the economy. In the 5 years before the financial crisis, the banks approved a total of £2.9 trillion in loans. Over that same period, the government spent a total of £2.1 trillion. So banks’ power to create money through loans, gives them more ‘spending power’ to shape the economy than the whole of our elected government. There are regular financial crises because banks are able to create too much money, too quickly, and use it to push up house prices and speculate on financial markets. A ‘boom and bust’ economy fuelled by easy credit is bad for jobs and businesses, creates systemic instability and makes environmental sustainability impossible. Taxpayers foot the bill for financial crises because the proceeds from creating new money go to the banks rather than the taxpayer, and because taxpayers end up paying the cost of financial crises caused by the banks.

After this presentation of a range of problems created by the current monetary system, the second area of the website explains how money works.

2. How our monetary system works

Positive money also shows how most of the money in our economy is created by banks, in the form of bank deposits – the numbers that appear in your account. 97% of the money in the economy today is created by banks, whilst just 3% is created by the government as notes and coins. Bank loans create numbers in a customer account, which then act like electronic IOUs circulating in the economy until a loan is paid off, so banks can effectively create a substitute for printed money. Banks create new money whenever they make loans and there are several statements by experts from the Bank of England that confirm this fact. In short, money exists as bank deposits – IOUs of commercial banks – and is created through some simple accounting whenever a bank makes a loan.

Banks aren’t middlemen between savers and borrowers as many people think. By creating money in this way, banks have increased the amount of money in the economy by an average of 11.5% a year over the last 40 years. From the time when the Bank of England was formed in 1694, it took over 300 years for banks to create the first trillion pounds. It took only 8 years for banks to create the second trillion.

In a short historic overview Positive Money also explains how banking evolved out of the inconvenience of carrying heavy coins around and the need for better security into note-issuing and finally deposit-making. The 1844 Bank Charter Act only stopped the creation of paper bank notes – it didn’t refer to other substitutes for money, such as bank deposits or ‘loans’ so banks could still create money simply by opening accounts for people or companies and adding numbers to them. Computers revolutionised banking so that today over 99% of payments (by value) are made electronically. With the rise of computers and financial deregulation, banks received almost unlimited power to create new money and are only required to keep a tiny fraction of their liabilities in reserve for emergencies (fractional reserve banking).

Deposit money now makes up over 97% of all the money in the economyaround £2.1 trillion, compared to only £60 billion of cash. By value of payments, bank deposits are used for 99.91% of transactions and transfers, with cash being used for just 0.09% of transfers. Consequently, the physical currency issued by the state has been almost entirely replaced by a digital currency issued by private companies. The UK’s money supply has been effectively privatised.

3. Positive Money’s Proposal

Positive Money’s proposal for reform makes three fundamental demands:

1. Take the power to create money away from the banks, and return it to a democratic transparent and accountable process

2. Create money free of debt

3. Put new money into the real economy rather than financial markets and property bubbles.

PM staff have written a 64 page report “Sovereign Money: An Introduction3, which outlines their reform proposals in detail. They claim the economy would be more stable and society better off if we transfer the power to create money from the banks back to the state, working in the public interest. This can happen if the Bank of England creates money and transfers it to the government to be spent into the real economy (rather than the financial or property markets). This reform would transfer the ability to create new money exclusively to the state, creating a ‘sovereign money’ system.

Taking the power to create money out of the hands of banks would end the instability and boom-and-bust cycles that are caused when banks create too much money in a short period of time. It would also ensure that banks could be allowed to fail without bailouts from taxpayers. It would ensure that newly created money is spent into the economy, so that it can reduce the overall debt burden of the public, rather than being lent into existence as happens currently.

The power to create all money, both cash and electronic, would be restricted to the state via the central bank. Changes to the rules governing how banks operate would still permit them to make loans, but would make it impossible for them to create new money in the process.

Banks would then serve two functions:

1. The payments function: Administering payment services between members of the public and businesses, and holding funds safe until they need to be spent.

