Rethinking Money

by Bernard Lietaer

  1. The system needs to be a win-win model for all participants.

  2. Its aim is to support a public good.

  3. It needs to be professionally managed.

  4. Total transparency of the accounts and the mechanisms for all participants.

  5. Democratic control by its users.

  6. Sustainable finances or at least a sustainable financial strategy.

  7. Guaranteed circulation of the currency.

  8. Willingness to collaborate with other regio projects.

  Finally, there is a preference that the currency does not bear interest. This is not a formal obligation, but so far all regios have been implementing that ninth principle as well.12

  As we have seen repeatedly, economic hardship gives birth to a multitude of local currencies. The trend toward cooperative currencies will be stronger now than at any time previously because of the convergence of cheap computing, the Internet, and the technology to launch such systems. The vast majority of the initiatives that arise as a consequence of the current global depression will be started with a lot of good intentions. But good intentions may not always be sufficient. Inevitably, some initiatives will be technically flawed, some may be outright frauds, and some may even be deliberate attempts at sabotage, as appears to have been the case in Argentina.

  Dee Hock is the founder and a former CEO of the VISA credit card association. Back in 1968, he convinced Bank of America to give up ownership and control of their BankAmericard credit card licensing program. The new entity was a nonstock membership corporation owned by its member banks. In 1976, its name changed to VISA. This new structure he calls a chaord, a word that comprises both the terms chaos and order.

  He writes, “We must conceive of and help implement wholly new forms of ownership, financial systems and measurements, free of the attempt to monetize all values that bind [us] to next quarter’s bottom line, gross mal-distribution of wealth and power, degradation of people, and desolation of the ecosphere, or our stories will be increasingly immoral and destructive.”13

  John Boik, a medical doctor who specializes in new cancer treatments, has applied his knowledge of natural systems to governance. He presents intriguing and important ideas on the functioning of an integrated cooperative currency and governance system.14 He addresses two key mechanisms of contemporary society that make it unsustainable: (1) The financial (banking and investment) system demands continuous economic growth, and (2) financial and political power is centralized within a small subset of the population.15

  “The Earth has finite resources and a limited capacity to absorb the waste products of human economic activity; unlimited growth is unsustainable due to real ecological constraints. And the country suffers from inherently undemocratic hyper-inequalities of power that cause widespread suffering and will likely lead to greater civil unrest.”

  Boik contends that the current financial, economic, and governance systems require an overhaul. “Tweaks and reforms, while important,” he says, “will ultimately fail to address foundational failures on which they rest.” His proposal calls for developing demonstration projects at the local level and on a volunteer basis to test and refine sustainable financial, economic, and governance systems. These projects, called “principled societies,” are essentially local membership clubs open to anyone who wishes to participate.

  In his blueprint, financial and political power is decentralized, in part through collaborative direct democracy, the governance system a principled society employs when adopting and refining rules. In this form of mass online democracy, members participate in the full creative problem-solving process rather than simply voting yes or no on proposals advanced by a small group. The system relies on built-in design elements that ensure efficiency, transparency, and effectiveness.

  Boik adds, “Power is also decentralized through the democratic features built into the proposed financial system, a local currency system called the Token Exchange System.” Unique to Boik’s proposal is a crowd-funding–like mechanism, which pools small amounts of resources and money from a diverse group of people, usually via the Internet. This generates investment funds for business, as well as a steady stream of donations for funding social services such as schools, nonprofits, clinics, universities, and other groups. Members must use a certain portion of their incoming tokens to make interest-free loans to businesses and make donations to participating nonprofits. Individuals choose the programs they want to support.

  Some of the interest-free loans would go to principled businesses, new socially responsible hybrids that contain elements of the nonprofit and for-profit models. This profit-neutral investment system accomplishes three goals: First, every individual participates and becomes a member of the investing class. Second, decisions are based on social concerns rather than profit. Third, in a profit-neutral investment system, funding will tend to flow toward those businesses that provide the greatest community benefits. Principled businesses have a competitive advantage here in that they are designed to deliver social gains.

  Boik adds, “Since investment is not motivated by profit, the system does not demand continual economic growth and can remain robust even under steady-state conditions. Profit-neutral investing is compatible with long-term ecologic viability. Thus, collaborative direct democracy is integrated with decentralized investment and social services funding. Each major aspect of a principled society—governance, finance, and economics—serves to distribute financial and political power to all system participants.”

  Boik asserts that from its core foundations, principled societies and those that follow this plan are inherently democratic.

