Money diversity

A review of “Rethinking Money” by Bernard Lietaer and Jacqui Dunne

Rethinking Money is an interesting book about the problems of our current monetary system and explores possible solutions. Lietaer is widely known for his studies of complementary currencies and has written several books on this topic and a large number of articles.

Before we can discuss monetary reform and complementary currencies, we need to understand what money is. Lietaer and Dunne argue that many economists conflate the definition of money with the functions  of money.

In economic text books we find three main functions of money. These functions are: store of value, medium of exchange and unit of account. The authors interestingly remark that there is no reason why these functions should be served by one and the same currency.

Later on the authors propose their definition of money. In their view money is an agreement to use a standardized unit as the medium of exchange within a certain community. The question is how such agreement is made. The answer: taxation.

By selecting something as the mean to pay taxes, that something  will become the currency of that particular community – whether the tax is levied in grain, tea leaves or gold. The rationale is that by requiring that a certain tax to be paid in a certain commodity, the government will create a demand for that currency.

Contrary to what is usually assumed, Lietaer and Dunne argue that money is not value neutral and that in fact the design of the monetary system does affect the structure of the economy and society.

About 97,5% of the money supply in modern society is created as bank debt – which also carries compound interest. This design leads, according to the authors, to short-term thinking and to a pressure for indefinite growth – which is both impossible and unsustainable.

Knowing that our current monetary system is fundamentally flawed, monetary reform seems to be inevitable. But unlike many other monetary reformers, Lietaer and Dunne do not advocate to replace the current system with another, but to add other monetary systems to the current one.

The authors classify the current monetary system as a monoculture, as there is only one type of money (debt-based and interest-charged). What Lietaer and Dunne propose is what they call money diversity. They present three arguments in favor of money diversity, the first one is a more pragmatic argument and the other two are more theoretical.

First, any attempt to replace the current monetary system will meet resistance from established interests, to the extent that reform will be become impossible. Rather than wasting time and energy in reforming the current system, one could develop alternative currencies which would coexist alongside the current national currencies. One way to stimulate this would be that governments will accept other currencies than bank debt in the payment of taxes.

Secondly, the authors argue that a monoculture is fundamentally unstable. If the single currency fails, then the entire economy would also fail. However, if multiple types of currencies (and not just different currencies) are available, then failure of one currency would not automatically cause the failure of the economy. This because people will be able to switch to other currencies.

The last argument is that each currency design has its own set of unused resources and unmet demands. No single currency design, be it bank debt or time dollars, could bridge all unused resources and unmet demands. Money diversity, however, allows to have different types of currency in a community and each currency could be designed in such way that more resources will be used and more demands are met, than would be possible with a single currency.

Having made their case for money diversity, the authors turn to discuss the several types of complementary currencies. The first distinction they made is between competitive and cooperative currencies. Lietaer and Dunne contend that a healthy economy needs both types of currency.

Further they advocate the introduction of local, regional and global currencies in addition to national currencies. Also they advocate sectoral currencies.

Before discussing actual examples of complementary currencies, the authors give a short discussion of the Chicago Plan. They formulate four objections against this plan proposed by Irwin Fischer among others.

Their first objection is that the Chicago plan replace one monoculture with another, in this case private debt-based money with public debt-free money. Hence it could not have prevented all monetary crises. The third objection is that the Chicago plan only gives monetary power to the central government.

The fourth objection is that publicly issued debt-free money is less competitive than the current system. Though this does not make such money a cooperative one.

In my opinion these objections should not prevent space settlements from implementing the Chicago plan in some modified manner. Since this plan only refers to national currency, there is some space for complementary currencies.

It’s my guess that the authors does not really feel for the Chicago plan, because it would meet severe opposition from the financial sector – as mentioned above. However,  this does not apply to space settlements, as fresh societies without established interests, they could implement policy reforms which would be impossible to pursue on Earth.

In order to give the reader some idea of what complementary currencies are and how they are different from standard currency, they discuss in short some prominent examples. They give a short description of LETS, Time Dollars and few regional currencies such as Chiemgauer and BerkShares.

In the next four chapters Lietaer and Dunne discuss strategies for banks, businesses, governments and NGOs for using complementary currencies to pursue their ends. We will discuss a few of the more interesting ones.

The Swedish JAK bank is an interesting example of a full-reserve bank in modern society. As such this bank could perfectly operate within a Chicago plan-based monetary.

It is, however, a little bit surprising that this example is included in this book, since this bank provide zero-interest loans in national currency. It’s unclear from the book whether the saving points issued by the JAK bank – and are required for getting a loan – can circulate among the members of that bank. If that would be the case this banking model would be far more attractive.

The commercial credit circle (C3) is a system designed for small and medium enterprises to overcome cash flow problems. This is done by providing interest-free credit in C3-currency – which is pegged on a one-to-one base to national currency. The credit is backed by insured invoices, i.e. the future payments a business will receive.

With this credit the business can pay off its suppliers. They can use this C3-currency they receive either to pay off their own suppliers, or to convert it for national currency by the C3-organization. However, this latter option means that they have to pay interest until the invoices are paid.

The authors suggest that C3 systems can be promoted if the government would allow businesses to pay their taxes in C3 currency (at least partially). This would ensure the acceptance of this complementary currency. In Mordan we could allow businesses to pay their electricity bills in this currency.

The last example I would discuss here is the Toreke. This is a local currency issued by the Flemish city of Ghent in one of its poorest neighborhoods. The residents of this neighborhood can earn Torekes by doing certain types of community services, and in return they can use this currency to rent an allotment garden on city-owned land.

The Toreke is interesting because its design is similar to that of our proposed currency, the Mordan Talent. This currency is issued debt-free and derives its value from the ability to rent a piece of land with it. It is therefore encouraging to notice that the Toreke has been a great success since its introduction.

Rethinking Money contains several thought-provoking ideas and its subject is very interesting. Though the writing style of the could use some improvements, it is interesting enough to be recommended.

See also Bernard Lietaer on complementary currencies and money diversity

Rethinking Money (Official author’s page)

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3 thoughts on “Money diversity”

  1. I pick up pennies in parking lots. 🙂 Once I found a dime. I kept it too. Not sure what I would do if I found a hundred $ bill. But I probably will not tell you.

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