the plan for the future
May 28, 2010 - December 20, 2012
Author: Bart klein Ikink
The importance for Natural Money
The Social Trade Organisation (formerly Strohalm Foundation) devises theories about money and experiments with alternative forms of money to improve the living conditions of people. Their best book is Poor Because of Money, written by Henk van Arkel and Camilo Ramada. The book was originally published in Dutch and was named Arm door Geld. It is a quest for a better form of money that serves not only the rich but everybody. The idea that a better future is possible never left me.
Poor Because of Money became the starting point for the theory of the Natural Financial System. During extensive discussions on the Dutch message board for investors IEX.nl between 2001 and 2008, a number of shortcomings in theories of Strohalm were detected and resolved, resulting in a monetary system that is more efficient than the current usury financial system.
Poor Because of Money is the result of the thinking and experimenting of the Strohalm Foundation. This document is an abstract of the book. The italic texts are additions based on other insights and recent developments. The book Poor Because of Money already contains many of the elements of Natural Money, and no other book has been more important for its development. Another book of the Strohalm Foundation is Money and its Alternatives written by Henk van Arkel and Guus Peterse.
Our world is without destiny
In a speech the Indian chief Seattle asked himself: "What sort of dreams does the white man speak about to his children during the long winter evenings?" His speech shows that our society has become poor in a spiritual sense. Money dominates our lives but experiments have shown that another world is possible.
In wealthy countries the monetary system contributes to dynamics, technological development and wealth. In many poor countries it leads to poverty and stagnation in development. Increased poverty and escalating numbers of refugees are the social cost of business expansion and stock market values.
Money in its present form is anonymous, which has destructive consequences for people, communities and entire countries. The victims of anonymous money exist among the homeless in the big cities and the child soldiers in Africa. This is a choice. The monetary system we have selected determines the outcome. When money can move through time and space without obstruction, everybody ends up competing on a global scale.
Alternatives are possible
During the crisis of the thirties money with a holding tax was introduced in Wörgl, Austria. In the middle of the crisis the local economy of Wörgl recovered because money circulated freely and neither businesses nor their clients had been subjected to interest charges. Many states and cities in the United States wanted to copy this idea. Irving Fischer, who at that time was the most important American economist, enthusiastically promoted it.
At a certain point in time President Roosevelt considered changing the monetary system in favour of a money with a holding fee. President Roosevelt consulted the central bank managers. They answered: "Presumably it will work but keep in mind that it will probably create other unthinkable social issues". The unthinkable social issues were among others, a more even distribution of wealth and the end of centralised government power. President Roosevelt was afraid of such a revolutionary change.
People take their destiny in their own hands
In many places people take initiatives to escape from poverty by inventing new ways of trading and new forms of money. Those initiatives are taken because the current monetary system does not serve the needs of many people. Strohalm helps with a number of those initiatives. Many communities worldwide have started mutual credit systems to facilitate mutual exchange between each other.
One model is the Local Exchange Trading System or LETS. Originating from Canada in 1982, there are LETS groups active in many countries. LETS uses a mutual credit accounting system, in which a debit from one account (the person making the payment) is always a credit to another account. The simplicity of implementing and maintaining makes LETS very popular, but in the long term LETS groups have tended to stabilise at an average of about 150 members or they declined in size to become a small barter club.
In Switzerland and in South America larger scale networks have been created, in which local businesses and consumers cooperate. In the Netherlands some local governments issue alternative currencies. In many developing nations micro credit institutions try to give poor people, that would otherwise be the victim of loan sharks, access to cheaper loans.
Farmers without land
In the first chapter the writer shares his experiences during a trip to Brazil where farmers without land occupied unused land of rich landowners:
The writer then talks about his work for Strohalm:
The farmers without land are not the only people who decided to take matters into their own hands. There are thousands of large and small-scaled initiatives aiming to get an economy of solidarity going. Often these initiatives make use of each other, but a good structure is still absent. Strohalm is working on the missing link. In South America people are willing and capable to organise a network. They have thousands of cooperative businesses, more than a million people in exchange systems and a micro credit program exists in every town.
Experiments to reinvent the economy are present at all levels, supported by local governments, social movements, universities, church groups, consumer groups, savings groups, credit unions and neighbourhood committees. In South America many people know how human misery is caused by interest payments and a monetary system that works badly.
The book Poor Because of Money is about enthusiasm and hope, the hope that a solution for the problem of poverty is in sight. The people of Strohalm wish to share this hope and enthusiasm with others. This hope is based on the following facts:
- There is a strong link between poverty and money.
- In history there have been other methods of exchanging money.
- The concept of money is changing.
- Consumers and small business owners can benefit the most from a change.
- The present situation in South America is a fertile breeding ground for new ideas.
- In South America many people feel, based on experience, that the present monetary system blocks their development.
- In South America there are tens of thousands small cooperative businesses, hundreds of thousands Trueque partners and countless consumer groups.
Mankind lives by dreams
What kind of future do we wish to give our children?
New points of view are developing and many people are working hard trying to make these points of view a reality. The idea that it might be possible to change the monetary system and that we can contribute to that change appears to be unrealistic. Closer inspection reveals a number of cracks in the structure of the modern monetary system. Mervin King, a former vice president of the Bank of England predicted that the current monetary system will disappear in the near future [+].
In a speech around 1850 the Indian Chief Seattle asked himself: "What sort of dreams does the white man speak about to his children during the long winter evenings?" This is something to think about. When it comes to dreams, our affluent world has become rather poor. Do we talk to our children about the future as something wonderful? Or do we talk about the future in terms of careers and money? Do we think that excesses and miserable situations are normal? Do we think that it is normal for children to live on streets and garbage dumps? It is important to have dreams about a better future.
A hopeful future
There are a number of examples of how people in poor countries who, with the aid of a savings or a barter system, have managed to free themselves from their poverty and have created their own opportunities. During the next twenty years the monetary system will totally change, and a situation that will offer opportunities to all the poor people will develop. In order to take advantage of these opportunities, it is important to make the necessary preparations.
Systematic poverty because of the monetary system
A monetary system with built-in poverty
Little attention is given to the influence of the monetary system on poverty as this idea is more abstract than the idea that poverty is a result of lack of education, natural disasters or wars. The monetary system is not the only source of poverty but the present monetary system ensures that hundreds of millions of people unnecessarily end up in a hopeless situation. The debt crisis in South America during the eighties subjected an entire generation to economic hardship. For millions the perspective to a better life was destroyed.
IMF programmes have caused capital to evaporate and have left populations in a state of shock. Interest on money plays an important in this process. Because of interest the rich continue to be subsidised by the poor. Interest is always paid by those who are short of money and need to borrow from people who have money to spare and are willing to lend it.
A monetary system with built-in growth
Interest is the driving force behind the creation of money. A substantial amount of this money is invested in new methods of production, which leads to more production, more consumption and additional profits, in short, economic growth. The result is an accelerated development of wealth, investments, production growth, consumption growth and a further concentration of wealth. In this cycle, nature, the environment and mankind are more and more exploited to the benefit of the rich.
The wealthy, willing to lend their money, demand interest. The borrower must pay this interest in addition to the amount borrowed. Thus people who borrow money end up paying more in return than originally borrowed. The flow of money from the poor to the rich is instrumental in the debt crisis experienced by many countries. Despite the payments of many billions on interest, the debt of those countries has steadily grown.
Usually loans exist of new money. A characteristic of the present monetary system is that banks are capable of creating money out of nothing in the form of loans. Although the loan is created out of thin air, interest on these loans must still be paid. The circulation of new money does not only result in an increased flow of interest from the poor to the rich, it is also the cause of a spiral of misery.
Since more money than originally borrowed has to be paid back, a shortage of money will appear. More money needs to be created to fill the gap. That money is also subject to interest so the shortage increases. So more money needs to be created. On the opposite side of the increase in debt is the increase of wealth. All the money paid in interest and all other profits, stock market profits, profits in real estate and profits realised in the speculation in natural resources end up in the hands of a relatively small group of wealthy financiers and institutions.
Economic development offers us many good things in life, such as an easier life style, comfort, travel possibilities and cultural experiences. But large groups of people are subjected to misery. The growth in economic activities also has adverse consequences for nature and our environment and the climate. The poor are hit the hardest. In poor countries deserts grow in size, fertile soil is washed away and seed either dries out or rots. Developing countries are the hardest hit by climate change.
The effects of the current monetary system
The kind of money we use these days has an influence on the choices we make. It also limits our options. Many things could be developed as a result of cooperation between people if the economy was organised in a different way. It is a pity that money has managed to change the economy into a battlefield of competition. On this battlefield the dark side of people rises to the surface.
Most people have now joined the dark side. Possibly the greatest obstacle to change is their belief that money is something that cannot be changed. This is a deep-rooted conviction. Academic circles have scarcely investigated alternatives to the present system. Authorities in poor countries have not seen any reason to implement real change in the monetary system.
