How Our Money Makes Growth and Debt Necessary with Criteria for What to Do About It

Paul Krumm There is a long history of how money has been done in the US, that has not been handed down in the last 50 to 100 years. This history is important to know as we look at how we got where we are, and how to get to just and sustainable money and economic systems.

History
The American Revolution was about money and economic justice, as much as it was about social justice. Paper money was distributed by a number of states and localities before and during the Revolutionary period. The American Revolution was accomplished with the use of such money. This was in contrast to the situation in England, where private bankers issued money as debt, through the loan process, as is done here today. In 1763, Ben Franklin, in England, was asked in the House of Commons why there was such prosperity in the Colonies. His response: "That is simple. In the colonies, we issue our own paper money. It is called 'Colonial Script'. We issue it in proper proportion to make the goods pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control it's purchasing power and we have no interest to pay to no one. "1 (emphasis added) Within a year, at the behest of the Bank of England, the House of Commons passed the Currency Act of 1764, which made it illegal for the Colonies to issue their own currency, leading to a major depression in the Colonies. Again from Ben Franklin. "In one year, the conditions were so reversed that the era of prosperity ended, and a depression set in, to such an extent that the streets of the Colonies were filled with unemployed. The colonies would gladly have borne the little tax on tea and other matters had it not been that England took away from the colonies their money, which created unemployment and dissatisfaction. The inability of the colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the PRIME reason for the Revolutionary War."2(Emphasis in original) The elite among the colonists, spearheaded by Alexander Hamilton, and his mentor, the banker Robert Morris, wanted the control of money and land to be in the hands of those who already controled them, as in Europe. For them, only land holders deserved the vote. Thomas Paine was one of the few that we have heard of besides Franklin that actively promoted a more democratic economy. His Common Sense was reviled by others of the elite. However he was influencial in the writing of the Pennsylvania constitution, which gave the voting right to unpropertied males, as well as those of property. The Pennsylvania legislature, based on this constitution, issued money for the use of its citizens.
1 quoted at http://www.mindcontagion.org/banking/hb1763.html 2 This and the following quotehave not been found by recent researchers in the extant Franklin literature. On the other hand, they are consistent with the historical record, and also consistant with Franklin's general attitudes toward money.

Under the Constitution of 1887, Morris and Hamilton took over the Pennsylvania Bank, renaming it the First National Bank. It was funded by nationalizing the debt of the Revolutionalry War. This debt had been bought up by Hamilton and his friends at pennies on the dollar, giving them a major windfall. After a period of time Pennsylvania revoked the charter of The First National Bank, which had charged exhorbitant interest, and led to many people going to debtor's prison. As a result of his risky investments, Morris himself ended up in debtor's prison, which ironically led to the writing of the first American bankruptcy law. 3 Banking continued after the Revolution by local private banks, each their own feifdom. In the early 1800's a Second National Bank was enacted. President Andrew Jackson, by his veto of its charter extension, closed the Second National Bank, and local private banks continued to provide the money supply. The Civil War was bankrolled by Lincoln's Greenbacks, a Government issued paper currency frowned on by banking interests. That experiment ended after Lincoln's death with the bankers causing a depression by getting Congress to retire the greenbacks, by calling loans, and refusing to make new loans.4 In 1913 the Federal Reserve Act was enacted, again giving the power to create money to the private banking system on a national scale. That act brought on the Roaring 20's and the Great Depression of the 1930's. Some of the best documented examples of the use of currency other than that of the private for profit banking interests occurred during the 1930's. Irving Fisher, a Harvard economist, advocated the use of locally issued currencies, based on the experience of European towns that had temporarily brought stability and prosperity to their economies by utilizing locally issued Stamp Scrips in the deep depression. These systems were outlawed by the governments of Germany and Austria, because of their threat to the commercial banking industry. Another similar system, the WIR, based in Switzerland, still exists today, and is credited with promoting the stability of the Swiss Franc. 5 The systems of the 1930's were based on the theoretical work of Silvio Gazell, a German who had lived and worked in Argentina. Fisher visited Europe, and wrote the book Stamp Scrip, as a manual for the proper organization of such issues in the US. Fisher, who had made the statement that "the correct application of stamp scrip would solve the Depression crisis in the US in three weeks"6 brought the idea to Dean Atcheson, then Undersecretary of the Treasury. Acheson referred the idea to his old professor Russel Sprague, who opined that "this approach would indeed succeed in bringing America back to work out of the Depression, but it also had some political implications about decentralization that he might want to check with the President"7. Instead the Administration decided on the centralized WPA program, which left private banking untouched. Emergency stamp scripts were outlawed. The depression ended only with the beginning of WWII, and the growth in the economy provided by the war effort.
3 4 5 6 7 Ibid. see http://www.xat.org/xat/usury.html see http://www.transaction.net/money/cc/cc04.html#history Bernard Lietaer, The Future of Money, Century, London, 2001, p. 157 ibid

