Money creation, like alchemy, is shrouded in ambiguous language and yields eternal wealth! For most of history these secrets have been used to empower sovereigns to spend money without the painful business of taxing or borrowing. Those foolish enough to try to grasp it with their rational minds are befuddled by unexpected politics, propaganda and paradoxes. In modern times this power now resides almost absolutely with banks, who lend money which doesn’t exist, and reap the interest as if it did! Are the alchemic fumes making your head spin?
What if those proto-chemists were found to be not ‘making gold’ but merely charlatans ‘taking gold’? Some sovereigns managed money better than others, but now that power resides with private corporations. The language of ‘wealth creation’ masks the real intention which is extract money from society as fast as possible, to lock it up in tax havens, and to drive the masses, deprived of a medium of exchange, back to the bank to borrow more! The social conseqences are increasingly acknowledged (although not by banks) to include the rich-poor divide, short-termism, erosion of democracy, the military industrial complex and, via the growth imperative, climate change itself.
Users of money and financial services seem to have very little influence in the matter. However much we disapprove of banks, boycotting them (as I do) makes normal life impossible. Banks are part of our social DNA, that’s what Too Big To Fail means.
The problem is not that saving and lending are critical functions which only banks can do. Indeed the idea that money is some kind of stuff which we rent is merely a misleading metaphor. The problem is that only a bank can underwrite your IOU so that everyone else will accept it. If all the banks and bank accounts were taken down in some Mr Robot scenario, the only money left would be a tiny volume of notes and coins. We wouldn’t be able to pay each other and the economy would stop dead.
You might think the alchemical fumes are affecting me when I say the way forward is in the collective relocating our trust. But it is worth considering just how much trust we place in banks, not only to guard our savings from theft and bail-ins, but to invest responsibly without the need for taxpayer bailouts, to set interest rates such as LIBOR fairly, not to launder money for international drug cartels, and indeed to manage the quantity of money in the economy. And compare that trust with the trust we place in our friends, family and business associates.
So the essence of bypassing banks, at least to the extent that we don’t use money to pay interest and taxes, is understanding how IOUs work. In the Irish banking strikes of 1970s, the whole economy ran on IOUs in the form of cheques. Allegedly pub landlords took the role of judging creditworthiness. It wasn’t the most efficient system but it worked. Similarly in Greece before the Euro, it was common practice for strong local businesses to pay their bills by cheque, and for that cheque to circulate as money before returning to the business. Both of these are examples of interest free money creation, and taken to scale, they create stable economies (no more boom and bust) in which credit is always available.
So how could this be instituted today? Its not enough to hope that all the banks fail at once, (and wish for the calamity that would cause). It can’t be expected that a whole culture would participate while banks are still omnipresent, But there are thousands of groups worldwide who practice forms of collaborative credit – the most numerous are business barter networks and LETS (Local Exchange Trading Systems). If only we had the collective sense to use them, not only would the economy’s liquidity problems be solved, but economic policy would devolve much closer to us, the people who actually back the money!
A key difference between these systems, which I call ‘collaborative credit’ systems and the mainstream economy is the principle of exchange. Conventional money is designed for saving, which means NOT exchanging. In fact by making debts more and more unpayable it can be shown even to prevent exchange. Many things can be used as a store of value, but a good medium of exchange requires that social consensus which is unique to money. Money which really facilitates exchange must be always available to be earned or borrowed, and it should be less valuable than real things to prevent its hoarding. The principle of exchange says that we should give and receive the same amount of value; that money isn’t valuable in itself, it is just a way of tracking the balance of my giving and receiving. By committing to give and receive favours in equal measure, we acknowledge that being owed favours doesn’t put one in a position of power, but brings with it an obligation to spend back. Taking responsibility for our own finances takes effort yes, but probably less than feeding a parasite! With money no longer scarce, competition (for money) gives way to collaboration. Collaborative credit implies that everybody’s promise has equivalent value, which in economics is called fungibility, an important property of money. Because every credit is balanced by an equal and opposite debit, aggregate supply and demand in the system are perfectly balanced by design. The simplicity and elegance of the exchange paradigm makes neoliberal economics look like the blind leading the blind up an alley without a paddle!
By forming what the Germans call ‘exchange circles’, narrow fields of reciprocation, we reduce our personal (and aggregate) demands for money; and within our own economic circles, we reclaim a measure of power of credit issuance and even monetary policy.
So why isn’t everybody doing it already? Even in Greece where the need is dire, the move to alternatives forms of production and exchange is almost imperceptible. I could list reasons all day about financial illiteracy, breakdown of trust, atomisation of society, but instead we should look to those who ARE doing it.
Fortunately collaborative credit does not require that ‘the masses’ participate, only that the circles have sufficient density. The bigger, and more connected exchange circles become, and the more goods and services move within them, the more they look and behave like money systems, spreading more risk more evenly, and allowing credit of greater quantities for longer durations.
If we use legal money, we do so for better or for worse, under the law. But the sentiment “I’ll scratch your back if you scratch mine” needs no law, no regulation, no taxation, and no money. Those who are serious about a fairer economy, are the ones finding, trusting and working for each other. There is no alchemy for creating wealth, but the obscuration of money creation is about appropriating wealth created by others.
Matthew Slater co-authored the Money & Society massive online open course with Professor Jem Bendell. Participation is free and it starts again on Feb 19th. See http://ho.io/mooc