Graham Barnes

The Future Monetary Ecosystem

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Published on FEASTA on June 8, 2017

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Over the next generation or two, there will be increasingly visible turf wars between money-suppliers with four very different motivations. It’s not really a fair fight, but it isn’t as one-sided as it used to be.

The spoils

The general term for the benefit associated with the issuance of a currency is seigniorage. Historically, the term has been associated with the profit made by a government from issuing currency, especially the difference between the face value of coins and their production costs. At the risk of outraging pedants we can use the term more broadly to include a wide range of benefits accruing to the issuer.

The spoils may be in the form of direct financial benefit (like the interest charged on credit-money created ex-nihilo). Or they may be indirect, in the form of influence that can in due course be traded or cashed-in (for example preferentially allocating credit to favoured partners).

There is, however, a further dimension. Money congeals as wealth. The location of wealth signals the ‘revealed preferences’ of the underlying money-system. Sure, there’s luck, inheritance and sometimes energy, enterprise and hard work. But mainly there’s the money system.

The motivations

a) OneWorld. The cherished belief of a certain section of the international elites that governance is best left to those who know best (i.e. them), and that societal and economic diversity is somewhat of a nuisance, entailing the never-ending energy-sapping suppression of a series of hare-brained ‘alternatives’. If this seems like a conspiracy-too-far for you, feel free to skip this section but remember that just because you’re paranoid doesn’t mean you aren’t being persecuted.

This direction of travel can be portrayed as a natural extension of monetary scope – if money is ideally a universal lubricant of exchange, then the more universal the better. Focal points for monitoring progress of this ideation are: Bilderberg, the future of the euro, and (most importantly) the evolution of the SDR (Special Drawing Rights) [1,2], the IMF’s ‘international reserve asset‘.

b) National Sovereignty. The nation state is the traditional home of the fiat currency, and indeed gives those currencies their primary raison d’etre – the compulsory requirement to pay your taxes in them. Unfortunately national governments have had a well-documented history of abusing their money-issuance privilege – usually via the simple expedient of issuing tons of it before elections to create a feel-good effect; occasionally in more subtle ways.

The current arrangement of outsourcing money-as-credit creation to the banks is at the subtle end of the spectrum (see The Bank-State Bargain [3]). It obviates the need for governments to have to bother much with real national strategies (typically characterised as ‘picking winners’ rather than ‘sustaining the planet for future generations’). They can concentrate on tinkering.

It’s not quite as attractive as printing money and putting it straight into your own account, but the revolving doors arrrangement ensures that political apprenticeships can often be traded for corporate gravy. Put it into your mates’ accounts and wait for payback. The arrangement is underpinned by a sense of inmpotence as national governments race to the bottom (regulation, tax) in response to corporate threats of absenting themselves. TINA.

But this gradual diminution of sovereign influence does beg the question – can’t corporations do the money thing themselves and cut out the sovereign middle man.

c) Private Money. As is often said, anyone can create money – the problem is getting it accepted as payment. Private entities cannot coerce quite like a government, but they increasingly have huge market power that can be brought to bear if they think they can profit from operating a currency. They can use this power to construct unique value propositions. And are likely to do so.

The potential for the likes of Amazon, Facebook, Apple and Google to operate their own currencies has been given a boost by the cryptocurrency phenomenon. All are already actively looking at payment systems and it seems likely that the next generation competition for commercial banks will come primarily from out of sector. The crypto-angle has opened up the possibility of currencies that cannot easily be closed down by the state, as many of the successful alternative currrencies of the 1930s eventually were. Of course private for profit currencies are unlikely to make use of the fully distributed consensus model of Bitcoin, being more interested in permissioned blockchains with the gatekeepers being – yes Google, Facebook, Apple or Amazon. But the possibilities of the blockchain are encouraging disruptive thinking.

One starting point for initiatives in this area is Hayek’s writing on the denationalisation of money [4]. Hayek generally thought that competition was the answer to everything, and he saw money as no exception. He thought monetary policy to be ‘neither desirable nor possible’, and identified government as the major source of economic instability. And while his writing predates our current over-financialised economy, he certainly anticipated the ‘parasitic’ secondary activities that could attach themselves to a monetary monopoly and saw competing currencies as a solution to that.

So while Hayek’s for-profit currencies generally come from a very different political place than value-based Intentional Currencies [5] and today’s complementary currencies, they share the core belief that ‘A money deliberately controlled in supply by an agency whose self-interest forced it to satisfy the wishes of the users might be best.’

d) Peer-controlled money. It is difficult to title this section. The vision is similar to Hayek’s but the ‘wishes of the users’ are determined in a co-operative way and the money is controlled not by a for-profit ‘agency’ but by the users themselves through various forms of co-operative institutions and governance mechanisms (including platform co-ops). I have previously expressed dissatisfaction with the adjectives ‘alternative’, ‘complementary’ and ‘community’; and ‘intentional’ can include a for-profit motive if objectives are explicitly set out, as can ‘value-based’. It can be argued that this form of money is the purest because it is directly controlled by its users; by the people who give the currency value by accepting it in exchange.

The Battleground

We can indulge the late Mr Hayek a bit further by exploring the competitive landscape, both between and within currency models . If we plot on a matrix the reaction of an *established* money-type to an *emerging* (or re-emerging) money-type we can surface a wide range of conflictual issues, including the regulation of private currencies (b/c),acceptable units of account for national taxation (c/b), national debt slavery as political influence (a/b) and the use of currencies as weapons in financial wars (b/b). Interesting stuff but far too much for a short article.

What follows therefore is a summary of two key battleground issues affecting peer-controlled money, (which is a category of special interest to Feasta).

The Ultimate Potential of Shared Value (c/d)

The core idea behind Intentional Currencies [5] is that the value-set shared by the relevant user community should be made explicit and will act as a cohesive force as a currency and its governance institutions develop side by side. However experience with intentional communities in general leads us to be a little cautious not to overstate the power of this idea. All too often communities that on the face of it have strong shared values can fracture and fragment because of personality clashes and power trips. Against this background the ‘honest profit’ metric has its attractions, (as has hierarchical decision-making). Profit is a hard verifiable metric, reassuringly value-free. From this perspective old money provides a service for us – it enables economic interaction with people we dont want to break bread with. It absolves us from social interactions.

Thus if this group of money-systems is to scale and replicate sufficiently to become a central progressive economic and societal force, the evolution of thinking around shared value is a critical success factor. Somehow it has to translate integral fellow-feeling into pragmatic mechanisms for exchange and do so authoritatively but in a co-operative fashion.

Selectivity vs Universality (b/d)

A related issue is that the restricted scope of a value-led currency – the potential preferencing of certain transactions – prejudices the variety of the portfolio of goods and services that are available. The concepts of the Preferenced Domain [6] and the Deprecated Domain [7] are attempts to flesh out this line of thinking. It is possible there will need to be an Intermediate Domain where we are relatively neutral about some goods and services and want to find ways to include them to enrich the offering, but may not want to extend full community benefit to their providers.

Conclusions

Activists in the Peer-Controlled currency space will generally welcome an increasing diversity in the developing monetary ecosystem. Thus the exchange of ideas about how value-led currencies can develop should in itself be a key factor in their progress.

There is certainly a window of opportunity. Decision makers in the higher reaches of international financial institutions will be more concerned with the power relationship with national currencies, so peer-controlled money will be somewhat off radar for while. An ‘offgrid money’ mindset may be helpful. But the same window is open for private for-profit moneys, and multinationals are already fluent in international finance.

One factor working to close the window is the increasing appreciation of the significance of digital/ crypto currency which is already sensitising established international institutions to potentially disruptive developments. Whether more democratic user-controlled currencies can establish a secure foothold before they are re-challenged by a new breed of national/ international digital moneys remains to be seen. No doubt many of the ICOs [8] coming to market now will turn out to be Ponzi schemes, but some are already seeking to differentiate themselves via value-statements (as opposed to get-rich-quick statements) and there may well be one or two that show us the shape of the peer-controlled currencies of the future.

References

[1]: IMF Factsheet: Special Drawing Rights (SDR)
http://www.imf.org/external/np/exr/facts/sdr.htm
[2]: One World, One Bank, One Currency : Jim Rickards on the SDR
https://dailyreckoning.com/one-world-one-bank-one-currency/
[3]: The Bank-State Bargain : Graham Barnes. How commercial banks facilitate deniability, debt-peonage-management and financial warmongering in return for massive anti-capitalist subsidies.
http://www.zerohedge.com/news/2015-04-05/bank-state-bargain-breaking-basic-rules-capitalism
[4]: Denationalisation of Money: The Argument Refined. An Analysis of the Theory and Practice of Concurrent Currencies. F.A Hayek published by IEA in 1990 and reissued by The Mises Institute 2009
[5] Intentional Currencies : Graham Barnes
http://www.resilience.org/tag/intentionalcurrencies/
& Designing an Intentional Currency : Graham Barnes
http://www.feasta.org/2016/07/13/designing-an-intentional-currency/
[6] Designer Currencies and the Preferenced Domain : Graham Barnes
http://www.feasta.org/2013/11/19/designer-currencies-and-the-preferenced-domain/
[7] The Deprecated Domain: the pros and cons of designed exclusion : Graham Barnes
http://www.feasta.org/2014/07/10/the-deprecated-domain-the-pros-and-cons-of-designed-exclusion/
[8] Initial Coin Offerings
https://en.wikipedia.org/wiki/Initial_coin_offering

 

 

The Strange Idea of Negative Interest

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Published on FEASTA on April 13, 2016

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This article addresses the role of demurrage (negative interest) in the design of new currencies. But it takes a roundabout route with diversions around the zero and negative interest rates being currently applied to fiat money; and a detour via positive interest which is itself a stranger idea than we have been led to believe. It suggests that demurrage is worth a place in the designer’s kitbag, but not for the reason normally postulated.

The basic idea of interest is simple. It’s a special type of rent. If we loan out something we have no immediate need for ourselves, it seems reasonable that the borrower should pay us rent for its use. So interest is a rent on money.

A fundamental problem with the rent rationale in general occurs when the ‘property’ concerned is a public good – a commons which has been enclosed – or where it has been secured by violence or some other unfair means. In that case we might feel a little aggrieved at having property we feel we should have a degree of proprietorship over sold or rented back to us. This is the way many people feel about water for example.

Another issue arises when the property owner has (and will have) no need for the property themselves and have acquired it only for its rental value. Seeking a store of value via investment is understandable but when the asset class created is a ‘stuff of life’ good, tensions are sure to arise because investors are affecting the price of essentials. The more they can corner the market the more they can increase the cost of basic living. This seems to be increasingly the case with housing.

