“Where will the government find the money?” is no longer a valid objection to providing an economic safety net for the people. The government can find the money in the same place it just found more than $5 trillion for Wall Street and Corporate America: the central bank can print it. In an April 9 post commenting on the $1.77 trillion handed to Wall Street under the CARES Act, Wolf Richter observed, “If the Fed had sent that $1.77 Trillion to the 130 million households in the US, each household would have received $13,600. But no, this was helicopter money exclusively for Wall Street and for asset holders.”

“Helicopter money” – money simply issued by the central bank and injected into the economy – could be used in many ways, including building infrastructure, capitalizing a national infrastructure and development bank, providing free state university tuition, or funding Medicare, social security, or a universal basic income. In the current crisis, in which a government-mandated shutdown has left households more vulnerable than at any time since the Great Depression, a UBI seems the most direct and efficient way to get money to everyone who needs it. But critics argue that it will just trigger inflation and collapse the dollar. As gold proponent Mike Maloney complained on an April 16 podcast:

Typing extra digits into computers does not make us wealthy. If this insane theory of printing money for almost everyone on a permanent basis takes hold, the value of the dollars in your purse or pocketbook will … just continue to erode …. I just want someone to explain to me how this is going to work.

Having done quite a bit of study on that, I thought I would take on the challenge. Here is how and why a central bank-financed UBI can work without eroding the dollar.

In a Debt-Based System, the Consumer Economy Is Chronically Short of Money

First, some basics of modern money. We do not have a fixed and stable money system. We have a credit system, in which money is created and destroyed by banks every day. Money is created as a deposit when the bank makes a loan and is extinguished when the loan is repaid, as explained in detail by the Bank of England here. When fewer loans are being created than are being repaid, the money supply shrinks, a phenomenon called “debt deflation.” Deflation then triggers recession and depression. The term “helicopter money” was coined to describe the cure for that much-feared syndrome. Economist Milton Friedman said it was easy to cure a deflation: just print money and rain it down from helicopters on the people.

Our money supply is in a chronic state of deflation, due to the way money comes into existence. Banks create the principal but not the interest needed to repay their loans, so more money is always owed back than was created in the original loans. Thus debt always grows faster than the money supply, as can be seen in this chart from WorkableEconomics.com:

When the debt burden grow so large that borrowers cannot take on more, they pay down old loans without taking out new ones and the money supply shrinks or deflates.

Critics of this “debt virus” theory say the gap between debt and the money available to repay can be filled through the “velocity of money.” Debts are repaid over time, and if the payments received collectively by the lenders are spent back into the economy, they are collectively available to the debtors to pay their next monthly balances. (See a fuller explanation here.) The flaw in this argument is that money created as a loan is extinguished on repayment and is not available to be spent back into the economy. Repayment zeros out the debit by which it was created, and the money just disappears.

Another problem with the “velocity of money” argument is that lenders don’t typically spend their profits back into the consumer economy. In fact, we have two economies – the consumer/producer economy where goods and services are produced and traded, and the financialized economy where money chases “yields” without producing new goods and services. The financialized economy is essentially a parasite on the real economy, and it now contains most of the money in the system. In an unwritten policy called the “Fed put”, the central bank routinely manipulates the money supply to prop up financial markets. That means corporate owners and investors can make more and faster money in the financialized economy than by investing in workers and equipment. Bankers, investors and other “savers” put their money in stocks and bonds, hide it in offshore tax havens, send it abroad, or just keep it in cash. At the end of 2018, US corporations were sitting on $1.7 trillion in cash, and 70% of $100 bills were held overseas.

Meanwhile the producer/consumer economy is left with insufficient investment and insufficient demand. According to a July 2017 paper from the Roosevelt Institute called “What Recovery? The Case for Continued Expansionary Policy at the Fed”:

GDP remains well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 10% below the Congressional Budget Office’s (CBO) 2006 forecast, and shows no signs of returning to the predicted level.

The report showed that the most likely explanation for this lackluster growth was inadequate demand. Wages were stagnant; and before producers would produce, they needed customers knocking on their doors.

In ancient Mesopotamia, the gap between debt and the money available to repay it was corrected with periodic debt “jubilees” – forgiveness of loans that wiped the slate clean. But today the lenders are not kings and temples. They are private bankers who don’t engage in debt forgiveness because their mandate is to maximize shareholder profits, and because by doing so they would risk insolvency themselves. But there is another way to avoid the debt gap, and that is by filling it with regular injections of new debt-free money.

How Much Money Needs to Be Injected to Stabilize the Money Supply?

The mandated shutdown from the coronavirus has exacerbated the debt crisis, but the economy was suffering from an unprecedented buildup of debt well before that. A UBI would address the gap between consumer debt and the money available to repay it; but there are equivalent gaps for business debt, federal debt, and state and municipal debt, leaving room for quite a bit of helicopter money before debt deflation would turn into inflation.

Looking just at the consumer debt gap, in 2019 80% of US households had to borrow to meet expenses. See this chart provided by Lance Roberts in an April 2019 article on Seeking Alpha:

After the 2008 financial crisis, income and debt combined were not sufficient to fill the gap. By April 2019, about one-third of student loans and car loans were defaulting or had already defaulted. The predictable result was a growing wave of personal bankruptcies, bank bankruptcies, and debt deflation.

Roberts showed in a second chart that by 2019, the gap between annual real disposable income and the cost of living was over $15,000 per person, and the annual deficit that could not be filled even by borrowing was over $3,200:

Assume, then, a national dividend dropped directly into people’s bank accounts of $1,200 per month or $14,200 per year. This would come close to the average $15,000 needed to fill the gap between real disposable income and the cost of living. If the 80% of recipients needing to borrow to meet expenses used the money to repay their consumer debts (credit cards, student debt, medical bills, etc.), that money would void out debt and disappear. These loan repayments (or some of them) could be made mandatory and automatic. The other 20% of recipients, who don’t need to borrow to meet expenses, would not need their national dividends for that purpose either. Most would save it or invest it in non-consumer markets. And the money that was actually spent on consumer goods and services would help fill the 10% gap between real and potential GDP, allowing supply to rise with demand, keeping prices stable. The end result would be no net increase in the consumer price index.

The current economic shutdown will necessarily result in shortages, and the prices of those commodities can be expected to inflate; but it won’t be the result of “demand/pull” inflation triggered by helicopter money. It will be “cost/push” inflation from factory closures, supply disruptions, and increased business costs.

International Precedents

Critics of central bank money injections point to the notorious hyperinflations of history – in Weimar Germany, Zimbabwe, Venezuela, etc. These disasters, however, were not caused by government money-printing to stimulate the economy. According to Prof. Michael Hudson, who has studied the question extensively, “Every hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.”

For contemporary examples of governments injecting new money to fund domestic growth, we can look to China and Japan. In the last two decades, China’s M2 money supply grew from 11 trillion yuan to 194 trillion yuan, a nearly 1,800% increase. Yet the average inflation rate of its Consumer Price Index hovered between 2% and 3% during that period. The flood of money injected into the economy did not trigger an inflationary crisis because China’s GDP grew at the same fast clip, allowing supply and demand to rise together. Another factor was the Chinese propensity to save. As incomes went up, the percent of income spent on goods and services went down.

