Financial Crisis Opportunities

Ethical Markets Reforming Global Finance

Shann Turnbull PhD

The financial crisis has created opportunities to use the “invisible hand” of market forces to stop climate change and build a resilient and much more efficient financial system.

The existing system is inefficient because it sucks excessive wealth from the real economy producing goods and non-financial services. Before the crisis, financial firms represented more that 25% in value of all listed shares in the US, UK and Australia. An efficient system should cost much less to service the production and exchange of all the real goods and non-financial services in an economy.

A fundamental problem is that governments around the world have created the wrong type of money. Money is a “message stick” for allocating resources. When the wrong type of money it is used the wrong message is sent and resources are not allocated efficiently.

What can be used as money is now defined by governments, not the private sector as it was in past centuries. Nobel Prize winning economist Frederick von Hayek advocated the denationalization of money as well as competing currencies to control inflation.

Governments have taxed and/or made illegal private currencies. So now the only type of “legal tender” available is a government monopoly. Besides becoming a nationalised monopoly, money is no longer defined in terms of anything real. In the words of The Economist legal tender has become “funny money”.

In the past, money was redeemable into commodities like gold, silver, tobacco, wampum shells, tea or salt. A currency defined in terms of electrical energy of Kilowatt-hours (kWh) would link the financial system to the real world problems of non-renewable resources and climate change. To allow market forces to solve these problems the currency would need to be defined in terms of kWh from only renewable energy resources.

While generating renewable electricity avoids the cost of fuel and has lower operating costs, these saving are more than offset by the technology being three or four times more expensive than that used in burning carbon to obtain equivalent output. This makes the financing cost of renewable generation three or four times higher than the technology required for burning carbon. As home owners are well aware, interest costs can more than double the value of total repayments required on a long term loan.

But if Islamic Banking was introduced with interest free money, renewable power generation could become cheaper than burning carbon. If interest free money was selectively made available for financing renewable power generation but not for coal powered generators then the cost of renewable energy would become cheaper at many locations. There would then be no need to introduce carbon taxing or a problematic and complex carbon cap and trading regime. Because such regimes place a cap on carbon emissions any savings and efficiencies achieved by households reduces the total emissions to increase the profits of big carbon emitters. This is because the cost of buying pollution rights becomes cheaper. Carbon taxing would create a much more efficient outcome. But a much more attractive outcome would be to reduce the price of power rather than increasing it. This could be achieved by introducing interest free or even negative interest rate money as described below.

During the financial crisis of the Great Depression thousands of communities in Europe and the US introduced their own local negative interest rate money. The spontaneous introduction of decentralised banking was eventually suppressed by the Central Banks Nazi Germany, Austria and the US.

However, in the US, a Bill for the US Government to issue $US1 trillion of self-liquidating negative interest money was introduced to Congress on February 17th, 1933. It would have created serious competition for the privately owned Federal Reserve System that makes its profit from money creation. Two weeks later on March 3rd the New Deal was announced that stopped the passage of the Bill and the use of self-liquidating ecological forms of money then being used in thousands of US communities.

It was an ecological form of money because like all living things it has limited life. The US proposal was based on creating a new form of “legal tender” in the form of a script that could be redeemed after one year into the standard dollars that were then backed by gold. The ecological money would be given away to each State Governor in proportion to the population of their State. The State government would then use the money for funding public infrastructure and to pay welfare recipients.

However, the script lost all its value unless postage stamps representing 2% of its value was fixed to the back of the script each week. The government owned post office would by this means collect 104% of its value by the time it had to redeem the script and obtaining a 4% surplus to cover administrative costs. Credit cards costs 2% of more for each transaction and during a week the script might be used many times to make its average cost per transaction substantially less than credit cards. Unlike ordinary money it contained an incentive to be spent rather than saved. In this way it would quickly re-invigorate the economy.

The issue of self-liquidating money by the Federal Government would provide a way to stimulate the economy without increasing a budget deficit. Ecological money could also be issued to finance power generation from renewable sources to reduce and/or supplement the need for carbon trading or taxing.

Ecological money would provide an inflation resistant complementary currency if it became redeemable into renewable kWh instead of the current monopoly funny money. As ecological money replaced non cash money created by the banks, the banks would not obtain profits (described as seigniorage) from their ability to create non-cash money. As a result the cost of the financial system would be significantly reduced to create a much more efficient economy and one that would be much more equitable and resilient.