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Climate and Currency: Proposals for Global Monetary Reform - page 3

If the flows are kept separate, however, each exchange rate adjusts so that export earnings always equal the cost of imports, and inflows of capital always equal outflows. This gives the government much more freedom of action. It means, for example, that if something happens which causes a lot of people to try to move their capital overseas, the exchange rate in terms of ebcus they will get for their money will rise to discourage them without putting up the exchange rate that other people have to pay to get foreign currency to buy imported goods. Consequently, this proposal would allow governments to adopt policies that benefit its own people even if these policies upset international and domestic investors. It would cease to matter whether a foreign company decided to invest in a country as all its decision to do so would mean would be that people who wished to move their capital out of the country would get more foreign currency in exchange. It would be the same with foreign loans - they would simply improve the terms on which the better-off could move their capital offshore. The separation of capital and current account flows could be adopted by countries even if the ebcu/SER arrangements do not proceed.

6. The new national exchange currencies should be spent into circulation by their governments rather than being created through the banking system on the basis of debt.

Sustainability requires a money supply system that can run satisfactorily if growth stops. Money created through the banking system on the basis of debt only exists because people have borrowed it and ceases to exist if they pay their loans off. Such a supply is therefore incompatible with sustainability since circumstances could easily arise - an ageing population, for example, as in Japan at present - in which people decide not to borrow enough to maintain a circulating money stock of sufficient size to permit the desired level of trading to go on. The smaller money supply that results causes the level of trading to shrink, further deterring borrowing and causing a further decline in the money supply and hence in the level of trading. In short, a debt-based money system is fundamentally unstable.

Instead, Feasta believes that money should be created by being spent into circulation by the government. This brings the following advantages:

1) If the state spent the required amount of new money into circulation each year, either taxes could be reduced, or public expenditure increased, or both. The benefit would be substantial. In the 1998-9 period in Britain, for example, it would have amounted to a sixth of all state spending. Statutory controls on the amount of money a government could issue are highly desirable, however, as in the past, many governments have found it easier to print money and spend it rather than raising it in taxes.

2) Allowing the banks the privilege of money creation constitutes a massive subsidy to the financial sector. It therefore distorts the way the economy operates.

3) The necessity to pay interest on almost all the money required to keep the economy running bears more heavily on the poor than the rich. It is effectively a regressive tax.

4) Spending money into circulation creates a stable economic system which does not have to be kept constantly growing regardless of the environmental and social consequences. If firms in a particular industry get into difficulties and go into liquidation, their departure leaves the money supply intact, and thus the same potential level of purchasing power to be shared among the rest of the economy. Demand in other sectors would therefore increase and profits rise, tending to counteract the decline. Such a system is therefore much more compatible with the achievement of sustainability.

5) Because a high volume of bank lending is required to keep the present money system functioning, the banks shape the way the economy develops. They determine who can borrow and for what purposes according to criteria which favour those with a strong cash flow and/or substantial collateral. As a result, the present money system favours the rich and multinational companies and discriminates against smaller firms and poorer individuals. The proposed system of money creation would lessen this bias.

6) Another advantage of the proposed system would be that the exchange currency could be allowed to inflate gently as people would no longer rely on it a store of value for their savings. A mild inflation - up to 8%, some economists think - creates a flexible, benign business climate and allows the government to reap seignorage gains as it spends the additional money the inflated volume of trading requires into circulation.

7. The establishment of regional (i.e. sub-national) and local exchange currencies should be encouraged.

Except in the tiniest countries, regional - that is sub-national - exchange currencies might be better than national ones in meeting users' needs. The drawback which can arise with a national exchange currency - and is almost inevitable with an international currency such as the euro - is that if a major crisis, such as the collapse of an important industry, takes place in one region of a country and leaves other regions unaffected, it is very difficult to attract or grow replacement industries to the affected region unless its price levels - and in particular, its labour costs - come down. The price levels which need to fall were, of course, set before the industry collapsed but are now too high to make the depressed area the most profitable location for a new or expanding business. Pushing price levels down is difficult because the newly-unemployed in that region will fight tooth and nail against accepting lower wages to 'price themselves back into work' since many will have taken out mortgages and made other commitments on the basis of their present wages and could not make ends meet at lower rates of pay. Consequently, it could be years before the region is able to restore its competitiveness in relation to the rest of the country (or, with the euro, the rest of Europe) and for its unemployment to begin to fall. Great social distress could arise.