In Japan, the massive stimulus programs called “Abenomics” have been funded through bond purchases by the Japanese central bank. The Bank of Japan has now “monetized” nearly half the government’s debt, injecting new money into the economy by purchasing government bonds with yen created on the bank’s books. If the US Fed did that, it would own $12 trillion in US government bonds, over three times the $3.6 trillion in Treasury debt it holds now. Yet Japan’s inflation rate remains stubbornly below the BOJ’s 2% target. Deflation continues to be a greater concern in Japan than inflation, despite unprecedented debt monetization by its central bank.

UBI and Fears of the “Nanny State”

Wary critics warn that a UBI is the road to totalitarianism, the “cashless society,” dependence on the “nanny state,” and mandatory digital IDs. But none of those outcomes need accompany a UBI. It does not make people dependent on the government, so long as they can work. It is just supplementary income, similar to the dividends investors get from their stocks. A UBI does not make people lazy, as numerous studies have shown. To the contrary, they become more productive than without it. And a UBI does not mean cash would be eliminated. Over 90% of the money supply is already digital. UBI payments can be distributed digitally without changing the system we have.

A UBI can serve the goals both of fiscal policy, providing a vital safety net for citizens in desperate times, and of monetary policy, by stabilizing the money supply. The consumer/producer economy actually needs regular injections of helicopter money to remain sustainable, stimulate economic productivity, and avoid deflationary recessions.

Republished from EllenBrown.com

The post A Universal Basic Income Is Essential and Will Work appeared first on P2P Foundation.

1. Could you tell us a bit about your background?

I discovered libertarian socialism as a student at York University in 1976, where I was studying English with the idea of becoming a journalist. The mid-late 70s were a high point of working class confidence in the UK. There was also a government favourable to cooperatives and a rediscovery of ‘common ownership’ of enterprises. The decade between 1975 and 1985 witnessed fast growth in the number of worker cooperatives. By 1985 there were more than 2,000 in the UK. After university I joined one of the many collective publishing and print production projects that had sprung up and organized along cooperative lines.

2. You currently work as Client Services Director at Calverts Cooperative. What is this cooperative about?

Calverts  is a worker-owned creative design studio and print shop. It was founded by seven people in 1977. It was the product of a conflict between employees and manager-owners of a publishing and printing subsidiary of the Institute for Research in Art and Technology. It started as a ‘sweat equity’ common ownership worker cooperative, designing and printing community, union and political publications. I became a member of Calverts in 1985.

Over the years, Calverts grew meeting its members’ evolving needs and aspirations and investing all its surplus in skills and technology development. It is now a leading print house and design studio, working for universities, consumer brands, arts organizations and publishers. It is still, however, also a ‘movement’ resource, often working pro bono for grassroots community organizations with which our members are involved. It has also remained true to its founding principles of equality. Our members are all hourly paid, on the same hourly rate – from the Finance Director to the Cleaner. We have no line managers, working instead as interlinked team circles, with a General Meeting every month. We have a culture of ‘emergent strategy’, and most decisions are made by consensus, using a mixture of sociocratic and devolved process. We try to avoid conventional voting, except when it is required by statute. This efficient and empowering approach is quite common in UK worker cooperatives, which are in the forefront of cooperative democratic innovation.

3. What other activities are you involved in as a co-operator?

Worker cooperatives in the UK fell back after 1985, and by 1999 the sectoral organization – Industrial Common Ownership Movement (ICOM) – was no longer viable. In 2000, ICOM merged with the consumer cooperatives’ apex to form a new apex body called Cooperatives UK. At that time I had not really been concerned with the cooperative movement outside worker cooperatives. I participated in a national cooperative congress with the idea of selling Calverts services to other cooperative businesses. The people I met, the friendships I made, and the things I learned at the event made me want to deepen my understanding of cooperatives.

In 2004 I was elected to a policy forum called the Worker Cooperative Council, then served as a board member of Cooperatives UK from 2006 to 2011. By that time, I found out that I was, in effect, already a ‘barefoot’ worker cooperative organizer – because groups would approach Calverts to learn from our experience, with the idea of setting up their own cooperatives, and I would help them. I was also giving presentations on worker cooperation to groups of students, particularly in the creative industries, in the context of the increased social and economic pressure on young workers after the 2008 crisis.

I formalized this in 2012, when I set up Principle Six that provides support and advice on cooperative enterprise development in areas of membership strategy, campaigning, policy, branding, copywriting and editorial and strategic communications. Through Principle Six I became involved with a range of cross-movement bodies, including the board of a specialist cooperative lender (Cooperative and Community Finance ); the London regional cooperative council (Cooperatives London ); a consortium of independent coop business advisers (London Coop Development); and now a crowdsourcing platform for cooperative development (Platform 6 ).

At the moment, I am focussing more energy on grass roots, local and international worker cooperative organizing. I still work part time at Calverts, managing key client accounts and maintaining Calverts links with the wider movement. I also serve as a board member of CECOP , European confederation of industrial and service cooperatives and support its communications team.

4. What do you think are the challenges and opportunities for the cooperative movement? How have you been addressing these challenges within your work?

Growing the cooperative movement is not so much a matter of finding the right formula, but of understanding how changes in the composition of communities, and in the world of work, are producing forms of collective resistance in new places. We need to see where people are already cooperating, using solidarity principles to articulate their demands for a better life, to see how we can connect with them – bringing in the technology of cooperatives, and putting our experiences to work.

This has implications for where we put our limited energy and resources. For me, defending cooperatives is important, but lobbying governments for special treatment is not a core task. Similarly, we might think there are self-evident opportunities for cooperation in (for instance) social care, platform-based businesses, or self-employment – but we will not succeed by offering top-down solutions. We need an agile strategy based on a close analysis of currents for social change, associating with them and investing tactically to see ‘what works’. This is the opposite of formulating grand narratives and strategies, where we propose cooperatives as ‘the answer to everything’. In this spirit, my recent work has been focussed in five main areas.

1) Supporting disaffected young people who are articulating a desire to take control of their situation: I helped with the formation of AltGen, the campaign for youth cooperation, and I also mentor young worker cooperatives in London.

2) Organizing around housing and public space: I work with the London Radical Housing Network  that brings together housing cooperatives, tenants of municipal housing and unions of private sector renters to promote access to decent housing.

3) Creating a better technology sector: Recent technological changes are transforming the world of work. I work with CoTech, a growing network of worker cooperatives providing technology, digital and creative services. The members of the network can use their collective experience, skills, and resources to promote the worker cooperative model that can create better workplaces, better products and better value for customers.

4) Connecting the cooperative movement with organized groups of super-exploited workers and new, small, and industrial unions, to see what scope there is to bring together these different strands of worker cooperation in a productive way.

5) Strengthening the existing network of worker cooperatives, creating accessible resources of knowledge, practical support and funds to spread and deepen cooperation. An example of this is the Worker Coop Solidarity Fund , which has collected more than £120,000 in four years in the form of micro-contributions from individual members and supporters. This means we can independently underwrite small worker cooperative education projects, fund co-learning and mentoring activity, and sometimes just give tiny amounts of money where it will make a difference. One example is that we have been able to sponsor CECOP’s 40th anniversary General Assembly and conference to be held in Manchester, which we hope in turn will result in meaningful conversations and learning between worker and social co-operators in the UK and across Europe.

