8 – Money and Currencies



The objective of this essay is to shed some light on the subject of money.  I will frame this understanding not in philosophical or abstract terms, but in very practical terms, and will build it up by starting from simple forms of local and regional currencies, and from there will move all the way up to the national and international level.  The ultimate objective is to understand how, by using parallel currencies but also by re-discovering the role of the national one, we can regain control of our economy and re-claim it from the dominance of impersonal, global forces. A large part of this essay is based on Chapter 15 of the book ‘Sacred Economics’ by Charles Eisenstein – I have reported most of this chapter in the essay, in the form of direct quotes.

What is money in abstract terms? – This is the first question to ask, in our quest to gain a better understanding of how money worksThe answer is that any IOU between two parties, as soon as it starts to circulate within a small community and to be accepted by third parties, becomes a form of money. In theory creating money is as simple as that, but to make it work is in reality much more complicated.

The three main challenges – In abstract terms the most basic form of money can be represented as an obligation circulating within a closed circle.  The obligation (which can be put in writing or not) starts when the first person does something for the next, this person in turn does something for the next person down the chain and so on, until the first person receives something from the last person in the chain and the loop is closed.  This is the basic idea, and it means that to make a currency work three problems have to be resolved: a) how to enlarge the loop so that it reaches significant proportions, large enough to be able to create a functioning economic infrastructure; b) how to close the loop – as normally this does not happen automatically, contrary to popular belief (in other words, it is necessary to deal with internal trade imbalances, and recycling trade surpluses so that the economy does not grind to a halt); and c) what sort of relations and exchanges to have with other loops, which in turns involves being part of a monetary system of a higher order.

It so happens that to perform these three functions the ‘authorities’ in charge of the currency need to make political and economic decisions, to establish rules, to enact laws, to create institutions and finally to be able to enforce the rules and implement the decisions.  All of this requires the active intervention of a sovereign political entity.  This is the reason why the only fully accomplished form of money is the national currency (as proven also by the problems manifested by the Euro, a currency without a state).  This paper will analyse a progression of currencies step by step, starting from the most basic forms and progressing higher and higher up the monetary hierarchy and will come to the conclusion that the national currency has to play a pivotal role in our quest to regain control of the local economy, as the state power it rests upon is indispensable to meet the three above challenges. We will concentrate mainly on the first of these challenges:  the creation of a functioning economic infrastructure, which is the very basis for a successful currency.  In the second part of the essay the third challenge, external trade, will also be considered.  The second one (recycling of surpluses and redistribution of wealth) will only be touched upon.  Although I will be using chapter 15 of ‘Sacred Economics’ extensively, I don’t completely agree with its point of view, which tends to underplay the role of the state and to suggest that local communities can rebuild vibrant local economies and escape globalisation on their own.  Let’s now start with the first building block of money creation:  a local community that desires to regain some control over its economy and creates a local currency for this purpose.

PART I – LOCAL CURRENCIES – meeting the challenge of rebuilding a vibrant local economy

What are the benefits of a local currency? There are at present thousands of local, unofficial currencies around the world issued by groups of ordinary citizens. The benefit they hope to achieve is to gradually build up a more vibrant local economy, partially insulated from global market forces, and to re-create community. An additional goal is to escape, at least in part, the effects of the austerity measures implemented nowadays by practically all Western governments.

Step 1: Proxy currencies The first step in currency creation is to set up a proxy currency, such as the Brixton pound. This   currency is not independent, it is a proxy of the British pound, because it is backed up 100% by pounds and convertible at a fixed exchange rate.

Other famous proxy currencies are the Chiemgauer (in Germany) and the BerkShare (in the USA). You can buy a hundred BerkShares for $95 and buy merchandise at the usual dollar price; the merchant then redeems a hundred BerkShares for $95 at participating banks. Because of this easy convertibility, merchants readily accept them, as the 5-percent discount is well worth the extra business volume. However, the same easy convertibility limits the currency’s effect on the local economy. In principle, merchants receiving BerkShares have a 5-percent incentive to source merchandise locally, but in the absence of a local economic infrastructure, they usually won’t bother.

In the case of the Brixton pound the discount is 10% (you get 100 Brixton pounds for £90) this 10% is creation of new money accepted within the local community but the local money supply will contract again when it is converted back into pounds.  A proxy currency becomes independent and moves up one notch in the currency hierarchy only when it is no longer backed up by another currency, but by its own goods and services and exchanged at a floating rate.

 Main advantage of a proxy currency: the multiplier effect – As there is only very limited scope for money creation, a proxy currency is not really a ‘proper’ currency, it is simply a device with a built-in incentive to identify and buy locally produced goods and services.  It is like a label that helps to identify local production and encourage people to buy local (also with the added 10% incentive).  By encouraging local circulation as much as possible, the hope is to capture the multiplier effect, calculated at around 1.7 %.  This means that a pound spent locally stays in the community and stimulates an additional 70p worth of local production – conversely, it is estimated that for each pound spent in globally produced goods, 85p will immediately leave the local economy (to pay for far flung suppliers, and for interests and profits that go into tax havens).   This is how ‘Sacred Economics’ puts it:

‘Say you want to buy a hamburger and have local currency. You might buy it at a locally owned restaurant rather than McDonald’s, even if the price is higher, because McDonald’s won’t accept the local currency. What does the hamburger joint do with the local currency then? Well, it can’t buy beef from the national distribution chain with it, but maybe it could buy beef from a local farmer, or pay part of employees’ wages with it. And what would the farmer or the employees do with it? Buy things from other local suppliers, including people who eat at the hamburger joint. This is how local currencies strengthen local economies.’

Main OBSTACLE: the local economy has been replaced by the global one! – ‘Unfortunately, the practical results of local currency initiatives have been disappointing. A common pattern is that the currency is launched with much enthusiasm, but eventually the novelty factor wears off, and people stop using it. According to one study, as of 2005 some 80 percent of all local currencies launched since 1991 were defunct.  Another common pattern is that local money accumulates in the hands of the few local retailers that are willing to accept it and who cannot find ways to spend it. Finally, even where local currencies have been relatively successful, they comprise an insignificant portion of total economic activity.’

