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In this Schumacher Briefing, Richard Douthwaite argues that just as different insects and animals have different effects on human society and the natural world, money has different effects according to its origins and purposes. Was it created to make profits for a commercial bank, or issued by a government as a form of taxation? Or was it created by its users themselves purely to facilitate their trade? And was it made in the place where it is used, or did local people have to provide goods and services to outsiders to get enough of it to trade among themselves? The Briefing shows that it will be impossible to build a just and sustainable world unless and until money creation is democratized.
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Foreword
by Bernard Lietaer
Four main benefits can be derived from reading Douthwaite’s Ecology of Money:
1. He introduces much needed clarity in the domain of money. I like the simplicity of the
six questions he uses to walk us through different money systems, a process which
facilitates comparisons of the nature, advantages and disadvantages of each money
system he describes.
2. He explores these different money systems using a terminology that lay people can
understand. This is no minor achievement, as illustrated by economist John Kenneth
Galbraith’s quip that “The study of money, above all fields in economics, is the one in
which complexity is used to disguise truth, or evade truth, not to reveal it.”1
3. He forces us to think the unthinkable - the possibility that our familiar national currencies
may actually be out-of-date in an age of globalization, information revolutions and
planetary ecological hazards.
4. He presents some ideas for new money systems designed to help us with some of our
biggest challenges of today.
In particular, two issues he addresses are highly relevant at this time:
•

The need for a new balance between the global and the local economies;

•

and the issue of carbon-energy efficiency.

Talking about small-scale local currencies in the middle of all the media buzz about globalization
may sound parochial or marginal to some. It is not. Community rebuilding is not a contradiction
with the trend towards a global civilization, but a necessary complement to it. Precisely because
of the globalization trend, strengthening local community is becoming more important. Rather
than argue from theory, I will contribute two case studies from Japan, clearly a globally oriented
economy.
Japan has decided to introduce local currencies, complementary to the conventional national
currency, to tackle two key problems which the West will be facing acutely soon - aging
The Ecology of Money by Richard Douthwaite

Foreword

populations and the need for new regional development strategies. Both examp; les illustrate
Douthwaite’s points.
Japan has one of the fastest aging populations of the developed world. By the year 2005, the
population over 65 years of age will reach 18.5% of the total (a situation that Germany will face
by 2006 the UK and France by 2016.)
A special currency called Hureai Kippu (literally “Caring Relationship Tickets”) has been
created by a group of 300 non-profit organizations. The unit of account is an hour of service. The
people providing the services can accumulate the credits in a “healthcare time savings account”
from which they may draw when they need credits for themselves, for example if they get sick.
These credits complement the normal healthcare insurance program payable in Yen, the
conventional Japanese national currency. In addition, many prefer to transfer part or all of their
Hureai Kippu credits to their parents who may live in another part of the country. Two private
electronic clearing houses have sprung up to perform such transfers. One particularly important
finding has emerged. Because they have experienced a higher quality of care in their
relationships with care-givers, the elderly tend to prefer the services provided by people paid in
Hureai Kippu over those paid with the conventional Yen.
The second application is potentially even more impressive. The Ministry of International Trade
and Industry in Japan (MITI) has recently concluded that the future of Japan’s development
strategy will be based on “Silicon Valley” type specialized regional economies. And that the best
tool to stimulate such regional development clusters are local “eco-money” systems. Four pilot
projects have already tested this approach, and the results are convincing to the point that by end
1999 no less than forty such systems will be launched. Some of Japan’s largest corporations
(such as NTT and Oracle Japan) are involved in these experiments.
The point about these two examples is that theory is way behind practice in this domain. People
are innovating in the monetary domain, and are obtaining demonstrably positive results from it,
while the majority of the policy makers remain still unaware about the potential of monetary
inventions to solve their problems. I would compare today’s non-conventional money domain to
aeronautics when the Wright Brothers took their first flights. The first airplane builders didn’t
know why their contraptions were flying, but fly they did. And it took the New York Times more
than four years to even mention the event (and then only because the President of the US was
witnessing a demonstration). Nevertheless, nobody questions that the aeronautical industry has
changed forever our way of life on this planet.
Do I agree with all the ideas that are presented here? Even Douthwaite admits that he doesn’t
“expect everyone to agree with the conclusions he has reached”. For instance, although I agree
with him on the importance of linking monetary issues to energy sustainability, I question the
viability of the means he proposes. (Why not include his “Energy-Backed Currency Units”
(ebcu) as part of a basket of commodities and services backing the currency - rather than being
the exclusive backing of currency? This would dampen the effects of price instabilities of the
ebcu due among other things to technological innovations in the supply of energy.)
I am also concerned with his benign view on inflation. Inflation has the positive effects
Douthwaite mentions only if it occurs by surprise, i.e. has not been discounted by inflationary
The Ecology of Money by Richard Douthwaite

Foreword

expectations. In other words, building inflation into the system may just kill whatever usefulness
it has.
However these disagreements pale in comparison with my wholehearted support of two of
Douthwaite’s key conclusions:
•

Contrary to what most economists believe, money is not neutral, i.e. different money
systems are now possible, and could make a dramatic difference in helping us with
several of our most important challenges including ecological sustainability;

•

“Only a widespread debate on the issues, by a well-informed public, will ensure that
when changes are made [to the money system] they are along the right lines.” To
paraphrase the line about war and the military, money is too important to be left only to
bankers and economists…

As the public is remarkably ill-informed about the nature of our money system, as even most
experts seem to believe that there is no choice, starting a debate about the effects of different
money systems on society is a vital task. In this sense, reading Douthwaite’s contribution may be
particularly useful because it is a controversial one.
1 Galbraith, J.K. Money: Whence it came, Where it went (Boston: Houghton Muffin Co., 1975) pg 5.

The Ecology of Money by Richard Douthwaite

Foreword

Introduction and Summary
Most people think that there's only one type of money because one type is all they've ever known. They know about
foreign currencies but they see these, quite correctly, as essentially the same sort of money as they use in their own
countries. They also know about cheques, credit and debit cards, credit notes, and several of the other forms that
money can take but, correctly again, regard these simply as special purpose versions of notes and coins. Money is
money, they think, regardless of the form it takes. Only the few who know a little monetary history, or are members
of a Local Exchange Trading System (LETS), realise that this is not the case. There are, potentially at least, many
different types of money and each type can affect the economy, human society and the natural environment in a
different way.
Most economists think that there's only one type of money too. That is when they think about it at all. The
profession, to quote two sociologists is: "curiously uninterested [in the topic], restricting itself to discussions of
price, scarcity and resource allocation with no specific interest in money as such."1 . David Hume, one of the
founding fathers of economics, referred to money as "the oil which renders the motion of the wheels smooth and
easy" 2 and this attitude persists to this day. Indeed, Paul Samuelson's well-known economics textbook defines
economics as: "the study of how men and society choose, with or without the use of money, [my italics] to employ
scarce productive resources" 3 .
In other words, economists see money acting as a catalyst that eases and speeds up economic interactions that would
have taken place anyway. Naturally, they are interested in the amount of money reaching circulation because that
affects the pace at which the economy can run, consequently determining whether national income rises or falls.
However, very few seem to have ever considered the possibility that the particular type of monetary catalyst in use
might be affecting the outcome of the economic interaction. Or that if other forms of money were used the results
might be quite different. The only economists even to glance in this direction are either Marxists or members of the
Social Credit movement who, because of the nature of their beliefs, have cause to analyse and question the nature of
money more closely than more typical members of their profession. The last big-name economists to concern
themselves with different forms of money and their effects were Maynard Keynes,4 Henry Simons and Irving Fisher
in the 1930s, a period in which the money system was quite clearly dysfunctional.
This Briefing will show that history is littered with examples of monetary systems that operated on quite different
lines to the one we know at present. If these systems had survived, they would have produced cultures most unlike
today's unsustainable, unstable global monoculture. The Briefing will demonstrate that different money systems
affect the world in different ways. Ecology is defined as: "the study of the set of relationships of a particular
organism with its environment."5 Consequently, anyone who is unfazed by regarding money as an organism can
consider this book an ecology of money. Some of the more enlightened economists will probably be happy to do so.
Professor Paul Ormerod, whose books have done much to alert the public to the problems within his profession,
writes that: "conventional economics is mistaken when it views the economy and society as a machine whose
behaviour, no matter how complicated, is ultimately predictable and controllable. On the contrary, human society is
much more like a living organism - a living creature whose behaviour can only be understood by looking at the
complex interactions of the individual parts."6
Certainly, if we wish to live more ecologically, it would make sense to adopt monetary systems that make it easier
for us to do so. Note the plural here. It is not just a case of exchanging a monetary system that emerged as a result of
a series of historical accidents for one with a conscious design. As each money system tends to lead to a particular
set of consequences, we are likely to have to use three or four money systems simultaneously to produce the
combination of characteristics that we want our society to possess.

