What’s all the fuzz about money?

Debt-free money may well be the solution to restoring a sane monetary system.

The internet played a big role in teaching us a new truth - "money is designed and that design matters" [EPA]

Chiang Mai, Thailand – In response to the 2008 global meltdown, there are really two arguments for what needs to happen next. One is fairly straightforward: We need to change the financial system through which money flows – though of course, the debate is on what precisely needs to be changed.

But there is a more fundamental debate growing throughout the world of autonomous media and its productive publics: What if money itself needed to be changed? This is not a debate about the financial system per se, but actually an argument about the intrinsic “design” of money.

But, isn’t money just money? No, it isn’t, and paradoxically, though the debates precedes its emergence, the internet played a big role in teaching us a new truth: Money is designed, and that design matters.

We’ve learned this because in distributed networks such as the internet and on social media platforms where everyone can connect to each other, there is nevertheless an invisible architecture. That architecture consists of thresholds, which makes certain activities easy (making friends on Facebook), and others difficult (protecting your privacy on Facebook).

In a distributed network, where there is no “us and them” that is readily identifiable, this invisible design has nevertheless a tremendous influence on the rules of the system and how we actually behave. And this is what we have come to understand about money: It is not a neutral means of payment, but a tool that is designed to benefit some people, and inevitably hurts others. Call it an expression of protocollary power, or call it value-sensitive design – it matters!

Remember, every traditional society and religion, as Islam still does today, considered lending at interest a grave sin. Why was that? For a very simple reason. If you ask for interest in a static pre-modern society and you need to repay more than you have borrowed, then you can only take it from someone else, thereby destroying the social fabric of non-growing societies.

This is why interest is forbidden in Islam and why the Jewish people had the Jubilee at the core of Mosaic Law, in which debt was cleaned from the slates (the so-called Clean Slate Edicts), and debt-slaves were freed. Capitalism has abolished these interdictions and has “solved” the social crisis through growth. Indeed, the only way you can pay back more than that you borrow without taking it directly from others, is by endlessly growing the economy.

This is why capitalism has to grow. There is no standing still for any firm or individual that has debts, which is really all of us. Growth therefore becomes a categorical imperative. Nevertheless, compound interest remains a phenomenon that violates physical and mathematical law, meaning that unpayable debts must be cleared periodically through major systemic breakdowns and deleveraging on a massive scale.

But what happens when society is in ecological overshoot, using 1.5 times more than the earth’s generative capacity already? Then the problem of compound interest becomes a dramatic impediment to the survival of the human race where interest-based money is directly responsible for the destruction of the biosphere. The existence of capitalism, debt and interest-based money are intimately intertwined. What needs to be understood is that “interest” is not a natural, trans-historical feature of money.

Negative interest

Indeed, traditional “pre-modern” societies were marked by the use of negative interest money, whose loss of value reflected the ongoing decay of natural resources (and the “physical” nature of the money was itself subject to decay). In Bernard Lietaer’s excellent new book, New Money for a New World, of which I read part in the manuscript version, has a very interesting section on medieval Europe before the 14th century, where the European population doubled in just three centuries.

In the “Brakteaten” system of the European Middle Ages, Lietaer writes, people had to give their coins back every four to six years, for example, five coins in exchange for four. The result was that accumulation of money was not very profitable, meaning that those with money had very good reason to invest it into productive resources or to lend it out, which was itself a core reason for the economic wellbeing of that time.

In this period, Lietaer writes, farmers enjoyed a five day working week, which included not just the day of the Lord, but Blue Monday, the day of the family, as well as more than 100 religious festival days. Female skeletons in the cemeteries of the time showed them to be quite tall, a sign of excellent health. However, after the defeat of the Cathar heresy, the French king re-introduced centralised royal money and interest. According to Lietaer, the results soon proved to be catastrophic and the 14th century was plain horrible.

Lietaer offers an interesting hypothesis – that it was not the plague which destroyed the High Middle Ages, but actually the dislocation through centralised money, which decimated the social fabric and allowed the plague to make easy inroads. By that time, the social pressure of the banking and merchant sectors became such that the Church slowly abandoned its opposition to usury. As the historian Jacques Le Goff has argued, it even introduced the idea of Purgatory, so that bankers could pay off their sins and shorten their punishments.

The decision by the French king shows another aspect of the design of money: The importance of who can issue it. For the budding nation-states, which eventually would become the Westphalian system, local money had to be destroyed and the state had to become the sole issuer of currency.

Today though, money creation has become a largely private affair. Not only is government money created through debt, but most money in circulation is also created through the leveraging of banks. Most of the money is lent into existence and thus essentially created by private banks in a system of generalised compound interest.

