Chapter Six — Fundamental Infrastructures: Money
[This is the ninth installment in my serialization of my book-in-progress, tentatively titled Desktop Regulatory State] , and the first of two installments on Chapter Six. Since this is a draft manuscript, it contains placeholders for additional material. Because I have split some chapters into multiple new ones since the previously posted excerpts, there is a loss of continuity in numbering. The current Table of Contents with active links can be found here.]
I. What Money’s For and What It Isn’t
Local currencies, barter networks and mutual credit-clearing systems are a solution to a basic problem: “a world in which there is a lot of work to be done, but there is simply no money around to bring the people and the work together” [Bernard Lietaier]. One barrier to local barter currencies and crowdsourced mutual credit is a misunderstanding of the nature of money. For the alternative economy, money is not primarily a store of value, but a unit of account for facilitating exchange. Its function is not to store accumulated value from past production, but to provide liquidity to facilitate the exchange of present and future services between producers.
The distinction is a very old one, aptly summarized by Joseph Schumpeter’s contrast between the “money theory of credit” and the “credit theory of money.” The former, which Schumpeter dismissed as entirely fallacious, assumes that banks “lend” money (in the sense of giving up use of it) which has been “withdrawn from previous uses by an entirely imaginary act of saving and then lent out by its owners. It is much more realistic to say that the banks ‘create credit..,’ than to say that they lend the deposits that have been entrusted to them.” The credit theory of money, on the other hand, treats finances “as a clearing system that cancels claims and debts and carries forward the difference….”
Thomas Hodgskin, criticizing the Ricardian “wage fund” theory from a perspective something like Schumpeter’s credit theory of money, utterly demolished any moral basis for the creative role of the capitalist in creating a wage fund through “abstention,” and instead made the advancement of subsistence funds from existing production a function that workers could just as easily perform for one another through mutual credit, had the avenues of doing so not been preempted.
The only advantage of circulating capital is that by it the labourer is enabled, he being assured of his present subsistence, to direct his power to the greatest advantage. He has time to learn an art, and his labour is rendered more productive when directed by skill. Being assured of immediate subsistence, he can ascertain which, with his peculiar knowledge and acquirements, and with reference to the wants of society, is the best method of labouring, and he can labour in this manner. Unless there were this assurance there could be no continuous thought, an invention, and no knowledge but that which would be necessary for the supply of our immediate animal wants….
The labourer, the real maker of any commodity, derives this assurance from a knowledge he has that the person who set him to work will pay him, and that with the money he will be able to buy what he requires. He is not in possession of any stock of commodities. Has the person who employs and pays him such a stock? Clearly not….
A great cotton manufacturer… employs a thousand persons, whom he pays weekly: does he possess the food and clothing ready prepared which these persons purchase and consume daily? Does he even know whether the food and clothing they receive are prepared and created? In fact, are the food and clothing which his labourers will consume prepared beforehand, or are other labourers busily employed in preparing food and clothing while his labourers are making cotton yarn? Do all the capitalists of Europe possess at this moment one week’s food and clothing for all the labourers they employ?…
…As far as food, drink and clothing are concerned, it is quite plain, then, that no species of labourer depends on any previously prepared stock, for in fact no such stock exists; but every species of labourer does constantly, and at all times, depend for his supplies on the co-existing labour of some other labourers.
…When a capitalist therefore, who owns a brew-house and all the instruments and materials requisite for making porter, pays the actual brewers with the coin he has received for his beer, and they buy bread, while the journeymen bakers buy porter with their money wages, which is afterwards paid to the owner of the brew-house, is it not plain that the real wages of both these parties consist of the produce of the other; or that the bread made by the journeyman baker pays for the porter made by the journeyman brewer? But the same is the case with all other commodities, and labour, not capital, pays all wages….
In fact it is a miserable delusion to call capital something saved. Much of it is not calculated for consumption, and never is made to be enjoyed. When a savage wants food, he picks up what nature spontaneously offers. After a time he discovers that a bow or a sling will enable him to kill wild animals at a distance, and he resolves to make it, subsisting himself, as he must do, while the work is in progress. He saves nothing, for the instrument never was made to be consumed, though in its own nature it is more durable than deer’s flesh. This example represents what occurs at every stage of society, except that the different labours are performed by different persons—one making the bow, or the plough, and another killing the animal or tilling the ground, to provide subsistence for the makers of instruments and machines. To store up or save commodities, except for short periods, and in some particular cases, can only be done by more labour, and in general their utility is lessened by being kept. The savings, as they are called, of the capitalist, are consumed by the labourer, and there is no such thing as an actual hoarding up of commodities. [Labour Defended Against the Claims of Capital]
What political economy conventionally referred to as the “labor fund,” and attributed to past abstention and accumulation, resulted rather from the present division of labor and the cooperative distribution of its product. “Capital” is a term for a right of property in organizing and disposing of this present labor. The same basic cooperative functions could be carried out just as easily by the workers themselves, through mutual credit. Under the present system, the capitalist monopolizes these cooperative functions, and thus appropriates the productivity gains from the social division of labor.