What is money?
First we must understand what money is. Most definitions of money talk about what it does, not what it is. Bernard Lietaer, the technical developer behind the transition from the various European currencies to the Euro, defines what money is as follows: Money is an agreement, within a community, to use something as a medium of exchange.8 So lets start out with some basic facts about what money is and how it works.

While the network of money transactions around the world is very complex, what money is, and the way it works is really rather simple, and is understandable by the ordinary person. Our money is not stuff in the ordinary sense. Rather, it is an agreement to use an accounting system based on numbers on paper or in a computer. Since money is an agreement, the terms of that agreement are negotiable and can be changed. The fact that our money is described as mysterious is a cover for how it does work; who benefits from its operation, and who it hurts. Our money is created in the process of making a loan, and is canceled as the loan is paid. More specifically, the principle is canceled, interest is an added debt to the bank. We will describe how the present money system works like a for profit casino, with the major owners, the central bankers, receiving interest on all money created. We have seen how the American Revolution and the Civil War were driven and supported by a different kind of money. We will see how the structure and function of our money system leads to structural violence; legalized violence that is one of the drivers of the overt violence in our society. The study of the operation of money is pivotal to any discussion of democracy, social justice, and ecological sustainablilty, as money is the basic language of economic relationships, and the values built into this language impact all social relationships. We will also show how the present money game is not sustainable, and note that the changes that lead to a democratically based money system are the same changes that make money and our economy sustainable.

As noted above, recognizing that money is a social agreement, we are free to to study the nuts and bolts - the rules of this agreement. We can also learn how our present money structure promotes the movement of money from the Main Street productive sector to the central financial sector, and see what results follow from different sets of rules. The possible sets of rules of money can vary greatly, and the resulting relationships between its users vary according to the nature of the rules of its creation. The nature of different
8 ibid, p 41

rules, and their differing results is the topic of what follows. But first we will note some of the universal characteristics of accounting of money.

So what is the nature of an accounting money system?

Money is simply accounting information on a balance sheet - numbers on paper, on a check, or in a computer. It has no value in and of itself. To become useful it has to be traded for some object or service. Money is the lubricant that makes it possible for people to exchange what they have to offer to the economy for what they need and want. Money takes care of the limits in barter, where people are limited to trading equal value at a single point in time. So we will talk about traders instead of consumers and producers, as producers and consumers are the same people. Money is a measure of who has contributed how much to the economy, and who has consumed how much from the economy. It is information that measures economic activity, just like inches and feet measure distance. It is executive information; giving its holder the right to execute (carry out) their desires and needs. Money gets its value solely from the faith and trust of members of the market that they can trade it for any good or service that they want or need, and that its value will be constant over time. (The latter assumption is often not met.) Since money is a measuring stick, not an object; it can be created at will, by whoever is allowed/authorized to do so. It can also be canceled at will. It is faith and trust on the part of community members that commitments will be kept, and that borrowed money will be repaid that enables the system to operate. A major advantage of using an accounting system for trade (over money based on some commodity or group of commodities) is that the money supply can be expanded and contracted at will to balance the need for money in trade. A second advantage is that the value of everything else is not dependent on changes and manipulation in the value of the reference commodity or commodities.

How does money work?

Money is created when a trader does not have sufficient money in their account, and buys goods or services from other traders. To complete the transaction, s/he makes a commitment to place goods or services in the marketplace of equal value in the future. In practice, the account of the trader who is buyer gets a negative entry, called a loan or commitment if their account does not have a large enough positive balance, creating money for the transaction. The trader who is seller gets a positive entry in their account. As the trader who is buyer, also a producer of their own products or services, makes sales or salaried income, and reduces their negative account balance to zero, the money is canceled; it no nonger exists.

Kinds of money
There are two ways that accounting money can be originated and managed, fiat money, and mutual money. The difference is in the way that the money supply is managed. In fiat money systems, the money supply is created and managed by a central authority. In mutual systems, money is created each time there is a transaction. The money supply is in effect managed by the users, as they conduct transactions. No central authority is necessary. This possibility will be discussed later. But for now we will be discussing fiat money systems, where the mediation of money creation is in the hands of a central authority, as in the dominant systems of today.