  The first step that cooperative currency networks should urgently consider is to establish international standards of quality and security with an Internet-based rating agency that produces a Cooperative Currency Consumer Report, complete with a reputation rating similar to that on e-Bay’s auction site. The criteria for such a rating should include not only the technical aspects, such as how the currency is created, its delivery mechanisms, and its security, but also its scale and liquidity, its transparency, its governance, and its underlying social values. Bottom line: It should become possible for anybody to consult the rating of a currency before accepting it.

  For any cooperative currency system that is destined to go mainstream, security measures should be commensurate with those of the conventional monetary system. There is one advantage that the cooperative currency domain has over the conventional system in this regard: Cooperative currencies should embrace transparency to its users and accountability. This is in stark contrast to the conventional system.

  Additionally, the electronic technologies now available make it feasible to trace the use of any currency from its birth to its final retirement, making it a less attractive target for fraud, disruption, or sabotage.

  Henk Van Arkel, founder of the Dutch nonprofit STRO, makes an interesting observation: “One of the reasons why systems fail is because there are too many meetings and the initiative gets bogged down. Additionally, a currency needs to be funded so the basic infrastructure and administration costs are covered. Otherwise, there’s burnout.”16 Michael Linton adds, “In a mutual credit system such as LETS, your money is as good as your word. If your word is no good, neither is your money. It doesn’t have to get overly complicated.”17

  This clearly works well in smaller, more close-knit communities, which form the backbone of most local cooperative movements, but what happens when a program goes truly global?

  A CURRENCY THAT MARRIES EFFICIENCY AND EQUITY

  The airline business is fiercely competitive, yet airlines need to collaborate when some unexpected disruption occurs. For instance, if a plane is delayed for whatever reason, its arrival and departure gates may have to be changed. This may affect other airlines, competitors of very different sizes and financial power. The old solution was to expand the airport. But that approach is less favored since most of the world’s important airports can no lo
nger expand their footprint—it is too expensive, and the land is simply not available.

  So, as necessity is the mother of invention, something quite out of the box had to be devised. Geert Jonker, who now works as a software engineer in his native Holland, decided to tackle this dilemma.18 His starting point took into consideration psychological studies showing that collaboration requires minimum levels of equity, which means that the benefits from the outcomes should be roughly proportional to the input of the different players. Individuals care about the payoff for others besides their own and are even willing to incur personal loss to reach a more equitable outcome.

  The methodology Jonker used to unravel this complex issue was agent modeling, whereby a computer simulates all the factors of choices and opportunities between all the players and assesses the impact on the system as a whole. In this case, options and actions are replicated based on specific goals for each airline, as well as their interactions with each other.

  “What we found was when conventional money was used in the time-slot exchanges, and all the airlines were fair, the results showed that the free market system actually worked well. As soon as even one airline exploited the situation, however, by leveraging its clout to obtain more than its fair share of benefits or delivering less than promised, all the airlines would also become self-centered, and cooperation broke down,” recounts Geert Jonker.19

  Bottom line: Conventional money can make a market efficient but not equitable, unless all participants keep behaving fairly forever, which is unrealistic. The erosion of community collaboration and its devastating consequences were seen in the !Kung tribe story back in Chapter 3. As soon as conventional money was introduced into their highly cooperative and supportive community, their community disintegrated.

  What Jonker proposes is a new system in which the airlines work cooperatively by allocating scarce gate-time slots among themselves via a currency specifically designed for this purpose. He calls this a spender-signed currency.

  Jonker describes how the currency works: “This is a mutual credit system like LETS where people can issue their own money. Basically, the credits count as an IOU, which has the issuer’s name on it, so whoever gives that IOU will do something in repayment. It’s called a multi-issuer currency, so there are multiple parties who might issue money, as this IOU can be passed along. In the case of air traffic management, however, I made a variation of that system, creating a spender-signed currency. Every user in the scheme has to add an electronic signature to every credit that goes through his or her hands. So, at any moment, every credit will have all the names of all the people who have used that credit in a payment up until that time.”

  In addition, every user has a reputation on a scale from one to three, with one being low and three representing high regard. The likelihood of a currency being accepted is a reflection of how well one knows the end issuer or the lineage of issuers and the reputation of each of them.

  If the issuer or several of its users are known exploiters or swindlers, that currency ends up with a lower exchange value in a free market. For example, if one were offered the choice between 10 units with a pedigree that is aligned to one’s values or 10 units for the same transaction but with a history that conflicts with one’s principles and ethics, which one would be preferred? One may decide, however, to take a lower-rated currency but at a lower value.

  As Jonker points out cogently: “The fact is that spender-signed currency enables a group of agents to punish an exploiter in a robust way, that is, in a way that doesn’t break down as soon as the first of the group starts to defect from common cooperative principles.”