There is some mileage in a perspective which considers Money as a Commons [1]. But the rental of surplus money, where that surplus is the result of the ‘sweat of the brow’ – the energy and innovation of the lender – can be defended to an extent. Unfortunately very little money lent is in this category. Most of it (97% it is said [2]) appears in our accounts as bank loans, created ex-nihilo specifically for the purpose by commercial banks. This is mostly well understood now and any doubters who still believe loans are redeployed money from savers are usually referred to the Bank of England paper on the subject [3]. The interest earned is a significant revenue stream for the banks [4] that have been given the right to create money-as-credit. This right is not merited – it is a privilege that forms part of the unarticulated Bank-State Bargain [5].

So interest as we know it is rather a stranger animal (with a weaker rationale) than we might have thought.

There is a huge literature on interest/ usury of which the most compelling and readable recent examples are from http://www.kreatoczest.com/kz_publishing_ourtitles-pwi.htm”>Tarek el Diwany[6] and the late Margrit Kennedy[7]. But it ain’t going away any time soon, though it almost certainly must do in the degrowth economy that the planet needs.

For a good number of years the so-called base rate – the interest rate set by a central bank for lending to other banks – was seen as the key tool in the policymaker’s kitbag. (If at this point you are wondering why a bank that can create money out of nothing needs to borrow from the central bank, you’re not alone. We’ve all been there [8].) During this ‘monetarist’ phase the prevailing view was that by making money cheaper (lowering interest rates) you would cause more loans to be advanced by the banks and stimulate the economy.

This view has been progressively (and inconveniently for the orthodox school) exposed as an unhelpful over-simplification (i.e. b****cks) for three reasons. First if there is lack of confidence in the future among borrowers, lowering borrowing cost will not automatically trigger more lending (the ‘pushing on a string’ argument); secondly because additional money created may be invested rather than spent, causing asset bubbles (e.g. in housing) which dilute the effect; and thirdly because the ‘call to consume’ is being increasingly resisted.

It is often said that ‘money needs to circulate’. This is not just the mantra of the consumer economy where we all have the citizen’s primary duty of consuming ourselves into oblivion. It is also quoted by currency activists who will claim a higher velocity of exchange for their currencies and a consequent incremental effect on local GDP. The implicit assumption is that more is always better – perhaps unsurprising in a society where GDP is still seen as the primary measure of progress.

More is not always better though. Economists have used the term ‘marginal utility’ to describe the additional satisfaction a consumer gains from consuming one more unit of a good or service. Indeed a key function of advertising is to emphasise the illusory status-improvement associated with purchases in order to boost the perception of marginal utility. But the zeitgeist is changing. There is a cultural emptiness associated with the ‘you are what you buy’ proposition, and this is beginning to express itself via an old-fashioned reluctance to buy unneccesarily. Add the effect of austerity and you have a recipe for resistance.

In response, central banks, who to be fair have very few policy levers at their disposal anyway, have decreased base rates down close to zero with insufficient effect and are now exploring negative interest rate policies (NIRP). So in a forlorn attempt to get banks to lend more they are effectively being charged for leaving reserves with the central bank.

The general idea of demurrage as an accelerator of exchange has been around for a long time, its full delineation often being attributed to Silvio Gesell [9]. In a currency design context the means of exchange function is usually considered paramount, and demurrage is seen to give the holders a ‘use it or lose it’ nudge towards spending.

My problem with it is that although the idea significantly predates 20th century consumerism, it still seems to reinforce the idea that we should buy stuff that we don’t need or really want. In a complementary currency context where the currency operates alongside fiat, ‘rusty money’ would presumably be spent before fiat, giving the currency an ‘edge’, but it still feels as if we are being bounced somewhat into the transaction. Maybe this is a personal thing; or a preciousness – certainly the German Chiemgauer currencies claim demurrage as a key success factor [10]. But its attraction in pre-consumerist times was probably related to the fact that most spending options were local then, so more spending meant more local exchange. Nowadays most spending sucks money out of local economies.

Where a currency is in its early stages or where the remit of the currency self-limits and there are a limited range of goods and services on offer, demurrage feels heavy handed. Overall it seems a somewhat artificial device encouraging users to live beyond their needs.

However demurrage in the right format may facilitate self-financing. In its classic stamp-scrip form holders of currency notes had to periodically buy a stamp for (say) 2% of the note value and attach it to the note for it to preserve its value. The stamp though was paid for in fiat currency so we are back to supping with the deprecated devil. For digital currencies, the option exists to simply deduct a percentage of the account holders balance. That deduction can be routed to the currency administration account and in the words of Pat Conaty et al [11] enables “cooperative accumulation”. In a mutual credit context both positive and negative balances can be adjusted in this way – an approach varied in some new designs [12] and reminiscent of Keynes’ design for the Bancor whcih was aimed at balancing international trade flows [13].

A variation on this theme was suggested by the late Richard Douthwaite, who in his design for Liquidity Networks drew a distinction between currency units that had been given into circulation and those that had been earned. The former he felt might be suitable for the application of demurrage; the latter were not. The rationale here is that ‘taxing’ earned units is on balance a disincentive, whereas taxing unearned income with the aim of increasing liquidity is on balance fair. (The example of currency units which are spent into circulation by a sponsor such as local government is a halfway-house case where the rationale could perhaps be argued both ways.)

Footnote

For currency project start-ups, finding the capital for step-change developments is likely to be problematic. For those that see themselves as fiat-averse [14], options are further limited. For such projects an alternative (or addition) to demurrage is to levy a transaction tax and set that aside for capital investment. This traditional approach to investment via savings might seem quaint and long-winded in comparison with what is now the usual borrow-fiat-to-invest model but it does have the attraction of decreasing outside dependency – a dependency on a deprecated system we are looking to reinvent. So if we can delay our gratification (which is after all meant to be the characteristic of an adult) this may be the right approach.

A secondary benefit of a transaction tax is in controlling gaming of the system. And since we should expect gaming (typically via false transactions) as soon as we introduce any differentiated reward/ penalty scheme, this would be no bad thing.

References:

[1]: Graham Barnes: Money as a Commons http://www.feasta.org/2014/09/05/money-as-a-commons/
[2,3]: Michael McLeay, Amar Radia and Ryland Thomas: Money creation in the modern economy:
Bank of England Quarterly Bulletin 2014 Q1
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
[4]: Joseph Huber, James Robertson: Creating New Money (1997)
http://www.jamesrobertson.com/book/creatingnewmoney.pdf
The authors estimated the gains possible through reclaiming seignorage from UK banks at GBP 47 billion – equivalent at the time to 15% of total UK tax take. The GBP 200 billion + figure is NEF’s updated calculation for 2012.
[5]: Graham Barnes: The Bank-State Bargain: http://www.feasta.org/2015/03/31/the-bank-state-bargain/
[6]: Tarek el Diwani: Tne Problem with Interest http://www.kreatoczest.com/kz_publishing_ourtitles-pwi.htm
[7]: Margrit Kennedy: Interest and Inflation Free Money
http://userpage.fu-berlin.de/~roehrigw/kennedy/english/Interest-and-inflation-free-money.pdf
[8]: See Positive Money http://positivemoney.org/
Essentially it’s because when they create credit-money as a loan, they create both an asset (the loan) and a balancing liability (the credit in the borrowers account) simultaneously.
[9]: Silvio Gesell: “The Natural Economic Order” [1916] e.g. “Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money. So we must make money worse as a commodity if we wish to make it better as a medium of exchange.”
[10]: Christian Gelleri: Chiemgauer Regiomoney: Theory and Practice of a Local Currency
http://ijccr.net/2012/05/29/chiemgauer-regiomoney-theory-and-practice-of-a-local-currency/
[11]: David Bollier and Pat Conaty: Democratic Money and Capital for the Commons
http://bollier.org/sites/default/files/misc-file-upload/files/Democratic%20Money%20and%20Capital%20for%20the%20Commons%20Report.pdf
[12]: Colin McKay’s Deror: http://www.deror.org/ has an interesting design variation, progressively cancelling both credits and debits
[13]: https://en.wikipedia.org/wiki/Bancor
[14]: Graham Barnes: New currencies and their relationship with fiat currency
http://www.feasta.org/2015/07/29/new-currencies-and-their-relationship-with-fiat-currency/

Featured image: Wörgl Shilling, a demurrage currency. Source: https://en.wikipedia.org/wiki/Demurrage_%28currency%29#/media/File:Freigeld1.jpg

 

 

Privatising Air

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Published on FEASTA on February 26, 2016

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We seem to have entered an era of ‘reductio ad absurdum’ capitalism. Many of life’s fundamentals such as land, water and energy have been or are being enclosed and privatised. As capitalism runs out of convenient colonies to parasitise, it has begun to work on societies within its traditional hosts in the developed world through austerity. In parallel the realm of  privatisation extends into areas previously considered as public goods available as of right. Is there any ‘natural’ limit to this process? Could air be privatised?

We should perhaps envy Marx for his somewhat detached historical perspective on the development of capitalism. All things must pass. The problem, perhaps felt more acutely if you have children and grandchildren, in that by the time capitalism has eaten itself there will be nothing left for our descendants to sustain themselves with.

If you had asked a member of one of the 170 native American nations before 1880 who owned the land they would not have understood the question [1]. Fast forward 140 years and the idea that land is just a special type of property, and that its resources and use-value can be reserved to the owner is embedded in law and in the general unchallenged narrative about ‘how things work’. Very little land is now held in common, and the only current activist initiative pissing into the prevailing wind is that of Land Value Taxation – a proposition which, while welcome, does appear to accept that land has been irreversibly enclosed, and restricts itself to demanding a land rental back to the exchequer in the form of a tax.

In Ireland a series of #right2water marches have attracted tens of thousands protesting at the Irish government’s plans to privatise water via the creation of a new semi-state (a public-private hybrid) Irish Water and the imposition of water charges. Elsewhere, in Flint, Michigan, following a series of commercial disputes over water supply, a state of emergency was declared as the extent of lead pollution became clear. In neither of these cases are we in an area of water shortage or stress. The common factor seems to be the introduction of public/ private partnerships to move the costs of water supply off of the national (or state) accounts.

In parallel the development of the bottled water market has burgeoned, seemingly unaffected by the inconvenient ‘market externality’ of trillions of plastic bottles going to landfill, and by Coca Cola (via their Dasani brand) and others bottling treated tap water [2] – based on an idea by DelBoy [3].

