Comment on Creating New Money: A Monetary Reform for the Information Age, by Joseph Huber and James Robertson. New Economics Foundation (2001)
Comment by Thomas H. Greco, Jr. February 15, 2002
Any reasonable and well-informed proposal for reforming the present system of money, banking, and finance should be welcomed by all who are aware of the serious errors, dysfunctions, and inequities inherent in the present regime. For this reason, I am grateful to Joseph Huber and James Robertson for giving us their proposal of “seigniorage reform” outlined in the above referenced book. That is not to say that I agree with everything in it, or that I fully endorse their proposal in all of its particulars.
My own work has, for the most part, taken a different approach, which is aimed at the liberation of the exchange process through the creation of independent credit clearing circles (like mutual credit systems, trade exchanges, LETS, and supplemental non-official currencies). Nonetheless, I propound the need for tackling the “money problem” at every level and in every quarter – including the grassroots level, the business-to-business level, the provincial, state and municipal government levels, and yes, if possible, even reform at the national and continental levels.
The H&R book reflects (particularly in the Appendix) a thorough understanding of the present system. The proposal is certainly a worthy effort and a useful point of departure for fruitful discussion of the fundamental issues involved in the money and banking problem. In this comment, I will attempt to do the following:
- specify the points with which I agree, those with which I disagree, and those that need further clarification;
- elaborate upon some of the more important issues raised in the H&R book;
- outline the basic approaches to monetary reform or transformation that seem to me to be viable;
- discuss the possibilities and prospects of these approaches given the present and projected political and economic realities.
This first attempt may not fully achieve those goals, but hopefully, it will stimulate a dialog that will lead to their subsequent greater realization.
Restating and Summarizing the Proposal
Let me begin by restating the H&R proposal, as I understand it. This will give the authors a chance to check the correctness of my understanding and set me straight if I have erred.
The essence of the H&R proposal is to shift the power to issue sight deposit (demand deposit) money away from the commercial banking cartel and into the hands of an independent central bank, to declare such sight deposits to be legal tender, and to allocate all such money to the central government, which would spend it into circulation.
[observation] This involves a shift in the nature of money from bank-created credit, backed by interest-bearing debts (secured or unsecured) of individuals and businesses, to circulating interest-free credit of government backed by its taxing power and its other revenue generating activities.
Points of Agreement
- Advantages of the proposal. H&R list a number of “possible”advantages that would derive from implementation of their proposal (p. 5):
- greater equity and social justice
- reducing inflationary tendencies in the economy
- creating greater economic stability by reducing the peaks and troughs of the business cycles
- improving the safety and stability of domestic banking institutions
- removing distortions caused by channeling 95% of new money into the investment and spending priorities of banks and their customers
- reducing monetary pressures and constraints arising from the creation of new money by commercial banks as interest-bearing debt, that encourage environmentally unsustainable development, and
- a monetary and banking system that is transparent and open to public and political understanding of how it works.
All of these are outcomes we should hope for. If we who are devoted to monetary reform or transformation can agree on these, we will, at least, have some common goals to work toward.
The ability of the proposal to deliver these outcomes is, however, arguable, and given the brevity of the book, it is not surprising that it is not altogether convincing.
- By declaring demand deposits to be legal tender and removing them from the banks’ balance sheets, the proposal would limit commercial banks to the “depository” function and rescind their privilege to act as “banks of issue.”I am all in favor of breaking the monopoly power of the banking cartel, and this proposal could be a step in that direction. As I will argue below, however, it may not be necessary to go quite that far.
- “Make a clear distinction between means-of-payment money in current accounts, and store-of-value money in savings accounts.”This is one of the most important features of the proposal and has my wholehearted agreement. As I argued in Part III of my book, Money and Debt: A Solution to the Global Crisis (1989, 1990), the various functions which money is said to perform need to be segregated. Separating the exchange media from the savings media is a first order imperative. As I will argue below, however, it is also necessary to separate out the measure of value function.
- Direct control over the money supply.While direct control over the money supply is not my ideal, I can accept it if it relates only to legal tender money, in which case it would surely be better than the present central bank practice of manipulating interest rates, which should be prohibited.
- “Gold will almost certainly continue to take an increasingly unimportant place among the assets of a central bank.”I agree that “The metal age of money is over now” (page 28). In an organized society, there is no need for commodity money. It is only under conditions of political and economic instability that people flee to gold, silver, diamonds, and other commodities as a way of preserving their wealth and achieving its easy portability and general exchangeability, but these are mainly value storage vehicles and not exchange media.
- Tax Shift
While not directly concerned with the money problem, I agree that there needs to be a “tax shift… away from taxes on employment, incomes, profits and value-added, and towards higher taxes and charges on energy, resources, pollution and the site-value of land” (p. 31). I would advocate adherence to the general principle that the proper basis for public revenue is charges for the grant of privileges, including use of the commons (like the use of physical “sites,” the use of the radio and TV spectrum, extraction of natural resources), corporate charters, limited liability, franchises of various sorts, and government guarantees. Pollution should be prohibited, not taxed. Transactions should not be taxed. Information transfers should not be taxed.Some Disagreements and Concerns
- The Central BankThe proposal favors the centralized issuance of legal tender money by an independent central bank. Ostensibly, this feature is intended to assure that the amount of money supplied to the economy is kept free of political interference and the monetary unit is not debased (the primary cause of inflation). On page 14, they argue that “the amount created should be decided at regular internals by a monetary authority with a high degree of independence.” They then go on to say that the “natural candidate” for the task will be the existing central bank – the Bank of England in the UK, the Federal Reserve in the US, etc.I have grave concerns about this aspect of the proposal. A key question which is not adequately addressed in the proposal is the constitution of the central bank. Who are these central bankers, how will they be selected, what will be the criteria upon which their actions will be based, and which segments of society will their actions favor? These details will need to be spelled out in any mature proposal. The existing central banks may be independent of democratically elected government, but they are certainly not independent of banking and financial interests. If they are to continue as presently constituted, I would expect them to oppose any sort of reform other than one designed to maintain and enhance the power and wealth of their present elite constituency. Even assuming the best of intentions on the part of central bank governors, it has been argued, and rightly so, that no group of men is wise enough to decide how much exchange media is necessary to the needs of a complex economy.
The kind of money proposed could simply be spent into circulation directly by the national Treasury. What seems to concern H&R is that given such power, the government would tend to create too much money, leading to price inflation. The logical constrain in such a case would seem to be to use some “rule” to limit the amount issued to equal the anticipated government revenues from taxes, fees, and other sources, within some reasonable time period. Such constraints could be imposed either by the government constitution or by its legislative body, which has the advantage, after all, of being accountable to all the people.
- The Status of Private Exchange AlternativesIt is not clear what the H&R proposal would do with regard to private exchange arrangements like credit-clearing circles, mutual credit systems, like LETS, and currencies issued by private organizations or lower levels of government. Would the proposal outlaw them? Section 5.6 (pp. 49-52) discusses these alternative exchange media but the discussion centers not on the proposal’s effect upon them, but mainly on the relative merits of the proposal in comparison to them.On page 3, H&R say, “..if any person or organization other than the central bank fails to observe that distinction and prints new non-cash legal tender into a current account, they will be guilty of counterfeiting or forgery – just as they would be if they manufactured unauthorized banknotes or coins.”
Perhaps H&R can clarify their position by distinguishing “legal tender” sight deposits from non-legal tender credits, but their intent is further clouded by their statement (on p. 46), “After seigniorage reform it will be illegal for banks to create non-cash money denominated in the official currency. Credit brokering will be permissible, credit creation will not…” Does this disallow credit creation by mutual credit systems, like LETS? Credit creation, after all, is the essence of LETS. Can a legal distinction be made between a bank and a mutual credit circle? Will their legislative remedy distinguish LETS credits from bank credits? Of course, it should be argued that LETS credits are not legal tender, and no one could possibly confuse the one with the other. H&R say further, in the same paragraph, “To create new money and put it into circulation will be treated as counterfeiting or forgery.” Even if they do not define local currencies or mutual credit as “money,” it can be expected that their intent will be perverted in the process of legislation and enforcement, as we have seen so often before, particularly with regard to the income tax.
I understand that the desire here is to prohibit banks from issuing legal tender, which is all well and good, but does that mean that banks should be restricted to the depository function and not be allowed to act as banks of issue? Perhaps, but it seems to me that there is a parallel between what LETSystems do and what banks do. LETS allow their members a line of (interest-free) credit; banks allocate to their “borrowers” interest-bearing credit. In this sense, both are banks of issue. The difference is that government stands in support of bank credit and accepts it in payment of taxes and dues, while it does not accept LETS credit.
If the government defined legal tender to be its own non-cash currency, and refused to accept bank credit in payment for taxes and fees, bank credit would no longer function as de facto legal tender, and each bank’s credit would have to compete in the marketplace. Why not allow privately issued credits or currencies, so long as they do not purport to be legal tender? People would be free to accept or refuse them, according to their judgement of their soundness, convenience, and utility.
