New Money for a New World

by Bernard Lietaer

  When, for instance, the British pound was playing the role of a global currency (from the 19th century and particularly during the first half of the 20th century), there was a tendency to favor the international role of the pound over its role for the domestic economy. That tendency helps explain why Britain was the last country to be able to get rid of war rations after World War II.

  When the U.S. dollar started playing the role of a global currency, these priorities were reversed. As Paul Volcker stated when he was Chairman of the Federal Reserve: “Americans are paying my salary, so I am managing the dollar to the benefit of America.”275 We claim that both these outcomes are undesirable.

  The Terra solves the quandary between national and global interests by leaving all nations free to manage their currency as they please, without any detrimental effect to their own national economy or to that of the world. By virtue of being privately issued, with all participants enjoying equal benefits of use, participation in the Terra system eliminates the lopsided effects of granting preferred TRC status to any single nation or group of nations.

  2. Lower costs and risks for doing international business

  International business activities typically involve someone—be it the buyer, seller, or even both—taking a currency risk. In theory, with today’s 24/7 electronic currency exchanges, trading in currencies, either immediately or at some future date (futures contracts), should be straightforward. In practice, the cumulative costs of such insurance are instead quite high, and efficient markets exist only for half a dozen major national currencies.

  The volatility of the Terra would be less than a quarter of what we currently experience between major national currencies, even if only 9 major commodities are included in the basket. Both the risks and the cost of hedging those risks would therefore be significantly lower when using the Terra compared to today’s national currencies.

  3. Increased investment in LDCs

  Less developed countries tend to be resource-rich and infrastructure-poor. By making their resources central not just to certain specific kinds of economic activities but to the international financial system itself, powerful incentives will exist for multinational entities and nations to help these LDCs develop their infrastructure and resources.

  4. Improved stability of the world economic system

  Recent decades have seen numerous boom and bust cycles that originated in one nation, but which cascaded contagiously across international borders.

  When banks collectively perceive economic activity as slowing, they withdraw credit from borrowers because of the possible increased risk. While this is sound practice for individual banks, it is detrimental for the economies involved, and even for the banking system as a whole. The very act of withdrawing credit makes it harder for the businesses involved to survive. By similar logic, when the economy is good, banks eagerly lend money, thereby potentially driving a healthy economic period into an unsustainable bubble. This amplification of the business cycle is what is meant by procyclical money creation.

  The Terra offers three ways by which it actually helps to balance out the boom and bust cycles.

  First, it acts as a countercyclical money creation process. The particular time periods when producers of raw materials have excess inventories (that can be sold against Terras) tends to coincide with the downturn of the business cycle.

  Second, it offers a complementary monetary system for international trade that is not tied to credit creation or withdrawal but rather to valuable assets.

  Finally, it allows resource suppliers to sell those resources for Terras when there may not be enough buyers who can pay in traditional money without significantly depressing the price. This, in turn, generates self-funding buffer stocks. Thes stocks can become critical in the case of crop shortages or failures due to climate change, particularly in the domain of food commodities. Global stocks are already dangerously low.

  5. Protection against inflation

  By structuring the Terra upon the foundation of a representative basket of goods and services that are central to economic activity worldwide, the Terra serves as a kind of proxy for the most significant international inputs of the world economy itself. The value of the Terra would therefore adjust automatically to inflationary pressures due to these inputs.

  Using the Terra for contractual agreements, particularly longer term ones, would therefore be an automatic inflation hedge.

  6. A shift from short-term to longer-term thinking

  As has been discussed elsewhere in this book, an overemphasis on short-term thinking has contributed to many of our problems today. Stockholders in public companies typically hold management accountable for quarterly results. Long-term threats such as global warming, ocean acidity, and deforestation do not enjoy constituencies willing and able to make long-term investments necessary to rectify them. These are but symptoms of a widespread systemic failure of money.

