transcribed by Kristin Sponsler
Jason Bradford: Alright, welcome back to the Reality Report. I’m your host Jason Bradford, and on the phone with us is Richard Douthwaite. Can you hear us OK, Richard?
Richard Douthwaite: I can, yes.
JB: Alright, thank you. Richard is in Santa Fe right now, but lives in Ireland, and he’s an economist, author, and founder of the Foundation for the Economics of Sustainability. His books include Short Circuit, The Ecology of Money, and The Growth Delusion. We’re going to talk today about complementary money systems, what they do to stabilize economies, and how they will foster efforts to cope with efforts like peak oil and climate change. So, thanks so much for being here today.
RD: It’s a pleasure.
JB: This is a really complex issue, and I think it’s one that few people that think about sustainability really get into in much detail as money, so it’s really a pleasure to have you on. I’ve been wanting to talk about this for awhile, and it’s good to have an economist who really cares about this stuff. I appreciate it.
RD: It’s good to have an economist that knows anything about money at all.
JB: It is ironic, isn’t it? I think most people in general really don’t understand how money works.
RD: No, I think when they’re told how money gets into circulation it comes as a great shock, and they think there’s something wrong with the whole process, and if they think that that’s not too far wrong.
JB: So let’s talk about that. How is the money most people use today in the world we’re talking to right now, where there is money going around, how is it created and what gives that money its value?
RD: Most of the money that we use on a daily basis gets into circulation because it’s borrowed into circulation. When I say most I mean the money that we transfer to each other whenever we use a check or whenever we use a debit or a credit card. Yesterday, for example, I tried to pay for my shuttle from Albuquerque Airport to Santa Fe with cash! And it was the first cash payment that the woman had had during the day. We don’t use very much cash. Cash gets into circulation in a different way. Only roughly 3 percent of our transactions these days are done in cash, and that’s in value terms, not in the number of transactions that we do. And that money is in fact bought from the Federal Reserve in the U.S. by the banks that issue it to us. But the rest of the money, the 97 percent of all the transactions that we do, are carried out with debt-based money. And this is a fundamental flaw in our economic system.
JB: What gives that debt its value, in other words, why do people assume debt?
RD: Well, one of the things that gives it its value is that people have to pay it back. So, if you’ve borrowed money, if you’re in debt at the moment, or if I am or anybody is, we’re very keen to get money so that we can repay that debt because we are going to be paying interest on that loan. The key thing that gives any form of money its value is we know that if we have it, then somebody else is going to be keen to take it from us and supply goods and services for it. So the main thing that gives any form of money its value is its acceptability, the fact that if we take it in payment for our work or something that we are selling, we know that we can pass it on to somebody else, because somebody else will accept that it has value and will take it from us. But there is nothing intrinsic behind that money that gives it its value. At one time, of course, there was a backing for money, and that was gold. But President Nixon took the U.S. off the gold standard in the early seventies, and that was the last link that our money system has had with anything real, anything tangible, anything that took real effort to produce. So this is why the central banks all around the world focus on making sure that there’s only a very slow rate of inflation. They’re frightened that if too much money gets into circulation there’ll be too much demand, and money won’t be scarce enough, and that there’ll be so much pressure for things like real estate or for services or for people’s labor, that there will be inflation, and money will lose its value.
JB: Well, that’s the worry we have in the U.S. right now, that there was such low inflation that it led to a housing boom, because people got skittish about stocks and bonds, and now we’re talking a housing crash, potentially.
RD: Yes, and it’s not just the United States that’s had that. I mean, money got into circulation by people borrowing to buy property and this has happened in Ireland as well.
JB: Yeah, and I know the U.K. had a big housing problem with that as well.
RD: Yes, that’s right. And with more money in circulation there was an asset price bubble. This is the thing that pushed stock prices up, the prices on Wall Street, and of course, there’s a positive feedback there, because if people are feeling a bit more prosperous because they reckon that the market value of their house is a bit higher, they can borrow against that, and that puts more money into circulation. And the thing that has been keeping down the cost of living around the world has been this flood of cheap goods from China. China has been producing and selling at very low prices. So rather than there being a cost-of-living inflation, it’s been an asset price inflation, and a lot of people think that it’s in fact an asset price bubble.
