One of my close research colleagues Trond Andresen has written the following systems engineering analysis of how a parallel non-debt-based monetary system might function in an economy suffering a debt-induced crisis in its main monetary systems. I thought his analysis could be of interest to readers of this blog.
(This is a revised and expanded version of a paper presented and in the proceedings of the 9th Society of Heterodox Economists Conference, December 6 and 7 2010, UNSW, Sydney.
An earlier and shorter version appeared in Counterpunch June 25 ? 27, 2010.)
What if the Greeks, Irish, Baltics, Spaniards, Italians did this:
high-tech parallel monetary systems for the underdogs?
Trond Andresen <firstname.lastname@example.org>
Department of Engineering Cybernetic
The Norwegian University of Science and Technology
N 7491 Trondheim, NORWAY
3 October 2011
Advances in information technology now make it possible for non-government entities, or governments themselves, to establish and run a national parallel paperless monetary system at very low cost and launch it on very short notice. The workings of such a system is described and discussed. Such systems may ameliorate the dire state of affairs in the hardest hit eurozone countries, and increase the political pressure on EU and national elites for debt forgiveness, full employment and reduction of cutbacks. It may also be applied in near-bankrupt U.S. States.
“Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally”
- John Maynard Keynes
This is an attempt to think outside the box, because any sorts of thinking inside the box on Greece, Ireland and other countries in similar situations has not led to anything and will not either. (But if the reader knows about some unconventional proposal that I may have overlooked, please point me to it!)
At the time of revision of this paper, 3 October 2011, the situation especially for Greece is even graver than when the two earlier versions were written in 2010. The main changes from earlier versions is that I have added two figures, and I expand on the need and possibility for governments to use this option, not only popular organisations or mobile phone companies.
Figure 1 above shows the dire state of a country that has excessive euro debt. The thick arrows are flows of goods and services, while the thin arrows are money (euro) flows (a time unit is indicated as w = week, but this choice does not have any importance for this paper). The government has to extract euros out of the non-government economy to service its debt, by taxing more than it spends. The private sector does the same, sending euros to foreign debtors. The only way to counter these two “bloodletting” flows from the domestic economy is to increase exports to a level that surpasses the sum of the two outgoing flows. This is not possible, especially after debt burdens have increased steeply due to risk-caused increases in interest levels on government bonds. So debt has to be partly written off, but since the creditors refuse this, the domestic economy will be increasingly starved for money. It is therefore in need of a parallel medium of exchange. This will reduce unemployment and enable people and firms to exchange goods and services. It will also enhance the country’s bargaining position towards the creditors.
2. A non-government monetary system
An alliance of large grass roots organisation (typically: unions) sets up a cooperative bank-like operation (“BLO”). Probably it should formally be an association requiring membership to participate (more on this below). This BLO issues “value points” (an arbitrarily chosen term, from now on abbreviated “VP’s” ? it could be called “units”, “work units”, “credits”, “coupons”, whatever ? but should for legal reasons not be called “money”). Technically, the BLO is just a national office with computer capacity and a few employees. There are no branches. A member gets a VP “account” with the BLO. To use the account the member needs a mobile phone subscription. When opening an account, (s)he is automatically offered credit up to a standard amount of VP’s from the BLO. Such a “start loan” has the purpose of enabling the person to start transacting with others. It is primarily meant as a medium of exchange, and not as a store of value. It is interest-free, but there is a very small membership fee per account, which is only to cover the expenses of the BLO office and computer/network costs. This fee must be paid in euros/regular money. The VP loan has limited duration, a few months. When the loan expires, the borrower has the right to an automatically renewed loan, but the maximum amount allowed may have been adjusted somewhat up or down in relation to the last loan received. More on this below.
Technological progress makes this possible
What is to be proposed here is a national and extremely efficient version of a Local Exchange Trading System (LETS) or a local currency system. These are basically barter schemes but strongly improved by using a local medium of exchange. Members gain points by supplying goods or services to other members. Such points gained are in the next round used to buy goods or services from other participants. The big advantage is that this enables economic activities locally which would else not have taken place due to lack of a regular medium of exchange (i.e. money). A LETS system has traditionally been managed by some trusted person(s) keeping tally of everyones’ points account, in modern times on a computer. This is done when reports of exchanges are received. Such a system is only manageable when it is confined to some local community. Another factor limiting the geographical and population scope of such schemes is that participants need to know which other agents (persons, firms) are also in the scheme, and what sort of services or goods they offer.
