Parallel monetary systems?

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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 <>

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

1. Intro­duc­tion

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


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

The pro­pos­al

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

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.

Build­ing con­fi­dence

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.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.