On Money & Wealth
Money is to humans as water is to fish. We’re surrounded by it; we can’t help but use it, touch it, exchange it. Some of us spend entire lives trying to accumulate it. But we rarely stop and think, what is it?
We’ve gotten so used to the existence of money that we take it for granted, as a natural part of our evolution. We’re even confused about the language we use to describe it. Money and wealth — are they the same thing?
This very inquiry is our starting point; the answer being a definitive no. Money is a tool to trade, store and account for our wealth. Wealth, on the other hand, is a much larger and vaguer concept. Wealth is value that’s created from capital or labor, ideas or sweat, time or technological advancements. It’s a funny thing to realize that what we call money is actually, in the literal sense, a piece of paper, or ever more often, a digit on a computer. Consider the case of a $100 bill. We’ve accepted, as a society, that this piece of paper is worth a week’s worth of nutrition, or a day’s worth of hard labor. However, the fact is that this piece of paper, taken at its material value, is not even worth $1; it’s just some paper with dye. This wasn’t always the case. In fact, people throughout most of history traded coins whose value derived from their content of precious metals such as gold and silver. Even if that were still that case — what makes gold valuable is also not a lot besides this collective idea, or myth. What gives any money its value is its users buying into the same myth. Just as in any self-fulfilling prophecy, when everyone acts according to a myth, the myth in turn, becomes our reality.
We forget that we are the creators of money. We design how it works — and when it doesn’t work, we can simply change it. For the entirety of modernity, since the establishment of the Bank of England in 1694, we’ve used one type of money across the western world. Only in times of great economic (and hence political) uncertainty and instability has there been a mainstream debate about the design of money.
It’s time that we make ourselves aware of the true rules behind our money, including the problems with our current debt-backed monetary system. We should experiment with a variety of currencies for various purposes, as opposed to a few that monopolize all markets. As our current economic paradigm continues to distress and fail us, we need to think more consciously about the pillar stone of our global economy, its currency: what it represents, how it’s minted and interested, and how and where it travels. These are all inquiries that demand serious thought, and more urgently, ingenious experimentation.
The Problems with Our Money
“It is well enough that people … do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” — Henry Ford
There are a few problems with our current economy in general. What follows today is a more specific discussion on solely some problems which lie with our central-bank issued, debt-backed money.
Our Money is Debt with Interest
The famous Harvard economist John Kenneth Galbraith famously stated, “The process by which money is created is so simple the mind is repelled.” Fiat money is created out of thin air, as a form of debt. Whenever the banking system needs to issue new money to the economy, they issue it as loans to their customers, for which they charge interest. However, the interest is never actually created. On an individual level, that seems fine; in fact, it seems expected that the customers of a bank should make a profit with the principal money, and give some of the profit back as interest. However, when an entire pool of money being created as debt is borrowed by the people to buy houses and cars and vacations, instead of generating future profits — problems arise. We’re stacking debt on top of debt on top of debt to power our currency, and as one should expect, things are starting to get weird.
The power of interest is a tricky concept to grasp, because it creeps up on you. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; … he who doesn’t … pays it.” To paint a picture in your mind; imagine that an ancestor of yours put down 1 pound to the Bank of England when it first opened in 1694 with 3% interest. You’d be sitting on 14,010 pounds right now. What if the interest rate was 4% instead of 3%? Well, you’d be pleased to hear that your wealth would be a staggering 317,500 pounds, 22 times what it would have been at a 3% interest rate. Not quite what you’d expect, is it?
Over time, the debt burden of our money creation schema taxes the economy exorbitantly. In fact, I was explaining this concept to an employee of CVS, and in the midst of his confusion, he summed it up better than I ever could:
“So, every time we print money, we’re losing money?”
Our Money is a tool for Speculation
It’s estimated that over 99% of the activity in the global economy is speculation. [1] FX markets, stock markets, bond markets, commodities, futures trading, even cryptocurrency trading; it’s all essentially legal gambling. Yet, players in the real economy (construction businesses, mom n’ pop shops, service industry etc.) are affected by the outcomes of this gambling just as much as the gamblers themselves, because they use the same value network ; the same currency. If the dollar that I use to pay for my business needs, and the dollar that is used to speculate on financial markets are the same currency, then when speculators create massive bubbles like in 2008, the average businessman is affected just as acutely, if not more, as the speculators who lost their dime in the global casino.