—————
Spotlight interviews with cooperators is a series of interviews with cooperative leaders around the world, whom ILO officials have encountered in the course of their work with cooperatives. This article does not constitute an endorsement by the ILO.

Republished from ILO.org

The post Siôn Whellens: Incubating worker cooperatives in the changing world of work appeared first on P2P Foundation.

His specialties are program development, research, data analysis, agent based modeling, computer simulation, monitoring and evaluation, complementary currencies, informal settlements, environmental programs, cooperatives.

In this episode, Will talks to us about his work over the past eleven years, organizing micro-entrepreneurs in poor areas of Kenya. Central to his work has been the creation of community currencies that have enabled a greater amount of trading and utilization of capacity in those communities. Recently, Will and his associates have been implementing digital forms of those currencies, and networking communities together in a wide area exchange system.

Grassroots Economics, https://www.grassrootseconomics.org
“Through community currencies people have a way to exchange goods and services and incubate new businesses, without relying on scarce national currency and volatile markets.”

Documentary on Will Ruddick and Kenyan Community Currencies, https://youtu.be/ojFPrVvpraU

How to Give People the Same Power As Banks, https://youtu.be/PfEW2atiB4s

Unblock HongKong – Interview with Will Ruddick – Director at BANCOR, https://youtu.be/OagQNEecZhA

M-Pesa, https://en.wikipedia.org/wiki/M-Pesa

This interview with Will Ruddick was conducted 2019 April 30.

Reposted from the Beyond Money Podcast

The post Will Rudrick on Community Currencies and Grassroots Economics appeared first on P2P Foundation.

By Michelle Chen

Can good values be good business, too? For generations, the cooperative movement has been answering with a resounding “Yes!”

After a surge of entrepreneurial fervor following the 2007 economic collapse, cooperative ventures are even getting a nod from our divided government: In August, Congress passed the Main Street Employee Ownership Act. The measure aims to help launch the next crop of worker-ownership ventures by directing the Small Business Administration to take proactive steps to increase technical and financial assistance for budding worker-owned cooperatives. Although the law does not provide major new funding, advocates hope it broadens avenues for securing seed financing, and for conducting community-outreach programs through local SBA offices.

Although the law offers just a small boost to the sector, according to Melissa Hoover, executive director of the Democracy at Work Institute, “It’s a start. It’s the very first time that anyone ever said worker coops matter in federal legislation.”

Often the main barrier to launching a coop is simply lack of knowledge—worker cooperatives aren’t just a fluffy hippie social experiment, they’re viable businesses with a track record of promoting civic-minded sustainable enterprises. What worker-owned cooperatives offer is simply this: a stake for each worker in the future. Based on a structure centered on shared equity and worker autonomy, the business model, which hews to a principle of “one-member-one-vote” workplace governance, intrinsically guarantees that each worker profits in tandem with their labor. The key difference from the conventional corporate model is that workers share in the equity and direct how funds are reinvested, be it in pay raises and pensions, new hires, or investing in tech upgrades and staff training.

According to surveys of the roughly 300 to 400 cooperatives nationwide, more than a third were launched since 2000. Their trades range from craft breweries to cab companies. The median coop workforce has nine to 10 people (that’s basically the equivalent number of co-owners), and a total workforce of more than 6,800. Far from the penurious, tree-hugging stereotype, coops run on average a yearly profit margin of some 3 percent, yielding about $150,000 in profits. Compared to the precarious, low-wage jobs that are driving the fastest-growing industries, coop workers earn considerably more, about $15.80 per hour, and work just over 30 hours per week. Median tenure for employee-owners is also about 50 percent higher.

The foundation of the cooperative is an idea for a business that produces material and social good together, which in turn also does good for workers’ communities. This principle, reflecting an ethical framework known as the “solidarity economy,” is put to practice in ventures like the Queens-based eco-friendly cleaning company Pa’lante, which is cooperatively run by a group of housekeepers who merge environmental concern with labor empowerment. Or the driver-led Union Taxi coop of Denver, which also mobilizes against the expansion of exploitative ride-sharing apps.

Though worker-ownership doesn’t necessarily mesh with the traditional unionization model, the Oakland-based Design Action Collective has joined a unique cadre of unionized coops, represented by Pacific Media Guild, in order to fully embody the movement culture that the enterprise serves. On a larger scale, Cooperative Home Care Association has established a 2,000-strong presence in New York City’s home health-care sector, with a fully unionized staff of care workers, who also mobilize with labor-led campaigns for health-care funding.

The equity principle of worker-owned cooperatives could be especially crucial for communities of color, as a path toward expanding community investment and closing the abysmal racial wealth gap. A community-based cooperative can be a vital economic on-ramp for women, immigrants, and people of color historically excluded from entrepreneurship. So far, the cooperative sector is roughly 63 percent people of color, up from 59 percent in 2015.

While many coops are start-ups, conversion of conventional businesses to cooperatives can be a vital investment in marginalized communities, and also widen accessibility to credit, since start-up capital can be pooled collectively. Of the 15 new cooperatives that launched in 2016, 11 were conversions.

As struggling communities lose the mom-and-pop shops that have long been a bulwark of economic opportunity, Hoover says,“It’s really dangerous for our small-business ecosystem for [systematic sell-offs and closures, instead of conversion to coops] to happen.… What’s happening to those businesses as their owners are getting older is that they’re getting shut down or consolidated, it really changes that landscape.”

But conversions to more democratic ownership can preserve local assets, and in less-diverse economic landscapes, cooperatives can actively diversify historically white-male dominated sectors. “Who owns businesses in this country,” Hoover says, “are white men.… And who works in most businesses in this country are not white men.” When a retiring boss passes ownership onto workers, “you’re effectively making a racial wealth transfer from an aging white man to a much more diverse set of business owners.” Cleveland’s Evergreen Cooperatives, a coalition of worker-owned firms, has tried to expand its sector by launching a new Fund for Employee Ownership to finance fresh conversions of old local businesses.

When coops rescue a local family business, it could inject not just a capital infusion but an inspired redevelopment vision. Unlike your average big-box retailer, cooperatives tend to stick with their democratic ethos over the long run. Many coop enterprises actively partner with civic-minded financial institutions, like community credit unions. And while a single business won’t radically change the country’s dysfunctional social and economic policies, a network of cooperatives can foster progressive programs such as promoting workers’ healththrough providing comprehensive benefits, expanding access to affordable childcare, and cultivating more balanced schedule systems and labor-directed workplace-safety programs.

Now that the cooperative sector is entering a more complex economic horizon, it can push for more supportive public policies—like pro-cooperative labor laws that help worker-owners organize, city-based development programs like New York’s Worker Cooperative Business Development Initiative, and opening Workforce Development funding for coops.

“More and more, people who are developing coops to solve social problems are thinking at a bigger scale, and with more ambition,” Hoover says. “They’re thinking about…how do we leverage all the things that traditional businesses do, but for good?”

And since worker-owners practice and produce what they preach, the budding world of cooperatives is in a perfect position to make the change they want, and to pay it forward.