Fiat money
In fiat systems the money supply is created and managed by a central authority. Shortages or surpluses of money can be, and often are, created by the institutions authorized to manage its creation. Surpluses cause inflation (bubbles), and shortages cause deflation and contraction of the economy. In our case, the decision for how much money will be created is made by the central bank the Federal Reserve, with input from the Treasury Department, and to a lesser extent by local bankers. The major motivation for money creation is profit for the banking sector, and therefore maximum income with minimum risk for this sector. We will compare this motivation later with other possibilities. In our present money system, for traders, Main Street players, money is a negative sum game. The reason for this lies in the way that money is currently created with interest. The process works as follows. The bank takes temporary ownership of collateral (for instance a car) put up for the loan. As noted above, as I repay the principal, the money is canceled. It is for this reason that money is thought of as a zero sum game. However, in the present accounting system there is also interest, which is added as a debt to the bank, but is not created as new money. As a result, at the end of a year (or any period of time) there isn't enough money available in the Main Street productive sector to pay all of the debt accrued as of that time, as more money is due to the banking sector (principal plus interest) than was created (just the principal). This feature makes our money system into a negative sum game for members of the productive sector (Main Street traders) whereas it is a positive sum game for the banking and financial industries, and to a lesser extent, for savers. One result of the negative sum nature of money on Main Street is that it makes for an atmosphere of scarcity. No matter how hard they try, in the long term, some traders in the productive sector always have to lose, even when everyone manages their affairs carefully. This is an example of the structural violence mentioned earlier. Note that also, the way our system is structured, for the service of creating money out of nothing, the bank gets temporary ownership of the collateral until such time as the principal and interest is paid. This setup gives the banking industry the power and leverage to take assets pledged, if principal and interest are not both paid, enforcing the negative sum game on its users, the Main Street productive sector.

Defining money as interest bearing, as our system does, is both a practical and a moral issue.

Interest - the practical issue

There are two major drivers of economic instability caused by the inclusion of interest in a money system; growth, and short term thinking. Growth: To pay interest as time goes on, one or more of the following three things has to happen.

The economy has to grow continuously at an exponential rate The money has to get worth less so that more money is traded for the same amount of goods and services (which we call inflation or an economic bubble) or A portion of members of Main Street, the productive sector, have to go bankrupt, ceding their assets to the banking sector.

This set of rules in the present money creation process systematically moves money and wealth from Main Street to the banking/investment sector and ultimately to the central bankers. Boom bust cycles are a result of the interest mechanism as will be explained later. The scarcity factor becomes most evident in the bust segment of the cycle. Forward thinking: The second driver of economic instability that results from the use of interest in the money system, has to do with forward thinking. In classical economics we find the concept of discounting the future. Discounting the future is based on the fact that income received in the future is worth less than income received now, because current income, when deposited at interest without risk, can grow before the date of receipt of the future income. It follows that any investment must make more than the guaranteed interest rate (and an amount to account for risk) or it is a potential loss. What is not usually inferred is that the discounting function promotes short term thinking. It is better to get your reward now, rather than wait, as the reward will not be worth as much if received in the future. Thus, short term thinking in the corporate realm is driven by the function of interest in the money system. Money that has a negative interest rate (called demurrage by economists) creates the opposite effect. It is better to get rid of such money and invest it in something that will loose less than the demurrage rate, maintain its value, or even gain in value over the long term, than hold on to the money and have it loose its value. So long term thinking and investing is reinforced. The cyclical effect of interest bearing money caused by hoarding during economic downturns, resulting in money scarcity, and money surplus in boom times, overheating the economy, are also negated by the use of demurrage money. We noted above that scarcity on Main Street is a result of the way interest operates. Another result of scarcity is that it promotes greed the idea that I must take care of me and mine even at the expense of others. A complementary result is that community is discouraged.