A local currency system does a similar job as a LETS scheme. In that case one has circulating paper currency resembling regular money, something that eliminates the need for account updates with each transaction, but which may be legally difficult to uphold due to the state’s monopoly on money issuance.
A LETS-like scheme must do the following:
- account for transactions (or run a local monetary system)
- give participants an easy and fast way to find other participants in the system and what they offer (or demand).
Today, with most people having mobile phones, and also access to the Internet (whether at home, work or elsewhere), both challenges may be elegantly and cheaply met, and “the local community” may be expanded to encompass a country (or state, like in the U.S.). Reporting of transactions is done via mobile phone/SMS and automatically received and accounted for on a server. And a web site data base (possibly on the same server), updated by participants and having a Google-like search system, will enable participants to advertise themselves or to easily find sellers and and buyers anywhere of the relevant goods or services.
Gradual increase in transactions
Mobile phone transactions with other BLO members may be implemented through one of the technically proven schemes already in operation in some developing countries. There are no physical/paper VP’s in circulation. People and firms offering goods and services will gradually ? as the scheme gets more popular decide to accept a certain share of VP’s as payment, while the rest must still be in euros. Such a share is decided freely and individually by the seller, and may also be adjusted at any time with circumstances. The same holds for wages: employers and employees may as the scheme gets widely accepted, agree on a certain share of wages being paid in VP’s, a share that may be re-negotiated as things develop.
Pure fiat money
The VP’s are pure fiat money. They do not have any property giving it an intrinsic value like money issued by a central bank, which has indisputable value by being the sole currency that may be used to pay taxes (as per the “MMT = modern money theory ” or “Chartalist” view). People or firms will therefore accept VP’s in payment only if they believe that a sufficient amount of other people/firms will accept them. This outcome is probable however, since today’s only alternative for the Greeks (and other nations in a similar situation) of increasing hardship, unemployment and too low and further shrinking income in euros over many years, is much worse.
Figure 2 shows the system with exchanges in VP’s in parallel with euros. The additional circulatory system is indicated at the bottom. The public holds stocks of both VP’s and euros using these for exchanges, and output YD consists of two components, mediated in euros and VP’s respectively. The thick arrows indicate goods and services being transacted.
The VP scheme has dynamics which may be unstable both ways: confidence building more confidence, or decreasing confidence leading to steep inflation and collapse. One should ensure a basic and initial level of confidence by the BLO being launched and run by (a) large, national and well established organisation(s). Second, and most important, by controlling the amount of VP’s in circulation, based on observing the average acceptance of VP’s as a share of payment together with euros, it should be possible to uphold the needed amount of confidence in the system. The amount in circulation may be limited by renewing loans with a lower amount when earlier loans expire. Then the borrower will have to accept a reduction of the amount in his/hers account. To avoid runaway inflation in VP’s, one should probably start the process by issuing a restricted amount (see below), and then letting the aggregate amount grow (or in between possibly shrink) based on the observed impact. Note that the existence of VP’s only as electronic entities on a computer (no physical “currency”), combined with the fact that the initial issued loan has not in any way been “earned” by the account holder, allows the scheme to freely regulate the amount of VP’s in circulation upwards or even downwards, by adjusting all accounts with the same amount. This is a new and potent macroeconomic control instrument that is not available in a regular monetary system.
Why is membership necessary?
As already mentioned, the BLO should be organised as an association or “exchange club”, requiring membership. Then the VP’s are not a state-controlled medium of exchange like euros, but a device only for club members to exchange goods and labour between them. Hopefully this will make it difficult for the state to ban such a system, like the Austrian state did in 1933 against the succesful local currency in the town of Wörgl. Organising the scheme as an association with transactions only being available to members, and no money-like paper VP’s in circulation, may prevent such an outcome.The state may also try the milder countermeasure of levying income tax in euros on such activities, portraying them as “tax evasive” and constituting “a black economy”. Such attempts must then be fought against politically and legally, in parallel with the ongoing other popular anti-crisis resistance activities. On may expect that such a scheme will be opposed not only by the state; it will probably also be derided by the economic establishment, including most financial pages pundits. But criticism in itself is not a fundamental obstacle. The bigger danger is whether the scheme may simply be banned, or quashed via euro taxation.