Betwixt him who produces food and him who produces clothing, betwixt him who makes instruments and him who uses them, in steps the capitalist, who neither makes nor uses them, and appropriates to himself the produce of both. With as niggard a hand as possible he transfers to each a part of the produce of the other, keeping to himself the large share. Gradually and successively has he insinuated himself betwixt them, expanding in bulk as he has been nourished by their increasingly productive labours, and separating them so widely from each other that neither can see whence that supply is drawn which each receives through the capitalist. While he despoils both, so completely does he exclude one from the view of the other that both believe they are indebted him for subsistence. [Popular Political Economy]
Franz Oppenheimer made a similar argument against the wage-fund doctrine in “A Post Mortem on Cambridge Economics”:
THE JUSTIFICATION OF PROFIT, to repeat, rests on the claim that the entire stock of instruments of production must be “saved” during one period by private individuals in order to serve during a later period. This proof, it has been asserted, is achieved by a chain of equivocations. In short, the material instruments, for the most part, are not saved in a former period, but are manufactured in the same period in which they are employed. What is saved is capital in the other sense, which may be called for present purposes “money capital.” But this capital is not necessary for developed production.
Rodbertus, about a century ago, proved beyond doubt that almost all the “capital goods” required in production are created in the same period. Even Robinson Crusoe needed but one single set of simple tools to begin works which, like the fabrication of his canoe, would occupy him for several months. A modern producer provides himself with capital goods which other producers manufacture simultaneously, just as Crusoe was able to discard an outworn tool, occasionally, by making a new one while he was building the boat. On the other hand, money capital must be saved, but it is not absolutely necessary for developed technique. It can be supplanted by co-operation and credit, as Marshall correctly states. He even conceives of a development in which savers would be glad to tend their savings to reliable persons without demanding interest, even paying something themselves for the accommodation for security’s sake. Usually, it is true, under capitalist conditions, that a certain personally-owned money capital is needed for undertakings in industry, but certainly it is never needed to the full amount the work will cost. The initial money capital of a private entrepreneur plays, as has been aptly pointed out, merely the rôle of the air chamber in the fire engine; it turns the irregular inflow of capital goods into a regular outflow.
E. C. Riegel argues that issuing money is a function of the individual within the market, a side-effect of her normal economic activities. Currency is issued by the buyer by the very act of buying, and it’s backed by the goods and services of the seller.
Money can be issued only in the act of buying, and can be backed only in the act of selling. Any buyer who is also a seller is qualified to be a money issuer. Government, because it is not and should not be a seller, is not qualified to be a money issuer.
Money is simply an accounting system for tracking the balance between buyers and sellers over time.
And because money is issued by the buyer, it comes into existence as a debit. The whole point of money is to create purchasing power where it did not exist before: “…[N]eed of money is a condition precedent to the issue thereof. To issue money, one must be without it, since money springs only from a debit balance on the books of the authorizing bank or central bookkeeper.”
IF MONEY is but an accounting instrument between buyers and sellers, and has no intrinsic value, why has there ever been a scarcity of it? The answer is that the producer of wealth has not been also the producer of money. He has made the mistake of leaving that to government monopoly.
Money is “simply number accountancy among private traders.” Or as Riegel’s disciple Thomas Greco argues, currencies are not “value units” (in the sense of being stores of value). They are means of payment denominated in value units.
In fact, as Greco says, “barter” systems are more accurately conceived as “credit clearing” systems. In a mutual credit clearing system, rather than cashing in official state currency for alternative currency notes (as is the case in too many local currency systems), participating businesses spend the money into existence by incurring debits for the purchase of goods within the system, and then earning credits to offset the debits by selling their own services within the system. The currency functions as a sort of IOU by which a participant monetizes the value of his future production. It’s simply an accounting system for keeping track of each member’s balance:
Your purchases have been indirectly paid for with your sales, the services or labor you provided to your employer.
In actuality, everyone is both a buyer and a seller. When you sell, your account balance increases; when you buy, it decreases.
It’s essentially what a checking account does, except a conventional bank does not automatically provide overdraft protection for those running negative balances, unless they pay a high price for it.
There’s no reason businesses cannot maintain a mutual credit-clearing system between themselves, without the intermediary of a bank or any other third party currency or accounting institution. The businesses agree to accept each other’s IOUs in return for their own goods and services, and periodically use the clearing process to settle their accounts.
And again, since some of the participants run negative balances for a time, the system offers what amounts to interest-free overdraft protection. As such a system starts out, members are likely to resort to fairly frequent settlements of account, and put fairly low limits on the negative balances that can be run, as a confidence building measure. Negative balances might be paid up, and positive balances cashed out, every month or so. But as confidence increases, Greco argues, the system should ideally move toward a state of affairs where accounts are never settled, so long as negative balances are limited to some reasonable amount.
An account balance increases when a sale is made and decreases when a purchase is made. It is possible that some account balances may always be negative. That is not a problem so long as the account is actively trading and the negative balance does not exceed some appropriate limit. What is a reasonable basis for deciding that limit?… Just as banks use your income as a measure of your ability to repay a loan, it is reasonable to set maximum debit balances based on the amount of revenue flowing through an account…. [One possible rule of thumb is] that a negative account balance should not exceed an amount equivalent to three months’ average sales.
