Towards the economic democratization

Earlier this month I visited several countries in Europe to learn more about complementary currency systems etc. I will depict it briefly and chronologically.

I arrived at Zurich, Switzerland to visit the Money Museum, one of few places in the world where surveys on historical monetary systems are conducted (Note: this museum is only open on Tuesdays in the afternoon!). I learned that the Sunflower Foundation, which runs this institution, is planning to host the Money Forum in 2010 where experts on this topic will exchange their opinions, on top of showing practices of complementary currencies. On this evening I had the chance to attend a lecture on Roman coins which tell us why Julius Caesar had to be killed (because the Senate did not like him), and I was intrigued by this message by this means of exchange.

On the next day I moved to Lausanne to visit Mr. François de Siebental who has been implementing social credit systems in different continents(Click here to learn more). The first initiative started in 2004 in Madagascar to give credits for irrigation systems, houses, churches, schools and cultural centres etc. in complementary currency, and he said that it is quite successful. He also mentioned the importance of basic income, alluring that his projects are contributing to make it a reality. Another interesting story that he gave me is that the Swiss people have more grip on their central bank than their neighbours in the Eurozone do, showing his pride on their national autonomy.

Then I went to Lille, France to attend a conference on the SOL project, an electronic currency system which works both as a developed form of mutual help and as a loyalty card among solidarity economy actors. The conference started with an introductive lecture by Mr. Philippe Derruder who argued that our monetary system has failed so far to improve our environment and human aspects, explaining that money is nothing but a “connection which is based on the social confidence,” condemning the current “illegibility of the monetary creation by the banking sector” and concluding that complementary currencies are a tool for the economic autonomy. Ms. Celina Whitaker, of the SOL project team, gave the general introduction on complementary currency systems and also about their own one, followed by a guided tour to different shops which accept SOL (a fair-trade shop, a bicycle-sharing non-profit etc.). Currently 1500 cards are issued in Nord-Pas-de-Calais (a French region with Lille as capital), and the challenge is how to continue this system after the experimental period ends in December 2008.

Last destination was Madrid, Spain where it was my turn to give the general lecture on complementary currencies. Mr. Jaap Vink of Strohalm gave a presentation on the projects which his foundation is conducting, such as C3 (Circuit of Consumers and Commerce), a legal-tender-backed internal exchange system which is already operational in Porto Alegre, Brazil as Compras, with 575 businesses circulating R$410,000(about 160,000 euro or US$ 227,000), commodity-based currencies in Central America(Honduras and El Salvador, click here for details) and Fomento in Fortaleza, Brazil (click here to understand the mechanism). After my general presentation Ms. Stefania Strega from Canary Islands stated that money should be circulated like nitrogen in the natural world, insisting on the importance of the holistic vision. Then several existing initiatives of Bancos del Tiempo (Time Bank in Spain, in Spanish) were presented, such as for problematic families and for youths, and I thought that these initiatives are still to grow further.

Next day I learned that Spain has other interesting initiatives, such as Solidarity Economy’s portal site which is alive with news from Latin America too, Economistas sin Frontera(Econists without Border, in Spanish) and www.noticiaspositivas.net (Spanish version of the British site www.positivenews.org.uk) and the solidarity finance bank coop57. I was intrigued by this dynamism and would like to go on working in close touch with them…

On Nov 03, 2006 I visited the Unterguggenberger Institute in Wörgl, Tirol, Austria and had a conversation with Ms. Veronika Spielbichler both about the historic event of “labor certificate” in 1930s and the ongoing projects today.

The first thing that attracted my attention on arriving at the Wörgl railroad station is the milestones. January 1st, 1 AD is arbitrarily selected as the day €1 is deposited with the compound interest rate of 3% per year, and historic incidents(such as the Destruction of Jerusalem, The Council of Nicaea, the Fall of Constantinople and the Fall of Bastille) are shown always with the value that this deposit had grown by that time(you will end up with being unable to count these numbers!). Of course both the publication of the “Natural Economic Order”(book / milestone) and the labor certificate”(to be depicted later) in 1932 are included in this series, accentuating the importance of monetary reform.