There is a further good argument for membership requirement: One should avoid giving the well-to-do a free lunch in the form of an automatic BLO loan, on top of the ample buying power they possess in euros. They should as a rule only be allowed to open an account, but not have access to an automatically given and renewed VP loan. The BLO should be targeted towards the less well-off in society. This may be achieved by having two grades of membership. Level 1 is open to all (including firms): you get an account but no initial loan. Level 2 (call it “core” membership) additionally qualifies for the loan. Core membership should only be given to people already belonging to one or more of the organisations behind the BLO (unions and similar popular organisations, for instance farmers’), to pensioners and to the unemployed. And it should be automatically given, to give the scheme a flying start.
It is probably wise to start the process carefully by only giving automatic loans to core members, and later relax the rules in a controlled manner, based on how things develop. Account holders that default on their loans above some defined level of transgression may be excluded as members of the system, and their accounts discontinued.
Credit above the automatic amount?
In an initial period, the system should be simple and only have the purpose of enabling transactions between agents that lack a medium of exchange (note that this is the main problem, not the lack of money as a store of value). If the scheme exhibits strong growth and widening acceptance, the possibility of extending regular and large VP loans to applicants could be considered. But this would demand a dramatic increase in the staff and organisation complexity of the BLO, because loan applicants have to be vetted and collateral has to be posted. This would probably also make it easier for the state or the central EU apparatus to achieve a ban against the system.
Also possibly a profitable business proposal
Assume the existence in one or more eurozone countries of a mobile phone company led by people with a certain amount of creativity and open-mindedness. They could decide to be the center of a BLO-type project. They could start an exchange club and offer a bundle with a phone, a subscription, and BLO membership. This would have the largest impact if it was done in cooperation with one or more national popular organisations, as mentioned above. Realistically, such an initiative would attract a lot of new subscribers and generate much traffic for the company. Additionally, the company would benefit from extensive media coverage and be seen by a large share of the population as socially responsible and different from the usual run-of-the-mill corporation.
Political resistance from within?
Resistance from the state and mainstream media pundits have already been mentioned. Another and perhaps more surprising source of resistance against this scheme may be the leadership in some of the mass organisations whose members would benefit from it. Many such leaders are anchored in a marxist/communist/left socialist tradition. The proposal may easily be seen by some of these as a “petty bourgeouis” invention of the “fringe” or “alternative” type, only “giving the masses illusions” and “leading them astray in the struggle against capitalism and for socialism”.
3. A (parallel) government monetary system
The above scheme also has the advantage of increasing the political pressure on the establishment: If they consider it economically harmful they can avoid it by reverting to a regular national currency combined with negotiating for partial euro debt forgiveness, as already argued by many voices. This would put the debtor nations on a much more powerful footing versus the creditors, and would be the best solution. But it seems to be politically totally out of the question for those in power.
An intermediate solution
A government could however, implement an a less drastic measure: use a variant of the VP system described above, as a parallel “emergency currency” (“EC”). As already mentioned, a government-issued EC has intrinsic value as opposed to the VP, since it may be used for tax payments. An EC will therefore easily be accepted as a means of payment by any agent ? individual or firm ? that is obliged to pay taxes.
An advantage of implementing this system electronically using the mobile phone network, is that it may be up and running very quickly after a government have decided to do it, so that its positive effects may have been demonstrated before the EU system could marshal forces to stop it. It will then be very difficult to kill, due to gained popular support.
A further advantage of an electronic EC is that tax avoidance is impossible, since any transaction occurs via accounts in licensed banks, and is logged there.
This scheme could also be useful for non-EU-countries, or such national regions that have authority to collect region-based taxes, like the near-bankrupt U.S. state of California. There EC’s could be implemented by the state government, with immediate positive results.
3. Conclusion: better than the bleak alternatives
Enabling unemployed or underemployed people to work for each other and (increasingly) to exchange goods and services with the rest of society, will ? with immediate effects ? ameliorate the dramatic and persistent decrease in living standards for most people, which is the bleak and only future (lasting many years) that the powers that be and most pundits are able to come up with. By the proposed scheme it should be possible to activate a large underused potential that the hard-hit eurozone countries have, unemployed or underemployed people, and to give many a better life. It will primarily stimulate domestic production, since VP/EC’s may not be used to pay for imports. It will also give euro-indebted countries a dramatically better position in their bargaining for partial debt forgiveness.
And if governments refuse to do this regardless of how bad the alternatives are, the option is there for non-government entities as described, for the first time in history, thanks to technological advances.