Bernard Lietaer and Christian Arnsperger on reinventing the financial system
What is the structural cause of the financial crisis and what is its structural solution?
1. Watch the video from monetary transformer Bernard Lietaer, from TedX Berlin:
2. Listen to the audio podcast interview here.
” Dawna Jones talks to Bernard Lietaer, author of “The Future of Money” and the forthcoming “New Currencies for a New World”, about the root causes of financial uncertainty and what practical steps businesses can take to insure against it.
So just how can small and medium size business reclaim control over financial instability? At their heart, economic downturns and financial instability are symptoms of a financial and monetary system that is unsustainable. Yet nature shows us how to create a structurally stable monetary system and the same principles can help business survive the current turmoil.
In this special half hour interview, we’ll also how local innovations in currency serve to stabilize cash flow, local and regional economies.”
But how do we get from “here” to “there”, how can monetary transformation be implemented in the current world-system?
Here is the thinking of Christian Arnsperger:
“So here’s the inconvenient truth: The monetary logic of capitalist debt which rules the day makes any collective transition project towards a pluri-economy based on a broadened equality-of-opportunity principle virtually impracticable. As it stands, our monetary system will get in the way of any “muddling through” process of gradual transition. This has nothing to do with any sort of conspiracy theory. Commercial private bankers aren’t any more “anti-transition” or reactionary than any other agent in the economy. In fact, on an individual and personal level, they may be all in favor of a transition. But the systemic logic which their activity reinforces de facto makes a transition difficult. That’s the reason why re-thinking the financial system is so crucial today for transition activists.
Now, status-quo realists may counter that States should simply be forced to extinguish their debt altogether: pay back past public deficits, create no new ones. Wouldn’t that solve the problem? Not at all. In fact, another part of the inconvenient truth of this system of ours is that, if there were no longer any outstanding debts (public or private), there wouldn’t any longer be a single dollar or euro in circulation in the economy! (This was one of the main reasons why the Fed encouraged a boost of mortgage debt in 2007 and why many institutions went soft on supervision, because public and consumer debt was all but saturated already, meaning that liquidity had to be created through other debt mechanisms — one of them being household debt linked to real estate purchases. Many of the loans were sub-prime, but for a short time they sent credit multipliers rippling through the banking system. This created new money and the hope was that the whole economy would thus be jump-started and the bad loans paid back thanks to the rising housing bubble and a new surge in macroeconomic growth. The Fed’s gamble was lost, as we now know.) The dollar and the euro are privately created currencies emitted by the commercial banks, under the “control” of a central bank whose main roles are (a) to ensure that the banks will keep enough reserves so as to be able to face potential cash withdrawals and (b) to look out for “too high” inflation so that debtors (households, firms, and the State) don’t get away too easily with nominal rises in asset values — since inflation basically benefits debtors and the owners of real assets and hurts the owners of financial assets. In such a system, there is a constant pursuit of debt rollover (i.e., new debts being reissued as outstanding ones are being extinguished) and, therefore, a constant pressure for growth, if possible in real rather than nominal terms.
Although perhaps needlessly polemical, Nobel laureate Maurice Allais’s quip that the money creation mechanisms embedded in bank debt are akin to “counterfeit” does capture a crucial aspect of what’s going on. In her remarkable book The Web of Debt (Third Millennium, 2008), Ellen Hodgson Brown recounts the pronouncement of one U.S. judge who, on behalf of a house owner who had been dispossessed by his bank, ruled that the bank had in fact been guilty of counterfeiting because it had lent and created money (through a mere scriptural operation) for which no prior wealth existed, not even in the form of deposits (since banks routinely lend more than the deposits entrusted to them). Moreover, the principle of interest-bearing debt generates a strongly competitive, rather than cooperative, economy. Here is how Bernard Lietaer describes the process:
“…interest is woven into our money fabric, and (…) it stimulates competition among the users of [the] currency. (…) When the bank creates money by providing you with your £100,000 mortgage loan, it creates only the principal when it credits your account. However, it expects you to bring back £200,000 over the next twenty years or so. If you don’t, you will lose your house. Your bank does not create the interest; it sends you into the world to battle against everyone else to bring back the second £100,000. Because all the other banks do exactly the same thing, the system requires that some participants go bankrupt in order to provide you with this £100,000. To put it simply, when you pay back interest on your loan, you are using up someone else’s principal. (…) In summary, the current monetary system obliges us to incur debt collectively, and to compete with others in the community, just to obtain the means to perform exchanges between us.”
