Monetary Systems

August 18, 2010

alternative monetary systems

There are viable alternatives to our current monetary system. They’ve been used in the past, and they can be revived for our benefit again. But the rewriting of history and our collective amnesia does not allow us a positive view of these systems. Let’s have a look.

First, let’s start with a brief simplified explanation of what our monetary system is and the structural biases inherent in it.

Our monetary system is based upon debt. For us to have growth, we must grow our debt. The creation of more debt creates more money in circulation. Is it any wonder then that we are seeing a “credit crunch”? Another giant burst bubble?

When you go to your bank for a loan or mortgage, the bank creates the money out of “thin air” to lend to you. They are not passing on depositors money to you, the Federal reserve 9:1 ratio allows them to create your mortgage amount with keystrokes, digitally putting the funds into your account. Only 1/10 of the funds needs to be actual money actually held by the bank in reserve.

The money you are given is now in circulation and has added to the growth of your country.

When you pay the money back the principal cancels out the amount created, but the interest you pay is now all the banks income and creates it’s profits. The interest you pay must be money found from somewhere in circulation, you have to work to earn it.

When the total amount of interest payable to all the banks by all the people who owe money to them, is greater than the total productivity of those people, then you have a musical chairs situation. There is only so much money to go around to find to pay that interest, those who cannot get their hands on enough to pay what they owe will go bankrupt. The music stops and there is not enough chairs.

The fact that interest can compound creates even more of a problem. If you have enough money for yourself that you can allow some to sit aside and earn interest, then you will get more money. If however you do not have enough money sitting around and you need more than you have to provide the necessities of life (a home is the biggest one) then you will have to borrow and pay interest. Those who have more than they need will get more, those who do not have enough for their needs will end up with less. Thus the rich get richer and the poor get poorer. This has been the pattern in many western countries for a long time. If we don’t change this system it will only get worse.

So that’s how our existing monetary system works, and the two main biases inherent in it, interest and debt, create the problems that we have.

Is there a better way? Yes, and it’s easy! However, expect legal obstacles, because laws are written to protect the powerful and alternative monetary systems undermine that power like no other method.

Money originally was a medium of exchange. We need to return to that idea and move away from viewing money itself as the end and not the means.

There are three main structural aspects to an alternative monetary system for it to work better for us and to avoid the problems we now have.

1. Interest cannot be allowed. No one can loan their capital to another and require interest to be paid on that capital. And before you respond with “where will anyone get loans from then? That can’t work!” read point number 2.

2. Periodically, every several months to a year, all the money in circulation must be devalued. It must all be returned to an exchange and new money issued. The money you get back needs to be a value about 5% less than the money you hand into the exchange. This structural requirement is biased to money being circulated more freely.

Our current system encourages hoarding of money; when we enter a recession or depression there is not enough money circulating for the needs of business because it is being hoarded. Hoarding is encouraged by compound interest. If your money regularly devalued there would be no point in saving it up and every point in using it to purchase the means to increase your comfort or production or material wealth.

There will still be some people who accumulate some money and have no desire to spend it straight away. These people may loan it to others who have an immediate need of capital, at no interest. The lender is assured that it will be returned in full at agreed payment dates by the borrower, and the lender thereby avoids the periodic devaluation. The borrower gets the capital they need, and has to pay it back, but does not have the burden of interest or compounding interest. Only what is borrowed need be repaid.

3. The creation of new money in circulation needs to be tied to production instead of debt. If a community at any level (small to country wide) produces more, then the amount of money produced to circulate in that community should increase. In this way we encourage growth by increased production, not increased debt.

There are several contemporary examples of alternative monetary systems in use at this time. There are many historical examples, the middle ages from about 1100 to 1300 was prolific with them and they worked very well indeed. They worked so well at distributing wealth more evenly that they undermined the status of the aristocracy, who felt under threat, and therefore they were outlawed.

I am convinced by long and careful reading and thought that the reason for our current economic ills has it’s basis in our monetary system, and our allowance of corporate power. If we can change our monetary system and remove some power from corporations over people we may be able to build a better world.

Further reading (and watching):
The excellent “Money as Debt” on YouTube explains how our monetary system works.
“Life Inc.”, by Douglas Rushkoff.
“Interest and Inflation Free Money”, by Margrit Kennedy.
Read about alternative monetary systems both contemporary or historical here.


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