Anonymous money and its effects
Money in its present form is anonymous, which has destructive consequences for people, communities and entire countries. The victims of anonymous money are among the homeless in the big cities and the child soldiers in Africa. The fact that money can be anonymous is a choice. The kind of monetary system we have selected determines the outcome. The writer then asks himself a number of questions:
In its present form money is a completely anonymous medium of exchange. When money can travel without obstruction then everybody ends up competing against everybody on a global scale. Most people think that this is inevitable. But that is not true. The current monetary system did not develop spontaneously. Choices lead to the present system. Through international conferences and decisions made by national authorities, the monetary system developed into its present form.
We have become used to the idea that currencies can be converted into other currencies without difficulty. This phenomenon is fairly new. Just 50 years ago, large currency transactions were rare. A permission had to be requested for the transaction and a good reason for the transaction had to be given. A bank could refuse a request if in their opinion no good reason is given for it, or on the grounds that the purchase of the currency from a particular country could have a negative influence on the strength of the currency of the country.
Lots of work has been done during the eighties and the nineties of the twentieth century to enable money to travel world wide as easily as possible. As a result, international monetary systems have become increasingly anonymous. Now, in one day, more money flows across the world than is needed to finance all purchases of consumer goods and services for an entire year. Most transactions are of a speculative nature and are not needed for economic reasons.
This has disastrous consequences. When it appears that a certain market is not going to perform well, money will flow out. Money has now managed to create nervous expectations. Manufacturing plants can run out of money, so supplies can no longer be purchased. Investments then come to a stop, wages can no longer be paid, people end up on the street and the local currency devalues. Goods for exchange disappear and within a few days an entire economy can collapse. The writer then mentions the example of his cousin who lives in Uruguay:
For years South Africa has allowed a limited exchange of its currency. Yet it was possible for the country to develop itself because of the restricted money flow to other financial centres. Most money had to stay in the country and make the best of it. That money was invested in sectors that according to the world money markets were not profitable enough, but made good sense for South Africa. In this way the country gained.
There is sufficient reason to develop different monetary systems. It is imperative to look for a system in which the average citizen does not unknowingly contribute to civil wars and child labour. In the information age an understandable monetary system should be feasible. It may be possible to allow money to circulate in a closed circuit where unidentified misery has no chance.
Poverty is advancing
Rich people can ignore problems as long as they remain at a distance. But refugees are arriving in increasing numbers. We are confronted with their problems. In the book Poor Because of Money an example is given:
Spain is no exception. Refugees from poor countries live in all affluent Western countries, illegal like pariahs. Without a regular income they are forced to work on the black market at best. They could also end up as criminals or prostitutes. The victims now appear in our own backyard and their problems are becoming increasingly difficult to ignore. In addition, more and more people travel from wealthy countries to destinations where they witness misery with their own eyes. Ignoring the misery of others is becoming more and more difficult. How much longer do we hide behind the idea we can do nothing?
How people start their own local economy
Dhikuties in Nepal
In many countries people without money have started their own local initiatives. Those people were fed up with depending on money that comes from elsewhere. They created their own savings and exchange systems. The little village of Dhule Gaunda is situated just outside Pokhara, the second largest city in Nepal. Twelve dhikuti's operate among the thousand inhabitants.
Dhikuti means storage box and a dhikuti is a local savings group. Each member in a dhikuti contributes about two thousand rupees per month. At the end of the month the box is handed over to one of the members to make investments in his or her own business. Within 25 months or so one of the groups had amassed the equivalent of 11,000 euro.
Each month someone comes into possession of an amount of money that he or she otherwise would not have been able to save. This money can be used for investments that can raise the standard of living in the community. The Dhikuti is an example of rotating savings and credit associations, or Roscas, that exist in many poor communities.
Banco Palmas: credit in Brazil
Fortaleza is a town with a few million residents in the North of Brazil. Five years earlier Conjunto Palmeira in Fortaleza was a shantytown like many others. Now Conjunto Palmiera has become a quarter where the people have managed to organise themselves rather well. They have built a sewage system and have improved the roads. They have planted trees and flowers.
The Banco Palmas has been pivotal to this improvement. The Banco Palmas is an organisation that operates its own monetary system in the quarter and arranges micro-credits in Brazilian currency. Most people do their utmost to repay their debts because they find it important to have help in case of an emergency. Thanks to the credit supplied by the Banco Palmas small enterprises in the neighbourhood benefited as well.
Being creative with guinea pigs
In the Lunahuana valley in Peru a revolving fund of guinea pigs was set up by a group of poor women. After they had attended a workshop about breeding guinea pigs one of them received a loan of six guinea pigs. She started breeding the guinea pigs and after enough offspring was produced, six guinea pigs of the same quality were passed on to the next woman.
While this practise continued, the first woman also maintained the breeding process. Throughout nearby villages several women have started with the breeding and trading of guinea pigs. It appears to be going well. After fifteen months all the women have guinea pigs for the purpose of breeding. Guinea pigs are an important part of the diet in Peru and therefore they represent a good way to earn money.
Local exchange trading systems
Many communities worldwide have started mutual credit systems to facilitate mutual exchange between each other. One model is the Local Exchange Trading System or LETS. Originating from Canada in 1982, there are LETS groups active in many countries. LETS uses a Mutual Credit accounting system, in which a debit from one account (the person making the payment) is always a credit to another account. The simplicity of implementing and maintaining makes LETS popular, but in the long term most systems stabilised at an average membership of about 150 people or declined in size to become a small barter club.
In many parts of the Third World, ancient traditional ways of exchanging goods and services are still in use. These methods often use a currency made from local items such as bamboo, wood, shells and beads, and follow rules which maintain the culture of the area. Some methods, such as in the Pacific, are quite advanced and cover long distances. These, like the Kula Ring of the islands within present-day Papua New Guinea, cover hundreds of miles and facilitate trading between distant and sometimes warring cultures.
In the Province of East New Britain in Papua New Guinea, the currency called Tabu can be used to pay local government taxes. The provincial government is also considering accepting the Tabu shell money for provincial taxes. In other areas, the traditional currency has been abandoned for the national currency, but the decline in traditional culture had a negative impact on society.
In 1997 the Asian Monetary Crisis had a devastating impact on rural economies throughout the region. While most communities were at a loss as to what to do, one community in northeastern Thailand decided to establish barter arrangements with each other. In 2000 the system was enhanced and officially launched.
Looking for an alternative
What history can teach us
Most people are convinced that the present monetary system is the only viable one. History however reveals a different picture. Presently new monetary systems are surfacing in many different areas. Strohalm is researching this, develops new ideas and organises cooperation with the purpose of facilitating a movement that will realise an economy of solidarity.
The Egyptian harvest bank
The historian Preisigke deciphered Egyptian hieroglyphics and he discovered that the papyrus scrolls contained directions for the administration of a banking system. Since the Nile River was unpredictable in the overflowing of her banks, harvests varied. Sometimes the harvest was abundant, sometimes there were lean years. That was why the Pharaohs built grain silos for the farmers to deposit their harvest.
When the grain was delivered, it was weighed. Its weight was then converted into a weight that represented a standard quality. The administrators of the silo then entered a credit representing that weight to the farmer. If the farmer already had a credit, it was added to the existing amount. Later the farmer could stop by and pick up some of his grain for food, or he could transfer an amount to the accounts of others. In this way he could purchase land, pay taxes and pay tradesmen. Grain ended up being used as money.
The grain storage facilities were not without costs. Because of the cost of keeping money, wealthy people preferred to spend it. Also farmers and craftsmen spent their money freely. The owner of money was not in a position to demand interest. It was easy for a young business owner to find people who were willing to finance them. Because people preferred to spend their money rather than saving it, the money contributed to a flourishing economy.
During the Great Depression money with a holding tax was introduced in Wörgl, Austria. In the middle of the crisis years the local economy of Wörgl recovered because money circulated freely and neither businesses nor their clients had been subjected to interest charges. Many states and cities in the United States wanted to copy this idea. Irving Fischer, who at that time was the most important American economist, enthusiastically promoted it.
Most experiments in the United States failed because the holding tax was too high. Often 1% or 2% per week was charged, while in Wörgl the charge was 1% per month. This undermined the confidence in the currencies and in the United States the money did not become a success like in Wörgl.
President Roosevelt considered changing the monetary system in favour of money with a holding fee. In this way wealthy users of the money would be charged for keeping money instead of poor people for needing money. Roosevelt consulted the central bank managers. They answered: "Presumably it will work but keep in mind that it will probably create other unthinkable social issues." President Roosevelt was afraid of such a revolutionary change.