The Casino
Our money system works in many ways like a casino. The central bankers are analogous to the House, and local bankers are analogous to contract table operators. So while local bankers feel justified that they are providing a legitimate service and also feel that they are taking risks in creating money, they are part of a pyramid scheme that systematically moves money, and the assets pledged for its creation from the productive sector to the banking and finance industry, and ultimately to the central bankers. There is a common misconception that the Federal Government creates money. This is not so. The government is in the same position as any other trader vis a vis the money industry. The Federal Government does not create money. If it needs money, it gets it through taxes, charges for services, or by borrowing it from the Federal Reserve, which creates it out of nothing, charging the government, and the taxpayers who fund the government, interest for the privilege. In our political economy, the Federal Reserve Bank (our central bank) has been given unlimited power to mediate the creation of money. Commercial banks, credit unions and savings and loans have limited power to mediate its creation based on how much money they have invested in the Federal Reserve. The Fed gets its power to mediate money creation through an exclusive monopoly charter granted by the Federal Government through the Federal Reserve Act of 1913. For the record, while the Federal Reserve Bank is chartered by the Federal Government, it is a private institution. While its board is appointed by the government, it consists of big players in the major banks, and economists who share their values. Its employees and other expenses are paid by money it creates, not by taxes. The Federal Reserve Act is the basic set of rules that governs how our money works. It is our "agreement, within a community, to use something as a medium of exchange. 9 Under these rules, a local banker has to have a 5 to 10 % reserve in money invested in the central bank to make a loan. The rest of it he can create out of nothing 10. (The 5 to 10 % invested in the central bank, called high power money, is created by the central bank out of nothing.) So all of the money created for my purchase was created out of nothing by the banking system. (When I asked a banker about this once, he allowed, Yea, we are pretty highly leveraged. Leverage is a euphemism for creating money out of nothing.) Banks give their customers a smaller rate of interest on their deposits. This practice buys members of the productive sector into the system, making the practice of charging and paying interest seem legitimate to everyone. But it is all a Ponzi scheme operated by the banking industry for the ultimate benefit of the central bankers.

Results of operation of the present system

Margrit Kennedy has analyzed the disparity in paying and receiving interest in the German economy. She divides the economy into ten equal sized groups in order of income. The
9 Bernard Lietaer, The Future of Money, Century, London, 2001, p 41 10 With a 10% reserve requirement, if a bank gets a $100 deposit and sends $10 to the central bank as a reserve, it can legally lend $90. When the borrower spends this $90, the receiving bank sets aside $9 and lends $81. The initial $100 deposit leads to $900 in new money, if banks lend all of the money they are legally allowed to lend. Quoted from http://www.lewrockwell.com/north/north769.html

highest tenth receives more than twice the interest that it pays. The second tenth pays about an equal amount as it receives. All the other lower groups pay at a minimum twice what they receive in interest, with the lowest half paying at least 5 times as much as they receive.11 Kennedy observes that the situation is even more accentuated here in the US. As noted above, one practical result of the interest mechanism is that the economy must grow faster and faster forever, which is simply not possible. This is why economists always talk about the necessity for continual economic growth. Continual exponential economic growth is required by the interest mechanism. It is not necessary with a properly designed money system. In the early days of an economy, growth is natural. However as an economy matures, and the limits of growth are felt, as is now the case with peak oil, and the knowledge that we have limited supplies of water and other resources, the system becomes unsustainable. Related to growth is the fact that in order for the money supply to grow, ever increasing amounts of natural resources turned into commodities have to be monetized so that there are assets to back up the money created. This requires ever increased privatization and monitization of resources (i.e. borrowing against their value to create money) and works against holding resources in common for the good of all. The concept of private property, with unlimited power over that property, was necessary to make this monetization of natural resources possible. In other words, replacement of the commons by private ownership was necessary for the present money system to work. Interest bearing money systems are not sustainable. Bulk outstanding interest payable grows exponentially, whether or not the economy grows. Thus, as time goes on, interest payments grow to be a larger and larger part of the economy. As this process continues, members of the productive sector spend more and more of their income paying interest, and less and less on themselves. Somewhere along this line, the system breaks down. This phenomenon was important in the breakdown of the Persian, the Greek, and the Roman Empires 12 We are rapidly approaching the same limit in our economic system.