‘It is imperative that we acknowledge that local currencies aren’t working today and figure out why. After all, they did work quite well in the nineteenth and early twentieth century. In the nineteenth, paper money consisted of “bank notes” issued by local banks and accepted only in the economic region where the banks were located. As recently as the 1930s, local currencies were so successful that central governments actively suppressed them. What has happened since then to make them (with a few notable exceptions) the plaything of social idealists? The economy has become so delocalized that it is hard to keep local currency circulating. In the words of one shopkeeper in Germany, speaking of one of the more successful local currencies, the Chiemgauer, “We do accept it, but we don’t know what to do with it.” His acceptance was reluctant -understandable when few of his suppliers are local.’

Local currencies are viable only to the extent that producers are making goods and services that are consumed locally by people who themselves produce locally consumed goods and services. In the 1930s, economies were still highly local. People had goods and services to exchange but no money to use as a medium due to bank failures and hoarding. Today, the situation is quite different. Most people provide servicesthat only make sense in avast, often global, coordination of labor. Local currency cannot facilitate a supply and production chain that involves millions of people in thousands of places.’

The obstacle to re-localising our economies is obvious, as increasingly the products we use (i.e., electronics) are inherently global in the nature of their manufacture.  However, many products could be produced locally but are nonetheless part of global production systems. This implies a considerable untapped potential for local currencies. Unfortunately, much of the infrastructure of local production and distribution has disappeared. Local currencies can be part of the rebuilding of that infrastructure, but by themselves they are not enough. If nothing else changes, they are consigned to a very marginal, usually subcritical role. As things stand, local money is not very useful to us because we import nearly everything we use from outside our region.

Main conclusion regarding proxy currencies: without economic infrastructure local money creation is pointless – ‘If a region has its own currency, yet is so integrated into the global commodity economy that nearly all its production is sold abroad and most of its consumption is purchased from abroad, then it might as well not even bother with its own currency. Under such conditions, the currency must be freely convertible (since economic circulation goes to and from the global market), making it into little more than a proxy currency for the dominant global unit of account (presently the U.S. dollar). Such a place is little more than a colony, and indeed that is what most places have become, especially in the United States, where towns have lost their local character and serve only as production and consumption centers for the global economy. For a region, city, or country to have a robust currency of its own, it must have a robust economy of its own as well.’

Import replacement & catch 22 – Key to building a robust local economy is “import replacement”, the sourcing of components and services locally, and the development of the associated skills and infrastructure. Otherwise, a place is subject to the whims of global finance and dependent on commodity prices over which it has no control. In [“developing”] countries that still have strong local economic infrastructure, local currencies help to preserve that infrastructure and insulate them from global financial predation. But in highly developed economies dominated by a national or supranational currency, anyone seeking to establish a local currency faces something of a catch-22. Local currencies only work if there is a local system of locally circulating production for which it can mediate exchange. Yet for such a system to grow and withstand the pressures of the global commodity economy, it needs a protected local currency. Import replacement cannot happen if local producers must compete with unrestricted, cheap imports. That is why such an economy can only manifest as an intentional choice. In other words, it will happen only through some form of democracy, popular action, and a government that responds to the will of its people rather than the will of international banks, investors, and the bond market.

Implementing the decision to rebuild economic infrastructure – The very first step is to create a proxy currency convertible at a fixed rate like the Brixton pound, otherwise it wouldn’t be accepted.  The proxy currency allows only limited money creation (and limited multiplier effect), but it makes people aware of the objective, and helps to get the work started.

As seen before, proxy currencies do little to revitalize local economies or to expand the local money supply, but they provide a token of desire to buy local and a very small economic incentive to do so. Since they originate as dollars, pounds, euro and are convertible into them at a fixed rate, anyone with access to the former also has access to the latter. The international equivalent is found in countries that adopt a currency board (i.e. they peg their currency to the dollar). We call these dollarized economies because they have effectively surrendered any monetary independence. Proxy currencies are useful as a consciousness-raising tool to introduce people to the idea of complementary currencies, but by themselves they are ineffectual in promoting vibrant local economies.

Step2: Complementary Fiat Currencies – The key to moving to the next step, a proper fiat currency (=un-pegged), is being able to use existing local spare capacity to organise some new production.

Fiat local currencies actually increase the local money supply. The Ithaca Hour falls into this category, as well as many Depression-era scrips. Essentially, someone simply prints up the money and declares it to have value (e.g., an Ithaca Hour is declared equal to ten U.S. dollars). For it to be money, there must be a community agreement that it has value. In the case of Hours, a group of businesses, inspired by the currency’s founder Paul Glover, simply declared that they would accept the currency, in effect backing it with their goods and services. During the Depression, scrip was often issued by a mainstay local business that could redeem it for merchandise, coal, or some other commodity. In other cases, a city government issued its own currency, backed by acceptability for payment of local taxes and fees.

The effect of complementary fiat currencies is much more potent than that of proxy currencies because fiat currencies have the potential of creating money and putting it in the hands of those who would otherwise not have it, by putting them to work. It is only inflationary if those accessing the money offer no goods or services in return.  In extreme economic times, it is often the case that there are plenty of people willing to work and plenty of needs to meet; only the money to mediate these transactions is missing. So it was during the Great Depression, and so it is becoming today. Municipalities all over the world are facing severe budget cuts due to lack of tax revenue, forcing important maintenance and repair tasks to languish and even laying off police and firefighters; meanwhile, many of their residents who could do those tasks sit unemployed and idle. Though legal hurdles presently stand in the way, cities can and probably will issue vouchers, acceptable in payment of city taxes, in lieu of U.S. dollars to hire people to do necessary work. Why not? Many of the taxes are in arrears anyway. When local government is the issuer, scrip much more easily takes on the “story of value” that makes it into money.