Towards a new development strategy
For most poor countries increasing production to supply the world market is the present strategy for economic development, resulting in more competition, a sell-off of natural resources and lower wages. This strategy ignores the failing monetary system. It is not surprising that it does not work. New possibilities emerge if the monetary system becomes the cornerstone of a new development strategy. That would make possible a society that combines a reasonable standard of living with solidarity.
Strohalm, in cooperation with people all over the world, is looking into the possibilities that monetary systems can offer and how they can be reinforced. In this network there are for instance field experts and researchers from Venezuela, Chile, Brazil, Poland, Ireland, Thailand and Japan. Globally they try to support each other in order to make progress, step by step, in the search for a new form of money.
Poverty as a local crisis
When there is unemployment in a poor country, this means that there is something wrong with their society and the monetary system. Otherwise local manpower would be occupied with fixing local problems while making use of local possibilities. In reality there is insufficient circulation of money since the rich are hoarding it, or bringing it outside the country. In this way the poor are living in a local economic crisis.
Older people have experienced the crisis of the Great Depression. They may remember that factories had to close while there were plenty of people who were in need of their products. During those years the British economist J.M. Keynes rediscovered the importance of purchasing power. For manufacturers it only makes sense to manufacture and invest when the manufactured goods can be sold. People must need the product but they must also have the money to buy that product. In other words there has to be demand and purchasing power.
John Maynard Keynes advised governments to take on more debt. He thought that when the economy recovers, tax income would rise, and the government could pay back the initial expenses. Much of the stimulus ends up abroad so this does not always happen. Furthermore, compound interest causes the cost of stimulus to escalate into the future.
Much of the poverty in third world countries has a similar cause. In many communities supply and demand for goods as well as services are present, but there is a lack of money to do transactions. Third world countries often do not have the option to stimulate the economy as the money is often spent on imported goods, so the government receives very little taxes in return. When people no longer have money to pay each other for goods and services, mutual trade stops. Consequently poverty emerges because of a malfunctioning monetary system.
There is only money available for activities that can sustain the interest level of the world money markets. As poverty often comes with unemployment, poverty is often not a development problem but an organisational problem. The poor have every reason to work. A slum needs workers to build walls and roofs. Diggers are needed for sewage systems and streets. Although those skills for those jobs are often available, they are not used because there is no money to pay for wages. Since the money flows out of the country, people are not able to work for each other and will remain unemployed.
In the United States the unemployment rate is still high, while the interest level has been low for a number of years. So why does the low interest level not kick start the economy? There are a number of reasons. First of all, many people are already deeply in debt and are not able to add more debt. Furthermore most people pay a much higher interest level than the 1% offered by the FED to the banks. Finally, much of the stimulus generated by the low interest levels in the United States has been used to buy imported goods.
It is time to take a different approach. It is time to study examples of how people with the aid of local exchange systems are managing to escape from the spiral of misery caused by money.
The Argentinean Trueque exchange system
There are many examples where people have decided to take matters into their own hands and managed to create a solution solving the problem of the absence of purchasing power. One of the most striking examples is the Argentinean Trueque exchange system. The writer then gives a report of his visit to a conference in Buenos Aires:
The créditos are the official means of exchange in the Red del Trueque. The Trueque emerged a few years before in areas where people started a swap system and kept track in a document who owed what to whom. If A did something for B, B did something for C and C did something for A, then the mutual obligations were erased from the document. As less money was available, more people embraced the swap system. In this way they could even out their needs and talents without ending up at home unemployed.
But the administration was not very convenient. That is the reason why people in the Bernal area decided to stop the book keeping and to use printed pieces of paper with values of 1, 5, 10, and 20 credits. Everyone in this area who took part in the system did get a total of 50 créditos. Bartering became possible without the need to write it all down. Because people knew each other reasonably well, there was no fear of fraud at that time.
The idea caught on in other areas and within a short period of time all kinds of coloured pieces of paper in various sizes representing different values and printed in various neighbourhoods started to show up. Since many citizens in bordering communities started to accept each others créditos, it did not take very long before the créditos got mixed up.
Fraud became inevitable. People noticed that an unusual amount of créditos of a particular area started to appear. Instead of 50 créditos 500 had been handed out to the participants in that neighbourhood. This grew into large problem but a solution was found. Local committees decided to print new and difficult to falsify créditos notes. For many Argentineans the créditos filled an important gap. Pesos were scarce because the Argentinean Government had to pay huge foreign debts and wanted to keep the value of the peso equivalent to the American dollar. This caused interest levels on the Peso to remain high.
A few things have changed since the early years. The notes have become difficult to falsify. The original local notes do still circulate in many areas. Often both types are traded along each other. Everybody can decide for him or herself whether to trust and to accept the note offered as a payment by someone else. There have been problems but the Treque system was a great achievement. People helped each other and worked for each other using paper that had no value as such.
Micro finance: a new future with small amounts of money
The issuing of small loans, often too small in value for commercial banks, can be pivotal in the lives of poor women who need a little help to earn their own money. Micro finance offers a growing number of people the opportunity to become a more self-sufficient. An example illustrates this:
To make some money people must be able to sell something. First they need to buy raw materials: bamboo to make chairs, flower to bake cakes, textiles to sew clothing. But where do poor people find the money for their investment? In the poor countryside of the countries in the south they have to go to the loan shark. He demands a high interest rate, sometimes as much as 50% for one day.
Up to a few years ago there was no alternative but deal with the loan shark. Then the Grameen bank in Bangladesh was set up. The Grameen bank specialised in small loans. This became a huge success. Countless people were assisted and the payback percentage of 90 percent was high. Ordinary banks seldom reach that level. It turned out that people in disadvantaged situations were creative and determined to achieve something.
Nowadays there are many micro credit banks like the Grameen bank. Often the members manage the banks themselves. After an initial startup period during which the bank is capitalised with money from abroad, the bank becomes profitable and does not need any help. When the members earn money, the management of the bank asks them to save a part of the profits so that other members are able to borrow.
An important disadvantage of micro finance is that people who receive assistance through the micro credit system are often the most enterprising and active individuals. Their energy is directed towards the regular economy and this can become a drain on their own community. In the regular economy there is often not enough room to create spin-offs that help other community members. With a loan someone may be able to improve production methods, but that does not mean that other community members can afford to buy the products.
Strohalm is working on its own micro finance solution to keep the micro finance money in the local community as much as possible. Strohalm helped to invent the Bonus System that has the following main characteristics:
- National currency is used only to purchase non-locally produced materials.
- Loans in national currency at low interest rate or even at zero interest are given to local businesses and entrepreneurs in the form of micro-credit.
- Local currency vouchers, backed by national currency funds held in reserve, are paid to individuals and businesses that work on projects.
- Businesses that receive local currency vouchers can use them to repay their micro-credit loans or they can use them for payment in the local economy until they are received by someone who uses them to repay a loan in the Bonus System.
While the Bonus program achieves the same goals as a typical local development or micro finance program, it also realises several benefits or bonuses. These are:
- Increased economic benefits of a project for a community through an increased multiplier effect in the local economy.
- Increased range of opportunities and benefits from multiplying the economic benefits of a project over a longer time-frame than the original project.
- If the local currency vouchers are accepted widely, this gives the possibility of the micro-credit program to expand its credit portfolio substantially, without being dependent on external capital via loans at interest.
- Increased demand for local goods and services, which benefits local employment and incomes. Again, this effect will be durable if a sufficient level of acceptance of the new local currency voucher has been achieved.
- Increased economic activity, local production and broader circulation of project funds.
- Increased employment and income-generating activity beyond the life span of the project.
- Increased sense of economic solidarity within a community.
- Increased length of time the national currency remains within a community.
Getting rid of the money that spreads misery
The successes of the local exchange and savings systems indicate that the current monetary system is not without problems. Everyone can participate in an exchange system such as Trueque. There is no barrier because it is not essential for an enterprise to make more profit than is needed to sustain the people working for it, since there is no need to pay interest. In the present monetary system any activity must make an extra profit to pay for the interest. Interest eliminates a large number of activities that could otherwise have employed people.
Interest promotes the production of low quality products and demands for higher production levels to make an operation profitable. The victims are often blamed for this as economists point out that their work was not efficient enough. The reality is that interest is an additional obstacle for people who already live in an economic environment that is in crisis. In poor countries interest rates are often high to keep the currency attractive. Because a lot of activities do not bring in enough money to cover interest charges, many workers remain unemployed.
Why do governments accept interest charges that make it impossible for many to earn money? Most economists and governments think that interest is necessary in order to put money into circulation. Those in possession of money will not lend out their money if they receive no interest. On the one hand interest creates unemployment, while on the other hand interest skims off gains. This accelerates the process that makes the rich become richer, often at the expense of the poor.
This is a reason for Strohalm to start looking for a kind of money that can function without interest or with low interest rates. Governments appear to be trapped in this monetary system when they try to address the problems of the poor. They have the choice to either financially assist in the process of globalisation or face a financial crisis due to the outflow of money. The current monetary system creates a society where everyone has to compete for scarce money because interest sucks money out of the economy.
