NOV 15 — Nobel Laureate Fredrick August Hayek is often viewed as a radical in the field of theory of money. Even the liberals see his arguments on monetary diversity as too revolutionary.
It’s been almost 150 years since the Industrial Revolution yet we continue to deploy the timeworn monetary concepts of currency monopoly. The practice of solo currency within a nation state still prevails. And today, many countries have political democracy without monetary democracy.
Since 1970, the International Monetary Fund (IMF) has identified 204 monetary collapses, 145 banking crashes and 72 countries around the world embroiled in sovereign debt crises.
Statistics have shown that very few people in their own country use currencies that are distinct from their bank owned debt notes. Furthermore, in this knowledge economy, to tackle 21st century complications, the monetary paradigm has to be fundamentally transformed to monetary ecology. That is, scaling up of complementary currencies of different values in parallel with the existing money system. The need for monetary diversity has been much delayed.
By analyzing four simple questions, we can develop the low resilient nature of the solo currency within a nation state. First, who creates money? Second, how is money created? Third, how is the monopoly of money enforced? And fourth, what do we mean by ‘money’?
Scholarly studies offer us the keys for first two questions.
Only around 3 per cent of the total money is printed by the reserve banks. And the majority of money is created by the debt with the banks. This is so because notes are issued with interest by the banking system. And every dollar/rupee/ringgit we see is someone’s debt. It’s either a government debt, corporate debt or private debt.
Third, why is that everybody uses dollars in USA or yen in Japan or rupees in India? Answer—taxes. Businesses can exchange whatever they want. However they need to pay taxes and there is just one thing, which is acceptable – bank debt owned notes. One of the purposes of the tax system is to give value to the currency.
Lastly, the definition of money, as per our economic textbooks is a component of functions viz. unit of account, medium of exchange, store of value and so on. However, that’s not what money is, it’s what money does.
Increasingly scholars have also started to redefine the function of money as an agreement within the community to use something standardized as a medium of exchange wherein community can differ from being a nation state to a two-person economy.
Even Bretton Woods institutions defined dollar as worldly use because of an agreement. However, the agreement remains unconscious. Just like fish in the water. There is no alternative as divorce is to marriage. We tend to assume money is neutral but it isn’t. Money is programmed to be a monoculture. The very reason for money’s structural instability is monoculture.
Critics often view this systematic problem as a by-product of development strategies. Yet, complexity theory proves that monetary monoculture causes structural problems. Consequently, low diversity leads to low resilience.
Need for monetary innovations:
Now, to achieve higher diversity with high resilience, Switzerland’s monetary innovation offers us such multiplicity. Switzerland is often considered as one of the most stable economies in the world. Italians remain as one of the largest non-naturalized groups in Switzerland yet it’s more stable than Italy. It isn’t for the cows or the mouse. It’s the WIR currency started in 1934 by 16 key businessmen, who started creating money themselves.
The mechanism is same as the bank owned debt notes. I sell you something, I have the credit in WIR (1 WIR = 1 Swiss Franc) and you have a debt if you are doing something back to me. Advantageously, the currency can be used among themselves without interest and not having to go to the bank. In the last few years, WIR has created commercial credit circuit where WIR can be exchanged for international currencies under certain specific conditions.
Similarly, the Uruguayan government now accepts two types of currencies in the form of taxes and services to be paid by the people. First, the conventional bank notes and second, the business-to-business currency. Result? Everybody in Uruguay now accepts this monetary diversity.
Another such multiplicity was seen in Ghent, Belgium when government introduced “Torekes.” A complementary currency used to promote gardening; cultivation of fresh vegetables and use of CFL bulbs. Result? Everybody began cleaning up their neighbourhood and started planting in need of special currency. The more torekes you have, the more euros you earn!
Therefore to achieve such monetary flying geese paradigm, governments should progressively support such multiplicity. Not only will it help in deficit reductions but also help achieve benefits in fundamental needs such as a safer environment and global warming decline.
* This is the personal opinion of the columnist.