2. The lending/saving function: acting as an intermediary (middleman) between savers and borrowers.

The central bank would be exclusively responsible for creating as much new money as was necessary to support non-inflationary growth. It would manage money creation directly, rather than using interest rates to influence borrowing behaviour and money creation by banks (as is the case at present). Decisions on money creation would be taken independently of government, by a newly formed Money Creation Committee (or by the existing Monetary Policy Commitee). The Committee would be accountable to the Treasury Select Committee, a cross-party committee of Members of Parliament who scrutinise the actions of the Bank of England and Treasury.

Positive Money’s presentation of the systemic instabilities caused by the money system and the profit-seeking mechanism by which commercial banks create most of the money we need creates a compelling case for reform.

Its proposals for reform are, however, much less convincing to this writer. To be fair to PM, it has also responded to many criticisms of its proposals but even its responses leave me uneasy about several major aspects. 4

A critique of the Positive Money Proposal

In my opinion, any credible reform proposals needs to meet three criteria:

(a) they need to be ‘systemic’ ie looking at the whole system, not just a part of it

(b) they need to be economically credible

(c) they need to be politically desirable.

1. Systemic reform

PM effectively proposes replacing a banking cartel with a government cartel. It seems like a mechanistic nineteenth century solution to complex twenty-first century problems rather than a systemic response to systemic problems. PM claims that “in a sovereign money system, there is a clear thermostat to balance the economy. In times when the economy is in recession or growth is slow, the Monetary Creation Committee will be able to increase the rate of money creation to boost aggregate demand. If growth is very high and inflationary pressures are increasing, they can slow down the rate of money creation. At no point will they be able to get the perfect rate of money creation, but it would be extremely difficult for them to get it as wrong as the banks are destined to.”

This is a bold claim that does not answer a fundamental question: on any given day, how would a committee sitting in London decide how much money the economy needs? By looking at trading statistics, GDP, how exactly? There are no known instruments that can measure such a critical statistic because the economy and financial system are complex and emergent, like all systems. The myriad of purposes and connections that need to be served by a single national currency cannot be reduced to a single number.

PM goes so far as to admit that its proposal would be less flexible than the current system of banks creating money in response to consumer demand. It is not clear how a less flexible system of money creation would help the economy, individuals or the environment. Nature teaches us that more diverse, flexible systems are more resilient and better able to withstand shocks than monocultures. Any credible systemic reform needs to demonstrate how the various system elements – users of money, commercial banks, central bank and government – can be realigned to be more flexible and better serve the needs of users, rather than replacing one monopoly with another.

Another reason why PM’s proposal is not a systemic solution is that it assumes a single national currency as the norm that everyone aspires to. In fact, monetary history shows us that people will accept almost any object as money so long as everyone else does. Stones, shells, beads, copper, silver, paper and now computer digits command belief so long as belief in them as a medium of exchange lasts. Single national currencies controlled by central banks are an eighteenth century invention that paved the way for globalisation but their monopoly is bought at a price of essential economic and social diversity. Over the last thirty years people all over the world have experimented with non-national currencies – local, regional and virtual – that do not replace national currency but complement it. They fill other niches that scarce national currencies cannot fill. A truly systemic reform would allow for currency diversity, not try to impose even greater currency uniformity than currently exists.

2. Economically credible

Over the last few years, the UK has experienced some of the most economically and socially damaging policies in living memory, in the form of ‘austerity’. Many economists have condemned these policies as counterproductive and yet the government has persisted with them, dressing them up as unavoidable or blaming the poor or people in debt for systemic problems caused by the reckless lending of banks and the poor regulatory oversight of government.

PM’s proposals give government the power to create the money it needs without raising taxes or incurring debt so it could theoretically pay for all public services and stimulate the wider economy in the process. No government has ever done this – they have always incurred more debt and raised taxes to service the debt – so this would be economically unknown territory and hard for anyone to predict the effects.