Such currencies are often called complementary because they are separate from, and complementary to, the standard medium of exchange. While they are usually denominated in dollar (or euro, pound, etc.) units, there is no currency board that keeps reserves of dollars to maintain the exchange rate. They are thus similar to a standard sovereign currency with a floating exchange rate. 

Examples of successful complementary currencies – In places where local currencies have been effective, either they have received government support, or they have emerged in war zones and other extreme circumstances (providing a form of automatic protectionism). In Argentina in 2001-2002 and the United States and Europe during the Depression, local governments actually issued currency themselves. Moreover, in those places and times, there was still a lot of local production, subsistence farming, local distribution and supply networks, and local social capital (= unemployed resources) in general. Local currencies had a real chance there and, unsurprisingly, provoked the hostility of the central authorities. In the case of Argentina, the IMF demanded their abolition as a prerequisite for aid.

The case of Argentina’s financial crisis of 2001-2002 is most illuminating. When provincial governments completely ran out of money to pay employees and contractors, they paid them in low-denomination bearer bonds instead (one-peso bonds, five-peso bonds etc.). Local businesses and citizens readily accepted these bonds, even though nobody really expected they would ever be redeemable for hard currency, because they could be used to pay provincial taxes and fees. Local government involvementenlarges the circle of participants, making the whole arrangement much more viable.  In addition, there is a psychological effect, acceptance for payment of taxes enhanced the social perception of value, and as with all money, value and the perception of value are identical. The currencies, which were all denominated in a common unit of account, circulated far beyond their region of issue. (However, this means that they were really functioning as national, not regional currencies!) They revived economic activity, which had ground to a halt since, after all, people still had the capacity to produce goods and services that other people needed, lacking only the means to make exchanges. This was only possible because Argentina is fundamentally a rich country that had not been completely converted into export commodity production. At the same time, Argentina’s government repudiated its foreign debt, temporarily cutting it off from imports and increasing the need for local self-reliance (import substitution). At that point the IMF stepped in with emergency loans to induce the country to keep its debts on the books.

Conditions for the success of complementary currencies– In the absence of local government support, because complementary fiat currencies are not easily convertible into the national currency, businesses are generally much less willing to accept them than they are proxy currencies. That is because in the current economic system, there is little infrastructure to source goods locally. Locally owned businesses are plugged into the same global supply chains as everyone else. Re-growing the infrastructure of local production and distribution will take time, as well as a change in macroeconomic conditions, driven by a political decision to re-localize in order to become independent of global finance, end austerity and improve the quality of our lives.

These are the conditions that make local currencies viable:

  • a large enough circuit– greatly enhanced by local government participation
  • credibility/trust– derived from backing by the local government or a large local business. If redeemable for local taxes a currency tends to gain wide acceptance
  • an economic infrastructurein place
  • protectionism/import substitution – needed in order to rebuild the local economy
  • spare capacity (unemployed resources) – this is the indispensable premise for money creation

What is the limit to money creation? – The presence of unemployed resources and the ability to convert them into new goods and services is the limit.  This is part of the reason why money is by definition ‘fiat’: as the purpose of money is to enable production and exchange, the possibility to create more of it in order to increase production is implicit in the concept of money.

What is the limit to local money creation? Technology The scope for local currencies in our ‘high tech’ times is, realistically speaking, rather limited, as local governments don’t have the means to build complex plant, equipment and infrastructure.  Realistically speaking the potential is limited to low tech and low skill goods and services that can be produced/offered by the local unemployed populations using simple tools and equipment (personal care, construction, maintenance of roads, parks, etc.).

Private forms of complementary money – credit– In absence of (or in addition to) local government involvement, also private people and business can create money and increase the local supply of goods and services.  Private money comes in the form of credit. These are some examples:

  1. a) The most basic form of DIY ‘private money’ are Time Banks– There is one resource that is always locally available and always needed to sustain and enrich life. That resource is human beings: their labor, energy, and time. In our atomized society, the traditional ways of knowing who has what to offer have broken down, and commercial means of disseminating this information (such as advertising) are accessible only with money. Time banks connect individuals who would otherwise be oblivious to the needs and gifts each can offer.

When someone performs a service through a time bank, it credits his or her account by one time dollar for each hour spent and debits the recipient’s account by the same. Usually, there is some kind of electronic bulletin board with postings of offerings and needs. People who could otherwise not afford the services of a handyman, massage therapist, babysitter, and so on gain access to help from a person who might otherwise be unemployed. Time banks tend to flourish in places where people have a lot of time and not much money. It is especially appealing in realms requiring little specialization, in which the time of any person is in fact equally valuable. A prime example is the famous fureai kippu currency in Japan, which credits people for time spent caring for the elderly. Time banking is also used extensively by service organizations in America and Britain. It can also apply to physical goods, typically by way of a dollar cost for materials and a time dollar cost for time.

Beyond the meeting of immediate needs, time banks have also the tendency to restore community. They generate the kind of economic and social resiliency that sustains life in times of turmoil. Another advantage is that the fundamental idea behind time banks is deeply egalitarian, both because everyone’s time is valued equally and because everyone starts out with the same amount of it, roughly 75 years on average.  A money system that recognizes this equality is intuitively appealing. When time-based currency replaces monetary transactions, it is a great equalizing force in society. The danger is that time currency can also end up transferring formerly gift-based activity into the realm of the quantified/monetised.

  1. b) Reclaiming the Credit Commons– mutual credit systems

Another way to foster local economic and monetary autonomy is through the credit system. An innovation commonly mentioned in discussions of complementary currency are mutual credit systems including:  commercial barter rings,  credit-clearing cooperatives, and localexchange trading systems (LETS).

When a transaction takes place in a mutual-credit system, the account of the buyer is debited and the account of the seller is credited by the agreed-upon sales price-whether or not the buyer has a positive account balance. For example, say I mow your lawn for an agreed price of twenty credits. If we both started at zero, now I have a balance of +20 and you have a balance of -20. Next, I buy bread from Thelma for ten credits. Now my account is down to +10 and hers is also +10.  Having a negative balance means that money is being created.

