Beyond Bailouts
The following article originally appeared in the Spring/Summer 2009 edition of Kosmos Journal.
Beyond Bailouts: How a Circulation Charge Can Help Save and Transform Global Finance
By Jordan Bruce MacLeod
An Earth Shaking Wake-up Call
The global financial crisis has created tremendous uncertainty about the future prospects of human society. Very few people saw it coming and even fewer, if any, can say with much degree of certainty what will happen next. National governments are currently injecting trillions of dollars into their financial systems and the broader economy simply to cushion the fall of equity prices, home values and employment rates. Several countries have already sought emergency support from the IMF and World Bank and several more may require extensive assistance down the road. Yet these international institutions were neither designed nor equipped to deal with crises of this magnitude.
Adding to our woes are the persistence of monumental global challenges such as terrorism, environmental degradation and climate change, which all must be confronted head on in the very near future. Given their worsening trajectory, one may now look back and realize that these problems were never going to be resolved from within the parameters of a financial system so conducive to myopic decision-making and growth for growth’s sake. Considering the awesome complexity of global challenges and the urgency with which scientists proclaim that humanity must change course immediately, then perhaps we will come to view this financial crisis as an Earth-shaking wake-up call and timely opportunity to align global systems and institutions with global challenges and complexities for the first time.
While many financial experts and politicians are focused on bailouts and the mainstream media is widely locked in to asking experts mundane questions about when the economy will recover, it’s time for global leaders and citizens to start asking the tough questions about what’s next for global finance. What’s beyond the bailouts and efforts to keep the global economy in one piece? Where do we go from here, not only to get credit flowing, but also to create a financial system that works in the service of all of humanity towards the effective resolution of global problems?
New solutions will require new values and new financial instruments to ground these values into the economic system. Without a practical means to change financial wisdom and shift the logic of investment and decision-making processes, new values are bound to remain peripheral and idealistically oriented, rather than central and integrated operating principles. One tool with the power to literally transform the economy and help restore lending emerged prior to another economic crisis, the Great Depression. Its inventor, Silvio Gesell, called it demurrage, a French term borrowed from the shipping industry. We will simply call it a circulation charge and explore its potential within the context that matters most: our need to save and transform global finance.
In 1932, the town of Wörgl, Austria, was suffering from a 35% unemployment rate. The town’s mayor had a long list of projects and only 40,000 Austrian schillings in the bank to pay for them. Rather than spend the money on what would amount to only a fraction of the work that needed to be done, he used the schillings to back the creation of local currency with a unique feature. The money was designed so that its holder would pay a small fee each month to keep it valid for circulation. Once the fee was paid, a stamp was placed on the back of the paper note to certify it for exchange.
After printing these notes, the mayor of Wörgl then used this currency to begin paying for public projects, thereby introducing it into the town’s circulation. Yet, it was only after this money was spent that the dramatic effects began to take hold. In less than two years from the start of the circulation charge, Wörgl became the first town in Austria to reach full employment. With the equivalent of a modest number of Austrian shillings in circulation, money expert Bernard Lietaer reported, “Water distribution was generalized throughout…. the town was repaved, most houses were repaired and repainted, taxes were being paid early, and forests around the city were replanted.” Clearly, when a town begins to experience full employment during a depression and citizens voluntarily decide to pay their taxes early, people will talk. Within a short period of time, the town’s revitalization garnered international attention and was branded the ‘miracle of Wörgl.’
A Circulation Charge
While a part of this marked turnaround came from the town’s revenues in collecting fees from the circulation charge, this was not the most significant force behind the dramatic transformation. Of greater importance were the extraordinary contributions from Wörgl’s increasingly engaged citizens. They were enabled to transform their community and do what was previously thought economically unfeasible after the average velocity of money throughout the town increased fourteen-fold because of the monthly expiration date.
In other words, with the introduction of a circulation charge, money changed hands fourteen times more frequently in the same period of time than did the national currency, the Austrian shilling. An increase in trade and activity of this magnitude represents a dramatic leap in economic activity and confidence that simply cannot be replicated by central governments through spending programs or tax cuts. The achievement truly was a miracle, yet backed by solid innovation and grounded economic strategy. Rather than rely on municipal governments or centralized powers, the people of Wörgl had created the means to take power into their own hands and directly accomplish things that would never have occurred solely through the meddling of relatively arbitrary and inefficient centralized bureaucracies. In a time of financial gridlock such as ours, a circulation charge also presents itself as an ideal economic tool to begin catalyzing lending and thereby melt frozen credit markets.