Then I went to the Unterguggenberger Institute, which is located in the very house Michael Unterguggenberger lived in. Ms. Spielbichler brought me to the city museum to show me several photos, publications and other reminiscences of this historic experience. In 1932 Michael Unterguggenberger, then mayor of Wörgl, issued the so-called “labor certificate” to stimulate the local economy, and it was extremely successful especially because of its “demurrage”(you would have to pay 0.1 schilling with each 10-schilling bill at your hand if you kept it to the next month, i.e. each bill loses 1% of its face value monthly). Although this experience was prohibited by the Austrian authorities one year later, this experience is known worldwide as the biggest success of the “Demurrage” that Silvio Gesell had proposed on his book “Natural Economic Order” in 1916.

But it is even more important that this is not only historic: Ms. Spielbichler told me a bit about the current situation in Wörgl. These milestones, built both by the municipal government(with the current mayor’s message) and the very bank which supported the labor certificate initiative more than seven decades ago, is a good proof that the local community still remembers this incident. This institute has been collecting information on today’s experiences in Europe as well as giving advices to those who want to introduce similar initiatives and has been playing an active role on introducing I-motion), a local initiative to promote the youth’s communitarian activities. She said that 2007 will be the “free money year” and several events(such as exhibitions and theaters) will be given there.

(Correction: the bank which financed the milestones is not the one which supported the initiative in 1932.  Thank you, Ms. Veronila Spielbichler, for the correction)

It is very nice for me that quite a few inhabitants still remember such a historic event. I wish them all the best and the further growth of this movement.

The international academic conference “Monetary Regionalisation - Local Currency Systems as Catalysts for Endogenous Regional Development” took place at Bauhaus Weimar-University in Weimar, Germany on Sep 28 and 29, attracting more than 250 participants not only from Europe but also from Argentina, Australia, India, Indonesia, Iran, Japan, Korea, New Zealand and South Africa. German and non-German researchers who see community currencies as a tool for autonomous development at each region gave different and invaluable presentations.The first day was supposed to begin with Bernard Lietaer’s online lecture, who classified community currencies as part of “complementary currencies” from the Taoist viewpoint of yin-yang, but the terrible Internet connection made it necessary that Margrit Kennedy, who has been working for years with Lietaer, should take his place. He(actually she) said that yang symbolizes male values such as competition and expansionism while yin represents female ones such as equality and sustainability, and that complementary currencies’ role is to fulfil the lacking yin as our current economic system is run only by the yang-promoting official currencies.

Historical examples in Europe and United States were given after this keynote lecture. Jérôme Blanc, of Université Lumière Lyon, France, made clear that local currencies were issued by different actors(such as local governments, non-profits, local businesses and banks) for the promotion of the local economy or its autonomous development, that regional banks issued their own currencies in France and Germany on their early stage of industrialization and that there were a number of initiatives from 19th to 20th century. Loren Gatch, from University of Central Oklahoma, United States, mentioned that similar practices were found there too in 1930s during the Great Depression, stressing the importance to design local currencies as an instrument for the self-interest of each individual and/or corporation.
Then followed two presentations on the framing of “regions”. Roger Lee, from University of London, told about the importance of keeping “economic geographies” which is under the pressure of today’s globalization, because economies are rather run in such zones than on the level of each nation-state. Robert Musil, from the Universität Wien, Austria, showed his study based on the networking theory, telling that rich regions tend to rule poorer ones and that different sorts of complementary currency systems are needed for different regional activities, ranging from mutual-help one to finance. And Nigel Thrift, from Warwick University, United Kingdom, spoke that we need to have another financial system which takes care of social aspects as well as regional developments since our society today is more and more controlled by the financial capital.