Our Money is a Monopoly
This essential problem ties back to monoculture; the fact that there is a single dollar or a single euro to rule them all. Maybe the biggest problem with our money is that there’s only one type of it. Maybe the problem is that we donate to charity and gamble in casinos using moneys with the same configurations. It sounds weird because we’re so used to it, but when we start to break down what value really means, we start to see why it’s a problem to represent different types of value with one monolithic bill.
Purpose of Money
“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” — Ayn Rand
Money is the holy facilitator of our society. It’s the special combination of a store of value, medium of exchange, and unit of account. What makes it so important is its role as a facilitator to one of our most precious inventions as a species, our network of value & trade.
When we start to look at currencies as networks, or economic currents by which humans store and exchange value (the word currency itself comes from curraunt, or ‘in circulation’), we begin to understand the configurations of these networks. Just like a national currency is used by a subset of the entire population of the world, a nation, we can design currencies that circulate between different subsets of people with different needs, wants, beliefs, and categorizations. We can design currencies for specific values, then tweak the relevant interest rate up and down to fit specific situations. We can restrict usage even further to localities, or to industries, to company supply chains or even to virtual commons who have never met, such as a group of environmentalists or cyber-libertarians to create new relationships and buttress support for people who want to be in the same network. The possibilities are endless.
I have one point that I want to emphasize, and maybe this place in the writing is as good a place as any: it is my belief that these new ideas for different currencies should come as complementary currencies. It is in no way my aim or my belief that we should replace our currencies wholesale with different ones (although a time might be coming when we’ll have to — google John Law if you’re curious.) This would simply replace our current monoculture with another, equally unhealthy one. My dream is a world of many currencies, from local (such as locality loyalty currencies) to global (such as bitcoin), industrial or agricultural, national, social, private, to aimful currencies where people easily exchange between one another, free to opt in and out of any network to fulfill their needs, wants and ideas. Our lives consist of different types of values, and quantifying all of them in the same bucket currency, no matter what you call it, is inefficient. It also leads to distortion and ambiguity in quantifying value.
Money, with the settings we’re used to, has only been around for the last 300 or so years. If history is our best teacher, let’s explore what existed before, and how we got to here.
When Wilhelm the Orange (King of England and Netherlands) gave royal blessings to the Bank of England (set up as a for-profit company) in 1694 to issue notes backed by the promise of the crown to fund his wars, he didn’t know he was inventing the economic backbone of the next 3 centuries. The bank quickly realized the gravity of its responsibility when it came to controlling money supply and inflation. Ever since the creation of independent central banks, concerned with regulating the economy of nations, it’s mostly been a trial and error learning curve. As nations battled with crises in their economy, whether the speculative bubbles like that of the famous South Sea Company, liquidity shortages and bank runs which occurred in the second half of the 19th century in the US, or deflation or stagflation, like of Japan’s Lost Decade, central banks had to come up with new and experimental ways to solve problems. These unorthodox methods lead to new problems and new learnings. The gist is, human economics is an emergent phenomena, a complex system. And we as humans, with our current technology, can only grasp the basic patterns and rules of the game because the whole picture is too complex for us to grasp clearly.
One such example of a blunder happened in 1929. The U.S. stock market crashed after the roaring 20’s, and the world economy was sent into a deep economic depression, much like what happened after the mortgage crisis of 2008. During the Great Depression, there were dozens of local recovery experiments happening across the US. Private corporate and corporate coalition currencies from localities and towns were dime a dozen, in places such as Massachusetts, Georgia, Illinois. It even came to a point where certain respected and well known individuals floated their own currency to reissue trust to a local economy! These experiments formalized on the federal level as the New Deal. Other parts of the world were not much different; in fact it was in Europe where the most noteworthy alternative currencies sprung up.
Wara, Worgl and WIR
In 1930s Germany, hyperinflation and the resulting rapid fluctuation of prices was bankrupting businesses left and right. German currency had become completely useless as a store of value.
