Despite the obvious limitations of our accounting schemes, and the availability and success of more relevant measurement tools such as the Calvert-Henderson Quality of Life Indicators,150 the GDP endures. So too do the many questionable practices it helps legitimize by means of their portrayal as gains to the nation. This same accounting mechanism has in fact now been adopted worldwide, with predictably destructive results. Indonesia, for example, has been a huge success story since the 1970s according to GDP standards. “But it achieved this status by clearcutting its forests, exhausting its soil, and selling off precious nonrenewable mineral wealth. In short, it sold off its future to pay for accounting measures of success.”151
According to Clifford Cobb, Ted Halstead, and Jonathan Rowe, the GDP endures because, “[It] serves deep institutional cravings, combining the appearance of empirical certitude and expert authority with a readymade story line.”152 That story line, that money activity and concomitant economic growth result in happiness and security, “is so entrenched that it now defines our consumer driven Western society.”153
The GDP’s continued use is explained further by the fact that, given the confines of the mindset from which it emanated, the national accounting scheme appears to make sense; that is to say, it accurately reflects the rationale and entrenched reductionist strains from which it and our economic and monetary paradigms emanated. When, for example, economists refer to “the economy” or to “the market,” they often intend only that portion of the economy or market that is readily measureable, not the entire economy. It is only when economic thought is linked up to real world outcomes and the whole economy that the flaws in our thinking and practices become obvious and costly.
It was under the influence of this same industrial-age mindset that our monetary system and economic tenets took root. But given what is now taking place, and what is now needed, it is time to review and amend our modern beliefs, tenets, and systems with the same strength, conviction, and purpose as Enlightenment leaders did with premodern European society.
CLOSING THOUGHTS
The general equilibrium theory and the GDP are emblematic of a mindset that, with all good intentions, sought to make perfect sense of a world by taking into account only limited, readily quantifiable aspects of our lives and activities. The tradeoffs and omissions that were made in the quest for mathematical certitude and economic predictability, however, contributed instead to limited understandings and many unintended, often costly consequences.
The same externalities that were excluded from traditional considerations constitute many of the very practices and issues that now threaten the environment and society. Additionally, the solutions that are required to address our concerns and bring about improvements simply are not to be found within the confines of traditional economic thought and its limited set of tools. It is only by broadening our understanding and by venturing outside, that solutions become both apparent and available.
CHAPTER NINE - Lessons from a Depression
A man is wise with the wisdom of his time only,
And ignorant with its ignorance.
~HENRY DAVID THOREAU
In 2008, the world economy went belly-up. Tens of millions of jobs and trillions of dollars of wealth were lost. Few analysts saw the crisis coming. Preceding the recession, many economists were instead congratulating themselves over the success of their field. Nobel laureate Robert Lucas, for instance, declared in his 2003 presidential address to the American Economic Association that, “[the] central problem of depression-prevention had been solved.”154 Lucas was not alone in his assessment. Another Nobel laureate, Paul Krugman, notes that leading up to the downturn, many economists were, “blind to the very possibility of a catastrophic failure in a market economy.”155
A few short years following the most severe downturn in seven decades, and the predictive failure by the overwhelming majority of experts, confusion about the economy abounds. As occurred in the early stages of the Great Depression, each hint of economic improvement is hailed by governments, banks, and regulators as evidence of the “end of the crisis.” Such pronouncements, however, now as in the past, are influenced by the apprehension that saying otherwise would only aggravate the situation. As The Economist noted in its lead story on October 11, 2008: “Confidence is everything in finance.”156
But confidence in today’s supposed economic recovery is not shared by all. At least some of the countless millions of recent additions to the ranks of under- or unemployed, who struggle mostly in vain to find jobs, are not likely to feel so optimistically inclined. They are joined by other concerned citizens from around the world, and by a small but growing assembly of noted economists, including Krugman, who, by mid-2010 stated on record that we are, “in the early stages of a new depression.”157 So-called signs of economic recovery are instead seen by at least some experts as misleading and transitory, reminiscent of what occurred during the 1930s.
History shows that periodic surges to the economy did occur in the early 1930s, but were short-lived. It was not until years after the 1929 stock market crash that a depression was understood and acknowledged to be taking place. Policymakers, Wall Street giants, economists, investors and many others back then had failed to appreciate what was unfolding and misinterpreted each fleeting advance as the hoped-for turnaround of the markets. But hope proved no match for faulty assumptions about how the economy actually works, or the failures in policy that derived from such notions. The Great Depression would persist for a decade and degenerate into the most catastrophic bust in modern history. In a number of disconcerting ways, history is now repeating itself.
In the above-cited 2008 article regarding the downturn, The Economist went on to say: “With a flawed diagnosis of the causes of the crisis, it is hardly surprising that many policymakers have failed to understand its progression.”158 This is indeed the case, although in a more profound manner than is generally appreciated.