In fact, as David Graeber shows in his monumental Debt: The First 5,000 Years, that kind of mutual credit-clearing system historically predates coinage as the normal basis for money. Adam Smith’s scenario of primitive barter first emerging as the basis for exchange, running up against the problem of “double coincidence of wants,” evolving into the stockpiling of especially commonly desired commodities, and finally to the adoption to rare metals as a universal commodity suitable for a common medium of exchange, turns out to be as much a “bourgeois nursery fable” as the “Social Contract” and the “original accumulation of capital.”
In all the known world, anthropologists have never yet found an actual example of barter being used as the primary basis for exchange within a village or other community. It is used only between communities, for one-off transactions involving strangers where trust is low. On the other hand, village credit systems like Riegel’s and Greco’s, where neighbors and merchants keep running tabs and periodically settle up, are quite common. In the 16th and 17th century English village, for example:
Since everyone was involved in selling something…, just about everyone was both creditor and debtor; most family income took the form of promises from other families; everyone knew and kept count of what their neighbors owed one another; and every six months or year or so, communities would hold a general public “reckoning,” canceling debts out against each other in a great circle, with only those differences then remaining when all was done being settled by use of coin or goods.
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In this world, trust was everything. Most money literally was trust, since most credit arrangements were handshake deals. When people used the word “credit,” they referred above all to a reputation for honesty and integrity; …but also, reputation for generosity, decency, and good-natured sociability, were at least as important considerations when deciding whether to make a loan as were assessments of net income.
For a credit clearing system to thrive, it must offer a valued alternative to those who lack sources of money in the conventional economy. That means it must have a large variety of participating goods and services, participating businesses must find it a valuable source of business that would not otherwise exist in the conventional economy, and unemployed and underemployed members must find it a valuable alternative for turning their skills into purchasing power they would not otherwise have. So we can expect LETS or credit clearing systems to increase in significance in periods of economic downturn, and even more so in the structural decline of the money and wage economy that is coming.
Karl Hess and David Morris cite Alan Watts’ illustration of the absurdity of saying it’s impossible for willing producers, faced with willing consumers, to produce for exchange because “there’s not enough money going around”:
Remember the Great Depression of the Thirties? One day there was a flourishing consumer economy, with everyone on the up-and-up; and the next: poverty, unemployment and breadlines. What happened? The physical resources of the country—the brain, brawn, and raw materials—were in no way depleted, but there was a sudden absence of money, a so-called financial slump. Complex reasons for this kind of disaster can be elaborated at lengths by experts in banking and high finance who cannot see the forest for the trees. But it was just as if someone had come to work on building a house and, on the morning of the Depression, that boss had to say, “Sorry, baby, but we can’t build today. No inches.” “Whaddya mean, no inches? We got wood. We got metal. We even got tape measures.” “Yeah, but you don’t understand business. We been using too many inches, and there’s just no more to go around.”
The point of the mutual credit clearing system, as Greco describes it, is that two people who have goods and services to offer—but no money—are able to use their goods and services to buy other goods and services, even when there’s “no money.”21 So we can expect alternative currency systems to come into play precisely at those times when people feel the lack of “inches.” Based on case studies in the WIR system and the Argentine social money movement, Greco says, “complementary currencies will take hold most easily when they are introduced into markets that are starved for exchange media.” The widespread proliferation of local currencies in the Depression suggests that when this condition holds, the scale of adoption will follow as a matter of course. And as we enter a new, long-term period of stagnation in the conventional economy, it seems likely that local currency systems will play a growing role in the average person’s strategy for economic survival.
For all these reasons, the kind of “community currency” that you have to buy with conventional currency is fundamentally wrong-headed. Unfortunately, this—Berkshares are a good example—is the most visible kind of “local currency” in the media—a “buy local” campaign in which local merchants agree to accept the local currency at some modest discount compared to dollars, and one obtains the local currency by trading in U.S. dollars at participating businesses. The problem is that, to obtain this currency, you’ve got to already have conventional money as a store of value from past transactions. It’s essentially a greenwashed lifestyle choice for NPR liberals: upper-middle class professional types who have the money in the first place.
Such local currencies are basically useless for the primary purpose of a local currency: providing liquidity and a unit of account to facilitate exchange between those who have skills to trade for consumption, but no money. As Jem Bendell and Matthew Slater of the Community Forge currency system argue:
Although awareness of the problems associated with the for-profit creation of money as debt at interest has grown, understanding of the solutions is still weak. Despite an understanding of the problem as just described, many currency innovators have chosen currency designs which initially ally themselves with the existing monetary system, such as the ‘Transition Pound’ initiatives in the UK. This could be because they are designed with an interest in how to market an idea to people who would choose to engage in the currency for reasons other than necessity. Although a similar model in Germany, called Chiemgauer, has had some success, it has been going a long time and its growth is slow, with everybody who maintains it being unpaid.
Those countries that suffer a larger contraction in money supply are not interested in or able to use systems that require bank-debt to buy local currencies that in turn require charitable funding and entail additional transaction costs.