Publications / Community Survival in the Age of Inflation Conference

The Place for Local Currency in a World Economy: Toward an Economy of Permanence

Adapted from a talk given at the April 25th conference titled “Community Survival in the Age of Inflation.”

I want to focus on the institution of money and the opportunity now presenting itself to develop a better system than our present one. We need a system that will by nature promote and enhance small-scale institutions, small businesses, cooperatives, small communities, and local towns. At the same time, it needs to be responsive to the needs of ecology. Obviously, the system we have now, which is failing, does not advance these goals. Before discussing that, I want to first touch briefly on the history of money and why I think we are at a unique point in time that is favorable to a new beginning.

Like most institutions that affect society as a whole, many customs grew unconsciously over many generations to form, by convention, our money and banking institutions. During all of this history through to the present years, money institutions were, in fact, small scale and decentralized. They consisted of either direct exchange of goods by barter, or later exchange with metals (gold and silver) of intrinsic value. As a system, banking grew slowly out of the medieval period, which is when goldsmiths first became the caretakers of gold, and later became bankers by using the gold as a reserve for redemption.

I want to clarify what I mean by redemption. Whenever paper money is issued-printed and distributed-by governments, banks, private individuals, or groups, it must be capable of being exchanged for something of real use and value by the government, bank, or individual who issued the currency in the first place. Otherwise, it can justifiably be called counterfeit, because the paper has no intrinsic value. Gold has traditionally been the commodity that governments and banks have offered for redemption of their paper money. But since 1934 in the U.S., the U.S. government and the banks have not redeemed their paper currency in gold—or any other commodity of real value.

The banking system that grew out of the medieval period was, by and large, very diversified with many banks issuing their own currencies. This condition existed right up until the present century. I have in my possession actual bank notes issued by four different banks in New Hampshire during the last century. By the end of the last century, or the beginning of the twentieth century, power was centralized in the emerging nation states, and then banking systems were centralized. Increasingly, they came under the control of the nation state. But the conventions that had grown up around money issue and money control essentially continued in the centralized system. For example, the so-called “fractional reserve” principle, an adopted part of the Federal Reserve System, is based on a convention that arose out of the medieval system of the goldsmiths. Few people understand it—including many of the bankers who use it—but it is an important factor in determining what happens in our lives.

My point is that a very large part of our lives is controlled, or governed by a system over which we have little or no control and do not understand. To a large extent, we have unconsciously accepted a system of money and banking, and we are asleep in our relationship to it. But the hopeful side is that in general, we are becoming more conscious as a society. There is a strong interest in wanting to become more conscious in all of our relationships. The first step that must precede the creation of a new money system is to replace the old one.

In the first place, we must be clear that the present centralized system is failing, as President Carter has carefully demonstrated. Moreover, we must also understand that for the same reason, it cannot be reformed or made to work by any centralized government. This doesn’t mean that governments will not issue a new currency when the present one becomes valueless; they will. But then the new currency will go the same way as the old—only in a shorter period of time.

As we enter into this period of increasing economic crisis, and as the present national currencies decline in value, we will be creating alternative methods for local exchange for the necessity of our own survival, such as the barter and labor exchange systems discussed here. Gradually as these systems become more sophisticated and better bookkeeping or accounting systems are developed, we should see an emergence of some new forms of money. It is in this direction that I want to point in order to visualize how such systems may come about, and how we can begin thinking, planning, and experimenting.

From a legal viewpoint, money is nothing more (or less) than a claim. But from a technology viewpoint, money is a tool. Like any other tool, it can be shaped to perform in different ways. Just as both a scythe and a combine are tools for cutting wheat, money should be designed to perform in different ways with different objectives. In the same way that we are presently designing and creating more appropriate hardware for small-scale needs, we must also be creating an appropriate tool for exchange.

I do not mean to suggest that creating a better money or exchange mechanism will solve all the problems which confront our society. Not by  along shot. But just as Schumacher pointed out that if we create inappropriately scaled tools we end up with many social problems (unemployment, dissatisfaction with work, alienation, etc.). The tool which we presently use for exchange is inappropriately designed for the various functions for which it is intended, and as a result has led to serious economic and social problems. Inflation and deflation are the names we have given to the two primary disasters which our money system has led to.

Economists are presently arguing about the possible solutions to these problems but since economists, like most modern technologists, are looking for macro solutions, they have virtually all overlooked the possibility of micro solutions. Caught up as they are in the seductions of the macro world which takes them to Washington, London, Paris, etc. to “advise” the heads of government about how to control the vast machine called the “economy”, they can hardly spare time to consider micro or small-scale approaches to the problem.