One engineer in the town of Schwanenkirchen came up with a way to jumpstart his local economy. He decided to revive a bankrupt coal mine, which was providing much-needed jobs for the struggling citizens of Schwanenkirchen. He couldn’t get financing from the banks, because they too were dealing with a shortage of money. So instead, he brought together the miners, the engineers, the shopkeepers and everyone else in the town, and explained to them that they could open the mine together, and recreate all the jobs. The catch was, they had to print their own money in order to do so! If everyone in the town accepted payment in a “Wara script” instead of the national German currency, they could avoid the consequences of hyperinflation and rebuild their economy. What seemed like a crazy idea turned out to be quite sound. Within a short period of time, not only had the Wara salvaged the local economy, but it was circulating nationally. [2]
Inspired by the Wara, the newly-elected mayor of a town in neighboring Austria, Worgl, decided to issue its own local currency, aptly named “the Worgl.” However unoriginal the name was, the results were miraculous. In what had been a poverty-stricken town, the introduction of a local currency was able to eradicate unemployment. [3] The currency gained swift traction across Austria, and soon more than 200 villages and towns were accepting it. The phenomenon caught international attention, from the economist Irving Fisher at Harvard to the French Minister of Finance, who dubbed it it “the Worgl Miracle.” Fisher even suggested to Franklin Roosevelt that a similar scheme might work in the U.S., but no one took him up on it. However, that “miracle” was soon forced to cease operations by the Austrian Central Bank, much like the fate of the Wara in the Weimar Republic.
Although on a national level, the local currency movement was being shut down by the central banking authorities, on regional levels its success was evident. Another country near the crux of this revolution was Switzerland, which started to float its own complementary currency, the WIR, around the same time. It was a currency introduced by 2 businessman in 1934 to alleviate the shortage of currency and global financial instability happening within Europe and Switzerland at the time. Just like the Wara and Worgl, the WIR gained traction quickly, and was accepted by over 3000 businesses in the first year. However unlike the other two, it wasn’t shut down by the Swiss National Bank (although they did try to shut it down in a smear campaign). The WIR got its banking license in 1936, and is still operational to this day. The network transaction volume was around 1.4 billion dollars, and more than 25% of all businesses in Switzerland are engaged with WIR. [4]
These might seem like fun historical curiosities, but the same debates that informed the emergence of these local currencies are re-emerging today. [5] The 2010s are not at all unlike the 1930s, in economic terms, at the very least. We’ve had a severe economic recession in 2008 that brought global finance close to its knees, much like the Great Depression of 1929. Some countries, particularly several nations in southern Europe, Japan[6], and some of Main Street America [7] are still not fully recovered after 10 years. More so, slow growth and anxious uncertainty has seemingly become the norm in global economics. Income inequality across societies has also hit similar levels to the ’30s. In politics, we’re witnessing the rebirth of an authoritarian, protectionist, nationalistic and aggressive playbook in many parts of the globe. They say history doesn’t repeat itself, but often rhymes. This is true in the money debate as well, even given the pace of advancement brought on by digitization, globalization and information share.
This begs the question, of course: can alternative currencies address some of these same symptoms in our own post-crash economies? If a monolithic currency stretches the elasticity of value beyond its limit, and if our current institutions have failed to support the dominant network of value exchange, I would argue that it is time to consider some alternatives. Research shows, others think so as well.
If you think you’re fine just holding onto your dollars and not thinking about any of this, I invite you to consider the following. Becoming the world’s dominant trade currency is the most lucrative status a currency can reach. Today, it’s the US dollar, whose hegemony was established after the US emerged from the World War II as the clear leader of the free world. With the OPEC agreements after the Oil Crisis of the 1970s mandating that oil be traded in dollars across the world (Google: petrodollar), and the Dollar being set as the global reserve currency with International Monetary Fund rules mandating that all central banks accept the dollar, it became the de facto currency of our time. But it would be a mistake to assume that because it is so today, it shall always be so. We can’t forget that the baton was handed down to the dollar from the British Pound, which had received the coveted status from the French Franc after the French Revolution and the Napoleonic Wars. I used to think the Chinese Yuan was next in line — I now believe it will be a global currency, such as bitcoin.
Once a particular currency becomes dominant, it is human nature to abuse it. If we place all of the value in this one currency, and I would argue that the US dollar is significantly more powerful than any other single currency in world history, the very definition of value becomes distorted. Its collapse, which could come with any number of geopolitical power shifts, would therefore cause more damage than ever before, particularly to those of us whose entire “worth” is contained in the value of our dollars.
