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World Bank

Currencies of desire

What's wrong with the money system - and what hope for change?
Vanessa Baird draws a few conclusions.

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THE money system as it stands today is remarkably efficient. Remarkably efficient at making the majority of us lose out, that is. Our labour and its value isn't factored into its humming computers. The ciphers that zip across the globe, bringing hardship to the many so that a few fatcats can prosper, are empty of conscience.

But three recent events have shown some chinks in its armour.

The first is a David and Goliath story. Imagine high-powered politicians from the richest countries with reams of statistics and analysis on why a set of international investing rules would make the world a better place. Imagine grassroots activists from various Non-Governmental Organizations around the world, linked via electronic mail, who are convinced it won't.

Who wins? Well, in the case of the routing of the proposed Multilateral Agreement on Investment it was the activists who won the day. They did it by using the Internet to broadcast information instantly, world-wide, and by pooling information that would embarrass their governments. In doing so they broke down the wall of secrecy that traditionally surrounds international negotiations.

The success of such networking, involving groups like the Penang-based Third World Network, was clear in April this year when ministers from the 29 industrialized (OECD) countries admitted that the global wave of protest had swamped the deal. It is unclear when, if ever, they will try again.

The second glimmer of hope came from a quite unexpected source: the World Bank. It's common for radical economists to denounce the IMF for its socially disastrous structural-adjustment policies in the 'developing' world. But when criticism comes from the Chief Economist of the World Bank it takes one by surprise. First, Joseph Stiglitz expressed his doubts about the IMF rescue package for East Asia. Then he took a swipe at the orthodox view that high interest rates and anti-inflationary policies are the necessary bitter pill that Majority World countries have to swallow. He went on to say that 'the dogma of liberalization has become an end in itself and not a means to a better financial system.' Moreover, deregulation had led to crisis in Thailand and the 'notorious Savings and Loans debacle in the US'. 1 This amounts to heresy in IMF and World Bank terms. But Stiglitz and other critics of the IMF's rescue package for East Asia have been proven right as the affected countries have sunk deeper into recession. It's not much to be hopeful about, but at least someone in the World Bank has got their eyes open.

The third glimmer came in May when the heads of the rich world met at Birmingham, England, for the annual G8 summit and found their conference hall surrounded by a human chain of 50,000 protesters calling for the cancellation of Third World debt. This unprecedented display of solidarity with the world's poorest nations was inspiring, though to date only Norway seems to have taken any positive action.

But to see cancellation of Third World debt as an act of 'charity', as some plainly do, is obscenely inappropriate. Not only have debts been paid several times over in interest charges, but debt is actually at the core of what is so wrong with our money system today.

Most of the money in the world is created, out of thin air, by banks through making loans (see page 16). What's more the loans to the Third World almost always have to be paid back or serviced in dollars or other 'hard' currencies. This means that if the currencies of Third World countries take a battering, as they so often do, the cost of their debt rises. Their negotiating position is thus continuously being weakened.

It is impossible to say this loudly enough: the indebted countries owe us nothing.

The consequences of our debt-based money system for the Third World are starvation, ill-health and unemployment. By the end of 1998 half the population of Indonesia is likely to join the millions in sub-Saharan Africa who live below the poverty line.

As long as this system reigns, gross inequality will prevail even if we do decide to cancel Third World debt. As long as commercial banks are given the privilege of creating most of the world's money through making loans, this pattern will go on being replicated, albeit in a milder form, throughout the industrialized countries too.

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Banks find many ways of protecting their interests.
This one in Mexico City takes a subtle approach.

Bucking the banks

It has to change. Abraham Lincoln knew this already in 1865, the year he produced his potentially groundbreaking Monetary Policy. In it he argued that the Government should create, issue and circulate 'all the currency and credit necessary to satisfy the spending power of the Government and that of consumers'. In this way, he wrote, 'the people will... be furnished with a currency as safe as their government. Democracy will rise superior to the money power.' 2

Six weeks after making this proposal Lincoln was assassinated. If he had lived and been successful in pushing through his plans, it could have signalled the end of banking and money power in the US. One can only dream about how different the world might be today.

