Rethinking Money

by Bernard Lietaer

  The formula used to calculate the commodity valuation in Terras is:

  Let us assume in our example that the commodity price for a barrel of oil at the time of the sale is $100. The Terra Unit Value, or the commodity prices for each of the items in the Terra Basket at the time of the sale (i.e., copper, grains, lead, one carbon credit, and oil), totals $500. Let us further assume that 1 million barrels of oil are sold. Therefore, 200,000 Terras are created:

  1c. Inventory Balance. The Terra Alliance rebalances its portfolio to take into account the inclusion of the 1 million barrels of oil.

  1d. Terra Creation. The Terra Alliance credits the oil producers’ account with 200,000 Terras. (Note that all Terra currency movements in the diagram are denoted by the thicker continuous arrowed lines.)

  2. Terra Circulation among Users

  Once the Terra is created, it enters into and may remain in circulation for a period determined entirely by the users. For example:

  2a. First User (User X). The oil producer decides to pay one of its suppliers, a German engineering firm, partially or completely in Terras for the construction of an offshore rig.

  2b. Other User(s) (User Y). The German engineering firm, in turn, decides to purchase specialty steels from a Korean steel mill and to pay partially or completely in Terras. The Korean steel mill, in turn, uses the Terras to pay a mining company in Australia.

  2c. Last User. Each Terra remains in circulation for as long as its users continue to use this currency, from one to an infinite number of transactions and without any particular date of expiration. The process comes to an end only when a particular user determines to cash in the Terra(s), in effect, becoming the last user.

  3. Demurrage

  Throughout the circulation life of each Terra, from its creation to its final cash-in, a demurrage fee of 3.5 percent to 4 percent per year is in effect. As seen previously, demurrage is a time-related charge on money. This demurrage fee acts like a parking fee, with the charge increasing the longer the parking space is retained. With Terras, this charge is based on how long a user holds the currency.

  The demurrage fee serves three key functions: as an incentive to think long-term, as a circulation incentive, and as the way to cover the TRC’s operational costs.

  • Incentive for Long-Term Thinking. As explained in Chapter 4, a demurrage fee makes the long-term future more important than short-term. If the Terra is used to make decisions to allocate resources internationally, it would reprogram the users of the Terra toward long-term thinking. This would resolve the prevailing conflict between shareholders’ short-term priorities and society’s need for long-term planning.

  • Terra Circulation Incentive. The Terra demurrage fee is designed as an incentive to keep the Terras circulating in a timely fashion from one user to another, since the demurrage fee increases the longer the Terra is held onto. The demurrage fee thus ensures the Terras’ usage as a mechanism of exchange and not as a mechanism of savings.

  • Terra Operational Cost Coverage. The Terra demurrage fee is calculated to cover the costs of the entire operation of the Terra mechanism (e.g., storage costs of the basket, administrative overhead, transaction costs in future markets). The demurrage fees for a particular Terra transaction can be calculated by the following formula:

  (Terra Operation Costs/time unit) ×

  (Terra holding period) × (Terras on account) =

  Demurrage Fee

  Let us assume that the TRC’s operation costs are evaluated at 3.65 percent per year, or 0.01 percent per day. Let us further assume that the German engineering firm receives 200,000 Terras from the oil producer and keeps these on account for a period of 10 days, prior to paying the Korean steel mill in transaction 2b in our diagram. Thus, the demurrage fee (represented by the dotted line identified with number 3 in Figure 7.1) in transaction 2b would be calculated as follows:

  0.01% per day × 10 days × 200,000 Terras = 200 Terras

  4. Terra Cash-In

  The circulation and existence of a particular Terra come to an end when the last user decides to cash in its Terras, for example, for national currency to pay its taxes or payroll.

  A transaction fee (proposed at 2 percent of the value of Terras cashed in) is charged at that point. This transaction fee serves two purposes:

  • Terra Circulation. The transaction fee is designed as a secondary motivation to keep the Terras in circulation rather than cashing them in too readily, thus continuing the beneficial effects of the circulating Terras. In effect, the 2 percent transaction fee requires those in possession of Terras to consider that cashing in their Terras will cost the same as paying the demurrage fee for more than six months (assuming a demurrage of 3.65 percent per year). It is likely that the holder will be able to pay someone at least partially in Terras over the next six months, as most suppliers would rather be paid earlier than later.

  • Cash-In Operational Costs. When the last user decides to cash in his or her Terras, the Terra Alliance sells the necessary volume of commodities from its basket to the commodity markets to obtain the necessary funds in conventional currency. The cash-in may take place directly with the Terra Alliance itself or, for example, through an intermediary bank, as in any foreign exchange transaction (4b).

  5. Reference Currency

  Once the Terra mechanism is operational and the advantages of using an inflation-resistant international standard are known, nothing impedes two entities (User X and User Z in the diagram), which may have no direct involvement in the Terra mechanism, from denominating contracts in Terras, even if the final settlement may happen in the corresponding value in conventional currency. The Terra, in this instance, functions purely as a trade reference currency, a reliable standard of value. This is similar to when two parties agreed on contracts denominated in gold during the gold standard days, even if neither party owned gold or had any involvement in gold mining or processing.

