Wednesday, April 06, 2005

Healing The Money System

....To heal society we must heal the money system. This will involve a two fold process of reducing money's importance in our lives and restoring its appropriate role in service to the wealth creation process. As we embark on the healing journey we should keep in mind that in a society in which relation ships are defined by love, generosity, and community the importance of money in mediating personal ex change and allocating resources is likely to decline markedly. The healing process will require work at both individual and collective levels and will have a variety of elements.

It will be necessary to demyth money. Given the importance of money in defining our values and priorities it is remarkable that our education in money rarely goes beyond teaching children how to count it. Even advanced courses rarely go beyond teaching the mechanics of interest compounding. I earned MBA and PhD degrees from one of the world's leading graduate schools of business. I learned some accounting and how to analyze financial statements, but I was never taught the difference between making money and creating wealth, nor how to distinguish between productive and predatory investments. Such lessons should be a basic part of any education for business or responsible citizenship.

We will need to reweave the social fabric. This will require reducing monetary dependence and restoring nonmonetary exchanges through a process that selectively delinks individuals, families, and communities from dependence on the predatory institutions of a global economy, down-scaling consumption to reduce dependence on paid work, increasing reliance on local products to meet basic needs, and strengthening the engagement of all persons in the productive life of family and community.

The truly monumental task will be to redesign the money system to make money the servant of wealth creation. Radical institutional and policy innovations will be required far beyond anything currently under discussion. Among other things, corrective measures will need to: (1) make speculation unprofitable, (2) limit the growth of financial bubbles; (3) increase incentives for cooperation among people and communities; (4) reward productive work and investment; (5) create a just distribution of claims to real wealth; (6) provide incentives for patient and locally rooted investment in real assets; and (7) strengthen the social fabric of family and community. The purpose of such measures is not to increase global growth and competition. Rather it is to create healthy and prosperous societies that provide economic security and just rewards for productive contribution to their members, have a strong and caring social fabric, and live in balance with their environment. The required measures will surely inconvenience corporations and financial speculators, but theirs are not the interests that human societies exist to serve.

Because we have so little experience in designing money systems to create societies that work for people and nature in nonexploitative ways, we will need to be creative. There are no tested guidelines. Thus, the following suggestions are put forward less as prescriptions than as possibilities meriting further examination. Each represents a sharp departure from conventional wisdom and practice.

Strengthen development of local currencies. A common currency exclusive to its members is one means of defining a community with a mutual interest in productive exchange among its members. It does not preclude exchange with those beyond its borders, but creates a desirable local preference consistent with creating and maintain ing a strong social fabric. A key public policy measure to strengthen local currencies would except them from taxation by any other than the local jurisdictions that sponsor them.
Introduce Zero or negative interest rate money. We take the idea of interest bearing money so much for granted that it is difficult to imagine any other kind. Interest gives money a curiously exclusive advantage as a means of storing wealth. Holding virtually any real asset involves a cost to the holder. Forests, factories, farming land, buildings, and personal skills must be maintained. Technologies become outmoded. Even gold must be stored and guarded. Only those who store their savings in money expect a secure, cost free return that with no effort on their part increases their future claim on the real resources that others have in the interim born the costs of creating and maintaining.

This gives the money person a considerable and inappropriate advantage over those who engage in real work and investment. This advantage is one reason why our money system so perversely advantages money people over working people. The argument can be made that the only appropriate place to store value is in real assets that will have real future value. Money, by contrast, should be purely a medium of exchange. A negative interest rate or holding charge on money, a device well tested in a number of local currency schemes, provides an incentive to keep money moving, because the longer a person holds it the less value it has. In a world of electronic money and debit cards this is an easy process to administer. A negative interest rate also encourages investment in real productive assets that continuously create value.

Limit debt. In our present monetary system virtually all money is created by banks lending it into existence, i.e., by creating new debt. Since loans must be paid back with interest, it is impossible for all borrowers to pay the bank both its principle and accrued interest unless total borrowing grows faster than old debts must be repaid. If overall debt does not grow, then some borrowers are inevitably forced into default, thus forfeiting their material assets to the bank. Beyond favoring the bankers, the system favors the rich in general. The wealthy borrow to leverage higher return investments, thus increasing their rate of positive accumulation. The poor borrow primarily for consumption, thus working themselves into an ever deeper financial hole.

The alternative is for government to create money by spending it into existence for public purposes, such as investment in education and public infrastructure, while placing limits on private and public borrowing. Borrowing to finance purchase of stocks and other purely financial instruments might be prohibited entirely. There might also be an absolute ceiling on the amount an individual or corporation is allowed to borrow for any purpose. This would increase equity investment relative to borrowing and reduce opportunities for a wealthy few to monopolize control of productive assets and create financial bubbles with borrowed money.

Tax Speculative and other Unearned Gains. If there is any place where a tax increase is justified it is in taxing away speculative profits that enrich private individuals at public expense. Appropriate measures would encourage long-term investments in real assets. A first step would be a small tax on all purely financial transactions such as the ex change of one currency for another or the ex change of money for a financial instrument like a stock or bond. A second step would be a time graduated capital gains tax. Profits from the sale of any asset held less than a week might be taxed at a confiscatory rate of 90 percent or more on the ground the gains are almost certainly speculative. Profits from the sale of a productive asset held more than 20 years might be taxed at a concessionary rate of 10 percent or less. A third step might be to tax land at its fair rental value, an idea proposed years ago by economist Henry George. The tax would apply only to the rental value of the land itself, not to physical improvements, thus encouraging investment in physical improvements while eliminating the incentives for land speculation.
Many of the best minds of our time are engaged in finding ways for the already wealthy to use the money system to claim ever more of the world's real wealth for themselves. Remarkably few are concerned with how we might redesign money to serve a society that works for all people. It is time to change that....

-David C. Korten

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