LETS– This kind of system has many applications. The above scenario exemplifies a small-scale, locally based credit system often called LETS. Since its inception in 1983 by Michael Linton, hundreds of LETS systems have taken root around the world.

Mutual credit is equally useful on the commercial level. Any network of businessesthat fulfil the basic requirement that each produce something that one of the others need, can form a commercial barter exchange or credit-clearing cooperative. Rather than issue commercial paper or seek short-term loans from banks, participating businesses create their own credit.

In commercial barter exchanges, firms sell excess inventoryand unused capacityfor which there is no immediate cash market to others in the exchange for trade credits. The buyer conserves cash, and the seller builds up credits to use in future transactions. No idealist commitment to complementary currencies is necessary to motivate businesses to join; in fact, most exchanges levy a hefty fee for membership. Some six hundred commercial barter exchanges operate around the world today, involving some half a million firms. (10)

Credit clearing cooperatives– A more recent innovation ismutual factoring, conceived by Martin “Hasan” Bramwell. Typically, businesses receive orders far in advance of receiving payment for those orders. To obtain the cash necessary to fulfil the order, they would ordinarily have to sell the account receivable at a discount to a third party (called a “factor”), such as a bank. Mutual factoring bypasses the banks and allows accounts receivable to be used as a liquid medium of exchange among participating businesses. The most famous commercial mutual-credit system is undoubtedly the Swiss WIR, in operation since 1934, which boasts tens of thousands of members and trade volume of over a billion Swiss francs. As of 2005, its volume dwarfed that of all the rest of the world’s commercial barter rings combined.

According to economist James Stodder, both the WIR and other commercial barter exchanges exert a contracyclical effect, showing greater exchange activity during economic downturns, a fact he attributes to their ability to create credit. This demonstrates the ability of complementary currency and credit systems to shield participants from macroeconomic fluctuations and sustain local economies.

In any mutual-credit system, members have access to credit without the involvement of a bank. Instead of paying money to use money, as in an interest-based credit system, credit is a free social good available to all who have earned the trust of the community. Essentially, today’s credit system is an example of the privatization of the commons, in this case the “credit commons”- a community’s general judgment of the creditworthiness of each of its members. Mutual-credit systems reclaim this commons by issuing credit cooperatively rather than for private profit. Mutual credit is not so much a type of currency as a means of issuing that currency. In the dominant system, it is primarily banks that grant access to money by extending credit. In a mutual-credit system, this power goes to the users themselves. The development of mutual-credit systems is extremely significant, for credit essentially represents a society’s choice of who gets access to money and how much of it.

The limits to credit-money creationWhen mutual-credit is applied on a large enough scale in which the participants don’t know each other a basic problem arises – What is to preventone of the participants from running up a higher and higher negative balance? The system needs a way to prevent this and eliminate participants who abuseit. Without negative-balance limits, a mutual-credit currency can be created in unlimited amounts simply by the will to make a transaction. This won’t work if that currency is used to exchange scarce goods.

 More sophisticated mutual-credit systems have flexible credit limits based on responsible participation. Global Exchange Trading System (GETS; a proprietary credit-clearing system) and Community Exchange System (CES) use complicated formulasin which credit limits rise with time according to how much or how well one has participated in the system. Those who have fulfilled their negative-balance obligations in the past get a larger credit limit. This formula functionsjust like a conventional credit rating.

Ultimately, the functions of a bank are indispensable. The real world does not always conform to a formula. Different kinds of businesses have different credit needs. Some mechanism is needed to set these limits and to grant or reject requests for credit. This might require research, familiarity with industries and markets, and knowledge of the borrower’s reputation and circumstances. Whatever entity performs this function, be it a traditional bank, cooperative, or P2P community, must have a good general understanding of business and must be willing to assume responsibility for its evaluations. Whether it is through social consensus, formulas, or the decisions of specialists, there must be some way to allocate credit. Banking functions, whether implicit or explicit, will always exist. Today, a banking cartel has monopolized these functions, profiting not only from its expertise in allocating credit toward its most remunerative use but also from its monopoly control over the former credit commons. In theory it is conceivable that a new banking system might arise from the ground up, starting with small mutual-credit cooperatives that form exchange agreements with each other.

Connecting different local currencies/private credit systems: convertibility  – Ultimately a local/regional economy whether based on a fiat complementary currency issued by a public authority or based on a private system of mutual credit (or both) will face the problem of how to interface with the outside world.  Complete convertibility (free trade/free capital movements) is obviously ruled out, as this would lead back to square one, losing the economic infrastructure that has been painstakingly re-built and returning to be a colony of the global economy.  On the other hand, no convertibility means that this community will deprive itself of the possibility to put in place more complex productions that require larger investments and access to larger markets in order to take advantage of economies of scale.  At this point it will be necessary to exchange with other economies, both within the same country and outside.  In both cases the community in question will need to use the national currency. In the first case it will need it to settle trade imbalances with other national entities, and the state will have to operate transfer payments in favour of those national entities that tend to have persistent deficit positions (thus closing the loop). In the second case, international transactions will be cleared at the level of the central banks, and then the state will be responsible for balancing the balance of payments, if necessary with foreign loans. In both cases the mediation of the state and its currency is indispensable.  This means that when local currencies open up to external trade, they will have to use the next currency higher up the hierarchy, which is the national one. Otherwise their trade will remain limited to the much more limited value that they are able clear directly, on a one to one basis. At this stage the role of the state becomes indispensable. We have thus reached the level of those goods that can best be produced on a national scale, and the relative decisions to re-localise production are national decisions. The state will have to walk a fine line between protectionism and liberalism, both in trade and capital movements.