Questions to ask
Young journalists are taught to ensure they answer six questions in every story they write - Who? What? When?
Where? Why? and How? This Briefing asks these same questions of every type of money discussed: commerciallyproduced money; people-produced money, and government-produced money.
1. Who issued the money? Was it the state, a financial institution, or the users of the money themselves?
2. Why did they do so? Was it as a method of taxation, to make a profit for their shareholders, or simply to provide
the users with a means of exchange?
3. Where was the money created? Was it in the area where it was going to be used? Or was it elsewhere, with the
result that would-be users had to sell goods or services outside their area to collect enough of money to be able to
trade among themselves?
4. What gives the money its value? Is it backed by gold (or another commodity), a promise of some sort, or nothing
at all?
5. How was the money created? Was it by people going into debt to a central organisation? Or did the users simply
agree to allow each other credit and generate it among themselves?
6. When was the money created? Was it done once, several times, or continuously as part of a system of creation
and destruction that caters for people's trading needs?
We'll ask a seventh question too:
7. How well does (or did) it work? Economics textbooks state that money serves three main functions, so we need to
assess a currency's performance in relation to them all. In other words, we should check how well each type of
money serves:
A. A medium of payment or exchange. A good payment medium makes it easy for people to buy and sell to each
other. This means that it must be generally acceptable and have a high value for its weight so that it is easy to
transfer from buyer to seller. It must also be divisible, so it can be used for small transactions as well as large ones.
And while there needs to be enough of it around (to enable everyone who wants to buy or sell to be able to do so
easily), there must be some limit on its availability so people keep their confidence in it and its acceptability is
maintained.
B. A store of value. A currency is a good store of value if someone receiving it is able to use it to purchase the same
amount of goods and services regardless of when they spend it - next month, next year, or when they retire.
C. A unit of account. Is the monetary unit a good one in which to keep financial records and to quote prices?
Normally, people keep their accounts and quote prices in the currency they use most frequently, but in times of
uncertainty, or high inflation, they may use another currency instead. During the German hyperinflation in the early
1920s, for example, shopkeepers quoted their prices and kept their records in US dollars although their customers
were paying in marks.
There are circumstances in which these three roles can come into conflict with each other. When prices are falling
rapidly, for example, the 'store of value' property of money becomes extremely attractive and people begin to hoard
whatever money comes their way in the knowledge that they will be able to buy more with it later on. This naturally
interferes with the ability of the currency to act as an effective means of exchange. Shortages of money develop and
normal trading becomes difficult. In the 1930s, businesspeople even had to invent special currencies - the Swiss
Wirtschaftsring (see Box 3) is a notable example - so that they could settle accounts among themselves. If, on the
other hand, prices are soaring rather than falling, money becomes a poor store of value and holders rush to spend it
as soon as they can. This leads to prices rising more rapidly still. In view of these conflicts, it seems doubtful
whether countries that limit themselves to the use of just one form of money can expect all three functions of money

to be adequately satisfied.
Plan of action
The first three chapters of this Briefing explain how the characteristics of money are determined by the way it is
created and then put into circulation. Chapter One (Commercially-Produced Money) explains that the commercial
banks create almost all the money that we use and put it into circulation by allowing us to borrow it from them. It
goes on to explore the consequences of this rather odd arrangement, among which are the present economic system's
chronic instability and insatiable need for growth.
Chapter Two (People-Produced Money) deals with the amazing monies that people have created to use among
themselves. These include American tobacco warehouse receipts, inscribed clay tablets representing quantities of
Egyptian wheat, and carved stones in the South Pacific too heavy for anyone to carry. Strings of seashells and
today's LETS fall into this category too. The important feature about all these currencies is that they are only created
when the society involved has resources, usually of human labour, which it wants to put to better use.
Chapter Three (Government-Produced Money) shows how, down the centuries, this form of money has often caused
serious inflation as it has been used as a system of tax collection. Henry VIII, for example, added large amounts of
copper to the silver from which he made his coins so that he could make more of them. As a result, prices doubled
and a rebellion broke out. Despite this ominous precedent, we discuss a current proposal that governments should
create any additional money their countries need and spend it into circulation. If this system were introduced in
Britain, it would allow tax cuts of around 16%.
Chapter Four (One Country: Four Currencies) attempts to weave all these threads together by devising a multi-level
multi-currency system which would ease the world's transition to sustainability by improving the way which the
economy allocates scarce resources between the present and future generations. It proposes an international unit-ofaccount currency whose value would be based on the right to emit greenhouse gases. This would be linked, through
a currency exchange market, to national currencies that were only used for trading and were not expected to hold
their value over long periods of time. Special currencies would be launched to fulfil the store-of-value function.
Lastly, local currencies would have a strong role to play. as they would not only be used to overcome local shortages
of national currency but also to raise funds for special purposes.
No consensus
The most important feature of this Briefing is its insistence on three things.
1.

All monies should be created by, or on behalf of, their users and not by institutions wishing to profit from
the activity.

2.

Different types of currency have to be used concurrently if the three key functions of money are to be
adequately performed.

3.

The international unit-of-account currency, to which all other monies would be related, has to represent,
and thus protect, a truly scarce resource. In other words, when we save money, we should also be saving
something vitally important, like the integrity of the natural world.

This Briefing is not, therefore, a judiciously balanced, middle-of-the-road report on some emerging consensus in the
currency-reform area. Such a document would be impossible to write as, apart from the widespread and longstanding agreement that governments rather than banks should put money into circulation, monetary reformers don't
seem to agree about anything. Instead, this Briefing is an attempt to discover why the present economic system
breaks down catastrophically if economic growth fails to occur. It also suggests how the monetary system could be
reformed to remove this defect, which obviously stands in the way of our achieving a sustainable world.
I don't expect everyone to agree with the conclusions I've reached. One friend, whose opinions I value, wrote, "this
looks like being an extremely stimulating and thought-provoking Briefing." I understood this to mean "You've gone

too far," particularly as his letter went on "You may be running a risk if you publish firm proposals, as presented in
this draft, [that you will] find quite soon that you want to change them significantly." In other words, I'd gone much
too far and might want to retreat. I've decided, however, to accept the risk of this happening and not to water things
down. However, all the ideas I discuss are under development and if they change as a result of a debate provoked by
this Briefing, their publication will have been worthwhile.
No reader should feel that they need to understand every paragraph completely before moving on, though I hope that
they will be able to do so. If, when they reach the end of the book, they accept the urgent need for a radical
restructuring of the money-creation system and have some sort of feeling for the general direction the restructuring
should take, that should be quite enough.
I greatly value the comments and suggestions received from those who read a draft of this paper. All of them gave
considerable time and thought to their responses, which helped me to make significant improvements. In particular I
want to thank: Alan Armstrong; James Bruges; David Fleming; Frances Hutchinson; Nadia Johanisova; Brian
Leslie; Bernard Lietaer; Barbara Panvel (and her friends Bill, Andrew and Elizabeth); James Robertson; Emer O
Siochru, and Alex Wilks. I would now welcome comments from other readers.
Richard Douthwaite,
Cloona, Westport, Ireland.
October, 1999.

Chapter One: Commercially-Produced Money
Let's start by asking the first of the questions identified in the Introduction about the type of
money we know best: a typical national currency. Many people will be surprised that the answer
to the first question "Who creates it?" is not "the government", or "the country's central bank",
but "the commercial banks". Yet there is no conspiracy to hide this fact. In his well-known
economics textbook, David Begg states: "Modern banks create money by granting overdraft
facilities in excess of the[ir] cash reserves" 7 . He adds: "Bank-created deposit money [the money
that people can draw from their bank accounts] forms by far the most important component of
the money supply in modern economies."
Dishonest goldsmiths
So how did money creation come to be privatised? This query takes us back to the late Middle
Ages when gold and silver coins were the main form of money. During this period, if anyone
obtained a large amount of coins (more than they felt safe with) then they would deposit them
with the local goldsmith, the only person in the area with a reliable strongroom or safe. The
goldsmith would give a receipt in exchange. The oldest surviving British record of money being
deposited with a goldsmith is dated 1633.8 Initially, depositors called at the goldsmith's to
reclaim their coins whenever they wanted to make a payment, but as time went on some of them
found it more convenient to transfer the goldsmith's receipts instead. Thus, by 1670, receipts
frequently had the words 'or bearer' on them as well as the depositor's name. As coins were
heavy and risky to carry around, the new receipts quickly became the preferred method of
settling bills.
Shortly afterwards, the goldsmiths would have noticed that they had many coins in their vaults
which were never taken out. History doesn't record the name of the first goldsmith who was both
smart and dishonest enough to realise that, as it was unlikely that all his customers would present
receipts and demand their coins at once, he could make money by lending out a proportion of the
coins entrusted to him and charging the borrowers interest on them. Indeed he might not actually
have to part with any of the coins at all because if he gave borrowers receipts with which to
make their payments (instead of cash), it would be rare for those who had received the false
receipts to bring them in and ask for real money. However he had to decide how many such
receipts he could issue without being found out if receipt-bearers did actually want to collect
coins in exchange. If several receipt-bearers came in a short period, and there wasn't enough gold
and silver money in his safe to pay them, he'd be disgraced and forced out of business.
This piece of sharp practice by a long-dead goldsmith laid the foundations of modern fractional
The Ecology of Money by Richard Douthwaite