What is also uncertain are the economic effects of restricting commercial banks to simply being intermediaries for existing money and forbidding them to create new money. PM claims it would prevent the chaos of irresponsible lending that led to the 2008 crisis, that better oversight and regulation of banks simply won’t work and that it would automatically create a more stable and just money system but these are theoretical assertions that have no grounding in practice yet. An economically credible reform needs to provide enough flexibility to all economic actors – businesses, individuals, government – to do their business in a complex, globally networked modern economy.

3. Politically desirable

England had a ‘sovereign’ money system for centuries – the king or queen strictly controlled the nation’s money supply and punished any counterfeiters with death. Experience showed that this system could not keep up with the complex needs of a growing economy, let alone the abuses of the sovereigns themselves, and so the Bank of England – one of the world’s first central banks – was born and the power of commercial banks grew with it. Just because this system has in turn led to great abuses is not an argument for a reactionary policy to create a new state monopoly of the money power, which in turn could lead to great abuses in the wrong hands.

PM proposes that a government appointed committee, accountable to Parliament, should alone decide how much money the nation needs to do its business. Given the increasing ‘democratic deficit’ in Britain’s political system, isn’t this a little naive? Who appoints this committee? Do members of the committee represent a true cross-section of society and economic interests or will it just be the usual members of the ‘great and the good’? What happens in the case of disagreement about how much money the country needs?

An alternative proposal

For me, there are just too many unanswered questions about the political mechanics of this proposal for it to be either desirable or credible. Government plays a critical role as a ‘referee’ and rule setter in the money system but not as a micro-manager and certainly not as the monopoly issuer of monopoly money. I fear that Positive Money’s great work of analysing the very real problems created by the current system is not matched by the credibility of its proposals. I fear that, out of desperation for something different, they are grasping for centralised solutions that, if implemented, could end up achieving the opposite of what they hope and just create new problems.

In a complex world, noone has all the answers and it is crucial that we enable systemic solutions to the multiple economic, social, demographic and environmental problems facing us to emerge naturally rather than forcing top-down solutions that people may come to regret. Complex systems require frameworks and processes rather than levers and pulleys to function optimally.

I would rather support a campaign group in drafting a piece of legislation that creates a framework for multiple money systems with equal legal status to emerge – let’s call it “The Money Diversity Bill”. This bill would allow for:

(a) government created, debt- and interest-free money for running national services

(b) more strictly controlled, interest-free, bank created money for business and personal loans

(c) city and regional currencies for regional development

(d) virtual and crypto-currencies for transnational trade.

And the government would be required by the new law to establish two agencies with branches in each UK region:

(e) a monitoring and evaluation agency using the best statistical techniques for measuring relative currency flows and economic effects

(f) an education and training agency for demonstrating the pros and cons of different types of money systems.

 

If you would like to comment on this article please write to the author and MONNETA expert John Rogers.

 

Fußnoten:

  1. https://www.imf.org/external/pubs/ft/wp/2012/wp12163.pdf
  2. https://monneta.org/en/news/history-of-monetary-reform-in-the-uk/
  3. http://positivemoney.org/our-proposals/sovereign-money-introduction/
  4. http://positivemoney.org/our-proposals/sovereign-money-common-critiques/

A constant in the history of money is that every remedy is reliably a source of new abuse.

John Kenneth Galbraith, Money: whence it came, where it went

For as long as money has existed in its two most popular forms – either as debt-based accounting systems or as notes and coins – it has had its critics. Some think there is too little of the stuff and others think there is too much, depending on your point of view, or more crucially, your existing wealth.

This is how a leading historian of money describes the historical pendulum swing between these two poles:

We shall see as our history of money unfolds that there is an unceasing conflict between the interests of debtors, who seek to enlarge the quantity of money and who seek busily to find acceptable substitutes, and the interests of creditors, who seek to maintain or increase the value of money by limiting its supply, by refusing substitutes or accepting them with great reluctance, and generally trying in all sorts of ways to safeguard the quality of money.i

So the history of money is also the history of proposals for money reform.