Image: Glut collective member Fiifi Andoh tends to a customer in 2015. Glut is a worker-owned cooperative store that serves the community in in Mount Rainier, Maryland. (USDA / Lance Cheung)

Originally published on The Nation, 8th March 2019: https://www.thenation.com/article/worker-cooperatives-economy-business/

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The main strategy was to notify the speculators who did not reside on their land that if within the next three months they did not come to justify their absence or take up residence there (fulfilling land social function), the property would be put up for resale to poor and young families at original price, cutting owners’ land gains. The resistance from the ‘owners’ of idle lots who resorted to lawsuits and even violence was met with vigils. However, all the ‘owners’ eventually left unoccupied land in favour of poor families.

The initiative has ended speculators’ abuse, and allowed finance for a small library, that has been opened to help children with their schoolwork. Ties of solidarity based on Ayni (a concept of reciprocity or mutualism among people of the Andean communities in agricultural work, constructions of houses and others) and the collective work of building houses according to plan were also strengthened. Residents provided technical resources themselves, such as tools for construction projects, and labour for construction projects was provided by the women and men affiliated to the community council.

From the community share of the small profits from the sale of the land, and another neighbours’ contributions, around US$40,000 was generated. Together with community work, the money was used to finance neighbourhood development such as the building, expansion and improvement of roads and storm drains, and amenities such as a soccer field, equipment for the local library and land housing for poor people – all achieved with no external help.

“This is the first experience I know that is using plus-value capture strategies [capturing the value of land for public investment] in areas of “informal” urban development. The explicit reference to traditional indigenous people collective mechanisms of land control/management (i.e. ayllus) is also inspiring, as well as efforts to protect and guarantee women’s housing rights though self-organized initiatives and strong networking at local, national and international level.”

– Evaluator Lorena Zarate

Would you like to learn more about this initiative? Please contact us.

Transformative Cities’ Atlas of Utopias is being serialized on the P2P Foundation Blog. Go to TransformativeCities.org for updates.

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What’s the issue?

Thresholds and allocations are easiest to understand by thinking of doughnuts and pies. Seriously.

Oxford Economist Kate Raworth popularized the idea of environmental and social thresholds by envisioning a doughnut: its outer edge represents “ecological ceilings” (i.e. Planetary Boundaries), or “do-not-exceed” limits of resource use beyond which natural systems start to collapse; its inner edge represents “social foundations,” below which societal systems start to founder[i].

And a “slice of the pie” is the best way to envision allocations, or a proportionate share (slice) of the full stock of a resource (pie). Think of water in a watershed, which needs to account for natural processes (e.g. evaporation; plant, animal & human consumption, etc…) before being divvied up between commercial / industrial users.

But now that you know what thresholds & allocations are, so what? How do they help us better understand how best to use our shared resources in ways that ensure their ongoing availability?

The idea of thresholds & allocations isn’t new. In fact, the concepts grew out of the notion of “capitals” as stocks of resources that generate productive flows, which are vital to support well-being (see below for a visual overview of the history of novel contributions to this thinking).

The key to achieving sustainability is to respect the carrying capacities of the capitals, as Reporting 3.0 Advocation Partner Mark McElroy established in his 2008 Doctoral Dissertation (applying the carrying capacities concept from the field of ecology). And McElroy also proposed a Sustainability Quotient for expressing thresholds, whereby sustainability (S) equals actual impacts (A) over normative impacts (N) — think carbon footprint over carbon budget.

And Reporting 3.0 notes that most practice in the so-called sustainability space (think CSR, ESG, etc…) amounts to numerator-only work, focused on incremental improvement that falls short of sustainability thresholds. As Reporting 3.0 Steering Board Member Brendan LeBlanc of EY notes, “the only thing more dangerous than no progress is the illusion of progress.” We at Reporting 3.0 also like to point out that thresholds and allocations are always being employed (resources always have upper or lower limits of viability, and use of a shared resource alwaysrequires parsing it out); the main question is how consciously resources are used and shared.

The key “marriage” of thresholds & allocations started with the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines in its second generation (G2) released in 2002, which introduced the Sustainability Context Principle that tied micro-level organizational impacts on the multiple capitals to macro-level economic, social, and ecological systems viability. Ideally, this would have inspired companies to make this vital micro/macro link in their management, performance, and reporting in order to operationalize sustainability.

Unfortunately, a 2017 study of 40,000 sustainability reports issued since then found that only 5% make any mention of ecological limits, and only 31 of 9,000 reporting companies (0.3%) integrate such limits into their strategy and product development. Reporting 3.0 calls this the Sustainability Context Gap.

What can you do about it?

In its 2015 Raising the Bar report, UNEP succinctly summarizes what companies can do:

All companies should apply a context-based approach to sustainability reporting, allocating their fair share impacts on common capital resources within the thresholds of their carrying capacities.

A number of initiatives have spawned in the past decade to help operationalize thresholds and allocations:

• Employ Context-Based Metrics, such as Science Based Targets for greenhouse gas emissions reductions and Context-Based Water Stewardship Targets;
• Implement the UN Guiding Principles on Business & Human Rights;
• Utilize the Vital Capital Index in agriculture and assess synergies between sustainability impacts;
• Consult the Embedding Project’s Road to Context for guidance;
• Set “break even” and “positive pursuit” goals using the Future Fit Business Benchmark;
• Apply systems-level considerations and measure influence in investment decisions, as advocated by The Investment Integration Project;
• Conduct scenario analysis (with guidance at the TCFD Knowledge Hub) and produce transition plans to <2°C business models (as advocated by Preventable Surprises);
• Use the MultiCapital Scorecard.

In additions to these actions, Reporting 3.0 provides a comprehensive approach to applying thresholds & allocations through a number of fit-to-purpose tools:

• Mapping: The Reporting 3.0 Strategy Continuum (covered in Part 5 of this series) enables plotting of practices, impacts, business models, etc. on the spectrum from incremental improvement through sustainability (defined by thresholds and allocations) to regeneration and thriving;
• Implementation: The Reporting 3.0 Integral Materiality Process (covered in Part 6 of this series) applies thresholds and allocations in its context-based approach to materiality;
• Governance: The UNEP Raising the Bar report also recommends: Multilateral organizations should collaborate to create a global governance body of scientists, governments, businesses, NGOs and other stakeholders to provide guidance on methodologies for determining ecological (and social) thresholds, as well as guidance on approaches to allocations, all of which are broadly applicable to the business level.

Reporting 3.0 is enacting this recommendation by establishing the Global Thresholds & Allocations Council (GTAC) with a 3-prong mission:

• Identify thresholds & norms for sustaining the carrying capacities of systems-level capital resources in the commons that are vital to stakeholder wellbeing, based on a comprehensive review of research in physical and social sciences and practice in the field.
• Design and validate allocation methodologies that apportion fair share responsibility for jointly preserving and enriching capital resources vital to stakeholder wellbeing.
• Disseminate consensus-based thresholds/norms/allocations with “off-the-shelf” ease-of-use in mind to facilitate global mainstreaming of such practices.

What will you have achieved afterwards?