Money and Value
“Money often costs too much” — Ralph Waldo Emerson
We’ve established that money is a mirage, a mere representation of value, or wealth. Yet, we haven’t talked much about what kind of value it represents.
As explained previously, our current fiat money represents debt. Before Nixon sacked the Bretton Woods agreement in 1971, our money was backed by gold, a commodity which has value to humans as a soft, conductive metal, a tickler of vanity and most importantly, the power of a shared myth as store of value. However, many things other than gold and debt can back money — all it takes is a group of people agreeing that it does. This backer of currency, whatever it ends up being, starts to take on a new kind of power.
Humans, as Adam Smith first proclaimed, tend to maximize their own utility, or more generally, tend to accumulate wealth. The easiest way to accumulate wealth is usually to accumulate whatever represents wealth at that period of time. At a micro-level, this tendency might not be too troublesome. Who cares if Joe down the road is spending his days trying to hoard blocks of gold? But when every person in a society acts according to this same agenda, what has happened historically is that the participants of the currency network go around trying to find or create more of whatever thing is used as the underlying backer of the currency network. If there’s not enough wealth to go around, they’ll do whatever it takes to get more. In the age of exploration, conquistadors crossed oceans and mountains to kill tens of thousands of indigenous peoples in their quest to accumulate shiny metals from buried rocks — ironically, only to unleash a huge wave of inflation in the European continent; but that’s another story. In modern times, with money being backed by debt, everyone seems to be going from bank to bank to find new debt, without considering whether it’s really needed (as opposed to college or healthcare debt), or as a clever trick to increase one’s cash flow through financing or leverage. Profits in many investment-heavy sectors have taken the form of a game of hot potato. Going into debt on a project, increasing its value, “refinancing” (or renegotiating with the bank) the debt of the project for a better deal with a new debt, and claiming the difference between two debts as profit is quite a common practice! Isn’t that a bizarre business model? This is why the dollar has been exponentially losing its value after the 1970’s (since gold stopped backing the dollar): because there is no limit to the available debt the way there is a limit to the amount of gold we can mine. Debt is not a material thing — it is borrowing from our future selves.
It makes logical sense that when a value, commodity, or “thing” is traded as currency, its utility to society increases, because it now serves two purposes — it becomes a symbol of wealth on top of its inherent functionality. This increase in demand fuels supply — and a virtuous cycle is created. In classical economics, when supply increases to meet demand of any product, that should be that. However, if that product backs a currency, which can be spent for other purchases, that increase in supply translates to an equivalent increase in demand for a second time (because of the increase in purchasing power of the supplier, who is essentially printing money in this currency network). Given this dynamic, I think we must choose our currency backers with delicate consideration. What we want more in the world should back our currencies. Let’s look at some alternatives for how we can store, represent, and trade the value systems and wealth that our collective civilization is built upon.
A commodity is the first idea that comes to mind. And that’s what our ancestors thought, as well. Ancient Egyptians (which we’ll revisit in more depth later in the writing) used a currency redeemable for grains (beer and bread, the staples of the common Egyptian diet). Maybe this was the reason why Egypt was as fertile as it was. The Babylonian ‘shekel’ was similar.
From more modern times, the Kubik concept from Germany, theorized by banker Heinz-Ulrich Eisner (but never implemented) is a currency backed by m3 of drinkable water, managed by a municipality. Though what money represents doesn’t necessarily have to be physical. Most of humanity used currencies ingrained with gold and silver, which have been universally accepted as “valuable” commodities. Other civilizations of the past have used seashells, salt, or coffee beans.
Perhaps our most precious resource in this world isn’t tangible, but is very real to all of us nonetheless: time. Just as with any other scarce resource, we’ve witnessed many instances of currencies based on time. These are called time-banks. A value network system which is backed by an hour of labor by and for the participants of the network. Some of the most famous examples are found in Japan, known as Fureai Kippu, which translates as “ticket for a caring relationship.” The Fureai Kippu is a complementary currency system in Japan designed to alleviate some of the economic costs of an aging population, and there are over 100 different implementations across Japan. The time-bank system governs itself, through the individual agreements between its participants. It’s kind of like that movie “In Time,” starring Justin Timberlake, in which people can trade the time they have left to live just as they would a currency. Although they are hard to scale above regional levels, time banks are quite popular complementary currencies across Japan, and in other parts of the world.