The Science behind the Miracle
In his opus The Natural Economic Order, Silvio Gesell introduced the concept as an economic tool to effectively solve the problems of hoarding, interest and inflation. It was his original thinking that served as the basis for the successful stamp scrip currencies in Germany, Austria and America during the Great Depression. His work garnered notable recognition and approval from many of his contemporaries, including some of the most acclaimed economists of the 20th century, including John Maynard Keynes and Irving Fisher.
Today, as members of the G20 and architects of the global Bretton Woods II convene to consider new financial instruments for building the 21st century economy, a circulation charge should be at the top of their list. A validation fee of this sort addresses the essential design flaws of the current economy that make it utterly impossible to reconcile finance with environmental sustainability and the alleviation of poverty. These flaws include compulsive exponential economic growth in a world of finite resources, the myopic discounting of the future and a regressive redistribution of wealth into the hands of the world’s wealthiest via the interest on money.
A circulation charge effectively goes to the root of these problems by changing the qualitative nature of how we hold money. It inherently shifts financial thinking towards longer time frames. It creates a natural incentive to lend money without the need for interest, which would mitigate compulsive exponential growth, lessen the costs associated with borrowing and investment and reduce social disparities. It is precisely by shifting these central financial dynamics that markets can naturally begin reversing the inequalities between the rich and poor, facilitate investments in alternative energy infrastructure and create a more resilient financial system.
Going Global
The implementation of a circulation charge in the global financial system will require profound, unprecedented cooperation between nations. Much like any other global instrument, it will rely on widespread adoption and integration to take hold and succeed. It is for this reason that the G20, as a relatively broad and diverse group of nations, is an excellent starting point for considering this tool. In addition to serving as a catalyst for restoring lending and confidence in markets, it would simultaneously enable a pragmatic shift within the financial system towards achieving the 21st century objectives of sustainable development and the alleviation of poverty.
A circulation charge could be integrated into the financial system through its simultaneous adoption by several nations for their currencies. The tool itself, however, is more naturally predisposed to function as an integral part of a global currency. In fact, it could enable the realization of a global currency by transcending the present weaknesses in monetary policy that arise out of current national fiat currencies and policies. These limitations characteristic of today’s national economies include exponential growth, interest rates, hoarding and inflation. The diverse economic conditions of nation-states within the current economic paradigm mean that national monetary policies are often divergent and frequently irreconcilable. It is therefore only when a global currency is realized that the problems inherent to national currencies are likely to be resolved.
A fully digital currency would also strongly support the efficient and stable adoption of a circulation charge within a relatively short time period. If digitized, the currency could be programmed to automatically deduct the circulation charge instantly, at the time of its expiry date, from anywhere in the world. A digital currency would also enable a faster velocity of money in circulation, greater control and oversight of the money supply and the real-time monitoring of demand. The currency itself, as we saw in the case of Wörgl, also carries the power to quickly restore full employment and effectively decentralize wealth and power into the hands of citizens.
A circulation charge enables the adoption of a monetary policy of zero interest and the creation of a money supply equal to demand. Under such conditions, a global currency could transcend the limitations of national currencies and the arbitrary power and problems that emerge when a national currency, such as the US Dollar, functions as the international reserve currency. A digital global currency with the above characteristics could be far more effectively regulated by global institutions, such as a United Nations agency designated to oversee international currency stability.
While the parameters of this article can merely serve as an introduction to a very broad and important subject, it brings to light the urgent need to recognize that our relationship with money is at the very heart of our global crisis. The consideration and implementation of the requisite financial tools will require the world’s leading nations to forge a common vision for a global economy. Integrating global values and instruments such as a circulation charge into the heart of their monetary policies can help ensure the constant circulation of money and thereby help restore economic activity, lending and the opportunity to catalyze a free market system far more aligned with solving planetary challenges. These are precisely the qualities that will help enable global cooperation and insulate the international community from the inherent dangers that are destined to emerge in the midst of worsening global economic conditions.
A circulation charge also reveals the very real potential to align and reconcile global finance with global values and visionary thinking. Getting there, however, will require bold new approaches in economics and a broader understanding that money is a social creation of the utmost power and importance in our lives. Its understanding and control can no longer be left in the dark corners of arbitrary or centralized power. The true value of money in our lives must be consciously recognized and mastered by all engaged global citizens as a precondition for successfully enabling global transformation. When we do this much-needed work, we will truly hold in our hands the power to change the world.