Application of thresholds and allocations is a necessary precondition for achieving truly sustainable organizations (at the micro level), industry sectors, investment portfolios and bioregional habitats (at the meso level), and economic, societal, and ecological systems (at the macro level). Indeed, thresholds & allocations approaches enable fulfillment of the transition from shareholder value creation to shared value creation (which aligns financial and social value creation while overlooking value destruction) to system value creation– which harmonizes financial value creation with the enhancement of social and ecological systems in which the economy operates.

What question will we discuss next time?

How Can New Lenses of Risk Help Ignite Breakthrough Transformations?

[i]The idea of outer and inner limits was first proposed by Barbara Ward in the Cocoyoc Declarationat a 1974 joint UNEP / UNCTAD Symposium.

Please add your feedback, the authors Ralph Thurm and Bill Baue of Reporting 3.0 will look at all responses. Don’t forget to ‘wave’ if the above resonated with you ;-).

[Context of this series: The sum of these articles form the basis of an Implementation Guide that summarizes the total value of Reporting 3.0 in implementing a future-ready sustainability strategy and disclosure approach, in line with the idea of a Green, Inclusive and Open Economy. By posting these articles here Reporting 3.0 seeks feedback in the writing process of the final document, released as Blueprint 5 at the 5th International Reporting 3.0 Conference in Amsterdam, The Netherlands, on June 12/13, hosted by KPMG, see www.2018.reporting.org]

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Filmed by Jonathan Hiller: HillerVisual.com

CharlesEisenstein.org

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Another milestone has been reached in our quest to build a new kind of trading system for the UK. We’ve now completed our first trading loop, which involved Lowimpact.org, Community Regen and Outlandish, two of which are co-operatives.

Here’s what Paul, of Community Regen, said about the trade:

I can see transactions that don’t involve money becoming very attractive for small businesses, who often have problems with cashflow. I have a small business that is all about connecting and networking with other organisations and businesses, and mutual credit is all about connecting and providing mutual support, so it feels very natural to me – very rewarding. I’ve already had deeper conversations with people at Outlandish. It builds trust between participating businesses, which just makes sense to me. It’s a no-brainer, really

And here’s Polly at Outlandish:

It feels great to be right at the start of a network designed to facilitate trade outside of the normal realm of monetary exchange. It’s great that like-minded businesses can be connected in this way, without having to contribute to banks’ profits. Hopefully it will also help us to extend our network of suppliers, and to find suppliers that operate ethically. I found the trade itself really easy.

And here’s Dave of Lowimpact.org:

It works! Three happy trading partners. From our perspective, we’ve started to get good advice from Paul, and we’ve already lined up a second trade with an accountancy firm in which we’ll use mutual credit as part of the payment for producing our annual accounts. We’re already having conversations with businesses that are quite unusual – based on trust, and a desire to build a different kind of world. It feels like a much better way to do business, which makes me believe that there is huge potential here for bringing about wider, beneficial change.

Around 100 businesses have expressed interest in joining The Open Credit Network – everything from farmers, accountants and graphic designers to weavers, IT specialists and printers. Each business has listed some of its ‘offers’ and ‘wants’.

Our job is now to find trading loops between those businesses. Eventually, this will all be automated so that participating businesses can find what they want without having to be part of a ‘loop’.

But for now, we’re initiating trading loops involving 3 or 4 businesses that can trade with each other, to complete a full cycle. Business A provides something for business B, which provides something of the same value for business, C, which provides something of the same value for business A.

We built the required software to run trade accounts for each business, who will be in credit or debit depending on how much they’ve bought from or sold to other members of the network.

Trades can be partly in mutual credit and partly in cash. One credit is equivalent to one pound. Credits can’t be exchanged for for pounds, or vice versa.

In our first trading loop Lowimpact.org provided a banner advertisement for Outlandish, who provided web services for Community Regen, who provided fundraising advice for Lowimpact.org with a trade value of £100, but in credits, rather than cash.

Once a business is a member of the Open Credit Network, trading itself is as simple as logging on to the website and filling out a short form. The admin team then check and approve the trades, one account is credited, the other debited and voilà – the businesses get what they want, without having to come up with scarce cash.

If you’re interested in setting up your business as a Member please fill in the expression of interest form.

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Republished text from The Money Question

Modern Monetary Theory

Introduction

In the space of little more than a decade, Modern Monetary Theory has spread from a relatively small group of academics to become a mass movement for economic change.

In general terms, MMT is a macroeconomic paradigm based on an understanding of monetary and fiscal dynamics that stands in stark contrast to neoclassical, neo-Keynesian, and other mainstream approaches. It is most well known for the claim that since monetarily sovereign governments issue their own currency and determine the unit of account, there are no purely financial constraints on public spending. However, at its core is the recognition that money is a creature of public law and state authority, not private exchange, and thus monetary systems can and should be designed in ways that best further public purpose.

Most modern economies use a ‘fiat’ currency, which gains acceptance because it can be used to meet legal obligations imposed by the state, and needn’t be convertible to a physical commodity (such as gold). Such countries face no technical limit to the amount of money that can be created. Therefore, there are no monetary constraints on a nation’s prosperity – there are only the physical limits of the economy’s productive capacity, and administrative, social, or political constraints on utilising that capacity.

While MMT has roots in historical and theoretical discussions over the nature of money, and its contemporary scholarship features relatively technical analysis of the monetary operations of governments and central banks, it has also acquired a broad appeal among progressive campaigners. No one group claims sole ownership over the theory, but prominent groups include the Modern Money Network and Sunrise Movement in the United States, Red MMT in Spain, Rete MMT in Italy, and the Gower Institute for Modern Money Studies (GIMMS) in Britain.

In the United States in particular, politicians and campaigners have drawn on MMT principles to promote dramatically increased public spending on social and environmental priorities, such as a ‘Green New Deal’. Their arguments have begun to affect the national conversation over economic policy.

MMT in 10

L. Randall Wray, an early member of the group of academics who refined and popularised MMT, explains the paradigm in 10 points, intended to capture the logic of the MMT position in a comprehensive way. The details of some of these points are unpacked further down this page. Paraphrased, they include:

1. Money is an IOU, because the issuer promises to accept it back in payment of debts they are owed. That IOU is denominated in a ‘socially sanctioned money of account’, usually established by a centralised authority: the state.
2. Taxes (or other obligations) drive the currency. Sovereign states can impose obligations that give the currency value, since it can be used as payment.
3. Anyone can issue money; the problem is to get it accepted. People who try to issue an IOU in the unit of account without support from the sovereign will struggle to make their promise credible.
4. ‘Redemption’ of money refers either to accepting it as payment of taxes, or converting to gold, foreign currency, etc. on request. However, the latter is no longer promised by the central bank in countries with non-convertible, floating exchange rate currency regimes.
5. There is no chance of an involuntary default on sovereign debt, ‘so long as the state only promises to accept its currency in payment’ – in other words, so long as the debt is denominated in a floating, non-convertible currency issued by the sovereign itself.
6. Functional Finance: the public finances should be managed in a ‘functional’ manner, i.e. with an eye to the actual effects of decisions in particular contexts, in order to achieve full employment with price stability. This doctrine stands in contrast to ‘sound finance’, which evaluates budget decisions against predetermined beliefs about the desirability of deficits and/or surpluses.
7. The Job Guarantee, a policy whereby the public sector will employ anyone willing and able to work at a fixed wage, is a critical component of MMT as a macroeconomic framework. It is thought to anchor the currency and provide greater price and financial stability than the alternative (i.e., than maintaining a pool of reserve (unemployed) labour).
8. Hyman Minsky’s lessons on financial instability: that periods of stability and growth see continual changes and increased risk-taking in financial markets, which lead to a build-up of instability such that ‘a slight reversal of prosperity can trigger a crisis.’
9. The government’s debt is a non-government asset, following from a view of sectoral balances across the macroeconomy. The non-government sector (including households, firms, and the rest of the world) must, as a simple fact of accounting, hold assets that correspond to the liabilities of the government sector.
10. The central bank is neither independent nor potent – conventional monetary policy, which operates primarily by manipulating the overnight interest rate on lending between banks, is weak and its impact is at best uncertain. In addition, monetary policy implementation always and everywhere requires the coordination and support of the treasury. This final point often leads to a preference for managing macroeconomic conditions through coordination between fiscal and monetary authorities, typically in the form of ‘permanent zero interest rate policy (ZIRP).