 Summing up what we have learned regarding LOCAL currencies– We’ve seen how money actually works by progressing from small scale to larger scale.  We started with a hypothetical IOU between two people, perhaps hand written on a piece of paper.  When this is circulated and accepted within a small community, it becomes money.  This is what money is in abstract terms.  In real life, however, the first step is the creation of a local proxy currency.  This turns out to be little more than wishful thinking, as we realise that we don’t have much of a local economy.  How do we go about re-building one?  By starting with simple low tech, low skill services that we can do for each other (the most basic application of this principle would be time banks).  If the local government gets involved then it can create a fiat (non convertible) local currency and re-start providing those services that have been cut due to austerity. Without (or in addition to) the cooperation of a public institution, the most natural thing to do between privateindividuals or businesses is credit.  LETS is the most basic form, then this principle can be scaled all the way up to credit clearing cooperatives.  If the volume of circulation is big enough and the participants no longer know each other very well, the problem arises to limit credit between participants – that is, we need to exercise banking functions. The same problem arises with complementary fiat currencies: the necessity to limit money creation, ultimately restricted by technological requirements and economies of scale. To overcome these limits we need a larger and more open system, hence the necessity to introduce limited currency convertibility and access to external credit. Realistically speaking, these arrangements can only happen (at a large enough scale) with the involvement of the state.

At this point we need to go back to the three requirements that make a currency successful:  a) a size big enough to create/re-create an economic infrastructure; b) being able to balance internal trade (or to make transfer payments) so as to close the loop and allow the money to circulate within the area covered by a given currency; c) being able to exchange with the world outside a given currency, and choosing the conditions of trade (a combination of protectionism and liberalism) which allows the given community to maintain its economic infrastructure and to be able to pay for its imports.  So far we have concentrated only on the first aspect, rebuilding economic infrastructure at the local level.  And we have come to the conclusion that this can be done only for what concerns ‘low-tech’ goods.  If we want a more advanced and diversified economy, the relevant level has to be the national one.  However, this reasoning applies also to the other two aspects.  Keeping the internal trade smooth by recycling trade surpluses requires powers of taxation and redistribution that are proper of the state.  And the same applies, even more strongly, for what concerns handling foreign trade.  Therefore, once we reach the stage of goods that require more complex technologies and larger economies of scale, the national currency has to take over.  We can roughly classify goods and services into three categories: those that can be produced locally, those that need to be produced at the national level, and the most complex, high tech ones, whose production can only be viable in a global market.  DIY local/regional currencies can only apply to the first types of goods; however, it must be noted that, although they have an important role to play in order to rebuild community, improve the quality of life, protect the environment and regain resilience in the face of external shocks, we cannot expect these smaller communities and their local economies to play a pivotal role in the pursuit of those objectives.  The pivotal role has to be played by the state for a series of reasons that include the points a, b and c (technology, internal redistribution and external trade) but go even beyond those aspects to touch upon questions attaining to the sphere of national sovereignty and the ability to interface with the external world also for what concerns extra-economic aspects (which I will address in the next section).  For this reason, in this respect I don’t find the position that Charles Eisenstein advocates in ‘Sacred Economics’ very convincing.  He seems to believe that, although so far this has not happened and it is still a long way from becoming a reality, local/regional communities should in theory be able to scale up the volume of their economic activities to a level sufficient to effect substantial change by exchanging directly with each other, without the mediation of the state. This is not stated explicitly in the book, but he seems to bypass the role of the state again and again in his analysis.  As far as I am concerned, I don’t believe that this is possible, and so far the fact that local currencies have never reached a relevant volume of trade in post WWII economies, is a strong indication that there must be some serious obstacle to their expansion.


 Protectionism vs liberalismOur main concern so far has been to rebuild an economic infrastructure at the local level, and we have reached the conclusion that the state has to play a pivotal role if this objective is to be achieved. We must at this point fully consider another obstacle, touched upon in ‘Sacred Economics’ many times but never fully developed:  the fact that states as well have the problem of recreating a national economic infrastructure and to regain independence from the global economy. We will see that this is not only an economic matter, but also one that involves extra-economic aspects (apt to engage the full powers of the state). We have established that local communities can rebuild an economic infrastructure only up to a certain level of technological complexity.  Past that level, the state has to take over the task of rebuilding a larger, more diversified, and more technologically complex economic infrastructure and it also has to interface with the external world for what concerns the top level of technological complexity.  For what concerns this top tier of production, the state economy will need to specialise and exchange with the outside world, but at the same time it needs to avoid becoming an appendage of the global economy. Therefore it is necessary to walk a fine line between protectionism and liberalism.  The amount of protectionism required will depend on the level of economic development reached by the country in question.  The more developed it is, the less protectionism it needs.  Nevertheless all economies need at least some level of protectionism both in capital movements and in trade.  Complete liberalisation endangers the autonomy of even the most developed countries, and puts them on a path to becoming appendages of the global economy.

The case of the Eurozone– The case of the Eurozone clearly demonstrates the fact that total currency convertibility tends to kill national economies.  The Eurozone constitutes an extreme example of economic liberalisation, as within this area all barriers to the circulation of people, goods and capitals have been removed, and the adoption of a single currency means that the currency of each state is 100% convertible at a fixed exchange rate into the currencies of its partners.  As a result, over time the opposite dynamic has occurred as that of regions adopting fiat complementary currencies.  Just as local currencies can help to revive a local economy by leveraging the multiplier effect to re-build economic infrastructure, conversely adopting a supra-national currency has had the opposite effect in the Eurozone states: it has accelerated the process of globalisation, depleting the local and national economic infrastructures of weaker countries and regions, and concentrating production in the stronger ones. In this context, the weak have become weaker and can only become ever weaker in a vicious downward spiral.