Interest - the moral issue

Then there is the moral issue with interest. As noted earlier, our money system constitutes a form of structural violence.13 A small part of interest paid goes to pay for legitimate expenses in the operation of the banking system. The rest is what is called unearned income, a tax paid by the borrower and received by the bank owners. To be blunt, much of the income received by the financial industry from the money system is functionally identical to the
11 Margrit Kennedy Why Do We Need Monetary Innovation? at http://issuu.com/margritkennedy/docs/pre_moneypres 12When ancient Egypt fell, only 4 percent of the population held all the wealth. When the Babylonian civilization collapsed, only 3 percent of the people owned all the wealth. When ancient Persia was destroyed, 2 percent of the people owned all the wealth. When ancient Greece sank into ruin, only 0.5 percent of the people held all the wealth. When the Roman Empire collapsed into ruin, only about two thousand people owned all the wealth in the known civilized world, and this debacle ushered in the period of history known as the Dark Ages. Jaikaran, Jacques M.D., Debt Virus, Glenbridge Publishing, Ltd., Lakewood CO., ISBN # 0-944435-13-0, page 24

13 See Appendix A

unearned income received by welfare recipients. I know that bankers (and those who live on interest payments) will rankle at being called welfare queens (or kings), however the major difference between recipients of unearned income and government welfare recipients is that the former group has plush offices and homes, receives a much greater payment, and perceive themselves to be respectable members of the community, who are providing a real service, unlike their perception of government welfare recipients. The problem is that in providing their services, the financial industry, just like a casino, is skimming the productivity of their clients, in this case the whole economy. And everyone is forced to be a part of their scam, not just those that choose to go to a regular casino. What we need to do at this point is consider what kind of welfare system we want to have, and invent it deliberately, instead of living with the inequitable system that we now have. If the payments that are currently transferred to the financial sector as interest, over and above conservative reasonable costs of recording and managing transactions, were reallocated to the people who produced the goods and services that were traded for that money, it would release an immense amount of energy and productivity in our economy. Depressions and recessions would be a thing of the past. The scarcity element in our money system would be removed, the greed motivation resulting from the system structure would be relieved, and other motivations, such as curiosity and community would be allowed to blossom. I say begin, as there is another major cause that leads to scarcity and greed. This is the fact that business corporations (including the banks) have a vertical pyramidal structure that is the same as a political dictatorship. The leadership in the rest of this oligarchy are welfare kings and queens in much the same way that members of the financial community are. Maintaining a political democracy in the midst of private economic dictatorships is a recipe for loosing the democratic nature of the political democracy. As money buys power in the halls of the political system, the political system also takes on the attributes of dictatorship; the dictatorship of those who control money.

Who really creates money?

But lets go back. Remember the definition of money; an agreement within a community to use something as a means of exchange? In all cases, it is the trust of traders and their resulting willingness to use the agreed upon money that gives it its value, not the bank or financial manipulator. In our economy, the banks and financiers have made it seem that they are necessary for the creation and management of money. In fact, they only mediate and control the process. It is the traders on Main Street who have committed to producing value that guarantee the system. This fact becomes especially obvious viewing the savings and loan bailout, and the recent bank bailouts. If the central bankers (the house in the casino metaphor) make loans or investments that end up being not payable, they claim they are too big to fail. They get bailed out. But who bails them out? The taxpayers. So it is ultimately us taxpayers, the traders on Main Street, that ultimately guarantee the operation of the money system by our bailouts as well as our faith in the system.

Ultimately borrowers (traders) are the functional creators of money, rather than the banks, and ultimately the market is the guarantor of those funds, not the banking system. Therefore the rightful holders of the collateral pledged for loans, and decision makers of who should receive loans, are the members of the the market, not the banking system.

Economic cycles
As noted above, interest is also the driver of our economic cycles. In the early stages of the economic cycle, the economy and the money supply both expand. During expansion sufficient money is created to cover the increasing interest debt due. However at some point, the exponential growth that is necessary to maintain system integrity, to provide enough money to pay the ever increasing interest load, is unsustainable. At this point several things happen. The number of bankruptcies increases, as increasing numbers of traders are unable to meet their payments. Those who have money hoard it, rather than investing it in a shaky economy, reducing the amount of money in circulation, so that there is a lack of money available to allow the economy to operate. Under these circumstances, the government is put in the position of having to become borrower of last resort, borrowing money into the economy, as is currently happening, to prevent the collapse of the monetary system. It must be understood that balancing the Federal budget over the long term with our present money system is simply not feasible. The only way to balance the Federal budget over the long term is to change the rules by which money is created. Another implication of the present system is its effect on community. As noted above, the payment of interest creates an economy of scarcity. Money is always scarce in the productive sector of the economy as a result of the continual siphoning off of money to the financial sector. Everyone on Main Street knows in their gut that money is scarce, and that if they aren't lucky, or gain advantage in their dealings with others, they will be the one who ends up having to declare bankruptcy, and lose everything they have. This structural violence breaks down community by making a competitive atmosphere in which everyone is competing to get scarce money with which to pay off their loans with interest. We must ask, in a democracy, is it appropriate for the money system, the basic mechanism for trade, to be a cash cow for a private group, or should the money system be a not-for-profit service for its users? Please note that the distinction is not whether money should be controled by the government or private institution(s), but whether it is a not-for-profit, or for profit operation.