Chapter One

reserve banking, the system under which banks maintain reserves of coins and notes in their
vaults worth only a fraction of the cash they would have to provide if all their customers came
simultaneously to demand the money they were entitled to withdraw. . The goldsmith had
created purchasing power (in other words, money) by issuing receipts that, in total, involved him
in promising to pay out more gold and silver money than he had in his safe. Modern banks create
money in the same way, by promising to pay out more paper notes and coins than they possess.
How banks create money
Begg explains how modern banks create money in the following way. He assumes that there are
ten banks, each trying to maintain its lending at the point at which the amount of cash held in
reserve in its vaults, or with the central bank, is equal to 10% of the amount that its customers
could draw out from their accounts. The total amount that account-holders could withdraw (in
other words, the bank's liability to its customers), not only consists of their deposits, but also of
any loan and overdraft facilities that they may have been granted but which they have not yet
drawn upon.
If one of the ten banks receives a lodgement of £100 in cash, both the amount of notes and coins
it holds in its safe, and the total of its liabilities to its customers, rise by that amount. However,
the bank's liability-to-cash-reserve ratio is no longer the 10:1 it wants to maintain. It has £90 too
much cash and if it increased its liabilities by lending £900 to its customers, its desired ratio
would be restored. But should it make the £900 loan? What would happen if the person granted
the new overdraft drew all £900 out as cash and spent the money in businesses that deposited
their takings in rival banks? In this case, the bank's liability-to-cash-reserve ratio would be
greater than 10:1 and there would be a risk that the bank might be unable to cash its customers'
cheques if an unusual number of them came at the same time, perhaps just before Christmas
when a lot of cash enters circulation.
The only safe course for the bank to take is to lend out £90 rather than £900. Then, if the entire
amount gets withdrawn as cash and ends up in other banks, its cash reserve ratio will still remain
within the desired limit. In his explanation Begg assumes that the £90 is withdrawn and spent in
such a way that all ten banks have an equal amount (£9) deposited with them. He could have
equally, and more plausibly, assumed that it ended up with the banks in proportion to their size.
No matter, the outcome would have been the same. If each bank now lends out 90% of whatever
deposit it has received, that will create further deposits throughout the banking system. And if
90% of that money is lent out too, through as infinite number of lending rounds, then the banking
system as a whole (rather than the bank which received the initial deposit), will have generated
£900 in loans. This occurs just on the basis of the original reserve surplus of £90 in cash. In other
words, the original £100 cash deposit allows the ten banks to increase their loans to the public
(and hence the money supply), by £1,000.
------------------------------

The Ecology of Money by Richard Douthwaite

Chapter One

BOX 1: How the Bank of England controls the money supply
The explanation of the way banks create money makes it appear that the amount of notes and coins in
circulation, coupled with the reserve ratio the banks set themselves, determine the extent of a country's
money supply. Actually, this is not quite the case. In most countries, the central bank does not attempt to
control the total value of the notes and coins in circulation. In Britain, for example, the Bank of England
(BoE) will sell as many notes and coins to the commercial banks as they wish. It simply debits the
accounts these banks operate with it by the appropriate amount. So the cash base of the British monetary
system is not just the notes and coins that the banks have in their branches, but whatever money they
have in their accounts with the BoE as well.
Another minor difference is that it is not the commercial banks themselves that decide the reserve ratio
they want to follow, but the central bank to which they report. For example, in Britain until 1981, the BoE
specified the total amount of notes and coins a bank must have available at its branches, plus the amount
on deposit with it, in relation to the amount of money the bank had created by granting its customers
overdrafts and other loans. This meant that if at any time the BoE felt that the amount of money in
circulation was too high and was causing inflation, it could force banks to reduce their lending by requiring
them to deposit more funds in their accounts. A reduction in the reserve ratio from 20:1 to 10:1 would
have halved the total of the amount of money that banks could create.
That system still applies but in a less rigid form. Responding to pressure from the commercial banks (who
argued that they would otherwise lose overseas business to foreign banks), the BoE abolished its
minimum reserve ratio in 1981. It now agrees a reserve requirement individually with each bank. This
reflects both the level of competition the bank is experiencing from its foreign rivals, and the lending and
other risks that it is perceived to be running. This change has weakened the BoE's ability to control the
money supply by varying the reserve ratio.
The second way that the BoE can control the money supply is by 'open market operations'. These involve
the BoE in buying, or selling, interest-bearing bonds. If it sells bonds, the purchasers (financial institutions
or members of the public), pay for them by writing out cheques drawn on their commercial bank accounts
in favour of the BoE. Subsequently, the BoE debits the accounts that the commercial banks operate with
it by the relevant amounts. Unless the commercial banks make up these debits in some way, the volume
of lending they are able to make (and thus the amount of money in circulation), has to be reduced by a
figure set by whatever the reserve ratio they had agreed with the central bank. If the ratio were 20:1, their
lending would have to be reduced by twenty times the amount of bonds that the BoE had sold.
If the reserve requirement is increased, or the amount in its account with the BoE falls, a bank could
maintain its lending by raising more capital and depositing this with the central bank. The new capital
could come from selling more shares, or from making a trading profit and paying that to the BoE (rather
than distributing it to shareholders as a dividend). For many years the Irish commercial banks attempted
to justify their huge profits with the argument that they were necessary to enable the banks to lend
enough money to finance a rapid expansion of business activity. Profits made by the UK's twelve banks
and former building societies quoted on the Stock Exchange are high too. In 1998/9 they totalled £22bn,
around £400 for every man, woman and child in the country.
If the BoE wants to increase the amount of money in circulation, it can do so by buying up bonds that it, or
perhaps a local council, had issued previously. In fact, a possible way that Begg's hypothetical customer
obtained the £100 to deposit with their bank was by selling some government stock (perhaps Consuls or
War Bonds that they had inherited). Alternatively, their lodgement could have been a payment from
overseas.
The Ecology of Money by Richard Douthwaite

Chapter One

The third way in which the BoE can control the national money supply is to alter the interest rate at which
it lends funds to banks that fail to keep positive balances in their accounts with it. According to an official
BoE statement,9 this is the main way that the money supply is controlled at present. The technique
involves keeping the banking system short of money and then lending the banks the money they need at
an interest rate that the BoE decides. The BoE statement explains, "If, on a particular day, more funds
move from the private sector [i.e., non-government accounts held in the commercial banks], to the
Government's accounts than vice versa, for example because banks' customers are paying their taxes,
then the banking system will be short of the funds needed [by the commercial] banks to maintain positive
balances on their accounts at the Bank." Alternatively, if the government is spending more than it is
collecting, the BoE can create a shortage by selling bonds itself. The Bank then lends the banks the funds
they need to keep their accounts with it in credit at a rate of interest that sets the rates at which the banks
lend to each other, and to their customers. And that rate of interest, of course, determines how much the
banks' customers borrow, and hence the national money supply.