Increasing the quantity of money

Before the modern era, kings and emperors always held a monopoly on the official money supply. Licensing the mints to create the ‘coin of the realm’ was a lucrative business for rulers. Generally, they tended to allow enough money to be created to meet their own needs but there was often greater demand for money at the local level than the ‘legal tender’ money could supply. Into this gap stepped the counterfeiters, who created money to look like the official stuff. If they were caught, they would be executed because rulers viewed such activity as equivalent to murder but that did not stop many trying because that too was a profitable business.

From about 700 AD to 1800 AD, England’s coinage was mainly a marriage of silver and gold. The Spanish conquest of new gold and silver mines in South America was also exploited by English and Dutch pirates, who were officially licensed by their governments as ‘privateers’ to intercept and plunder the Spanish ships. The result was a large influx of new money into Europe. In Spain, it led to hoarding by the rich and price inflation in the economy. In northern Europe it tended to encourage commerce. As long as the economy was growing, potential inflation from the new money was kept in check.ii

War and the need for credit

There is a strange symbiotic relationship between war and peace. The need to defeat an enemy makes people very inventive: jet engines, computers, navigation systems – all these technologies were either invented or rapidly developed during the crisis of war and then found new uses in peace time. War also consumes money. That makes those who wage it get creative in developing new monetary instruments that can also be used for peaceful purposes when war ends.

In the late seventeenth century, England was fighting the increasing power of France under King Louis XIV, the ‘Sun King’. England suffered a humiliating naval defeat at the hands of the French in 1690 and needed to rebuild its navy. It desperately needed money. The traditional way to raise money was to go to the money lenders and pay high rates of interest. However, a previous King Charles II had notoriously defaulted on his debts so the moneylenders were reluctant to lend King William the money.

Scotsman William Paterson proposed a bold plan: the creation of a new Bank of England with subscriptions from the public. £1.2 million (roughly £155 million today) was raised within 12 days, half of which was used to rebuild the navy. This great shipbuilding effort created employment, stimulated the economy and paved the way for the rise of the British navy and later a global empire.

The birth of the Bank of England in 1694 also signalled the birth of the ‘national debt’, which has grown along with the economy ever since. Over the last three hundred years, there has been a constant debate about the wisdom of a national debt. There are three typical positions on this question: “pessimist”, “optimist” or “realist”:

Public debt pessimists argue that government provides no truly productive services, that its taxing and borrowing detract from the private economy, while unfairly burdening future generations, and that high and rising public leverage ratios are unsustainable and will likely cause national insolvency and long-term economic ruin…

Public debt optimists believe that government provides not only productive services, such as infrastructure and social insurance, but means to mitigate what they perceive to be “market failures,” including savings gluts, economic depressions, inflation, and secular stagnation. Optimists contend that deficit-spending and public debt accumulation can stimulate or sustain economy activity and ensure full employment, without burdening present or future generations…

Public debt realists contend that government can and should provide certain productive services, mainly national defense, police protection, courts of justice, and basic infrastructure, but that social and redistributive schemes tend to undermine national prosperity. Realists say public debt should fund only services and projects that help a free economy maximize its potential, and that analysis must be contextualized – i.e., related to a nation’s credit capacity, productivity, and taxable capacity. According to realists, public leverage is neither inevitably harmful, as pessimists say, nor infinite, as optimists say.iii

Great Recoinage of 1696

At first, the new Bank of England only affected those who had invested in it – who earned a handsome 8% return on their investment – and those who benefitted from the new employment opportunities created by rebuilding the navy. Of more concern to most people was the silver coin of the realm used to do daily business. For centuries, both monarchs and counterfeiters had tried to get ‘more bangs for their bucks’ by adulterating the precious metal of official coins with base metals. By the year 1696, English silver coinage was in a sorry state. Years of ‘clipping’ the edges had reduced the value of many coins and, according to one estimate, up to 10% of the coins in circulation were counterfeit. Added to these problems was the ancient conflict between commodity money acting both as a medium of exchange for trade and as a valuable commodity in itself. Silver as a commodity had a higher market value in Paris and Amsterdam than in London, so vast quantities of silver coins were being shipped out of the country and thus no longer in circulation as a medium of exchange.

