An astonishing money creation scheme from the 1930s that could help to save the Greek economy
17th February 2014
Compare the terms demanded of the Greek government to those offered to the banks. Eurozone ministers now insist upon unconditional surrender(1); a national abasement that makes a mockery of democracy. But when the banks were bailed out, governments magicked up the necessary money almost unconditionally. They shyly requested a few token reforms, then looked away when the bankers disregarded them.
The German government, now crushing the life out of southern Europe, merely tickled its own banks. As the New York Times reported(2), though the corrupt German banking system “required a bailout bigger than the one American banks received”, “there is little appetite for change in Germany because the banking system is so deeply intertwined with its politics, serving as a rich source of patronage and financing for local projects.”
When the Greeks complain that they have been reduced to colonial subjects, they are right, but the colonial masters are not the northern members of the eurozone. They are the private banks. The governments that seem determined to destroy a sovereign state for its impudence are merely the intermediaries of power.
None of this is to deny the corruption and fiscal promiscuity of previous Greek administrations. But while the banks have got away with far worse, the bullies of the eurozone insist on extracting every last drop of blood from people who had no role in their governments’ deceptions.
Greece is stuffed: or so almost everyone asserts. Perhaps. Or perhaps there are possibilities we have scarcely begun to examine.
I should warn you that no one in their right mind would take financial advice from me. (Or, for that matter, from most financial advisers). I seek only to suggest that there may be some possibilities of hope among the ruins.
One of these radical ideas was proposed a few months ago by Martin Wolf in the Financial Times(3). He suggests stripping private banks of their remarkable power to create money out of thin air. Simply by issuing credit, they spawn between 95 and 97% of the money supply. If the state were to assert a monopoly on money creation, governments could increase its supply without increasing debt. Seignorage (the difference between the cost of produing money and its value) would accrue to the state, adding billions of pounds to national coffers. The banks would be reduced to the servants, not the masters, of the economy.
An entirely different approach is proposed by Ann Pettifor, in her fascinating but badly-written and chaotic book, Just Money(4). She argues that governments have failed to understand what money is. It should not be seen as a commodity, she says, but as a social relationship based on trust. Unusually for a radical critic of finance, she sees the creation of money by private banks as “a great civilizational advance”, freeing nations from the usurers who once monopolised and restricted wealth.
The supply of money is, in effect, unlimited: as long as there is sufficient productive activity to absorb it there is no obvious restraint on the amount of money that can be issued(5). So when governments and central bankers tell you that the money has run out, Pettifor argues, they are either deceiving us or deceiving themselves. What holds back economic activity is an unnecessary and artificial restriction of the medium of exchange.
Banking’s great civilisational advance has been all but destroyed through deregulation, whose result is a new system of usury, speculation and exploitation. Private banks borrow cheap and lend dear, forcing us to work ever longer hours and to inflict ever more damage on the natural world to service our debts. Pettifor suggests that governments should reassert control over interest rates at every level of lending.
But perhaps the biggest transformation could happen at the local level. Greece already has some local currencies(6), that have kept money circulating several towns and cities, as it cannot be siphoned away. (There are similar systems in Britain, such as the Bristol and Totnes Pounds(7)). But strangely they do not make use of the thrilling, transformative system that almost saved Europe from fascism; the currency developed by the economist Silvio Gesell called stamp scrip. It is explained in Bernard Lietaer’s magnificent book The Future of Money(8).
In its original form, stamp scrip was a piece of paper on which a number of boxes were printed. The note would lose its validity unless a stamp costing 1% of its value was stuck in one of the boxes every month. In other words, the currency lost value over time, so there was no incentive to hoard it. Stamp scrip projects took off across Germany and Austria after national currencies collapsed in the early 1930s. In 1932, for example, the Austrian town of Wörgl was almost broke, unable to finance public works or to support its destitute population, until the mayor heard of Gesell’s proposal.
He put up the town’s tiny remaining fund as collateral against the same value of stamp scrip, and used it to pay for a building project. The workers then passed on the currency as quickly as they could. Like the magic pudding, this little pot of money kept circulating, enabling Wörgl to repave the streets, rebuild the water system, construct new houses, a bridge and even a ski jump. In the 13 months of the experiment, the 5,500 scrip schillings in circulation were spent 416 times, creating between 12 and 14 times as much employment as the standard currency would have done(9). Unemployment vanished, and the stamp fees paid for a soup kitchen feeding 220 families.
The governments of Germany and Austria, profoundly threatened by the success of these projects, shut them down. Employment collapsed once more, and a twisted but charismatic Austrian painter found the opening he had been waiting for.
When the great American economist Irving Fisher examined these experiments, he concluded that “the correct application of stamp scrip would solve the depression crisis in the US in three weeks!”(10). Roosevelt’s government, aware that such currencies could invoke a massive loss of federal power, promptly banned it.
Could these ideas be useful to Greece? Could they be of relevance in other parts of Europe? Even perhaps in Scotland, where the currency issue was unimaginatively fudged before the referendum? I don’t know. But if Greece leaves the eurozone, it could open up a world of possibility to which other nations have closed their minds.
references for this article.