It is, therefore, I think up to us who are the advocates of appropriate technology and small-scale to become the inventors, creators, and producers of an appropriate technology for money and banking. We cannot expect the answer to come outside of our own ranks. Moreover, it is vital to us, because all of the other appropriate technologies with which we are involved depend eventually upon a proper and decent exchange system. When the dollar system fails through runaway inflation or for whatever reason, we may survive in some fashion through barter or labor exchange systems. But if we are to expand and grow and become not merely a counter culture or New Age portion of the larger culture then we must create a new money system to replace the present one in which all of the attributes which we value (cooperation, self-reliance, community, etc.) can become the growing and dominant part of the entire culture. Such would be the direction of the work on which we must concentrate in order not only to survive the coming currency collapse but to develop an “economy of permanence”, in Schumacher’s words.

I have no allusions about the size and difficulties of this task, but when we realize that the ultimate survival of our values depends upon it, it will no longer seem so formidable.

Without attempting to suggest the solution which we must work towards, let me outline some of the specifications or characteristics which such a micro approach to money would have to meet:

  1. It would have to be simple to understand, but consistent with our experience of the present money system. That is, it would have to consist of both cash (or paper currency) as well as a checking system, or another form of bookkeeping that utilizes the computer to simplify accounting.
  2. Unlike our present money system, it would have to be redeemable or exchangeable in some form in real value. It wouldn’t necessarily need to be gold or silver. Rather, it would be something that meets the needs of everyday use, such as energy. Without a redemption system, it would be difficult to convince people of its value. After all, isn’t the reason the dollar has become so devalued because it cannot be redeemed for real value by the primary issuer-the U.S. government?
  3. Most importantly, we would need to establish a measurement of value that was as universal as possible, and not subject to value swings up-and-down (as is our present money system). In other words, it would have to remain as constant in value as possible. This would help it establish a sense of permanency and security as well as make it more practical for exchange to take place. Such a method of measurement would be the most revolutionary element in the design, and would be the key factor in creating a universal system of money and banking that worked without the need for central banks or governments to become involved in money issue.Once this standard of value had been arrived at, the state or federal government could monitor it, just as the Bureau of Standards maintains and monitors other standards of measurement, such as weights and units of space. However, it would not require state intervention into the economic sphere as is now the case.
  4. And finally, it would have to be organized at the local level and controlled by the community as a whole. For example, each community would elect members of the board of the issuing bank, which would preferably be a nonprofit institution. Under such structure, banking would become truly more of a profession; bankers would be paid for their services, but the community would decide how and where its savings were to be reinvested.

 

Let me reiterate briefly these four specifications: A local, appropriately scaled currency should be:

  1. Consistent with customary practices (cash, checking, and accounting systems);
  2. Redeemable in real goods of everyday value;
  3. Based on local production, upon a universal measure of value;
  4. Organized at the local level, and by the community as a whole.

To illustrate possible answers to the question, “How would it be issued?,” we have some historical and present-day examples. During the Great Depression of the 1930s, a number of local currencies were created and issued by towns in Europe and by groups of cooperating merchants in the U.S. Switzerland has a system called WIR (“the ring”). Created by the merchants of several towns, the WIR uses a checking system by which members can purchase and sell goods in exchange for the WIR currency. In Los Angeles, a similar system that has been computerized makes exchanges possible between merchants without the use of U.S. dollars In all of these cases, the new currency or script is measured in the national currency, and uses national currencies for a reserve system. Whenever suppliers, or manufacturers do not accept the local currency, national currency on reserve was available for exchange.

In part, these systems have worked because they simply expand the volume of business possible for each market. However, in times of runaway inflation, such a system would be less likely to work, since the reserve currency-the national currency-would not have any value. We must therefore look to use some commodity of universal value for our reserve currency.

In order to make as clear as possible what is suggested here, I would like to make a simple proposal that we consider using some form of energy as the unit of measurement and as the reserve currency for redemption purposes. It is generally recognized that energy is a factor in all forms of production and in meeting the needs of society as a whole. In this respect gold, commodities or resources that provide essential energy are replacing gold as the traditional form of reserve currency. Thus oil is referred to as “black gold.”

But if we’re looking for a universal form of energy to use, where do we look? Obviously, the most sought after forms of fossil fuel energy such as oil are poorly distributed and limited in supply about the earth. What is needed is a form of energy which is both renewable and as universally available throughout the word as possible. In  this regard, I want to quote Dr. Schumacher:

As a ‘fuel economist’, I should like to say this: Since fossil fuels, the mainstay of the ‘modern System,’ have ceased to be cheap, and may soon cease to be plentiful, many people are becoming interested in solar energy. They are looking for all sorts of wonderful contrivances to collect solar energy. I am not sure that they always appreciate the fact that a most marvelous, three-dimensional, incredibly efficient contrivance already exists, more wonderful than anything man can make— the TREE. Agriculture collects solar energy two dimensionally; but silviculture collects it three dimensionally. This surely is ‘the wave of the future.’