  Chapter Eight

  STRATEGIES FOR GOVERNMENTS

  Money is the crowbar of power.

  FRIEDRICH NIETZSCHE,

  19th-century German philosopher

  Trash was a nightmare problem in Curitiba, the capital of the southeastern state of Paraná, Brazil. There was a large slum population dwelling in shantytowns, makeshift, improvised housing constructed from corrugated steel, cinder blocks, and whatever else was available.

  “Back in 1989, the primary problem we faced was garbage in the favelas. We needed to avoid pollution in our streams and, of course, to protect the kids who were playing in what were very contaminated areas. The problem was that we had to have the garbage collected with trucks, but they couldn’t get into the favelas because the pathways were too narrow and the terrain was very hilly,” recalls Jaime Lerner, who was mayor at the time.

  The issue was further compounded because the city simply did not have the funds to deal with the crisis. Raising the necessary money through conventional methods, such as requesting funding from the federal government, was not an option. Something else had to be done.

  This dilemma facing governments at whatever level of authority is commonplace some three decades later. Even in better economic times, making the limited conventional currency stretch has always been troublesome. With tax revenues to fund programs and services dwindling today because of the harsher economic climate, everyone is feeling the pinch. National governments have had to slash programs, particularly in Europe, following a series of austerity measures to get spending under control.

  Lerner, however, took stock of the resources on hand. There was an abundance of food, given the region’s rich farmland, proximity to the sea, and subtropical climate. Additionally, there was an underutilized municipal bus system and people with a lot of time on their hands. Lerner, who was trained as an architect and consequently thought in terms of systems and their integration, had an idea!

  It was a strategy that developed over time. Large metallic bins were placed on the streets at the edge of the favela neighborhoods. Le
rner recalls, “We separated the trash into three unique components: one third, such as paper, glass, and cartons, was commercially recyclable; one third was biowaste (available to produce organic compost); and the other third was trash for the landfill. Those who collected and sorted the trash were given tokens to ride the local bus system.”

  Thousands of children responded by picking the neighborhoods clean. The children have taught their parents how to do it. Lerner noticed that to earn bus tokens, some slum dwellers even collected and sorted garbage along the highways, making it easier to get the waste picked up by trucks.

  People made use of the tokens to travel downtown, often to find work. The bus tokens were soon accepted at local markets in exchange for food. The project expanded from there. In one three-year period, more than 100 schools traded 200 tons of garbage for 1.9 million notebooks. The paper-recycling component alone saved the equivalent of 1,200 trees—each day!1

  Eventually, more than 70 percent of Curitiban households became involved in the various programs. The 62 poorer neighborhoods alone exchanged 11,000 tons of garbage for nearly a million bus tokens and 1,200 tons of food. Other programs were created to finance the restoration of historical buildings, create green areas, and provide housing, all by methods that didn’t create any financial burden on the municipality.

  Thanks to Lerner and his innovative methods, Curitiba has made major strides in other social sectors, providing the city with some of the best quality-of-life indices in the world. Sixty to 70 percent of Curitiba’s trash is recycled in situ, possibly the highest percentage in the world.

  The experience gained, along with the lessons learned as mayor of the city of Curitiba, served Lerner well when he later was elected governor of the state of Paraná. The ideas and their implementation served as a blueprint on a larger scale.

  Lerner adds, “When I was a governor, from 1994 to 1998 and again from 1998 to 2002, originally we wanted to avoid loans, as in the case of Argentina and the $800 million World Bank loan they took out to clean their bays. We decided that it’s not only a question of money but also a question of mentality. It’s not only a question of public works but also it’s how to successfully stimulate a learning process. So we didn’t have the money to clean our bays. So instead we made agreements with our fisherman. When they catch the fish, the fish belong to them. When the days weren’t good for fishing, they catch garbage, we pay for the garbage with our tokens. The more garbage they fished, the cleaner the bay became; the cleaner the bay became, the more fish they could catch. It’s a win-win solution.”

  Another major problem is street children. “These children were usually begging for money to feed their families. We tackled that problem by making an agreement with each family: We provided each of them with a monthly basket of food for as long as they kept their children in school.”

  The idea was to implement this program across all of the 399 municipalities of Paraná, which is home to over 10 million people.

  “When we realized the low cost of monthly baskets of food, and how they helped those living in poverty by freeing up their limited resources to pay for other things, everybody got very excited. Instead of having to use all their money to buy food, they could now use the money in different ways and at the same time be sure that their kids were going to school,” Lerner recalls.

  Garbage that is money. When the fish aren’t biting, the fishermen clean the bay instead. Photo credit: Instituto Jaime Lerner.

  The many initiatives—environmental cleanup, city restoration, job creation, improved education, disease intervention, and hunger prevention—were each tackled with various cooperative currency systems. This all happened without having to raise taxes, redistribute wealth, issue bonds, rely on charity, or obtain loans from the federal government or organizations such as the World Bank and the International Monetary Fund (IMF). The improvements burdened no one. Everyone benefited.