(Bernard Lietaer, The Future of Money, pp. 51-52, © Century, 2001)
Basically, we’re living under a system where debt-money, as the only legally sanctioned means of exchange, is created and circulated by commercial private agencies (banks) under supervision of frequently semi-private agencies (central banks, many of which aren’t public institutions, despite what their names seem to indicate) so as to create an optimal “business climate” for investors in financial capital and for providers of capital-driven private and public employment. Money is not fully anarchic, we do have institutions that “manage” it and that steer the current monetary system (from national or regional central banks all the way up to the International Monetary Fund and the Bank for International Settlements), but these institutions are mainly designed to uphold and maintain industrial-financial capitalist social democracy — precisely the system which is getting dangerously close to unsustainability because of the persistent externalities and internalities it generates by its very logic. If we really want a transition towards a sustainable pluri-economy, with the help of all the framework conditions discussed in the previous installments, we need to address the alternatives that exist to this monolithic, private-monopoly money system.
The basic idea is that means of payment should exist in proportion to expenses that we deem adequate — not just in order for miscellaneous private actors to reap maximum profits, but in order to reduce the multiple instances of crippling environmental and human stress produced by the economic system. Since the global de-growth compact (or economic Kyoto protocol) would require developed economies to become much more selective in the way they trade with each other, local currencies would quite likely become relevant again. As the spectrum of local economic activities becomes broader over time, locally earmarked means of payment would gain in stable and durable purchasing power, making it more and more rational for local economic agents to hold part of their money balances in local currency. One way this could occur, as Michael H. Shuman has suggested in his fine book Going Local (Routledge, 2000) [see his website in the sidebar], is for banks to have local branches that commit to dealing with local actors and not to siphon off the money of local depositors towards national or international investments. There are instances where this has worked, but usually it means some sort, and probably a substantial dose, of public intervention. Why would any private commercial banker in his right mind accept to forgo profit opportunities outside the local community? In other words, most local currencies are likely to be emitted either by the democratic community itself (as is the case in most Transition Towns — see Rob Hopkins’s blog in the sidebar) or by locally anchored non-profit financial institutions, which may either be private (as part of the Social and Solidarity Economy sector) or public.
In all cases, however, such local currencies would have the same status as the local currencies of European countries prior to the euro had with respect to the dollar as a world currency: They would be complementary local currencies, coexisting with the euro and the dollar, not replacing them. This is, in fact, sensible because we saw that selective relocalization and reasonable de-globalization are not abrupt, revolutionary moves — they have to be compatible (via the crucial notion of subsidiarity) with a plurality of trade regimes, with most regions or municipalities developing both a stronger local economic fabric and lasting commercial links with other regions located as near to them as possible (or as far from them as necessary). As fossil fuels become more expensive, as climate change impels more and more countries to look for new options, and as local economies get revitalized as a result, increasing volumes of trade may stop being global and there might be a partial return — for bioregional reasons of sustainability rather than for opportunistic reasons of nationalism or dogmatic regionalism — to more restricted trade agreements. Bilateralism and its opaque power plays should, whenever possible, be avoided, but a “bull’s eye” logic in trade, where you get what you need as close by as you can get it rather than scanning the whole planet for the very cheapest bargain (even if it implies a negative return in terms of net energy), is likely to be a new reality. Still, none of this would imply a disappearance of world trade. There should certainly still be a world currency, though more and more numerous voices are calling for the U.S. dollar to stop assuming that perilous function. Lietaer’s and Douthwaite’s idea of an “ecology of currencies” doesn’t imply that there would only be local currencies. There should be, roughly speaking, as many currencies as there are legitimate trade areas: There is localized trade within a city, localized trade within a region, inter-regional trade within a broader but still circumscribed area, and international trade. In each of these cases, there are difficult technical issues as to how to actually delimit the optimally-sized trading area in an operational way. Whatever the case may be, there would be several complementary currencies, each performing a specific role in irrigating trade (and hence also production, work, investment, etc.) at the appropriate bioregional level. Each currency would need its own emission and regulation institutions, but there would be absolutely no reason why these should all conform to the current private-monopoly principle whereby commercial banks create money under the supervision of a (more or less private) bankers’ bank, the central bank. In fact, as I explained above, there are good democratic as well as ecological arguments why such a monolithic logic should not prevail.
