A Better Way to Make Money

In Russell Hoban’s novel Riddley Walker, the descendants of nuclear holocaust survivors seek amid the rubble the key to recovering their lost civilization. They end up believing that the answer is to re-invent the atom bomb. I was reminded of this when I read the government’s new plans to save us from the credit crunch. It intends – at gob-smacking public expense — to persuade the banks to start lending again, at levels similar to those of 2007. Isn’t this what caused the problem in the first place? Are insane levels of lending really the solution to a crisis caused by insane levels of lending?

Yes, I know that without money there’s no business, and without business there are no jobs. I also know that most of the money in circulation is issued, through fractional reserve banking, in the form of debt. This means that you can’t solve one problem (a lack of money) without causing another (a mountain of debt). There must be a better way than this.

This isn’t my subject and I am venturing way beyond my pay grade. But I want to introduce you to another way of negotiating a credit crunch, which requires no moral hazard, no hair of the dog and no public spending. I’m relying, in explaining it, on the former currency trader and central banker Bernard Lietaer.

In his book, The Future of Money, Lietaer points out — as the British government did a couple of days ago — that in situations like ours everything grinds to a halt for want of money. But he also explains that there is no reason why this money should take the form of sterling or be issued by the banks. Money consists only of “an agreement within a community to use something as a medium of exchange.” The medium of exchange could be anything, as long as everyone who uses it trusts that everyone else will recognize its value. During the Great Depression, businesses in the United States issued rabbit tails, seashells and wooden discs as currency, as well as all manner of papers and metal tokens. In 1971, Jaime Lerner, the mayor of Curitiba in Brazil, kick-started the economy of the city and solved two major social problems by issuing currency in the form of bus tokens. People earned them by picking and sorting litter: thus cleaning the streets and acquiring the means to commute to work. Schemes like this helped Curitiba become one of the most prosperous cities in Brazil.

But the projects that have proved most effective were those inspired by the German economist Silvio Gessell, who became finance minister in Gustav Landauer’s doomed Bavarian republic. He proposed that communities seeking to rescue themselves from economic collapse should issue their own currency. To discourage people from hoarding it, they should impose a fee (called demurrage), which had the same effect as negative interest. The back of each banknote would contain 12 boxes. For the note to remain valid, the owner had to buy a stamp every month and stick it in one of the boxes. It would be withdrawn from circulation after a year. Money of this kind is called stamp scrip: a privately-issued currency which becomes less valuable the longer you hold onto it.

One of the first places to experiment with this scheme was the small German town of Schwanenkirchen. In 1923, hyperinflation had caused a credit crunch of a different kind. A Dr Hebecker, owner of a coalmine in Schwanenkirchen, told his workers that if they wouldn’t accept the coal-backed stamp scrip he had invented — the Wara — he would have to close the mine. He promised to exchange it, in the first instance, for food. The scheme immediately took off. It saved both the mine and the town. It was soon adopted by 2000 corporations across Germany. But in 1931, under pressure from the central bank, the ministry of finance closed the project down, with catastrophic consequences for the communities that had come to depend on it. Lietaer points out that the only remaining option for the German economy was ruthless centralized economic planning. Would Hitler have come to power if the Wara and similar schemes had been allowed to survive?

The Austrian town of Wörgl also tried out Gessell’s idea, in 1932. Like most communities in Europe at the time, it suffered from mass unemployment and a shortage of money for public works. Instead of spending the town’s meager funds on new works, the mayor put them on deposit as a guarantee for the stamp scrip he issued. By paying workers in the new currency, he paved the streets, restored the water system and built a bridge, new houses and a ski jump. Because they would soon lose their value, Wörgl’s own schillings circulated much faster than the official money, with the result that each unit of currency generated 12 to 14 times more employment. Scores of other towns sought to copy the scheme, at which point — in 1933 — the central bank stamped it out. Wörgl’s workers were thrown out of work again.

Similar projects took off at the same time in dozens of countries. Almost all of them were closed down as the central banks panicked about losing their monopoly over the control of money (just one, Switzerland’s WIR system, still exists). Roosevelt prohibited complementary currencies by executive decree, though they might have offered a faster, cheaper and more effective means of pulling the US out of the Depression than his New Deal.

No one is suggesting that we replace official currencies with local scrip: this is a complementary system, not an alternative. Nor does Lietaer propose this as a solution to all economic ills. But even before you consider how it could be improved through modern information technology, several features of Gessell’s system grab your attention. We need not wait for the government or the central bank to save us: we can set this system up ourselves. It costs taxpayers nothing. It bypasses the greedy banks. It recharges local economies and gives local businesses an advantage over multinationals. It can be tailored to the needs of the community. It does not require — as Eddie George, the former Governor of the Bank of England, insisted – that one part of the country be squeezed so that another can prosper.

Perhaps most importantly, a demurrage system reverses the ecological problem of discount rates. If you have to pay to keep your money, the later you receive your income, the more valuable it will be. So it makes economic sense, under this system, to invest long-term. As resources in the ground are a better store of value than money in the bank, the system encourages their conservation.

I make no claim to expertise. I’m not qualified to identify the flaws in this scheme, nor am I confident that I have made the best case for it. All I ask is that, if you haven’t come across it before, you don’t dismiss it before learning more. As we confront the failure of the government’s first bailout and the astonishing costs of the second, isn’t it time we considered the alternatives?

George Monbiot is the author of the best selling books, The Age of Consent: A Manifesto for a New World Order and Captive State: the Corporate Takeover of Britain; as well as the investigative travel books Poisoned Arrows, Amazon Watershed and No Man’s Land. He writes a weekly column for the Guardian newspaper (UK). Read other articles by George, or visit George's website.

4 comments on this article so far ...

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  1. Michael Kenny said on January 21st, 2009 at 12:57pm #

    Since I have come accross it before, I’ll take up Mr Monbiot’s offer and dismiss it without learning more. The odd part is where I came accross it: Britain in 2009! Separate local banknotes, parallel to UK legal tender notes and coin, have long been issued in Scotland. They are accepted all over Scotland but not outside it (perfidious Albion, and all that!). A similar system exists in Northern Ireland (where they even accept Euros, having a land frontier with the Eurozone!). The last time I was in the Isle of Man, which, admittedly, was in 1961, they too had a system of local bank notes. So Mr Monbiot should perhaps think about visiting Britain, where he’d see the system working in practice.

  2. Doug Page said on January 21st, 2009 at 1:01pm #

    This is a fertile, for us revolutionary, idea, one that is suppressed by the taboo of the mainstream. This concept needs to be explored and widely disseminated. Lincoln issued Greenbacks to finance the Civil War. Our original colonies issued paper money, Pennsylvania quite successfully. Please communicate with me on this topic if you have banking expertise.

  3. Doug Page said on January 21st, 2009 at 1:14pm #

    George Monibot and all readers should check this article by Ellen Brown, “A Radical Plan for Funding the New Deal:”


  4. David said on January 22nd, 2009 at 11:12am #

    Let me remind you of the power of three letters: IRS.

    When I was living in Evanston, IL, in the 1970s, some of the locals had set up a skills-swapping barter system. For example, a dentist who needed a new hot water heater in his home would offer a plumber listed in the system a free examination and cleaning for the plumber’s children upon installation of the hot water heater.

    The IRS got wind of this and declared that the value of such swaps were taxable as income. This effectively shut the swap system down.

    Local currencies could be declared as barter and taxed.

    Lastly, only the federal government is allowed to print and issue currency by the US Code.