Monetary theory and a safe house for humanity
Could it be so that it is a badly-constructed monetary system that is holding humanity back in its shared project of peace on Earth? Or at least this miss-construction is not doing us any good? Marc Gauvin, money theoretician and author of two websites Money Transparency and Bibo Currency offers some interesting angles on money as a system. In recent correspondence, he suggested that the money system itself impacts peace negatively, but the system could be adapted to be a peace-promoting tool for humanity. We’ll lay out the ideas here and look forward to hearing your comments in the comments box below.
I recall from the Bible the anger of Jesus over how money was being used in the temple. The possibility that the money system could be detrimental to peace has been debated since money was invented, but maybe not explored enough now in a modern context that money is predominantly digitalized and all ties to the gold standard have been cut. Maybe Gauvin can give us some insights.
Deep austerity undermines peace
Firstly, we need to explore what the money system should do. One intersection between peace and money is austerity – measures inflicted by government that result in economic hardship for citizens. In deep austerity people cannot afford the basics. Two pillars of peace as I see it (the Safe House for Humanity promoted by the Invest in peace initiative) are access to food and to shelter. People’s suffering for the lack of the basics undermines peace, fanning the flames of conflict. Desperation can mean that planetary boundaries overshoot and nature suffers as people scrabble, for example, for firewood from depleted forests.
Early economists wanted to get people from self-sufficiency into work
Centuries ago, people owned smallholdings and were to a high degree self-sufficient. For example, they made their own clothes and shoes and grew their own food. It was in the 1700s that the first economists like Adam Smith propounded division of labor, which meant leaving the life-style of self-sufficiency to one where people worked for their living in the expanding industrial sector. Instead they should buy things like their clothes and shoes from other factories.
Balancing work, basic needs and credit
In the modern money-based and work-based world, a person is expected to work to earn money to buy these things. Logic tells us that if you have a zero or negative balance in your account, are hungry and without a place to stay, it would be impossible to buy these things without access to credit. Too much credit seems risky, but on the other hand, there is nothing positive in people suffering either. Suffering impacts prosperity and is no good for businesses. If people have no money to buy their goods, businesses suffer and so does the overall wealth of the nation. A balance needs to emerge between work, basic needs met and the credit risks in the system.
Indeed, on the planet today, there may be up to a billion people who do not have enough to eat. But that is not because there is insufficient food – some say food waste is the real problem – the United Nations calculate that the planet already produces enough food for everyone. Or it could be a distribution problem, with all the money in the global system it cannot surely be a money problem?
With Peace comes prosperity
So; if there is enough food, why is there not enough money to buy it? This is where Marc Gauvin’s insights come in. Money is an accounting system and not a commodity in itself, he claims. Even credit is not a commodity but a feature of the system. So we should not think in terms of money being “scarce”. Marc is at pains to point out that the money system is something we are all part of, and the healthy functioning of the system is everyone’s concern. He is not alone. Former president of the Minnesota Federal Reserve Bank Naryana Kocherlakota’s 1998 paper The Technological Role of Money, gives a formal explanation of how money’s sole technology role is that of a mnemonic tool or “record keeping” device.
Money as a system needs to be managed as such to underpin prosperity
The answer lies in avoiding or managing the imbalances in the system. Making sure everyone has enough money to buy food is an example of managing such an imbalance.
To understand this better we should explore Marc’s model of transactions.
The table below shows how transactions take place between various societal entities. Each entity has its own account which can be positive or negative. Each transaction is a plus in one column and a minus in another. In the case below, the period starts off with a payment from government to citizens. Note that as the government account was at zero to start with, the government account goes into minus, and that is added to the overall system debt. System balance (debt) is the sum of all negative accounts in the system.
Money can never “run out”
Seeing money as a system like this reveals some interesting insights. Because it is a system of accounting and balance there is no danger of money “running out”, money is simply a record of transactions. And it does not have to be debt-based. In this case the system debt started out at -30 but thanks to the transactions it reduced to -20. It is possible to envisage a scenario where the system debt reduces to zero.
The system works on mutual trust
One thing the system has to have, though, is trust. People using the system, for example to receive payment for services, need to trust they will be able to use the balance to fulfil their needs. To put it another way, if a society is determined to work towards peace, and to ensure everyone has the basics, then the monetary system can support that.
To understand this further you need to follow the way Marc categorizes each transaction.
There are four possible permutations of transactions based on the balances in the accounts of the buyer and seller.
Either you have a positive balance or a negative one in your account. And you pay to someone with either a positive or negative balance.
The four variants are therefore:
(A) Positive buys from negative (reduces system imbalance)
(B) Negative or zero buys from positive or zero (increases system imbalance)
(C) Negative or zero buys from negative (system balance unaffected)
(D) Positive buys from positive or zero (system balance unaffected)
Based on this, and looking at the table above, you can see how only transactions of type (B) negatively affect the system balance. To put it another way, the way to create system imbalance is to have poor people buy from rich people. And the way to create balance is for the rich to buy from the poor. Type (A).
The system records a total 80 units of value, of which 60 units are reciprocated i.e. the result of over time leaving only 20 units of value pending reciprocation, that is the result of two (B) type transactions increasing the system balance/risk to – 40 and only one (A) transaction of 20 units reducing the system balance to -20.
