Sacred Economics: Money, Gift, and Society in the Age of Transition (29 page)

Another currency that emerged around this time, and that is still in use today, was the WIR in Switzerland. The currency is issued by a cooperative bank and is backed only by the mutual agreement of its members to accept it for payment. Founded by adherents of Gesell’s theories, the currency originally bore a demurrage charge that was eliminated during the high-growth period after World War II.
¹¹
As I shall explain, negative interest is unnecessary in a very high-growth environment; today, as we approach a steady-state economy and enter a new phase of development, it may be attractive once more.

In the United States many “emergency currencies,” as they were called, were issued in the early 1930s. With the national currency evaporating through an epidemic of bank failures, citizens and local governments created their own. The results were mixed, and very few of them incorporated Gesell’s design, but rather imposed a fee per transaction rather than per week or per month.
¹²
This
has the opposite effect of demurrage because it penalizes circulation rather than hoarding. However, in 1933 at least a hundred cities were preparing to launch stamped currencies of their own, many of the correct, Gesellian, type.
¹³
Moreover, with the backing of Irving Fisher, a bill was introduced in both the House of Representatives and the Senate that would have issued one billion dollars of stamp scrip nationally. This and many of the proposed state and local currencies would have had a much, much higher demurrage rate—2 percent per week—that essentially would have made the currency self-liquidating in one year. This is an entirely different animal from the Wörgl currency and most modern proposals, but it shows that the basic concept was being seriously considered. Here is an excerpt from the Bankhead-Pettengill amendment to the Costigan-LaFollette unemployment relief bill (S. 5125) of 1933:

Senate Bill 5125 never came to a vote, and a month later Roosevelt banned all “emergency currencies” by executive decree when he launched the New Deal. According to Bernard Lietaer, the reason he did this was not because the local and state currencies wouldn’t be effective in ending the Depression, but because it would mean a loss of central government power.
¹⁴

Today we are at the brink of a similar crisis and face a similar choice between temporarily shoring up the old world through an intensification of centralized control or letting go of control and stepping into the new. Make no mistake: the consequences of a free-money system would be profound, encompassing economic, social, psychological, and spiritual dimensions. Money is so fundamental, so defining of our civilization, that it would be naive to hope for any authentic civilizational shift that did not involve a fundamental shift in money as well.

The idea behind free-money, so popular in the early twentieth century, has lain dormant for sixty years. It is resurgent now, as the economic crisis demolishes the sureties of the past half-century and calls forth the thinking that came out of the Great Depression. Part of this is a Keynesian revival, since the monetarist prescription of lowering interest rates and purchasing government securities to stimulate the economy has hit a limit—the “zero bound” beyond which central banks cannot lower interest rates. The standard Keynesian response (based, however, on a partial reading of Keynes) is fiscal stimulus—the replacement of flagging consumer
spending with government spending. President Barack Obama’s first economic stimulus was a Keynesian measure, although probably insufficiently vigorous even within that paradigm.

The zero bound problem has gotten some mainstream people thinking about negative interest rates: my research for this chapter uncovered a paper by a Federal Reserve economist,
¹⁵
a
New York Times
article by a Harvard economics professor,
¹⁶
and an article in
The Economist
magazine.
¹⁷
When Keynesian stimulus fails (ultimately, for the reason of the depletion of the commons, as I’ve discussed), the far more radical solution of decaying currency may be on the radar screen. Presently, the economy is in mild recovery, and the delusional hope of a return to normal still possible to maintain. But because of the near-depletion of the various forms of common capital, the recovery will probably be anemic, and “normal” will recede into the distance.

The first obvious failure of Keynesian stimulus came in Japan, where massive infrastructure spending starting in the 1990s failed to reignite economic growth there. There is little room in any highly developed economy for further domestic growth. The solution for at least twenty years has been, in effect, to
import growth
from developing countries by using the monetization of their social and natural commons to prop up our own debt pyramid. This can take several forms: debt slavery, where a nation is forced to convert from subsistence production and self-sufficiency to commodity production to make payments on foreign loans; or dollar hegemony, in which highly productive countries like China have
no alternative but to finance U.S. private and public debt (because what else are they going to do with those trade surplus dollars?). Eventually, though, the solution of importing growth must fail too, as developing countries, and the planet as a whole, reach the same limits that developed countries have.

Official economic statistics have hidden the probability that the Western economies have been in a zero-growth phase for at least twenty years. Whatever growth there has been has come largely from such things as real estate bubbles, the prison industry, health care costs, insurance and financial services, educational costs, the weapons industry, and so forth. The more expensive these are, the more the economy is assumed to have grown. In areas where there has been growth, such as the internet, much of this is actually a covert form of importing growth. Internet-based revenue comes mostly from sales and advertising, not from new production. We are more efficiently greasing the wheels of the conveyor belt of goods from China to the West. In any event, developing countries cannot keep the growth machine running forever. The more it slows, the more it will be necessary to get around the zero bound.

While the idea of fixing stamps onto currency seems quaint, recently several prominent economists have proposed modern alternatives. Since most money is electronic anyway, the key measure is some kind of liquidity tax (as proposed by Irving Fisher as early as 1935) or, equivalently, a negative interest rate on deposits in the Federal Reserve. The latter measure was proposed by Willem Buiter, then a professor of economics and now chief economist at Citibank, in a 2003 paper in the
Economic Journal
and then in the
Financial Times
in 2009 (see the bibliography). It has also been broached by Harvard economics professor Greg Mankiw and
American Economics Association president Robert Hall,
¹⁸
and even discussed by Federal Reserve economists.
¹⁹
I hope these names make it clear that this is not a crackpot proposal.