Alternatives:
The above analysis brings up questions that need thought.

Who should authorize the creation of money? What changes in the money creation rules might make money consistent with democratic and sustainable values? Specifically:

Again, should money creation be a not-for-profit service to the market or a profit center for a subgroup of the population? Should money get worth more over time? Less over time? What should be our relationship with property, the earth and its natural resources?

The problem at hand is succinctly described by Bernard Lietaer in the following piece at one of his web sites. 14 Aligning Moral and Economic Incentives There are three main ways to induce nonspontaneous behavior patterns: moral pressure, coercion, and economic incentives. For example, recycling glass bottles can be promoted by education, by regulations, or by incorporating a refundable deposit in the purchase price. A combination of all three incentives is obviously the most effective strategy. When these incentives conflict, problems will arise. For instance, when there is an economic incentive to do something a regulation or law prohibits, we need costly and permanent enforcement systems. Even in the presence of such enforcement systems we expect . . . imaginative forms of cheating to occur. More evident are cases where moral pressure is supposed to overrule economic interests. . . . However, this moral pressure is diametrically opposed to the concept of receiving interest on money, which provides a built-in incentive to hoard currency. Whenever there are such structural contradictions many people are unable to afford, or simply do not care enough, to follow the moral advice. It is possible, however, to design a coherent and operational currency system so that this apparent structural contradiction disappears. In other words, by questioning some traditional implicit assumptions, we can realign the moral and economic incentives so that they are in harmony. (Emphasis added) The issue at hand is to design a kind of money that is stable over time, and is consistent in its values with the values of democracy and sustainability. With design criteria in hand, we can consider experiments to transition in that direction.

Proposed characteristics of a sustainable and just monetary system

Locally based. Communities are like businesses, individuals, and national governments, in that they have to have balanced budgets in order to remain healthy. The disappearance of small towns and communities in America is a good example of

14 http://www.transaction.net/money/cc/cc01.html#align

this issue. More money goes out of most small communities than comes in. This leads to their demise, and the sale of their assets to ever larger economic units. Each community needs to maintain a balance of payments with other communities, just like a business or person. Local currency allows communities to measure and control their imports and exports and maintain their balance of payments.

Embodies mutual credit, rather than managed money creation. In a mutual credit system, money is created each time there is a financial transaction, with a debit entry in the buyer's account, and a credit in the seller's account. There is no need for central control of the money supply, as the money supply is self regulated at the local level by trades being made. Self regulation is much more immune to manipulation than central control, and automatically reflects the money supply needs of users. Community members are much more effective in deciding what their needs are, and how to maintain solvency and economic balance, than are larger economic entities. Promotes maintenance of balances close to zero, not always keeping a positive balance. The principle of assuring that all budgets stay balanced (all account balances remain near zero, or return to zero) must be built into the structure of any monetary system, if it hopes to be stable over time. Both negative and positive balances are necessary to maintain the zero sum game in a mutual money system. Democratically controlled, using the participatory budgeting process for large community improvements.15 If a community using such a system sees that it would benefit from a project that would require a relatively large sum of money, it can commit itself as a community to one or a group of its members, or its government, giving them a line of credit (permission to temporarily operate with a large negative balance) to complete a project. This is what banks do now in making loans. Under a democratic system, the decision making simply moves from the bank to the community, and there is no interest liability. Communities will have to develop criteria for deciding to whom and in what amounts to allow negative balances (loans) Non profit. So that money can be exclusively a service, it is imperative that the organizations that manage its creation are not-for-profit. When money creation becomes a for profit operation, it introduces the greed factor in its operation to maximize profit for its owners and operators. This sets the tone for all transactions using it to do the same. Independent organization separate from government. Having an independent entity manage the money creation process puts the government business on an equal playing field with other businesses and individuals. It requires government, like any other business or person, to go to the community for authorization for deficit spending. It may be appropriate for government to have limited ability to create money to deal with disasters.