This may go against much modern thinking that does not see money as a system. To reduce the system risk, poor entities need to be given the opportunity to sell to the rich. From a government policy perspective, this means that the rich should be encouraged to use more of their money on buying from the poor when the system reaches risk levels.
Furthermore, notice how both type (C) and (D) transactions had zero impact on the system balance. Transactions between negative and negative balances (C) also have zero impact on the system balance. In other words, poor (in account balances) can freely buy from others also with zero or negative balances without affecting the system as a whole. That is, they can access any amount of credit to employ each other and exploit their resources without incrementing system risk and hence without having to desperately sell off those resources at discounted value. This means that society can afford any amount of time for those in negative to turn their situation around.
Everyone needs the opportunity to participate in the economy
To return to the trust issue: let us say that most people of working age have 1800 hours a year they can work. If a person’s account is in the negative it is likely this person has not had the opportunity to use their working hours to get reciprocated in money. In joining the system, people need to trust that their 1800 hours can be reciprocated for money.
Understanding the risk in negative system balances
So wherein lies the risk? Given that the key raison d’être of money is to record the value of goods and services pending reciprocation, balances of money cannot “be” the risk but rather they measure the risk. The greater the system negative balance the greater the risk that the value that brought about the system balances will not be reciprocated.
The size of the system balance is a measure of system risk as well. Since balances exist precisely because some members of society have provided value that is pending reciprocation, those balances represent a risk, and the sum of either all the positive or negative balances is the measure of value at risk of not being reciprocated. In other words, one person’s payment and negative entry to their account is another person’s positive payment.
Negative balances are actually a natural consequence of positive balances, mirror images of themselves.
If all accounts are massively in the positive some inflation can be expected, so removing positives from the system might be needed.
Economic growth is good, but not as a goal that bypasses managing system risk
In the table above, the economic product of the period is shown in the last column, going from zero to 80. Economic growth could be measured as the percentage difference between earlier periods. So, if an early period’s product was 75 we could determine that growth was100*5/75 or 6.6%. However, it should be clear from our reasoning hitherto that growth of the overall product is not desirable if there is a similar or larger growth in system risk.
The answer to increasing growth without system risks is to allow negative balance to negative balance transactions type (C). This insight brings some deep-going practical consequences which we need to leave for later articles.
The system risk has been quantified already
Economist Steve Keen has developed a way of quantifying just this system risk. The diagram below from his recent talk shows that the risk zone of an economy is when private debt is higher than 150% of GDP and credit accounts for a large fraction of total demand (more than 10%).
Such mounting of risk could be easily managed if money was solely a record of value and not an asset and money created as a product of transactions as opposed to being a precursor and enabler of transactions. Under such circumstances only one of the four possible permutations – type (B) where positive sells to negative – is responsible for increasing risk. The conclusion then, is that control of risk in the system does not require limiting the supply of money; all that is required is to limit type (B) transactions permitting all other transactions to continue unfettered. In other words, limiting certain types of transactions limits inequality and builds a foundation for peace.
Allowing house prices to inflate above replacement costs inflates risk
In Sweden, one of the countries on Steve Keen’s risk list, the reason for private debt is the inflated housing market. Many homeowners have mortgage loans that are so large compared to their salaries that they cannot possibly hope to pay off the loan in their lifetime. This too compounds the system risk. But this would never take place if money were properly and formally defined as a mere after the fact “measure of value” and not also an asset, because only when money is considered a scarce resource can it bear a per unit cost, which is exactly what is responsible for the compounding of not only the prices of homes but also of the cost of living in general.
What of the government role?
This does point to an interesting government role. In the worked example table above it is the government that begins and ends the period with a negative account. It is far better for governments to accrue negative accounts than citizens, households or corporations, all of whom need to cover their regular outgoings and for citizens especially to be secure in the basics.
From a governmental policy perspective, those nations wanting to invest in peace should consider the potential of treating money as a record of transactions, and take the opportunity to use digitalization to offer this system to its citizens. The system should allow the poor to buy and sell to each other on credit. (Type (C) transactions.) Governments should continuously monitor the overall system risk and put in place mechanisms that ensure the overall system does not go into the risk zone.
This may be new thinking to many readers and raises many obvious questions about how this modern approach to money could be implemented and inequality, hunger, homelessness solved to firm up the foundations of Peace. It might seem an impossible task – but we should not give up. After all, the aim of the EU is a peaceful Europe with well-being for all. The monetary system should be subservient to that. We should just try harder to find a way to evolve from where we are today
References and links
Kocherlakota, N. R. (1998). The technological role of fiat money. Federal Reserve Bank of Minneapolis. Quarterly Review-Federal Reserve Bank of Minneapolis, 22(3), 2.
Historical perspective on the change from self-sufficiency to workplace and consumption.
McNally, David. Political Economy and the Rise of Capitalism: A Reinterpretation. Berkeley: University of California Press, c1988. <link>
Steve Keen https://www.youtube.com/watch?v=Zc2t6X-gla0
Explanation by economist Michael Hudson of the system risks of debt <link>
Stephanie Kelton, economist and former advisor to Bernie Sanders explains the role of government in the economy in this light and accessible video. https://www.youtube.com/watch?v=6IBEoWSiTHc
Many thanks to Marc Gauvin for the main content of this article and to valuable feedback and suggestions from many others including Steve Keen, Chris Cook and Micheal Linton.