Picture a village. It has a grocery shop and a pub. A little down the road you can find a cobbler and a hardware store. A factory manufactures parts for some large concern in a nearby city and local farmers supply their produce to the villagers. There are a dozen taxi drivers, a priest, a few doctors, teachers, nannies and so on. Crucially, there is also a shared idea of what constitutes the good life, a common culture that enables the inhabitants to trust each other – perhaps the most fundamental and most overlooked component of a properly functioning economy. We are looking, in short, at that increasingly endangered social construct: a community.
Now the village also has a bank. Once, a man rather like Captain Mainwaring was its manager and he was known and respected in the community. Like the neighbourhood policeman who had no need of CCTV cameras because he understood exactly who was who, our bank manager, equipped with local knowledge, could match lenders and borrowers sensibly and thereby contribute to the gradual prospering of the world which his customers wove together and somehow felt they could control.
Alas, he is long gone and machines now greet those customers as they walk into the Bank’s fluorescent hall. Actually, most of their business is processed by computers that read a series of boxes on forms; algorithmic filtration leads to a simple ‘yes’ or ‘no’. Our community still thrives so long as the algorithm – controlled by God knows who – churns out ‘yeses’. Indeed the village’s postboxes are filled with solicitations to borrow more and more and we have yet to hear of anyone being given a no. People have never felt richer because the plethora of yeses has led to prices being posted on the estate agent’s window that no-one could have imagined before. But they have been fooled. Money may well be in plentiful supply but since money is in fact created by banks out of thin air when they extend loans to their clients many times the value of their deposits, that which has really increased is not so much their wealth, as their debt. And such obligations do not make us masters of ourselves, but slaves.
A few have remembered their lessons about compounding and how it constitutes through its capacity to grow at the speed of light ‘the eighth wonder of the world’ (Einstein). They are uneasy, because the community’s loans and indeed all the other intertwined borrowings throughout the planet that determine its future in ways it cannot influence, attract interest at just such compounding rates. In turn, for those liabilities to be honoured a corresponding growth rate that can never be matched in the real world will be required. Simply put, tactile reality has its limits where the financial ether does not. Sooner or later a system predicated on the assumption that the world admits no boundaries will break. But such naysayers are ignored. After all, the estate agent’s window does not lie.
And then the trumpet sounds.
Limits have indeed been breached. Significantly, they have been breached far away – the result of bad decisions made by a few hundred people in Wall Street and similar financial centres; the consequence of inputs on keyboards and of mad financial instruments that have turned the global economy into a giant casino; all of which could not have occurred without the assistance of politicians and bureaucrats in thrall to the other-worldly theories of neoliberal academics, or to journalists writing for The Economist.
Our villagers’ world is turned upside down in an instant. The Estate agent’s window is now a mirror of gloom, the bank’s enthusiastic letters no longer fill their postboxes, and the news from the capital is grim: major financial institutions are collapsing and will need to be bailed out by the general population. Moreover, the managers of these institutions must not be vexed by the threat of reduced bonuses, lest they de-camp with their ‘talent’ to friendlier shores. Unemployment soars, confidence plummets and above all the money – or credit – tap is turned off. Lacking lubricant, the machine seizes.
The villagers now ask some intelligent questions:
‘But I was taught that in this land I was free. How can I be called ‘free’ if my destiny is determined not by what I or my community do, but by the actions of dubious people playing with things like sub-prime mortgages thousands of miles away? If we have worked hard why should we, who have nothing to do with this mess, suffer, while the culprits go unpunished and fly around in private jets? Freedom must surely be about more than voting for some fool every few years.’