So the answer to question one, "Who creates money?" is that almost all of it is created by
commercial banks, although, as Box 1 explains, central banks limit the extent to which they are
able to do so. Most people find this answer quite staggering. Even bankers do. Lord Stamp, a
director of the Bank of England at the time, commented in 1937: "The modern banking system
manufactures money out of nothing. The process is perhaps the most astounding piece of sleight
of hand that was ever invented." As the economist J. K. Galbraith remarked:"The process by
which banks create money is so simple the mind is repelled. Where something so important is
involved, a deeper mystery seems only decent."10
Let's move on to answer our other questions:
Question 2) Why do commercial banks create money? To make profits.
Question 3) How do they create money? By granting loans on which interest is paid. This
means that almost all the money in a country exists because someone, somewhere, has gone into
debt and is paying interest on it.
Question 4) When do they create money? Whenever there is a demand for loans at interest
rates above that at which they can borrow from the central bank. .
Question 5) What gives the money its value? This hasn't been mentioned yet, but the answer is
purely its acceptability to other people. The value is not guaranteed. No one is standing by
prepared to supply a fixed amount of something tangible in exchange (as they were in the days
when paper currency could be exchanged, on demand, for a definite weight of gold). The value
of modern money is constantly eroded by inflation. It is backed by nothing at all.
Question 6) Where is the money created? In the banks' head offices wherever those may be.
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For although decisions on individual loans are made in hundreds of bank branches around the
country (and the book-keeping side of money creation is done there too), each branch works
within limits and to policies set by its head office. The profits generated by the lending also flow
to the head office. Places using bank-created money for trading locally can only obtain money if
they are prepared to borrow it on the same terms as other bank customers, or if they can sell
goods and services to the outside world to earn money that people in other communities have
borrowed. The fact that there is a branch bank in the community means nothing.
A little more discussion is needed to answer the intriguing problems posed by Question 7,
namely "How well does this sort of money fulfil the three functions of money?" and "What are
the consequences of allowing commercial companies to create it in this rather odd way?" The
first thing to note is that as bank-created money only exists because people have borrowed it, it
will cease to exist if they pay their loans off. This is because when borrowers assemble the funds
they need to repay their loans and lodge them with their banks, those funds cease to be available
to other people to use for trading unless the bank lends them out again. The money supply
therefore contracts. Consequently, people need to take out new loans to maintain the amount of
money in circulation.
Circumstances could easily arise in which they would not be prepared to do so, however, and the
economy could plunge into a depression. For example, suppose a crisis overseas caused exports
to fall sharply. As redundancies at home increased and people lost their confidence about their
future prospects, they might be unwilling to take out new loans. However, if they continued to
pay the interest and capital payments on their existing debts, thereby reducing the total sum they
owed, then the amount of money in circulation in the country would fall. Unless 'the velocity of
circulation' of money increased (in other words, money moved from hand-to-hand fast enough to
compensate for the fact that there was less of it about), then the volume of buying and selling
going on in the country would also fall. Indeed, this would be bound to happen at some point
when the rise in the velocity of circulation of the money became unable to counteract the
diminishing supply. There is nothing remotely contentious about this. After all, it is the reason
why central banks put up the interest rates at which they lend to commercial banks at the first
sign of inflationary pressure. By doing so borrowing is cut, the money supply is reduced (or at
least its growth is moderated), and excessive demand is reduced.
Moreover, even if the velocity of circulation did increase to make up for the fall in the amount of
money, the ability of businesses to make profits would be reduced. Profits are recorded by
businesses that have more assets at the end of a year than at the beginning. These assets can
either be goods (finished stock, work-in-progress, raw materials, capital equipment) or cash and
accounts receivable. If the amount of money that businesses have in their bank accounts and on
their premises falls because the money supply has been reduced, the value of their other assets
has to increase by more than enough to offset these falls if profits are to be made. But if firms
place tight limits on the amount of raw materials and finished goods they carry in stock, and on
customer credit (usual measures taken when their bank accounts are low) they will find it
impossible to make profits. Many businesses will start to run at a loss. As a result, few will carry
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out investment projects the following year. Instead, rather than expanding, firms are likely to
attempt to restore their profits by reducing staff. Job losses will become widespread, not just in
the companies that would have built and equipped the new developments had the investments
gone ahead, but also in the firms that would have invested themselves.
Against this background, the public's aversion to further borrowing will grow especially as, with
reduced earnings, many people will be having problems servicing their existing loans. "Neither a
borrower nor lender be" will become a popular maxim again. Even those with money to spend
won't rush to do so in view of the uncertainty of the times and the fact that because firms in
distress will be cutting their prices, anyone with money will be able to purchase whatever they
need more cheaply later on. This reluctance to spend will slow the circulation of money,
effectively reducing the money stock even more. A severe depression will develop, exactly as
happened in the 1930s and for the very same reasons.
Fundamental problems
Creating money on the basis of debt therefore makes the economic system fundamentally
unstable. The system is always balanced on a knife-edge. If bank customers borrow too little, the
economy moves into recession and, unless corrective action is taken, the positive feedbacks just
discussed (such as people's natural reluctance to borrow and spend) will kick in and produce a
catastrophic depression. Indeed, the main reason that a serious depression has not developed in
Western Europe and North America since the 1930s is that semi-automatic corrective
mechanisms have been unwittingly incorporated into the system. One of these, unemployment
pay and the social welfare system generally, has been a particularly important means of
preventing crashes. It has ensured that, whenever the rate of joblessness has increased, larger
amounts of money have automatically been transferred to the people who spent all of it
immediately. This is a very effective way of compensating for the loss of spending power.
Another corrective mechanism is that whenever the economy has turned down, many people and
firms have been forced to increase their bank debts involuntarily, simply to survive. This has
increased the money supply to everyone else. However, if an economic shock was sufficiently
severe, these twin buffering mechanisms would be overwhelmed and a serious depression would
develop.
Another fundamental problem with the debt method of creating money is that, because interest
has to be paid on almost all of it, the economy must grow continuously if it is not to collapse.
Perhaps the best way of explaining this is to use the question asked when gold was the main
currency. Since the gold being borrowed did not increase itself and very little was being mined,
where was the extra amount of gold to come from to pay the interest when both principal and
interest had to be paid at the end of the year? Obviously, as borrowers could only obtain the extra
gold they needed by bringing about situations in which others had less, lending money at interest
necessarily meant that borrowers either had less gold themselves after paying interest, or that
they had impoverished someone else. As either outcome was socially undesirable, both the
Roman Catholic Church and Islam condemned usury - all forms of money lending at interest no
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matter how low the interest rate - as immoral.
Just because we now use paper currencies doesn't mean that the problem of "where is the interest
to come from?" has disappeared. Borrowers can only obtain enough money to pay their interest
bills without reducing the amount of money in circulation if they, or other borrowers, borrow an
adequate amount more. As a result, under the current money creation system, the amount of
money in circulation has to rise, year after year, by a sum at least equivalent to the amount being
removed from circulation by the banks as a result of interest payments. The amount removed is
equal to the profits left to the banks after they have paid dividends to their shareholders in the
country concerned, invested in new equipment and premises and met all their wages, salaries and
other operating costs there. These profits will be held in accounts in the banks' own names and
unless they are put back into circulation (by being spent or lent), the amount of money in
circulation will fall. As a result, the business sector will show a loss and cut back its investment
and borrowing, thus pushing the whole economic system into decline. The only thing to prevent
this from happening would be that, by chance, the country's foreign earnings or capital inflow
rose by enough to compensate for the interest lost.
The fact that the amount of money in circulation usually has to increase each year to enable
interest to be paid means that the total value of sales in the economy has to go up too if the ratio
of the money supply to the volume of trading is to stay constant. The required increase in sales
value can come about in either, or both, of two ways: inflation and expansion. If there is no
increase in output during the year, the increased amount of money in circulation could simply
push up prices, or allow firms to increase them. This inflation would provide businesses with
enough additional income to pay their increased interest bills. The alternative is that the output of
the economy grows by enough to require the monetary increase. This is the expansion. Of course
the most likely outcome is a combination of inflation and expansion to restore the balance
between the value of trading and the value of money.
This analysis means that, due to the way money is put into circulation, we have an economic
system that needs to grow or inflate constantly. This is a major cause of our system's continuous
and insatiable need for economic growth, a need that must be satisfied regardless of whether the
growth is proving beneficial. If ever growth fails to materialise and inflation does not occur, the
money supply will contract and the economy will move into recession. Politicians naturally do
not want inflations and recessions occurring during their periods in office so they work very
closely with the business community to ensure that growth takes place. This is despite the
damage that continual expansion is doing both to human society and the natural world.
The impossibility of perpetual growth
Continuous economic growth is impossible in a finite world. True, some people believe that
growth can be made environmentally harmless ('angelized' to use Herman Daly's term) by being
stripped of its energy and natural resource content, so that it is capable of being continued
indefinitely. But this is a pipe dream. The energy and resource content of many activities can
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certainly be reduced so that we can increase them without increasing our environmental impact
but that impact cannot be reduced to nothing. Sooner or later, angelizing efforts will reach a
point at which the amount of energy and other resources saved by further improvements in
technology have become minimal. This will make further significant increases in the volume of
production impossible without causing additional environmental damage.
So could growth continue endlessly if it was the value of production that increased, rather than
its physical volume? Technological optimists suggest that people might be prepared to pay more
for goods and services of superior design or performance but the same resource content. But
even moving everything up-market has its limits. After a time consumers would be unhappy
paying extra for increasingly minor improvements.
No part of the economy has been angelized already, not even parts of the service sector. Indeed,
once the inputs required (vehicles, buildings, copying machines) are taken into account, this
sector might not be much less environmentally harmful than many industrial activities. "That
most services require a substantial physical base is evident from casual observation of a
university, a hospital, an insurance company, a barber shop, or even a symphony orchestra,"
Daly says.11 In any case, who would want angelized growth if it was not required to keep the
economic system from breaking down? It would certainly do nothing for the poor, as Daly points
out: "If the ... expansion is really going to be for the sake of the poor, then it will have to consist
of things needed by the poor - food, clothing, shelter - not information services. Basic goods
have an irreducible physical dimension." 12
The fact is that, if we want to build a sustainable economic system, - one that has the potential to
continue unchanged for hundreds of years, without consuming the social and environmental
resources it needs to operate - we have to give high priority to scrapping a money supply system
that collapses if it is denied continuous expansion and not permitted to inflate. Sustainability
requires a money supply system that can run satisfactorily if growth stops. Consequently, we
need to add an eighth question to our list: "Is this money supply system compatible with the
achievement of sustainability?"
We can now sum up the performance of the present dominant form of money by answering the
last two questions:
Question 7) How well does bank-created money work?
A. As a means of exchange? Since the end of the First World War, it has been extremely rare to
have long periods in which the supply of money has been just right for the volume of trading.
Either too much money got into circulation and inflation threatened, or too little, resulting in
recessions or even a depression. Governments and central banks have devoted a great deal of
effort to trimming the monetary controls and, because of the long response times before the
results of their adjustments appeared, they were very likely to over-correct. A money supply
system should be fundamentally stable rather than fundamentally unstable as this one is.
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Money supply increasing faster than incomes

Britain's M4, the supply of money created by commercial banks plus the amount of notes and
coins already in circulation, has grown by twice as much as the country's national income since
the early 1980s. The only part of its money supply on which no interest is paid, the notes and
coins, has fallen from 7.4% to 3.6% of the total supply in the same period.
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B. As a store of value? Since 1918, most of the attempts to control the money supply have been
intended to enable the monetary unit to serve as a reasonable store of value by preventing, or
rolling back, inflation. These efforts were not notably successful and resulted in frequent large
fluctuations in the value of one national currency in relation to another, within the space of a few
weeks.
Fluctuations of the Dollar against the Pound

A good store of value?

The exchange rate of the dollar in terms of sterling is now so British consumer prices have gone up by over 600% since
unstable that it is of little use when planning for the future. 1974.

Safe for One's Savings?

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For most of the 42-year period between 1935 and 1977, anyone hoping that investing in shares would enable their
savings to keep pace with inflation was likely to be disappointed.

The record is poor even in terms of what a currency unit could buy within its national borders.
The best that money-holders have come to expect within the past decade has been a loss of
purchasing power of 3-4% a year. The reason for this gentle, but appreciable, decline is that
monetary functions A and B conflict. Thus, if a central bank ever ensures that the store of value
function is maintained perfectly, too little money gets into circulation to provide easy trading
conditions. This causes profits to decline, investment to fall and the rate of unemployment to
rise. Monetary supply management is therefore reduced to securing the least-bad compromise
between two incompatible objectives.