How about energy? One could argue that it’s the blood of our economy. From transportation, to generation, to the powering of our digital empire — all ties back to energy. It could certainly be a more speculation- and inflation- resistant base for a currency than abstract debt. And some have theorized schemas to test this idea. Kilowatt Hours are one concept, operated by a non-profit which circulates Kilowatt cards worth 10 Kilowatts either to claim for energy, or to be used as currency. [8] WAT is another concept, based on redeemability. The WAT, launched in Japan in 2000 by Eiicho Morino, the head of Gesell Society in Japan, is money that is pegged to work-hours by humans (6 minutes of labor equals one WAT) and also kWh of “clean energy.” [9] This bears a lot of resemblance to the Wara example from Weimar Germany, the promissory note denoting coal from the mine that was collectively opened and operated by the workers of the Schwanenkirchen region. Coal is just one kind of energy.
We can also start thinking about backing a currency with a collection of commodities, sort of like an averaging of all humanity’s needs. This is known as a commodity basket. A currency doesn’t have to be based on a single commodity, such as gold or grain; it could be backed by a composite basket of them. Suppose that a basket were to be formed by the government, where the basic needs of a person for a week — water, food, maybe some wood or bricks for shelter and some oil — were bundled into a basket. If you chose your basket wisely, you could design a currency that has universal value, irrespective of region, government, ideology, and economic conditions. TERRA is a concept, designed by currency theorist Bernard Lietaer, for a truly agnostic global trade currency. It’s an alternative global reserve currency. TERRA is 100 percent asset-backed by a basket of a dozen commodities; copper, wheat, gold and oil, as opposed to the conventional, central bank-issued, debt-backed fiat currencies. Lastly, the TERRA doesn’t bear interest. Instead, it has a demurrage charge. This is essentially a negative interest rate, intended to account for the decay of the goods in the basket of commodity, and the cost of operations for the currency. This concept is hard to wrap one’s head around at first. A negative interest rate? Isn’t that like a doomsday scenario? Maybe not. With this question in mind, let’s explore the relationship of currencies and interest.
Currency and Interest
“Compound interest is the most powerful force in the universe.” — Albert Einstein
The history of interest is complex and has unfolded over thousands of years. Today, every single dollar we spend is bound by interest, because the currency requires an interest payment back to its originator, the bank. This certainly wasn’t the case all throughout history. In fact, we observe quite a shift in the acceptance of interest as a part of commercial activity. Aristotle is famously quoted as saying, “For money was intended to be used in exchange, but not to increase at interest.” In his own era, making money off of interest was considered “unnatural” in his words. There were other periods, such as the European Middle Ages, where interest was both banned and condemned. The Bible, the Koran, and the Torah all feature sections about the concept of interest. Why is interest a topic of such heated debate? Because of its subtle power.
Because of its diffusive nature, the effects of interest are seemingly hard to detect on a day-by-day, or even year-by-year basis. But across generations, those effects can make or break the wealth of entire societies. It’s just like the metaphor of the frog in boiling water: the change happens slowly, but the consequences are drastic. So we would do well to understand it completely, and to try to harness it for positive change.
Let’s consider the three basic settings: positive, zero, and negative. All three settings come with different results, and each could reasonably apply to different scenarios. Let’s explore how those could work.
Positive Interest
Interest performs some key functions in a society, especially in loans.
First, interest serves as insurance, or default protection, for the lender. Imagine a lender who lends $1100, as $10 to 110 people. The 110 agreements state that he’ll receive his money one year later at 10% interest, so he expects $11 from everyone he lent the $10 to, at the end of the first year. The following year, 100 of the 110 pay back their loan with interest, netting him a total of $1100. However, 10 people have defaulted, causing him a loss of $100. Since he charged interest as default protection, the lender in the end of the year is still holding $1100; he hasn’t lost anything.
Interest also serves to compensate the lender for opportunity cost. When you lend money to someone, you forego your opportunity to use that money in some other endeavor to make profit in the meantime. Therefore, interest serves as a benchmarking tool to qualify which undertakings within a society are most worth pursuing. Imagine that we’re in the early 1900s, and there’s a huge influx of people moving into big cities. Every industry is stimulated and business is booming for everyone. All of those people need houses, so construction companies are building them left and right, making around 10% returns year-on-year. More people means more need for food, as well. So a lot of bakeries are opening across neighborhoods; the average return for a bakery is 7%. There are also more kids going to school, so a local bookstore owner might expect to make a 5% return every year. In a city-wide or national industry, there are tens, maybe hundreds of different sectors, all with different return rates and respective interactions with one another. Human economy is too complex for a single agency (whether a firm or a government) to manage in top-down fashion.