- Value Measurement – The Unit of AccountIn the Appendix, H&R describe the “dual economic function of money.” They seem content to accept the “currency standard” in which legal tender functions, not only as a means of payment, but also as a means of value measurement. In my mind, this leaves a major part of the money problem unsolved. I believe that a necessary requirement for preventing the debasement of any legal tender currency, and consequent price inflation, is that there be an independent and objective measure of value. In other words, it is important to define a unit of measure of value which is separate from the currency. This can be achieved by choosing a concrete, physical standard of value. So-called “index standards” seem well suited to this task. If a program of monetary reform is to be pursued, why not pursue it fully in every aspect?H&R maintain that a unit of value is not comparable to a unit of weight or length. They say, “to ensure that a unit of account maintains a stable value.. will surely always require…action to regulate the combined effect on purchasing power of the quantity of units of account in circulation and the velocity with which they circulate.”
I disagree. It is not “units of account” which circulate, but i.o.u.’s denominated in the chosen units of account. H&R say, (Sec. 5.7, p. 54.), “..central banks will exercise monetary control by directly regulating the quantity of units of account available for transaction purposes..” It will not control the quantity of units of account, but rather the amount of circulating government credit, denominated in the unit of account.
One does not build a house with inches or feet, but with lumber and other materials measured in inches and feet. I maintain that, while value is subjective and situational, a more objective standard and more stable unit of account can be obtained by defining it in physical terms. The measure of value is another supposed function of money that must be separated out. (These matters are argued rather thoroughly in Part III of my book, Money and Debt: a Solution to the Global Crisis.)
The Quantity of Money and Measure of Value
As I argue in all of my books, it is not the quantity of money, per se, that is important, but how the money is issued into circulation. That is not to say that quantity is unimportant, but rather, that it should be determined by a higher order consideration. If money is properly issued, the quantity of it in circulation at any given time will be just the right amount to mediate the exchanges which traders desire to transact. Bilgram and Levy point out that, “every piece of money is essentially a credit instrument, an acknowledgment of debt, accepted in the market as a medium of exchange, and that its value depends solely on the value of the credit on which it is based.” So money is an i.o.u. The pertinent questions are: What is the basis of issue? Who is the issuer? To what extent is the issuer willing and able to redeem the issue? (All of this is addressed in Chapter 12 of my latest book, Money: Understanding and Creating Alternatives to Legal Tender). Besides the specifics about the issuer and the basis of issue, judgements about the value of a legal tender currency require that there be an objective value measure or unit of account to compare it against.
As Walter Zander has so clearly stated:
Whatever the monetary system of a country, it is essential that the measure of value should be clearly and unequivocally determined. Thus where there is a gold currency, a silver currency, or an index currency, the value should be measured by gold, silver, and the index respectively. This basis of measuring economic values, and therefore of any monetary system, is destroyed when in the case of a gold or silver currency the notes of the bank of issue are made legal tender, for this compels everybody to accept these notes in payment regardless of their real value. Compulsory acceptance renders it even impossible to measure the notes by the unit of value and thus to ascertain their value within the country. Indeed. it establishes a legal fiction on the basis of which note and unit of value are identical. For this reason, the names of the units of value – e.g., the terms dollar, mark, pound – become ambiguous in that they mean now a fixed weight of gold and then the note of a bank of issue. Accordingly, the measure of value, on the unambiguity of which everything depends, comes to have two definitions This renders impossible any real measurement and thus the whole monetary system is falsified.
Ideally, the amount of exchange media in circulation at any given time, should be automatically determined by the amount of trading which players in the economy wish to conduct. This is exemplified by mutual credit systems, like LETS. In a mutual credit system, the “money supply” can be thought of as the total amount of debits or credits, which is determined, not by some authority using questionable models and assumptions, but by the value of goods and services actually exchanged by the members, and their attendant commitments to reciprocate.
How the Government Should Spend Money Into Circulation
I do not dispute the government’s right to issue its credit obligations as circulating currency, be they in the form of paper notes or accounting ledger credits. Indeed, spending currency into circulation is certainly preferable to selling bonds, especially if the currency is issued interest-free. This kind of money has historically been know as “tax anticipation warrants,” which have sometimes paid interest and sometimes not. I believe it was Thomas Edison who once said, “If the government can issue a bond, it can also issue a circulating note.” That is precisely what Abraham Lincoln did during the War Between the States. His action saved the government considerable amounts of interest expense. As pointed out above, however, there must be some limit to the amount so issued.
H&R touch on various possible ways in which government might spend money into circulation, but the various choices have important implications which need to be explored. In this regard, another general principle needs to be adhered to, i.e., money issued into circulation should be matched to goods and services coming to market. When considering a government issued currency rather than one based on commercial bills, the currency foundation is the taxing power of the state and only the amount of taxes due in the near term should be monetized.
Alternative Approaches to Reform/Transformation
The H&R proposal takes a reformist approach. It seeks to improve upon the status quo by taking the money power away from the private banking cartel and replacing it with a central bank/government monopoly on the creation of legal tender money. It proposes to do this by limiting banks to the depository function and prohibiting them from lending their credit.
Removal of Bank Privileges Presently, banks monetize the value of their customers collateral and charge interest on the “debts” thus created. There are three fundamental errors inherent in that process:
- The interest burden attached to the “loans” they make causes debt to grow exponentially, creating a growth imperative which leads to despoliation of the natural environment and adds to the disparities in incomes and wealth,
- The monetization of some assets, which do not result in the timely delivery of new goods and services to the market (causing price inflation),
- The non-democratic allocation of credit among competing uses and bidders.
Rather than prohibit banks and other private entities from extending credit to their customers or members, a simpler and more feasible approach to reform might be to remove the actual privileges which banks now enjoy – privileges which protect them from competition and provide government guarantees of profitability. There is an abundant body of literature on “free money and free banking” that describes ways in which banking could be structured to avoid the creation of cartels and monopolies, and to provide competition among currencies, leading to more sound and equitable exchange mechanisms.
A Decentralist Approach
It is not the creation of money as debt that is problematic, but the charging of interest on that debt. Corrective legislation could be enabling rather than prohibitive. By supporting the creation of not-for-profit mutual banks of issue that charge no interest, assets could be monetized in an economically sound, democratic, and sustainable manner.
In support of their proposal, H&R quote both Jefferson and Lincoln, but these two Presidents had quite different views on money. Lincoln was a centralist, while Jefferson was more a populist. When Jefferson said that the money power “should be taken from the banks, and restored to the people to whom it belongs,” he meant just that – the people, not the government. Popular control over government is tenuous, at best.
Reducing the power of the banks over the economy is a necessary reform, but it needs to be done in a way that does not prohibit or impede private exchange alternatives. Indeed, the emergence of “alternatives to legal tender” is a phenomenon which has shown great promise. Thus far, community-based credit clearing circles and community currencies have been extremely limited and supplementary to national currencies, but commercial trade exchanges, which mediate trades worth billions of dollars annually, have demonstrated the huge potential of private exchange mechanisms. I can conceive of the formation of federations of mutual credit systems that would extend their usefulness worldwide. I can also conceive of web-based credit clearing systems that will allow people to transcend national currencies to a very great extent.
Since “every piece of currency is a credit instrument,” there is no reason why any person, group or company should be prohibited from issuing their own i.o.u.’s? Just as stocks and bonds of various companies, states, and municipalities are exchanged routinely in the markets, commercial paper and other private obligations could circulate as exchange media. The role of the government should be simply to define the standard of value and unit of account, and to keep markets open and free. If government wants to float its own i.o.u.’s and declare them to be legal tender for all debts and taxes owed to it, that is fine, but it should not require that they be the only medium of payment allowed for private debts. (The first issue of Greenbacks under Lincoln were legal tender only for debts owed to the government. Subsequent issues were made legal tender for both public and private debts. The latter provision, I believe, to be unconstitutional and inflationary).
It is my view that the key to transforming economic interrelationships lies in liberating the exchange process from monopolized money and banking. This requires that the following be accomplished:
- the separation of the various functions which money is supposed to serve,
- the establishment of an indepeendent, objective standard unit of account and,
- the democratization and decentralization of the exchange process.
Elaboration on these points can be found in my various books and writings.
In sum, this can be accomplished by the establishment, through private, democratic initiative, of mutual credit or credit clearing circles, federated into global networks. Producers cannot, and should not, be prohibited from granting credit to one another, and that credit can serve as an exchange medium, just as it does in LETSystems and other mutual credit circles.
Any proposed remedy to the money problem must recognize the political realities which confront us. It is clear that we live today under a global imperial regime. Since “the Battle of Seattle,” there has begun to be some public debate about the pros and cons of globalization. But, it is not simply a question of whether globalization is good or bad. There have undoubtedly been some positive aspects of globalization but there have also been some very negative and destructive aspects. I am an advocate of greater human unity, understanding, and tolerance, and, to the extent that globalization serves that purpose, I support it. But, the process of globalization, as we’ve experienced it over the past decade or two, has militated against that ideal in that the terms of trade have not been fair, and the interests of many groups have been ignored and damaged. For many, especially women in some third world countries, economic globalization, has provided opportunities for greater independence and liberation from ancient tribal and cultural restrictions. On the other hand, it has also disrupted and destroyed long-established patterns of production and distribution which enabled a high degree of local self-reliance and self-determination. It is not the fact of globalization which is problematic, but the process of globalization as it is currently being conducted. This process has been largely imperialistic and exploitative in its nature. While the institutional government of nation states is declining, the power of corporations has been rising. Government for and by the corporations has become the dominant political paradigm. It is a situation which closely fits the definition of fascism.