The creativity of the market, which at its best is a joy to behold and a source of life-enhancing innovation is a curate’s egg. And the parts that are bad are fouling the world. Markets have no inbuilt ethics. And we have yet to demonstrate any governance capability that can detoxify them.

As a thought experiment, (and since we are in reductio ad absurdum territory) consider the potential privatisation of the air that we breathe. That air is a basic necessity of life is of itself no protection. There is no apparent ethical barrier – other necessities such as land, shelter, energy and water have been enclosed by elites and rented back to citizens. So there is no ‘in principle’ difficulty.

The difficulties are practical.

For example there is rather too much clean air to make for the globalised opportunity which would be ideal. However this does not need to be a major barrier provided we sculpt the narrative properly. In the U.S. 92% of tap water is of the highest potable quality [2] but this has not interfered with the growth of bottled water sales. Creative (occasionally mendacious) advertising plus mainstream media focussing on any convenient tap water scare stories have done the trick.

The prime difficulty is in the physical enclosure of a separated-air-space and supply. A controlled-quality-air environment can be envisioned at the personal, dwelling, community, municipality or planet level. So there are product development opportunities for personal breathing devices, masks and filters, passive house variations with recirculated air and domes. As pollution increases, helpful stories about diesel particulates or Beijing air quality will progressively sensitise consumers to the need for interventions. Our inability to leave fossil fuels in the ground will help this narrative get established – an interesting variation on the theme that every market failure provides an opportunity for a new market. At the community level we should see a natural extension of the gated community service proposition to include guaranteed air quality inside large scale geodesic domes. Some municipalities – particularly scenic locations – may banish sources of pollution, buoyed by extra-high local rates acceptable to wealthy residents. Depending on local micro-climates such Canute-propositions may persist for a few years until higher pollution levels waft in from neighbouring areas. At a planetary level geoengineering solutions will develop to pump pollution back into less prosperous sink areas.

So it’s just a matter of being creative. Technology plus entrepreneurship can enable the enclosure of any public good. Absent effective sustainability-minded governance that is.

Endnotes

1]: “My reason teaches me that land cannot be sold. The Great Spirit gave it to his children to live upon. So long as they occupy and cultivate it, they have a right to the soil. Nothing can be sold but such things as can be carried away” –Black Hawk quoted in Lewis and Clark: The Unheard Voices http://archive.adl.org/education/curriculum_connections/in_this_issue_fall_2004.html

2]: Bottled Water is a Scam: March 2015 http://www.salon.com/2015/03/14/bottled_water_is_a_scam_pepsico_coca_cola_and_the_beverage_industrys_greatest_con_partner/

3]: The renowned Peckham Spring brand featured in Only Fools & Horses episode Mother Nature’s Son http://www.imdb.com/title/tt0666564/

Featured image: barbed wire. Source: http://www.freeimages.com/photo/barbed-wire-1221152.

 

 

 

 

 

 

 

 

A Financial Transaction Tax (FTT) for Ireland

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Published on FEASTA on January 27, 2016

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Around 40 Irish civil society groups and NGOs (including Feasta) have expressed their support for RobinHoodTax.ie, an initiative led by Claiming Our Future aimed at introducing an FTT in Ireland. The launch event yesterday at the Mansion House in Dublin featured speakers from Stamp Out Poverty and the Nevin Economics Research Institute plus, inevitably, a large number of Lincoln Green hats with red feathers for the apres match photo-opportunity.

A Financial Transaction Tax levies a (small to miniscule) percentage tax on financial transactions such as share and bond purchases and derivatives. The idea is as old as the hills (well 1930s) but it has recently reappeared on the political horizon, as ten EU countries work together to flesh out a European implementation under a so-called ‘enhanced co-operation‘ [1] regime – an occasionally used device for facilitating agreement of a subset of EU members when full consensus is not possible in the short-term. David Hillman of Stamp Out Poverty gave a rundown of progress on this front, ending with a ‘you are not alone’ message.

The Irish government has taken a passive aggressive stance on the proposal – lining up (but less vociferously) with the UK and Sweden in the anti-lobby. The last detailed discussion in the Dail looks to be in 2013 [2].

The second presentation at yesterday’s event was from Micheál Collins of the Nevin Economic Research Institute (NERI). He is in the process of completing a quantitative analysis of the likely tax receipts of an FTT in Ireland, based on the emerging European model. Estimates stand at a net positive annual tax receipt effect of 320-360 million euros. Full results are scheduled to be revealed at a NERI seminar on February 10th [3].

So what are the messages that would most likely hit the spot with policy makers? This is difficult territory for me because while I admire policy advocates, I have no deep belief in the power of ideas carrying all before them. The thoughts that follow therefore are more in the tradition of Harry S Truman’s advisors [4].

Fairness. After many years of privatised megaprofits, the losses associated with the 2008+ financial crisis have been socialised. Thats a coded way of saying that the corporations who caused the problems didn’t pay for them, citizens did. The residual resentment at that unfairness is deeply entrenched in society, and despite calls for an end to banker-bashing from the 1%, they are still part of the zeitgeist. The #MakeBankersPay hashtag is therefore understandable.

Whether it is wise is another matter. It identifies with the activist strand within the FTT lobby. If we believe that policymakers are more likely to identify themselves with the 1% than with street demonstrators [7], it may invite a further retrenchment into that embattled minority, and encourage existing confirmation bias against all and any activist agendas. So it may be a good message for recruiting activist support and a bad one for influencing policy makers.

This is not to say there is no fairness issue here, clearly there is. But it may be best approached via a plea for rebalancing the economy. With the prevailing neoliberal self-sufficient self-interest narrative, ‘not fair’ is the complaint of the playground weakling. Sad and deeply disappointing as that is.

Rebalancing. There is a clear sentiment in society at large that the financial economy tail has been wagging the real economy dog for too long. There are also some indications that this sentiment extends into the mindset of many politicians. They are constrained however by the ‘race to the bottom’ between nation states as they seek to compete for the attention of multinationals by deregulating, lowering corporation tax and generally bribing to achieve FDI (Foreign Direct Investment). Arguably FTT gives these nation states a mechanism for embarking on the beginnings of a rebalancing – if – and only if – they can be reassured that their resident financial corporations will not migrate to pastures new at the first mention of the tax. As they will no doubt threaten.

So there’s the rub. At yesterday’s event David Hillman defended the laughably low levels of tax (for example a tax of 0.01% on derivatives) by saying it was easier to get it accepted at that level and then increase it once it was established. This has indeed been the pattern with taxes, and that much will be obvious to the financial lobby who will see it as the thin end of the wedge and resist it tooth and nail. In this context it becomes vital to be able to rebut the FUD (fear, uncertainty, doubt) agenda that will be offered up. FUD is proving a reliable strategy for those seeking to preserve the status quo. It worked well for the electoral reform referendum in the UK and for the Scottish independence vote, and will take some countering here.

NERI’s work is vital because it will break down the taxation receipts by instrument, allowing an analysis of the likely effects of a tax at a per instrument level. It seems likely that virtually all the costs will fall on financial institutions and that the potential for them to pass on these costs to consumers will be limited by competition. This is the way the FTT is designed. In 1936 when John Maynard Keynes floated the idea of an FTT, he saw it as a tax on excessive speculation [5]. If a detailed analysis by instrument can reinforce this strategic positioning, there may be a chance. This brings us to the final message – of increased stability and resilience.

Stability. If, as Keynes envisaged, and the more enlightened politicians hope, an FTT dampens some of the excessive speculation/ gambling that takes place in the casino economy, it can be developed as an intervention mechanism for policy makers. Having discovered that control of the interest rate does not give them the power they once thought it did, they have very few tools left in their toolbox and may well welcome one more. To say such a tax could do away with the boom-bust cycle is going too far. Other systemic monetary changes will be necessary for that including the resumption of strategic guidance over the allocation of credit-as-capital [6]. But an FTT could well give potential for a smoothing effect. Policy-makers who must feel like eunuchs in a brothel at present, may well like the idea of having another meaningful instrument at their disposal.

So that would be my prescription for messages – stability, rebalancing and yes,ok, fairness. The final message, which most FTT proponents emphasise and which I called unkindly in the introduction dogoodability is also important. Emphasis is usually placed on the use of FTT receipts for (say) climate change work and international development. As delegates yesterday pointed out, such hypothecation of tax receipts is normally resisted by policy makers as a constraint on their decision-making. But as an appeal to a wider society audience it has it place. And there are precedents in Ireland with some environmental taxes, so why not?

Claiming our Future are to be congratulated for spearheading FTT adoption in Ireland. If NERI can put together some detailed technical rebuttals on a per-instrument basis, we may yet see a proposition for re-empowering economic policy-makers on the back of a societally-beneficial FTT. Used and adjusted actively such a tax can help restore financial resilience – a valuable quality that has been sacrificed in favour of efficiency for too long.

References

[1]: http://www.euractiv.com/topics/enhanced-cooperation which also has an article on banking industry response.
[2]: http://oireachtasdebates.oireachtas.ie/Debates%20Authoring/DebatesWebPack.nsf/committe etakes/FIJ2013100200003?opendocument#C00350
[3]: http://www.nerinstitute.net/events/2016/02/10//
[4]: “Give me a one-handed economist! All my economists say, ”On the one hand? on the other.'” Harry S. Truman
[5]: “Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation.” J M Keynes
[6]: see for example: Richard Werner at http://republicirelandbank.com/?p=601
[7]: http://www.commondreams.org/views/2016/01/26/volcanic-core-fueling-2016-election

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Motivations for New Currency Design

MoneyHolegc2reddit-logoOff the keyboard of Graham Barnes

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Published on FEASTA on November 15, 2015

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There appear to be four main ‘flavours’ of motivations driving new currency innovation:

a) deprecatory: informed by a view that mainstream fiat money is toxic and a better form can be usefully invented
b) economic: driven by the desire to preference a given sub-economy
c) value-led: where specific social outcomes are sought through the device of a currency
d) commercial: currency invention with narrow commercial aims

The first three map (loosely admittedly) on to Kenichi Ohmae’s ‘strategic triangle’ of competitor, customer and corporation. The first identifies fiat currency as the competitor and sets out specifically to address perceived weaknesses and faults of fiat. The second defines a group of target customers/ users, usually but not always based on geography. The third seeks to build an institution founded on a specific value-set (think mission statement) – albeit that the imagined eventual institution may well be more co-operative and/or digital/ autonomous than standard corporation. (Examples: bitcoin, Brixton Pound, timebanks). Mixed motivations are of course possible.