  Curitiba, along with the state of Paraná, discovered a means by which to match unmet needs with unused resources. In 1990, Curitiba was honored with the United Nations Environmental Program’s (UNEP) highest environmental award.2 Curitiba was awarded the Globe Sustainable City Award in 2010.3 This award recognizes cities and municipalities around the world that excel in sustainable urban development.

  None of the exceptional features of what has happened in Curitiba would have been possible without the various cooperative currency systems implemented by Jaime Lerner. Curitiba is the first city to have systematically used a “monetary ecosystem.” It is therefore a practical demonstration of what becomes possible within less than one generation when one rethinks money. There have been several PhD studies dedicated to the innovations in city planning and public transport systems of Curitiba. What is surprising is that, not withstanding the availability of 25 years of data, no systemic economic study has been performed on Curitiba.

  THE CIVIC: ECONOMIC STIMULUS WITHOUT DEBT

  In the case of Curitiba, the results of using a cooperative currency in purely economic terms are worth noting. From 1975 to 1995, the GDP of the city increased by 75 percent more than the rest of the state of Paraná and by 48 percent more than Brazil’s as a whole. The average Curitibano earned more than three times the country’s minimum wage. If nontraditional monetary gains, such as the exchange of garbage for provisions, are taken into consideration, the real total income for residents was at least 30 percent higher still. The results in human terms—in the renewal of dignity and hope for a better future—are incalculable.4

  This was accomplished by rethinking money, moving from a model of scarcity that the conventional system inadvertently encourages to one of prosperity with the use of smartly designed cooperative currencies.

  Traditional economic stimulus is an effort by government to boost an ailing economy by pumping more money into it, usually by cutting taxes and by borrowing money. With these measures, it is hoped that liquidity in the system will increase, which in turn will lead to greater financial resilience, as there is now money for job creation and/or other programs. But this approach has serious negative repercussions: Both increase the national debt. Lately, the net effect has been a tightening of the proverbial belt with drastic austerity measures, such as slashing social programs. This has lead to massive civil unrest, particularly in Spain and Greece.

  Richard A. Epstein, a senior fellow at the Hoover Institute writes, “Grim is the right word to describe the latest economic news from both the European Union and the United States. Throughout the European Union, austerity programs have failed both politically and economically. In Spain, unemployment rates have soared above 24 percent. The Dutch government is on the edge of collapse because of the popular and political unwillingness to accept the austerity program proposed by its conservative government. Romania is not far behind. Greece, Italy and Portugal remain in perilous condition. … On the American front, the decline of GDP growth to 2.2 percent rightly raises fears that our sputtering domestic recovery is just about over.”5

  There is a solution, as the events in Curitiba illustrate. Government, whether at a local, state, or regional level, can take its economic fate into its own hands and issue a cooperative currency. This cooperative medium of exchange, which can be customized to any given government’s needs, is a currency called the civic. The key component of such a solution is that it provides a financial Keynesian stimulus with a fundamental and critical difference: It doesn’t generate any additional debt.

  Indeed, a Keynesian stimulus means that government steps in and launches projects that it funds through deficit spending. The government then borrows from the banking sector, going further and further into debt. This is because the government cannot issue itself the currency. In contrast, if the government launches the same types of projects but issues cooperative currencies to fund them and requires taxpayers to make a contribution payable only in that same currency, no debt is generated.

  Furthermore, the process is more bottom-up than the usual top-down central gove
rnment stimulus plans. It tends to be more successful since the cash injection can be very precisely applied. Residents and local government members clearly have a better insight into a community issue with all its nuances than does a central government bureaucracy. And since the currency’s governance needs to be more transparent and easier to manage because of its size, there is less opportunity for fraud and misappropriation. In Chapter 11 the importance of governance issues are addressed.

  HOW IT WORKS

  A yearly contribution in civics would be requested of all town or city households by their local government authority. Residents would earn civics, which would be issued by the city, by participating in activities that contribute to the city’s democratically agreed-upon goals and objectives. Agreement as to the nature of these tasks might be reached by canvassing neighborhoods door-to-door or by online voting. This unit of account could be one hour of time, valued at the same rate for everybody. So, for instance, if a city aspires to be greener and more eco-friendly, the activities could include growing food on terraces, rooftops, or vacant plots of land; taking responsibility for plants and trees in the neighborhood parks; or training people in city-based horticulture.

  From a purely economic angle, if an annual tax of $1,000 can be replaced with 10 hours of civic activity per household, anyone earning less than $100 per hour should be interested in joining the system. Additionally, the civics system has the added benefit of allowing people to earn an income from civil activities.

  Such an approach provides, in fact, a decentralized Keynesian stimulus at the city scale without creating new debt or incurring further costs to the government. Contrast this to what’s happening now, as governments try to keep up the social system with the euro, which clearly isn’t working.