Wray’s 10 points reveal that MMT, like other schools of economics, is a theoretical paradigm where certain dynamics in the economy follow logically from fundamental premises, and from which policy insights can easily be drawn.

Thought Genesis and History

Chartalism

MMT was initially known in academic literature as ‘Neo-Chartalism’. Chartalism is a theory that stresses the importance of social context for the existence of money. It is typically contrasted with the ‘orthodox’ (‘M-form’, ‘Metalist’, or ‘commodity money’) view, which holds that money was invented to facilitate exchange, and that its value was initially determined by the value of a physical commodity (e.g. gold or silver) from which it was made. By contrast, Chartalism holds that ‘the value of money is based on the power of the issuing authority, and not by any embodied or backing precious metal’ (Wray, 2000).

Several important intellectual precursors to MMT held this view. George Knapp argued in 1924 that ‘the attempt to deduce [money] without the idea of a State [is] absurd’. This was an explicit contradiction of commodity money – Knapp claimed that ‘the soul of the currency is not in the material of the pieces, but in the legal ordinances that regulate their use.’ Several years later, Abba Lerner also contributed to this standpoint with an article entitled ‘Money as a Creature of the State’.

Neo-chartalism reorients the emphasis of monetary theory on the currency systems prevalent in the world today, which, almost without exception, are fiat currencies issued by sovereign governments. The phrase ‘taxes drive money’ captures this recognition that the state creates the value for a common currency by leveraging its centralised authority. It does so by imposing non-reciprocal obligations (e.g. taxes and fines) that can only be paid by tendering the currency.

Functional Finance

Building on the lessons of neo-chartalism, MMT next draws important conclusions about the nature of public finance and government spending.

MMT scholarship has since applied the chartalist understanding of money and taxation through analysis of the economy’s sectoral balances, an approach pioneered by Wynne Godley. As Stephanie Kelton argues, ‘proceeds form taxation and bond sales are not even capable of financing government spending since their collection implies their destruction.’ When the fiscal authority (Treasury) receives tax payments, the banking system loses the same quantity of money in reserves. Similarly, the purpose of bond sales is argued to be the same: draining reserves, and thereby relieving pressure on the policy interest rate, due to the incentives faced by banks holding excess reserves. The central bank provides the reserves necessary to ensure bond sales clear.

This accounting logic gives a concrete, practical face to the occasionally abstract theory of money that MMT is ultimately based on. It also has radical consequences for how to understand the options for fiscal policy faced by a monetarily sovereign government.

In 1943, Lerner wrote another article, ‘Functional Finance and the Federal Debt’. There, he staked out the position that:

‘government fiscal policy, its spending and taxing, its borrowing and payment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.’

Put differently, this means that there should be no concern over the size of the government deficit on the grounds of ‘debt sustainability’ (or other axioms about the desirability of running a budget in balance or in surplus). Insolvency of a monetarily sovereign government is impossible.

Nevertheless, government spending adds to a real economy where productive resources are used and prices are set; public spending must take these ‘productivity enhancing’ factors into account. This is the ‘functional’ in Functional Finance – fiscal policy should be operated with a view only to the function it serves in achieving real economic effects. MMT scholar Bill Mitchell expresses the principle as:

‘the desirable deficit outcome at any point in time to be a function of the state of non-government spending and the utilisation of the productive capacity of the economy.’

Financial Instability

Alongside Knapp and Lerner, MMT is indebted to Minsky, who proposed that ‘money manager capitalism’ – the form of economic order that became ascendant in the post-war world – is inherently unstable.

In short, the implication of Minsky’s view was that a period of stable and growing prosperity leads caution among private firms to lapse. Firms, households and banks undertake ‘innovations’, engage in speculative activity, and start to take on more risk, increasing fragility in the economy. As the cycle continues, short-term debt is increasingly used to cover interest charges on earlier investment. This behaviour makes a crisis almost inevitable over a long enough stretch of time (Minsky, 1982).

The privileged position Minsky occupies in the lineage of MMT has affected contemporary thinkers. Many hold that the public financial architecture must recognize that there there are multiple sources of new purchasing power and investment beyond government spending. The resultant purchasing power has consequences for economic activity, the distribution of wealth and income, and financial stability, and so must be addressed by any comprehensive paradigm. Public authorities must be on guard against the effects of private money markets, even while the government operates Functional Finance (for an example, see Warren Mosler’s ‘Proposals for the Treasury, the Federal Reserve, the FDIC, and the Banking System’).

Policy recommendations

It is important to recall that MMT is not prescriptive of specific spending priorities. It simply undermines any objection to increased public spending that is based on an idea of monetary scarcity, or that the nation ‘can’t afford it’. Instead, as according to Functional Finance, spending proposals should be assessed on the basis of their effects on society and the economy.

Nevertheless, the intellectual framework for understanding the modern economy that MMT provides offers several priorities and directions for building government institutions. Éric Tymoigne and L. Randall Wray have written that:

‘Financial stability, price stability and full employment… are important goals that have to be met independently from one another by putting in place structural policies that work independently of the current political climate, and that manage as directly as possible the goal that needs to be achieved.

MMT rejects the traditional trade-off between inflation and unemployment, and does not rely on economic growth and fine-tuning to reach full employment.’

An important plank in the MMT framework that helps to achieve these goals is the Job Guarantee. The JG is a ‘buffer-stock’ scheme for the job market where the state functions as ‘employer of last resort’. Anybody who wants a job on the public scheme can have one at a fixed wage; the scheme, therefore, absorbs workers displaced from private sector employment. Mitchell (2000) claims that the JG wage ‘prevents serious deflation from occurring and defines the private sector wage structure’ (in the sense of providing a viable outside option for those on low wages).

MMT reverses the typical role played by a nation’s economic institutions, in that typical MMT policy platforms see fiscal policy, and not the manipulation of interest rates by the central banks, as the proper tool for controlling inflation. For MMT advocates, this is a simple consequence of the fact that taxes destroy money, and also follows from Wray’s 10th point: that a policy interest rate is a weak tool for manipulating spending in the real economy.