People in Thailand, Argentina, Nepal, Peru Mexico, Kenya, Amsterdam, Zierikzee and many other places are looking into different ways of organising mutual trades. Sometimes, slowly but certainly, these efforts produce noticeable results. In Argentina hundreds of thousands of people trade with money they have created themselves. There are tens of thousands of cooperative businesses in South America. The WIR in Switzerland has grown into an organisation with a turnover of three billion Swiss Francs, in which thousands of businesses practise mutual exchange.
Our theory on interest
Throughout history interest has pushed people into slavery. This still happens today. Interest on money is accepted as normal. Most people feel that interest charges are unavoidable and reasonable. But what would you think when your neighbours lend you a pound of butter and asked for two pounds in return?
Interest reflects inequality and it encourages dependency, because there is a good chance that when two pounds of butter must be returned, the borrower would quickly run out of butter again and will need to borrow butter for a second time.
Usury is everywhere
A few decades ago bankers were seen as gentlemen and not as usurers or extortionists. On a personal level this may be true. Many bankers are convinced of the necessity of banks for the economy. They understand little of the disastrous effects of interest charges.
After Nixon took the US dollar of the gold standard, many developing countries borrowed money because interest levels were lower than inflation. A few years later US dollar interest rates rose and many countries in South America ran into trouble. South America already has paid back its debt more than threefold, but because of interest charges total debt has increased.
The present monetary system uses the capacities of the most enterprising people to extort interest out of a society. They receive the loan and they are charged with interest. In general these people are able to find the money to pay the interest charges. In fact these enterprising individuals have found a way to make others pay for the interest charges.
The interest charges have been added to the prices of the products. On average products cost approximately 25% more because of interest charges. This has escaped catholic moral theologians when it was decided that interest charged to enterprises no longer needed to be considered as usury.
Many people think that payments of interest and received interest on savings cancel each other out. However most people borrow more than they can save, even when pensions are taken into the equation. The hidden interest in products, in housing and taxes causes the scale to tip. When all income and interest payments on savings are added, eighty percent of the people pay more interest than they receive. Ten percent manages to balance interest payments and only the wealthy ten percent makes money on interest.
In recent years interest payments on savings accounts do not compensate for inflation. Because interest is the underlying cause for the expansion of the money supply, interest itself is to blame for this. Informed wealthy people have moved their money out of savings accounts and have bought assets that protect them against inflation.
Solon, the Greek economist
Several centuries before Christ agricultural output in Greece came under pressure. Because of interest charges, mostly paid to city people, the debt load for the farmers had gotten out of hand. They could no longer pay their debts and were forced into slavery. Many farms became the property of the rich city folk. But the city people did not understand farm work and slavery did not contribute to agriculture. After a while people in the cities were threatened by famine.
To avoid total hunger and chaos the city people appointed a Solon as their leader. The new leader realised that a healthy countryside is a countryside without debts, where farmers who understand the business of farming must make their own decisions. Not slavery but the farmer's ambition to improve himself is indispensable for a vital countryside. That is why Solon introduced drastic measures such as eliminating existing debts. To avoid new debts he curtailed interest charges.
Solon was successful in averting a catastrophe. His decision to limit interest charges remained in power for a long time in the Eastern Roman Empire, which is also known as the Byzantine Empire. Perhaps this was one of the reasons why the Byzantine Empire survived the fall of Rome.
The consequences of interest
Interest is a catalyst:
There is a constant shortage of money because every euro put into circulation bears interest. Money is created under the agreement that more money is returned. Each individual will try not to be the victim of this game of musical chairs. This results in a stiff competition, as well as well as looting of natural resources and human labour.
For countries in debt it becomes important to sell for export instead of domestic consumption. To pay interest poor countries have to sell their natural resources. In this way lasting ecological, cultural and social values are impossible.
Interest is a tax on the poor to the benefit of the wealthy:
All money has been put into circulation for the purpose of collecting interest. The poor often pay the highest interest rates. Interest charges flow from the poorest areas of the world into the ever increasing financial sector. Many people are left behind impoverished and robbed from their means of exchange necessary to trade. Some money returns in the form of development aid, which offers an opportunity for corruption and this contributes to social dislocation.
Interest causes an exponential growth of debts and credits:
Interest represents a percentage of the borrowed amount that the borrower must pay to borrow the money. In the current monetary system additional debt must be created to pay for the interest and therefore debt increases exponentially like the amount of interest that must be paid. The opposite happens for credit. Savings accounts earn interest on top of interest.
Imagine that someone in the year 1 deposited a golden ducat into a savings account at a fixed interest rate of four percent and forgot about it. By 1998 the accumulated capital would have grown to 1.040.000.000.000.000.000.000.000.000.000.0000 golden ducats. This is about 139 golden globes of the size of the Earth. If the interest rate had been 5%, the amount of gold would have been 26 billion of Earth-sized globes.
Interest obstructs durable solutions:
When confronted with the choice of building a quality house that will last long or a cheap house of inferior quality, it is not difficult to see the advantages of a well-built long lasting house. It is better for the environment because a longer lasting house means that fewer new houses need to be constructed, fewer materials and energy need to be used while there is less waste from renovation and houses that need to be demolished. Because the quality house lasts longer, it can be cheaper to live in.
Suppose that a cheap house will last 33 years and that it will cost 200,000 euro to build. The yearly cost will be 6,060 euro (200,000 divided by 33). A more expensive house costs twice as much (400,000 euro) but will last a hundred years. This house will cost only 4,000 euro per year. For two thousand euro per year less, it is possible to build a house that is not only more pleasant to live in, but will also cost less in energy use.
After going to the bank for a mortgage application the math changes, because the bank calculates interest. If the interest rate is 10% then the expensive house will not only cost 4,000 euro per year on write-offs, but during the first year there will be an additional interest charge of 40,000.00 euro (10% of 400,000.00 euro).
The long lasting house now costs 44,000.00 euro in the first year. The cheaper house now appears less expensive again. There is the yearly write off of 6,060.00 euro but during the first year there is only 20,000.00 euro in interest charges. Total costs for the first year are only 26,060 euro. During the following years, lower interest charges still make the less durable house cheaper.
Interest leads to slavery:
Currently more people live as slaves than in Roman times. Twenty seven million men, women and children currently are slaves. When people can no longer pay the interest on debts they end up as slaves. Entire families have become the property of a money lender. In many villages in India the only house made out of stone belongs to the money lender. He is the financier of small investments and he is in a position to demand high interest rates.
In Western nations a new class of debt slaves is emerging. In the United States, but also in the Netherlands, debts have gone out of control There is an entire industry that specialises in the art of tempting people to buy on credit. Often they have been lured into debt for unnecessary expenses they could not afford to pay. Now their houses are being foreclosed and they often have to pay high rates on their credit card debts.
If interest was forbidden, people in financial trouble cannot go further into debt, as there is no compensation for the risk. Furthermore it is not possible for the debts to grow out of control by compound interest.
Interest leads to higher prices:
When buying a loaf of bread, people pay for the wheat, the farmers income, the bakers income, the firing of the oven and the wages of the seller. But we pay more. The farmer had to finance his equipment with a bank loan and it is possible that his land is still mortgaged. The farmer must pay interest and those costs are passed on to the wheat buyer. The baker may have needed a bank loan when he bought his bakery, machines and inventory.
How much of the price of bread is the result of interest charges? Strohalm asked the Erasmus University of Rotterdam to research this. It turned out that interest charges could add up to more than 25% of the costs. This is on top of the interest charges people have to pay on their own loans, mortgages and taxes as governments pay interest on their debts.
Apathy is the price we pay for our wealth
We have become used to poverty and it becomes easier to get used to it. But do the rich feel comfortable behind barbed wire charged with 10000 Volts and a mean dog in the yard? Are we closing our eyes to the reality that is knocking on our back door?
Five year old children work long hours on garbage dumps amidst a nauseating stench, looking for pieces of old paper and bits of metal so they can have something to eat. We ignore it as we are convinced that there is nothing we can do about it.
This is good for our mental health as this makes our lives bearable. But something is lost in the process, the involvement with all that is alive.
The cost of being wealthy
The cost of wealth is often higher than most of us realise. Material wealth tends to direct personal development towards material values. How often are we busy with the protection or enlargement of our wealth? Our needs increase without us being aware of it. That is not a choice but an unconscious development.
Investments are subject to intensive studies. It is an absorbing game. Profit is a game but the losses are real. When the needs and possibilities to satisfy these needs keep growing, we have less and less time. Stress has become part of the present daily lifestyle.
Time spent on investment related activities could have been used to make useful products or services. The pursuit of profit without producing something useful makes an economy less efficient.