They begin to understand how the much-vaunted ‘globalisation’ and ‘interconnectedness’ that were sold to them by their politicians are simply polite terms for the expansion of global capital and that ‘interconnectedness’ actually means that if there is a problem in New Zealand it becomes their problem too. They now appreciate how old fashioned concepts such as autonomy, sovereignty and self-sufficiency must become their bywords once more and that without such concepts, freedom is in fact impossible. Yes, such thinking can have its dark side: in extremis a destructive form of nationalism as witnessed in Europe only two generations ago. But that darkness was the inevitable consequence of capital unleashed – as has occurred again – and constitutes not an argument against autonomy and self-sufficiency but rather a warning about allowing a virtual, international economy to supplant a real, more local one.
The problem will of course be particularly acute in countries such as Britain, which chose to dismantle an economy that produced actual ‘things’ in favour of the City’s smoke and mirrors, and less severe in places such as Germany which focused instead on what one can touch.
In the meantime it is obvious that the politicians in the capital, together with the financial institutions of which they are the servants, care nothing for the villagers. Once upon a time, there were millions of such communities, all over the world – some small, some big – but all of a human scale; each with its own cheese, or craft beer or local delicacy; its poets, artists and musicians; its own particular culture; and the whole was richer as a consequence. But while such places once defined civilisation they are now considered backwards – and the irony that the Kardashians and ‘give it to me baby one more time’ should be judged progress is lost on the political and financial ‘elites.’
And so the villagers no longer look to the experts on television for solutions. Instead, they resort to the common sense that once summarised the national character and continue with their questions:
‘What has really changed? Who says the banks should have a monopoly on the creation of money? Why can’t we have that control?’
The penny has dropped. Money is a cultural construct. It is not simply a store of value but a unit of account and a means of exchange. Indeed, we can have varying forms of money performing separate functions in different locales just so long as there is a record of our mutual obligations. The key then is who controls this record, or ledger, and how they can manipulate it. And nothing says that such a power cannot reside with society itself, nor that it cannot be formatted in ways that are more stable.
And so, over the years there have occurred throughout the world numerous experiments in short-circuiting the banking system. Usually known under the umbrella term of ‘Local Exchange Trading Systems’, methods have differed to include schemes backed by hard currency or IOUs between members of a given community denominated in units of time – variations on a theme of mutual exchange which typically eliminate the charging of interest and return to principles of greater self-sufficiency in areas that have become depressed through over -reliance on external economic factors, specifically a global economy rendered hyper volatile by finance.
Perhaps the most famous of these experiments occurred in the Austrian town of Worgl in 1932-33 at a time of economic devastation, where families were bankrupt and unemployment was high. Just as with our own village described above, people had the will and the wherewithal to work. Only the money was lacking. And so an enlightened Mayor did exactly what I have hinted at. He forgot the banks. The town created its own money in order to stimulate the local economy and embark on a range of public projects. A stamp scrip, backed by a fund of Austrian Schillings, was put into circulation with an interesting feature: a demurrage, or penalty, of 1% of the face value of the scrip applied at the end of each month, which thereby encouraged the holders of the scrip to spend it, including on their taxes.
The result was a miracle. Unemployment was eliminated and the town’s projects completed. Crucially, a milestone in the evolution of monetary thinking had been reached. This anti-hoarding mechanism – the opposite of the current dispensation whereby money is pooled in ever larger and more exclusive agglomerations – dramatically increased the ‘velocity’ of the town’s money, or the speed at which it circulated. Better to have a hundred pounds flowing a hundred times a day between a hundred people than a million pounds just sitting there. In short, a greater, more intense distribution ensured that the oil was at last fulfilling its function: to lubricate the engine.
Something of this reasoning was encapsulated in a principle applied by Henry Ford who was famous for paying a generous wage to his employees rather than seeking to extract from them the maximum output of labour for the minimum input of capital. His logic: the more he paid his workers the more they could afford to buy his cars. His insight: a greater equity in distribution is not just good for economic justice; it is also good for business.
Naturally enough, The Austrian Central Bank, alarmed by the success of the Worgl experiment, pressed its rights in the courts and the issuance of such parallel currencies was outlawed. Since then, in one form or another, the State has made clear which side of the debate it is on and its principal role, far from guaranteeing some mythical compact with the citizenry, has become the protection of the economic order – now in its death throes – and the vested interests that rely on it.