JB: So when people borrow money, though, aren’t they also expecting that they’re going to be able to pay it back, and when a bank loans money, aren’t they also expecting that for the most part, the economy’s going to be good enough that whoever they’re going to be lending money to is going to be able to have a job, a stable salary, the economy’s going to be moving along, so that they can pay back that loan plus interest? Does that then necessitate future economic growth for that to happen?
RD: It does. This is one of the big weaknesses of our system. I mean, supposing, for example, that we think that our jobs aren’t safe, let’s suppose, that we’re employed in the construction sector, at the moment, and we’re a little bit worried that there’s going to be layoffs. What this is going to do, it means that we’re not going to be happy about taking out a loan to buy a car, still less a loan to buy a house. We’re just going to say, “Oh, I’ll wait for six months and see what’s going to happen.”
JB: That’s why they look at the consumer confidence data so carefully.
RD: Exactly. And if the confidence isn’t there, people don’t borrow, and this is a self-fulfilling prophecy. Because if we’re not borrowing enough to replace the loans that were taken out in the past, as they’re being repaid, this means that the amount of money in circulation begins to fall. Which means that trading conditions become much more difficult and this has a knock-on effect on businesses. If businesses aren’t doing the same amount or a little bit more than they were doing six months ago, they’re going to say, “Well, things aren’t quite so good, I think I’ll wait before I decide to extend my premises”, and they won’t borrow either. And so this is the thing that terrifies every government around the world. If we lose confidence in our ability to repay then the economy goes into a downward cycle, and we plunge ourselves into a recession.
JB: Well, I remember a couple of days after September 11th, President Bush got up and said, “Go shopping, please.” It was pretty amazing. “I’m sorry we’ve had this national tragedy, but we now need to go out to the malls.” That’s American.
RD: Yes, there’s a great cartoon, and it shows a sort of huge ferocious beast, which is labeled recession, and there’s two little people in front saying, “We must consume faster! It’s catching up on us!”
JB: Let’s talk in more detail about the relationship between the money supply, compound interest, and the drive for economic growth. Why does compound interest set up a structural need for economic growth?
RD: Well, if, let’s say you have a business, and there was no growth last year, but you invested, you extended your factory or whatever it was, then you’re not going to invest again this year. Which means that you’re not going to be able to borrow. What it means is that the costs of business went up, because business would have borrowed, and in an economy like that of the U.S. something under 20 percent of all the goods and services that are produced are plowed back into growing the economy for the next year. And so, if there’s no growth, all the people who are involved in construction and in financing that or in fitting out new factories or whatever it is, all their jobs are in danger. And if they lose those jobs they are going to have to fall back on their savings, and that’s going to cost other people their jobs, and the terrifying downward spiral begins. So under the present system, we need to borrow a little bit more each year. Why do we need to borrow a little bit more? Because we have to pay interest on our previous year’s borrowings. So that means that we have to pay back more, in fact, than we borrowed.
JB: So in order to pay back more than we borrowed, the economy has to be bigger…
RD: That’s right, otherwise we would have to borrow money to repay, and our debts would increase. So supposing there’s no growth in the economy, then our debts would gradually increase year after year and that becomes unsupportable.
JB: Well, eventually people lose confidence in the whole system if the debt gets too big. I mean I would not lend to somebody, I mean this is what you look at, you say “Gee, you have a huge debt load, I shouldn’t lend you any more”, and if that happens to enough people, then confidence erodes in the whole stability of the system, which is what we see now, people questioning is the debt load of the U.S. unsustainable? Is the debt load of California, we have all these bonds, for example, on the state ballot right now, and people are saying, that’s going to double our debt of the state, and is that something we want to do?
RD: So, under the present system, somebody has to borrow, and if it’s not private citizens who are doing the borrowing, it has to be either government or the industrial or commercial sector. And there has to be a justification for borrowing, and that means the economy has to grow year after year. And if it stops growing, and every politician is frightened of this, then the economy can’t just stand still. I mean, the United States isn’t in a position to say, “Look, we are one of the richest societies there has ever been in the world. We have grown enough. We’re using too much of the world’s resources, there are people in far greater poverty elsewhere in the world. Let’s stop.” We can’t say that under our present system, because our present system just crashes if we don’t get economic growth, and that’s because of the way that we put money into circulation on the basis of debt.