C. As a unit of account? The record here is poor in two respects. One is that, because inflation
has had to be allowed to take place continually (to enable there to be adequate supplies of the
means of exchange), it is difficult to make meaningful comparisons between financial results
several years apart. The usual method is to convert them all to a common unit (1990 pounds, for
example). These conversions are not always simple to make because the prices of various
components of output, or cost, will almost certainly have changed by different percentage
amounts. Even comparing one year's results with the next can be misleading. As a result, retail
businesses' annual reports frequently correct a year's sales figures for price changes before
comparing them with those of the previous year.
A more fundamental, and serious, problem with the use of modern money as a unit of account is
that, as its value has no fixed, guaranteed relationship to anything tangible, it can lead to a gross
misuse of resources. Cost-benefit analysis, a technique widely used to compare alternative ways
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of achieving the same objective over a period of time, shows this well. Suppose the objective is
to meet an increasing demand for electricity. For instance, in Finland, two alternatives for
meeting an increased demand for electricity were being compared in 1999. The first was to build
another nuclear power plant. The second was to employ people to turn the waste wood left in the
forest after timber extraction into wood chips to be burnt in combined heat and power plants.
The costs and benefits of these alternative solutions naturally occur at different times in the
future. For example, the nuclear plant would require very heavy spending in the ten years it
would take to build. For 30 years after that, however, the operating costs would be very low and
the benefits, in terms of the power produced, high. But after closure, the benefits would stop
while the costs of dismantling would continue for over a hundred years and the costs of safe
waste storage for centuries. The wood waste alternative would involve less capital investment
and give a more rapid start to the flow of benefits but because of the wages of the workers
involved, it would have much higher annual operating costs for as long as power was produced.
Analysts attempt to compare such projects by calculating for each cost and benefit the sum of
money which, if invested today, would grow to be equivalent to the estimated amount of the cost
or benefit in the year in which it occurs. These sums are known as the 'present values' of the
benefits or costs. Analysts add up all the present values of the costs of a project and deduct them
from the total of the present values of all the benefits. The project that has the greatest surplus of
benefits over costs is the one they recommend for adoption.
The interest rate at which the money invested today is assumed to be able to grow is obviously
crucial to the outcome of these calculations. Many firms use a rate of 10% which means that a
benefit of £10 million in 25 years' time has a present value of only £1 million today while£10
million in year fifty is worth only £100,000. In other words, at such an interest rate, the costs of
dismantling the nuclear station and storing its waste indefinitely have almost no impact on the
result of the calculation. So projects that deliver their benefits soon and their costs far into the
future always win. The mathematician, Colin Clark, was able to show this in a famous article.13
He worked out that it was economically preferable to kill every blue whale left in the ocean as
fast as possible rather than to wait until the population of the species had recovered to the point
at which it could sustain an annual catch. With the nuclear power example, it is even conceivable
that dismantling the station and disposing of its waste might consume more energy than the plant
gave out during its operating life, but that a cost-benefit analysis wouldn't reveal this.
That's why we need a money that acts as a proper unit of account. Present value calculations are
only possible because our money means nothing. If, instead of pounds sterling, the unit of
account for long-period calculations represented kilowatt-hours of electricity or even blue
whales, people doing cost-benefit analyses would not be able to blithely reduce the value of costs
and benefits arising years in the future in the cavalier way they do. To be a satisfactory unit of
account, a money has therefore to represent something of real and lasting value. Its value cannot
be set, as is modern money's, on an infinitely compressible scale. The values that a good unit-ofaccount currency might represent are discussed in Chapter 4.
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Question 8: Is the money supply system compatible with sustainability? No, because it
requires the value of production to rise constantly if the ratio of debt to output is not to build up
and create loan-servicing difficulties that might possibly tip the economy into depression. Only
economic growth can maintain the debt-to-output ratio on a permanent basis, while
simultaneously allowing investment to continue, and thus avoid the crisis that would follow if
investment stopped. However, as we discussed, continuous growth is incompatible with a
sustainable world.
A second reason for regarding the current money supply system as a barrier to sustainability is
that, as it is an inadequate unit of account, it is difficult, if not impossible, for the economic
system to allocate resources properly between present and future uses.
------------------------------BOX 2: Why does our present money system lead to a long-term misuse of resources?
The prices set by the market at any given moment have nothing to do with long-run values because of the
type of money we use at present. As a result, they are entirely inadequate for determining the
development path that we should select. The problem arises because the market is a human construct
that works according to rules people have devised for it. Currently, those rules prevent millions of people
without money from affecting the price levels in the market. The needs of the unborn cannot be reflected
in market prices either. Consequently, the prices that emerge from the market merely reflect the
immediate wants of that fraction of the world's present population fortunate enough to have the money to
be able to express them.
The ideal use of resources over the years can only be assessed in terms of one's objectives. At present,
the system's objective is simply to minimise costs from moment to moment in terms of market prices that
are largely determined largely by the current pattern of income distribution. This inevitably leads to a
gross misallocation of resources in favour of the present. A key step toward sustainability is therefore to
establish a unit-of-account currency that represents absolute amounts of something important to the
whole world's population, present and future, rather than current transitory price levels determined by a
temporary minority.

---------------------------------The problems with the present system of money creation can be summarised as follows:
1. The system creates a highly unstable economic climate.
2. The system requires continual economic growth if it is not to collapse. It is therefore
incompatible with sustainability.
3. The system is pre-disposed to competition rather than co-operation as, with a limited
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amount of money in circulation, people and firms have to compete for it in order to
survive.
4. The system's money is created outside the communities in which it is used. So money has
either to be earned by the export of goods and services from those communities, or
borrowed by them. This undermines local self-reliance.
5. The money supplied by the system is not created by the users as, and when, it is needed.
Instead, it is created for them by profit-seeking organisations whenever the central bank
thinks that inflation is under control. Shortages that prevent people meeting their needs
can therefore arise.
6. The money created by the commercial banks does not represent anything real. Thus, an
economic system based on its use is an ineffective way of allocating resources in short
supply between current uses and those likely to arise in the future. A money system
should be developed that represents the world's most critical scarce resource at the
present time. People's natural, and constant, efforts to save money would then
automatically involve them in saving the resource.

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Chapter Two: People-Produced Money
If an economic system is to move towards sustainability, and to maintain it once it has been
achieved, it needs to establish what is the scarce resource whose use it seeks to minimise. Then
systems and technologies can be adjusted to bring the least-use solution about. Unfortunately, the
present economic system regards money as the scarce resource when, as we have seen, it can be
created at will by a few account entries. The idea that money is the scarce resource is a relic from
the days when money consisted of gold and silver coins. At that time, the world was essentially
on an energy standard because the amount of gold produced in a year was determined by the cost
of the energy it took to extract it. If energy (perhaps in the form of slave labour rather than fossil
fuel) was cheap and abundant, gold mining would prove profitable, and a lot of gold would go
into circulation enabling the economy to expand. If the increased level of activity then drove
energy prices up, the flow of gold would decline, slowing the rate at which the economy grew.
Gold was often a people-produced form of money, rather than a governmental or commercially
generated one. Theoretically, it was possible for anyone to pan for it in a stream or sort through a
bed of gravel containing nuggets, thus converting their time and energy plus some bought-in
supplies, into something exchangeable for goods and services all over the world. Gold rushes
were all about the conversion of human energy into money. They were, and are (as the thousands
of ordinary people mining in the Amazon basin show), a democratic form of money creation.
Obviously if supplies of food, clothing and shelter were precarious, people would never devote
their energies to finding something that they could neither eat, nor live in, and which would not
keep them warm. In other words, gold supplies swelled whenever a culture was producing a
surplus. Once there was more gold about, the use of the precious metal as money made more
trading possible and thus catalysed the conversion of whatever surpluses arose in future years
into buildings, clothes and other needs.
There are plenty of historical accounts of this type of conversion. Before transport systems
improved and money became widely available, rural people in many parts of the world had a
potential surplus in the form of spare time. They could have easily increased their agricultural,
construction or craft output, but didn't do so as there wasn't a market for the extra produce.
Instead, they used some of their surplus by helping their neighbours through mutual-aid systems
that they used like banks, confident that they would be repaid. "The giver, by giving, guaranteed
that he would be the receiver in the future" Hugh Brodie writes in his study of Irish rural life.14
He continues: "In that way, the giving of surplus to friends and neighbours is not very far from
the giving of surplus to the cashier in a bank. The quality of integrated society, like the legal
rules of banking, guaranteed that the gift would not be forgotten and a future claim ignored." But
when money became available and the surplus could be converted to it, people saved actual cash
for a rainy day rather than storing up favours with their neighbours.
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Creating currencies from unused resources
Rather than converting a surplus into gold to use as money, the inhabitants of a group of islands
in the Pacific Ocean converted theirs into carved stones to use as currency. According to Glyn
Davies' mammoth study, The History of Money :15
The peculiar stone currency of Yap, a cluster of ten small islands in the Caroline group of the central Pacific, was
still used as money as recently as the mid-1960s. The stones known as 'fei' were quarried from Palau, some 260
miles away, or even the more distant Guam, and were shaped into discs varying from saucer sized to veritable
millstones, the larger specimens having holes in the centre through which poles could be pushed to help transport
them. Despite centuries of at first sporadic, and later more permanent, trade contacts with the Portuguese, Spanish,
German, British, Japanese and Americans, the stone currency retained and even increased its value, particularly as a
store of wealth.