In many countries the well-to-do middle class lives behind security walls. That is where they feel safe. The walls that are meant to keep the world outside also keeps them in their chosen prison. Many white Africans from Shanton, a luxury suburb near Johannesburg do not dare to go to a black neighbourhood not far away. Around Los Angeles wealthy neighbourhoods exist that have their own schools, their own shops and their own security.
At the same time the middle class people in many areas of the world are uncertain of their position. They have a constant fear that one day all could be lost.
Most people accept this because there seems not to be an alternative. A feeling of being powerless may offer a degree of safety, but our wealth and their poverty seem to be connected. Buying Fair Trade products is not sufficient. Something more is needed.
Poverty is unnecessary
The flow of money from poor countries to rich countries is a disaster for the poor countries, but for the rich countries the money is only a small amount. This is mindless violence on a large scale because the wealthy do not need the impoverishment of the poor.
The focus of the poor countries on the western markets, the plundering of natural resources, the damage to the environment as well as the human misery are not necessary to support the economies of rich nations. The squandering of natural resources is not needed because technology has advanced to the point that it is possible to largely switch over to recycling of raw materials.
This is a loose-loose situation because the inhabitants of wealthy countries will gain from more prosperity in poor countries. Reducing poverty could make the world a lot safer as poverty can be a breeding ground for unrest. The capacity of hundreds of millions of people are presently being ignored and that is not good for anyone.
Money creation or exploitation
Creating money out of nothing
During the Middle Ages alchemists tried to change lead into gold. They never succeeded. Or did they? With pen and paper and later on with bits and bytes, money is created out of nothing. In order to explain how the modern alchemy works, we have to go back to Italy during the thirteenth century.
In that time goldsmiths were both dealers in gold bullion as well as bankers. They stored their gold in secure safes and lent out their gold at interest. Others also used their safes to deposit their gold. The gold was carefully weighed and stored and the owner of the gold received a piece of paper indicating legitimate ownership. The name of the owner did not appear on this paper, so the papers stating gold ownership could be used as money.
After some time the goldsmiths discovered that most of the gold never left the safe so the deposited gold could also be used to cover loans. At a certain point in time goldsmiths discovered that they could issue loans for which there was no gold in the safe. This was pure bluff based on the experience that the owners of the gold never came all at once to ask for their gold. The actions of the goldsmiths caused an increase in money supply that spurred economic growth in Europe.
This modern alchemy is named fractional reserve banking. Most money in circulation is created by fractional reserve banking. Our current money has no gold backing but it is covered with paper money, which is often money created by governments. This money has no intrinsic value and its value is determined by the faith in the government issuing it.
Self sustaining money shortage
An important feature of fractional reserve money is that it is created as an interest bearing loan. Money is created under the agreement that more money is returned. Consequently this results in a shortage of money. This shortage can only be resolved by new loans and consequently more debt. The most ingenious trick of the modern alchemy is that it manages to keep itself going by the necessity to continue the process of lending and paying back more on an ever increasing scale into infinity.
This is the reason why total debt only grows over time. When consumers and businesses are reluctant to take on more debt, there will be a recession or sometimes even a depression. In such situations governments often go deeper into debt to keep the economy afloat.
This is wonderful for those who can profit from this process by demanding interest on new money, without the need to provide any other service. In the long run it is disastrous for a society that is being pressured into a continuing necessity to earn more and more money. It is disastrous for nature and the environment, which are both getting more and more depleted to make this possible. It is disastrous for the modern human being who ends up with less and less tranquillity in his or her life. It is disastrous for the poor, who in the end are the ones who pay for the interest charges.
Monetary systems are not alike
4,000 years ago alternative types of money existed, like the wheat exchange of the Egyptians and the Sumerians. After World War II, John Maynard Keynes tried to introduce the bancor for international trade settlements. The type of money we use is a choice. If no other choice is made, poverty and international financial chaos will persist. Now every country tries to solve its continuing shortage of money by exports. The United States on the other hand ends up importing the surplus because the US dollar is the international reserve currency.
Over time this situation resulted in a massive accumulation of US dollars by exporting nations. In fact many countries have no shortage of dollars but still accumulate them because their economies are built around exports. Those countries have become problematic exporters. The savings of those countries are not used for investments but for financing the deficits of other countries that have become problematic importers. The savings of the problematic exporters will be lost as they have been used to purchase currencies of problematic importers that will prove to be worthless in the end.
The Bible has two stories that may relate to an ancient competition of monetary systems. The original Sumerian central wheat storage principle was introduced in Egypt by Joseph. He told the Pharaoh that building wheat storage buildings would prevent starvation during years of meagre harvests. It is likely that this was the beginning of the wheat exchange system that operated in Egypt for many centuries. Papyrus scrolls show that a wheat exchange system operated in Egypt 1,500 years later when the Romans ruled Egypt.
The golden calf
After having escaped from Egypt, the People of Israel created a stature of a golden calf. The golden calf may have symbolised money based on gold. Money based on gold is not subject to decay. The owner of the gold had time on his side, while the farmer who needed money for seed, could not wait. This advantage in power allowed the owner of gold to demand interest. Therefore money based on gold automatically becomes money that carries interest.
Despite Moses' clear rules forbidding interest, the temple in Jerusalem functioned as a bank in the year 33, where money changers occupied the Temple Square. In old Jewish books Mammon is the pre-eminent idol, the opposite of that what is good and the personification of evil. In the time of the Sumerians it probably was already understood that users of gold as money were 'mammonised'. A system built on greed and exploitation ends up destroying itself because it promotes the dark side of human beings.
The cause of economic imbalances
The present monetary system is a result of the Bretton Woods agreement that determined the economic order after the Second World War. In this system countries with continuing export excesses were able accumulate claims, while countries with a continuing trade deficits were able to accumulate debts. Because of compound interest many of these debts became impossible to repay. The British economist John Maynard Keynes proposed an alternative system for international settlement that would compel countries to maintain a balance between import and export. This proposal was discarded because it did not serve the interests of the United States.
After Bretton Woods agreement, the value of the money circulating in the member countries was based upon the value of the US dollar. Within this system it was not necessary to balance imports and exports, so claims and debts could escalate. Debt burdened countries were forced by the IMF to sell off their natural resources and to focus their economies on the global marketplace. The competition for exports resulted in low prices and the export strategy turned into a sellout. Because the US dollar became the reserve currency, and many countries had to keep US dollar reserves, the United States became an exporter of US dollars in exchange for real goods and services.
Development of the monetary system
Many books describe the history of money as a neutral development. This description contradicts with the truth as the current system is there by choice. The world has known a number of alternative monetary systems. In the most modern monetary systems, the creation of money is connected with interest. Interest is a tax which the poor must pay the rich. Because consumption possibilities for the rich are limited, more money becomes available for investment. In rich countries this brought a temporary prosperity for many.
When the rich keep investing, they end up with all the possessions, and the rest will become poor and homeless. As Karl Marx predicted, Capitalism will destroy itself in the end because the masses will become impoverished. Then demand will collapse. The game of Monopoly is a model for Capitalism and it shows that the winner takes it all. For all the others it is game over. As this process takes many generations, this is not obvious to most economists.
The impoverishment of the middle class and the foreclosure crisis in the United States are side effects of the accumulation of capital by the wealthy in the capitalist economy. Interest on money makes it possible for the poor to go into debt, which aggravates their situation. Over time a class of rich oligarchs has emerged that has bought the government in order to increase their own profits. Their greed further accelerated the decline of Capitalism that was already in its final stages.
In poor countries the prosperity did not materialise because the rich people in those countries spent most of their money on imported goods. The basis for healthy prosperity disappeared as a result, which is the presence of sufficient means of exchange that stimulates the local economy. For example, the increase of prosperity in the Netherlands during the seventeenth century was helped by the offering of the first shares in the world. These were shares in the Dutch East Indies company. Because everybody knew the value of these shares, they could also be used as a method of payment. The amount of money in the Netherlands increased enormously and for the Netherlands the seventeenth century became the Golden Age.
Nixon's decision in 1971 to separate the dollar from the gold standard helped to increase the money supply to an unprecedented level. During the last decades of the 20th century, the money circuit was able to grow to a size of unprecedented proportions with the help of information technology. A speculative circuit of financial titles ensued, which can be used for trade, and thus became substitutes for money. Government money itself has become more and more a target for speculation. Speculation has aggravated the financial crises in a number of developing nations.
Digital money has replaced visible money. Currently this development leads to chaos and has disastrous effects for millions of people. It does not have to be that way. Modern technology can undermine the dominant monetary system and new systems can be developed. We can use those possibilities to realise more social and lasting monetary systems.
Hopeful developments in South America
The economy of solidarity
Strohalm helps in South America in different activities and cooperates with people from a variety of backgrounds. All those people do not want to subject themselves to economic rules that offer them no perspective. Most of the members in the economy of solidarity participate for obvious reasons. Their business went bankrupt and the only way to stay employed was to continue in a cooperative system. After years of occupying wasteland, a group of farmers that finally owns a parcel of land, are only able to buy agricultural machinery together.
