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The conflict at the heart of modern money
Published last year in Open Democracy blog
Recent currency innovations like Bitcoin and an economic recovery now dragging into its seventh year have led many people to question what money is - and more importantly, what it should be. Answering this question is fundamental to any attempt to transform society.
Economists will tell you that money has many different functions, most importantly as a store of value and a medium of exchange. Wealthy people tend to focus on the former function, while those who must work to eat may think the latter more important. Over time these functions have been conflated, with disastrous results for equality and the economy. Making money into a positive force for social change requires detaching money from its role in storing value.
A store of value retains its worth over time. Gold is the classic example, but many other things are used like stocks and shares, houses, and savings accounts. A medium of exchange, on the other hand, is something that allows people to buy and sell without the need to resort to barter - exchanging stuff directly for stuff. Exchanges need a token which has value, or acts as a proxy for value - like a bank-note. But these tokens don’t have to be valuable in and of themselves as long as sellers know they can spend them on.
The number of these tokens in circulation is critical, because without them transactions become more difficult and the economy grinds to a halt. But if the tokens are themselves valuable they tend to be hoarded—taken out of circulation by the rich as a way of storing wealth. Once the tokens are scarce, and competition for them is high, the rich can get even richer by lending or investing them to make a profit.
In this way, money as a store of value and money as a means of exchange become increasingly entangled with each other. And it’s this problem that helps to explain the ups and downs of the business cycle and the inability of governments to respond to this monetary crisis in any meaningful way. The economy abounds with factories, raw materials and skilled labour, but often there’s no money to lubricate it. So either policy makers must issue more money and go further into debt (the stimulus approach), or try to pay back the debt and choke off the economy in consequence.
Either way, the banks win. More debt means more interest-income for them, and a choked-up economy means that they can acquire troubled assets cheaply.
The way out of this paradox is to use different instruments for different functions, as has happened for a great deal of monetary history. Modern legal tender, despite its being created out of nothing, is really a descendant of store-of-value money. It is made scarce, so as to be valuable, and there is a cost to producing it, which is the interest on the loan that creates it. The term ‘common tender’ is hardly ever used today but it describes the plethora of non-valuable monies that would circulate on a more local basis alongside legal tender. While legal tender was for the aristocracy to buy land, import and export, pay dowries, taxes, and soldiers, common tender was for food, taverns, tradesmen and daily life. When Europe was drained of valuable silver because of merchants exporting it to the East, the people didn’t starve for lack of an exchange media as they do now in Southern Europe. The worthless currencies of daily life, hardly ever mentioned by historians, were unaffected.
What were these common tender currencies like? There were two main sorts, one was promises of money in the form of bills of exchange. These have an advantage over real silver in that they are not limited by the quantity of silver actually available, although promises are of course only useful within networks of trust. Periodically all the promises are cancelled out, and some silver is usually needed to settle the balance.
The other main type of comment tender was called, in the Holy Roman Empire, a Bracteate. It was a thin metal disk often fixed to a leather backing for durability, which would be spent into circulation by the local lord. Periodically they would be recalled and re-issued, perhaps at a rate of 3 new ones to 4 old ones, so storing them for long periods meant being hit with a 25% tax. The store of value function was done by something else.
This is why Silvio Gesell, an economist who was gaining influence until National Socialism put Germany on the path to fascism, proclaimed that "Money is an instrument of exchange and nothing else." He proposed a design in which paper money would need to be constantly validated by affixing a monthly stamp. It was tried by a small town in Austria in the Depths of the recession called Woergl. They put some tax receipts aside and in their place spent these new notes into the economy. The more notes people held as the end of each month approached, the more they would try to spend before the stamp became due. And each time the note changed hands, work was done and economic value was created. In the depths of the 1930s ‘recession’, Woergl reached full employment, fixed all its infrastructure and built a ski jump. A hundred other towns were considering the model when the national government made it illegal, in order to concentrate on a economic recovery using legal tender, which it could better control.