15 See www.participatorybudgeting.org

Includes demurrage. It may be advantageous to have small fees on negative as well as positive balances. Demurrage removes the store of value criterion from the definition of money and prevents the drive to accumulate money. It forces traders to want to get rid of money and therefore speeds up the velocity of money transactions. It is counter cyclical in that it removes the motivation to hoard money. Includes some mechanism for payment of expenses of money system operation. Demurrage can cover system operation. Transaction fees have been shown to slow down the rate of trading.16 A monthly charge for banking services is another alternative, however it does not give the positive benefits of demurrage. Any surpluses from the money operation are available to the community for distribution, making every member of the community a philanthropist. To be stable, money must have a value related to something. Commodity based money systems have intrinsic value built into their commodity base, but have the limitation that the money outstanding is related to the supply of commodities, not the need for economic exchange. The natural base for money value is the hour of work, as willingness to work and trade that work for the work of others is the basic engine of commerce17. The hour of work is therefore a natural measure of economic value, immune to inflation and deflation, and universal in value the world over. Its only limit in quantity is the time its participants share their services with others, which is the natural driver of economic exchange. Some allowance may need to be made for undesirable, dangerous, or skilled work. Betting on the exchange value between different currencies for personal gain adds nothing of social value, is immoral and must be made illegal. It is for good reason that Jesus threw out the money changers and that for 18 centuries the Catholic Church decried the payment of interest. The Muslim faith still maintains this practice. Having all currencies based on the same criterion, an hour of work, simplifies transactions between communities and gives equal value to all people for their productive work. In so doing it obviates the need and utility of exchange rates, and the inequalities that they can promote. All bank balances are public record. The bank balance of anyone buying needs to be open knowledge to the seller, who can decide not to sell to someone who is not pulling their weight; buying more than they are selling (borrowing from the people with whom they trade by building up a large negative balance). With electronic payment systems, stops can be put on payments if balances get too negative, just as occurs now with credit and debit cards. There will be a need for regional, national and international clearing houses to manage transactions between communities. The use of the same monetary unit in all

16 Irving Fisher, Stamp Scrip, Adelphi, New York,1933 17 Robert Blain, Toward World Cooperative Community, With a Proposal for a World Monetary System, Southern Illinois University at Edwardsville, Edwardsville, IL, 1979, out of print

jurisdictions makes possible transactions between all systems at par.

The proper role of government is to set the definition and operational rules of the official money system used to pay taxes. The proper place for money creation is at the local level. Until mutual trust in the larger system is established, it may be necessary to use commodity based money for trade between communities which are not well known to each other. Any new system needs to be prototyped on a small scale, and operated at a local level. Growth can occur by multiplication and connection, rather than by biggerization. This makes for a more robust and less fragile money system. No part of the system should be allowed to grow to a point where it is considered too big to fail. New patterns will be required to deal with surpluses of productivity and investment. Electronic payment systems utilizing the above criteria can be set up and used in parallel with the present money system. We need to acknowledge that the earth's resources are a legacy that we all have an interest in, rather than commodities that accrue to the individuals or groups that can gain the rights to control and exploit them. This will require rethinking ownership patterns that have been accepted since the beginning of the industrial era.

Some groups, including the American Monetary Institute, propose that the Government put 'credit' money into circulation. It needs to be understood that this kind of money doesn't come for free. It is a one time tax on the market by the institution which issues it. An additional disadvantage of such a system is that it perpetuates central control and management of the money supply, rather than having the money supply self regulate, as occurs in a mutual credit system. On the other hand it may be appropriate for the government to have its own bank, to deal with catastrophic events, for instance, as noted above. Use of this bank must be limited so that it is not used for imperial projects.

Transition
It is easy to say that the vision described here is all well and good, but it is pie in the sky not attainable from where we are now. This brings up the issue of transition. Transitioning to an economic system based on curiosity and community rather than greed will be filled with problems. One of the most pernicious will be the resistance on the part of those who benefit the most from the status quo to loosing their preferred status. Also knowledge of how things currently work may make those who have been on the short end of the stick very angry. Those who will loose power need to look at the alternatives for their children and