Credit has become one of the primary means of reverse wealth distribution, a tax on the 99 per cent by the 1 per cent; financial expert Margrit Kennedy has calculated that 45 per cent of the price of goods reflects this cost of capital. As economists such as Steve Keen and Michael Hudson have demonstrated, the systemic breakdown in 2008 is essentially a crisis of debt – a generalised incapacity of governments, corporations and households to repay their debts. Without wiping out the debt, we cannot restart the economy.

A monetary revolt?

Successful negative interest experiments are by no means confined to ancient times, when they were the norm. A famous “modern” case is the introduction of the Worgl Shillings in the crisis-ridden economy and hyper-inflation marking Austria in the thirties.

When burgomaster Michael Unterguggenberger created “labour certificates” that depreciated one per cent in value every month, his town became an island of prosperity and dramatically reduced unemployment; it subsequently became the town became a centre of pilgrimage for European and American macro-economists. (The successful experiment was killed by the Austrian National Bank, who feared the loss of control of its national currency monopoly.)

That much is clear. The failings of not just the financial system, but also of its mainstream money mechanism is becoming public knowledge, leading to an unprecedented wave of alternative practices on a local-regional, national and global scale.

People are no longer waiting for financial reform from the top down, but are busily creating a monetary bio-diversity.

Local complementary currencies are already well-known, in the form of LETS and Time Banks, but they are now experiencing a real boom, even in emerging countries such as Brazil. Fortified by studies that show how local currencies insulate the local economy from boom and bust cycles and from “leakage”, many communities are starting new ones since 2008.

In a recent study on their economic effects, Bielorussan researcher Ivan Tsikota concluded that “all complements provide wider employment opportunities, growth of welfare, and richer access to credit facilities. Analysis of interest-free banks suggests that this type of financial institutions can foster more efficient allocation of resources”.

New softwares

There are now several digital and internet packages that facilitate the management of such schemes. A problem, though, is their difficulty in scaling, which is one of the reasons they are now instituted right away on a regional scale, such as the German Regiogeld experiment.

One of the more successful and often cited examples is the WIR, an 80-year-old mutual credit system that unites 90,000 small businesses in Switzerland and has a proven counter-cyclical effect. When the mainstream economy gets tough, its members increase the weight of the WIR-denominated IOU’s in their internal dealings, keeping the local Swiss economy moving.

As monetary expert Thomas Greco writes, “WIR has proven over a long period of time the effectiveness of direct clearing of credits between buyers and sellers as an alternative to conventional bank-created debt-money.”

The late Richard Douthwait of FEASTA concluded in his own study, “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.”

There is also movement on the national scale, through economic mavericks such as public banking advocate Ellen Brown and the proponents of Modern Monetary Theory, which counts James Galbraith, Steve Keen and Michael Hudson amongst its adherents. Essentially, they argue that public authorities should abandon the debt-based creation of money and spent money into circulation for productive rather than speculative.

There is an extensive historical record to show that such money creation does not create inflation and that such policies were instrumental in getting countries out of crisis situations (most recently Argentina). The refusal to bailout their banks is also at the root of the revival of the Icelandic economy. If only the Greeks would follow suit!

Debt-free currency

However, the biggest development may in fact be the creation of a workable, socially sovereign, debt-free currency called Bitcoin.

Started on January 4, 2009, it already has developed an impressive ecology of operational support infrastructures and services. At this point, it is already working as a small-scale global reserve currency. Bitcoin draws its value from peer-to-peer network dynamics and mints new currency not through debt but raw computational activity. You can buy many different goods and services with Bitcoin, exchange it with other currencies, pay salaries, etc.

It works without any difficulty on a global scale and solves the scaling issues that plagued local complementary currencies. Hence, it is symbolic of the shift of our world system to a “post-Westphalian” phase that goes not only beyond the dominance of the nation-states, but also beyond the private global powers that have hijacked global governance, such as the financial system of the 1 per cent.

It is a true p2p monetary system – perhaps even a shadow banking system for civil society – and exists by virtue of its social creation and the social trust of the global hacker community. It protects their elective communities from global financial storms.

If debt-free money is indeed the problem, then we can now embark on the journey to return to a sane monetary system that requires neither infinite growth nor the impoverishment of many, not by waiting for the agreement of the 1 per cent and their institutions, but by creating the conditions for change on the different scales where citizens can act right now.

Michel Bauwens is a theorist, writer and a founder of the P2P (Peer-to-Peer) Foundation.

Follow him on Twitter: @MBauwens