Davies adds that shell necklaces, individual pearl shells, mats and ginger supplemented the stone
currency but quotes from a book published in 1952 when fei were still in use, to the effect that
the stones were "the be-all and end-all of the Yap islander. They are not only money, they are
badges of rank and prestige, and they also have religious and ceremonial significance."16
It is often said that gold makes a good currency because of its 'intrinsic value' but this is
nonsense. Gold is no more or less intrinsically valuable than hundreds of other commodities.
True, it is an attractive metal that doesn't tarnish, but satisfactory substitutes can be found for
most of its uses. Fundamentally, it has no greater intrinsic value than did the Yap islanders'
stones or any of the other many things that people have used as a base for their money systems.
These have included salt, silk, dried fish, feathers, stones, cowrie shells, beads, cigarettes, cognac
and whisky, and livestock. - The word "pecuniary" comes from "pecunia," the Latin for "cow"
and "fee" is a corruption of the German word "Vieh," meaning cattle. In 1715, the government of
North Carolina declared seventeen commodities, including maize and wheat, to be legal tender.
In ancient Egypt, grain was the monetary unit. The farmers would deposit their crops in
government-run warehouses in return for receipts showing the amount, quality and date. These
stores suited the farmers because they protected the grain against theft, fire and flood and also
saved them the cost of providing their own storage facilities (or selling their crop immediately
after harvest when prices were low). The stores also enabled them to pay their rent and to buy
goods simply by writing what was effectively a cheque, to transfer grain from their account in
the store to that of someone else. People using another grain store in another part of the country
could be paid with these cheques. The various stores would balance out their claims against each
other just as banks do today. This meant that the grain would only be moved if there was a net
flow of cheques from one area to another and if it was actually needed there for consumption. In
other words, the weight of corn was merely a basis for accounting and the corn itself was not a
standard barter good.
Tobacco stores in the New England states operated in much the same manner and enabled the
crop to serve as legal tender in Virginia and Maryland for almost two hundred years. As
Galbraith points out 17 this was longer than the gold standard managed to survive. An important
feature of both grain and tobacco as currencies was that whoever made a deposit was not only
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Chapter Two

charged for keeping it in the warehouse but knew that it would deteriorate there. Consequently
people used the commodity themselves, or spent the receipts, as soon as reasonably possible. As
a result, money was not hoarded but circulated well.
Shell money performed well
The earliest account of the use of wampum (the shells of a clam, Venus Mercenaria) as money in
North America dates from 1535. Both native Americans and the European settlers used the shells
and they were made legal tender for payments of up to a shilling in Massachusetts in 1637. This
limit was raised to £2 in 1643, a substantial sum at the time as it was equivalent to three
week's wages for a skilled man. Although wampum ceased to be legal tender in the New England
states in 1661, the last factory drilling the shells and putting them on strings for use as money
closed as late as 1860.
In the early days, several coastal
tribes such as the Narragansetts
specialised in making up the strings
and exchanging them for goods with
settlers and inland tribes who wished
to have the convenience of a means
of exchange.
The essential feature of all these
commodity currencies is that they
were open to anyone with time and
access to land or seashore to produce.
This didn't mean, however, that they
could be produced without cost and
that the money supply was therefore
unlimited. If that had been the case,
the monetary unit would have had no
value. The currencies worked because
people would only spend their time
making tokens to serve as money if
that was the best way of satisfying
their needs. In other words, whenever
they could get their needs (food,
clothing, shelter) more easily by
growing them or collecting them
themselves instead of growing tobacco, or collecting wampum shells to trade, they would
obviously do so. As a result, money was only produced and spent into circulation when its
exchange rate with real goods was favourable, a feature that generally guaranteed that it would
maintain its value. There were exceptions to this, of course. The value of gold in terms of the
goods it would buy fell in Europe when the Spanish conquistadors brought in plundered supplies
from South America. Similarly, the exchange rate of wampum against commodities such as
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Chapter Two

beaver pelts dropped sharply when the European settlers began using steel drills to bore the
stringing holes. This was because they could produce them much faster (and therefore with a
reduced opportunity cost), than the Indians using stone-tipped tools.

Box 3: Businesses organise their own currency to overcome money drought
One way that businesses can continue to make profits in periods in which the supply of national currency
is inadequate is to allow each other credit. As discussed in Chapter One, the credit-control measures that
most firms use to protect themselves whenever trading becomes difficult actually make matters worse.
While it would obviously be a mistake for firms to have no credit control at all, what businesses need
when national currency becomes scarce is a properly regulated system of mutual credit so that they can
use much less normal money when they trade amongst themselves. The Swiss Wirtschaftsring
(Economic Circle) co-operative (WIR) is such a system. It was launched in 1934 by a group of
businesspeople to overcome the currency shortages of the time and has since grown into a massive
organisation. In 1993, its 60,000 account holders turned over 2,521 million Swiss francs (£1,200
million).
The founders' idea was simply that traders who knew and trusted each other would extend credit for
purchases within their group, cutting down their need to borrow from banks. According to report on the
system in 1971: "they thought they could transact business among themselves with a system of chits
similar to IOUs that would cover at least part of the price of any transaction, the balance being settled in
the conventional way. (However) it was soon found that in order to bring about wider acceptance of these
chits, and also to comply with existing banking laws and avoid financial losses, collateral was essential."
This insistence on collateral might partially explain why WIR has survived and similar systems established
at the same time in other countries have disappeared without trace. However, an official history of WIR 18
produced for its 50th anniversary suggests that WIR is the sole survivor because the other systems did
not realise the significance of what they were doing and closed down after the financial crisis was past.
But opposition from vested interests played a part in some cases too. The founders visited circles in
Norway and Denmark before starting WIR and when they returned to Denmark for a second visit, they
found that the government had closed the circle there after pressure from the banks.
Essentially, WIR is an independent currency system for small and medium-sized businesses. A company
wishing to join contacts a WIR office and sets up a meeting at which the firm's credit requirements and
the collateral it is able to offer are discussed. As first mortgages in Switzerland do not usually exceed
60% of the purchase price of a property, the collateral most frequently offered is a second mortgage on a
house or business premises (in recent years, over 80% of WIR's loans have been secured this way). A
loan application is then sent to the WIR credit approval committee that checks the security and obtains a
report on the applicant from a credit-checking agency. If the report and the security are in order, the new
participant is given a WIR chequebook, a plastic charge card and a large catalogue listing other
participants with whom the loan can be spent.
Although the sums in WIR accounts are denominated in Swiss francs they cannot be turned into normal
currency, paid into ordinary banks or given to non-members. Even when someone wishes to leave the
organisation, they cannot exchange the system‚s units (Wir) for national currency. As a result, the
purchasing power created when the credit committee authorises a loan remains entirely within the 'ring',
generating increased business for all participants. Secured loans of this type are cheap. In 1994, Wir
mortgages carried a service charge of 1.75% and relatively long repayment terms could be negotiated;
the charge for ordinary current-account loans was 2.5%.
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In order to maintain the Wir's value, the credit committee restricts the total value of the loans to one-third
of the system's annual turnover. All repayments are made in Wir (earned by selling goods and services to
other members). Only service charges have to be paid in Swiss francs, since the co-op itself cannot
function without some national currency. Its other charges, the cost of the WIR magazine and catalogue
and a levy of 0.6% of the value of each cheque lodged to a participant's account, are all in Wir.
Almost every conceivable product and service was listed in WIR's summer 1994 catalogue, including 167
lawyers, 16 undertakers, 1,853 architects and 18 chimney sweeps. Not all suppliers take 100% payment
in Wir, but with several sources listed for most products and services, it is generally possible to find at
least one who will (especially at slack times of year or during sales). Prices and payment terms for Wir
transactions are just the same as they would be for cash. And since the beginning of 1995, it has been
possible to make combined payments of cash and Wir using a single plastic charge card.
The percentage of the Swiss franc price of the goods and services that participants will supply for Wir is
discussed with each member when they join. The service charges mentioned so far only apply to 'official'
members who have agreed to guarantee to accept at least 30% of the payment in the system's unit.
Members unable to give such an undertaking are called 'unofficial' and pay higher charges. Income
earned in Wir is, of course, taxable, and has to be paid in Swiss francs.
Overall, the Wir avoids the two main defects of national currencies: it should never be in short supply, and
because no interest is charged for its use it does not create the growth compulsion. In addition, it does
not have to be earned or borrowed from outsiders before it can be used. Its main drawback seems to be
due to the way the WIR is run, rather than any design defect in the currency. The WIR is often regarded
as a way of financing the working capital requirements of businesses, rather than purely of facilitating
trade between them. As a result, too many long-term loans are issued and some members earn so many
units that they become reluctant to take any more. The availability of mortgages has obviously
compounded this problem.