JB: OK, let’s summarize this. We have an expansion of the money supply by commercial banks, a desire for a low and stable inflation rate to more reliably plan investments and estimate rates of return, the structural need for economic growth because of compound interest, and all these financial norms then appear to be in conflict with concerns about energy constraints and climate change. Is that right?
RD: Yes, because the way that we’ve been generating growth is by using more energy. If you look at how productivity per person is increased, the basis on which firms compete with each other, labor has been the expensive factor of production, energy and materials have been the cheaper of the two. So we’ve been getting economic growth by using more and more energy, by making ourselves more and more labor-efficient and using more energy to do that.
JB: Yeah, I went into a supermarket one time, and they had this whole section where there are no longer any checkout people. It was all computerized; you could scan your own. It was complete replacement of labor with technology and electricity. So essentially more economic expansion requires work, work needs energy, most industrial energy sources are fossil fuel-based, so a scarcity of fuels can lead to higher prices and an inability to grow. Is that what you’re saying?
RD: That’s right, and this is the reason why the world has not yet been able to respond adequately to the threat of climate change. It’s been a tradeoff between are we going to get economic growth or are we going to preserve the climate. If we don’t get economic growth, we’ll have our economies collapsing in the short term, and of course it’s the short term that politicians pay attention to, because they need to get reelected. They’re hoping by the time that climate change really begins to kick in they’re going to be in retirement or possibly pushing up the daisies.
JB: You do see discussions. I think that Canada and the United States and Australia have been arguing that we can’t deal with climate change, because it will wreck our economy, like you’re saying, in the short term. Now there are reports coming out by the World Bank, I think it is, saying if we don’t deal with climate change, it will wreck your economy in the long term.
RD: Yes, I think you’re referring to a very remarkable report that came out earlier today in London. Sir Nicholas Stern’s review, which Tony Blair has called the most significant report that he’s had as Prime Minister. Sir Nicholas was the chief economist at the World Bank for a period, and this makes it quite clear that it’s going to be very much cheaper to deal with heading off climate change now, that this might cost us about 1 percent of the world’s gross national product a year, rather than trying to deal with the consequences of it later.
JB: We haven’t really gotten to the alternatives yet, we’ve been talking about our current money system. I just wanted to ask another question about that. How is the structure of the monetary system related to its function, in other words, who benefits from our current monetary system?
RD: Basically the banking system does. It’s been a privatization, nobody really planned it this way, but this is the basis of the bank’s huge profits. They’ve been given the right to create what is in fact a common service, to provide a common service, and it’s very profitable indeed for them to do that. So you mentioned alternatives. One alternative that’s been proposed by James Robertson in a publication called Creating New Money, which is published by the New Economics Foundation in London, is the right to create money should be taken away from the banks and governments should spend it into circulation. So this means that the crazy situation that applies to most governments and in particular to the government of the United States which has been borrowing a tremendous amount. I mean it’s absolutely crazy for the United States government to borrow money that has been created by the click of a mouse in a computer and pay interest and impose a burden on taxpayers to do that.
JB: Wasn’t the Fed set up to be a check on government of just expanding the money supply for short-term reasons, like saying “Oh, I’m a politician, I’m going to expand that money supply now.” How would you put a check and balance on that?
RD: You’ve got to have checks and balances on this. You only have to look at what happened in Argentina and other countries too. If you have a lazy government, and most governments are pretty lazy, they will say “Well, it’s very much easier for us to spend money into circulation, to create it that way,” than to incur displeasure from the voters by in fact taxing them. There’s got to be some system that ensures that they don’t just put an enormous amount of money in circulation as happened in Argentina to such an extent that during the mid- to late-’80s, they were running inflation at 5000 percent.
JB: So this is what we’ll get to when we start getting to the other complementary currency systems. So you discuss in the Ecology of Money that there are different types of complementary currency systems. So why don’t we go through the different scales of those and what their purposes are? What other currency systems are being discussed or being used right now?