If that view is anywhere near correct, the H&R proposal would seem to have little chance of being implemented anytime soon, and if it were to be implemented, it would likely be in a form that would further concentrate power in the hands of the same elites who now control the banks, the corporations, and the central governments.
Elite control has always been based on force, deception, and manipulation of the various economic factors – labor, land, capital, and more recently, money. These have been manifested in overt slavery, “enclosure acts” and “clearances,” monopoly capitalism, the banking cartel and manipulation of money, banking and finance. To continue with centralized control over the exchange process by retaining dysfunctional institutions and outmoded notions of money is to invite corruption and to perpetuate the use of force, deception, and manipulation to benefit the few at the expense of all.
H&R seem to minimize the obstacles to implementation of their proposal and to exaggerate the obstacles to private and unofficial exchange alternatives. It is difficult to see, given present political realities, how the necessary implementing legislation for their proposal could be passed. The entire history of money provides strong testimony which argues to the contrary.
In my view, improvement is more likely to come through private initiative and technical innovation. Indeed, much of this has already been evident over the past three decades with the evolution of commercial “barter” or trade exchanges, the proliferation of mutual credit systems, like LETS, and the development of grassroots trading clubs and local currencies, such as those which have exploded upon the scene in Argentina. The next “big thing” in this regard will be internet-based payment systems. Initially, these were restricted to the transfer of bank-created money, but newer systems are making clear the possibilities of credit clearing transactions which are free from official government currencies and bank-created money based on interest-bearing debt. Exemplars of this potential are the e-cash and cyber buck experiments conducted a few years ago by David Chaum’s company, Digicash; the Friendly Favors networking website; and the open money experiments of Michael Linton and Ernie Yacub, which allows anyone to create their own currency and invite others to join the circle of users. Other promising developments are software developed by the Oakington Corporation in Britain, and PayPal.
I believe that the time is right for monetary reformers to work more closely together. While we continue to develop, expound, and promote our diverse approaches and proposals, we should also seek ways of working together to deepen our understanding of the problem and the obstacles we face in solving it. Now is the time for action. To the extent that implementation efforts at the various levels can be coordinated and harmonized, progress toward our common objective will be enhanced and accelerated.
Respectfully submitted, February 15, 2002.
Thomas H. Greco, Jr.
James Robertson’s Comments of 1 March 2002 on
- Thomas H Greco’s Money: Understanding and Creating Alternatives to Legal Tender, Chelsea Green, 2001, and
- Greco’s comments of 15.02.2002 on Joseph Huber’s and James Robertson’s Creating New Money: A monetary reform for the information age, New Economics Foundation, 2000.
I am very grateful to Tom Greco for sending me both of these. In particular, I appreciate the attention he has given to the Huber/Robertson proposal.
These comments concentrate on points on which it seems to me clarification is needed or which I question. As will be seen, I believe there are two major differences between Greco’s thinking and mine.
The first is about the practical, political feasibility of what he proposes. He seems to believe that “the establishment, by private initiative, of community-based complementary exchange mechanisms …” could be achieved on a transformative scale, without reform of the currently dominant monetary and financial systems. I think this is unrealistic.
The second is more conceptual and philosophical. I find it difficult to accept some of his basic assertions about the essence of money and the necessary characteristics of acceptable money systems.
My comments on Greco’s Money
This book provides a first-rate source of ideas and information about the need for monetary reform and innovation, and particularly about alternative currencies. As such, it will be a boon to many people who recognise the need to underpin political democracy with democratic monetary and financial systems, and want to do something about it.
Some specific comments are as follows.
[I will not respond at this time to these comments about my book, but will restrict myself to the subject at hand, i.e., the H&R proposal. – t.g.]
p.5, first paragraph:
“Today, money takes the form of bank credit that must be borrowed into circulation”. This does not necessarily mean, as the following paragraph and many others in the book suggest, “that in order for money to come into circulation, someone must go in debt”. Money could perfectly well be issued debt-free. The Huber/Robertson reform would mean that mainstream official money would be created debt-free.
There is an important difference between the USA and other countries regarding the status of the central bank. The ‘Fed’ may be a private corporation, but central banks can and should be agencies of the democratic state.
For example, in the century and a half since the Bank Charter Act of 1844, the Bank of England has been steadily evolving from a specially privileged commercial bank into an agency of the state. It was nationalised in 1946 and restructured in 1997 as an operationally independent central monetary authority. It is now responsible and accountable to Parliament for achieving published monetary policy objectives, framed by elected ministers and approved by Parliament. In discharging this operational task, it is free from interference by elected ministers of government.
The Huber/Robertson proposal implies a change in the method by which the Bank of England ( along with other central banks) carries out this task, to bring it into line with the needs of a democratic society in the information age. A central feature of the economy today is that almost all money in circulation is now non-cash money held in and transmitted between computerised accounts in banks and other financial institutions. Almost all this new money is created by the commercial banking sector. The proposal is that, instead of regulating the money supply indirectly by interest-rate changes as now, and allowing commercial financial institutions to profit from creating it as interest-bearing debt, the Bank of England should itself become directly responsible for deciding and creating debt-free the amounts of new money required in accordance with the policy objectives of the elected government.
Though this would be an extremely important change, it would not be an excessively radical one. It would confirm the Bank of England’s existing responsibility for controlling the money supply and maintaining price stability. It would not affect the Bank’s function of lender of last resort. The Bank’s Monetary Policy Committee would still be able to regulate interest rates, as well as deciding directly whay additions to the money supply to create. The change would be within the realm of practical politics in the foreseeable future.
p.14, first paragraph:
The need for community currencies would, in fact, become less urgent if the mainstream mechanisms of money, banking and finance were reformed to meet the needs of democratic societies. But local community currencies should still be encouraged, particularly in those subnational regions and localities and communities which would continue to be disadvantaged by a one-size-fits-all national monetary policy.
p.16, second last paragraph:
Greco says that alternative currencies will not compete with existing institutions but will develop in parallel with them. He assumes that existing institutions will agree. But remember what happened to Schwanenkirchen and Worgl (as descibed at pp 65 and 66). The monetary authorities stamped out their alternative currencies as soon as they threatened to be successful. What would stop that happening again, if the mainstream monetary system and authorities hadn’t been reformed?
p.17, last paragraph:
Central banks need to evolve further (see my comment on p.7 above).
Five functions of money are listed. I would bracket 2 with 3 and 4 with 5.
p.24, middle of the page:
It is not clear whether Greco is saying that money as a medium of exchange should be denominated in a different currency from money as a store of value, or whether the proposed Huber/Robertson distinction between current accounts and savings accounts denominated in the same (national) currency meets the need.
p.25 second paragraph, p.26 last paragraph, and p.28 last paragraph:
Notions about essence and essential always raise questions in my mind – on any subject! Greco says “the essence of money is an agreement”, an “essential fact” about money is that it is created and extinguished, and “the essence of money” requires money to be issued only by a buyer for himself. The status of these definitions (are they just opinions or objectively demonstrable facts?) is problematical.
Are we to accept that the “originator” and the “issuer” of money must necessarily be who they are said to be here. Or are these just opinions?
p.32, top half:
An excellent exposition, in my view.
I wholeheartedly agree with the need for the dispersal of financial power, and I believe the spread of complementary currencies will be an aspect of that. But I do not think it will happen without reform of the mainstream monetary and financial institutions. Without reform they will make sure it doesn’t. This also applies to p.47.
p.51, second new paragraph:
A global network of community exchange systems would surely imply a need for impersonal transactions, and therefore impersonal systems.
pp 65 and 66:
Suppression of alternative community currency systems that begin to become significant will always happen so long as the elites who profit from the present mainstream system remain as powerfully motivated and powerfully positioned as they are now to suppress alternatives that might become a threat. So mainstream monetary reform is a prerequisite to the significant development of alternative currencies.
This chapter is a very important one. But the judgements in it seem rather subjective.
p.127, first sentence:
I find it difficult to accept as a necessary principle that “every piece of money is essentially … an acknowledgement of debt”. I can’t see why debt-free money is a necessary impossibility. The original issuer of a currency need not necessarily be under an obligation to redeem it. The Bank of England sees its obligation as being to ensure that the currency retains its value, not as being ready to redeem it for something else.
p.128, Basis of Issue, first paragraph:
I do not see why this should be necessarily accepted as the ideal.
p.128, Basis of Issue, second paragraph:
Yes, the ambiguous meaning of the term “credit” is the cause of great confusion. Huber/Robertson propose that debt-free money in current accounts should no longer be confused with “credit” in the sense of borrowed money but should be clearly defined as “non-cash money”.
p.128, last two paragraphs:
Why should the quantity of money in an ideal system necessarily be self-adjusting? And, in practice, would an ideal system necessarily be possible?
p.129, first paragraph:
Why is “the proper basis of issue” necessarily “the transfer of value, as it is being exchanged, from a producer to another (potential) producer “? The Huber/Robertson proposal is for new money to be created/issued by the central monetary authority and transferred to the government. A possibility (not recommended by us in Creating New Money but which both of us view favourably) is that the government should put the new money into circulation as a basic income paid to all citizens as of right. None of the parties to such an arrangement would be a “producer”. Would that signify that the money was issued on an improper basis?
p.129, second paragraph:
Although the credits and debits should always balance in a LETSystem and other comparable alternative currency systems, and so in that sense it is true they won’t suffer a shortage or surplus of money, such systems can nonetheless be crippled by a shortage of demand (buying activity).
p.130, six lines from bottom:
If official money provides necessary backup for parallel currencies, it must clearly remain important – together with the need to reform it.
p.132, second paragraph and p.133, second paragraph:
There seems to be a contradiction between these two views of commodity-backed currencies.
p.134, first paragraph:
Moving away from monopolised, political and coercive monetary systems will require reform and democratisation of existing mainstream monetary systems, both for its own sake and as a prerequisite to the development of democratic parallel currencies.