  He continues, “What happens is that the credits that have my name on them tend to stay close, or around me, and will tend to circle around me from the people I know and then come back to me, when the IOU is redeemed, and it disappears. The upshot is that everyone has his own little economy or exchange sphere around him or her. All these circles, all these local economies, stay interconnected and form a global economy. I think that that very nicely models the social exchange as we do in real life. So I exchange socially with people I know and people I trust, and not with the people I don’t know or don’t trust. The spender signed currency enables lots of local economies around each user’s own local economy, together interconnected into one big universal economy while keeping the efficiency of a normal monetary open market—a market with money.”20

  MONEY THAT SMELLS?

  The Roman historians Suetonius21 and Dio Cassius22 both reported a conversation between Emperor Vespasian (emperor from 69 to 79 AD) and his son, Titus. Titus was complaining to his father about the disgusting nature of a particular tax that his father had recently introduced. It was a urine tax, levied on the disposal of urine in the famous Roman sewer system. In response, Vespasian held up a gold coin and told Titus, “Pecunia non olet!” (“Money doesn’t smell!”).

  This phrase is still used today as a way of saying that money is unaffected by its source or its users.23 What Jonker invented, by contrast, is a system of money that tracks all its users. The currency’s originator and its users leave an indelible imprint so that subsequent users can express their opinion. It is now possible to have “smelly money,” as a previous user’s reputation may stink!

  A possible application of this is described in the next chapter, with two Irish lads working out their deal on buying a car. The clincher as to whether a bargain is struck is the origin of the funds over time.

  Since available information technologies are now capable of making Vespasian’s statement untrue for the first time, imagine the role and effect of a currency such as Jonkers outlined in a monetary ecology. This currency could circulate in parallel with conventional money, using the existing economic framework, but it would change the economic market into one where collaboration and reputation for fairness become as important as profit and competition. The very fact that a participant is willing to use it would be a sign of its reputation rating, and it could even make corporate whitewashing or “greenwashing” counterproductive, because any dishonesty immediately shows. It just wouldn’t pay to misbehave.

  This type of currency assumes, as in classical economics, that all relevant information is always available to every participant in the market, which clearly is not the truth with conventional money. Mobile Internet access, however, could create a space where a lot more information could be pulled into a decision than was ever the case.

  An economy of relationships is trying to emerge: An economy in which interconnectivity empowers the individual, along with his or her various communities, evolving into a more democratic, transparent, and viable economic life, enabled by various consciously created currencies operating at all levels of society, from local neighborhoods to the world at large.

  TOWARD A MONETARY ECOSYSTEM

  Revising our monetary systems through the inclusion of cooperative currencies fosters the possibility of building a better world, one to enjoy now and one worthy of bequeathing to future generations.

  What could be some of the components of what we have described a monetary ecosystem?

  That it provides balance between competition and cooperation, as measured, respectively, by the system’s efficiency and resilience, is crucial to the long-term health of any given complex flow system. As already discussed in Chapter 4, in all sustainable systems, the optimum point between resilience and efficiency invariably lies much closer to resilience. And these two factors for resilience are diversity and connectivity.

  What could elements of a mature monetary ecosystem look like one generation into the future? For example, a multitiered monetary system could consist of:

  • a global reference currency

  • three main multinational currencies

  • some private international scrip

  • scores of national currencies

  • dozens of regional currencies

  • a multitude of local cooperative currencies

  • a wide
variety of functional currencies

  Of course any one individual or business would participate in only a few of these systems. Just like today, nobody uses all of the conventional national currencies in existence. This list just describes what is available as choice of media of exchange.

  Let’s now explore what each of the items in the currency menu could look like.

  A Global Reference Currency The need for a global currency that is nobody’s national currency has finally been recognized. It has taken the form of the Terra described earlier, or some variation of it, and arose from a systematization of corporate barter.

  Three Multinational Currencies It has indeed become obvious that regional economic integration can reach maturity only when a single currency levels the playing field for all economic participants. A single currency is the only way to structurally guarantee a unified information field. After some serious start-up problems in Europe, various multinational alliances have evolved from the original euro. There are also multinational currency zones in Asia (triggered by a deal between Japan and China) and in the North and South Americas (around a new Amero, or federal dollar, after a reform of the U.S. dollar).

  Some Private International Scrip The airline loyalty currencies were the first large-scale application of an international corporate scrip. Today, Facebook is trying to dabble in the same direction. Google may be tempted to do the same. The net result will be that several corporate scrips will be competing on the Internet, issued by the likes of Amex, Microsoft, or an alliance of European and Asian corporations. Some have created special subsidiaries, with strong and liquid balance sheets, to issue these currencies and imbue them with greater credibility.