Many people involved in the economy of solidarity think further than their own activities and their own self-interest. For them building the economy of solidarity means building a new society. People in South America are very much aware of the adverse consequences of the monetary system as their region was hard hit by economic crises. State owned companies, natural resources and land were sold off and the government was no longer respected by its citizens. Many South Americans realise the harsh necessity to find radically different ways to organise their economy.
Red del Trueque
The Red del Trueque network in Argentina was at first a group of consumer groups, credit unions, micro credit programmes and local exchange networks. The exchange networks simply came to life because during the financial crisis in Argentina there was no longer any money to facilitate the most elementary way of trading. More than a million people in Argentina used the créditos distributed by a local Red del Trueque.
The main goal within the Trueque movement was to revive the local economy and to do something about the outflow of capital from the local economy. In many places Trueque members were working to include business activities within the network. The Red del Treque network helped hundreds of thousands of people to exchange goods and services.
MST, a well organised network
MST is an organisation of farmers without land. MST takes initiatives to improve the lives of hundreds of thousands of families. MST organises land occupations in which about a thousand farmers without land occupy the unused estates belonging to landowners.
Sometimes an occupation has to continue for a long time or the farmers are attacked by the small armies of the landowners. The farmers strongly depend on each other. In many cases they have managed to develop and cultivate their land.
The economy of solidarity consists of producers and consumers and much of the production takes place in cooperatives, which are industries that are commonly owned by members. Cooperative industries also exist wealthy countries but they are barely distinguishable from privately owned industries. In the Netherlands cooperatives dominate the dairy business and they have a significant stake in the insurance and banking business.
In Brazil cooperatives sometimes take over bankrupt companies. There are many cooperative industries in South America, but they must operate within the framework that is dictated to them by the international monetary system. The challenge is to combine the purchasing power of the Trueque members, the productive power of the cooperatives, credit information of the lenders of micro credits and the energy of local authorities that consider alternative monetary systems.
Mutiraos are communal building initiatives in which people conceive a building project for themselves. They make mutual agreements, make monthly money contributions and together they look for an architect and a developer. During the building phase they contribute in labour as much as possible themselves. It may be possible to combine the local Trueque system with local building initiatives and in this way stimulate local employment.
The Workers Party
In some of the Federal States and cities in Brazil progressive governments are in power, and a number of them realise that there is no room for the poor in the present world order. The government of Rio Grande do Sul in Brazil is run by the Workers Party, a broad front of different sorts of groups.
This government has written worldwide history by developing a way by which through referendums the people decide how government money is spent. Whenever possible the government of Rio Grande do Sul wants to cooperate towards further expansion of the economy of solidarity, because much of the tax money that the government spends disappears from the local circulation and does not stimulate the local economy.
Building a cooperative association
The number of parts of the economy of solidarity has grown over the years. Strohalm is supporting initiatives on different levels with people who are involved in monetary reform or could benefit from it. Together with universities in the South of Brazil, Chili, Columbia and Argentina, Strohalm is structuring the reinforcement of theoretical backgrounds and methods. A network of people using different angles in finding a breakthrough for the economy of solidarity is supporting this entire process.
Strohalm is working in the following main areas:
- stimulating mutual trade between members of the Trueque Networks without the use of traditional money;
- the emergence of a network of local consumer groups;
- increasing the use of local exchange trading systems and further developing Trueque networks;
- closing the gaps between the different parts of the economy of solidarity;
- converging the different parts of the economy of solidarity into a trade network of industries and consumers.
The United States economy has transformed into a third world economy as factories have been closed and jobs have been shipped overseas. This will become obvious as soon as the purchasing power of the US dollar collapses. Many European countries face similar issues and this will become clear when their purchasing power is no longer propped up by the euro. Therefore the problems of South America have become the problems of the United States and Europe too.
Ten ways money makes us poorer
1. Money leaves areas where it is needed most
If you look at our money from the perspective of a Martian, the first thing you will notice is that money organises the economy least where organisation is needed most. Money leaves areas where it is already in short supply. Monetary deserts pop up where mutual trade disappears and with the money, the entire economic organisation vanishes [+].
2. Interest is charged on the poorest
The underlying cause is the current monetary system that imposes interest charges on the poorest. Interest is demanded for money that is created out of thin air. The effect of these interest charges is bigger than most people realise because we do not notice how interest charges are hidden in the prices of all products. In this way the poorest always pay usurious prices [+].
3. Accelerated modernisation produces waste and unwanted developments
The money that is extorted from the poor by interest, accumulates in the hands of people who already have more than they need. They take it to investment funds, which try to find returns for it. This causes a permanent hunt for investment possibilities. Modernisation is accelerated at such a rate that it is impossible for many people to catch up. Technical developments such as nuclear power and gene technology continue without evaluation. Simultaneously the production causes more and more waste. Machines end up on a garbage dump long before they have reached the end of their technical life cycle.
4. Interest makes productive activities unprofitable causing unemployment and poverty
Within every market economy an investment has a pay-off period. In our current monetary system, the yield of every investment must exceed the interest level. Many investments cannot offer that yield so unemployment and poverty ensue.
5. Interest escalates imbalances
The current monetary system is selected in 1944 and puts the costs of trading imbalances on the shoulders of the weakest trading partner [+]. This is because someone who wants to make up a deficit has to borrow money while loans are subject to interest. A country that produces too much is as much of a problem as a country that produces too little. A shortage of goods requires loans denominated in a scarce means of exchange. Interest then leads to an imbalance in debt relations.
6. Unrestrained money flows cause worldwide competition
The price of a product does not tell the consumer anything about the consequences of a purchase, Brazilian farmers may buy Dutch tractors because they are somewhat cheaper. With their money, purchasing power disappears from their own region. In the long run the farmers end up paying more, because if their fellow countrymen do not make money producing and selling tractors, they will have no money to buy their products. Eventually the farmers will have to lower their own prices in order to compete on the export market.
7. Depopulation of the countryside
The monetary system misleads savers, especially in the countryside. The promise of higher returns lures their money into world capital markets, thus neglecting investments in their own region, which in turn impoverishes the countryside. The unintended result of this is that the possessions of savers lose their value as well, as house values drop, while the opportunities for making a living become scarce. Employment opportunities disappear and life on the countryside becomes increasingly hard. Eventually the children follow the money of their parents and the social structure of the countryside deteriorates.
The effect of low food prices caused by world markets is also important. There is fierce competition in food markets. Economists call this situation perfect competition. Only by economy of scale farmers can compete. Consequently farming becomes mechanised and automated so there are less people that can make a living out of farming. As farming is the basis for economic development in the countryside, economic conditions in the countryside deteriorate.
8. Speculative money flows
Many poor areas have been hit hard by the consequences of speculation with money. Money comes into a region to make a quick profit and then retreats if the prospects deteriorate, leaving the local economy in a state of collapse. Millions of people in Asia and South America have experienced the effects of speculative money flows firsthand.
9. Money turns society into a rat race
Because money is created in order to generate interest there is a systematic shortage of money. This unnecessarily aggravates the competition. Apart from the competition for markets, there is a competition for financing. This additional competition turns our society into a rat race.
10. Interest fosters corruption
People in the poor countries pay for the interest via loans, taxes and in prices of products. Money is supplied in the form of development aid or bank loans. Consequently an unbalanced social structure arises that fosters corruption.
Crisis or opportunity: from fissures in the money bastion to the disappearance of money
Becoming less dependent on money
An increasing part of the economy is becoming less dependent on the current monetary system. Big companies use a single accounting department for an entire production chain where internal transactions are settled without money. This saves a lot of interest costs and enables these companies to gain a competitive advantage. Such administrative settling methods offer smaller companies a way to save money as well by uniting in a trading network. Will a crisis in the monetary system provide opportunities for the transition to a more balanced trading and bartering system?
The entire monetary system is in crisis these days. The speculative capital has become so powerful that central banks do not control their own currency any more. They are losing their grip on financial developments and a power vacuum is forming. The speculative capital is so fleeting and unreliable that economies are disrupted by its movements.
In a hectic volatile situation new chances surface. The Chinese language reflects this duality as the character for the word opportunity is combined with the character for crisis. Every crisis is also an opportunity. A monetary crisis causes a lot of misery, but there is room for change as well.
Companies realise more and more that money is not always needed and that many transactions can be settled with the use of a computer program. The use of money can be avoided if it is merely used for accounting applications. Most people hardly notice how often big corporations already use these possibilities. Corporations that strive to bring all layers of the production chain into their own company can benefit the most. The Dutch Van der Valk conglomerate is an example of this.