The same comment again. I agree that pressure will grow for alternative currencies. But it will also grow for reform of mainstream money.
Very interesting. I would argue that the law, medicine, accountancy, journalism and communication should also become principled professions.
In its present form Harwood’s proposed split between the two banking functions he describes seems over-theoretical. In the real world it is sometimes difficult to distinguish sharply between
a. short-term borrowing to cover working capital, and
b. capital investment.
But the Huber/Robertson proposal to make a clear split between non-cash money in current accounts and savings in savings accounts, bears a certain resemblance to what Harwood suggests.
My Comments on Greco’s Comments on Creating New Money I am always grateful for comments and criticisms as careful and informed as these. They are a great help in clarifying one’s own thinking and how to express it. The following are some responses to them.
p.1: The essence of the H&R proposal… [observation] The non-cash money that would be created by the central bank /central monetary authority would not be credit that has to be backed by anything except the obligation of central bank and government to maintain the stability of the currency. It would simply be debt-free non-cash money.
p.2, Advantage No.3: “Separating the exchange media from the savings media”. The term “medium/media” in the monetary context is usually (I think) taken to mean a currency/currencies. Is that what it means here? So is Greco saying that two different currencies should be used, one for exchange and one for savings? Some people (eg Richard Douthwaite) propose this. I don’t agree (see my comment under Value Measurement below).
p.3: 6 Tax Shift “Pollution should be prohibited..”.
I agree that some forms of pollution should be prohibited, i.e. made illegal. But many types of pollution in the form of excessive emissions can be very significantly reduced by making businesses and people pay for the polluting activities and for the causes of pollution like energy-intensive production, transport and other activities powered by fossil fuels.
p.3, The Central Bank:
My first response to this comment is to repeat my earlier comments on page 7 of Greco’s Money .
On the question of a constitutional or legislated quantitative “rule” to constrain the amount of new money to be created, this is a course which some monetary experts have proposed. In principle, it could apply whether the new money is created by the elected government, or by a separate central monetary authority in the form of the central bank (as Huber/Robertson propose), or (as now) by commercial banks responding to interest rates administered by the central bank. But it has always been rejected as too inflexible to meet the possible need for an emergency monetary reponse to some unforeseen event of a catastrophic kind.
Private Exchange Alternatives:
The Huber/Robertson proposal would NOT outlaw alternative exchange arrangements and currencies like LETS, mutual credit, etc. What would be outlawed is the creation of money denominated in the official currency by anyone other than the official central monetary authority. I don’t see that there is any problem here. So far as I know, no systems like LETS, Hours, etc. create new money denominated in official dollars, pounds, Euros, etc. They use their own denominations as their units of exchange.
Under the H/R proposal there would be absolutely no question of government refusing to accept payments from banks. That the question is asked at all must arise from confusion about the meaning of the term “credit” (see my comment above on Money, p. 128).
I don’t understand what could be meant by “an independent and objective measure of value”. Nor do I understand how the currency units used in exchange transactions could be separate (different, distinct) from the units used for saving (i.e. for potential future exchange transactions), and from the units used to value goods and services for purposes of exchange.
Greco’s proposed “concrete, physical standard of value” or “index standard” sounds very like a commodity-backed (and therefore commodity-redeemable) currency. But he agrees that that is an outdated idea. And even if it wasn’t outdated, it couldn’t be objective. The commodities backing the currencies would have to be chosen subjectively, their values would fluctuate, and the values of particular commodities would be greater for some people than for others. Objectivity in monetary valuations is a mirage (witness the problems with GDP). There can be no objective standard measure of value somewhere out there, comparable to the scientifically accurate measuring devices which now provide standard measures of time (e.g. seconds) and space (e.g. metres).
Quantity of Money and Measures of Value:
Why do we have to accept the Bilgram and Levy assertion that every piece of money has to be a debt? And why do we have to accept the assertion that ideally the amount of exchange media (money?) in circulation should be automatically determined by the amount of trading that people wish to conduct? Even if we were to accept that as ideal, would it necessarily be feasible in practice?
How the Government Should Spend Money into Circulation:
Under the Huber/Robertson proposal the non-cash money created by the central monetary authority as an agency of the state would not be a credit obligation of the state. It would simply be debt-free non-cash money. It would not have to be matched to goods and services coming to market. It would simply be one, and only one, source of public revenue available for public spending like revenue raised from other sources, such as taxes, charges, borrowing, etc. Like most other public spending, most of the money from that new source of revenue will be spent debt-free. There will be no question of anyone having to repay it. Therefore the question of relating its quantity to “the taxing power of the state” will not arise. Its quantity will be what the central monetary authority decides will achieve the objectives of democratically decided monetary policy.
There are certain public functions which are appropriately performed by agencies of the state. The Huber/Robertson proposal recognises that, so long as there is an official national currency, it should be provided and regulated officially by the state in the public interest, and that the revenue arising from that function should be public revenue, not private profit. This seems obviously reasonable. It would be a huge improvement on the existing monetary system. It would be workable in practice. It could become politically feasible within a comparatively short period of years, if enough people understand it and support it. At the same time, particular organisations and groups of people should be encouraged to issue their own currencies for their own use if they feel a need for them, so long as these currencies are clearly different from the official currency.
Removal of Bank Privileges:
Why should commercial banks and other people and organisations not be prohibited from creating new non-cash money denominated in the official currency, just as they are already prohibited from forging and counterfeiting coins and banknotes? One of the most important and anomalous privileges, which results in subsidising some banks much more than others, is the privilege of being allowed to create non-cash national currency, and to profit from so doing. This distorts the market for banking and financial services, and is an important cause of the weak competition in the banking industry. It is unrealistic to expect that “free money and free banking” innovations could correct this in any foreseeable period of time.
A Decentralist Approach:
I share Greco’s view that the monetary and banking system needs to become more decentralised. But I cannot see this happening significantly without reform of the mainstream monetary system. That mainstream system has been moving in the wrong, centralising direction – e.g. the replacement of many European national currencies by the Euro. The remedy will have to include both mainstream reform and the spread of alternative currencies. Personally, I shall be continuing to publish the case for the UK
- keeping the pound and using the Euro as a parallel currency when convenient, and
- extending the principle of parallel currencies to regions of the UK which are economically damaged by a one-size-fits-all national monetary policy.
This commonsense approach – Both/And rather than Either/Or – is, I think, becoming more widely understood
“Liberating the exchange process” is, of course, something we can agree upon. But we differ about how it is to be done. The Greco emphasis, as I see it, is almost exclusively on the need for alternative new currencies. As I have said, I don’t see how they can ever become significantly transformative, unless the mainstream monetary system is also democratised and brought up to date. In any case, I think a parallel evolution of democratic monetary and financial systems at the national, supra-national and global levels is necessary for its own sake. I don’t think the same (ideal?) operating principles need necessarily be the basis for every democratic monetary system. Nor, as I have said, do I understand what the separation of the various functions of money between different currencies would mean in practice, or how it would be possible to establish an independent, objective standard unit of account.
The first paragraph certainly describes the prevailing features of the globalisation process in recent years. At the same time, however, the democratic reaction seems to be growing stronger around the world, and constructive alternatives aimed at good globalisation (an essential feature of which will be localisation and decentralisation) are steadily gaining understanding and support. Whether the 7th September events in New York and Washington will prove to have strengthened the prevailing global tendency towards “fascist” domination, or will have alerted “Western civilisation” to the urgent need to reverse it, is not yet clear.
But, either way, my judgement is that the later paragraphs in this section of Greco’s comments are utopian. They are based on the hope that a great multitude of flourishing private and community monetary innovations will emerge at the grass-roots level worldwide and be able and allowed to grow to a strength capable of overpowering and transforming the existing concentration of power that is the mainstream monetary system, without that concentration of power having been tamed and democratised. That hope is less realistic,to my mind, than a strategy of mobilising support for continuing the process of democratising the central monetary authorities and bringing their method of monetary control up to date (see my earlier comments – on p. 7 of Money – about the evolution of the Bank of England) – in the knowledge that this will help to improve the prospects for monetary decentralisation.
This difference of judgement may reflect different perceptions of political economy now prevailing in the USA and Europe, and the different opportunities and obstacles for and against monetary progress most evident in those different places.
I wholly agree with Tom Greco that “the time is right for monetary reformers to work more closely together. While we continue to develop, expound, and promote our diverse approaches and proposals, we should also seek ways of working together to deepen our understanding of the problem and the obstacles we face in solving it. Now is the time for action. To the extent that implementation efforts at the various levels can be coordinated and harmonized, progress toward our common objective will be enhanced and accelerated”.