This article is an attempt to drill down into these motivation flavours and see what insights we can extract. It is part of the Feasta Currency Group’s work programme on Intentional Currencies, and anticipates a diverse future monetary ecosystem where currencies are more under the control of their users. (Who knows? Taxes could be payable in a user’s currency of choice.) Thanks to Phoebe Bright and Ciaran Mulloy for the discussions that preceded this particular brain-dump.

The Deprecation of Fiat

Fiat money operates within and is notionally controlled by an individual state (the euro being the problematic exception). Its main success is that of total acceptance within the relevant nation state. But it is an invention of man, and the question is ‘can we do better?’. Dissatisfaction with fiat revolves around its private creation as credit by an oligopoly of banks; its subsequent rental (via interest) transferring wealth from the have-nots to the already-haves; its misallocation away from productive use to fuel the casino and asset bubbles; and its lack of democratic or strategic control.

Currency reformers are gaining some traction in the unenviable task of effecting policy change in the teeth of enormous vested-interest resistance. [1,2,3,4,5]

But the nation states (who are in theory if not in practice the custodians of money-issue privilege) are being increasingly undermined by globalisation. Multinationals spearhead a race to the regulatory bottom. Trade trumps virtually any ethical or environmental concern and the sole recognised measure of progress is increasing GDP.

Against this background, the oft-inferred libertarian ambition behind Bitcoin – taking back money-issue-control from the state – hardly seems worthwhile if that control is already being outsourced to corporations. Anyway, setting aside the issue of Bitcoin’s democratic credentials [6], we can still assert that its underlying technology, the blockchain, does open up possibilities for decentralised co-operative management of information, and will clearly pave the way for the development of other digital currencies.

Given the multi-faceted and anarchic but energetic nature of cryptocurrency development it is starting to look as if the nation state’s only choice might be how exactly it wishes to be undermined – by globalised capital from the inside or by citizen-led ‘digital heteropeia’ [7] from the outside. Or maybe both at the same time, meeting in the middle to contest the emaciated remains of national sovereignties.

We have suggested elsewhere that the attitude of new currencies to fiat can usefully be made explicit – as fiat-friendly, fiat-cautious or fiat-averse [8]. But there is probably a fourth category – fiat-agnostic – for currency designers that haven’t the time or inclination to understand precisely the nature of fiat-toxicity.

Economic

The motivation here springs from an identification with a given sub-economy, and a desire to preference that sub-economy over the outside-world. The most common manifestation of this is where the sub-economy is a town or identifiable region that senses it is losing its sense-of-place under an onslaught from major brands and centralised supply. The preference then is for genuinely locally-rooted independent businesses and for keeping money circulating in the local economy, against the tide of centralised supply chains.

Currency projects of this sort, like the proxy-pounds, can be seen as much as local-identity reenforcers as economic interventions. Claims are made for increases in ‘local-GDP’ due to increase in velocity of exchange, but real additionality is difficult to prove. Some substitution of local for remote supply surely takes place, but the key objective – the creation of new local businesses – is elusive. The heavily centralised (out-of-area) supply of stuff-of-life transactions such as food, energy, shelter makes this a huge challenge.

Local economy currencies tend to attract activist support during start-up, but can struggle to retain a progressive mindset. Recently a tendency has been observed for them to attempt to grow via inter-connection [9], thereby arguably undermining the local-preferencing objective. Other ways of keeping up the progressive enthusiasm include new technology, local council integration and aggressive anti-consumerism.

Value-led

Value-led currencies are the most potentially interesting of the motivation-types because they are exploring the ability of a currency to be used for good. This positioning sets aside the economics professions conceit that money is neutral and replaces it with the assertion that if monies always carry values/ promote behaviours/ trigger specific outcomes then designers should be explicit about their objectives and how they are to be achieved. [10]

However, to move from no-brainer propositions such as ‘transactions are not all equal’ and ‘growth is not always good’ to a rigorous theory of value-led currencies is a bit of a challenge. It is hampered by the fact that there aren’t too many examples to study. The best examples are perhaps the Fureai Kippu [11] elder-care currrencies of Japan and the timebanks of various flavours that facilitate the exchange of participant-hours.

Review of the literature does suggest a number of challenges for such currencies. Staying true to themselves is perhaps the most severe. There is always the temptation to try to scale inappropriately by extending into non-core transactions. This is not to say that such scaling is always unwise – more that the potential value-conflict it surfaces should be carefully scrutinised and assessed. Part of the pressure for scaling is the underlying assumption that currencies must be as widely used as possible. But in a future diverse monetary eco-system this rationale potentially disappears. Another part of that pressure is the human desire for what might be called qualitative growth. The operators perhaps tend to get bored if the game isn’t perpetually changing. Tech developments deliver a continuing stream of possible futures and it seems unadventurous to ignore them.

Since around 2010 there has been a surge of interest in Behavioural Economics [12] – fuelled to a large extent by the Nudge unit set up within the UK Cabinet Office [13] and now being replicated world wide. There is likely some read-across from this experience to value-led currencies. One particular potential mindset-clash however needs to be addressed. The would-be discipline of Behavioural Insights, like it or not, carries a hint of citizen manipulation with it that sits ill with the sort of fully participative governance anticipated for value-led currencies. Put it this way – if we are going to be nudged then its important that we buy into the process and are aware of the intervention. It is clearly a hierarchichal process with the nudger and the nudgee. It would be good to see the nudger nudged; the policy makers directionally influenced via an understanding of their underlying psychology – #reversenudge .

Commercial

The proposition that corporations should be free to issue their own currencies and have them competing in a free market goes back to the seminal paper by Hayek [14,15], probably before. Arguably, the emergence of multi-nationals with multiple brands and a diverse range of ultimate products should encourage this approach, but as yet no examples seem to exist.

Of course, we have a proliferation of loyalty schemes but these tend to operate at the individual brand level, (though coalition loyalty schemes such as Nectar are obviously an attempt to widen the redemption options available). There does seem to be a recent pattern of the ‘superbrand’ asserting ownership of its sub-brands. Unilever comes to mind, as does the ‘peel-off’ corner on Danone ads. So there is probably a brand bun-fight going on internally at some of these organisations. Indeed, taking the Unilever connection further, their recent well-resourced attempts at CSR initiatives [16] might indicate a fertile ground for a value-based superbrand currency.

Loyalty schemes on their own are significant for one reason. They have driven the engineering of an alternative payment mechanism – when I go into Costa I can pay in cash or in Costa points if I have enough of them. The significance here is that the Point of Sale systems, settlement and back office systems permit it. The card swipe takes my Costa loyalty card and routes data to the back-end Whitbread servers rather than to the merchant acquirer. So loyalty systems are paving the system way for the diverse monetary ecosystem that is coming.

Summary & Conclusions

There will clearly be mixed-motive currencies – indeed most new and developing currencies will want to explore the various motivations and set out for themselves – ideally explicitly – their balance of motives. This process should not be seen as an additional chore, rather it can be part of developing a coherent and compelling narrative for a currency project – feeding into statements of mission and values in a way that gives a currency real brand-value. It can act as a guide to future action and as a mandate with external partners including potential funders. The tensions that the process of motivation disclosure surfaces should themselves be treasured. They will form an important part of the agenda going forward, and their publication will underline the transparency of governance that is needed for real progress. Feasta would be happy to play a part in such motivation audits.

References

[1]: Swiss group says it has signatures for ‘sovereign money’ vote
http://uk.reuters.com/article/2015/10/31/uk-swiss-sovereign-money-idUKKCN0SP0FW20151031

[2]: Sovereign Money : Joseph Huber
http://www.sovereignmoney.eu/

[3]: Creating a Sovereign Monetary System: Positive Money
http://positivemoney.org/our-proposals/creating-sovereign-monetary-system/

[4]: Iceland looks at ending boom & bust with radical money plan [March 2015]
http://www.telegraph.co.uk/finance/economics/11507810/Iceland-looks-at-ending-boom-and-bust-with-radical-money-plan.html

[5]: International Movement for Monetary Reform: Coalition of 22 national sovereign money groups
http://internationalmoneyreform.org/member-organisations/

[6] For example around 2% of BTC addresses control over 92% of BTCs:
https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html

[7]: Miscione G & Kavanagh D : UCD School of Business, University College Dublin [July 2015]
Bitcoin and the Blockchain: A coup d’état in Digital Heterotopia?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624922

[8]: http://www.feasta.org/2015/07/29/new-currencies-and-their-relationship-with-fiat-currency/

[9}: For example the ‘Town Pound’ project
http://guildofindependentcurrencies.org/wp-content/uploads/2014/11/GoIC_Conf2014_TownPound_GW.pdf

[10]: Series of articles on Intentional Currencies at:
http://www.feasta.org/author/graham-barnes/

[11]: Hayashi, M. (2012) ‘Japan’s Fureai Kippu Time-banking in Elderly Care: Origins, Development, Challenges and Impact’ International Journal of Community Currency Research 16 (A) 30-44 <www.ijccr.net>

[12]: https://en.wikipedia.org/wiki/Behavioral_economics

[13]: https://www.gov.uk/government/organisations/behavioural-insights-team

[14]: https://en.wikipedia.org/wiki/The_Denationalization_of_Money and

[15]: Hayek’s Plan for Private Money:
https://mises.org/library/hayeks-plan-private-money

[16}: https://www.unilever.com/sustainable-living/

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The Bank-State Bargain

Off the keyboard of Graham Barnes

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Published on FEASTA on March 31, 2015

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“I react pragmatically. Where the market works, I’m for that. Where the government is necessary, I’m for that. I’m deeply suspicious of somebody who says, “I’m in favor of privatization,” or, “I’m deeply in favor of public ownership.” I’m in favor of whatever works in the particular case.” J K Galbraith

There’s no getting away from it. Banks create money out of nothing when they extend loans and then charge borrowers interest on this newly created capital. The result is an ongoing multi-billion pound/ dollar subsidy breaking the basic rules of capitalism. What is perhaps even more surprising is that there appears to be no explicit description of the ‘bargain’ underlying this important arrangement. What follows is an exploration of elements of a possible rationale for an unspoken agreement.

Until quite recently there was surprisingly fierce argument over the way in which money is created. Thanks largely to determined and repeated enquiry by monetary reformers [1] and propogation of the issue via social media, there is now consensus over the role that private banks play in originating money in the form of loans, essentially ex-nihilo – out of thin air.