RD: Well, money fulfills three roles. It’s a means of exchange in economist’s jargon, which means that it’s the way that we trade with each other. It’s also a storer of value, we try and save money for our retirement or whatever. And it’s also a unit of account, in other words, it enables us to compare what happened one year with what happened another. It gives us a reference point. But all these things are, these three objectives are in conflict with each other. Because if we save money, we’re tending to take it out of circulation, we’re not passing it on, we’re damaging it as a means of trade, and of course, if there’s inflation, it’s not much good as an item of account either. You can try and correct for the inflation but not all prices change the same way.
JB: Yeah, that’s really complicated to do, isn’t it?
RD: Yes it is. So what we basically need is money that is good for each purpose. We would need a currency that makes trading easy, but we wouldn’t keep our savings in that. Because if you have a little bit of inflation, that’s very good for an economy. It allows adjustments to take place. So, let’s suppose a sector of business is in decline. If there’s no inflation, it becomes difficult for businesses in that sector to adjust. If you have an inflation, on the other hand, it’s going to be asked by its employees to put its wages up, and the sectors where the inflation is taking place are going to be able to do that. But it’s going to be under pressure, so it’s not going to be able to put its wages up so much, and so it’s going to fall behind. And this is going to signal to people, oh perhaps we should move out of this sector. So the sector can gradually decline, whereas if you keep prices absolutely rigid, the business is just going to go bust, and it will crash overnight. So having a bit of inflation in an economy creates a sort of forgiving economic environment.
So we need a currency that just makes trading easy, but we also need a currency we can keep our savings in, and won’t be plagued by inflation. And we also need to think about where is that money going to be created? Is it going to be a multinational currency like the Euro, or an international currency like the dollar, a currency which is in fact being used for trading all over the world? Is it going to come from outside our communities or are we going to create it within our communities? You need different sorts of money. There is a need obviously for an international currency to allow international trade to be carried on. There is also a need for a national currency, but that shouldn’t be used for international trade, and then we need local-level currencies, either in the U.S., let’s say at the state level, or at city level.
JB: So what are some examples of those? I’ve heard of LETS, and time-banking, and things like that at the local level.
RD: A LETS would be a very local currency. It’s just set up by a group of people who say we will use this instead of the national currency for trading amongst ourselves. But it’s structured very like the national currency system. So if I come and do some work for you, you will pay me in green dollars, in the LETS currency, and say you go into debt, your account with whoever is keeping the accounts for the system goes into debt, and mine goes into credit…
JB: There’s just no compound interest.
RD: That’s right. This in fact turns out to be one of the weaknesses of the system. You’ve gone into debt, there’s nothing to compel you to pay back that loan to get out of debt very quickly. What tends to happen in a lot of LETS systems is that first of all, a lot of effort is expended trying to get people like you who’ve been in a debt for a long time to repay. But suppose I am very active, working, working in that system, I get a lot of units which I can’t spend because other people aren’t putting the effort into it. And after eighteen months, two years, they can break down. So other solutions are needed.
JB: Yeah, there’s a woman, Annette Briggs, who is working on something like this, who is aware of that problem with LETS and things locally here, so I’ve very curious to see what she’s coming up with. So what about these regional or state level or store value currencies, how do you do savings accounts with them, if they’re not tied to trade?
RD: Let’s talk about regional currencies. If we are going to be responding to the threat of climate change or to oil peak, we would be responding to both in the same way. Different places are going to be affected differently, and if these places are trying to use the same currency, it’s not going to work out very well. So what would be much the best solution, and this was demonstrated well in Argentina, is to have currencies created by local government. So that could be at state level, or it could be at city level. Jane Jacobs, the Canadian-based economist who died recently, said that every city-region should have its own currency, and I think she was right. Because you can get what’s called an asymmetric shock, a shock that affects one state, one city-region, that doesn’t affect the others, and if you have a common currency, it means the place that’s been affected, that’s been damaged, can’t adjust very easily, and people have to move. An area can get into continuous decline. So if on the other hand, a government can spend money into circulation, and have a floating exchange rate, a variable exchange rate against the dollar, so that you can make a declining area competitive again, because if the local currency, the currency in which people are paid, in which people borrow to buy their houses, declines relative to the national currency, the dollar, then that becomes a much better place to set up a business. It’s got a lower cost base. So instead of the people moving, and of course, if people move, they take jobs with them. I know in the west of Ireland, it was calculated for every three families that left the west of Ireland some years ago, another family had to leave. So if you have a place that is in decline and people are leaving, that decline can become permanent.