Of course, physical currency would need to be subject to the same depreciation rate as reserves, which could be accomplished either through Gesell’s method, by having expiry dates on currency, by replacing it with (or redefining it as) bearer bonds with a negative interest rate, by using cash currency that is distinct from the official unit of account, or by letting the exchange rate between bank reserves and currency fluctuate.
²⁰
Another option would be to ban official physical currency altogether, which could vastly increase the power of government since every electronic transaction could be recorded. Frightening as that is to those (including myself) who are wary of the surveillance state, my response to that concern is, “Too late.” Already today nearly all important transactions are done electronically anyway, with the notable exception of those involving illegal drugs. Cash is also used extensively in the informal economy to help people avoid taxes, a motive that would disappear if taxation were shifted away from incomes and onto resources as I propose.

Moreover, there is no reason why unofficial currencies shouldn’t thrive alongside the official, negative-interest electronic currency. Whether these are electronic or paper depends on the application: probably commercial barter rings and credit-clearing cooperatives would use electronic money while local, community-based currencies might prefer paper. Either way, transactions using these currencies would be outside the purview of the central government. Their community
of use would decide what level of record-keeping to exercise over the currency. People who operate completely in a local economy, such as hippies, back-to-the-landers, and other people I love, would lead economic lives invisible to the central authorities. There are, however, other reasons to make all transactions and financial records open, not only to the government, but to everyone. This, indeed, has been proposed more generally as an antidote to the surveillance state—make surveillance technology public and ubiquitous—and it is happening already with the proliferation of video cameras in cell phones, hand-held gaming consoles, and other devices. When the activities of government are just as transparent to the people as the activities of the people are to the government, we will have a truly open society.

I want to emphasize the practicability of the modern negative-interest proposals. While Gesellian stamp-scrip currency seems like an anachronistic pipe dream that would involve massive economic disruption, levying a charge on reserves would require almost no new financial infrastructure. Indeed, it is an extension of where monetary policy has already been headed. The same Federal Reserve, the same central banks, the same basic banking system could remain intact. Of course, profound changes would follow, but they would be evolutionary changes that would spare society the disruption of scrapping the financial system and starting anew. As I wrote in
Chapter 5
, “Sacred economics is part of a different kind of revolution entirely, a transformation and not a purge.”

Some central banks have already flirted with negative interest. In July 2009 the Riksbank (Sweden’s central bank) went negative, levying a 0.25 percent charge on reserve deposits, a level at which it remained as of February 2010.
²¹
This is negligibly different from
zero, but the justification for lowering the rate that far also applies to lowering it still farther. The Riksbank, Buiter, Mankiw, and other mainstream advocates of negative interest rates see them as a temporary measure to force the banks to restart lending and make cheap credit available until the economy starts growing again, at which point, presumably, interest rates would rise back into positive territory. If, however, we are entering a permanent zero-growth or degrowth economy, negative interest rates could become permanent too.

The proper rate of interest, positive or negative, depends on whether the economy is to grow or shrink. In the old thinking, monetary policy was intended to spur economic growth or to restrain it to a sustainable level. In the new thinking, monetary policy strives to match the base interest rate to the economic growth (or degrowth) rate. Keynes estimated that it should be “roughly equal to the excess of the money-rate of interest over the marginal efficiency of capital corresponding to a rate of new investment compatible with full employment.” This formula would need to be modified if, as I suggest in
Chapter 14
, we should no longer and can no longer seek full paid employment as a positive social good (this is a necessary consequence of steady-state economics and not so scary in the presence of a social dividend). Essentially, though, what Keynes is suggesting is that the liquidity tax be set at a level to compensate for the excess of interest over the average return on investment in productive capital. In other words, it must be set at a level so that there is no advantage to holding wealth versus using wealth.

Buiter and Mankiw are no liberals, which is significant because their proposals are contrary to the interests of the creditor class that conservatives typically represent. Liberal economists sometimes
advocate a near equivalent to demurrage: inflation. Inflation is mathematically very similar in its effects to a depreciating currency in that it encourages the circulation of money, discourages hoarding, and makes it easier to repay debts. Free-money has several important advantages, however. In addition to eliminating classic costs of inflation (menu costs, shoe-leather costs, etc.), it does not impoverish people on a fixed income. Here is a typical pro-inflation argument by Dean Baker of the Center for Economic and Policy Research:

The problem is, in a deflationary environment when banks aren’t lending, how can the Fed create inflation? This is the biggest problem with the inflation solution in a situation of overleveraging and overcapacity. Quantitative easing exchanges a highly liquid asset (base money, reserves) for less liquid assets (e.g., various financial derivatives), but that won’t cause price or wage inflation if the new money doesn’t reach people who will spend it.
²³
Even if the Fed monetized all debt, public and private, the essential problem
would remain. Owing to the zero lower bound, the Fed was powerless to inflate its way out of the debt trap in 2008 and 2009. Here we return to the original motivation for free-money: to get money circulating.