Monthly Archives: May 2006

Open Money Manifesto

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…

Chiemgauer in Germany: A new currency to regain regional economic autonomy

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.

A local currency to revive the local economy in Austria

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.

What’s demurrage, alias negative interest?

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.

Interest rate and long-term projects

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.