Extra-economic challenges: political sovereignty– We must now consider those extra-economic aspects, mentioned earlier, that starkly affect the viability of a currency.   Having clearly seen how dysfunctional the adoption of complete liberalisation has proven to be in the Eurozone, this begs the question of why the governments that took the decision to form a single currency area could be so misguided.  This leads us into the terrain of political choicesand ultimately political sovereignty. What has occurred in the Eurozone, greatly facilitated by the single currency, ultimately is the same process of neoliberal globalisation that has occurred in many less developed countries, and also in countries like the USA and the UK that sit at the top of the international financial order. As a consequence of adopting the neoliberal economic paradigm, local and national economies have been losing their economic infrastructure and have been turned into centres of consumption and production (and high finance, in the case of the UK) for the global economy, unable to fully control their currencies for their own interests, constrained in their ability to generate their own credit for productive purposes, and vastly dependent on international markets and international finance.  As the money earned from local activities flows outside to buy globally produced goods and services, and the profits deriving from those activities are likely to be diverted to off-shore tax havens (to be then re-directed to the international financial markets) the national governments have limited scope for money creation and need to source outside (from the financial markets) their financing.  This process is self inflicted in the UK and USA, caused by the adoption of the single currency in Europe, imposed by the IMF in other countries, but it is essentially the same process and the solution can only be found in regaining true economic and political sovereignty at the national level – rather than hoping that many local/regional communities acting in the same direction could eventually reach critical mass and effect substantial change.

Rebuilding national economic infrastructure– We have seen that at the local level economic independence (and money creation) finds a limit in the complexity of technology and economies of scale.At the national level the same limit also applies, but for a more restricted number of goods that are best produced globally due to their complexity. We have seen that, roughly speaking, we could classify products into three categories: global, national and local/regional.  Many globalised productions could be brought back into the realm of the national economy, if it wasn’t for a more subtle constraint, the ‘unofficial’ loss of political sovereignty.  Re-nationalising a large part of the economy (as much as it is consistent with the political objectives of a given national community) is a political choice, and only within that political space, can then the choice to revive the local economies find its proper place and the tools necessary to make it possible.  It is hard to see how the local economy can be revived if the state doesn’t first regain sovereignty over the national economy.

The three sovereignties– We have seen so far that monetary sovereignty is ultimately constrained by economic autonomy and that the two are inextricably connected. Now we need to add political sovereignty to the picture, as this factor is just as important (and probably more) and just as inextricably connected with the other two.  Most people don’t fully realise that without political sovereignty (= the ability to contend in the international arena) a national community is scarcely able to position itself in a good place in the international division of labour, and may well end up as a commodity exporter (third world country) or as an appendage of the global economy, exporting cheap labour and low tech manufactures (middle income country). This is because colonisation happens nowadays mainly with economic (rather than military) means, that is, by imposing neoliberal policies on less independent countries.  Therefore what has happened in the last forty years is that the lack of political sovereignty, leading to the adoption of the neoliberal economic paradigm, has resulted in loss of economic infrastructure, with the consequent demotion in the position of many advanced countries (most notably in the Eurozone), not to speak of persistent underdevelopment in less advanced ones.  The above three aspects (monetary, economic and political) go hand in hand in a circular process of causation, but if anything, political sovereignty is the main one, with a stronger traction effect on the other two.  At the same time, having a functioning, relatively autonomous economy is an indispensable requirement in order to be able to exercise real political sovereignty. Therefore a state doesn’t really have a choice on this matter, if it wants to be a proper state it needs to rebuild and protect its economy – and equipping itself with an independent (un-pegged) currency is indispensable for this purpose.

Regaining national economic sovereignty – the role of protectionism

Assuming therefore that a given state wants to regain as much autonomy as possible from the global economy, and rebuild its economic infrastructure, what needs to be done?  A measure of protectionism is necessary both for trade and for capital movements. How much, and what type of protectionism will depend on the level of development of the country in question, and its particular skills, resources and objectives.  I will give here a very general framework of what needs to be done.

CONTROLLING CAPITAL MOVEMENTS– For what concerns capital movements, it is necessary to 1) create credit internally as much as possible, 2) accept external credit only for productive investments and 3) limit the exit of capital.

1) Credit import substitution – a) creating public credit at the local and regional level – One of the “imports” that local and regional governments can replace is credit itself. The nations of East Asia (the so-called Asian Tigers) that achieved quick economic development in the second part of the twentieth century, implemented a variety of protectionist measures, including keeping the banking industry off-limits to foreign banks through government policy and informal cultural barriers. On a regional or local level, and even without a local currency,governments can replace exogenous credit by operating their own public banks. If we are to pay for credit, then shouldn’t that payment stay in the local economy? Today, state and local governments deposit tax proceeds with multinational banks that lend it wherever they can profit the most; indeed, in an era of banking consolidation they have little choice, as local banks have merged into larger ones. State-owned banks, exemplified by the Bank of North Dakota, can lend locally, finance local projects without having to issue high-interest debt on the bond market, exercise a contracyclical effect by lending during credit crunches, and keep banking profits local instead of exporting them to Wall Street. Publicly owned banks needn’t be driven by profit, and any profits they do make can be returned to their owners, the people, thus restoring the credit commons. These advantages pertain even in the present monetary system. b) Creating public credit at the national level – On the national level, public banking is little different from the power to issue the national currency, a power that the United States (and most other countries) has abdicated and given to a private institution, the Federal Reserve. But in theory, it could set up its own bank and lend money to itself, essentially printing money at zero or negative interest. (Or the private central bank can lend indefinitelyas it is doing now, but not for the real economy..). Or it could bypass the banking system and create money directly, as authorized by the Constitution and enacted during the Civil War.The only limit to money creation is the presence of unemployed resources and of the technologies available to convert them into goods and services. c) Controlling private credit and making sure it doesn’t work at cross purposes with the government’s economic policies

2) Restricting entry– a state needs to put in place restrictions to protect its economy from predatory, speculative credit (the familiar scenario of financing non productive activities, inflating asset prices, and then quickly withdrawing and leaving a financial collapse behind, with consequent asset stripping) and from the currency runs that numerous national currencies have suffered in the last twenty years. Formal and informal mechanisms to limit the acquisition of external credit, and limit the acquisition of productive assets by foreign firms need to be applied, as well as currency controls, and external credit (as well as foreign investment)should be resorted to only when necessary, for productive purposes.

3) Restricting exit– (restricting imports/encouraging the sourcing of local components, restricting divestments, restricting the repatriation of profits). States need to exercise capital control functions similar to those that wiser nations imposed when developing their economies through import substitution. The most extreme measure is that, once a foreign entity invests in a state, it is not permitted to take out that capital. This would force foreign investors to source components locally. Less extreme but similar measures were applied by Taiwan, Japan, Singapore, and South Korea in the 1950s and 1960s, when they restricted foreign companies’ repatriation of profits.