Recently the Bank of England somewhat belatedly broke their silence and joined this consensus via an in-house publication on the subject [2]. So we have a little light shining in on the phenomenon of which J.K. Galbraith in 1975 wrote: “The process by which banks create money is so simple that the mind is repelled.[3]”

The amount of money in circulation has increased rapidly since 1970 [4]. According to one source, in the UK alone more than £200 billion a year seigniorage (profit from money-issue) is achieved via interest on loans to banks [5]. The money that is loaned out does not represent the fruits of the banks’ labour or innovation. It is created at a stroke of a pen. The extent to which banks are constrained by rules and regulations (reserve ratios, capital adequacy) can be debated to some extent, but it appears to be negligible. The extent to which this unearned £200 billion carries corresponding costs (e.g. reserve costs, operating costs) can also be debated, but it is minimal. What exactly do banks provide in return for this bounty?

The answer (although as we say, it does not appear to be articulated anywhere) may be that banks are seen to provide:

i) trustworthy, stable influence over the quantity of money-issue
ii) superior quality of capital allocation
iii) the provision of essential financial services
iv) the operation of payment and settlement systems
v) deniability – providing a buffer for politicians enabling denial of responsibility for unfavourable events
vi) an agency role in pacifying the population through the burden of debt
vii) front-line capability (and a quartermaster role) in international financial wars

We can look at these briefly in turn ….

The Quantity of Money, in orthodox economics, is moderated by the price of money – the interest rate. The base rate determines a floor to the price, and the private banks in turn ‘mark up’ the interest rate according to the risks they perceive on a particular loan and the demand for money. This ‘money market’ narrative has never adequately described the real world. Even neoliberal economists recognise ‘market failure’ in this area, and have been content to support state intervention in the form of Quantitative Easing. (A likely fruitless sidetrip is possible here, so we will content ourselves with the observation that QE is preferred to so-called helicopter money because – the argument is – it can be ‘unwound'[6]. In other words the troubled assets/ bonds bought, releasing money into circulation, can be sold at a later date removing that circulating money. Of course the price achieved is irrelevant.)

So if it is widely accepted that private money-issue left to its own devices causes crises that need periodic intervention, exactly what role in the private/ public mix does it play? Each round of regulatory measures aims to reduce the frequency and severity of crises but never does. It is as if the errant son is regularly forgiven and put back in charge of the shop after each bailout with minor changes to his groundrules. Such indulgent treatment makes him progressively cavalier about his behaviour. He knows whatever he does will be forgiven, and after a short period of public penitence resumes business (and bonuses) as normal.

The Quality of Capital Allocation is just as problematic. The assessment of risk is faulty – to the extent that interest rates achieved are more a measure of insider status than assessed risk. This preferenced access to capital reserved for friends of the casino has unfortunate side effects, including the taking out of innovative start-ups by less effective incumbents with better access to capital via leveraged buyouts. Worse still, there is no national (or planetary) strategic guidance over capital allocation. The banks are implicitly trusted to be the proxies of the market and to allocate funds ‘efficiently’. Unfortunately their idea of efficiency will likely result in a dead planet for our grandchildren. Maybe the ‘free market’ can be safely trusted to produce all the things we don’t need but for the stuff-of-life market failure is the norm – failure in terms of socially unacceptable outcomes.

The Quantity and Quality of capital allocation as credit can be (and is) articulated as part of the neoliberal narrative – the superiority of profit-motivated decision making, the inability of governments to ‘spot winners’, the highlighted failures of public procurement projects.

It is true of course that core financial services are vital. Producers need to insure against events and hedge risks. But most of our over-financialised economy is betting on other peoples’ risks rather than insuring our own. The resulting market in derivatives is so complex that no-one knows where the risks actually lie should the bets need to be unwound. This inherent uncertainty, which cannot be resolved except through a crash, results in a political inability to let businesses fold. The financial services industry is too interconnected to fail, and politicians dont want to take the risk of triggering a crash on their watch. It might be containable but it might not. No-one knows. Essential financial services should be provided via a stripped down version of the sector. We have, through sins of omission, allowed the real economy to be relegated to a corner of the casino.

There are many inter bank payment and settlement systems enabling national and international funds transfer, interlinking ATM networks and so on. They are run by a variety of bank consortia and co-operatives and enable a range of valuable personal and corporate services. These valuable services act as a sort of ‘human shield’ for the casino extremists. There is no reason that their function could not be provided by neutral ‘outsider’ or public service networks but it has to be accepted that this level of corporate re-engineering is not likely to be attempted. The complexity of interconnection, though, adds to the uncertainty surrounding any domino-collapse scenarios, and contributes to the general market failure of the banking sector. The uncertainty, which is often cultivated by the banks themselves when crisis threatens deprives the banks of that divine right of capitalism – the right to fail.

The importance of core financial services and payment systems is emphasised in the prevailing narrative, but these are presented as inseparable from banking per se. Arguably the dismantling of barriers to functional diversity (like Glass Steagall) have facilitated the ‘complexification’ and loss of resilience of modern banking, in the process creating the uncertainty that governments find it so hard to confront.

Of course, for politicians the idea of the free market is immensely attractive. The ‘invisible hand’ of the market works away, automatically allocating resources where they are best used and encouraging competition so that progress is guaranteed. That’s the theory. And none of it calls for any difficult value judgements. If things go wrong it was nothing to do with decisions they made because they didn’t make any. Unfortunately free markets don’t exist and the idea that if we tweak the regulations right we can get them to is to deceive ourselves. As Galbraith says in the quote at the beginning of this article we have to be more pragmatic about intervention. A good rubric would be ‘if it doesn’t really matter leave it to the market’. And money really matters.

In a previous article [7] I argued that there are three fundamental problems with mainstream money – the misallocation of capital referred to earlier, the impact of interest-based debt and the monetisation of everything. Certainly the level of debt and the interest burden taken on by the current generation is grinding it down and acting as a drag on the economy. We can be forgiven for imagining that the resulting pacification is not entirely unwelcome to the 1%. To Orwell’s Prolefeed [8] we can add debt burden debilitation. After earning enough to service our debts (and our childrens’) we may not want to do more than sit down on the sofa with a Big Mac and Eastenders. No energy for activism? Shame.

Finally, perhaps the most distasteful part of this unstated bargain is the role the banks play as the front line troops and quartermasters in financial wars. Alongside the use of drones, financial war is perhaps the favourite modern flavour of conflict. The bodies of victims are not so obviously visible. Wars may be national, like the measures being taken against Russia and Iran, or (shock-horror) class-based like the austerity wars of the European periphery. In either case banks act on the front line, taking measures which match the prevailing ideology and providing to some extent the ‘deniability layer’ for politicians. It’s nothing personal. James Rickards and others have written in some detail about this aspect of the financial system and the likely currency wars of the future. The amoral mindset required to be a diligent financial foot-soldier of the prevailing neoliberal truth is arguably a key factor in the degradation of modern banking. The moral vacuum gradually being uncovered represents a key element of the Deprecated Domain [9] – a driving force for us to design better money-forms than the one currently imposed on us.

These last three aspects – deniability, debt-peonage-management and financial warmongering represent the real ‘value for money’ that justifies the multi-billion subsidy provided to the banking fraternity via debt-interest. Because these elements of the bargain are not publicly recognised, and for obvious reasons will not be, they cannot be easily attacked. It is for this reason that I believe policy change with respect to money-issue will not be achieved, no matter how compelling the case.

Conclusion

Galbraith was right. Governments should be more pragmatic. Politicians should stop hiding behind the skirts of ‘the market’ and make some judgement calls. Their decisions can be influenced by quantitative analyses including economic indicators expressed in money terms. But they must reflect the fact that many of the most important things in life cannot be easily quantified, and must recognise that reducing everything to numbers leads to faulty decision-making. There is more to people, natural resources and land than a ‘Natural Capital’ formulation expressed in money terms.

Some of the elements of the bank-state bargain are already under attack from ‘disruptive’ digital developments and we can expect banking and financial services to be progressively reinvented, over time. But the neoliberal hold over private money-issue policy and its inherent banking-subsidy is secure. Certainly, mainstream media buy-in to the neoliberal narrative supports this intransigence, but the main factor is the hidden services provided to pseudo-democratic government. Without the deniability cloak, governments would be less able to claim that they were at the mercy of ‘events dear boy’ [10]; a less debt-burdened population would have more time and energy to reflect and question; and the loss of a financial warmongering capability would strike at the heart of the fascist state-corporate nexus. None of these outcomes is desired by TPTB.

Progress in relieving the ‘externalities’ associated with the beloved free market, such as the premature demise of planet earth, must therefore come from disruptive alternative projects. Some of these will be profit-oriented – so be it; increasingly as understanding and practice develop side by side, they will be commons-based or co-operative. In that context money can be ‘design[ed] to serve desirable interests of cooperative users inhabiting a different monetary world’ [11]. And we may see, gradually, ‘the exodus from proprietary money’ [11]. As @ChrisCook and others have said, we need banking but we don’t need banks, at least not banks like this.

[1}: How Banks Create Money – Positive Money http://www.positivemoney.org/how-money-works/how-banks-create-money/
[2]: Money creation in the modern economy – Bank of England http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
[3]: John Kenneth Galbraith, Money: Whence it came, Where it Went p. 29.
[4]: see for example: http://www.safehaven.com/article/8030/composition-of-the-us-money-supply http://ieconomics.com/uk-money-supply-m3
[5]: In their seminal publication Creating New Money (1997) Huber and Robertson estimated the gains possible through reclaiming seignorage from UK banks at GBP 49 billion – equivalent at the time to 15% of total UK tax take. The GBP 200 billion + figure is NEF’s updated calculation for 2012. Similar (1997) figures for % of tax take were 19% for Japan and between 4 and 6% for USA, Germany, Eurozone.
[6]: see Andrea Leadsom’s contribution to UK parliamentary debate on money creation as summarised (and responded to) by Positive Money: http://www.positivemoney.org/2014/11/sovereign-money-response-andrea-leadsom-economic-secretary-treasury/
[7]: The Mainstream Money Mess: http://www.feasta.org/2015/02/02/the-mainstream-money-mess-three-aspects-and-what-they-mean-for-new-money-forms/
[8]: http://en.wikipedia.org/wiki/Prolefeed
[9]: The Deprecated Domain: the pros and cons of designed exclusion http://www.feasta.org/2014/07/10/the-deprecated-domain-the-pros-and-cons-of-designed-exclusion/
[10]: As Harold Macmillan may have never said: http://en.wikiquote.org/wiki/Harold_Macmillan
[11]: http://www.dyndy.net/2011/08/our-future-our-money-the-design-of-currency-systems/

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Mainstream Money Mess

Off the keyboard of Graham Barnes

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Published on FEASTA on February 2, 2015

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The Mainstream Money Mess – three aspects… and what they mean for new money-forms

Background

This article looks at three of the most poisonous aspects of Mainstream Money from the perspective of a currency designer exploring new money-forms:

i) the interest on debt – 97% of money issued is created as interest bearing debt with horrendous consequences
ii) capital misallocation – most of that credit is allocated away from the real economy, and with no strategic guidance on priorities
iii) the monetisation of everything – the implicit narrative that anything that cannot be expressed in quantitative (monetary) terms has no worth

Many books and articles have been written about these three factors, and they are thankfully receiving increasing amounts of mainstream media coverage. This article attempts to briefly summarise the state of play in each area, from a particular perspective – that of the currency designer envisioning new currencies that might avoid the excoriating societal, economic and ecological impacts of such built-in dysfunction on future generations.