The beauty of a free-market economy, and therefore of interest, is embedded here. It allows for self-organization and automatic, bottom-up optimization. If there’s a free pile of wealth, waiting to be used in the economy, it doesn’t need to rely on a central government to assess all industries and determine where to dedicate the wealth. Due to supply and demand, the sectors with the most critical offerings will reap the highest returns, so those can absorb the highest interest rates. This self-sustaining benchmarking system ensures that capital flows efficiently, without any one agency having to keep an eye on all the sectors.
Finally, from a psychological standpoint, interest ensures that there are always people willing to fund new explorations, ventures, and endeavors propelling humanity towards advancement and improvement. It serves to encourage competition and fuel economic growth. Interest is to an economy what survival of the fittest is to nature. However, just like in nature, our economic landscape should be a delicate balance of competition and cooperation, working harmoniously towards driving evolution. If positive interest is competition, what is cooperation?
Negative Interest
An interest rate that is negative to face value, or demurrage, is essentially a charge for holding onto money. Initially coined by German-Argentine economist Silvio Gesell in his 1916 book The Natural Economic Order, negative interest is money that rusts. Just like compounded interest, in which money gains value over time, with demurrage, your money is set to lose value over time. This mechanism incentivizes people to spend money as quickly as possible. The interesting thing about money is that, when everyone is spending it together, everyone is employed, hence everyone wins: you can create wealth just by circulating the money faster within a network. This notion, in economics, is called money velocity.
In fact, many currencies throughout human history were demurraged in one way or another. Wara, Worgl, and WIR moneys of the 1930s Europe were demurraged, inspired by the work of Silvio Gesell. It was perhaps their cooperative nature, and fast circulation, that most effectively remedied the severe unemployment crisis and the general lack of cash in their respective regions, hence resulting as successful experiments.
Let’s go back in time to another, mostly forgotten point in human history. The time between the 10th century and the 13th century in Central Europe is known as the Central Middle Ages, the High Middle Ages or the Age of the Cathedrals. This period shouldn’t be confused with the Late Middle Ages, which featured the Black Death and started around 1350 AD, or the Early Middle Ages (Dark Ages) which correspond to the collapse of Rome. Central Middle Ages was the pinnacle of the Medieval culture. [10] In Central Middle Ages, forensic evidence from human skeletons of the period show that the population actually ate well, and grew tall and sturdy. Historians understand that these people also worked in surprisingly comfortable conditions. The average man worked around 6 hours a day, and some localities had as much as 170 holidays each year in the form of religious feast days. [11] Science and culture also advanced during this period, and women were able to choose their own occupation and work. There were more women in powerful positions than in many later periods of history, too. The renaissance of the 12th century (and prior to that, the Carolingian and Ottonian renaissances) brought about a return to Ancient Greek and Roman ideas that had lain dormant for the better part of a thousand years. People studied the Classics in the first universities that emerged across Europe, along with the first translations of Arabic texts on science and philosophy. These proto-renaissances paved the path for the great European renaissance beginning around 1500 and blossoming for another two centuries.
Another unique aspect of the High Middle Ages was that many local currencies circulated simultaneously. [12] There were two main types of currencies operating throughout Europe: gold and silver coins, whose value was more or less standardized, were used for long-distance trade with the Arabs. But there was also a complementary monetary system. Each kingdom issued their own local pounds, florins and denaris. These currencies had a subtle demurrage to them, known as Renovatio Monetae. After a monarch died, the new king would issue a new coin. Each citizen would have to trade in their old coins for the new ones, usually at a discount. Because people never knew when a king might die, they were incentivized to spend their money when they had it. This incentive created a cooperative economic environment, and bolstered public spending such as for cathedrals, bridges and other public works organized by the Catholic church. The philosophy of investing was different. Compared to modern times, a construction project would take much longer to finish. Each year, only a small fraction of the needed funds would be collected from citizens, who were more eager to spend their money compared to today, due to demurrage. These funds would go to the construction of churches, which could progress only little by little, employing the local citizens along the way. The local and high-velocity nature of the currency ensured that even peasants saw a decent amount of money passing through their hands, providing a relatively comfortable life.
