the plan for the future

Natural Money and complementary currencies

15 October 2020

Wörgl currency

The makers of the book Poor Because of Money of the Social Trade Organisation wrote that 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.

The underlying cause they believed to be the current monetary system that imposes interest charges on the poorest. Interest is demanded on money that is created out of thin air. The effect of interest charges is bigger than most people realise because we do not notice how interest charges are hidden in the prices of all products. The money taken from the poor by interest accumulates in the hands of people who already have more than they need.

This is a reason to introduce interest-free local currencies. The success in Wörgl has inspired people all over the world to start a local or regional currency. A few are more widely known, for instance the Brixton pound, the Chiemgaur and BerkShares. But these currencies didn't produce an economic miracle like in Wörgl. They are now called complementary currencies, which means that they can supplement the existing financial system but are not expected to replace it.

Local and regional currencies are aimed to keep money circulating within the local community or region. Exchanging complementary currencies for regular currencies often comes with exchange costs so if you own such a currency then you are more willing to spend it on local or regional products. There may be a holding fee or demurrage to stimulate spending. The reasons why the economic miracle in Wörgl was never replicated probably are:

  • If you are employed in the regular economy then you are less willing to sell your skills for a complementary currency. Many people in Wörgl were unemployed and had skills to offer that would have been in demand if the economy wasn't in a depression.
  • There is little demand for complementary currencies as long as the government isn't backing them by making them legal tender or accepting them for taxes. The municipality of Wörgl created demand for its currency by accepting it as payment for taxes.
  • The administration of complementary currencies requires a dedicated group of volunteers. In Wörgl the municipality administrated the currency. When a local or regional government is actively backing the currency it has more chance of becoming a success.
  • Switching to local or regional products may entail a reduction in some narrow measures of economic efficiency. Economic efficiency often leads to division of labour via international markets. There may be cheaper or better producers elsewhere so you may get less value for money.
  • There are however significant economic benefits to employing people that would otherwise have been unemployed that can offset the loss of economic efficiency in terms of labour division, most notably when the economies of scale are relatively low.
  • Complementary currencies are small-scale so there are only a few potential borrowers and lenders. The counterparty risk for potential lenders is high. Therefore, financial markets in those currencies are non-existent.

  • Counterparty risk stands in the way of developing financial markets in complementary currencies at competitive prices. In other words, the interest rate on these loans would be higher if the lender is to be compensated for the risk of default. But interest charges in financial markets were a reason to start these currencies in the first place. And so it appears that local and regional currencies do little to fix the issue of interest charges.

    This brings us at the explanation why that might be so. It is not the monetary system that imposes interest. There are two reasons for interest to exist. The first has to do with supply and demand for money and capital. The second had to do with risk, for instance counterparty risk. The people from the Social Trade Organisation are still busy finding ways to make local and regional money work for people. Natural Money takes a different approach and deals with the issue of interest.

    It is the abundance of capital in the global financial system in combination with efficient financial markets that drive interest rates to zero. Interest rates can even go below zero if zero interest isn't low enough to clear the excess of savings. It appears that people, businesses and governments can get access to these low interest rates if their creditworthiness is good. Important prerequisites for ending usury therefore are financial integrity and access to financial services.

    Natural Money aims to apply a holding fee or demurrage in the global financial system, for instance on currencies like the US dollar and the euro. To end usury altogether borrowers in financial markets must be trustworthy and high standards of integrity need to apply on governments. Issues like fraud, tax-evasion and corruption should be tackled, and every country in the world must become like Denmark or New Zealand, at least with respect to these issues.