The second day started with Martina Schäfer, of the Technical University of Berlin, about the REGIO(regional currencies) initiatives which have been emerging in Germany for the last four years as a means to create buy-local-style economy and to promote non-profit activities, on top of showing some key points for the success of REGIO. Jonathan Warner, from Dordt University, Iowa, United States, followed her to tell about the recent trend of local currency movements there.
Several mainstream economists also gave their analyses on community currencies. Wolfgang Cezanne, of Cottbus University, shows his survey on them as well as on the “aging money,” suggested by Silvio Gesell(1862-1930). Gerhard Rösl, at Regensburg University who once worked for the Federal Bank of Germany, told that he is in favor of using this tool, although he is skeptical on its effectiveness on the regional economy. And Henning Osmers, from Universität Oldenburg, Germany, explained how the monetary policy is affected by regional currencies.
Several real practices were presented in the afternoon. Peter North from Liverpool University, United Kingdom, told about this movement in Hungary, followed by Athanasia Kyunghee Chun from Daejeon University, Korea, who gave the overview on this movement in this Asian country as well as on Hanbat LETS with which she has been involved. Gill Seyfang, from East Anglia University, United Kingdom, said that Time Bank systems, operational there, play a complementary role with LETS(local exchange and trading systems).
On the last part Stephen DeMeulenaere, based now in Bali, Indonesia as an employee of the Dutch non-profit Strohalm to work for the promotion of community currencies, gave several examples in Southeast Asia and other parts of the world. Then Barbara Roßmeißl showed her analysis on the RGT movement in Argentina, followed by Heloisa Primavera, from the University of Buenos Aires, told about her Colibri projects in Argentina and Brazil.
I was strongly impressed by the fact that most participants shared the awareness that we need to create community currencies and other systems to get over social and economic issues because they are tightly related with our monetary system. The results of this conference will be published soon in English and German.

Some people do misunderstand that local currency and other initiatives aren't for the business world: the WIRBANK(in German, French and Italian) in the Switzerland, founded in 1934, has been quite successful to help small businesses by offering them cheap loans in its own complementary currency called WIR("we" in German).

The bank was created precisely in times when the Swiss were still suffering from the huge impact triggered by the Great Depression. Several people who already knew Gesell's idea of "Freigeld"(free money) gathered to set up a clearing circle which later would evolve into a cooperative bank. People used WIR instead of Swiss Franc(CHF) as their means of exchange since the conventional money's circulation wasn't enough. Although WIRBANK gave up sticking to Gesell's original idea of demurrage in 1948, it still serves for trades among small businesses in the Switzerland.

As a rule only small businesses can join this cooperative. They use WIR(equivalent to CHF) in parallel with CHF on trading with other WIRBANK members(for instance, WIR 30 + CHF 70). They can also enjoy loans in WIR whose interest rate is lower than in CHF because WIRBANK can create WIR by itself while it has to borrow from the central bank with the burden of official rate, and it can offer, for instance, 2% loan in WIR and 5% in CHF in case the official rate is 3%.

Another advantage for WIRBANK members on joining WIR is the increase of their customers: those who have WIR can't spend it to non-members(huge and/or foreign companies), so WIR members have the advantage to attract other members. In this way they make up a circle in which their purchasing power stays without flowing over the border.

A survey proves that WIRBANK balances economic ups and downs, playing the complementary role to the conventional economy(to be depicted next time). WIR members trade more in WIR when the Swiss economy is staggering while they exchange less during the boom, so they are less afraid of economic recessions. More than 70 years of their history has a lot from which we can learn…

A book on WIRBANK

There are some concepts on which our societies are based today, such as democracy, human rights and freedom. Suppressors of these values run the risk of being condemned by the international community while NGOs and other advocates are likely to receive supports all over the world.

The Open Money Manifesto is a good application of what the modern world has achieved so far onto the economic realm. It begins with some quotations from The Universal Declaration of Human Rights, adopted in 1948 at United Nations, raising questions about the authenticity of our current monetary system.

• Not democratically managed: money is a tool everybody needs, but currently it’s managed by private banks as they decide who can make loans = start projects.
• Costly: lenders of money are obliged to pay the compound interest on top of the principal while profits go into only pockets of a few hands.
• Hoardable: bearers of money can withdraw their money as long as they like, stagnating its circulation and bothering those who are really in need for it.
• Unfair: the very existence of compound interest increases wealthy people’s asset at the sacrifice of the vast majority of the poor(see Kennedy for details)
• Unsustainable: our current monetary system is destined to go bankrupt sooner or later because it requires an exponential growth forever(see ibid.).

In short, our monetary system is undemocratic and does not take human rights or freedom into account.

It is important for us to remember that the monetary system is not a natural law but a convention which was and still can be arranged for human needs. Therefore we should revise it if we want out means of exchange to serve for our values…

The globalization which enriches only a few in the world at the cost of the vast majority gives rise to a number of counter-movements and some insightful people have found out that another currency system may give a fundamental change in our socioeconomic system. This time I would like to depict an interesting initiative in a tiny community not far from the marvelous experiment in 1930s.