For the part of the JG, Mitchell proposes a ‘Buffer Employment Ratio’ or incomes policy to keep the lid on inflation resulting from the increased government spending such a scheme would require. (Importantly, MMT advocates acknowledge that there are other sources of inflation beyond excessive demand, and other tools that can address inflation in general, ranging from better financial regulation (Minsky) to reducing accounting control fraud (Bill Black) to improving market governance and competition law (Fred Lee)).

Critiques & Responses

Despite its growing popularity, MMT has not enjoyed an easy reception from the mainstream of economic thought and commentary. Eric Témoigne and Wray classify critiques of the paradigm into five categories: ‘views about origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT’ (2013).

Some have questioned whether MMT really offers any novel lessons for macroeconomic policy that aren’t already implicit as components of a more conventional view, mainstream view. For instance, Simon Wren-Lewis has argued that:

1. ‘MMT seems obsessed with the accounting detail of government transactions;
2. This seemed to lead to ideas that I thought were standard bits of macroeconomics.’

Similarly, an article published in mid-2018 at the Institute for New Economic Thinking (INET) by Arjun Jayadev and J. W. Mason claimed that ‘the analysis underlying [MMT’s policy proposals] is entirely orthodox.’ They elaborate:

‘The difference between MMT and orthodox policy can be thought of as a different assignment of the two instruments of fiscal position and interest rate to the two targets of price stability and debt stability. As such, the debate between them hinges not on any fundamental difference of analysis, but rather on different practical judgements—in particular what kinds of errors are most likely from policymakers.’

Jayadev and Mason accordingly target the switch in policy emphasis from interest rate-fixing at the central bank to fiscal policy as the main tool of macroeconomic stabilisation, a point that Wren-Lewis also sees as the main divide between MMT and more ‘mainstream’ economic thinking.

However, the INET authors’ argument addresses ‘the logic of the functional finance position rather than MMT as a body of thought’, and they admit to ‘make only limited references to MMT literature’.

This has led MMT scholars to respond that the economic paradigm they have developed goes far beyond the implication of functional finance, and rests on fundamentally different premises about the economy from mainstream views (such as Kelton’s argument about the impossibility of bond finance or taxation to fund government spending). The INET critique also gives no room to the ideas on investment and financial dynamics adopted from Minsky, which lead to differences between MMT and the mainstream in terms of understanding the business cycle.

Finally, MMT advocates take issue with the assumptions about human behaviour and macroeconomic dynamics used to structure the very formal model used by Jayadev and Mason in their analysis (see Mitchell for more detail). For example, MMT denies that there is a ‘natural’ rate of interest at which the economy will reach full employment, if only it is set by the central bank (which can be prevented by the zero lower-bound). In that sense, MMT advocates do not see their theory as a ‘preference’ for fiscal policy over monetary policy as a tool of macroeconomic stabilisation. Instead, from an MMT perspective one of those tools (monetary policy) can never achieve what it claims it can achieve, whereas the other can.

Economic theory as a ‘lens’

One category of objections to the MMT narrative concerns how it relates to the institutions and practices established to manage government spending and monetary policy in reality. Some critics have claimed that MMT has few lessons for modern economies. They argue that legal structures – such as central bank independence and laws prohibiting monetary financing of deficit spending – mean that MMT is only true in a stylised world, and therefore lacks relevance to the real one.

This as Bill Mitchell writes,

‘MMT identifies two levels of reality. The first level defines the intrinsic characteristics of the the monopoly fiat currency issuer which clearly lead us to understand that such a government can never run out of the currency it issues and has to first spend that currency into existence before it can ever raise taxes or sell bonds to the users of the currency – the non-government sector…

The second level of reality [is] the voluntary institutional framework that governments have put in place to regulate their own behaviour. These accounting frameworks and fiscal rules are designed to give the (false) impression that the government is financially constrained like a household – that is, in context, has to either raise taxes to spend or issue debt to spend more than it raises in taxes.’

Elsewhere, he describes MMT as a lens ‘which allows us to see the true (intrinsic) workings of the fiat monetary system.’

The power of MMT, then, lies in its ability to reveal the gap between what is necessarily true about monetary systems, and other, contingent facts that are only true under present circumstances. It shows that gap for what it is: a political construct that persists only because our society so chooses. Structures like central bank independence must be argued for on their merits, and cannot be referred to as ‘how the world really works’. Ultimately, MMT has become a much broader project than a single economic theory, and is consistent with insights from historical, anthropological, legal, and sociological approaches to understanding money, the economy, and society. Increasingly, the future of MMT is interdisciplinary.

References

Bell, S. (1998). Can Taxes and Bonds Finance Government Spending?. Levy Economics Institute of Bard College, Working Paper No. 244, July

Bell, S. (2001). The role of the state and the hierarchy of money. Cambridge Journal of Economics, 25, 149-163

Knapp, G.F. (1973). The State Theory of Money. Clifton, Augustus M. Kelley [1924].

Lerner, A.P. (1947). Money as a Creature of the State. American Economic Review, vol. 37, no. 2, May, pp. 312-317.

Lerner, Abba P. (1943). Functional Finance and the Federal Debt. Social Research, vol. 10, 1943, pp. 38-51

Jayadev, A., and Mason, J.W. (2018). Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them? Institute for New Economic Thinking, September. Available at: https://www.ineteconomics.org/perspectives/blog/mainstream-macroeconomics-and-modern-monetary-theory-what-really-divides-them

Minsky, H. (1982). Can “It” Happen Again? A Reprise. Hyman P. Minsky Archive. Paper 155. Available at: https://digitalcommons.bard.edu/hm_archive/155/

Mitchell, W. (2016). Modern Monetary Theory – What is New About It? Available at: http://bilbo.economicoutlook.net/blog/?p=34200

Mitchell, W. (2000). The Job Guarantee and Inflation Control. Centre of Full Employment and Equity, Working Paper No. 00/01, January

Mosler, W. (2009). Proposals for the Treasury, the Federal Reserve, the FDIC, and the Banking System. Draft, September. Available at: http://moslereconomics.com/2009/09/16/proposals-for-the-banking-system-treasury-fed-and-fdic-draft/

Tymoigne, Éric and Wray, L.R. (2013). Modern Money Theory 101: A Reply to Critics. Levy Economics Institute of Bard College, Working Paper No. 778, November

Wray, L.R. (2000).‘The Neo-Chartalist Approach to Money’. July. Available at SSRN: https://ssrn.com/abstract=1010334

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by Antonin Calderon & Jean Rossiaud (Leman Currency / APRES-GE in collaboration with Gaëlle Bigler (FRACP / URGENCI)

This is the third issue of the series we started in October, on the theme of “local currencies”, after a general presentation of the advantages and challenges of local currencies through the example of the Leman currency (October 2018) and the avenues for collaboration and synergies between local currencies and sustainable food (December 2018), we propose today to reflect in terms of production/supply chains, for different types of agricultural products, and starting once again from the Geneva experience: from seed to production, from production to processing, from processing to distribution, from distribution to consumption. The five key agricultural sectors on which Leman and the Chamber of the Social and Solidarity Economy (APRES-GE) are currently working are the following:

• Beer: from hops to pints
• Vegetables: from pitchfork to fork
• Bread: from seed to bread
• Wood: from tree to stere
• Wine: from vine shoot to glass

This is why it is particularly interesting to bring the different actors in a production/supply chain together around the same table, in order to reflect together on current and potential value flows – and the resulting cash flows. Many economic actors generally do not have the time to take this step back. The local currency offers producers a great opportunity to strengthen the links between them, and between them and consumers, and thus to strengthen the local economy in the face of competition from globalized markets. The service provided by the local currency is “economic facilitation”: it is a form of brokerage that allows producers to better choose their local suppliers, and in case of overproduction to sell stocks in the payment community.