grandchildren. Helping them recognize the unsustainable nature of the present money system can help convince them that change is necessary, and that to bequeath the present system to their children and grandchildren is to bequeath them chaos. Either we can move toward a fair and just money and economic system, or we will move toward economic and social breakdown and fascism. Another cohort that will be resistant is that group of middle and upper class people who have made investments and are expecting to have this capital as income for their retirement, and for passing on to their descendants. Fear of not having this income, and justification of the system that they used to get their nest egg makes them resistant to change. Mechanisms to deal with this issue will have to be worked into any transition proposal. Proposals for those who have just accumulated funds necessary for their retirement can differ from proposals for those who can never reasonably spend themselves what they have accumulated. While plans to deal with personal accumulation of wealth must meet the value criteria of the new economy, they must also respect those who have gained from the present system. These people are human too, even though they have been involved in the structural violence of the present system. Everyone, including those on the short end of the stick, needs to recognize the basic humanity of everyone else, and try to move creatively from where we are to a place that is sustainable and just for us all. As we remove the possibility of building a nest egg with interest on money, we have to develop new ways to invest, and to support those who need support, that build our communities and ecosystems, rather than destroying them. With a money system that includes demurrage, such investments won't be fighting the short term profit motive that is a major motivator in the present negative sum money economy. To the extent possible, decisions on such issues as this should be made at the local level. However in the interest of justice, some rules and regulations are appropriate at higher levels. Society has many issues that have not been dealt with well in the present economy based on greed. Freeing the economy from the necessity for greed and the resulting war economy will open many new possibilities for curiosity and community toward fellow humans, toward our earth and its many forms of life, and toward the cosmos. The greening of the earth will become a natural outcome, as respect for people and the earth become major motivators, and long term thinking is reinforced. There will definitely need to be programs for retraining those whose industries are phased out. A guaranteed income utilizing the dividend currently being paid as interest is one mechanism to help smooth the transition. Reallocation of funds currently spent on war is also a major potential source of money for social programs. The obstacles to transition are high, but the stakes are immense. Do we want to follow the model of the Roman empire which led to the dark ages, or do we want to transition to a society and economy that is sustainable and that respects everyone each with their own cares and gifts to share?

Further Resources
What is said here only scratches the surface of what needs to be done. Many organizations and people are already out there working on the transition. A few that come to the author's mind (in no particular order of importance):

The Natural Economic Order by Silvio Gesell at http://www.utopie.it/pubblicazioni/gesell.htm Transition towns www.transitiontowns.org/ Participatory budgeting www.participatorybudgeting.org Bernard Lietaer The Future of Money, Random House, London, 2001, Different ways to organize money at www.transaction.net/ papers on the current crisis, www.lietaer.com, http://www.terratrc.org/PDF/Terra_WhitePaper_2.27.04.pdf, Margrit Kennedy http://www.margritkennedy.de/index.php?lang=EN Edgar Cahn and Jonathan Rowe, Time Dollars, Rodale Press, Emmaus, PA http://www.timebanks.org/ David Korten, Agenda for a New Economy, Barrett-Koehler, 2010, http://livingeconomiesforum.org/ Robert Blain Hour money http://www.hourmoney.org/ and http://www.siue.edu/~rblain/index.htm Brian Milani http://www.greeneconomics.net/ Yes Magazine www.yesmagazine.org/ the Green Party www.gp.org/ Ron Paul - Campaign for Liberty http://www.campaignforliberty.com/ (With the caveat that Libertarians focus on rights, while ignoring the responsibility toward one's fellows that comes with freedom.) Transpartisan Alliance www.transpartisan.net/ New Economy Network http://www.neweconomynetwork.org/ Many single issue groups and organizations A number of web based news organizations that publish news that is not carried by the major networks. And now the Occupy Wall Street movement http://occupywallst.org/ Add your own favorites to this list

Caveat
As author of this piece, I must acknowledge that I benefit from this system, as well as paying into it, though I have paid in more than I have received.

Appendix A
Margaret Mansfield describes structural violence as follows: Structural violence occurs when physical and psychic harm results from systemic policies that don't directly rely on overt force.18 Mansfield lists four characteristics of this form of violence: 1. Structural violence is hard to recognize. It is embedded in institutions that are considered normal. 2. Structural violence is short sighted. It damages everyone, slave holder as well as slave. 3. Structural violence is self reinforcing. It creates vicious cycles such as the cycle of ever increasing disparity of poverty of the many and affluence of the few. 4. Structural violence promotes scapegoating. Labeling, from welfare queens to corporate fat cats deflects attention away from policy and its administration. (The author recognizes that he has engaged in the fourth activity in this paper. It was felt that to name the problem was of greater importance than the possibility of labeling taking away from continued discussion.) This study is a work in progress. Comments are welcome. The author can be reached at pkrumm@rhelectric.net.

18 Mansfield, Margaret, Structural Violence and Friends Testimonies: Simplicity is not Enough, in Seeds of Violence, Seeds of Hope. Friends Testimonies and Economics, 14 New Jersey Ave, Hainsport NJ.