This may mean that we should not be distracted too much by debate about conceptual definitions and principles, and that we should each concentrate mainly on our own practical priorities. But we should also help one another to communicate the urgency of our shared commitment to restructure and transform the existing system of money and finance – into one that serves people and meets their needs, and no longer gives dominating and exploitative power to a minority.
1 March 2002
The Old Bakehouse, Cholsey
Oxon OX10 9NU, UK
tel: +44 (0)1491 652346
fax: +44 (0)1491 651804
Dear Tom and James, I would like to thank both of you, Tom for his careful critique, and James for his detailed reply. Since I agree with most of it, that saves me much of what I could have replied myself. Allow me nevertheless to say some words on a couple of selected aspects.
– I knew that Tom Greco’s view of legal tender and central banks is opposed to H&R’s view of that. But I agree with Tom saying that in the forseeable future central bankers (I add financial politicians and academic financial economists) would reject rather than adopt seigniorage reform, even if they actually profit from it in terms of institutional standing and importance. For the time being, though, central bankers are likely to reject any monetary reform proposal. In comparison to other professions, banking comes with a community that exerts a particularly strong social control on its members reinforcing an ultra-capitalistic mindset, including central bankers as much as other ones. Only a few (central) bankers understand that what they do is economic politics determining people’s existence to a considerable extent, and that therefore they should be responsible to the public and the government much more than to their shareholders. The few bankers who are willing to understand this cannot openly speak out, certainly not before retirement.
– Can official currencies and private commercial currencies and/or local community currencies coexist? I thought James had included a passage in Creating New Money saying “yes”. For my part, I remain skeptical about a harmonious coexistence of various currencies – with regard to practice, not in principle, where such constellations are easily conceivable if slightly higher transaction costs are accepted. As James said, local currencies would be tolerated by the central authorities only as long as they didn’t grow into something more epidemic. To LETSs that can probably not happen because there is no circulation of money, and in order to keep the balance of income-obligations (debits) and income-fulfilments (credits) it needs the rather narrow limits of moral control within local community circuits where people know each other. Money-issuing local currency organisations, however, could reach the critical mass for challenging official currencies. They would evolve into new banks of interregional or even international reach, growing large and very large, and thus would have to be included in the official banking regime. Otherwise we were witnesses to a true revolution. Not even the global commercial banks of today have been able to legally usurp the public prerogative of defining the official currency and controlling the issue of money (in this case, the cash), even though many mainstream economists are outspoken about their preference for denationalizing currencies in favour of private commercial currencies.
As to James’ “both/and”-approach also including the case of parallel official currencies, well, let’s wait and see what happens if the British people or government decided not to join the Euro: whether or not the BoE will allow Euro-accounts with domestic banks to everybody. Remember Knapp and Keynes and the chartal theory of money. Parallel official currencies are adopted in weak states with low economic potential and a weak national currency – an arrangement which is usually not adopted voluntarily, but forced upon weak governments by the facts, or by foreign powers. The UK of course isn’t in such a situation and that’s why the British government could afford first to opt out. The BoE may nevertheless try to allow Euro-accounts for reasons of political good will – to explore whether Euro-accounts would account just for a few percentage points of the turnover, or whether it would represent more. In the latter case I bet you a good bottle of wine on parallel Euro-accounts going to be ruled out.
– Me too, I do not understand Tom’s insistence on separating the store-of-value-function of money from its function of being a means of transaction and, related to this, a means of valuing, i.e. pricing, and (ac)counting. Were is the need? Since the metal age of money is over, the store-of-value-function of money has been dwindling anyway. That’s one of the reasons why the well-off and the rich are more than ever looking for substitutes – stocks, real estate, paintings, …, with the value (market price) of such items climbing to really crazy, fundamentally unjustified hights, unsocially distorting price relations particularly in the case of real estate and housing. Money and financial capital serving as a reliable stock of value (i.e. no inflation) would actually seem to be preferable to this.
The idea of solving the store-of-value-problem by “backing” the value of money by a basket of commodities has been the preferred proposal since about 100 years. It doesn’t work for the same reasons that have the store-of-value-function made dwindling: dynamic growth, permanent structural change, real-economic as well as financial and monetary mismatches, inflation, all resulting in a permanent restructuring and revaluating of any “basket” of goods and services in existence. The final “basket” representing the stock of economic value in circulation, and representing the benchmark for the quantity of money necessitated, is the domestic and global real-economic product (including banking services).
– The last point I want to comment on regards the question of whether money unavoidably represents debt. I agree with what James said on this in his reply, but I would like to add a more specific aspect, one which is not necessarily of practical importance, though it may contribute to clarifying our concept of money. James wrote that under seigniorage reform money “would simply be debt-free non-cash money. It would not have to be matched to goods and services coming to market. … There will be no question of anyone having to repay it. Therefore the question of relating its quantity to ‘the taxing power of the state’ will not arise”.
I would say, by difference, the quantity of money actually has to be matched by the goods and services coming to market. That’s the central conviction of any monetary quantity policy oriented at the potential of market growth, as opposed to interest rate policy (which I wouldn’t propose to abolish, as Tom Greco does, but which actually has come up as a substitute for lost quantity policy, and should not be among a central bank’s first priorities).
Furthermore, and more important to the concept of money, plain “debt-free” money issued under a reformed seigniorage regime would clearly not be interest-bearing, but it would in a certain sense continue to represent a “debt”, i.e. a liability which under certain conditions might be due to redemption and then indeed touch the taxing power of the state. We are talking here about another variant of the monetary reflux problem. Because, when seen technically in terms of book-keeping, the issue department of a central bank would deliver an amount of newly created money to the treasury by entering into its balance sheet a claim on the treasury, i.e. a liability of the treasury to the issue department. In practice, that would of course be “eternal credit”, an indefinite-period interest-free loan, not expected to be paid back, and certainly free of any interest payment. One can nevertheless conceive of a scenario of no more economic growth – I guess about 100-200 years away from today’s realities – in which a certain percentage of the money issued into circulation may become excess money no longer necessitated, thus facing the monetary authorities of the fictious day with the choice of either allowing an accelerated inflation rate to solve that problem, or to phase the quantity of excess money out of circulation. In the latter case, the phasing-out would be done by putting aside some of the tax revenue and remitting it back to the issue department, thus extinguishing that quantity of money, i.e. decreasing the quantity of money in circulation. I want to emphasize, however, that this is a hypothetical scenario that can help to clarify the concept and show its consistency, not something I would expect to be relevant in practice.
I will stop here, sending you best wishes. JH —- Joseph Huber – Sybelstr. 37 – 10629 Berlin Tel +49 — (0)30 — 323 12 16 Fax +49 — (0)30 — 327 656 34 e-mail firstname.lastname@example.org web http://www.soziologie.uni-halle.de/huber
Robertson Responds to Huber
From: “James Robertson”
Cc: “Tom Greco”
Subject: Re: Tom Greco’s critique of seigniorage reform and James R.’scomments on it
Date: Tuesday, March 12, 2002 12:53 PM
Thank you for your message below. As always, you raise interesting, educative questions! I can’t forbear to comment on them – in CAPITALS below.
On 06/03/2002 3:47 pm, “Joseph Huber” wrote:
> Dear Tom and James,
> I would like to thank both of you, Tom for his careful critique, and James for
> his detailed reply. Since I agree with most of it, that saves me much of what
> I could have replied myself. Allow me nevertheless to say some words on a
> couple of selected aspects.
> I knew that Tom Greco’s view of legal tender and central banks is opposed to
> H&R’s view of that. But I agree with Tom saying that in the forseeable future
> central bankers (I add financial politicians and academic financial
> economists) would reject rather than adopt seigniorage reform, even if they
> actually profit from it in terms of institutional standing and importance. For
> the time being, though, central bankers are likely to reject any monetary
> reform proposal. In comparison to other professions, banking comes with a
> community that exerts a particularly strong social control on its members
> reinforcing an ultra-capitalistic mindset, including central bankers as much
> as other ones. Only a few (central) bankers understand that what they do is
> economic politics determining people’s existence to a considerable extent, and
> that therefore they should be responsible to the public and the government
> much more than to their shareholders. The few bankers who are willing to
> understand this cannot openly speak out, certainly not before retirement. [I
> agree that this describes the present situation. But I think there is a good
> chance of, within the next 5, 10, or 20 years, building political pressures
> strong enough to make the central bankers and commercial bankers look at and
> publicly discuss the case for seigniorage reform – in the broader context of
> the need for socially and environmentally responsible global and national
> monetary and financial systems as an aspect of the kind of democratic and
> sustainable globalisation more and more people will continue to see we have to
> evolve. On the other hand, although I support the development of alternative
> community currencies as parallel currencies, I see no chance of them having a
> transformative global effect, except in parallel with mainstream monetary
> – Can official currencies and private commercial currencies and/or local
> community currencies coexist? I thought James had included a passage in
> Creating New Money saying “yes”. [The relevant passage is on page 50 where we
> concluded that, whatever the answer to that question was, it would not
> overtake the need for mainstream monetary reform.] For my part, I remain
> skeptical about a harmonious coexistence of various currencies with regard
> to practice, not in principle, where such constellations are easily
> conceivable if slightly higher transaction costs are accepted. As James said,
> local currencies would be tolerated by the central authorities only as long as
> they didn’t grow into something more epidemic. To LETSs that can probably not
> happen because there is no circulation of money, and in order to keep the
> balance of income-obligations (debits) and income-fulfilments (credits) it
> needs the rather narrow limits of moral control within local community
> circuits where people know each other. Money-issuing local currency
> organisations, however, could reach the critical mass for challenging official
> currencies. They would evolve into new banks of interregional or even
> international reach, growing large and very large, and thus would have to be
> included in the official banking regime. Otherwise we were witnesses to a true
> revolution. Not even the global commercial banks of today have been able to
> legally usurp the public prerogative of defining the official currency and
> controlling the issue of money (in this case, the cash), even though many
> mainstream economists are outspoken about their preference for denationalizing
> currencies in favour of private commercial currencies.