The Problem with Interest

Interest can be seen as capital-rent. Funds flow from a lender with more money than they curently need to a borrower with less money than they need. By definition the interest flow is from the poorer to the richer. So rather than the ‘trickle-down’ effect once postulated, we have a ‘trickle-up’ effect. In previous ages the power imbalance in the borrower-lender relationship has been partially addressed via debt forgiveness (jubilees) and through bankruptcy law. The current neoliberal-designed narrative emphasises the primacy of the debt – the ‘free will’ of the borrower and the unfairness of any write-downs to the lender. Thereby all lenders have licence to be predatory.

Now if the lender is a hard working self-made person, simply ‘parking’ money for a period of time until it is needed, then there is perhaps some rationale for capital-rent. At a guess, such loans might account for perhaps 0.1% of credit. Typically 99.9% of loans will come from two source-types – the smaller portion from inherited wealth pools where the initial accumulation of wealth is a result of historical serendipity, the smart commerce of previous generations or malfeasance (or a combination thereof), and where wealth-possession implies no merit for the current holder whatsoever; and the larger portion from private banks who create the credit out of thin air [1].

This latter category is the subject of monetary reform proposals which would see the state reclaim (at least partially) the right to issue money [2] – a right it has outsourced to the commercial banks as part of an undocumented and opaque ‘bargain’. The bargain appears to be based on two foundations – the banking sector’s ‘agreement’ to operate payment and settlement systems (which could in fact be handled via a neutral third party); and the political attraction of the state being able to wash its hands of difficult strategic decision making and leave all investment decisions to the ‘market’ (or the banks as a proxy for the market) – which is the subject of the following section. (I say ‘appears’ because to my knowledge the exact nature of this bargain has never been formally described.) It has been estimated that in the UK alone GBP 192 million is paid by the nation to the banks in interest every day [3]. This ongoing seignorage represents a wealth transfer into the pockets of the high priests and gatekeepers of finance – a key factor in the creation of a terminally divisive society. And a factor which is relegating the real economy to a smaller and smaller corner of the casino.

For chapter and verse on the truly horrific effects of debt+interest, the reader is referred to the writings of Tarek el Diwani[4] and the late Margrit Kennedy [5].

Kennedy has debunked one particular myth about interest – that it only affects those who borrow. Her work calculated the embedded interest accumulated in the supply chain of various goods and services and showed that it is quite common for 50% of a price to be due to interest costs.

At this point we will resist the temptation to disentangle the idea that the cost of money – i.e. the interest rate – is related to the level of risk involved for the lender. Suffice to say its complete b******s. Interest rates are more a measure of insider-status than of forensically-assessed-risk.

Interest in Currency Design

The two functions of means of exchange and store of value should be clearly separated when it comes to the design of new money-forms. For a ‘pure’ exchange currency the primary interest-related issue is the question of whether to implement a negative interest (demurrage) regime (or to design-in alternative treatment of relatively inactive currency units).

The underlying assumption to this line of thinking is that increased ‘local-GDP’ is good. (Note: ‘Local’ here needn’t necessarily mean local-geographic – more Preferenced-Domain [6] specific). In other words more trade is good, so the velocity (frequency of exchange) of money-forms needs attending to. But we know all about the Growth Illusion [7], the impossibility of infinite growth and the disconnect between GDP type measures and well-being. So it can be argued that buying in to this underlying assumption is itself to take on board some of the neoliberal ideology we are aiming to dump. However if a new currency is predicated on preferencing real world ‘core’ transactions (food, shelter, energy, society) then perhaps growth in currency turnover could be a meaningful metric. With this proviso, we can explore further.

The basic premise of demurrage, as anticipated by Gesell [8] and others, is that if carrying money incurs a cost it incentivises spending. As I see it there are three potential problems, (other than the spending=always good axiom) :
i) The approach implies that all purchases are equal (this can be addressed via the definition of the Preferenced Domain)
ii) There may be (especially in the early stages of a new currency) nothing that the holder wants to purchase available. Thus incorporation of demurrage in immature currencies is probably ill-advised.
iii) It can be gamed. Especially with digital currencies, trade ‘cycles’ ( e.g. A->B B->C C->A ) can be used to generate fictitious trades to avoid demurrage. (Note: An embedded transaction fee could mitigate against this. Further discussion below.)

Given these issues, plus the danger of succumbing to growth fetishism (or the ‘ideology of the cancer cell'[9] as it has been described), caution is advised. Successful use of demurrage has been reported by the German Chiemgauer currency but this appears to be measured in terms of velocity – three times that of the Euro as reported in 2009 [10]. However, it is possible that the currency is being used for local transactions that would have taken place otherwise in euros, so that the overall velocity of exchange in the local economy is in fact unchanged.

Proving real ‘additionality’ looks to be tricky. But then maybe it’s not necessary to do so. The demurrage creates a small revenue stream that can be partially diverted (as with the Chiemgauer), to non-profits. And with the recent conversion of the previously dismissive European Central bankers to the idea of negative interest, maybe Gesell was ahead of his time.

In a store-of-value context, interest can be used as a mechanism for incentivising the setting-aside of money – as an asset class in its own right. But the money thus set aside is then further invested (by someone) in other asset classes, so in currency design terms I prefer to see store-of-value currencies backed by something tangible and of enduring use-value, ideally energy.

Lastly, all currencies will need working capital at some point. For digital currencies this is best achieved via the transaction fee mechanism. Interestingly this mechanism is part of the smart incentive design of Bitcoin. At present mining incentives are the major reward, but as the currency matures, transaction fees will gradually overtake them in importance. Creating a separate store-of-value companion currency for a designed exchange currency might well be an interesting direction, but not with interest as its key value enhancement device.

Misallocation of Capital

As noted above, the lion’s share of issued money appears in the form of credit allocated by private banks. It may be harsh to say these funds are allocated on a whim, but there is certainly a herd-mentality, and the idea that there is a competitive money-rental market mediated by independent minded banks via the interest rate charged is an illusion. The end result is that insufficient funds are made available to the real economy. Most goes to the financial sector and to secured personal loans, largely mortgages. In theory this allocation is guided by a risk-weighting process underpinned by the Basel agreements. Different weightings are defined for different generic asset categories – government bonds being the ‘safest’.

Click to enlarge

The key point here is that there is no strategic guidance on capital allocation. Governments therefore are showing an implicit blind faith in the ability of markets (or banks as their proxy) to determine what is best for us and for following generations. This ‘social experiment’ has lasted now for around 45 years and in the words of Wren’s epitaph at St Pauls ‘si monumentum requiris circumspice’ [11].

Thanks to the reforming efforts of Positive Money and other pressure groups, the case for so-called ‘sovereign money’ is reaching a wider audience but the inertia of entrenched vested interest and the political expediency of being able to delegate national investment strategy to the ‘markets’ represent enormous obstacles to change. We must hope that this market supremacist phase of capital is temporary.

Capital Allocation in new currencies

As noted above all new money-forms will have need of capital at some point for development. If at this stage they are forced to return to fiat currency markets to borrow, they immediately become dependent on a competitor. Whether this dependency prevents the new money-form from achieving its objectives will depend on those objectives, but it is likely to act as a constraining influence.

The gradual accumulation of capital via embedded transaction fees is preferred but this means that the hard yards have to be put in to achieving critical mass in an old-fashioned save-and-invest sort of way; and that unless goods and services can be sourced via payments in the new currency, they are not acquired. Development is postponed. In this context smart strategies for bootstrapping a currency into sustainable existence are clearly needed.

When sufficient capital has been accumulated, the focus then turns to governance. New currencies must design-in governance mechanisms that are transparent and fit for purpose.

The ‘Proxy Pounds’ or Transition Currencies are backed by fiat – that is the Brixton/ Bristol pounds are issued in exchange for sterling. The sterling received is then ‘banked’ and a proportion can be loaned out to local borrowers. But unless interest is charged on those loans, the lending risk cannot be covered and scheme costs (which are generally payable in sterling) cannot be met. The interest ‘problem’ is linked to the capital accumulation ‘problem’.

The Monetisation of Everything (TMOE)

The TMOE mindset is related to the 1980s consulting mantra that ‘if you can’t measure it you can’t manage it’. Both display a complete disregard for the ineffable. It is difficult to argue a case for the complete abolition of metrics, but it is a rare metric that is widely accepted as an unambiguous measure of something that matters. Putting a numeric value to an entity can lead to unintended and unpredictable side-effects as experience (for example with the NHS) has shown. Numbers can also be gamed by insiders with a vested interest in specific outcomes.

Money’s function as a unit of account – as a yardstick – a measure of comparative economic value – shares some of these challenges. Perhaps the two main money-related metrics are personal-wealth and GDP. The first has become a fetishised proxy for personal-worth; the second is widely accepted to be unrelated to happiness/ well-being. War and car crashes are good for GDP. Attempts to identify a more meaningful index have led to work on the ISEW [12], GPI and the German NWI [13]. This process normally involves putting a numeric value (in money terms) on social and ecological parameters.

The dominance of money-measures in the shaping of economic policy has led to this ‘quantification’ approach being applied to many aspects of life not heretofore addressed by economics – to the ‘price’ of carbon, to the ‘value’ of housework and so on. Commentators talk glibly about natural capital, social capital, human capital. The quantification juggernaut is a key facet of the extension of markets into areas not previously treated as such. The market economy has become the market society. The classic neoliberal response to a failed market is to create a new market to address the failure, and money-metrics are central to this process.