To illustrate how universal is energy from wood, I want to note that a group of scientists recently made a study of the energy sources in a village in India. In this village which is typical of villages which comprise 15% of the Indian population, they discovered that of all energy sources—electricity, kerosene, bullock power, human labor and firewood—firewood itself comprised over 807o of all energy consumed after converting all sources into the same energy units. Their conclusion was that the best long range solution for supplying energy to the village would be an energy forest with one acre for every ten families.

My proposal, then is that we consider using some convenient measure of wood energy which can become the standard unit of measure and which can be used for redemption purposes in order to establish a local currency which also has universal value. We might begin for example, with some thing as simple as cord wood. I realize that the energy component of cord wood is variable and might not be ideal, but if you compare a cord of wood with the U.S. dollar in terms of its constant value, the cord comes out way ahead. I only suggest this as a way to begin, we will have to perfect it as we go along—perhaps an index of different kinds of wood or use one ton of dry wood. Consider also that besides being used on a world-wide basis as a primary source of energy, wood is also used for other basic needs—fruit and nuts for food, lumber for building, and wood can be transformed chemically into plastics which substitute for metals.

Briefly, let’s project a scenario of how we might start such a local but universal money and banking system. A group of organizations such as cooperatives, community development corporations, community land trusts, local merchants, small businesses, etc. could form a structure which, while not actually forming a bank, could operate through a local bank by establishing a joint account in the bank with each of the member depositors. Deposits in the bank would be in terms of U.S. dollars initially and would be used to make loans for the purposes determined by the organization— essentially for increasing local self-reliance in the basic necessities such as food, energy and housing. This is an overly simplified version of a proposal which has been initiated in the Southern Berkshire region.

Once sufficient capital were established in the bank, however, the surplus (with agreement from depositors) could be used to invest directly in a commodity or commodities of intrinsic value. This could be gold or silver, but I am suggesting that a better and more productive approach would be to invest in energy, and the best source of energy available almost anywhere is trees. Therefore, the surplus would be invested in forests or trees (or directly in cords of wood) and set up under a community land trust to manage and control. As a sufficient potential supply of cord wood from the forests becomes available, each depositor would then be issued a certificate (or note) measuring the value of his/her deposit in energy— or cordwood. This would mean that his/her deposit would be redeemable in cordwood, if he/she chose to redeem it.

With a ready and continuing supply of cordwood to “back” their currency, the group of organizations would then be in a position to “issue,” or provide credit for projects of real productive value within the local community and would no longer be entirely dependent upon U.S. dollars. In order to increase its holdings of forests, the organization would offer to buy forests or woodlots at energy value from owners of forests, using its own currency. With dollars declining at a rapid rate, this might appeal to owners.

In making such a proposal, I am aware that I am part of a long tradition in Massachusetts which goes back to early colonial days. In 1684 John Colman, a Boston merchant, first proposed a bank which would issue its own currency based on land and finally in 1740 such a bank was formed. This bank became so successful that it threatened the British Colonial government and was, therefore, outlawed by the British Parliament a few years later. John Adams subsequently wrote: “The Act to destroy the land bank scheme raised a greater ferment in this province than the stamp-act did.” In other words, this bank may have played a more important role in bringing about the American Revolution than historians have noted.

One hundred years later William Greene who lived in Brookfield, Massachusetts, proposed a similar bank which he called a “mutual bank.” The most unique aspect of the mutual bank concept was Greene’s break with the tradition of gold and silver as the commodity for redemption. Although conceived as a “land bank” in the sense that land would back the currency, actual redemption was to be in any commodity of real value. Gold and silver, however, were retained as the measure of value.

If, then, as I am suggesting, we were to set up a local currency system, issued by a group of organizations including cooperatives, community development corporations, community land trusts, small businesses and other local groups, and using a measure of wood energy as the unit of value, it is conceivable that a new approach to a money system could begin. Such a system would have not only local value, but universal value in a world economy, an economy no longer dependent upon or tied to the nation state and its vast bureaucracies.

Let me reiterate this major point: the most pressing need I can imagine for a local and regional self-reliant economy is the invention and establishment of an appropriate exchange system such as I have described. Yet such a system, because it is based on a universal measure of value like a unit of wood energy, could, at the same time, become the key to eventually establishing a world-wide system. For it is obvious that while on the one hand we are at an historical point where local and democratic participation in the economy is essential to our economic survival and to our humanity, it is also clear that we live in a world which is rapidly moving towards a one world economy. This new, appropriate system would consist of thousands of small, primarily self-reliant regions exchanging or trading directly with each other using a common unit of exchange. Thus the formation for a true world economy would emerge.

I would, therefore, call for a task force of volunteers to come forth from this conference determined to study and then establish the beginning of such an appropriate money and banking system.

Publication By

Robert Swann

Robert (Bob) Swann was the founder of the E. F. Schumacher Society, now the Schumacher Center for a New Economics. In 1974 E. F. Schumacher asked Robert Swann to start a sister organization to his own Intermediate Technology Development Group, but it was not until 1980, when prompted by Resurgence editor Satish Kumar, that Swann organized the E. F. … Continued

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