Local “economic communes” could, eventually, use the local currency to collect local taxes, which would give all local economic actors an incentive for holding at least a minimal amount of that currency, hence for trading locally with the people who have some of it to spend. (I am indebted to Bernard Lietaer for this idea, which is linked to the so-called “Chartalist” school of monetary theory, represented a.o. by L. Randall Wray’s book Understanding Modern Money, Edward Elgar, 1998.) As a result, a fraction of the Economic Transition Income could end up being labeled in local currency, and thus spent on local goods and services, further contributing to a local revitalization. This would not imply that a citizen would lose his/her right to a full ETI if he/she moved to another place. The corresponding fraction of the ETI would simply be relabeled in the new local currency.
But how would local complementary currencies be put into circulation? I emphasized in the previous post (installment #5) that capital should increasingly be seen as as a loan from the democratic community to its social entrepreneurs, who in turn will use it to produce and sell as locally as possible, to employ local labor whenever feasible, and so on. (To repeat once more, local citizens would also hold national and/or world currencies, and would perform trade accordingly at higher levels, too. Local currencies are to be complementary, not exclusive.) This in itself implies that the criteria for financing investments would have to be modified substantially, since as we saw, the current logic almost forces all innovators and investors to skim world markets in the hope of reaping sufficient wealth (labeled, if possible, in dollars or in euros) so as to honor their own interest-repayment obligations. One way to have the democratic community decide is to replace private by State monopoly. Let me say immediately that neither I nor Lietaer really believe in this option. But it has an audience within alternative circles. The idea would be to snatch money creation completely back out of the hands of the private banking sector — for instance, by imposing a 100% obligatory reserve rate or by making lending more than one’s deposits illegal. Money creation would become a State prerogative again, under tight democratic control (so that no one here is advocating a discretionary right for government to use the printing press whenever it feels like it). The quantity of money would be calculated so as to correspond closely to the needs of the real economy, not the needs of private banks for profit (nor the central-bank mediated needs of financial-asset owners for low inflation). Economic activities would be financed through public credit institutions, or the equivalent of public banks. There would still be interest payments — so that the growth imperative wouldn’t be completely eliminated — but they would accrue to the community rather than to the private banking sector. Rather than being the late counterpart of bank credits that were lent out while never even having been deposited, these interests would be sort of a tax that would allow to publicly finance a “social dividend” or social credit, an equivalent of the ETI. The State might therefore even be able to correspondingly lessen fiscal pressure on incomes, to the extent that both the ETI and transitioners’ infrastructure investments could be financed through the social dividend. (For a discussion of social credit and basic income, see chapter 14 of Rowbotham’s Grip of Death.)