JB: Yeah, especially if there’s like a post office or a grocery store.
RD: Yes, because there just isn’t the demand from the people who are there. And what’s particularly damaging is if your young people leave. Because they are the people who borrow, and under the present system they’re the people who put money into circulation. I mean we all go through phases of our lives, and during the period let’s say from twenty-five to forty-five, we’re borrowing, and after that, we’re saving. And it’s the people who are borrowing who are bringing money into the area and putting it into circulation into that area and creating jobs. So if you lose your young people from an area, and if you’re just left with the older ones, people who are trying to save, that area can be locked into permanent decline. So to get over that, you’d need to have a regional currency, that the local government spends money into circulation, but then taxes it back. So you need local taxes, too, because if you know that you can pay your local taxes in the regional currency, if you know that you can pay your mortgage in the regional currency that creates value. That makes it acceptable.
JB: It’s not just massage therapy or something like that, it’s for real tangible stuff.
RD: Exactly. And this is exactly what happened in Argentina during the money crisis there. All the regions, all the provincial governments in Argentina, all 26 or 27 of them, put their own currencies into circulation. Otherwise, they would have had to sack teachers, civil servants, close down hospitals, this sort of thing. Because there just wasn’t enough regular money in circulation for them to be able to collect enough taxes to pay the people they had on their payroll.
JB: So this is a huge boost to issues of stability during economic crises.
RD: Exactly.
JB: Because a lack of confidence leads to starvation, well food sits around as a potential. That happened during the Great Depression here. There was food in the fields, but it couldn’t get to market and people couldn’t afford it.
RD: Yes and this would have happened to a much greater extent in Argentina had these provincial governments not created their own money during that period. Strangely the Argentineans have much better experience than any one else in the world with regional currencies, but they’re ashamed of it, and very little work on this has been done at an academic level.
JB: Maybe we should step up to the international level, because at some point we have to figure out a way of encouraging energy efficiency dramatically, of encouraging a reduction in consumption of material goods, of localizing economies. How can we use international currency systems to do that?
RD: I think you need to base your international currency on what’s the scarcest international resource at the present time. And for me, that’s the ability of the earth sinks to absorb the carbon dioxide and the other greenhouse gases that we’re putting into circulation. That’s the really scarce resource, and we need to have a world economy which lives within that scarce resource. So what I’ve suggested is that we set up a true international currency called the EBCU, the Emissions-Backed Currency Unit, which takes its value from the right to emit a ton of carbon dioxide. So what we have to do is first of all decide how much carbon dioxide we can get away with releasing into the atmosphere without doing really terrible damage to the world’s climate. Once we’ve got a tonnage, and it’s a pretty small figure, you have to think whose is the right to emit that? Does it belong to the companies that are already emitting large quantities? Does it belong to governments, or does it belong to everybody on the planet? Is it in fact a human right? Should we all be sharing this equally? And I think that the latter one is the answer. So we need to share this very limited amount of emissions equally amongst every one on the planet. So in this system we would all get annually an emissions permit for whatever tonnage it was felt could be safely emitted that year. Now living in Europe or the U.S., we all emit too much, and our systems can’t adapt quickly to living within that limit, so we would have to buy emissions permits from people in poorer counties, who haven’t created the climate problem and are living in a very energy-frugal way, so we would have to buy the right to consume more from them. So this transfers wealth from the rich countries to the poorer countries, and from within countries from richer people to poorer people.
JB: Do you worry at all about an incentive to increase population size if you have a value per capita in place, in other words, might governments say, forget birth control programs, we get more money if we have more people.
RD: Yeah, so you have to devise a system that doesn’t create that incentive. You could, in fact, say let’s issue only to people who are over 18, but why don’t we give women slightly more than men, because women generally have the responsibility for raising children, whether as mothers or as grandmothers. You could adapt something that way.
