the debtors continued to devote the same proportion of their incomes to paying off any new or remaining loans, they would be free of debt much more quickly.
3. The End of Debt-Based Money
Output in today’s economy gets a massive boost from the high level of energy use. If less and less energy is going to be available in future, the average amount each person will be able to produce will decline and real incomes will fall. These shrinking incomes will make debts progressively harder to repay, creating a reluctance both to lend and to borrow. For a few years into the energy decline, the money supply will contract as previous years’ debts are paid off more rapidly than new ones are taken on, destroying the money the old debts created when they were issued. This will make it increasingly difficult for businesses to trade and to pay employees. Firms will also have more problems paying taxes and servicing their debts. Bad debts and bankruptcies will abound and the money economy will break down.
Governments will try to head the breakdown off with the tool they used during the current credit crunch — producing money out of nothing by quantitative easing. So far, the QE money they have released, which could have been distributed debt-free, has been lent to the banks at very low interest rates in the hope that they will resume lending to the real economy. This is not happening on any scale because of the high degree of uncertainty — is there any part of that economy in which people can invest borrowed money and be sure of being able to pay it back?
Some better way of getting non-debt money into the real economy is going to have to be found. In designing such a system, the first question that needs to be asked is “Are governments the right people to create it?” The value of any currency, even those backed by gold or some other commodity, is created by its users. This is because I will only agree to accept money from you if I know that someone else will accept it from me. The more people who will accept that money and the wider range of goods and services they will provide in return, the more useful and acceptable it is. If a government and its agencies accept it, that increases its value a lot.
As the users give a money its value, it follows that it should be issued to them and the money system run on their behalf. The government would be an important user but the currency should not be run entirely in its interest, even though it will naturally claim to be acting on behalf of society, and thus the users, as a whole. Past experience with government-issued currencies is not encouraging because money-creation-and-spend has always seemed politically preferable to tax-and-spend and some spectacular inflations that have undermined a currency’s usefulness have been the result. At the very least, an independent currency authority would need to be set up to determine how much money a government should be allowed to create and spend into circulation from month to month and, in that case, the commission’s terms of reference could easily include a clause to the effect that it had to consider the interests of all the users in taking its decisions.
This raises two more design questions. The first is “Should the government benefit from all the seignorage, the gain that comes from putting additional money into circulation, or should it be shared on some basis amongst all the users?” and the second is “Should the new money circulate throughout the whole national territory or would it be better to have a number of regional systems?” I am agnostic about the seignorage gains. My answer depends on the circumstances. If the new money is being issued to run in parallel with an existing currency, giving some of the gains to reward users who have helped to develop the system by increasing their turnover could be an important tool during the setup process. On the other hand, if the new money was being issued to replace a collapsed debt-based system, giving units to users on the basis of their previous debt-money turnover would just bolster the position of the better off. It would be better to allow the state to have all the new units to spend into use in a more socially targeted way.
A more definite answer can be given to the second question. Different parts of every country are going to fare quite differently as energy use declines. Some will be able to use their local energy resources to maintain a level of prosperity while others will find they have few energy sources of their own and that the cost of buying their energy in from outside leaves them impoverished. If both types of region are harnessed to the same money, the poorer ones will find themselves unable to devalue to improve their exports and lower their imports. Their poverty will persist, just as it has done in Eastern Germany where the problems created by the political decision to scrap the ostmark and deny the East Germans the flexibility they needed to align their economy with the western one has left scars to this day.
If regional currencies had been in operation in Britain in the 1980s when London boomed while the North of England’s economy suffered after the closure of its coal mines and most of its heavy industries, then the North-South gap which developed might 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 that were forced to close. Similarly, had Ireland introduced regional currencies during the brief period it had monetary sovereignty, a Connacht punt would have created more business opportunities west of the Shannon if it had had a lower value than its Leinster counterpart.
Non-debt currencies should not therefore be planned on a national basis or, worse, a multinational one like the euro. The EU recognizes 271 regions, each with a population of between 800,000 and 3 million, in its 27 member states. If all these had their own currency, the island of Ireland would have three and Britain 36, each of which could have a floating exchange rate with a common European reference currency and thus with each other. If it was thought desirable for the euro to continue so that it could act as a reference currency for all the regional ones, its independent currency authority could be the ECB. In this case, the euro would cease to be the single currency. It would simply be a shared one instead.
The advantages from the regional currencies would be huge:
1. As each currency would be created by its users rather than having to be earned or borrowed in from outside, there should always be sufficient liquidity for a high level of trading to go on within that region. This would dilute the effects of monetary problems elsewhere.
2. Regional trade would be favored because the money required for it would be easier to obtain. A strong, integrated regional economy would develop, thus building the region’s resilience to shocks from outside.
3. As the amount of regional trade grew, seignorage would provide the regional authority with additional spending power. Ideally, this would be used for capital projects.
4. The debt levels in the region would be lower, giving it a lower cost structure, as much of the money it used would be created debt free.
In addition to the regional currencies, we can also expect user-created currencies to be set up more locally to provide a way for people to exchange their time, human energy, skills and other resources without having to earn their regional currency first. One of the best-known and most successful models is Ithaca Hours, a pioneering money system set up by Paul Glover in Ithaca, New York, in 1991 in response to the recession at that time. Ithaca Hours is mainly a non-debt currency since most of its paper money is given or earned into circulation but some small zero-interest business loans are also made. A committee controls the amount of money going into use. At present, new entrants pay $10 to join and have an advertisement appear in the system’s directory. They are also given two one-Hour notes – each Hour is normally accepted as being equivalent to $10 — and are paid more when they renew their membership each year as a reward for their continued support. The system has about 900 members and about 100,000 Hours in circulation, a far cry from the days when thousands of individuals and over 500 businesses participated. Its decline dates from Glover’s departure for Philadelphia in 2005, a move which cost the system its full-time development worker.
Hours has no mechanism for taking money out of use should the volume of trading fall, nor can it reward its most active members for helping to build the system up. It would have to track all transactions for that to be possible