The latest measure in the discharging of that role is an attack on any form of physical currency. I refer to the State-Bank war on cash. Take, for example, Visa Card’s offer of incentives to retail outlets in return for banning cash purchases, (thereby compelling customers to rely on their credit cards); or the increasing number of banks that do not keep cash on hand; or Indian Prime Minister Modi’s sudden withdrawal of 500 and 1,000 rupee notes from circulation; or the restriction of cash transactions in countries such as France, where the maximum is pegged at a thousand euros, and so on. The usual canards are relied upon to justify such measures: the combatting of money-laundering and terrorism. In fact the real motivation is to prevent runs on banks as occurred recently in Cyprus. If money can only be withdrawn from one bank to be deposited into another, then it remains within the system and keeps it alive for longer. We are thereby compelled to pay the banks’ fees, to deposit funds into accounts that generate no return and to submit to the perfect surveillance system. If whenever I buy petrol or pay for a meal or go to the cinema I am forced to transact through a financial institution, a record is kept of my every movement.
But quite apart from the Orwellian implications of such policies, consider the practicalities. Bearing in mind that the majority of the world’s population do not have a bank account in the first place, the elimination of cash will disenfranchise them even further. By removing the lubricant and transferring economic power even more from ordinary people to the banks, we reduce money’s velocity, concentrate wealth yet further and stifle economic activity – as the Modi experiment proved with retail and wholesale markets stalling throughout India. As anyone who has experienced places such as Africa, India, China, the Middle East or even Southern and Eastern Europe will confirm, it is precisely the so-called ‘underground’ economy that keeps people, not to mention nations themselves, alive. Were it not for the local bazaari or black marketeer or general hustler, who conduct business in wads of notes, the inhabitants would starve.
Fortunately, in times of crisis, human ingenuity tends to find solutions. From my own experience I have seen for example how in prison, where inmates are not allowed cash, other tokens are quickly substituted – phone cards and cigarettes – and an efficient economy is soon established. Likewise in Iran which faced crippling banking sanctions. Oil and gas were soon exchanged for other commodities on a bilateral basis with different nations. So too, a merchant in a bazaar, simply on the basis of his reputation, could instantly summon up tens of millions of dollars from expatriates abroad who had no need of the banking system to register their credits or debits but would do so verbally, or by means of a written contract, out of the purview of the CIA.
Enter Cryptocurrency. Returning to the social credit experiments referred to above; effective as they may have been, a number of problems remained: specifically, the need for some form of central authority to police transactions and also a means of achieving critical mass so that the newly created currencies could be widely accepted and thereby effective as a means of exchange. It was only a matter of time before the internet, as a global, decentralised medium, enabled these difficulties to be resolved with the development of blockchain technology. Now we have no need of the banks. We can transact with each other from one side of the planet to the other in minutes without passing through any central authority, irrespective of state controls and in a way that is confirmed, without the need for trust, on an immutable ledger. Ironically, it was ill-conceived measures on the part of the state, some of which I have described, that acted as a catalyst. It was always intended for money to have an anonymous and easily transferrable quality. After all, on our own currency is printed Her Majesty’s promise to pay ‘the bearer’ the face value of the note in his possession. While the state has sought to erode such a quality, cryptocurrency represents, curiously enough, a return to original concepts and ordinary people who have no desire to transact exclusively via banks they do not trust, nor to have such transactions monitored by the state, are beginning to transfer their wealth out of state-bank control and into these new currencies, such as Bitcoin.