Prien am Chiemsee, some 80 kms to the East from Munich, is a Bavarian resort where thousands of tourists enjoy their summer vacations along the lake Chiemsee. Christian Gelleri, teacher of economics at that time at a local high school who had learned Gesell, Wörgl and other related topics, came up with the idea to hold a curriculum to run a local currency in fall 2002. Six female students showed interest in joining this project and the Chiemgauer project took off next January.

This system was conceived to create a win-win relationship among non-profits, consumers and local businesses. Each actor has the following advantage and this means of exchange promotes local production and consumption.

* non-profits: purchase 100 Chiemgauer(=€100) at €97 and resell it to consumers at €100, therefore earning €3 to be spent for their own activities

* consumers: purchase 100 Chiemgauer at €100 and spend it at local businesses at its face value, therefore donating 3% of their consumption to local non-profits without additional expenditure.

* Local businesses: accept 100 Chiemgauer and spend it for other local businesses or redeem it into €95 paying 5% of commission. The 5% commission can be regarded as an advertisement fee and they can attract more consumers who want to help their community.

* Chiemgauer office: sells 100 Chiemgauer at €97 and pays €95 on redemption. The €2 difference is spent to cover its running cost.

It has been successfully increasing Chiemgauer users as well as local businesses’ turnover in Chiemgauer. Now 700 consumers and 380 businesses join this system, recording the annual turnover of 720,000 Chiemgauer(see here for details). It is expected to grow furthermore as the smart card is introduced, receiving more and more attention all over Germany and abroad.

Gesell’s demurrage theory is hardly told without referring to the successful historic experience which took place in the middle of the Great Depression in Wörgl, Austria. This time I’d like to show you how effectively this monetary system worked to help the economic recovery of this Tyrolean community.

This small town, like everywhere else at that period, suffered from the recession: As many as 350 people were jobless in a town with the population of only 4,216 and more than 200 had already run out of their unemployment insurance in spring 1932. The tax revenue diminished and the city hall too was on the verge of bankruptcy. Then the mayor Michael Unterguggenberger decided to issue the “labor certificate” in July 1932 as a local currency to get rid of this plight.

Bills of 1, 5 and 10 Schillings were printed and paid by the city hall as a salary for construction workers. Each bill expired every month and a stamp of one hundredth of its face value was needed to keep it valid again. That means, your €10 “labor certificate” is only valid until May 31st if you receive it today(May 09) and you need to buy a €0.10 stamp to paste on this bill if you fail to spend it by the end of this month. So bearers of this local currency were encouraged to circulate these bills rather than to hoard them, reviving economic activities in Wörgl. The average money supply of only 5,490 Schillings created more than 2.5 million Schillings of transactions during merely a bit more than one year, allowing the city hall to spend more than 100,000 Schillings for its public works and decreasing the unemployment by 1/4. There were even some people who offered to pay tax in advance(would you do so even when you were rich enough?) because they were so affluent.

This boom of parallel currency, however, frightened the central authority in Vienna and Wörgl had to stop the circulation of this wonderful currency in September 1933: but this success was reported in different media and has been proving how effective Gesell’s theory is. Now the Unterguggenberger Institute has been working to collect related materials as well as promoting the contemporary local initiative “I-motion”, receiving many visits of those who work for “Regio”(regional currencies, to be presented next time) practices in Germany.

It’s now a clear-cut fact that today’s positive-interest-based monetary system is a huge hurdle against our sustainable lifestyle as well as our economic activities. Silvio Gesell(1862-1930), a German-Argentinean merchant and economist, is a remarkable figure who suggested how to reform this paradigm on his masterpiece “The Natural Economic Order.”

He starts his argument with the fact that money is at a privileged position in comparison with other goods. In general commodities are depreciated as the time passes by and you can’t sell yesterday’s newspaper or one-year-old apples while you can hoard your money as long as you like without suffering from any loss at all(in case of no inflation: note that Germany adopted the gold standard when he wrote that book), which allows bearers of notes to charge the compound interest on lending them to somebody in need. The more money you have the more profit you can earn by this financing, enabling the superrich to live solely on such income while most of the poor are asked to contribute to them.

So what was Gesell’s idea?: “To abolish the privilege of money.” People prefer money to goods on storing economic value because money remains the same, so he came up with charging bearers of paper notes a certain amount of “demurrage fee” regularly to prevent them from hoarding(for instance, to put the stamp of one-hundredth of the face value each month: to be depicted more next time).