It was Silvio Gesell who proclaimed that in a natural order, economics must replicate nature. His idea was that our foodstuffs and our houses decay in value over time, hence our money should as well. He proposed a demurrage on all money which represents goods that decay, in order to more accurately depict their value.
Going back another few millennia, the economy of Ancient Egypt functioned on a similar understanding. To our knowledge, Ancient Egyptians hold the record for the longest civilization sustained. And by all accounts, they had a solid economy for thousands of years, which only faltered after their defeat by Rome.
Although no certain claim exists, a common understanding is that commerce was done using two different moneys; [13] every Ancient Egyptian regionality pooled their grains into municipal grain banks, and transacted with shats, for their deposit. Local commerce and barter would occur through these shats, which were depreciative in nature, as they symbolized the value of stored grain. The incentive to spend, which was ingrained in these shat as natural demurrage, ensured that even the lowest echelons of society had access to bread and beer, the staples of the Egyptian diet. Governments would also use those deposits to provide funding for local public projects such as roads, fueling local infrastructure development. In international trade, or in the purchase of more valuable or capital-intensive things such as a house or an ox, gold or silver was used instead.
This dual economic system would be considered advanced, even compared to our modern economy; it’s surely one of my personal favorite implementations of a complementary currency system. Just like Gesell said, economics must replicate nature — and I take balance to be the first law of nature. I have yet to see a more balanced system than a depreciating local currency which represents the staple and commoner requirements of life in cooperation with an appreciating, continental currency representing the grander needs and interests of life.
Zero Interest
One other option for balanced currency might exist: a value-neutral, interest-free currency, or money that can be printed, just like that, by governments or communities and distributed at face value of the relevant currency unit. Unlike the dollar, however, it would not carry interest, hence does not punish its users for investing or pooling resources for collective action. One thinker on the matter was Henry Ford.
He strongly favored a concept of currency with zero-interest for the purpose of financing dams and infrastructure projects by the US government in the early twentieth century. One caveat of this scheme, however, is that it takes effort to get people to participate in this network, so the project must be for the collective good of everyone involved and managed by a central authority, such as a government, to ensure trust.
Currency and Region
“Money is like muck, not good except that it be spread.” — Francis Bacon
Another approach to complementary currencies is to restrict them by regionality. Instead of playing with the settings of value or interest in a money, we can institute regional moneys to create different closed loops. This allows for the divvying up of global capital into pockets of local capitals, and the management of that capital can take place in a self-organizing, organic manner by the various localities. These pockets would serve as stabilizers for global economic fluctuations, and would represent a more decentralized economic order; one which is more robust, more resistant to political, climatic, and economic instabilities throughout the world and with faster response mechanisms in the face of unexpected externalities.
Simple regional currencies that are pegged to the euro or the dollar have been the most implemented type of currencies. They are simple to use, and are familiar to the end user. By limiting the flow of a currency within a tighter region, they are also aimed at increasing what is called local money multiplier, the amount of times a currency changes hands (which is directly correlated to the money velocity.) Larger money multiplier, in turn, creates a larger wealth effect. It is estimated, from a study conducted in Andersonville, Chicago, that a dollar spent in a local store is nearly 60% more impactful than a dollar spent at a chain store. [14] Another study found that local spending incites charitable spending up to four times because local businesses are much keener to give back to their community compared to national chains. [15] Mentioned added effects are promoting entrepreneurship and self-sustainability, as well as improving economic equality within a region.