Isaac Newton, who had already transformed the world with his scientific theories, was invited to apply his knowledge of chemistry and mathematics to rescue the coinage from the counterfeiters and adulterators. Newton approached the problem in a thorough manner. He proposed withdrawing all silver coinage from circulation and issuing new coins. New mints were established at Bristol, Chester, Exeter, Norwich, and York. Old coin could be given back by weight rather than face value. The new strategy did not work. Silver was still worth more when melted down into bullion and sold. Out of this experience, England eventually developed the ‘gold standard’ because gold was perceived to be more stable than silver.iv

Newton also went after the counterfeiters ruthlessly. He cross-examined more than 100 witnesses and personally gathered much of the evidence he needed to prosecute 28 ‘coiners’. One of these was a notorious con man called William Chaloner, who was eventually convicted of high treason and suffered the ultimate gruesome penalty: he was hanged, drawn and quartered.v

More war, more debt

The Napoleonic Wars of 1803-181UK National Debt5 left the British economy in chaos. The national debt was now over one hundred years old and decades of war had only increased it. While an economy is growing, public debt is not necessarily a problem, as there is enough national income to pay back the debt without incurring further debt. The crucial statistic is its relationship to national income (now called Gross Domestic Product or GDP). In 1815, the national debt stood at 200% of GDP, a record ratio it would never again reach. The rapid growth of the industrial revolution and the global trading monopolies of the British empire would later ensure a continual decline of the debt to GDP ratio to a low of about 30% on the eve of the First World War in 1914, after which it shot up again.

Banking reforms in the nineteenth century

The wars against France from 1789 to 1815, combined with economic conflicts, created a shortage of silver and copper coins. Paper money was legalized in 1797 to help fill the gap. All over the country, local banks and private companies created local notes and tokens.

According to historian Glyn Davies, “By the turn of the century the total supply and velocity of circulation of tokens, foreign coins and other substitutes very probably exceeded those of the official coin of the realm.vi

This power of local money creation certainly played a dynamic role in empowering entrepreneurs in the early stages of the industrial revolution but it also inevitably led to abuses. Local companies created ‘truck shops’ at which their workers were forced to buy overpriced goods with the tokens their employers had created. Local banks created worthless paper notes and then crashed, leaving their creditors with nothing.

All of these abuses led to calls for reform. A series of banking acts in 1826, 1833 and 1844 made local notes and tokens illegal and began the monopoly of ‘legal tender’ national money in England, Wales and Northern Ireland, which lasts to this day.

The Great Crash, Keynesianism and Monetarism

The greatest monetary event of the early 20th century was the Great Crash on Wall St. in 1929, which sparked a worldwide economic depression. This event clearly showed how interconnected the world economy had become in the preceding century of unprecedented growth fostered by industrial capitalism. It also called into question the orthodoxies of ‘laissez faire’ market based economics and sparked great debates about economic and monetary policy.

The Gold Standard Act of 1925 had obliged the Bank of England to sell gold at a fixed price. But in the economic chaos following the 1929 crash the Bank feared it could not meet its obligations and in 1931 Britain left the gold standard, which gave the government more flexibility in economic policy.

One perceptive observer of these events was the economist John Maynard Keynes who published The General Theory of Employment, Interest and Money in 1936. He called into question the economic theories that seemed to have led to the events of 1929 and after. This book would deeply influence the next generation of economists and policy makers, whose policies came to be known as ‘Keynesian’. These policies generally encourage an increase in the money supply in order to stimulate economic growth.

During the 1960s and 1970s, however, there was a widely observed phenomenon of ‘stagflation’ – a wicked combination of stagnant economic growth, high unemployment and price inflation – that Keynesian theory had no direct answers for. Some non-Keynesian economists argued that UK policy makers had failed to recognize the primary role of monetary policy in controlling inflation. Keynesianism fell out of fashion and the ‘monetarist’ theories of Milton Friedman, which argued for ‘tight money’ policies, were enthusiastically adopted, particularly in the UK and the USA in the early 1980s. Strict monetarism was later relaxed as it did not deliver the economic results it promised and the price in unemployment was so high.