---------------------------

A non- commodity currency
Although the value of their units is not based on any commodity, Local Exchange and Trading
Systems (LETS) are a modern equivalent of wampum and the other types of popularly-produced
money because they enable people to create spending units for themselves. They are generally
set up by a group of people living in the same area who have time on their hands and too little
national currency to meet their requirements. The first system was set up in the early 1980s in
British Columbia by Michael Linton as a response to the unemployment caused when a local air
base closed down.
Between 1-2,000 communities throughout the world have LETS systems and many variants on
the original model have been developed. The common feature of every LETS, however, is that
members trade with each other using a monetary unit of their own devising (often called odd
names like Hags, Bats, Bobbins and Reeks) and that records are kept of all transactions. This
makes it possible to spot members who are taking more value out of the system than they are
putting in.
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In a LETS system, members create spending power by going into debt, just as with WIR (see
Box 3). When a system starts up, all the participants have a zero balance in their accounts. The
first trade between members means that the balance in the account of the member who made the
first payment becomes negative, while the account run by the member who supplied goods or
services in exchange for that payment becomes positive by the same amount. The member with
the positive balance can then spend these units with other members, while the member with a
negative balance will have to supply goods or services to someone else in the system to return
their account to zero, or to get into the positive zone.
In most cases, payments between members of a LETS system are made using cheques that are
then sent to the system's book-keeper who credits and debits accounts. In some systems,
however, payment information is simply telephoned to the book-keeper or their answering
machine. In a few systems, fixed-value tokens (i.e. scrip) circulate between members to cut out
the book-keeping that would be entailed by a lot of small cheque transactions. Just as happens
with national currency, members get these tokens from their system's bank and their accounts are
debited with the amount involved. If members earn tokens they don't want, they can lodge them
to their accounts for credit. The use of scrip is very common among LETS systems in Argentina.
Perhaps the best system for keeping LETS accounts evolved in Germany in 1997. In exchange
for their annual membership fee, members receive a record book. When they go to work for
another member, or sell them something, the other member writes the details and the amount of
the transaction in their book, and signs it while they write in the other member's. This means that
the balance of each member's account is constantly up dated. The record books are exchanged for
new ones at the end of each year and they are checked by the managing committee to ensure that
no fraud has occurred.
LETS systems' major weakness
Besides eliminating centralised account keeping, the German-style record books have the
potential to ameliorate a major weakness in most LETS systems. Linton's original philosophy
was that it should be left to each member to decide how much indebtedness they could take on. If
other members, knowing the state of the member's account, then sanctioned the decision to take
on more dent by selling him or her more of their goods and services, that was all right.
This has not worked well, however. Indeed, a major factor in the collapse of Linton's pioneering
system after a few year's trading was the high level of indebtedness of Linton's personal account.
Nevertheless, many systems have continued to adopt this approach. True, some do impose credit
limits but none seems to have found a satisfactory way of ensuring that members do not stay
permanently in deficit. As a result, members whose accounts are in credit frequently find their
units are difficult to spend because indebted members see little reason, apart from mild group
pressure, to go out of their way to earn them. The members in credit consequently become
disenchanted with the system and leave. With the German-type record books, however, it would
be a simple matter to prohibit members from selling to people whose account-books showed
them to be overdrawn beyond an agreed figure. Requiring overdrawn members to get back into
credit within a certain time would still be a problem though.
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Because of their reliance on these lax informal controls, very few LETS systems have been able
to recruit and retain more than 200 active members. This has meant that their economic effects
have been small but they nevertheless play a very valuable social network-building role for
people on the social and economic fringes of their communities. Bigger, more economically
effective systems would require legally enforceable agreements backed by collateral, similar to
those adopted by WIR.
By allowing people to trade using monetary units they have generated themselves, LETS systems
meet the need that wampum strings, or wheat deposit certificates, met in earlier times. But there
are important differences. For example, wampum shells allowed their holders to trade beyond
their communities, while LETS systems are used to enable people to trade within them. In
addition, LETS systems, like the WIR, have no need to establish the value of their unit by
requiring people to do a certain amount of work to produce them. They normally use the value of
their national currency unit as their measuring stick, although some systems have experimented
with units based on time (for instance, Time Dollars, a community currency system in which
people provide each other with care in which everyone's hourly rate is the same ). ). This saves
the effort that has to be wasted on producing, (in the case of gold, Yap stones and wampum),
commodities that would be unnecessary but for their monetary use. The downside, however, is
the fact that indebtedness levels need to be policed, as we have just discussed.
So let's answer our eight questions about popularly produced currencies:
Question 1) Who creates the money? - With the commodity-based currencies, anyone with time
and access to resources. With LETS and WIR, it is the members.
Question 2) Why do they create money? - To facilitate their own trading.
Question 3) How do they create money? - With the commodity-based currencies, by producing
tokens which embody a fixed amount of labour and resources. With LETS and WIR, by granting
each other the right to borrow up to a certain amount. No interest is charged on these borrowings.
Only a service charge to cover the costs of running the system is paid.
Question 4) When do they create money? With the commodity-based currencies, whenever it is
more advantageous to produce more currency than to produce other goods and services. With
LETS, whenever a member wishes to trade and other members, or the committee, allows them to
create the units to do so. With WIR, whenever the management thinks that the demand for loans
can be satisfied without putting too much extra spending power into the system. If the latter
happens then members with positive balances in their accounts will be reluctant to accept more
Wir as they cannot find attractive ways of spending it.
Question 5) What gives the money its value? With gold, Yap stones and wampum, purely their
acceptability to others. Their exchange value for other commodities or labour is not guaranteed.
Wheat, tobacco and other consumable commodity-based currencies are backed by the amount of
the commodity the receipt represents. Their exchange value for the purchase of other
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commodities will fluctuate quite widely from year to year, according to relative growing and
harvest conditions. With LETS and WIR, the value of a unit is determined by the readiness of
other members of the system to provide their goods and services in exchange for it at its nominal
value in the national currency. The range of goods and services available in exchange is also a
consideration.
Question 6) Where is the money created? Within the group of people or the territory using it. It
does not have to be earned or borrowed from outside first.
Question 7) How well does the money work?
A. As a means of exchange? Gold does not work well as a means of exchange unless it is turned
into coins, something that is discussed in the next chapter. Moreover, the supply of coins has
often been inadequate for the amount of trade desired, forcing people to barter, or use a range of
gold-substitutes. Yap stones seem to have played the role of large denomination notes, only
useful for major purchases, which is why mats, ginger and shells were required as small change.
Wampum strings were designed to make counting easy and obviously performed well since they
survived in use in competition with other currencies for hundreds of years. The Egyptian grain
and the New England tobacco receipts also worked well and sophisticated money transfer
systems developed for them. It would, however, be a mistake to establish commodity-based
currencies in economies that were not dominated by the production of that commodity and that
were consequently not prepared to allow all price relationships to vary according to its level of
production. LETS units perform poorly as a means of exchange because of the lack of pressure
on those in debt to earn them. Their use is also restricted to a small group. Wir are better than
LETS but still work significantly less well than the Swiss franc, as they are only acceptable
among a particular group. As a result, users frequently want to exchange their Wir for Swiss
francs and, breaking their system's rules, sell them at a discount to do so.

B. As a unit of account? Only the Wir scores highly here. It functions as well as the Swiss franc
since, unless a firm wishes, there is no need for it to distinguish between the two in its books.
LETS units are never worth as much as the national currency they shadow, and the gap between
the two is variable (depending on a system's membership and its attitude at the time). The gluts
and shortages caused by differing harvests, gold rushes and technological change mean that the
value of the commodity-based currencies in terms of other goods and services is too erratic to
provide a good accounting base.

C. As a store of value? Gold proved an excellent store of value between 1658 and 1798,
fluctuating by no more than a third during this time. The discovery of the cyanide method of
extracting it from crushed rock in 1887, coupled with major finds between 1847-97 increased
production enormously. This damaged it as a store of value. The world's gold stock is estimated
to have doubled between 1890-1914 allowing prices in Britain to rise by 25% during this period,
and in the US by 40%. Doubtless if powered equipment had been used it would have lowered the
value of Yap stones too, and as we have already seen, steel drill bits devalued wampum. All
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commodity-based currencies have the defect that their value will fall if the commodity on which
they are based becomes cheaper to produce. The Exeter Constant 19 was an experiment currency
used in New Hampshire, in the US, for a year in 1972-3 whose value in dollar terms was based
on the current market price of specific amounts of thirty commodities. It would have lost almost
20% of its purchasing power in terms of other things between 1990-99 because of the rate at
which commodity prices have fallen. LETS units are a hopeless store of value, since one cannot
predict if the system will still be in operation in a few years. Like LETS, the Wir is also money
that should be spent quickly, although it holds its value reasonably well from year to year. The
drawback with it as a form of saving is that, as no interest is paid on accounts in credit, people
with a lot of Wir usually want to convert them to Swiss francs to take advantage of the much
wider range of investment opportunities in that currency.
Question 8) Is popularly produced money compatible with sustainability? Yes, in all cases,
because the availability of these monies only increases when the systems in which they operate
have underused resources, particularly those of human labour. In other words, these monies tend
to keep the level of economic activity in step with its technological and resource base. And,
because these monies are spent into circulation, the constant payment of interest on almost all the
money stock entailed by the present system is avoided. This means that the economic systems
they would produce would not depend on continual expansion in order to avoid a collapse.

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Chapter Three: Government-Produced Money
Although it was open to anyone to find gold and silver, it was not possible for everyone to turn it
into useful money. The problem with simply using a lump of either metal for a transaction was
that it could have been adulterated with other, cheaper, substances. Moreover, lumps weren‚t
exactly the right weight for every purchase. Andrew Carnegie, the steel magnate and
philanthropist, wrote a book about money a century ago in which he described receiving his
change in China as: 'shavings and chips cut off a bar of silver and weighed before my eyes on the
scales of the merchant.' „The Chinese have no 'coined' money" he explained, "You can well see
how impossible it was for me to prevent the Chinese dealer from giving me less than the amount
of silver to which I was entitled." Perhaps that was because he was a tourist. Another Chinese
merchant would certainly have ensured he received the right amount.
The twin problems of purity and weight were partially solved by the invention of coins. These
were standard-sized pieces of metal, containing a specific amount of gold or silver, stamped with
the profile of the head of the state (or the symbol of the temple) that had issued them as a
guarantee. The first records of coins of any sort are in China, almost 3,000 years ago where
rulers from the 12th century BC until 1912 (despite Carnegie's remark) regulated the production
of small, round, low value, base metal coins with holes for stringing known as Œcash‚. Other
types of non-round, base metal, Chinese coins, inscribed with an official authorisation go back
much earlier. As China only began making high value silver coins in 1890 (after Carnegie's
visit), very large quantities of cash were required to make substantial purchases. Its cash coins
had no 'intrinsic' value, any more than a shell currency had in the past, or a pound coin has today.
Currency as a form of tax
Rulers in almost every country have used the currency they issued as a form of tax (see Box 4).
In 17th century Russia, for example, Tsar Alexis thought that he could mint 312 roubles out of
five roubles' worth of copper, while Peter the Great debased his silver coinage by 42%. Their
goal was to maximise seigniorage: the difference between the price they had to pay for the
metals their mints used, and the spending power of the coins made from them. However, there
were other, more effective, ways in which a ruler could raise tax with his right to mint money.
Bracteates were thin silver-alloy coins issued between the 12th and 15th centuries by the rulers
of the small autonomous states in the Holy Roman Empire. Initially, the coins, which could be
broken into four to make change, were valid only for a year and had to be replaced before
holders could use the big autumn markets in most towns. Moreover, as with the other low value
coins issued at the time), whenever a ruler who had issued a batch of bracteates died, all the
coins bearing his head became invalid and had to be exchanged (at a 20-25% discount), for new
ones bearing his successor's features. For obvious reasons, it wasn't long before rulers began to
recall bracteates more frequently, sometimes as often as three times a year. In the 14th century
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Chapter Three