Sub-national exchange currencies would overcome this problem because the fact that the region was exporting less and importing more after the industry collapsed would mean that its exchange rate would fall in relation to the ebcu, and thus in relation to the currencies used in the rest of the country. This would restore its competitiveness in a matter of months. If regional currencies had been in operation in Britain in the 1980s when London boomed while the North of England was on its knees after the closure of its coal mines and most of its heavy industries such as shipbuilding, the North-South gap which developed would have been prevented. The North of England pound could have been allowed to fall in value compared with the London one, saving many of the businesses which were forced to close.

The value of national and regional exchange currencies in relation to the ebcu should be determined solely by the market and that central banks should not maintain ebcu and foreign currency reserves to use to support their currencies. Speculators ought to be able to do the job of moderating the rate of change of the currencies and preventing them overshooting their new values at least as well as any central bank. In addition, leaving the determination of relative exchange rates strictly to the market would make the establishment of regional currencies a much simpler process as there would be very little financial infrastructure to put in place


Anyone who has money has power - over people, resources, governments and arms. Surprisingly, however, the world has paid very little attention to how money is created and the power structures that result from creating it and issuing it in a particular way. We have worked until now on the assumption that there is only one type of money and that only one type of global and national money system is possible. One size has to fit all because we are not aware of any other possibilities.

Thus, SDRs apart, we have to work with one type of international money, the debt-based reserve currencies, which become more abundant when people are happy to borrow and scarcer when potential borrowers become afraid. Such currencies inflame economic booms and worsen depressions. Moreover, they require the economic system to grow continually to avoid collapse, so bringing it into conflict with society and the natural world.

These conflicts will run on until the monetary system is changed. The environmental movement should therefore demand that the reserve currencies' be replaced by a global currency whose availability is determined by the availability of the scarcest environmental resource. Feasta believes this to be the ability of the Earth to absorb greenhouse gases. National and regional currencies should then be linked to the new global currency by floating exchange rates in a system which prevents capital inflows and outflows distorting rates determined by trading in goods and services which would otherwise ensure every country's imports and exports were always in balance.

Last revised, 1st May, 2002


i Economic Update, 12/02/2002.
ii Is the US Trade Deficit Sustainable? Institute for International Economics, Washington DC, 1999.
iii See Finance & Development, Vol. 37, No. 1, March 2000. Can be downloaded from
iv 'Current Account Adjustment in Industrialized Countries, ' International Finance Discussion Paper No. 692, Board of Governors, Federal Reserve Board, Washington DC, December 2000. Available at
v 'When the Tide Goes Out', European Investment Perspectives, Morgan Stanley, 13th February 2002. Also 'Global Decoupling' Global Economic Forum, Morgan Stanley, 30th January, 2002.
vi Europe Economics: Global Decoupling: Chaotic or Orderly?, Global Strategy Bulletin, Morgan Stanley, 17 February, 2002.
viiThe International Monetary System in the 21st Century: Could Gold Make a Comeback?, lecture delivered by Robert Mundell at St. Vincent College, Letrobe, Pennsylvania, March 12, 1997. Available at
viiiKingpins of Carbon: How Fossil Fuel Producers Contribute to Global Warming, Natural Resources Defense Council and others, New York, July 1999.
ixThe Imminent Peak of Global Oil Production, Feasta Review, No. 1, Dublin, 2001, pp 88-97

Related links in the Feasta website:

Curing Global Crises: Let's Treat The Disease Not the Symptoms
Chapter Four of The Ecology of Money: One Country, Four Currencies

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