The suggestions that follow are based on limited knowledge of local consideration in India. They are are also the result of many years of research and on the direct experience with a local script system in Exeter, New Hampshire. The concept proposed here is to develop a very simple system at the local level that could be integrated at a wider regional level and eventually with an international-level system on a more sophisticated basis.
It should be kept in mind that we are dealing with principles of banking which are universal but not used properly in our national monetary systems. In short, we are trying to create an honest monetary system. In the history of the world, at least the western world, such a system has seldom if ever been created. We are breaking new ground, and this should be recognized.
Principles on which to Base a Proposal
- Honest money can only be created by people who produce goods or services of real value to the community or village. Money (meaning credit) is created in the process of making loans for productive purposes.
- Banking is a community function. The community, or representatives of the community who make up the community bank, should decide when to loan money for specific purposes.
- To create honest money, a redemption system must be included. Otherwise , it may be possible for scoundrels to take over the bank and issue money for their own purposes-just as present national governments do for their own purposes (usually war and violence).
- Thus a certain commodity (or commodities) will be selected as a standard on which to base the currency, and the bank will be prepared to redeem all the currency presented to it in the commodity specified on the face of the currency.
- Currency may be issued or created in various ways, but it must be for productive work—primarily short-term production. For example, agricultural workers on an ashram farm could be paid in whole or in part with such created currency, because they are engaged in the short-term production of crops that have value equaling several times their cost. Other workers, such as teachers, could be paid partial salaries in the new currency, but consideration would have to be given according to the productive value of their work in relation to the length of time it takes to “bear fruit.” (More discussion of this later.)
- Interest should be no more than cost. Nonprofit credit unions charge 6 percent on the unpaid balance, at a flat rate of 12 percent interest per year. However, until the total volume of business has reached a certain level (perhaps 5 to 10 lakhs per year), it will be necessary to charge more to subsidize the cost of operation.
In the normal course of commercial banking, as opposed to savings banks or credit unions, credit is issued in the form of a deposit account in the checking system once a loan for commercial purposes has been made. In the script system proposed here, a bookkeeping entry would be made for the loan, and script could then be issued for this amount. Once the loan has been repaid, a proportional amount—at least 10 percent—should be required to remain on deposit as savings by the borrower. Thus, the amount of script in circulation will be reduced and the savings deposits accumulated as the basis for long-term loans.
Design of the Local Village Currency
Once a currency is decided upon, consideration should be given to the quality of paper on which the currency is printed. Poor quality will deteriorate rapidly with use. If possible good quality paper, such as that which ordinary currency is printed on, should be used.
However, a bookkeeping system can be substituted for actual paper, at least during the first months (or even years) while the decentralized system is being developed. Each village may be advanced a certain amount of credit by the ashram, or the regional bank, acting as the “central” bank for the village system. This credit is kept on the books of the village bank, or the village fund. Villagers can receive credit for work performed for the village, and this is entered as credit on the books of the village fund. Then, when the villager wants to purchase something from the ashram or village store (or other source of supply), the village bank will issue him a note to him for the amount needed. He will then use the note to make the purchase. This procedure is similar to the “check” system used in banks, and has been successful in the past.
It is obvious, however, that there would be an advantage in having actual printed notes or currency with a standardized form and shape. The following are suggestions regarding its form and content:
To a considerable degree, it should be made to conform to the size and denominations of rupees so that it will not appear too unfamiliar. Nevertheless, it should be distinguishable, and its color, font, and images should be clearly different. Perhaps it should be marked with a special stamp of Gandhi’s image and the ashram or village name. Each note could be hand stamped, at least at first, in order to insure that counterfeiting would not take place. The design of the stamp could be made hard to duplicate.
The notes would be denominated in numbers equivalent to rupees so that they would be easy to exchange. A certain year, for example 1972, could be used to fix the exchange value with rupees. One local unit (Gandhi note?) would equal one rupee in 1972. From that point on the exchange value would fluctuate as the rupee devalues.
More important, however, would be the selection of a commodity on which to base the value of the currency. This commodity would be printed on the currency and clearly state its exchange value. For example, if wheat is chosen as the commodity for redemption, then one unit of currency would be equal to a certain weight in wheat. This would have to be worked out in relation to the value of wheat in 1972 as measured in rupees. Then, currency will be printed with the inscription: One unit of Gandhi currency is equal to one kilo of wheat (or some such measurement), and is redeemable by the central bank (Ashram or regional village bank) for that amount of wheat.
Criteria for Selection of the Redemption Currency
Traditionally gold has been used as the commodity for redeeming currency. This is obviously based on the fact that gold is easily stored, has a high value for its weight and size, and is much coveted in all parts of the world. However, we want to get away from gold as a standard and to base currency on commodities that have greater value in every day life. Nevertheless, it must be kept in mind that the virtues of gold are the same virtues we seek in any commodity for redemption purposes.
For example, storage can be a problem if the chosen commodity is perishable, or if it’s very bulky relative to its value. For this reason, wheat presents some problems as a redemption commodity. It is both bulky and perishable. Nevertheless, if we keep in mind that redemption is provided only as a means of creating confidence in the currency, and is to be expected except in unusual circumstances, then we can design a redemption system that will minimize the problem of storage for a commodity such as wheat.
We can require, for instance, that only a set minimum quantity of currency units can be presented for redemption. The minimum could be set to represent a convenient weight of measure such as a bushel, or one hundred pounds, etc. Furthermore, a discount rate, or fixed fee charge for redemption could be set, which might be as high as 5 percent. Both such measures would reduce the tendency for redemption.
How to Issue an Alternative Currency
As indicated, the Ashram or regional bank could initiate the currency by paying partial salaries to its workers in the new currency. Initially, no more than 20-30 percent of salaries might be paid in the new currency. As confidence in the currency grows, a higher percentage of salaries—perhaps along with an increase in salary-could be paid in the new currency. However, it will be important not to increase the amounts issued beyond the productive capacity of the ashram to furnish the goods (mostly food) or services needed by the workers. In this way, agricultural workers might be paid more in new currency than other workers, providing that their labor contributes directly to an increase in agricultural production.
In order to create a “reserve” system for banking, each ashram or village could require (or request) each farm family to contribute a small portion of its wheat production. This amount could be stored and used as the reserve fund in case of excess redemption needs. According to banking theory, at least five times the value of the amount of wheat kept for this reserve could be issued as new credit for productive purposes. This is only true, however, if the productive purposes are for short-term needs such as crop production. Only in this way can inflation be prevented. Let us not follow the example of the government and issue money for long-term credits that add to the inflationary problem.
Long-term needs, such as the labor cost of building dams or housing, should be met directly out of the savings funds.
A Final Word
Let us keep in mind at all times that what we are doing is creating a monetary unit that arises naturally out of the labor expended by each person. Only a productive person, a worker, can create real or honest money. What the government is instead doing is creating dishonest or counterfeit money to pay for the vast hordes of bureaucratic workers, most of whom are creating nothing of real value to society. Even worse, the present national governments are creating money to pay for their vast expenditures on military hardware that eventually could destroy the world.