Thursday, 18 August 2011

New Money Systems for Real Direct Democracy

We have become so used to a money system based on the creation of debt by banks and the lending of money at interest that any attempt to change these fundamentals is as fiercely resisted as any other attempt to challenge any of our tightly-held belief systems.

The global financial crisis which began in 2007 and which intensified in 2011 witnessed a rapid loss of faith in fiat currencies, notably the US dollar and the Euro – a loss of faith which was mirrored by an extraordinary flight to safety as seen by a rapid increase in the price of the Swiss Franc and of that barbarous relic, gold.

Behind the crisis lies the inescapable fact that the western democracies are hugely indebted as a result of the enormous credit expansion of the last decade. It appears as though there is nothing that western leaders can do to return to a system of economic stability, so that the present currency system simply has to collapse. As Ludwig von Mises pointed out:

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and catastrophe of the currency system involved”.

Because interest on debt needs to be paid, in reality there can be no voluntary abandonment of further credit expansion, therefore at best we have some time before the inevitable currency collapse, time to ensure that a more stable system is put into place.

This is nothing new, and indeed the consistent strength of the Swiss Franc can be directly attributed to the presence in that country of just such an alternative money system, one which was put in place during the first great depression of the 1930s.

At that time in Switzerland as in many countries there was a rapid withdrawal of the national currency, the Swiss Franc, which made commercial life very difficult, so a number of businesses got together to create their own money, a complementary currency – as it complemented but did not replace the Franc. This was a business-to-business credit-clearing currency called the WIR, a system which now includes around 65,000 firms – 25% of all of the country’s businesses - and has now been operating for 75 years. At that time the WIR added much-needed liquidity into the Swiss financial system – and today it has assets of nearly 4Bn Francs. Indeed, a recent study by James Stodder has shown that the secret of the stability of the Swiss economy is in fact the WIR.

Information technologies and the Internet have given us the tools to create other flexible complementary currency systems at trivial cost. Mervyn King, the then governor of the Bank of England, already asked in 1999:

"Is it possible that advances in technology will mean that the world may come to resemble a pure exchange economy?" and continued "There is no reason, in principle, why final settlements could not be carried out by the private sector without the need for clearing through the central bank. Without such a role in settlements, central banks, in their present form, would no longer exist; nor would money".

One technology now emerging which is making Mr King's forecasts a reality is that of C3 or Commercial Credit Circuit Systems. C3 Systems can be seen as financial innovations which are able to facilitate trade, provide cash-flow and deal with unemployment in environments where there is simply a lack of money.

In cases where C3 currencies can be used to pay local or even national taxes - potentially huge gains in flexibility and unprecedented upswings in economic activity can be realized. A current pioneer in such initiatives is the state of Uruguay.

In order to successfully implement such C3 systems, a robust software system is required which can handle secure, transparent transactions across the Internet, by mobile phone or by the use of card-readers.

The Dutch-based STRO organization has developed just such a system, Cyclos, which is already in use amongst providers of complementary currency systems in a number of countries.

Such systems are independent of governments - C3 systems do not use central banks - so a system of this kind would be ideal as a currency system in a country where direct participatory democracy is embedded.