A lot of energy and ink has been spent trying to allocate the blame for the recent disaster. Greed in the financial sector, lack of oversight by regulators, policies that over-emphasize deregulation, and incompetence at various levels, have all been cited. Our view is that any or all of these may have played a role, but at the core we are dealing with a much deeper systemic issue related to our monetary paradigm.
While the global recession is the biggest one since the 1930s, it isn’t the first such crisis. Economic troubles are, in fact, all too common. The World Bank has identified no less than 96 banking and 176 monetary crises in one 25-year-period alone, beginning with the floating exchange regime introduced by U.S. President Nixon in the early 1970s. Additionally, long before this period, banking and monetary crises were, in the words of historical economist Charles Kindleberger, “hardly perennial.”159 Kindleberger inventoried no less than 48 massive crashes between the 1637 tulip mania in Holland and the stock market crash of 1929. According to the U.S. National Bureau of Economic Research, 47 recessions have befallen the United States alone since 1790, a dozen of which occurred in the decades following the Great Depression.
These repeated breakdowns in different countries and times, under different regulatory environments, and in economies with very different degrees of development, should be seen as telltale symptoms of an underlying systemic, structural problem.
If such a deeper systemic issue is in fact involved, it would explain why each new set of regulations achieves, at best, a reduction in the frequency of banking and monetary crises, without getting rid of them or their horrific economic and sociopolitical costs. A deeper structural problem would also explain why even some of the brightest and best educated people on the planet have not been able to avoid major financial catastrophes, however diligently they do their work, whether on the regulatory or on the financial services side. Finally, if our monetary system is in fact a structural accident waiting to happen, then even if it were possible to perfectly control greed through innovative and tight regulations, such measures woul
d only defer when the next disaster will hit.
Until and unless there is review and amendment regarding these critical matters, we cannot expect an end to repeated and costly financial disruptions, or realistically hope for lasting improvements to our economies.
In support of our claims regarding the monetary paradigm and the relief that is possible with new initiatives, we offer the following all-but-forgotten accounting regarding the role of complementary currencies during the difficult Depression years in Europe and the United States.
COMPLEMENTARY CURRENCIES AND WW II
Scores of complementary currencies were in operation during the 1920s and 1930s, and included initiatives from Germany, Austria, France, Italy, the Netherlands, Sweden, the Baltics, Canada, Mexico, China, the United States, and other nations. Many programs were undertaken in response to the dramatic conditions of the period, with the inability of communities large and small to meet their socioeconomic needs. Two popular initiatives in Germany and Austria, and the U.S. response to complementary currencies in the leadup to World War II, are of particular relevance today, and are explored next.
German Hyperinflation and the Wära System
The German economy and its currency had been in trouble for years prior to the depression. In 1913, prior to the outbreak of World War I, one U.S. dollar was worth 4.2 German marks.160 By the time Germany’s inflation peaked a decade later in November 1923, the exchange rate for one dollar reached an untenable 4.2 trillion marks. A postage stamp cost billions and a loaf of bread required a wheelbarrow full of money. Almost one hundred million trillion German marks were then in circulation.161 Daily salary negotiations preceded work, wages were paid twice per day, and earnings were typically spent within the hour.
Sparked by these desperate conditions, people looked for alternative means to meet their needs. This led to growing interest in complementary currencies, which was inspired in large part by the teachings of Silvio Gesell, a merchant-turned-social activist and economist. Gesell founded the principles of modern demurrage and advocated its use as a means to help ensure money’s circulation (see insert).
Silvio Gesell, Demurrage, and the Wära
Much of the credit for the understanding and use of demurrage in the 20th century is attributed to Silvio Gesell, who provided a modern theoretical framework for this practice.
Gesell’s ideas regarding demurrage derived from railroad and shipping vessel practices. The quicker a freight train or cargo ship could be unloaded and reloaded, the greater its earning power. To encourage quicker turn-arounds, a charge was levied for the time the train or vessel remained unused, beyond an allotted time for unpacking. The term coined for this purpose was demurrage (from the French verb, demeurer, to delay).
Gesell’s interest in economics and money derived from his own personal experience with downturns. In 1887, Gesell moved from Europe to Buenos Aires where he went to work in his brother's business. But a depression in Argentina hurt the business considerably and led Gesell to reflect upon the structural problems caused by the monetary system. In 1891, Gesell released his first writing on this topic: The Reformation Of The Monetary System As A Bridge To A Just State, followed by Nervus Rerum and The Nationalization Of Money. He left the business with his brother and returned to Europe in 1892, where he studied economics and worked for decades on monetary reform.
In 1929 an organization based on Gesell’s teachings was formed in Germany. Its name was the Wära (“VAIR-a”) Tauschgesellschaft (or Wära Trading Company).162 The founders coined the term “Wära,” which is a combination of the German words “Ware” (goods) and “Währung” (currency). The aim of the Wära Trading Company was to “fight stagnation of the market and unemployment.”163 It issued a currency—the Wära bill—which had a small monthly demurrage charge in the form of a stamp fee to ensure that the currency would circulate and not be hoarded.