Johann II of Saxony changed his currency no less than eighty-six times in thirty-six years. 20
Since holding bracteates was rather risky as they could lose up to a quarter of their value
overnight, people spent them as soon as they could. And once their day-to-day purchases had
been made, they used the remainder on improving their houses and property. Even relatively
ordinary people were able to afford fine houses during this period and the tradesmen's guilds
were prosperous enough to make gifts of towers, windows and complete chapels to the Church.
The construction work meant that there was a high demand for labour and wages were
consequently good: an ordinary day-labourer could expect to earn six or eight groats a week,
enough to buy four pairs of shoes or two sheep. Working hours were short and there were at least
ninety religious holidays a year. It was a time of great prosperity, with (in the words of the
German commentator Fritz Schwartz, from whom much of this material is taken), "no difference
between the farmhouse and castle."21 Farmers wore coats with golden buttons and had silver
buckles on their shoes.
Gold ends a golden age
Ironically, it was gold that brought this golden age to a close. A bracteate was generally "a totally
wretched and ugly little disc of metal, very thin, of low fineness", and due to its low silver
content and its liability to be devalued, it was useless for international trade. Realising this, the
Genoese and the Florentines issued gold coins in 1252, and Venice followed in 1284. These new
coins could act as both a store of value and a means of exchange. 22 They allowed people to build
up their assets in ways that did not involve employing others and thus passing their surplus
around. Moreover, as the gold coins spread, trading itself became more difficult. "The means of
exchange disappeared into socks and mattresses," Schwarz writes, and as money became scarce,
interest rates soared, despite the opposition of the Church. Some merchants found it more
profitable to sell off their stock and lend out their capital, and a gulf developed between families
with an income based on interest and the rest of the population. The demand for labour dropped,
wages fell, and unemployment appeared. Moreover, rulers had to find other means of taxation.
Even today, the British government makes a profit out of seigniorage. James Robertson, in a
paper based on the work of the Bank of England Monetary Policy Committee,23 states that
between January 1998 and January 1999, the value of the notes and coins in circulation in the
UK rose by £1,300 million. As the cost to the Bank of England of printing the notes and minting
the coins would not have been high, the seigniorage it earned must have been at a similar level.
During the same period, the amount of money created by the commercial banks was £52,600
million, forty times the amount of money the state made. Although the sum the banks created
was balanced by liabilities (and was not therefore money which belonged to them in the way the
profit from issuing coins belonged to the British Government), nevertheless the interest paid
provided a substantial income for the institutions involved.

-----------------------------Box 4: Devaluation in Britain through the ages
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Offa, the king of Mercia, issued the first silver coins minted in England, in 760AD, who decreed that 240
pennies should be made from a pound of silver. However, as a result of a series of reductions in its silver
content, the value of the penny fell inexorably for the next thousand years. The first devaluation was
carried out on the orders of William the Conqueror, who opened a mint at the Tower of London in 1067
and decreed that it would make its pennies out of a Tower pound of silver rather than a troy pound. The
Tower pound was 6.5% lighter. He also reduced the purity of the silver itself to 925 parts per thousand.
This became known as sterling silver, and coins were made from silver of this standard right up to 1920.
As coins were valued by number rather than weight, it was not just the rulers who had an incentive to
reduce the amount of silver they contained - the users did too. They brought their reduction about by
clipping or filing the coin's metal away to sell, despite the fact that, if detected, they were liable to the
death penalty. It was only in 1663 that the Mint began milling each coin's edges to prevent this being
done. Until then, to maintain their appearance, coins were periodically reminted but without adding any
more silver.
The first major reduction in William the Conqueror's standard was in 1343, when the weight of a penny
was cut from 22 grains of silver to 20.3. By 1346, it was 20, and in 1351, Edward III reduced it to 18 so
that he could produce 293 pennies from every pound of silver. During the next 150 years, the weight of
silver in a penny was halved, but the value of the metal in terms of other commodities rose so, as Adam
Smith pointed out, the price of wheat scarcely varied from 6s. 8d a quarter throughout the period. 24
Then came the Great Debasement. In 1542, Henry VIII, sorely in need of funds to fight the French, told
the Mint to add six ounces of copper to every 10 ounces of sterling silver it used to make pennies. A few
months later, the amount of copper was increased to seven ounces per pound, then to ten, then to twelve
and finally under Edward VI, to thirteen. The adulteration enabled the Mint to produce much more money
than would otherwise have been possible. Prices doubled and Ket's Rebellion broke out in 1549 in protest
against the domestic inflation. On the foreign exchanges, the pound lost over half its value. A
proclamation that a shilling (12d) would henceforward be only worth 9d set off a national panic. It was left
to Elizabeth I to call in all the debased coins, refine out the copper, and re-issue them as 100% sterling
silver.
England's first gold coin (a gold penny twice the weight of a silver penny and worth twenty times as much)
was issued in 1257 primarily for use in the export trade. Running two coinages whose external value was
based on their content of different metals didn't work well. "Even the arrival of one Spanish treasure ship
in Cadiz, or the departure of a silver-laden trader for the East, could shift the value-ratio between them by
several points", Peter Wilsher wrote in his excellent history to mark the decimalization of the British
currency.25 This was a drag on commerce so Sir Isaac Newton was asked for his advice as Master of the
Mint. He advised that silver should be dropped and fixed a price for gold, to which the value of all other
coins was to be related. His advice was taken and as Wilsher states: "Trade and society flourished as
never before".
--------------------------

Robertson, like many before him, goes on to argue that rather than this money being created by
the bans as a debt (as discussed in Chapter 1), the government should have created it instead. It
could have spent this money into circulation in place of some of the money it was collecting in
taxes. The banks, he says, rather than creating money, should be limited to credit broking. In
other words, they should simply take in deposits from one set of customers and lend them out to
others, on exactly the same 100% reserve basis as used by the credit unions and those building
societies that have not converted themselves into banks. Robertson advances four arguments for
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Chapter Three

such a change:
1. The money the banks put into circulation is, in fact, created by society. The banks only do the
bookkeeping that brings it into effect. This money is therefore the property of society and should
consequently be treated as a source of public revenue, rather than commercial profit.
2. If the state spent the required amount of new money into circulation each year, either taxes
could be reduced, or public expenditure increased, or both. The benefit would be substantial as,
in the 1998-9 period in which the UK banks lent roughly an extra £50 billion into existence,
government spending in the UK was £300 billion.
3. Allowing the banks the privilege of money creation constitutes a massive subsidy to the
financial sector. It therefore distorts the way the economy operates.
4. The necessity to pay interest on almost all the money required to keep the economy running
bears more heavily on the poor than the rich. It is effectively a regressive tax.
The first three arguments are sound but I have doubts about the fourth. It is certainly true that the
poor pay a greater proportion of their income in interest than the rich. Margrit Kennedy shows
that in 1982, only the richest 20% of the German population received more interest than they
paid.26 There is little doubt that the same is true in other countries. In the US, for example, the
bottom 10% has negative net worth (that is, they owe more money than they could raise if they
sold everything they had). In addition, as they are perceived as high-risk borrowers they will
certainly be paying a lot of interest on these debts. The fact that money ceased to be created as
debt would not cure this problem, however, as borrowing and the payment of interest would still
go on. Robertson, though, thinks that ceasing to create money via debt would ease the situation
quite a lot, especially if the seigniorage gained by the state when it spent its money into
circulation was used to finance the payment of a citizen's income.27
Two further arguments were identified in Chapter 1, which could be added to Robertson's list as
numbers 5) and 6). In addition, Brian Leslie, the editor of the British Green Party's Land Tax and
Economics Policy Working Group's newsletter, Sustainable Economics, has suggested the
seventh argument that I believe carries a great deal of weight. 28
5. If new money were spent into circulation rather being created as debt, the money stock would
not contract if, as a result of a change in the economic climate, less borrowing was undertaken
and less investment carried out. As a result, the potential level of profit would remain the same.
This is a big advantage, as it would make the economy much more stable than it is at present. If
firms in a particular industry got into difficulties and went into liquidation, their departure would
leave the same money supply, and thus the same potential level of purchasing power, to be
shared among the rest of the economy. Demand in other sectors would therefore increase and
profits rise, tending to counteract the decline.
6. Spending money into circulation creates a stable economic system that does not have to be
kept constantly growing regardless of the environmental and social consequences. Such a system
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Chapter Thre