The beer production/supply chain: from hops to pints

Let us take the example of the beer sector to illustrate what we are saying. The development of artisanal breweries is currently in full expansion and their operation is easily modelable. The main links in this chain are: farmers, malthouse, breweries, distributors, as well as bars, restaurants or grocery stores. The diagram below illustrates this.

If you still don’t know it, you should know that 90% of beer is made up of water, which is used as the basis for adding malt, hops and then yeast. To this can be added additional ingredients, such as coffee, fruit, spices or other condiments or herbs.

Farmers (1) grow the cereals, which will then be processed into malt by the Malting plant (2). At the same time, hops (2”), a climbing plant, must be cultivated and its flowers harvested and dried; yeast (2”) must be produced, usually in a laboratory.

These three ingredients are used by artisanal breweries (3), with water, for the production of beer. Other goods are also needed to produce beer, including bottles, capsules, labels, glue, and of course water. These products are considered as secondary in the beer production chain, although they are obviously necessary. More and more often, breweries collect their bottles, through a deposit system, and reuse them.

Then, the distributors (4) are responsible for transporting the drinks produced in bars, restaurants and grocery stores (5), where they are sold for consumption, and in particular to employees (6) of the various companies in the beer industry. Indeed, some of the beer consumers work in the sector.

A new activity should also be integrated into this beer sector: mushroom houses (4′). They work with breweries, recovering the used malt (spent grains) and using it as a substrate on which mushrooms (especially shiitake and oyster mushrooms) will grow. The recovery of the substrate is currently being studied for use as protective packaging, for its lightweight and shock absorbing properties.

All these actors also have costs for premises, energy, production and transport machinery, IT, printing and administration. This is what we call the secondary network of suppliers.

The following diagram summarizes the primary network of the beer sector, by modelling the flows of goods/services, as well as the cash flows that allow these exchanges.

The economic relationship

The local currency is above all a tool for establishing economic links between the actors of a sector. While stakeholders are convinced of the value of creating a strong local economy, they do not always have the time, energy or even the knowledge to analyse all current and potential flows in their own economic production/supply chain Pressed by short-term economic constraints and lack of liquidity, they usually go as fast and cheap as possible, whereas their real economic interest in the medium or long term would be to favour a concerted and solidarity-based approach, for example in a pooled credit system.

Working in their own local currency encourages economic actors to be aware of the specificities and various constraints within the chain and puts everyone in commercial contact with their potential suppliers and customers: the farmer with malting, malting with breweries, distributors with breweries, and bars, restaurants and grocery stores with distributors.

The stakes are not only economic and ecological. Admittedly, it makes it possible to increase the volumes of activity of each individual and the wealth produced on the territory; and the development of this territory, in short circuits, reinforces economic resilience and ecological sustainability (reduction of CO2 emissions). On the social and political level, the economic network thus created breaks the isolation of each actor and it is the social fabric that is strengthened. Together, it will be easier to defend your collective interests and become stakeholders in public policies to promote local agriculture.

Monetary liquidity for the sectors

The pooled credit system offered by a complementary local currency such as the Leman in the Lake Geneva region provides significant liquidity to the production/supply chains. Indeed, each actor is granted an operating credit line (currently between LEM 1,000.- and LEM 20,000.-, depending on its size) that can be used without interest rates and without limit as long as it remains below the established threshold. The potential for economic exchange for the entire economic chain concerned is therefore increased by the sum of the credit limits of all its players.

This ancestral system of credit pooling, which has practically disappeared today, swallowed up by the contemporary banking system, is nevertheless a very simple and very stable system. The network as a whole is by definition always totally balanced “at zero”: the sum of the positive amounts is always equal to the sum of the negative amounts, and there is no monetary creation. The more money turns, the more wealth is produced. The lack of liquidity is a barrier to activity. Shared credit therefore replaces bank credit very advantageously.

Conventional bank credit is expensive – when it is granted, because banks often refuse risk. It raises the price of products, because it is necessary to include the cost of money (interest) in the selling price, and weakens the seller in a competitive market occupied by large groups that lower prices.

By working in local currency, we recreate a parallel economy, and we avoid pressure from large groups and foreign products. Getting started with the complementary currency, particularly for agricultural sectors, must be seen as a survival and development strategy. But we must play the game together, companies, employees and consumers, so that the currency can continue to supply the local economy continuously, without stagnating in bottlenecks.

Towards healthy irrigation of the production/supply chains

The main challenge is therefore to avoid the formation of pockets of local currency retention, which indicate an economic blockage. Such a blockage is beneficial if it allows the actor in question to question himself about his partners who do not accept the local currency. It may be time to change it, and to opt for suppliers who also fit into the logic of relocation and social and environmental responsibility.

This is where the services of local currency “facilitators” come into play: they work with companies to integrate suppliers into the payment community, if they meet the conditions of the charter and, if not, to find new partners.

On the other hand, pockets of local currency are problematic if companies cannot put as much currency back into the circulation as they accept: the currency then loses its primary function, which is to facilitate trade. The risk of devaluation of the currency (it will be exchanged below its official value, for example 120 units will be requested for a good/service worth 100 in state currency) is therefore significant.

Two types of actors can find themselves structurally in this “bottleneck” position. First, the company that would occupy a central place in the supply chain, and would have no or too few substitutes. In the “beer” sector, it is the malting industry, with which all local breweries have an interest in working in local currency. Secondly, the company at the “end of the chain”. In our example, it is the farmer who grows the cereals that will then be processed into malt. The following diagram shows this problem of pocket retention of local currency at the end of the supply chain.

For these two cases, there is a simple theoretical answer, but it is not so easy to put into practice, because it already requires a dense economic network: the payment of part of the salaries in local currency. However, the money supply redistributed monthly is a powerful lever for boosting the local and sustainable economy through consumption. This is explained in the diagram below.

We have therefore seen that producers in the agricultural sectors have a clear interest in using the local currency to resist competition from large groups and foreign producers. However, this success is based on the balance of flows. Strengthening the local economy therefore requires organization and patience, as it involves bringing all its stakeholders into the payment community into a virtuous circle.

It is up to the local currency to carry out this work of economic facilitation and credit pooling, and it must be given the means to do so. Once this work is done, in the same way that an irrigation system would be installed in a crop, money can then flow in a virtuous way by creating value in the local and sustainable economy, and by strengthening economic resilience, in the face of systemic financial crises. 2008 should be a lesson to us!

In a future newsletter, we will take the example of one or more particular companies and how they use local currency on a daily basis to make sense of their work: an economic sense, of course, but also the feeling of participating fully in improving the common good.

This post is also available in / aussi en: French Spanish

Photo by practicalowl

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