Human nature, being what it is, the focus has been almost exclusively on the consequent dramatic increase in the value of these instruments. But for this discussion, far more important is the underlying technology. The reader should be in no doubt: the potential for economic transformation is unprecedented and nothing constitutes better evidence for this than the deliciously shrill response on the part of the banks. Take JP Morgan’s Chief Executive officer, Jamie Dimon, who has threatened to fire any of the bank’s employees caught trading cryptocurrency, and has described Bitcoin as a massive ‘fraud’ and a ‘bubble’ similar to the tulip craze. I repeat: it is irrelevant whether Bitcoin is over or undervalued. What matters is the technology on which such currencies are constructed. Moreover, there has been no greater fraud or bubble in history than that perpetrated by institutions such as Mr Dimon’s. The system of which he is but a well-paid servant is fabricated on exponentially expanding debt that can never be repaid. As soon as that fact is generally recognised it will collapse, and the sole purpose of those at the helm is to delay the evil hour.
Consider the facts. We no longer need the banks to do business. Governments have no way of keeping track of who owns what coins. No state can serve a warrant on Bitcoin since it has no central authority located in any jurisdiction. While a state actor could shut down a node in one country there are millions of them all over the world confirming and registering transactions, and the number is growing. As their capacity to collect taxes is curtailed, states could collapse under their own weight. Certainly they would need to downsize. Suddenly, the centrifugal nature of the current financial structure is reversed. Economic power can now reside on the local level. There may be international currencies such as Bitcoin, but I also see a London Guinea, a Southampton Shilling, a Birmingham Dinar acting in parallel, exchangeable for local goods and thereby curbing capital flight from communities. I see greater self-sufficiency, the end of the dollar’s hegemony, interest free credit. As wealth flows out of the banks I see people suddenly waking up to the fact that they no longer need to service their loans. They can default en masse with impunity if only they realised. Nothing would alter current power structures more.
Granted, those at the top are wily. On the one hand they may try to ban such technology, but it is too late. More likely they will try to subvert it by attaching derivatives to these new currencies and manipulating their price, in much the same way that large financial institutions shorting gold futures can affect the commodity’s value more than any consideration of supply or demand for the physical gold itself. But, again, the genie is out of the bottle. We will find ways to counter these measures and as one currency is contaminated another will take its place.
Where Marx once argued that power lies with those who control the means of production, now it rests with those who control the means of production – of money. From its inception as a social device designed to facilitate transactions in goods and services for the betterment of humanity, money has morphed into a giant mutual-indebtedness organism that requires exponential growth to pay down debt to stay alive. It wreaks havoc on human societies and the ecosystem for the benefit of a very few. Our most urgent challenge is to design an economic system capable of coping with non-growth or contraction whilst simultaneously ensuring greater convergence – no small task, since capitalism has only ever existed in a context of growth. At the heart of this project will be monetary reform.
But who will rise to the occasion? The State? Unlikely, even if central banks are now making noises about adopting cryptocurrencies, since the State has been captured by finance. So complete is this capture that it is not even recognised. Banks, not Governments, create the vast majority of the world’s money out of nothing by issuing loans. They become in turn the arbiters of where that money is allocated and for what purpose. In Britain alone, they earn hundreds of billions of pounds a year in ‘seignorage’ out of profits from issuing this money, where once such seignorage reverted to the State, and thereby in theory at least, to us. And yet purportedly democratic societies, where often the capture has been most comprehensive, have not even debated how such a unique set of privileges is justified. What have the banks done to deserve such concessions? Was our consent sought? And what do we get in return for it?
And so it will be for the common man to devise alternative monetary mechanisms. I have shown how over the years an uneven dialectic has arisen between the financial interests which seek to monopolise the creation and control of money and, typically, smaller, more local groups that have attempted to counter such a trend by creating their own money. The two latest iterations in this dialectic have been a war on cash in which the state has, yet again, sided with finance and most significantly the emergence of cryptocurrency – a technology with genuinely emancipatory prospects that threatens to make the dialectic less one sided.
Far more than terrorism or crime, our politicians are terrified of one thing: the democratisation of money. And, alleluia, it is coming.