These currencies can also effectively be supported by local commerce of a region, hence are politically easy to align behind. This makes regional currencies quite common in the complimentary currency space. At it’s current phase, the complimentary currency revolution is still under the radar — but it’s easy to see burgeoning examples in many parts of the world. The Bavarians of Germany have their wildly successful Chiemgauer. [16] One cool thing about this currency, besides its strong adoption and volume, is the application of demurrage; every three months, a Chemgauer loses 2% of its value. Through this, it is estimated that the Chemguer’s money multiplier is three times that of the Euro. [17]
Up north, in a post-Brexit Britain, the emergence of the Bristol Pound [18], the Brixtol Pound [19] cue towards a trend. These are 2 of the 4 transition towns which are running regional currencies alongside the conventional pound. Local businesses can pay their wages with local currencies, and local workers spend in the local economy, creating positive reinforcement loops for the local economy. In Bristol, the mayor gets paid in Bristol Pounds to support the local currency movement. And the projects are garnering enough success to incite other cities to think about issuing their own local currency. Most recently, a private company in Liverpool launched what it dubbed the Liverpool pound, on the blockchain as a cryptocurrency.[20] Or, in tandem with the current politics of independency efforts in the region, the local-currency movement in Barcelona can also be seen from a new perspective and as part of a megapolitical trend.[21]
One of the most famous examples of a complementary currency in a regionality is in the city of Curitiba, Brazil. In 1971, the newly elected mayor had a problem on his hands. Curitiba was a poor city in the middle of fertile lands. It had seen significant urbanization from the farmlands in recent years, and much of it consisted of favelas. These favelas were hard to keep clean because the streets were narrow, and garbage trucks couldn’t move through the alley-like streets. Curitiba also had a modernized public-bus system, which was under-utilized because most of the citizens were too poor to afford it. Like any other city mayor, he had a certain amount of capital he could play with, and he wanted to get the greatest impact from it.
The mayor came up with an idea. He put large garbage bins on the edges of the favelas and distributed people varying quantities of plastic chips, depending on the amount of garbage they collected. These chips could be redeemed for bus rides , allowing people mobility into the city for new job opportunities. The chips also organically developed a local economy where people used the chips to purchase fruits and vegetables, which were in abundant supply from the surrounding farmlands.
Schools also organized around the idea to collect garbage, and cashed them in with the city in exchange for the children’s notebooks and school supplies. According to Bernard Lietaer’s 2010 book New Money for a New World over 100 schools participated to receive 1.9 million notebooks in exchange for collecting more than 200 tons of garbage! Between 1971 and 1990, with more than 70% of households in the city participating, the economy of Curitiba managed to grow at a rate of nearly 50% faster than that of the rest of Brazil; this is a miraculous growth rate difference by any modern standard. (For reference, if the US grows at 3% in a year, it’s considered “strong growth.”)
Conclusion
“Wealth is the slave of a wise man. The master of a fool ” — Seneca
The core purpose of money is to quantify, save, and exchange wealth. The aim of this and many other conversations is actually to discuss wealth: how we define it, how we maximize it, and how we share it. We could very well live in a society where large segments of the population are not forced to work two jobs and drive for Uber on the side to make ends meet, while others have five mansions scattered across the globe and private jets for traveling between them. We have the technological resources at hand to incite a true revolution, and transition into a post-scarcity economy. Our food could be harvested at very low labor costs by agricultural robots, coupled with hydro- or aquaponic farming methods, which are immensely more efficient. Our energy needs could be met, almost for free, with well-configured wind farms and scaled battery storage. The best of our educational material, free to all with MOOCs. 3D printing and robots completely overhauling manufacturing and even construction. Self-driving cars assisting our transportation, and the unfathomable power of AI to orchestrate it all for us.
The future is coming, and it’s coming much faster than we can even perceive. But we still don’t have a clear way to manage and distribute the immense wealth that will come with it. We have two paths in front of us — either we share these accessible resources within a new economic paradigm, with new incentive structures, business models and currency settings; or we face complete chaos that’ll stem from the rightful dissatisfaction of the billions that get left behind.
On the bright side, for the first time in history commons have seized the power to economically self-organize and self-sustain with the advent of Bitcoin, blockchain technology, and easily configurable cryptocurrencies. Thanks to Satoshi Nakamoto, the people can reclaim their economy from ivory towers and marble offices and decide what’s best for them. It is no doubt that all indicators of the current paradigm, and the promise of a digital, borderless, global economy point to cryptocurrencies as the money of the future. [22] But if we are to build out the next economic paradigm, and justly share our wealth with one another as we ought to, we need to start thinking about the money in our hands, and lift our heads out of the sand — as a beautiful world awaits us atop.
As for my part, I’m trying to build, with an amazing group of people, a small project called Localties in my company Consensys. If you’d like to learn more about my project, or discuss any of my ideas, feel free to reach out to me.
Thank you.