> As to James’ “both/and” approach also including the case of parallel official
> currencies, well, let’s wait and see what happens if the British people or
> government decided not to join the Euro: whether or not the BoE will allow
> Euro-accounts with domestic banks to everybody. Remember Knapp and Keynes and
> the chartal theory of money. Parallel official currencies are adopted in weak
> states with low economic potential and a weak national currency an
> arrangement which is usually not adopted voluntarily, but forced upon weak
> governments by the facts, or by foreign powers. The UK of course isn’t in such
> a situation and that’s why the British government could afford first to opt
> out. The BoE may nevertheless try to allow Euro-accounts for reasons of
> political good will to explore whether Euro-accounts would account just for
> a few percentage points of the turnover, or whether it would represent more.
> In the latter case I bet you a good bottle of wine on parallel Euro-accounts
> going to be ruled out.
[Snap! Joseph, I take your bet. As follows-
- IF the UK keeps the pound, AND IF by 2012 the percentage of the total monetary turnover of companies, other organisations and individuals based in the UK, which is denominated in Euros and uses Euro bank accounts based in the UK, has risen to 10% or more, AND IF the Bank of England has accepted this, you will treat me to a good bottle of wine.
- IF the UK keeps the pound AND IF the Bank of England explicitly refuses to allow Euros to be used as a parallel currency on that scale, I will treat you to a good bottle of wine.
- The bet will be cancelled IF the UK replaces the pound with the Euro, OR IF it keeps the pound and, without any discouragement from the Bank of England, fails to raise its use of the Euro as a parallel currency to 10% of total turnover by 2012.
You may want to alter these terms?!]
> – Me too, I do not understand Tom’s insistence on separating the
> store-of-value-function of money from its function of being a means of
> transaction and, related to this, a means of valuing, i.e. pricing, and
> (ac)counting. Were is the need? Since the metal age of money is over, the
> store-of-value-function of money has been dwindling anyway. That’s one of the
> reasons why the well-off and the rich are more than ever looking for
> substitutes – stocks, real estate, paintings, …, with the value (market
> price) of such items climbing to really crazy, fundamentally unjustified
> hights, unsocially distorting price relations particularly in the case of real
> estate and housing. Money and financial capital serving as a reliable stock of
> value (i.e. no inflation) would actually seem to be preferable to this.
> The idea of solving the store-of-value-problem by “backing” the value of money
> by a basket of commodities has been the preferred proposal since about 100
> years. It doesn’t work for the same reasons that have the
> store-of-value-function made dwindling: dynamic growth, permanent structural
> change, real-economic as well as financial and monetary mismatches, inflation,
> all resulting in a permanent restructuring and revaluating of any “basket” of
> goods and services in existence. The final “basket” representing the stock of
> economic value in circulation, and representing the benchmark for the quantity
> of money necessitated, is the domestic and global real-economic product
> (including banking services).
> – The last point I want to comment on regards the question of whether money
> unavoidably represents debt. I agree with what James said on this in his
> reply, but I would like to add a more specific aspect, one which is not
> necessarily of practical importance, though it may contribute to clarifying
> our concept of money.
> James wrote that under seigniorage reform money “would simply be debt-free
> non-cash money. It would not have to be matched to goods and services coming
> to market. … There will be no question of anyone having to repay it.
> Therefore the question of relating its quantity to ‘the taxing power of the
> state’ will not arise”.
> I would say, by difference, the quantity of money actually has to be matched
> by the goods and services coming to market. That’s the central conviction of
> any monetary quantity policy oriented at the potential of market growth, as
> opposed to interest rate policy (which I wouldn’t propose to abolish, as Tom
> Greco does, but which actually has come up as a substitute for lost quantity
> policy, and should not be among a central bank’s first priorities).
[IT DEPENDS WHAT YOU MEAN BY “MATCHED”. IF YOU MEAN IT HAS TO CORRESPOND TO SOME OTHER AVAILABLE MEASUREMENT WHICH WILL DETERMINE WHAT THE QUANTITY OF NEW MONEY MUST BE, I DISAGREE. IF YOU MERELY MEAN IT SHOULD BE OF SUCH A QUANTITY THAT THE PURCHASING POWER OF MONEY FOR GOODS AND SERVICES REMAINS STABLE, AND THAT THE MONETARY AUTHORITY MUST JUDGE WHAT THAT AMOUNT IS, THEN I HAVE NO PROBLEM.]
> Furthermore, and more important to the concept of money, plain “debt-free”
> money issued under a reformed seigniorage regime would clearly not be
> interest-bearing, but it would in a certain sense continue to represent a
> “debt”, i.e. a liability which under certain conditions might be due to
> redemption and then indeed touch the taxing power of the state. We are talking
> here about another variant of the monetary reflux problem. Because, when seen
> technically in terms of book-keeping, the issue department of a central bank
> would deliver an amount of newly created money to the treasury by entering
> into its balance sheet a claim on the treasury, i.e. a liability of the
> treasury to the issue department. In practice, that would of course be
> “eternal credit”, an indefinite-period interest-free loan, not expected to be
> paid back, and certainly free of any interest payment.
[I AM VERY MUCH OPPOSED TO METAPHYSICAL MYSTIFICATIONS, SUCH AS THIS IDEA OF AN ETERNAL CREDIT THAT NEVER HAS TO BE PAID BACK. WE ARE TRYING TO OPEN UP THE MONETARY SYSTEM TO PRACTICAL UNDERSTANDING. LET US SAY WHAT WE MEAN CLEARLY — THAT REFORMED MONEY SHOULD NOT BE SEEN AS A DEBT. IT SHOULD BE SEEN AS SOMETHING THAT CAN BE CREATED, THEN CONTINUES TO EXIST, AND CAN THEN (IF THE NEED AND THE REQUIRED ARRANGEMENTS EXIST) BE DESTROYED –see below. ]
>One can nevertheless conceive
> of a scenario of no more economic growth – I guess about 100-200 years away
> from today’s realities – in which a certain percentage of the money issued
> into circulation may become excess money no longer necessitated, thus facing
> the monetary authorities of the fictious day with the choice of either
> allowing an accelerated inflation rate to solve that problem, or to phase the
> quantity of excess money out of circulation. In the latter case, the
> phasing-out would be done by putting aside some of the tax revenue and
> remitting it back to the issue department, thus extinguishing that quantity of
> money, i.e. decreasing the quantity of money in circulation. I want to
> emphasize, however, that this is a hypothetical scenario that can help to
> clarify the concept and show its consistency, not something I would expect to
> be relevant in practice.
[I THINK WE MUST HAVE DISCUSSED THIS, JOSEPH, BUT DECIDED NOT TO DEAL WITH IT IN CNM. I HAVE CERTAINLY DISCUSSED IT WITH RICHARD DOUTHWAITE, AND I THINK IT IS NOT SO REMOTELY THEORETICAL AS YOU SUGGEST. YOU HAVE TO, I WOULD SAY, CONCEIVE OF AN ECONOMICALLY DECENTRALISED, ENVIRONMENTALLY SUSTAINABLE PHASE OF GLOBAL ECONOMIC DEVELOPMENT IN WHICH SOME CONTRACTION OF THE MONEY SUPPLY AT THE NATIONAL LEVEL (IF NOT ALSO AT OTHERS IN A MULTI-LEVEL-CURRENCY WORLD) WOULD PLAY AN IMPORTANT PART. TO MY MIND THE ANSWER IS FAIRLY CLEAR AND OBVIOUS. THE RESPONSIBILITY OF THE CENTRAL MONETARY AUTHORITY WOULD INCLUDE DECISIONS ON WHATEVER REDUCTIONS IN THE MONEY SUPPLY, AS WELL AS WHAT ADDITIONS TO IT, IT JUDGED TO BE NECESSARY, AND (WHEN NECESSARY) THE DESTRUCTION OF MONEY INSTEAD OF ITS CREATION. IT WOULD BE THE GOVERNMENT’S PUBLISHED RESPONSIBILITY TO RESPOND TO SUCH DEMANDS FOR REDUCTION BY RAISING THE REQUIRED SUMS FROM TAXATION OR OTHER SOURCES OF PUBLIC REVENUE AND PAYING THEM TO THE CENTRAL MONETARY AUTHORITY, WHICH WOULD THEN REMOVE THEM FROM EXISTENCE. THERE WOULD BE NO NEED TO CONFUSE THE ISSUE BY DRESSING THIS PROCEDURE UP AS THE REPAYMENT OF A DEBT. IT MIGHT OR MIGHT NOT TOUCH THE TAXING POWER OF THE STATE. IT COULD BE MET FROM PUBLIC BORROWING, FROM REDUCTIONS IN PUBLIC SPENDING, OR FROM NON-TAX CHARGES, LICENCE FEES, ETC.]