JB: The other issue that I can imagine being brought up is, what are they going to use this flush of money for? Are they just going to put in highways and mega malls, or are they actually going to use the money to develop an alternative to a fossil fuel-based economy?
RD: Well, I think it would give a big incentive to develop an alternative. Because fossil fuels are going to under this system get very expensive very rapidly. I mean one of the things that fossil fuels has done is the amount of human labor that you can buy equivalent in fossil fuels is huge. Ten liters of gasoline has the energy equivalent of one man working for a year.
JB: That’s about two gallons.
RD: Sorry about that! So we’ve devalued human labor. If we put up prices of fossil fuels, it’s going to mean instead of trying to economize on labor, it’s going to be sensible to use more people and use less equipment, so it’s going to spread work around the world, and the millions of people who have no real role in the present system because there’s no market for their labor will find that things begin to improve for them.
JB: How does this relate to, I remember Al Gore said that he would like to maybe eliminate the income tax and impose carbon taxes instead, and I know in California there’s consideration of a cap-and-trade mechanism in conjunction with states out in the Northeast, and I know there’s a cap-and-trade system in Europe that has had some ups and downs. What’s your take on the difference between carbon taxes and cap-and-trade, and how would that relate to the EBCU?
RD: Well, what I’ve just been talking about is essentially a cap-and-trade system. That you cap the amount of carbon dioxide that the world can emit. You then allocate on some equitable basis, and I’ve been arguing just now that equal per capita is basically the right way to go, and then you trade. So when each of us have got our allocation, we would sell it, and it would be bought up by the banking system, by brokers, whatever, and they would sell them on to companies that were either bringing fossil fuels into a national economy or producing them within that economy. So you can limit it. So this is a cap-and-trade system, and the European emissions trading system and the system they are proposing in California is cap-and-trade too. So this in my view is much better than trying to go for carbon taxes. Because with carbon taxes, to get emissions down to a level that is compatible with what the climate can accept means that if the world economy is booming, you have to have a very high tax rate. But then, if the world economy is doing badly, that tax rate is going to be too much of a burden, and there’s going to be unemployment and so on as a result. And so this means that the rate of carbon tax is going to be perpetual political football. People are always going to be saying it’s too much, we can’t afford to pay, or it’s too little, we’re not achieving the target. If you set the cap, and then you allow the market to determine what the price of our individual emissions permits is, then you can be sure that you are going to hit your climate targets.
JB: What about the tradable energy quotas? Is this something you think might be useful integrated into sort of an EBCU concept?
RD: That’s essentially what the emissions permits are. It’s an entitlement to emit; it doesn’t entitle you to a gallon of gasoline, or a liter, or whatever it is. But it entitles you to the emissions from that, so somebody who is wanting to consume energy or to import energy has to have not only the price of the energy, but also the price of the emissions permits for it too.
JB: So it spreads throughout all sectors of the economy pretty quickly.
RD: It would do, yes. And so aviation, for example, is going to become very much more expensive. A thing that particularly worries me about the effects on the United States is that trucking is very energy-intensive, and so there’s going to have to be much more production for local use and this is one of the things that we’ve all been wanting for some time.
JB: Yeah. A better rail system for some long haul stuff, but do it locally as best you can.
RD: Yes, that’s right.
JB: So where do you recommend people go to get more information, if they want to work on complementary currencies, and learn more in general about these issues?
RD: There’s an awful lot of stuff of course on the Web.
JB: Your website of course is feasta.org?
RD: www.feasta.org, and if they then go to the left of the screen and click on energy and climate, they will come across quite a lot of publications that we put out on this topic. This coming Saturday is World Climate Day, and I don’t know what you’re doing in California, but in a lot of countries around the world there are going to be demonstrations on this topic. We are just launching a campaign on Saturday, this is a group within FEASTA, and it’s called Cap and Share, and we’ve launched a special website which I hope is up and running now, it certainly will be by Saturday. So that is www.capandshare.org.
JB: Alright, well we’re going to have to close out the show now, we’re at the top of the hour. I want to thank our guest today, Richard Douthwaite. I’ve been your host today, Jason Bradford. Go to www.feasta.org for more information about the economics of sustainability. Take care, Richard.
RD: Thank you very much, Jason.
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