Feasta and Sensible Money organised a one day conference in Dublin on Friday 31st May 2013 to explore the consequences of our malfunctioning money system and some of the proposals for its reform, replacement or supplement.
The event was co-chaired by Paul Ferguson of Sensible Money and Feasta’s Graham Barnes. The morning session focused on how money is created and allocated into ‘first-use’ as debt-based money with associated interest, followed by a careful look at some of the consequences in terms of personal debt, and social and environmental damage.
The afternoon focused on responses to the Money Mess, contrasting proposals for reform of the existing private monopoly of money creation with money diversity – ground-up development of multiple currencies with varying objectives and in some cases explicitly designed functionality. Among the latter, two Irish-initiated proposals – Fair Money and Plain Money – were described.
Below are videos from the talks along with brief summaries.
Paul Ferguson: The Issues
Paul Ferguson argues that the big problem with money at present has to do with the way it’s created. 97% of money is created by private banks when they extend credit to customers. Many central bankers have described this process. However economists seem to frequently be misled about the origins of money, assuming that it has to be funded from savings. Savings are really only useful to the banks when they have short-term cash flow problems and wish to avoid transferring central bank reserves to another bank. They aren’t necessary for extending credit.
With the switch to electronic money, the supply of money has quadrupled over the past 50 years. This is why we haven’t had huge amounts of defaults in the past few decades. But this rate of money expansion is unsustainable, hence our current recession. There are many other problems with it too, including the debt crisis, unaffordable housing, environmental problems caused by the need for continual economic expansion and extreme inequality.
Graham Barnes: Reforming the Monopoly, Money Diversity & Designer Currencies
Graham Barnes provides an overview of the problems with the current money system, again including its dependence on continual economic growth. Money simply isn’t a neutral facilitator.
He goes on to describe the responses that are being put forward by activists. These responses fall into two broad camps which could be complementary. One camp, which includes Sensible Money and Positive Money, advocates a change in the way that state currencies are created so as to address the problem of capital being misallocated for things that aren’t necessary or useful, such as financial speculation. The second camp advocates the creation and adoption of alternative currencies in order to reflect the fact that nature selects for a mixture of efficiency and resilience, rather than just efficiency alone.
Graham finishes up his talk with some suggestions for people who don’t have time to be actively involved with money reform but who would nonetheless like to contribute in some way. These include moving your money so as to minimize the power of intermediaries and participating in experiments with new forms of currencies, especially when they try to achieve democratic and transparent governance.
Emer O’Siochru: Tax and Money
Emer O’Siochru draws on the work of Modern Monetary theorists to explain why money and taxes are really the same thing; modern money is only backed by the fact that you have to pay taxes in that money. Governments don’t really have to raise money in order to spend it. Instead they can simply create money.
Since it’s important for social solidarity that the value of money remain reasonably stable, taxes need to be widespread and unavoidable. The super-rich who manage to pay low or zero tax are actually devaluing their own financial assets.
The best way to approach taxation is to focus on protecting the commons and thus to shift the basis of taxation onto charges for the use of the commons. This would simultaneously prevent tax avoidance, preserve the value of our virtual money ( a type of social commons) and protect our physical commons, whose depletion is causing the most serious crises we’re facing at present, including peak oil and climate change.
One such commons-based tax is a site value tax, which prevents the development of property bubbles such as happened in Ireland in the run up to the current bust. The bust was really caused by a handful of developers who were speculating on underdeveloped sites. Simply changing bank regulations won’t solve this problem. The commons need protection. A commons dividend could be used to provide a basic income, which is a very good way to get new money into the economy.
Arthur Doohan: The Personal Debt Mess
Arthur Doohan is a former capital markets trader who gave up trading after deciding that it amounted to “gambling with someone else’s money”. He believes there is a central structural flaw in current banking: the conflation of two separate activities, clearing transactions and advancing credit. In contrast, stock exchanges and bond markets separate out the trading from the assumption of the risk. Correcting this flaw in banking would be awkward but not particularly complicated to achieve. Credit card operations should be separate too and parallel methods of making payments, such as post office giros, should be strengthened.
Another serious problem at present is the existence of banks which are too big to fail, which receive an implicit subsidy from governments. They’re able to borrow money more cheaply than small banks, even though the latter are safer. The giant banks need to be split up.
A third reform that he advocates is a change in the requirements for deposit guarantees. These guarantees were originally put into place to protect savers but they now work against the common interest because banks have become so internationalized. So we have a situations such as the Irish government guaranteeing a bank that is 3 times its size, with 50% of its business being conducted overseas. Guarantees instead should only be allowed for assets within the jurisdiction of the guaranteeing state.
Cathal Spelman: Fair Money for Ireland
Cathal Spelman argues that there are two related problems with finance in Ireland at present: a shortage of spending power and the takeover of the money supply by private corporations. Ireland is currently in a deflationary depression. The fact that banks create money through loans and then charge interest on the loans is key, as that interest isn’t created and yet still has to be paid back. This makes the financial sector a black hole which sucks away the wealth of the economy. Effectively, the derivative speculators and bondholders exist in a different world from the rest of us. Our defaults enable them to buy up our assets cheaply.
A good antidote to this would be to adopt some of the suggestions made by CH Douglas and plug the gap in spending power in the economy. Every household could be given a monthly dividend cheque which would draw on funds that are created by fiat, free of debt, by the government. One benefit of this would be that prices would come down, as 45% of prices are caused by unnecessary interest charges (according to Margrit Kennedy).
If it seems too daunting to achieve this nationally it could be done on a community level first, by developing mutual credit trading systems which could have euro convertibility in order to attract businesses. On a national level, either a parallel national currency could be brought in or Ireland could drop out of the euro.
Paul Ferguson: The Solution
The solutions proposed by Sensible Money (“plain money”) begin with the separation of current accounts from savings accounts. This would separate payments from investments. Bank deposits would all be declared as legal tender, which would mean that money would no longer be liabilities of the banks. Debt would also be removed as an asset of the banks. So banks would therefore start with a fresh balance sheet.
Central banks would then take on the role of deciding now much money to create, and creating it, while governments would control budgets and decide how best to spend new money. No money would be deleted under this system. The new money created would be in relatively small quantities so inflation is unlikely to be a problem.
Current accounts would be risk-free and there would therefore be no risk of bank runs. Savings- more properly called investments – would carry some risk, but also the potential to provide returns. Banks would need to consult with savers about investment decisions so that savers would have some control over the degree of risk they are undertaking. All these ideas are explored in more detail at http://sensiblemoney.ie.