These extreme swings of fashion from one theory to another seemed to confirm Glyn Davies’ ‘pendulum theory’ of monetary history:

There are few things more impressive than the haughty analytical certainty with which fundamental theories of money are for a time almost universally held, only to be discarded in favour of a diametrically opposite but equally firmly and widely held new orthodoxy which in turn lasts until the whole process reverses itself suddenly a generation or so later.vii

Modern calls for reform

Although a few idealists argue for a world without money – and most written utopias abolish money altogether – most people accept that complex, interconnected modern economies need money in some shape or form to function. Only 3% of modern money exists as notes and coins. The rest – from bank loans to mortgages to your monthly salary – is stored as digital records in computers.

Just like the 1929 crash before it, the 2008 economic crash – the biggest in history – unleashed unprecedented questioning of economic and monetary orthodoxies of the preceding generations and reinvigorated debates around various longstanding ideas for monetary reform:

Monetary Reform Movements

Organised monetary reform movements are relatively small and they face a massive challenge. In our basic education, most of us do not learn about where money comes from, who creates and controls it and for what purposes. Monetary reformers therefore have to first educate and inform  before they can mobilise and reform. They have to create a basis of understanding of the existing financial system and its shortcomings in the public mind before they can convince people to consider and campaign for other ways of doing things.

Britain first became a fully representative democracy less than one hundred years ago, when all women over the age of 21 won the right to vote in 1928.viii Over the last century, citizens of democratic states have won a voice in many areas of policy that affect us all such as education, sexual and mental health, environmental issues. We can see from this short history of monetary reform that problems with the money system were always debated amongst a small elite of (mostly) male bankers, economists and politicians and the 2008 financial crisis made it clear that monetary policy, which profoundly affects all other areas of public life, is maybe the last bastion of policy not truly under democratic control.

A ‘democratic deficit’ describes a situation where institutions claiming to be democratic do not act according to democratic principles of representation. This is most clearly the case in the area of monetary policy. In all the centuries of elite debate, the basis of a monetary system in which privately owned, profit-seeking banks create most of the money supply through interest-bearing loans has never been called into question. It is taken as a given and all economic policy is based on it. No alternatives are seriously considered.

For many years such issues and proposals for reform were debated on the fringes of society by small groups of concerned citizens such as: Christian Council for Monetary Justice; Forum for Stable Currencies; Prosperity UK with its annual Bromsgrove conference.

After the financial crash of 2008, a new campaigning group emerged called Positive Money, which has been very successful at reaching a much wider audience with monetary reform ideas by smart use of modern media. Positive Money highlights the economic problems created by reliance on the private banking system to create most of the money supply and proposes giving government the powers to create interest-free, debt-free money for the public benefit. There is now an International Movement for Monetary Reform.

In November 2014, the UK Parliament debated money for the first time in 170 years. ix

Seven MPs spoke at the debate, 12 MPs asked questions and another 15 were in attendance out of a total of 650 MPs. This historic debate has so far produced no concrete proposals for reform from the Parliament of a country suffering the ravages of deeply contested austerity policies, in a world holding its breath for the next big financial crash.

Whether reformers are campaigning for changes in the national monetary system, for banking reform or for alternative systems such as regional and virtual currencies, they will need to work harder to reach both hearts and minds with arguments and strategies that are believable and workable – economically, technically and politically.

It took thirty years from the first anti-slavery debate in the House of Commons until William Wilberforce and his colleagues saw victory with the first anti-slavery legislation. We can only hope it does not take so long to free us from financial slavery to big banks and their unjust grip on the financial system and we create a monetary system that is truly under democratic control for the first time in history.

 

In my next post I will take a more detailed look at the proposals of Positive Money and another campaign “QE4 People”. Will they prove GK Galbraith wrong, quoted at the start of this post? Or will the ‘remedy’ be a source of new abuse?

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