If we don’t just want to replace a private monopoly by a public one, we need instead to think up bottom-up solutions so that money gets created more or less endogenously when it’s needed for specific types of transactions. One obvious solution is so-called mutual-credit currency, such as is being used in Local Exchange and Trading Systems (LETS) or in the Swiss inter-firm trading system known as the WiR (in German, Wirtschaftsring-Genossenschaft). There, without any intermediary and with a minimal amount of administrative coordination, non-interest-bearing credit lines are automatically opened and extinguished as individuals or firms engage pairwise in transactions. There are currently researchers and practitioners developing large-scale mutual-credit networks with elaborate compensation mechanisms so as to be able to broaden the scope of trade beyond small neighborhood or city communities (see http://communityforge.net/resources). Lietaer has thought up, and actually contributed to implement, other complementary currencies in municipalities or regions desiring to further specific environmental or social priorities. (See, for instance, his “C3? or Circuito de Crédito Comercial scheme experimented in Uruguay, designed to boost employment when there is a dearth of mainstream currency in times of financial or banking crisis. Website: http://www.c3uruguay.com.uy/. See also Lietaer’s contribution to the WAT system in Japan, where a parallel currency is used to foster environmentally sustainable activities and ecological restoration by local NGOs. Website: http://www.lietaer.com/2010/05/the-wat-system-in-japan. See also: http://web.archive.org/web/20070302172021/http://home.debitel.net/user/RMittelstaedt/Money/watto-e.htm.) Another relatively decentralized and bottom-up way of creating non-banking currency would be to foster cooperative — private or public — financing networks within the Social and Solidarity Economy. (In Belgium, there is a Réseau de Financement Alternatif that studies and implements such solutions. The New Economics Foundation in the UK — see website in the sidebar — has also been very active in this area.) The idea here is that not-for-profit financial institutions would offer a service to the community and could charge much lower interest rates than the commercial banks who are being strangled by the disproportionate profitability demands of the investors who place their funds with capitalist financial institutions.
If you think I haven’t really spelled out a very coherent picture here, you’re quite right. I haven’t. Research on parallel, complementary currencies is still in its infancy. After so many decades of private-bank monopoly on money creation, and after just as many decades of misleading most citizens into believing that money is created by the State, re-thinking money creation as a plural, decentralized, citizen-driven and democratically controlled activity is really difficult. We’re struggling to discover the right mixture of top-down and bottom-up for each instance of a currency. Much will depend on the transition-related objectives — better care for the fragile and elderly, more humane employment opportunities, greener production, more cooperatives, more “voice,” etc. — that we wish to assign to our various currencies. Lietaer and Douthwaite are both insisting on the fact that the more diverse our “ecology of money,” the more resilient will be the various subsystems of our sustainable pluri-economy. I agree with them. And this means that monetary reform is most probably — along with the global de-growth compact discussed in installment #1, with its fair and differentiated growth guidelines — the most urgent framework condition in favor of which transition activists should militate, even before we engage in any actual transition initiative, which under current conditions is likely to remain almost invisible and to miss its full potential. The first steps of the transition will be political, to be sure.”
Please note that for Christian Arnsperger, monetary change can only take place in a wider framework, in which 6 concurrent political and policy conditions are met:
* “De-growth” and an economic Kyoto protocol
* Fostering new governance through the creation of a World Transition Organization
* Fostering new governance through participatory coordination and communalism
* Introducing an Economic Transition Income
* Deepening economic democracy and encouraging new forms of entrepreneurship
* Re-thinking money creation and fostering a new “ecology of currencies”
These six conditions seem to me to be components of a desirable and not unreasonable worldview. Still, to believe they could be introduced next Monday morning would be madness. Well, okay, it’s probably the case that to believe that anything at all could be changed next Monday morning (such as the kids starting to clean up their rooms by themselves) would be madness… But you know what I mean.
What, given the horizon traced out by these six central framework conditions, might be things we could start changing soon? What are the actual next steps we might take, not in order to instantly implement these six conditions (as if they could be suddenly couched into a new economic and social constitution), but in order to create changes which, although perhaps still far removed from the ideal, might put the needle of our compass in the right position or, at the very least, might help us not to forget that these conditions are the ones we’re ultimately aiming for? Those are questions we now need to ask ourselves.”