This will give a fundamental shift to the financial system as it’s quite helpful for borrowers: lenders see their act as a means rather to get rid of suffering from the monetary loss triggered by the demurrage fee than to increase their asset and even negative-interest loans will be possible when the demurrage fee is high enough: In case the fee is 1% per month = roughly 11.4% per year, it’s better to lend US$1000 to receive only US$950 next year than hoarding it at home and losing more than US$100. The negative interest rate will give more chances to those businesses which haven’t been financed so far due to their low profitability, more people will have access to credits = more freedom to run the business they want and consequently our economy will be more democratically managed.

Although Gesell died in 1930 without witnessing any case at all where his theory is applied, the subsequent history proves that he was right. Next time I’ll deal with a historical success.

The current compound interest is liable not only for what I depicted in the last article but also for pouring money arbitrarily into short-term projects while those with a longer time span find it quite difficult to be sufficiently financed. Stefan Brunnhuber, another German who has been tacking this issue, gives a clear picture on all about it on his book “Wie wir wirtschaften werden”(to be published in English as “Our Future Economy”).

Let’s say that you have two projects to choose from: which project would you invest to?

a) a €10 pine tree which will grow to €100 in 10 years

b) a €10 oak tree which will grow to €1000 in 100 years

The interest rate plays an essential role on your choice although most of you aren’t aware of it: the positive interest rate is synonym of the depreciation of future assets because what will be bigger in the future is smaller in the past. Provided that the interest rate is fixed at 5% per year your € 1000 in 2006 is equivalent to €1628.89(1000×1.05^10) in 2016, but this means that your € 1000 in 2016 is reduced to only €613.91(1000/1.05^10) in 2006. From this viewpoint the pine tree is worth now € 61.39 while the oak tree is only worth € 7.60(1000/1.05^100) and everybody is therefore inclined to plant a pine tree while nobody is interested in oak.

This explains why entrepreneurs rush into China to set up new factories because profits are expected to be brought soon. Long-term projects such as reforestation and education are unlikely to call the attention of the business world because they aren’t profitable in this framework.

But this paradigm will see a fundamental shift as the interest rate changes: future assets can be appreciated instead of being depreciated in case there should be a negative interest rate. The pine tree will be worth €162.89 instead of € 61.39 and the oak tree €131,501.26 instead of € 7.60 with 5% of negative interest rate. This will favor long-term projects or those which will churn out profit constantly, enabling more projects to be financed.

But how can we make a negative interest rate possible? Next time I’d like to deal with this issue.

Nowadays more and more people are concerned about the sustainability issue but it’s quite odd to find that very few attempts have been ever made to apply this concept for the monetary realm. Everybody is quite aware of how devastating the monetary crisis is for any national economy as we’ve witnessed several cases all over the world(Asia in 1997, Russia in 1998, Argentina in 2002…), but it’s quite hard for me to imagine financial analysts debating over how to build up a sustainable monetary system.

Margrit Kennedy, a German architect, is one of few persons in the world who have ever tried to give an answer to this question. She found out that the current monetary system is unfavorable for eco-friendly buildings she was making and she began studying the monetary aspect of our economic system to conclude that it has several structural faults. Here are her key findings from her masterpiece “Inflation and Interest-free Money.”

1. Exponential growth

The current monetary system, equipped with the compound interest, obliges our economy to grow forever and even more than before. This phenomenon is uncommon in the natural world, however, for instance human beings stop their physical growth when they become adults, and the economic exponential curve is destined to eat up all the natural and/or human resources before going bankrupt just like the cancer accelerates its growth to end up with killing the whole body.

2.Interest repayment is a big burden for any project

We pay interest not only when we repay our debt but also when we pay for any goods and/or service. Part of your bus fare is spent to repay the bus company’s debt with interest, and Kennedy estimates that the percentage of interest on what we pay amount to about one fourth on average. It’s quite important to notice that this interest makes some eco-friendly projects “unprofitable.”

3.Unfair redistribution of wealth by way of interest

But the most important point of the interest in relation to the economic democratization is that this transfers the wealth from the poor to the rich: Obviously those without money need to borrow it when they need to buy something big(like house or car) and they have to repay the interest in addition to the principal while wealthy ones can make use of this circumstance to enrich themselves even more. Kennedy shows that more than 80% of the population loses money with this system while only a fistful of superrich can earn from this system, raising a question whether a monetary system with such a feature is allowed from the viewpoint of social justice.