The idea of the perfectly functioning market is a deeply attractive one. The invisible hand ensures that goods and services are traded at the right price, and, like the subcontracting of money-issue to the private banks, absolves the politicians from having to trouble their tiny minds on strategic human priorities. Unpopular outcomes can be attributed to the mysterious workings of the ‘deus-ex-machina’ of the market. This cloak of machine-like impersonality in turn can be used to obscure the influence of the puppet-masters. In the process we all adopt the language of the market and its prevailing narrative without realising it. It’s a shame such a market does not exist.

Quantification is also an important ingredient for the agnotology [14] central to neoliberalism – the spreading of doubt and uncertainty in order to paralyse meaningful citizen action while strings are pulled and neoliberal ducks lined up. There’s nothing better to argue over than numbers, their meaning and consequences.

Quantification in currency design

Exchange currencies – beyond the gift economy and simple barter – need a unit of account. So, whatever that is, there is a numerical representation of an account balance. As long as the rules concerning the exchange of these units are clearly set out; that non-trade uses for the currency (e.g. exchange with other currencies, fees) are transparently understood, and the underlying payment system is secure, then this particular metric is fine.

Over and above the individual transaction, however, there is an ongoing process of development of the community-of-users of the currency. This process involves the reciprocal assessment of various soft factors, of which the most important is probably trust.

We have recently seen some hyperbolic claims that Bitcoin does away with trust, and articles on trusting vs trustless schemas. But Bitcoin has not done away with the need for trust – it has moved the trust boundary. The blockchain manipulation algorithms allow the emergence of consensus as to whether or not payment has been made. Further development of cryptocurrencies – for example the determination of embedded contract conditions – will probably move the trust boundary further out. But they will not do away with it entirely.

Some of the existing ecommerce platforms address the matter of trust via a reputation metric. Reputation can be seen as a qualifying parameter. There may be people with the goods/ services you need (or the requisite units of currency) that you choose not to do business with. The reason is usually related to some facet of reputation. I hope to cover this more fully in a later article. But when reputation is expressed via a metric, it can be gamed.

The last family of ‘gameable’ currency-related metrics relates to the use of incentives in currency design. In other articles I have suggested that one aspect of behaviour-change-via-currency is the identification of various pro-currency behaviours [15] or achievements and their reward via new currency issue. Some of these triggers might be one-off events (e.g. recruiting a new member, recommending a new local source), but much of the thinking in this area has been around increasing activity levels. This type of reward can be gamed via fictional circular trading. And we also find ourselves back at square one if we incentivise the local-GDP of the currency irrespective of transaction ‘quality’ – its correspondence with the Preferenced Domain [6].

Summary

There are a number of ‘ways-in’ to the design of new money-forms. Identifying problem areas of mainstream money and then seeking to avoid them by design is but one.

Interest payable on credit is associated with never ending growth. New currencies will need to be more attuned to stability and ‘right-sizing’ than to the ideology of the cancer cell. So different ways of accumulating capital, allocating it productively and dividing the value-added are needed. Embedding transaction fees seems a promising way of achieving this, together with fair and transparent governance that can adapt to changing circumstances. But steady incremental organic growth (or indeed degrowth) requires patience and doggedness and is culturally alien to the dominant wham-bam entrepreneur-lionising value-set.

Convertability with mainstream money can ease a start-up but it creates a dependent relationship that is difficult to break. The new money-form child never leaves home. The road less travelled will involve a purposeful separation from mainstream money with consequent challenges for building critical mass and, when maturing, some form of capital controls to isolate or at least moderate harmful interactions.

Lastly, while metrics can perform a useful input to developmental discussions, an awareness that many of the important things in life cannot be expressed numerically will be useful. Judgement must be applied – in a transparent and pre-agreed way by a community of users. We cannot, using digital technology or otherwise, create an adequate money-form that is 100% algorithmically self-managing.

References

[1]: http://www.positivemoney.org/how-money-works/how-banks-create-money/
[2]: http://www.positivemoney.org/our-proposals/sovereign-money-creation/
[3]: http://www.positivemoney.org/2014/12/change-money-change-world-talk-ben-dyson-video/
[4]: http://www.kreatoczest.com/kz_publishing_ourtitles-pwi.htm
[5]: http://kennedy-bibliothek.info/data/bibo/media/GeldbuchEnglisch.pdf
[6]: http://www.feasta.org/2013/11/19/designer-currencies-and-the-preferenced-domain/
[7]: http://www.aislingmagazine.com/aislingmagazine/articles/TAM24/Sustainable.html
[8]: http://www.utopie.it/pubblicazioni/gesell.htm
[9]: Edward Abbey, The Journey Home: Some Words in Defense of the American West
[10: CHIEMGAUER REGIOMONEY:THEORY AND PRACTICE OF A LOCAL CURRENCY Christian Gelleri
https://ijccr.files.wordpress.com/2012/05/ijccrvol132009pp61-75gelleri.pdf
[11]: If you seek [its] monument [handiwork], look around yourself
[12]: http://en.wikipedia.org/wiki/Index_of_Sustainable_Economic_Welfare
[13]: http://www.wikiprogress.org/index.php/German_National_Welfare_Index
[14]: http://en.wikipedia.org/wiki/Agnotology
[15}: http://www.feasta.org/2013/07/26/designer-currencies-and-behaviour-change/

Featured image: Measuring tape. Author: Colin Broug. Source: http://www.freeimages.com/browse.phtml?f=view&id=1432929

Capital without Capitalism: A Currency Design Perspective

Off the keyboard of Graham Barnes

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Published on FEASTA on November 11, 2014

Capitalism

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In the capitalist model, capital accumulates as ‘surplus value’ following a production process supervised by the capitalist, with labour as a key input. The resulting tension between capital and labour is a fundamental aspect of capitalism, though it has become rather less visible in the past 40 years, as ‘free-market’ economics has progressively favoured capital over labour. Globalisation has helped capital to become way more mobile than labour, in the process limiting the bargaining power of the employed.

The recent surge in interest in the design of new currencies is partly informed by a creeping realisation of the unfairnesses of the so-called free-market and its associated monetary dysfunction.

The zeitgeist of this (still small but fast-growing) activist/ alternative movement tends to coalesce around diverse bottom-up, often peer to peer solutions. It tends to be anti hierarchical-imposed-solutions no matter how apparently well-intentioned. And it frequently unites left and right in strange ways.

The currency approaches that are developing tend to prioritise the means of exchange function over the other functions of money-forms[1]. The mutual credit approach, for example, needs no central authority (other than some form of collective risk management/ insurance) and is backed solely by the users’ self-professed ability to produce going forward. It is likely that this form of P2P exchange, facilitated by social media and underpinned by new technology developments can evolve into rather more scalable economies than was ever possible with LETS schemes.

One of the challenges facing sub-economies based on these types of approach is the need, at some point, for capital investment. With preferred governance models that proscribe the accumulation of capital via profit, and deprecate the capitalist role in favour of peer-managed production, how might that capital be formed?

One possible mechanism is via the incorporation of a form of FTT (Financial Transaction Tax) whereby a peer-agreed proportion of the value of each bilateral transaction is set aside for a ‘community-account’ fund. But the mechanism is perhaps the easy bit.

For what purposes should the funds be set aside? To what extent can/should these be agreed in advance? What is the consensus mechanism for agreeing those purposes? Is that consensus subcontracted to a trusted sub-group? How are members of that group appointed over time?

The basic shared interest of a mutual exchange function could be undermined by differences of opinion over legitimate capital expenditure needs. Commons need protecting against enclosure attempts, but setting aside excessive resources will act as a drag on the economy.

The unit of account of the currency concerned is also a factor. For example timebanks, where the unit of account is one hour of the participant’s time will accumulate hours. But other inputs than labour will be needed. And the organisation/ combination function that is traditionally the role of the capitalist must be recognised, allocated and rewarded.

The multi-functional complexity of mainstream money is non-trivial to replace. But as bubbles burst around us, it is increasingly clear that over-complex entities are prone to fragility. Re-engineering money offers us the chance to imagine and create a more sustainable economic infrastructure.

Endnote

[1] For an overview of the different functions of money see the introduction of Richard Douthwaite’s Ecology of Money.

23 Things They Dont Tell You about Capitalism by Ha-Joon Chang: Review

Off the keyboard of Graham Barnes

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Published on FEASTA on October 16, 2014

Capitalism

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Just one uneasiness about Ha-Joon Chang’s brilliant book – which, breaking the black hat habits of a lifetime, I’ll leave until last.

The book is a concise debunking of free market ideology. It presents as 23 ‘Things’ – short, provocative (to some) statements such as ‘There is no such thing as a free market’, ‘free market policies rarely make poor countries rich’, and ‘equality of opportunity may not be fair’. Each ‘Thing’ is introduced via a description of ‘What they tell you’, where Chang restates the position of free-marketeers in short order, with minimal use of adjectives. Read together these sections could provide an 8 page precised prospectus for the free market. Reading them one’s confirmation bias (I admit it) feels threatened, and a sense of unease initially sets in.

The joy of the structure Chang has chosen is that each of these sections is followed immediately by a ‘What they dont tell you’ section which states, in similarly bald prose, a rebuttal of the free-market thinking. Sections that follow then expand on this critical narrative, homing in on key aspects of the argument.

His choice of words is pointed, sparse and memorable. There were so many tweetable gems in the 260 pages of this £9.99 Penguin paperback, that I had to exercise self control or be suspected of agency status.

There are many insightful passages, so it is difficult to choose, but maybe these will give a flavour:

“A market looks free only because we so unconditionally accept its underlying restrictions.”

“Shareholders may be the owners of a corporation but, as the most mobile of the ‘stakeholders’, they often care the least about the long-term future of the company.”

“The wage gaps between rich and poor countries exist not mainly because of differences in individual productivity but mainly because of immigration control.”

“..the internet revolution has .. not been as important as the washing machine …. We should not underestimate the old and overestimate the new.”

“The world works as it does only because people are not the totally self-seeking agents that free market economics believes them to be…..if we assume the worst about people we will get the worst out of them.”

And that’s just from the first 5 Things.

Finally, the quibble. Chang is a capitalist, just not a free market capitalist, and in places there are apparent implicit ‘growth is good’ sentiments – for example when comparing the success of different national economies. I am not entirely sure if this is indeed part of Chang’s value-set or if he is taking the Marxian approach of assuming the entirety of your opponents proposition in order to rebut it. But Chang on Degrowth I’d like to read.

It’s an absolutely brilliant book. Hugely recommended.