Van der Valk may have many reasons for keeping all activities between the farms and the restaurant in its own hands, but one of those reasons is saving money. Often a large part of the money customers spend in a restaurant is needed to pay the wholesaler, who in turn needs most of it to pay his suppliers. Van der Valk is its own wholesaler and supplier. The company needs not to pay the wholesaler or other suppliers and can pocket most of the money received in the restaurants.
No money circulates between the subsidiaries of Van der Valk. All bills are settled in a single accounting department. So the conglomerate has all the money that otherwise was needed for the payments in the supply chain readily available for other purposes. The conglomerate also saves the interest costs on money that would otherwise be moving between the subsidiaries or sitting in the current account.
Big corporations prove that information technology and accounting software are sophisticated enough to enable dynamic and complicated internal settlements. Mergers often happen in order to exploit this opportunity to the full. They do not always make sense from a business perspective, but from a financial perspective they open up a lot of possibilities.
Mervin King and the disappearance of money
Bankers also noticed this development. In the summer of 1999 Mervin King, vice-president of the Bank of England, held a presentation for a group of national bank managers and other influential financial pundits. He declared the end of the monetary system as we know it and stated that the central banks would no longer form the financial basis of the monetary system. They would merely supply monetary units. These monetary units would be used to indicate the value of goods and services, while new settling systems will take care of the actual transactions.
Money guaranteed by states and banks will have to compete more and more with other forms of settlement and value coverage. King predicted that the world will become a barter economy again. He said that nothing will prevent two individuals from settling a transaction as a transfer of wealth from one electronic account to another. The buyer can pay with any currency as long as there is a market price for it. The unit of calculation may still be US dollars or euros, but as soon as proper agreements have been made, and computers are powerful enough, a privatised institute can take over the financial transactions from the banks.
The most likely source of the money of the future are multinational corporations. Consumers all over the world know them and will put faith in their promises because of their market value and production capacity. Hundreds of millions of consumers already save Air Miles and other savings stamps that can often be used as money. Freebies with BP gasoline can already be spent in Electro World. If this development continues, the banking function falls into the hands of multinational corporations. In this situation poor people will not gain better access to investment money or money as a means of exchange.
But current developments also create new opportunities for consumers and an independent companies. They will have a unique opportunity to create a world where poverty is virtually nonexistent, personal growth is within the grasp of a lot more people, and cooperation becomes more predominant instead of competition. The possibilities could surpass our wildest dreams.
This crisis can be turned into an opportunity if consumers and independent business owners use money as little as possible for economic activities. In other words: if they settle their transactions within their own settling system as often as possible. When there is an international cooperation that links all local networks, even less money is needed. This creates room for poor people to trade as they can use their own talents in their own community and do not have to pay interest.
In 1944, in the town of Bretton Woods, New Hampshire, the United Nations Monetary and Financial Conference was held with the intention of establishing an international monetary agreement to regulate monetary units and to end nationalist competition between currencies. A new economic order was needed that would put an end to nationalistic competition between currencies and in its place promote the cooperation and mutual assistance between countries to overcome short term exchange difficulties. This was to be accomplished by pegging all participating national currencies to the US dollar, in relation to the value of gold at 35 US dollars per ounce.
Following the motto of international cooperation towards world peace and prosperity, the Bretton Woods agreement created the World Bank and International Monetary Fund, which were to work together to help particular states out of financial difficulties in case of a large and persistent balance of payments disequilibrium. The World Bank would fund the reconstruction of Europe, and then the Third World. The IMF would guard international fiscal stability, providing loans and bailouts for states that would fall into economic troubles. All participating countries would have to keep their foreign reserves in US Dollars.
From the 1950s onwards, the United States began accumulating persistent trade imbalances, creating liabilities of the United States to other central banks. The US government remained reluctant to devalue its currency in order to reduce its balance of payments deficit. The destabilisation caused by market speculation, and the large and persistent US balance of payment deficit caused the demise of the system in 1971. Countries holding the surplus chose to increase their reserves of US dollars rather than revalue their currencies, which added to a ballooning stock of US dollars held outside of the United States.
Although the original intention was equilibrium among national currencies, the design of the system did not require to keep exports and imports in balance. Countries could accumulate large debts or claims and the IMF would be there to bail them out. The responsibility for solving the imbalance then falls upon those who have imported too much. The accumulated interest by debtor nations made debts unrepayable so countries were forced to follow the directives of the IMF. The IMF directives caused debt burdened countries to compete with each other for markets, resulting in lower prices for their products. This then reinforced their problem.
Bretton Woods offered the United States the means to finance an increasing trade deficit, to import and consume more than to export and produce, as well as to persist with an over issuance of US dollars without causing spiralling inflation, because other countries would take up the excess dollars into their foreign reserves. For decades the living standard in the United States was enhanced by issuing debt.
The bancor proposal
At the Bretton Woods conference, the British delegation was headed by economist John Maynard Keynes, who proposed a multilateral clearing system between currencies through the introduction of a new reserve currency he called the bancor. The bancor would be freely available to any country with a balance of payments deficit for payment to countries with a balance of payments surplus. It was a monetary tool for equilibrium between countries.
Each country would have a quota and balance limit in bancors, relative to their trade volume. Member states would be allowed to withdraw up to a certain amount. Holders of positive balances would have to pay 1 percent annually on their average balance of bancors in excess of 25% of their total quota. This payment would increase to 2 percent for the average balance in excess of half the allotted quota. Countries would not have to pay these contributions if they decided to cooperate with each other through the managing body of the bancor.
The bancor proposal was more flexible than the American proposal. Debit balances in the bancor could be relieved by devaluing the currency, controlling outward capital transactions, or payment in gold or liquidation of other assets. Positive balances in the bancor could be controlled by expanding domestic credit and demand, appreciating the currency, reducing import tariffs and providing international development loans.
By focusing on circulating funds rather than accumulating them, the result would be increased multilateral investment rather than lending by a group of wealthy countries, while at the same time creating a method for countering monetary disequilibria by establishing responsibilities for both creditor and debtor nations. By creating an overdraft facility for providing relief to some without overburdening other countries, countries would not fall into unrepayable debt. This proposal was politically unattainable in 1944. At that time the interests of the United States were better served by the system that was selected.
Keynes' proposal was similar to that of Silvio Gesell several decades before. Gesell visualised the concept of an International Currency Association which would issue and manage a neutral International Currency Unit (ICU) that would be freely convertible into the national currencies of the member states. The proposed International Currency Association was part of a plan for a post-capitalist monetary system, free of monopolies, customs frontiers, trade protectionism and colonial conquest.
The end of the gold standard
From the 1950s onwards, the United States began running persistent trade imbalances, which created liabilities in the United States to other central banks, and beginning in the early 1960s, the United States no longer had sufficient gold to cover liabilities to other nations. Starting in 1965 France was converting its US dollar assets into gold in a desire to reduce the economic power of the United States. In 1967 the British Pound was devalued, which undermined the stability of the monetary system. During the first months of 1968, a number of central banks and the US Federal Reserve were forced to sell gold.
Later in 1968 an international reserve currency, called Special Drawing Rights (SDR) was created to ensure sufficient international liquidity. The Special Drawing Rights were reminiscent of Keynes' bancor proposal, and were defined as 35 SDR = 35 dollars = 1 ounce of gold. The use of the SDR from 1969 onwards could not prevent the collapse of the Bretton Woods system. President Nixon made the decision in August 1971 to take the dollar from the gold standard by instructing that the US dollar could no longer be exchanged for gold.
Nixon's move left the International Monetary Fund, the Bank For International Settlements and World Bank all without any foundation for global monetary policy other than to rely on the US dollar as a reserve currency. Thus the departure from the gold standard was seen as an imperial move by many, making these institutions marketing agencies for the US dollar. In this way the United States forced other central banks to invest their surplus of US dollars in US Treasury Bonds. The alternative was that creditor countries accepted that the US dollars received in international trade had become worthless. The US balance of payment deficit has escalated in recent years. Something will have to change.
WIR: A Swiss network demonstrates what is already possible
About 60,000 Swiss companies participate in the WIR and settle their mutual transactions without money. Its yearly turnover is over one billion euro. Every member has an account in WIR units with a positive or negative balance. It can be compared to a bank account of a bank that doesn't participate in the national and international payment clearing systems. It is only possible to exchange payments with other customers of the bank. Thanks to the large number of companies participating, virtually anything can be bought through the WIR and participants have genuine advantages.
Recently the WIR bank was founded for the WIR circle, so even more financial transactions can be settled using the WIR network. The WIR took decades to reach its current size. In the time when only a few companies participated, the network was not always an attractive option. Credit has always been cheap in the WIR, but it was not always easy to spend WIR units. Networks are only attractive when they are large so everything can be bought in the network.