Jordan Bruce MacLeod is author of New Currency: How Money Changes the World as We Know It. He is a partner at the consulting firm Cornerstone Global Associates and co-founder of Elevator Software Corporation. Jordan also serves as Co-Chair for the Club of Rome’s tt30 and is the founder of www.NewCurrency.org.
Tags: Circulation Charge, Global Currency, Kosmos Journal
Circulation Charge, Global Finance | admin | 
May 15, 2009 7:27 am
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By Art Shipman, May 21, 2009 @ 11:51 pm
Interesting article…
I agree *absolutely* that “our relationship with money is at the very heart of our global crisis.” However, your article seems to avoid any discussion of this “relationship with money,” focusing instead on the new relationship you propose.
You say Gesell’s “work garnered notable recognition and approval from many of his contemporaries, including … John Maynard Keynes and Irving Fisher.” But you neglect the problem Keynes pointed out regarding stamped money: a series of alternatives will emerge.
I may be open to Gesell’s idea. But I have powerful reservations about going global. You call for “profound, unprecedented cooperation between nations.” You call for a currency “regulated by global institutions, such as a United Nations agency.” You write of “global citizens” and “global transformation.” It will be difficult for you to get cooperation from anyone who uses the word “sovereignty.” And there’s lots of ‘em out there.
ps: I got to your site via your haiku comments in the NPR Planet Money thing.
By admin, May 22, 2009 @ 12:36 am
First of all, keep in mind that within the parameters of a 2,000 word article introducing a concept as novel and foreign (to most) as a circulation charge (demurrage) it’s impossible to address every issue. By no means am I avoiding the problems of alternatives or the relationship with money. All of these issues I discuss in detail in my new book (which should be out in a couple of weeks by the way).
The nature of a circulation charge in my opinion lends itself primarily to global currency design because of the issue of emerging competitive alternatives that you mention. How could America implement a hoarding tax alone, for example, without experiencing a flight from dollars to other national currencies? So, in my opinion, if it is going to work, and some day I believe it will, it needs to be built on unprecedented international and/or global cooperation.
In terms of the sovereignty issue you are of course on the money. From my perspective, as global complexity continues to increase and fly over the heads of nations to adequately address the emergent problems, true “sovereignty” of all nations will increasingly be eroded to the point where it is increasingly in question. Already, we live in a world where Hezbollah can (and does) easily enter the US through Mexican drug cartel routes and Iran is a year or two away from the capability of launching an elecromagnetic pulse (EMP) attack from commercial vessels. Oil dependence, climate change, massive debt, terrorism, resource depletion, etc, etc. All of these problems are converging to build a need for a radical rethinking of what “sovereignty” and security means and how we are going to ensure they address 21st century challenges.
Ultimately, I believe the only answer is to build an exponentially more dynamic and self-organizing economy that integrates all of humanity into win-win-win scenarios, increases the velocity of money, resilience, savings and investment. It must also increase efficiency in resource consumption and, I believe tap into powerful new insights that can generate meaning and broader, more integrated values and identities. At the same time, such qualities must also allow us to keep and preserve what’s best and most treasured from each of our distinct cultures, nations and civilizations.
No, this is not easy. But I don’t think we live in a world with easy challenges or life conditions. In my opinion, there’s nothing else out there with as much power or potential to reinvent the international economic paradigm as a circulation charge. To put the matter back in your court, if you agree that it has potential then I’d be interested to hear how you think it could be implemented independently by “sovereign” nations?
Thanks for the excellent questions and observations.
Jordan
PS - It’s intriguing to me that we are so willing to call something a global crisis yet have so much resistance to global cooperation or transformation and thinking of ourselves as global citizens. Ultimately, how are global crises of any nature or order going to get dealt with effectively without the latter?
By AndrewBoldman, June 4, 2009 @ 2:05 pm
Great post! Just wanted to let you know you have a new subscriber- me!
By CrisBetewsky, July 6, 2009 @ 3:33 pm
It’s a pity that people don’t realize the importance of this information. Thanks for posing it.
By macromedia, July 7, 2009 @ 8:06 am
Great post!
By Robert Searle, July 10, 2009 @ 9:41 am
I think people would find my developing project of great interest. It is called TRANSFINANCIAL ECONOMICS.
By Robert Searle, July 13, 2009 @ 6:58 am
Yes, the idea of local currencies is all fine, and good. For it to be really successful it would need massive cooperation on a global scale to bring it about, and ofcourse, it could even become a challenge to the banking system which would at some point put a stop to it if they feel their interests were threatened.
By Bill Bartmann, September 3, 2009 @ 1:39 am
Hey good stuff…keep up the good work!