More recently, economist Bryan Gould has argued for much the same idea: 'Why not challenge the virtual monopoly we have allowed the private sector banks to exercise over the creation of credit? Why shouldn't a socially aware and economically responsible government create credit where appropriate in order to ensure... investment is made and at the same time strike a great blow for the democratic control of the economy?' 2

Of course, 'socially-aware' and 'economically responsible' are key words. And the idea is not for the government to simply take on the role of banker but to become the provider of a stock of money free from debt.

Even if governments produced a larger proportion of the total money, it would buck the current trend. For example, the British Government in 1963 issued 21 per cent of money; today it's a paltry 3 per cent. 2

The idea of 'social credit', as it is called, was developed in some detail in the 1920s by a certain Major CH Douglas whose theories are enjoying a renaissance among radical and green economists.

In the words of one proponent, Frances Hutchinson: 'Social credit seeks to counter economic globalization by securing control over the institutions of finance by local communities, enabling values other than money values to resurface.' 3

Social credit challenges the perpetual claim that the things a society needs like good healthcare and education cannot be provided because of 'lack of money'. The current debt-based system of creating money is founded on a false invention of scarcity, which is then reinforced by debt.

But to overturn a system that creates poverty, so that the privileged few can roll in the greenbacks, and replace it with something that places people first will require more than technical solutions. It will require a concerted social struggle to shift the massive concentration of financial wealth and real resources from this privileged minority which also controls the 'creation of money' within the international banking system.

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Back to basics: Senegalese villagers use money
as it was intended - a useful exchange tool.


Practical measures

However, there are some practical measures that could be taken to at least protect the most vulnerable in these times of tremendous global financial instability:

  • Control the international tides of money that flow in and out at the slightest whim by imposing a uniform, foreign currency transaction tax as devised by James Tobin. This would discourage money moving about at high speed for purely speculative purposes while leaving more long-term investment relatively untouched.
  • Force creditors to bear more of the cost of currency crises. Too often banks lend to raise interest and create money, then expect to be bailed out by public funds if they get into trouble. The IMF has become the rich world's debt-collector.
  • Shut down tax havens. Keep money where it is generated, to 'protect the local globally,' in the words of environmentalist Colin Hines.

    One measure, in isolation, is not enough. What's needed is a new economic framework. And how we create money, how we use it, and how we view it is central to this. Too often we find ourselves enslaved by money and it is used to this end by those who control it. We need to make it work for us, instead of the other way round.

    Under the present system, money isn't even a real indicator of value. As Frances Hutchinson has pointed out: 'There is not the slightest reason to connect a strong financial economy with a strong (or sustainable) real economy. Money does not create wealth. Hard work does not create money. High rewards go to tasks with a dubious social value, while essential tasks receive little reward, if they are rewarded at all.'

    This has a well-known feminist dimension, especially poignant for women working in the home, bringing up children or caring for relatives.

    So what's to be done? At present banks and financial institutions are unlikely to release their grip on the community's money-power in response to special pleading.

    But people are, albeit in a piecemeal way, trying to take control. LETS and other local currency schemes are small but encouraging signs.

    The increase in ethical investment is another indication that people are becoming more discerning in requiring that their money is not used to support repressive regimes or harm the environment. This is a start. The next stage is to examine the very basis of banking and investment funds themselves.

    Reforming the world's economic system and its money system seems like a massive task, but it affects us all. Nearly all the issues individual NGOs and voluntary organizations are dealing with - be they drugs, homelessness, health, hunger or poverty - are results of the debt money system. Here there is a tremendous potential for political action. 4

    With more cracks showing daily in the edifice of global finance, people are becoming more open to seeking out alternatives. Information and awareness are all-important. So is imagination, if we are to get out of this mess and create the currencies we desire - the simpler, people-centred monies that facilitate life and its transactions instead of entrenching inequalities.

    1 Joe Hanlon, 'The World Bank speech that knocked down every pillar', Electronic Mail and Guardian, Johannesburg, 23 June 1998.
    2 Michael Rowbotham, The Grip of Death, Jon Carpenter, Charlbury, 1998.
    3 Frances Hutchinson, What Everybody Really Wants to Know About Money, Jon Carpenter, Charlbury, 1998.
    4 See Alan Armstrong, To Restrain the Red Horse, Towerhouse Publishing Ltd, Dunoon, 1996.

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New Internationalist issue 306 magazine cover This article is from the October 1998 issue of New Internationalist.
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