CONTROLLING TRADEWhat needs to be done in terms of trade restrictions depends on the level of development of a country.  Roughly speaking, if the Eurozone is the quintessential negative model, the quintessential positive model are the East Asian countries and their successful move from poor undeveloped economies to advanced ones in the second part of the last century. It is widely known that they adopted an industrial policy (picking and protecting the industries that they wanted to grow) and opened up their economies to foreign competition in a selective and gradual manner.  Roughly speaking, we can distinguish three different levels of development, to which different sets of policies need to be applied:

Undeveloped economies – a) positive models– in the 50’s and 60’s Taiwan, South Korea, and Japan adopted industrial planning, deciding which new industries they wanted to grow. They nurtured those industries with import replacement (aided by tariffs), subsidies, positive discrimination and other forms of help.  These countries raised the money necessary for their industrialisation by selling cheap products in the export market and keeping tight control of the foreign exchange thus earned, using it only to buy machinery and industrial inputs. They also set up state enterprises to tackle desirable productions when there were no suitable private ones. They raised the money necessary for the new industries also by accepting foreign investment but with stringent conditions. In Taiwan foreign-invested factories were required to purchase a high percentage of components locally, encouraging the development of domestic industry. In Japan, South Korea, and Singapore as well, formal and informal mechanisms gave domestic enterprises a privileged status. At the same time, they imposed currency controls and restrictions on the repatriation of profits. Foreign investors could freely convert their currencies into won, Taiwan dollars, and so on, but they couldn’t convert it back again as freely. Today, these countries have a large middle class, world-class industrial plants, and tremendous overall wealth, despite starting in great poverty after World War II.

b) Negative model Mexico– Compare their policies with those of Mexico, which allowed foreign manufacturers to set up factories in the ‘Maquiladora’ zone, with no taxes, no limits on the expatriation of profits, and no requirement to source components in Mexico. Mexico and the many other countries offering such “free-trade zones” merely provided low-cost labor and freedom from environmental restrictions, essentially selling off their natural and social capital without gaining much know-how or infrastructure in return. Instead of enriching their economies, they bled them. Then foreign investors moved to take advantage of even cheaper labor elsewhere. First GATT, then NAFTA and the WTO and EMU (European Monetary Union) destroyed in one country after another the protections that kept local economies from becoming helpless colonies of commodity export and consumption. The only beneficiaries were the elites, who are relatively independent of the local economy (they can import what they need and move away if conditions become too terrible).

Middle income economies – a) positive model – China– The above models apply to poor undeveloped countries (although the same policies can be applied also by more advanced economies, for the purpose developing high tech industries).  China has also been following the same pattern, it has reached the second stage of development – that of a middle-income country, producing mainly labour-intensive low-tech commodities for the export market – and is now concentrating its efforts on moving to the top level: producer of knowledge-intensive high value added goods for both the internal and export markets.  These productions are necessary to raise the standards of living of the national population and to earn enough export revenues to pay for necessary imports.  Advanced countries don’t rely on exports to sustain their economies but on internal demand.  They need to have high wages in order to sustain internal demand and need to shift to high value added productions in order to pay for the necessary imports (they compete in the international markets with high value added products rather than with low priced, cheap labour products).  This way the national economy becomes less dependent on the outside markets and wages, and therefore the standards of living, are able to rise.  Thus a middle income country needs to operate three shifts: a) it needs to increase its proportion of high tech industries, b) its exports need to decrease and its internal market has to be developed, c) it also needs to shift a high proportion of the workforce from producing goods (as high tech industries tend to be automated) to producing services (including public services) which tend to be more labour intensive.  If this move is not achieved, an export based low-tech country risks remaining an appendage to the global markets, dependent on their ability and willingness to absorb its exports, and at the prices decided by the global speculators. China is currently in the process of moving to this top tier, and it’s a very tricky business, as competition is very fierce and operated with extra economic means as well.  At the same time, many European countries (including the UK to some extent) are fast sliding from this premier league.  b) Negative model – Italy– The Eurozone and especially Italy clearly exemplify the reverse shift, from advanced to middle income economies.  Italy started this process in the 90’s, by selling off its strategic industries (mainly public), which were at the cutting edge of technological development in their respective fields; then it adopted an overvalued exchange rate (with the single currency), which chocked the economy resulting in further selling off of industrial assets.  The resulting need for austerity (in order to reduce trade deficits) destroyed internal demand, further compromising the survival of its remaining industries. Now the only proposed solution by the European authorities is to cut wages in order to compete in the international markets with low tech, cheap labour productions.  We can see a clear pattern here.   While Italy and the Eurozone easily exemplify what must be avoided, it is not easy, on the other hand, to remain in or to move up to the top league.  What then are by and large the measures that need to be adopted?

Advanced economies– Just as the previous two, they also need an industrial strategy.  They need to keep an eye on imports and have a healthy amount of exports, but obviously advanced, high-tech exports.  This is a real challenge. It means that states need to help their best enterprises to tackle more complex productions for the global markets. They need to decide which industries have this type of growth potential and then nurture them by adopting protectionist measures similar, to some extent, to the ones applied in the previous stages.  They need to spend money financing R&D, they need to find large enough markets to achieve economies of scale, by increasing wages at the national level and by gaining access to global markets with trade deals, strategic alliances etc.  Technological advances are so rapid these days that it is necessary to always be at the cutting edge, otherwise the risk to shift to second league is very high.  Increasingly, it is also economic warfare (waged also with extra-economic means) that can produce enormous damage.  It is a non-declared, non-official state of affairs, but nonetheless very real, for which states would do very well to fully equip themselves.  In various ways, states always have engaged in this sort of warfare, but in the last few decades it has become ever more pervasive and demands serious attention.  Failing to take the above outlined steps (keeping up with technology, making deals and defending itself from economic warfare), far from reversing globalisation, a state will actually see its remaining industries gradually annexed by the global economy with mergers and acquisitions, or even indirectly as suppliers of low tech components, and relegated to lower grade complementary productions.  State owned enterprises and national banks also need to play a big role in driving this process.  Another obvious part of a successful strategy aimed at maintaining economic independence is to keep strategic enterprises (heavy industry, military and nuclear technology, telecommunications, electronics etc.) in the national economy (with protection, subsidies, nationalisations etc.) and avoid selling them to foreign investors.  It is also crucial to achieve a good measure of food and energy self-sufficiency and secure access to foreign energy sources.  This means that also for the purpose of self-sufficiency, and not just for the purpose of developing high tech industries, it is necessary to form political alliances, negotiate deals, and avoid being captured by foreign interests (or worse, invaded).