The Consumer Commerce Circuit
We pay too much
A breakthrough in the area of money motivates people in two ways: it offers durability, better chances for poor people, and concrete advantages for the participants. This win-win-situation makes the change a real possibility. Big corporations suggest they deliver good quality for good prices, but the reality is different: the consumer often pays too much. Increase in scale does have the advantages of size, efficiency and internal settlement, but interest and dividend payments together cost the consumer much more.
Products that are made in low wage countries often appear to be cheaper than locally produced goods. But the loss of jobs that is the consequence of moving production to low wage countries will in the end cost more. The same applies for large scale production substituting small scale production.
Consumers are loyal allies of global degradation. They follow the latest fashions and are suckered into buying indiscriminately. Unwittingly the longing for luxury and bargain hunting causes human suffering in other parts of the world. In the mean time the consumers always pay too much. Consumers finance these developments but they have little influence on them. Why do they go on like this?
Do we consume enough?
Our consumption level may be too low. Because the consumer pays too much for money, causing an unstoppable pressure to invest and innovate, consumers may be better of when there is no interest on money. If consumers decided not to go with the newest trends, life can be much cheaper. For example, when products are recycled more, purchasing power can rise dramatically.
High quality designer clothing that costs 200 euro when it is new, can be found for 5 or 10 euro in a shop with used goods. People who buy those goods there have twenty to forty times as much spending power with the same amount of money, while requiring less natural resources and energy.
An interest-free economy has a lot to offer for consumers. The wish of consumers to pay less can be the drive behind the change that makes the economy switch from exponential growth to economic flourishing, to chances for everyone and economic circumstances that encourage sustainability. Curiously people can be much more prosperous after the change.
The Consumer Commerce Circuit
Strohalm is looking for a possibility to use the crisis in the monetary system to build a bartering network that gives poor people the chance and directs the economy towards more sustainable way of producing. As long as many items are not for sale in the network, and most regular suppliers do not participate, the barter network is not attractive. Both companies and consumers have a good reason to join. Companies could realise their investments cheaper and consumers can buy cheaper products.
The Consumer Commerce Circuit is the result of more than a decade of investigation, experimentation and evaluation in the field of interest-free money carried out by Strohalm. C2C is a national and international cooperation of local and regional networks where members use money to buy exchange units (also known as vouchers) that will be used for mutual trade. These transactions are recorded in an internal accounting system. Participants can always trade their vouchers for money. This will cost a percentage as trade-back premium. The participants have agreed to leave the consumer prices in vouchers/exchange units at the same level as regular prices.
A C2C is basically a combination of two elements:
- a customer-loyalty program in which members buy prepaid vouchers, which they use for their purchases within the circuit.
- a trade network between independent companies which uses an internal accounting system for transferring the units used in transactions between members. No money is needed for these transactions.
The major portion of the money that has become available by issuing the vouchers can be used by the members in the form of interest-free loans. The C2C is similar to the accounting system used by many large companies. Internal transactions of funds between different branches of the same company are recorded within a joint accounting system. This enables companies to improve their cash flow which was previously lost to facilitating internal transactions. They can reduce their need for interest-bearing money in this way.
The plan was launched around the year 2000. Until now not much has been achieved. Because the economy in the Netherlands did well in the years after 2000, companies and consumers felt no need to organise themselves in this way.
Organic farms, clean energy and support for poor countries
Stohalm intended to integrate the Consumer Commerce Circuit with existing programmes like biological food-subscriptions and Fair Trade Shops to stimulate sustainable agriculture and development of third world countries.
The South American Consumer Commerce Circuit
For the huge number of cooperating cooperatives in South America, it is only a small step towards money-free mutual barter. The Trueque participants and the local savings- and consumer groups can bring in their spending power and gain extra possibilities to strengthen themselves locally. There are many companies, organisations and governments that can benefit from this way of working and want to work this way.
In recent years Strohalm started an initiative in Uruguay in cooperation with the government to implement a nationwide network.
New opportunities for independent entrepreneurs
Many independent companies do not have any choice but to cooperate in a mutual trading organisation. Their current position on the money market is weaker than that of their big competitors. In order to survive they must make use of this development. The WIR in Switzerland has demonstrated that it is possible.
Conglomerates have a major advantage in avoiding interest costs because they can use internal settlement. Their financing costs are significantly lower, and sometimes they are only half those of independent companies. Many independent companies have already gone bankrupt. They can only respond by cooperation. This can be achieved by joining a monetary circuit in order to gain access to cheap capital.
Strohalm's continuous search for solutions
The reason for the search
The writer explains why he keeps on searching for alternative solutions and what his motives are:
An interest-free monetary system will lead to economic prosperity, but it will also mean the end of the exponential growth caused by the interest-bearing money.
There will be an end of the exponential growth in materials consumption. Production means such as machines will be used longer, thus creating those production means will bring more prosperity with less effort. Products will be recycled more, creating more purchasing power. In fact more prosperity is generated in an interest-free economy than in an economy based on interest. People may then choose to work less, but the extra leisure time has value and should be seen as increased prosperity.
In 1994 Stohalm started a Local Exchange Trading System (LETS) in Amsterdam. This is a barter system without money. Within a few years there were more than a hundred LETS systems in the Netherlands. The LETS movement was strong enough to stand on its own two feet. Amstelnet is a barter network for companies in Amsterdam that uses a WIR-like system. The network however was too small to make a difference.
Exchange and research network
The research network of Strohalm is founded on a common concern about the dynamics of interest, the accumulation of wealth and power it causes, and its effects on the purchasing power of the majority of people. The people of Strohalm are astounded by the obviousness by which the major premises of neo-liberalism are accepted, without ever checking them. The research programme intends to fill theoretical gaps in order to construct a theory that is closer to reality and does not encourage large scale accumulation of wealth and abuse, and which, most importantly, does offer a solid support for those who wish to improve their fates.
Keynes observed in the nineteen-thirties that when interest levels fall below 3 or 4 percent, owners of money prefer to keep it rather than to lend it or to invest it. The interest does not cover the risk of loss. This led him to discover the concept of the liquidity trap, which has manifested itself repeatedly all over the world. Keynes discovered that as soon as interest nears zero, there will be a crisis or liquidity trap.
Interest levels reflect the price of money and capital and there is always an equilibrium. If interest levels are too low, and a liquidity trap occurs, then interest levels will rise because more savers keep their money at home. This in turn reduces demand for money, as the economy is too weak to sustain the required level of interest. The liquidity trap does only occur when there is a risk that the money is not paid back in full, which is more likely to occur with gold than with fiat money, where losses can be made up with additional money printing.
Interest levels under market conditions are derived from expected returns and risks in the economy. If the economy is doing well, real interest levels tend to rise. Countries that have a higher risk profile also have higher interest rates. This is why interest causes of poverty. When central banks interfere with interest levels, markets become dislocated. Low interest levels may stimulate speculation and produce monetary inflation because credit is cheap. With a holding tax on money and a ban on credit it is possible to have zero interest rates without monetary inflation.
Stroham has identified a number of research themes:
- Investigate the rate of interest in poor countries and assess how much productive capacity is being unused as a result.
- Investigate the relation between money creation in certain years and money shortage in others.
- Investigate which social groups bear the burden of the debts.
- Establish a distinction between competition over markets and competition over finance, and thereby make visible the unnecessary toughening of the market economy because of monetary dynamics. Try to investigate periods or areas with different rates of interest.
- Collect data on the extent and effects of this monetary flow.
- Analyse the concentration of capital and the effects on expenditures and investment patterns.
- Investigate the proportion of money related activities in the lives op people in different times and different areas.
- Investigate the added value of locally circulating purchasing power, in for example island economies or economies which are excluded from interaction with other countries. Calculate the effect on prices. Investigate if these arguments are being weighed in discussions about import restrictions.
- Investigate capital flows in communities and calculate the benefits of capital being invested locally.
- Investigate the amount of economic activity that can be generated in crisis situations only by introducing a means of exchange.
- Collect data on the growing debts. Compare national debts, consumer debts and the debts of enterprises. Try to find how these dynamics have functioned in other historical periods. Investigate if these debt burdens are transferred geographically and if they are accumulated.
- Investigate the developments in the credit worthiness of regions.
- Quantify the relation between the non usage of production capacity and tax revenues. Case studies of areas and periods in which the economic conjuncture showed sharp declines.
- Investigate the net amount of global money flows and determine which countries have a net gain of purchasing power, and which lose purchasing power.
- Investigate the amount of imports replacing once existing local production for different countries.
Help us to write the last chapters
Poor Because of Money is a work in progress, an internally networked collection of the thinking of Strohalm over the past decades. This thinking has not gone on within the stuffy confines of a scientist's, or worse, an economist's bell jar. It has been a partly scientific, partly organic development in collaboration with many other thinkers from around the world, that cooperate to build a new economy, and by doing this, a new world.
The book is translated from Dutch but the translation has not been done by a professional translator. Despite that the message of the book has not been lost in the translation.
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