> I will stop here, sending you best wishes. JH
> So will I. Best wishes to you both.
Greco’s Final Word
Since I started this dialog, I will claim the prerogative of having the final word before publishing to a wider audience. That is not to say that further correspondence can not continue, but I think some closure needs to be made at this point. Hopefully, we each will have developed a better understanding of our respective positions and of the basic issues involved in this problem. I will now try to concentrate my efforts on writing my next book, which will, I hope, more clearly and fully explain the positions I’ve come to hold. In the course of my almost 25 years of research into money and banking, I have discovered some rich veins of insight which I would like to share with other reformers and encourage them to mine these same veins. I am attaching a bibliography of monetary freedom sources, which I hope others will explore.
Main Points of Contention
- Is the kind of money proposed by H&R debt or not debt?
- Is it necessary or important to separate the measure of value from the means of payment?
- What is the nature and role of central banks?
- Is it necessary that state issued money be legal tender?
- Is the kind of money proposed by H&R debt or not debt?We all agree that it is possible for money to be issued interest-free, and we further agree that money should be spent into circulation, not borrowed at interest, as it presently is. I think we can safely say that that is our common objective. To say, however, that money issued according to the H&R proposal is “debt-free” is to stretch the established meaning of common words beyond recognition, and to obfuscate the picture of what money actually is and what gives it value.The proposed money, which is to be spent into circulation, just like the tally-sticks which were issued into circulation by the English kings, is government’s i.o.u. to whomever accepts in payment for real goods and services. Government redeems/extinguishes it by accepting it back as payment for taxes and fees (This is known as the “tax foundation” of money). Tallies were first issued during the reign of Henry I who ascended the throne of England in 1100 AD. This was the era of the Crusades, a time in which much of the usual money, gold and silver, was taken out of the country. Given the insufficient supply of gold and silver, a substitute form of money had to be invented. The answer was “tallies,” which were used for more than 700 years.
Of course, government can issue anew in a continuous cycle. It is an ongoing process of creation (by spending) and extinction (by accepting it for taxes or services). There is a “stock” and a “flow” of money. Any circulating medium of this kind must flow, and there must be a reflux of the currency back to the issuer, who accepts it as payment.
Think of it as a faucet pouring water into a tank which has a drain valve at the bottom. The money supply is the amount of water in the bucket. If more water comes in than goes out, the money supply increases. If water flows out faster than it pours in, the money supply decreases.
I would say it this way: We need to phase out our monopolized, usurious bank-credit money, and replace it with interest-free credit. I agree that money should be spent, not lent, into circulation. That’s the way mutual credit (LETS) works. However, spending money into circulation still creates a debt obligation (commitment) on the part of the spender/issuer to reciprocate by accepting his money back in payment for whatever he sells. Without this “reflux” the currency would not be valued in the market. As Zander points out, it is not state fiat that confers value upon inconvertible money, but “their value is entirely due to their being accepted by the fiscal offices at the indicated value, regardless of their exchange rate.”
It is legitimate for the government to issue currency by spending WITHIN THE LIMITS OF ITS ANTICIPATED TAX AND OTHER REVENUES. This has historical precedent in currencies called, “tax anticipation warrants.”
- Is it necessary or important to separate the measure of value from the means of payment?Robertson says, “I don’t understand what could be meant by ‘an independent and objective measure of value.’ Nor do I understand how the currency units used in exchange transactions could be separate (different, distinct) from the units used for saving (i.e. for potential future exchange transactions), and from the units used to value goods and services for purposes of exchange.”Robertson, further, says, “Greco’s proposed “concrete, physical standard of value” or “index standard” sounds very like a commodity-backed (and therefore commodity-redeemable) currency. But he agrees that that is an outdated idea.”
What I propose may SOUND like commodity BACKING, but it is not. There may be a place for warehouse receipt currency redeemable for commodities stored at a particular location, such as I describe in Chapter 20 of Money, but the index standard I am proposing is strictly a value measure, not a payment medium. It’s like the difference between a yard and a yardstick. I thought the Zander quote in my Comment made it clear, but evidently, it will take a more detailed explanation. I will elaborate a bit more here but a thorough treatment of that subject must await the completion of my next book.
We have become so accustomed to using the national currencies themselves as value measures, we’ve forgotten that the currency is just an i.o.u. denominated in units which are now abstract and undefined. The slight of hand happened when governments declared their currencies to be legal tender, i.e., they forced the acceptance of their paper by creating a legal equivalence between the paper and the gold. If a gold pound were still the unit of account, and there was no forced acceptance of Bank of England notes, then the notes could be objectively valued in the market, and traders could discount them whenever the Bank issued too many notes or issued them inappropriately. As Zander put it, “what counts now is no longer the value of the gold, but the question whether the note of the central bank, measured by gold, changes its value.”
When I say that we agree that “the metal age of money is over,” I mean that we no longer need to use gold, silver or other commodities as a medium of exchange (no more commodity money), nor do we need to make paper or deposit money redeemable for commodity money. A currency need not be “redeemable,” i.e., there is no need to promise to deliver one kind of money in exchange for another in order to make it acceptable in the market; it is redeemed in the market for whatever goods or services the holder may choose. The Scottish banks of the 19th century demonstrated that non-redeemable (for metal) currencies could provide a perfectly acceptable and stable medium of exchange, the value of the currency being “backed” by the commitment and collateral of their (borrowing) clients. [See Somers ] The ultimate redemption occurs when the entity that first issued it accepts it in the market as payment for goods, services, dues, or taxes.
Gold could still be used to define the value unit, but the reason I prefer a “market basket” standard (I think this is the same as what Zander calls an “index standard”) over a gold standard is that the market for gold is not sufficiently free. It is dominated by a few governments and central banks, which prevent the market price from providing an adequate valuation consensus.
So, no, I am not proposing, as James asks, that “currency units used in exchange transactions could be separate (different, distinct) from the units used for saving.” I am proposing a VALUATION UNIT that is separate and distinct from the currency units. With such an objective unit at hand, it is possible to set a value on a currency, as well as on goods, services, investments, and savings media.
- What is the nature and role of central banks?I have no objection to the creation of “a separate body with the sole responsibility of controlling the volume of national money in circulation” so long as I am not limited to using national money for all my exchanges.If I can use community currencies, mutual credit, or commercial credit-clearing arrangements, it doesn’t matter much to me how the national currency is managed. What DOES matter is that I be able to denominate my contractual obligations and dues in terms of a unit of account that cannot be devalued by the actions of the government or central bank.
Robertson says, “It [the BofE] is now responsible and accountable to Parliament for achieving published monetary policy objectives, framed by elected ministers and approved by Parliament. In discharging this operational task, it is free from interference by elected ministers of government.” It could be argued that “free from interference” really means, unaccountable and beyond the control of the democratic process, especially when one considers the relentless shift of power away from the chambers of government and toward corporate boardrooms.
Robertson also says, “The proposal is that, instead of regulating the money supply indirectly by interest-rate changes as now, and allowing commercial financial institutions to profit from creating it as interest-bearing debt, the Bank of England should itself become directly responsible for deciding and creating debt-free the amounts of new money required in accordance with the policy objectives of the elected government.”
There is no argument with the first part of that. What is in dispute is the centralization of power in the hands of an elite group of bankers, who, despite their mandate to achieve “the policy objectives of the elected government,” will, in all likelihood act to advance the interests of their elite constituency. There is no need to vest such power when well established principles of monetary reflux are sufficient to achieve the purpose.
- Is it necessary that state issued money be legal tender, and should other payment media and clearing arrangements be allowed?Legal tender should apply only to payments due to the government, as were the first issues of Lincoln’s Greenbacks. Government can, and should, specify the form(s) of payment which are acceptable to it in payment of taxes and dues, and, indeed, if it issues its own currency, it should be required to accept its own currency at par (face value). That, of course, implies that there is some objective value measure against which the government’s currency can be evaluated.As Beckerath has put it:
“But even boundless respect for the State cannot cancel the fact that in our society the collection of taxes is nothing but the sale of tax receipts by the exchequer (its goods!) – of course, a compulsory sale, but for that reason, assured.
“…even if its acceptance were represented in solemn proclamations as an irremissible patriotic act, as during the American War of Independence, at Washington’s instance, who could not buy hay or cloth for “Continentals” (Bullock “Monetary History of the United States , p 66 ). The same George Washington who talked another language when his own tenants offered him in payment Continentals at par (And who had got his troops, in the end and intentionally marched into the wilderness, in order to be “paid off” there – with inflated paper money. Thus he made himself and his cohorts safe from their justified anger!; even if the refusal to accept assignats at par is punishable with 20 years’ penal servitude French Act of 1 August, 1793; Jastrow’s “Textbuecher”, vol. 4, p. 61); even so, State paper money is and always has been a prosaic purchasing certificate for tax receipts, and noting else.