The Wära stamp scrip (a currency with a stamp fee) drew international attention after its success in the German community of Schwanenkirchen.
Up until hyperinflation, the largest employer and economic mainstay of Schwanenkirchen had been the local coalmine. But like many other businesses in Germany during the 1920s, it was forced to file for bankruptcy. Operations were shut down and the coalmine went on sale for 8,000 reichsmarks, far below its estimated value.
One former production engineer wanted to purchase the mine, but could not get a bank loan. Max Hebecker instead decided to apply the concept of the Gesell-inspired Wära stamp. Hebecker gathered the miners, local shopkeepers, and others that would be affected by the new local currency. He explained to all that the coalmine could be reopened, but only if each were willing to accept payment in Wära scrip in replacement of the virtually worthless national currency. The coal inventory extracted from the mine would provide the backing for the scrip. Following a lively exchange, all parties finally agreed.
The decision to accept the complementary currency turned out to be economically very sound. During a time when many other businesses and communities in Germany were struggling to survive, the Wära not only saved the coalmine and revitalized the local economy, but also began to circulate nationally.
Over 2,000 businesses throughout Germany were soon accepting and paying one another with Wära scrip. Many banks even opened Wära accounts. The Wära’s great success, however, also turned out to be its downfall.
Germany’s central bank, the Reichsbank, grew concerned over the popularity of the Wära and other local currencies then in circulation. The relief to businesses during the difficult downturn, and the longer-term potential benefits provided by these complementary currencies to the national economy (and to the banking system itself), were outweighed by their perceived threats to the hegemony in the issuance of money by the central bank. Consequently, in October 1931, by legislative action through the “Brüningsche Notverordnungen,” (Brüning’s Emergency Regulations, named after Heinrich Brüning, then Germany’s Reichs-chancellor and foreign minister), the Wära and other complementary currencies were declared illegal in Germany.164
Two years following the banishment of complementary currencies, as the economy continued to plummet, a dramatic shift took hold of the German political landscape.
Rise of the Nazi Party
The repression of complementary currencies, together with other anti-inflationary decisions by the Reichsbank, led to a sharp decline in the German money supply.165 This resulted in the shut down of the Schwanenkirchen mine and hundreds of other businesses. Unemployment thus soared once again.
Given that the reigning monetary monopoly made it increasingly more difficult for people to help themselves on a local level, advocates of centralized solutions gained appeal. In the beer halls of Bavaria, an obscure Austrian immigrant began drawing audiences to his fiery speeches, with promises of a return to jobs and glory. His name was Adolph Hitler.
Some may consider the simultaneous ban of complementary currencies, deterioration of economic conditions, and the rise of radical authoritarian political ideology as unrelated coincidental occurrences isolated to Germany. It should be noted, however, that a nearly identical set of circumstances was taking hold concurrently in neighboring Austria.
Austria and the Wörgl
When Michael Untergugenberger was elected mayor of Wörgl, Austria, he faced high unemployment and a near-penniless constituency. He had a long list of projects he wished to accomplish, along with many willing and able people to do the work. But only 40,000 shillings remained in the bank…just enough to pay the salaries of about 20 people for one month, a pittance compared to the cost of what was needed.
Rather than spend the last of the limited funds on a long list of projects, the mayor instead put the money on deposit with a local bank as a guarantee for 40,000 shillings’ worth of Wörgl’s own complementary “labor certificates,” officially termed Banknotenausweis, which soon came to be referred to simply as the Wörgl (“VUR-gul”). Like the German Wära, the Wörgl was a stamp scrip that
included a “relief tax,” which was actually a demurrage charge applied through a stamp affixed each month at 1 percent of face value. As with other demurrage charges, this relief tax acted as an incentive to keep the currency in circulation. Those paid in Wörgl made sure to spend it quickly. The extra money in circulation led to additional employment opportunities in the community.
The Austrian Wörgl, like the German Wära, was a dramatic success. Wörgl quickly became the only town in Austria with full employment. This was made possible through the rapid circulation of the local stamp scrip, which was estimated to have created eight times more employment than national shillings would have. The demurrage-charged, anti-hoarding feature proved particularly effective as a spontaneous work-generating device.
Swiss essayist Alex von Muralt, who investigated the Wörgl at the time, reported the mayor’s delighted comments that, “taxes were eagerly paid…in a number of instances in advance.”166 Following his investigation, Von Muralt concluded:
This eagerness to pay taxes may be, in my opinion, simply owing to the fact that the businessman who finds at the close of the month that he holds a considerable amount in relief money [Wörgl], can dispose of it with the greatest ease and without loss by meeting his parish [local tax] obligations. A change of attitude has manifestly taken place. If formerly the paying of taxes was deferred to the last, now it occupies first place.167
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