Money as Commons

Off the keyboard of Graham Barnes

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Published on FEASTA on September 5, 2014

money_tree

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From one particular point of view – that of money as private property – the idea that money could be treated as a Common Pool Resource (CPR) [1] seems patently absurd. The money I have in my account is mine alone. The more I have of it the more I am concerned that it should keep its value intact until I want to spend it. How can it make any sense that its stored value be shared?

But going forward money is either a reward for past work, or (when issued through the device of credit) an advance secured in expectation of future work. From this viewpoint we can see money as an aspirational commons – a Common Pool Resource backed by our collective efforts, that with the right governance regime could be managed equitably and to mutual benefit.

This article is *not* a specification of a commons-based money-form. Rather it is an attempt to explore the concept of money from a commons perspective.

Some aspects of mainstream fiat money are less than ideal – how it is issued, passed on and accumulated…

i) Allocation of new money. Private banks create money out of nothing and allocate its first use as credit to whomever they see fit. This bank-centric oligopoly can be challenged by new currencies that are effectively controlled by their users [2]. The level of effective control over current money supply and distribution exerted via the democratic process is close to zero.

ii) Influence of old money. A considerable proportion of existing wealth is inherited. Its possession confers no merit whatsoever. It is not a reliable indicator of past effort or innovation. The ‘soft power’ of its owners acts to prevent progressive reform and reinforces inequality. New currencies may be designed so as to prevent capture by this soft power.

iii) Coagulation in Asset-Form. Money coagulates as various asset classes (including money itself). This has two effects that may be considered negative to a sub-economy – firstly it removes currency from being available to exchange trades and thereby reduces economic activity; secondly it encourages the rentier class – those who live by charging for the use of acquired assets rather than by doing any work – allowing outsiders to sequester our assets and rent them back to us. Newly designed currencies may incorporate mechanisms to hinder asset coagulation or manage asset formation to insider (currency user) benefit.

… but one particular aspect – the way it facilitates division of labour – will be hard to match.

The desired result

The Money we are working towards here is a value-led means of exchange – the manifestations of value being decided by its users – the commoners. What follows is a consideration of three important design areas from a commons perspective: convertibility, the equitable allocation of issued money, and how to provide capital investment; followed by a comment on division of labour.

Convertibility

Convertibility we can define as the extent to which the currency design and operation supports or hinders exchange with fiat. If we look at a parallel situation with a more easily thinkable CPR, land, then we can see that the key danger is of a commoner selling their rights to an ‘outsider’ who may not share the values of the community. Elinor Ostrom’s number one key design principle in her rebuttal of the so-called Tragedy of the Commons [3] is “clearly defined boundaries (effective exclusion of external un-entitled parties)”.

A guaranteed fixed exchange rate with fiat, as operated by the proxy-pounds for example, means that currency can be bought by outsiders, but the localised acceptance of the Brixton, Totnes or Bristol Pounds means there is limited scope for outsider disruption. Convertibility is certainly a plus in terms of starting up a currency because a user whose commitment wanes can always bail out and cash in for fiat.

In future, though, we can imagine circumstances where the Preferenced Domain [4] of a currency incorporates some access rights or goods and services that are reserved to (or supplied at a preferential rate to) the users – the commoners. Engineering this will help to attract users. In this context, some means of defining, identifying and excluding ‘un-entitled parties’ is needed.

To address any concern that this form of exclusion is elitist in some way, it is best to consider it as a protective measure – to keep a new developing currency safe from the Deprecated Domain [5] – from outsiders wishing to appropriate it as capital and rent it back to its users. Because that would be a natural course of events in a pure capitalist eco-system. It’s one interpretation of what has happened with fiat.

There is a feasibility issue here too though. In an open market economy there is nothing to stop an exchange developing that would manage supply and demand for our new currency and ‘discover’ a fiat market price for it. This can be addressed via a ‘right to use’ status held independently for each user separate from their currency account balance. Such a right to use would be based on an individual’s reputation – their track record in supporting the values and extending the reach of the currency. This line of thinking was anticipated by Feasta’s co-founder, the late Richard Douthwaite [6]. Interestingly, the role of ‘oracles’ in Bitcoin, as trusted assessors of some external condition that will trigger a payment (or some other blockchain transaction) gets us into the same ground. As assessments required become progressively more subjective and less ‘factual’, reputations of assessors will matter more and more.

Equitable Issuance

For our proxy-pound example, issuance is only achieved by purchasing with fiat. Essentially no new currency is created. Fiat can clearly not be considered a CPR – it breaks every one of Ostrom’s eight design principles [see Annex]. So we are here concerned with currencies that issue new money in some form. The issuance regime of Bitcoin allocates new coins to the miners. It has been argued that this is just substituting a tech-geek oligarchy for a financial oligarchy. Perhaps there is an element of shared-value anti-government sentiment in that community, but rewards appear to be accruing to accounts in an inequitable manner. At its heart is an important development – the blockchain – but Bitcoin is not a value-led currency suitable for treatment as a CPR.

For an equitable issuance regime, we can turn back to ‘to each according to his needs and contributions’. The needs part of this equation can translate into some form of issuance related to a Basic Income or Citizen Dividend (maybe one-off, maybe recurring). The criteria for inclusion could be a combination of targeted audience (geographic, demographic, interest-group) , charter-value sign-up and the completion of some initial tasks appropriate for the particular value-set. A handful of Altcoins are already pre-distributing currency – for example Auroracoin to the citizens of Iceland.

The contributions part implies a continuing, ideally peer-reviewed process assessing the contributions of each user to the currency itself and to its underlying value-set, with appropriate reward levels. There is admittedly a chicken-and-egg problem here in that the pro-currency and pro-value activities have to be assessed ahead of the distribution, and therefore issuers need to recognise that the use-value of the issued currency is at that stage unguaranteed. Work is being undertaken for uncertain reward, energised primarily by the communal shared value-set, and underlining the need for clear articulation of that value-set.

Capital Investment

A good issuance regime can make sure there are enough ‘insiders’ with enough currency to circulate to facilitate exchange between users. It cannot, without additional design features, cater for currency to be set aside for capital projects. Arguably it should not do this at all because we know that saving (or hoarding) slows down circulation with a consequent lack of liquidity and exchange. There are after all many asset classes out there competing for investment, and in a money-diverse future new currencies will operate alongside fiat.

But it is tempting to set out to address one of the problems with fiat – that capital is available to most only as a loan at interest. If our new currency can be created out-of-nothing (just like the banks do with fiat) then we have the option of varying the terms. Most of the rationale for interest disappears anyway with ex-nihilo fiat, except for its justification as a ‘hidden subsidy’ for the issuer banks in return for their unholy partnership with government and the operation of a payment clearing system (which could incidentally be run itself as a commons).

The incorporation of any form of capital accumulation and allocation, even for projects which clearly benefit the CPR itself, adds a significant level of complication to the currency. But if investment in the CPR itself is needed, as is likely, external financing brings with it the possibility of part-capture or enclosure by outsiders, so designing-in forward access to capital will have to be attempted.

Division of Labour

We have come this far without mentioning Mutual Credit, and have done so mainly to avoid specifically critiquing it in the cause of a wider exploration of the issues. Mutual Credit and Timebanking are both interesting money-form models, but they both illustrate a key issue – that of facilitating the re-combination of labour into the co-operative production of goods (and services).

As individuals we can essentially issue our own currency based on forward commitment of work. Fiat currency effectively allows the capitalist to put a numeric value on individual contributions (via wages) and inputs, add a profit element and set a price. Who performs this role in a mutual credit or timebanking context? And how is this co-operative process governed?

Unless we accept that new CPR-oriented currencies must restrict themselves to exchange between individuals, it seems necessary to complement the core currency design with the governance design of an institution which takes on the ‘capitalist role’ in the management of collective endeavour. To this extent, the institution-type *is* the currency. And if the corporation is the flawed and outdated institution-type of fiat currency capitalism, what might the preferred institution-type of a commons currency look like?

Summary

The paradigm of money as a common pool resource may be able to provide insight and encourage radical monetary innovation. The complexity and multi-functional nature of the fiat money form should not be allowed to conceal the fact that the root backing for money is work – past work rewarded and future work pledged. An exchange currency needs a stability of value (non-volatility) but it does not need to provide an appreciating store of value. Fiat money has become a toxic asset class in its own right. Because of the manner in which much of it has been created and passed on , holding it implies no associated merit; it confers increasingly unequal social power which may in turn be exchanged for political and economic influence.

New money forms do not need growth. Designers can choose to exclude or discriminate against deprecated behaviours, recognise and reward behaviour compatible with an explicit transparent value-set, and prioritise the well being of commoner-insiders. In so doing the exemplars created will lay the foundations for a post-modern version of common wealth.

Annex: Ostrom’s 8 principles (from Wikipedia)

Ostrom identified eight “design principles” of stable local common pool resource management:

  • Clearly defined boundaries (effective exclusion of external un-entitled parties);
  • Rules regarding the appropriation and provision of common resources that are adapted to local conditions;
  • Collective-choice arrangements that allow most resource appropriators to participate in the decision-making process;
  • Effective monitoring by monitors who are part of or accountable to the appropriators;
  • A scale of graduated sanctions for resource appropriators who violate community rules;
  • Mechanisms of conflict resolution that are cheap and of easy access;
  • Self-determination of the community recognized by higher-level authorities;
  • and In the case of larger common-pool resources, organization in the form of multiple layers of nested enterprises, with small local CPRs at the base level.

Endnotes

[1] A clarification from my Feasta colleague Brian Davey: “A common pool resource is the resource itself. (e.g. the earth’s atmosphere). A commons is a shared set of management arrangements for a common pool resource. (eg a cap and share arrangement organised through a global commons trust). Thus a common pool resource can be managed with privatising principles and arrangements or with commons arrangements and the practice and the values of commoning. Of course a common pool resource can be the subject of an “aspirational commons” – a set of arrangements that does not yet exist either partially or fully but which could be brought into existence or developed.”
[2]: http://www.feasta.org/documents/moneyecology/chapterfour.htm
[3]: http://en.wikipedia.org/wiki/Elinor_Ostrom#Design_Principles_for_CPR_Institutions
[4]: http://www.feasta.org/2013/11/19/designer-currencies-and-the-preferenced-domain/
[5]: http://www.feasta.org/author/graham-barnes/
[6]: http://www.feasta.org/documents/liquidity_network/2010_LQN_CI_Scan.pdf

Disclaimer: Feasta is a forum for exchanging ideas. By posting on its site Feasta agrees that the ideas expressed by authors are worthy of consideration. However, there is no one ‘Feasta line’. The views of the article do not necessarily represent the views of all Feasta members.

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