The pivotal role of the state – All of the above confirms that the state plays a pivotal role.  At the local level its role is indispensable because it needs to provide the basic economic infrastructure within which a successful local economy can then be carved out.  Even more important is its role in contending with extra national forces when carving out for itself a viable position within the global economy. This is a very complex and strategic task, completely ignored both by well meaning activists and by analysts of economic and monetary issues.

These strategic tasks can only be performed by nation states as they have historically evolved.   Improvised secessionist republics cannot learn the ropes from one day to the next. States have had to deal with state management (and international competition) for centuries, so they tend to have (to different degrees, obviously) the institutional apparatus, the know-how, the social cohesion and all those tangible and intangible qualities necessary to organise their economic and social life internally, as well as to interact and contend with the outside world.  The main objective that a state has to pursue when organising its economy (which plays a big part in ultimately determining its viability as a state) is to position itself in a good place within the global division of labour (just as an individual would want to get an education and aspire to a good job).  In addition, as the external environment is potentially hostile and fairly lawless (behind a thin veneer of international laws and conventions) a state needs to seek protection and alliances, but it also needs to maintain as much autonomy and bargaining power as possible in the international arena.  Being able to defend itself in the international arena and to position itself well in the international division of labour – these are the two major goals for a state that wants to achieve real sovereignty and economic viability.

The international monetary system – very different from the national onesWhen interacting with foreign economies a state, while trying to maintain its autonomy and self- reliance as much as possible, is by definition tied to the rules of the international monetary system, which normally is controlled by the major superpowers.  This is a very heavy constraint that needs to be taken into account. Compared to the national monetary systems, the international one has some very peculiar characteristics. It is anarchic, in the sense that there is no supreme power (at least not formally) to which every state has to submit.  In addition, this monetary system does not have its own currency, but instead the currencies of a few states (predominantly the US dollar) are used.  This means that the international system is heavily skewed in favour of the states able to create those currencies, and this is not a small detail.  There are rules, agreements, institutions and, to some extent, enforcement mechanisms similar to those of a national monetary system, but given these very essential asymmetries (no supreme power and no currency) it is really a completely different ball game.  In this game the players (obviously with very different amounts of power) are the states (not a non existing central authority) and, as ultimately nobody is responsible for keeping the system in balance (i.e. closing the loop by recycling trade surpluses, which means redistributing wealth among the economic players so that economic activity can proceed without blockages), ultimately the only possibility for an orderly and fair economic life can be found only within the states, not outside.  Internally, the state is the only agent responsible for stabilising the economy with counter-cyclical policies and to redress imbalances between regions and between social classes with the tax system (as well as monetary policy).  Externally the state has to find the means to pay its way in the world. This is the reason why money = state. In other words, while there can be many currencies – public, private, local, national, supranational and lately even technological (Bitcoin), or commodity money such as gold – the only truly accomplished form of money is the one in which political, economic and monetary sovereignty always go hand in hand, and at the moment this happens only in the case of national currencies.

ConclusionNow we’ve reached the top of our chain of interconnections.  We started with local money as a means to restore community and avoid austerity. Progressively we’ve discovered that monetary autonomy requires economic autonomy, and the main obstacle is the fact that the economic system is, roughly speaking, articulated in three different levels, due to technological constraints.  Then we realised that it is not just technological constraints but political ones that chain us to the neoliberal global economy. Once reached this level, we came to the conclusion that the only way to re-gain economic autonomy vis-a-vis the global markets (a euphemism for the global elite) is by rediscovering the role of the state as the pivotal actor in the current economic and political environment.

As there are obvious limits to what can be achieved at the local level, concentrating our efforts there and disregarding the state won’t take us very far.  Given what we have seen so far, it seems reasonable to conclude that the ‘small is beautiful’ logic can be applied to the local/regional economies only with the help of a functioning state.  A local economic infrastructure can only be viable within the framework of a solid economic infrastructure at the national level. In turn, the national economy needs to be connected to, but not completely dependent from, the global one. The only way that we can have a high standard of living (and pay for a modern welfare state) is by participating in the global economy but in a selective manner and at the top level, by selling high tech productions that earn good amounts of money needed to pay for our imports.

Therefore first and foremost we need to focus on recovering national autonomy as much as possible and from there we need to act in two directions. 1) Work to reform the supranational institutions, as they are both undemocratic and non transparent, yet remain indispensable, as some form of global governance needs to be in place.   2) At the same time, the state should support local economies in their quest for autonomy, resilience, and a more sustainable economic model, both socially and environmentally.  But it would be naïve to think that local communities can pull through this effort on their own, or that regional communities are up to the task of reforming undemocratic supranational institutions.  The model should be:  we re-build a state that retains a fair amount of strategic industries so as to be able to defend itself in the international arena and to export enough to pay for its imports.  Once we have this backbone in place, we will be able to afford a modern welfare state, and then we can also flesh out the local economies with the things that make life both more pleasant and more environmentally sustainable: organic agriculture and local food culture, decentralised energy production, arts and crafts, cultural events, wildlife protection, personal care, further education etc.  To get the work started, local activism and local currencies could play an important role, but we need to keep in mind that state policies are the pivotal ones in this process of re-democratisation of the economy.