“If we consider how easily all the favorable effects that may rightly be anticipated from paper money, may be obtained from an unforced paper money; furthermore, the destructive effects regularly ensuing from a forced currency, even under a well-intentioned Government, one would be inclined to compare the economists who insist on a forced currency, with the master builders of the imposing and now excavated castles of Mycene and elsewhere, who, as we know, also substituted compulsion for the use of mortar and sentenced every building operative to death in whose piece of work a knife could be inserted between the piled-up stones The suggestion that there were other ways would naturally have been stigmatized by the ancient “practical men” as “abstract” and “sentimental”.” – pages 224-226
Here is a pertinent quote from Somers:
“The question betwixt a central and a plural issue is in reality a question whether banking is to be confined to the great capitalists, or to a few of the greatest towns, and to the high commerce of nations, or opened up to all classes of people and made to embrace the industry, savings and interests of the many. The tendency of a State or central form of issue is to aristocratize banking. The effect of a plural issue is to popularize this powerful lever both of moral and material improvement. The one seems, therefore, as comfortable as the other is counter to the social tendencies of the age, and to that ever-advancing impulse to raise, enrich, refine and brighten the whole body of a people, which is the crowning glory of all civilization.” – p. 206
Huber speaks of LETS as probably immune to government suppression because “there is no circulation of money.” This is a very important point, and one which has been made previously by Hayek. We should recognize that LETS, and what I refer to generically as mutual credit systems, are simply arrangements for credit clearing. Thus, money as it is generally understood, is not needed, only a mutually agreed way to measure values.
Joseph goes on to say “Money-issuing local currency organisations, however, could reach the critical mass for challenging official currencies. They would evolve into new banks of interregional or even international reach, growing large and very large, and thus would have to be included in the official banking regime. Otherwise we were witnesses to a true revolution.” (emphasis added).
Indeed, would that not be a happy outcome? And, if we extend the clearing process to become global in scope, would not the exchange process have been liberated from the grip of governments, central banks, and oligarchy? No money needed, just an objective measure of values.
LETS and mutual credit have provided a good learning experience for many people, and they have provided prototypes in which the clearing process can be explored and understood. There are many advantages to keeping LETS local and personal, but that is not a sufficient answer to the money problem. We need to envision and promote more extensive (even if somewhat less personal) networks of exchange which utilize the process of clearing.
- ProspectsI think enough has been said about this above to allow the reader to judge for him/herself.
My work has been greatly influenced by freedom oriented sources, particularly the work of writers who have espoused free money and free banking. Many of the most significant contributors to this movement were active during the first half of the 20th century and were part of what has been called the “German School of Monetary Freedom.” These men were very astute in their insights and understandings and offered valuable materials which, while now obscure, have been preserved and are available to us today. We owe a great debt of gratitude to John Zube, who has almost single-handedly rescued these works from oblivion and has performed the monumental feat of archiving almost a half million pages of material, first on microfiche, and more recently in digital files and CD-ROM.
The following resources are highly recommended. The Beckerath and Zander writings are contained in Zube’s Peace Plans #9, #10, and #11. Zube, himself, is very knowledgeable and includes in these files many of his own insightful editorial comments. He was personally acquainted with some of these authors. These files can be obtained from John Zube at:
John Zube, LIBERTARIAN MICROFICHE PUBLISHING, P.O. Box 52 or 35 Oxley St., Berrima, NSW 2577, Australia.
Email: email@example.com Tel.: (02) 48 771 436. No FAX! Website: http://www.acenet.com.au/~jzube
von Beckerath, Ulrich, The Practical Realization of the Milhaud Proposals. Geneva: Annals of Collective Economy, 1934. [in PP9]
– Compensation Money and Public Insurance: the Possibility of Developing Insurance Facilities in Asia, in Colonies, and New Countries, Through Applying the Milhaud System: Together with Some Reflections on this System. Geneva: Annals of Collective Economy, 1938. [in PP11]
Zander, Dr. Walter, “A Way Out Of The Monetary Chaos”. From The Annals of Collective Economy, Geneva, 1936. [in PP9]
– Railway Money and Unemployment and Further Remarks Concerning Railway Money – with Special Reference to the Position of the American Railways. 1933
Riegel, E. C., Private Enterprise Money. New York: Harbinger House, 1944.
This can be downloaded from: http://www.mind-trek.com/treatise/ecr-pem/index.htm. I have copies for sale of the following two books by Riegel.
-, The New Approach to Freedom. San Pedro, CA: The Heather Foundation, Box 180, Tonopah, NV 89049, 1976.
-, Flight From Inflation: The Monetary Alternative. The Heather Foundation, Box 180, Tonopah, NV 89049, 1978.
Somers, Robert, The Scotch Banks and System of Issue. Edinburgh: Adam and Charles Black, 1873.
Besides these, money reformers should be aware of the names Meulen, Milhaud, and Rittershausen.
The Reference sections of my books contains other important sources which are more generally available.
The excerpted e-book version (in PDF format) of my new book, MONEY: Understanding and Creating Alternatives to Legal Tender, recently published by Chelsea Green, can be downloaded at:
A Final Note
I conclude this dialog volume with some words of wisdom excerpted by John Zube from Riegel’s The New Approach to Freedom. May they inspire you as they have me.
These excerpts were taken from John Zube’s Peace Plans #11 (following the index).
E. C. Riegel in: THE NEW APPROACH TO FREEDOM :
“The growth of freedom is entirety the growth of unhampered exchange. – Man is civilized to the exact extent that he has developed his exchange facilities. An exchange-free people is a liberated people and such has never yet existed, due largely to the interference of the State. Beginning on a barter basis, man slowly raised the social order until an escape from its limitations became necessary. Then he invented money which, properly understood and utilized, removes all limitations to progress.” (p. 1)
“It is a remarkable fact that no constitution of any State or any declaration of human rights has ever proclaimed the right of freedom of money issue and its unalienability from man, the producer and yet this right is inseparable from the right of bargain or exchange, which is the very foundation of liberty. Man’s ignorance of the laws of money has blinded him to the very touchstone of freedom, without which the State cannot be curbed or his own capacity for progress and prosperity facilitated. We stand now at the dawn of a new approach to the age-old problem of human emancipation from superstition with prospect of a tremendous lift to the human spirit of conquest over the forces of darkness and depression” (p. 4)
(See the human rights draft in PEACE PLANS 4 and various drafts of Ulrich von Beckerath on monetary rights. – J.Z., 9.12.01.)
“As you scan the world scene with all its miseries, its drab outlook, the discouraging prospect of a solution for humanity’s problems by political means and the remoteness from you of the capitols through which promised salvation is desperately hoped for, you are saddened by a sense of frustration. But if you realize that the citadel of power is your own home and that yours is the majesty and sovereignty, sadness will be dispelled by gladness. To bring this transformation you must comprehend the power of money and that you are the money power ¼ the money power of the State is a delusion, the inherency of money power in man is a fact, as we shall learn. This revolution in the minds of men will assure freedom, for freedom is constituted in unrestricted power to exchange, which in turn means prosperity and peace.” (p. 5)
“Consider whatever intercourse you may desire with your fellow man and you will find that it is facilitated or retarded by the extent to which you and he have enjoyed freedom of exchange, even though there be no material exchange in the particular intercourse you visualize. Life is constituted in freedom of intercourse and mutual agreement, and exchange is the touchstone of mutual agreement because it implies satisfaction to both parties. Anything that impedes free exchange is a force against harmony and mutuality and an anti-social influence. All political laws controlling exchange limit man’s right of untrammeled choice and strike at the very base of his freedom. (p. 14)
“The belief persists to this day that money, to be sound, must promise the delivery of gold or silver. The essential quality of money, however is its promise to deliver value in any commodity at the choice of the holder,” (p. 15)
“Genuine money requires redemption by the issuer through accepting it for his goods or services. Without such redemption the issuer robs the economy by inflating the circulation and raising prices.” (p. 17)
”Without the money-counterfeiting tool of government there could be no war except by popular mandate because the price would have to be consciously and immediately paid. The would-be war maker first of all conquers and subdues his own people by the narcotic of counterfeit money. If the people would hold the veto power on war they must deny their government the power to counterfeit money.” (p.23)
“Our so-called free economy is, under the counterfeiting process, but a transmission belt to communism.” (p.24)
“…the recognition that world government already exists on the economic plane and that all political governments are arrayed in attack upon it far more serious than their interstate wars, In fact, the latter are but the result of the former.” (p. 27)
“Producers or potential producers must always be permitted to spark exchange, and thus, in consequence, production, when it stalls by reason of a deficiency of money circulation. In other words no producer should be dependent upon the money circles initiated by others. When all circles fail to include him and he is left impecunious, he serves not only himself but the economy by starting a circle himself, for if he does not, he must stop buying and thus he reduces the demand for the production of others and spreads the contagion of unemployment. By buying he absorbs materialized labor, thus creating demand for more, which will react upon him, since when we buy of others, we indirectly buy from ourselves. This is the security against unemployment and depression …” ( p. 31 ) See note on p. 104 of PP 9.
Harry Brown called this slim booklet, of 48 pages: “¼ the best explanation of the free market that I have seen. The presumed “free market for ideas” is so flawed that it took this booklet, which appeared some time after 1948, until 1967 to reach me. As disorganized is the world of ideas, still!
Ulrich von Beckerath, 1882 – 1969, always on the lookout for such literature, never had heard of him, either.
Isn’t it high time for all monetary freedom advocates to finally get organized, collect and publish all their writings, discussions, reviews, bibliographies, abstracts, indexes and addresses?
Beckerath tried for all his life, in vain, to get all the volumes of SOUND CURRENCY, but managed to get only one! After WW II it was finally microfilmed, except for a single issue. – PIOT, J.Z., 9.12.01.