Today, complementary currencies aren’t banned, and government permission is not needed to create and use them, but the dominance of legal tender in a globalised economy doesn’t leave much room for other currencies. With around half of income going to taxes in the UK, for example, the demand for legal tender is unlikely to fall, especially when most people also have to pay legal tender to the banks in the form of interest. Banks collect interest not only on the national debt and your mortgage: monetary expert Margrit Kennedy estimated that 50 per cent of the cost of goods and services is directly attributable to ‘capital costs’ - in other words, to interest. Alternative currencies can’t compete currency which have legal privileges; they can only work in the less essential, marginal, surplus and grey parts of the economy.
Many fanatics would like the alternative currency, Bitcoin to fulfil this role of a secondary currency but I think it is a poor candidate. Most of Bitcoin’s design and the discourse around it is about providing an alternative to gold and a competitor to legal tender. Like fiat currencies, Bitcoins are created from nothing, and like gold Bitcoins cannot be created as needed and thus are scarce. Consequently most people holding Bitcoin are hoping the price will go up rather than spending them. Its creator Satoshi Nakomoto had set out to create a digital form of gold, so we shouldn’t be surprised to see Bitcoin hardly circulating as slowly as gold. But another approach is much closer to this concept of common tender and it is going on under our noses, without most of its practitioners even realising its potential.
There are maybe three main types of local credit clearing system. In all of them, members are trusted to spend what they earn and earn back what they spend and close their accounts at zero. There is no interest, no actual money, and perfect economic equilibrium, which means that supply always equals demand.
Business barter systems have member businesses selling what they call surplus capacity, or unsold stock and procuring supplies and treats from others in the network. The growth of these systems could absolutely save the economy, but at the moment they won’t because they are too heavily taxed which limits the benefits of participation, and because their 20th century business logic prevents them from becoming interoperable and instead members find themselves trapped in small marketplaces with few trading partners.
The same mechanism also exists at the grassroots level and in civil society. For the past 7 years I’ve been giving software to local communities who declare their own unit of account (a currency) which they issue and control.
LETS (Local Exchange Trading Systems) have been going since the 1980s and there are a few thousand of these across the world and maybe a hundred in UK. Similarly Time Banks’ unit of value is simply one hour and there is a rule that says everyone’s hour is worth the same. Of course these systems don’t attract many brain surgeons but they do give their members a way to give and receive useful things, and to build relationships.
Participants in these schemes commonly report a completely different feeling when using common tender. Legal tender money is actually really stressful to use. Earning it involves competing for employment and obeying your boss, and when you have it there are security concerns, paperwork, passwords and even the bank tries to snatch it from you. In contrast local currency units are much easier to earn and to spend than legal tender and the relationships built around them are much better than normal business relationships.
Anthropologist David Graeber talks about settling a debt (i.e. paying it in full with valuable money) as a way of actually severing a relationship. But when a community is bound together in a mesh of small, unsettled, often undocumented debts it is necessary to stay on friendly terms with neighbors and easier to call in favours when needed.
Unfortunately neither the LETS nor the timebanks are thriving in UK. Quantitive Easing has displaced much of the economic pain that would lead people to seek such alternatives. LETS hasn’t managed to renew itself since its heyday in the early 90s recession and the buzz about the sharing economy has largely passed it by; Timebanks often rely on government support and despite the Big
Society rhetoric of the last election neither finance or policy are going their way. One currency cannot be optimised for two functions. This table shows how separating the functions would stop them interfering.
As these alternatives are demonstrating, money can be both a fungible store of value and a worthless medium of exchange but it should not be both at the same time. Rather than the medium exchange being hoarded by the rich, value should be stored in real commodities instead of by withdrawing the lifeblood from the economy. One way to bring that about is through negative interest rates, or a holding tax, on the medium of exchange. Money which is sufficient for the needs of the economy allows work, employment, value creation to take place. Money which is not too scarce helps people to move from insecurity and wasteful competition to co-operating together for the common good.