  It is the nature of interest-bearing currencies that a dollar today is worth more than a dollar tomorrow. This encourages a focus on short-term cash flow, and the higher the rate of interest the more short-term becomes the thinking. In contrast, exactly the opposite is true with a demurrage-charged currency. Almost all corporate decisions on investments or allocations of funds are undertaken using the Discounted Cash Flow technique, whereby the interest rate is part of the discount rate. Demurrage is instead a negative interest rate that reduces the discount applied.

  The historical record shows that the impact of money on investment timelines isn’t just theory: in cultures where demurrage-charged currency complements interest-bearing currency, a longer planning horizon develops and more long-term investments are made. Examples of this include the Central Middle Ages and Dynastic Egypt (described in more detail in Part IV).

  This difference in planning horizons can be compared to a well-known principle of inventory management. Sophisticated companies strive to have exactly the right amount of each production component (asset) on hand when needed for their production activities. Too little, and they cannot fulfill orders. Too much, and they are wasting money on inventory carrying costs. The concept is called “just-in-time inventory.”

  Money is also an asset, and can therefore be inventoried. Demurrage-charged money such as the Terra is expensive to hold. Therefore, if you receive it sooner than you need it, you are wasting money. Such a system encourages a mindset of receiving money only when it is actually needed in the future. It encourages a more forward-looking mindset, which balances the immediacy of interest-bearing money.

  Differences from Earlier Proposals

  The Terra is a commodity-basket currency. Several proposals of this kind have been made by noted economists for more than a century.276 The main reason why these other plans have not been implemented is not due to a technical fault of the concept itself, but rather that they were aiming at replacing the conventional monetary system. Such replacement would have put in jeopardy powerful vested interests. This is not the case with the Terra proposal. The win-win strategy underlying the Terra mechanism includes the financial sector as well. Anything that exists under the current monetary modus operandi would remain in operation after the introduction of the Terra, as it is designed to operate in parallel with the existing system.

  The political context for a new international monetary treaty, a new Bretton Woods type agreement, has not been available. The Terra avoids this difficulty by relying on private initiative. From a legal or tax standpoint, it would fit within the existing official framework of international barter (technically called countertrade), and not require any new formal governmental agreements to make it operational.

  The final conceptual difference between the Terra and all previous proposals, and perhaps the most important one, is the use of demurrage. The fact that the storage costs of the basket would be covered by the bearer of the Terra resolves the inherent problem that previous commodity proposals faced and couldn’t resolve: namely, who will pay for it all?


  Growing concern and dissatisfaction with today’s monetary situation has led to renewed interest in a return to the gold standard. Some of the advantages and disadvantages are discussed below.

  Advantages of the Gold Standard

  The gold standard has indeed some systemic advantages compared to the current system. Specifically, two advantages are worth mentioning. First, the gold standard would reduce inflationary tendencies because gold cannot be created at will by governments or the banking system. And second, the gold standard is more symmetric, in that it provides corrective mechanisms to both those countries with a balance and payment surplus as well as to those with a deficit, so as to correct their balance of payments. Under the gold standard surplus countries would automatically see the value of their currency increase, which would make their products more expensive in the global market and reduce exports over time, thus bringing their trade balance back into equilibrium. Similarly, countries with a deficit would see their currency devalue, automatically making their products more competitive, which would, over time, bring their trade balances back in equilibrium.

  The reigning Bretton Woods system is instead not symmetric: deficit countries are penalized, while those with a surplus have no incentive to bring their balances back to zero. The origin of this lack of symmetry can be traced back World War II, and expectations by the United States that it would be the only country whose productive capacity was left intact after the war. This advantageous position turned out to be only temporary, however, and today countries like China and Germany are taking advantage of this asymmetry.

  Disadvantages of the Gold Standard

  The gold standard has also some limitations, especially when compared to the Terra. In reality, the genuine gold standard was formally implemented for only a brief period.277 By 1910, for instance, the Bank of England covered only about 20 percent of its emissions of Pound sterling with gold. This fact was kept from the public at the time, and illustrates how easy it was for a central bank to abuse the system. The same could easily happen again if the gold standard was reintroduced.

  Another limitation is that the price in the gold market today is easily manipulated, given that its volume is so limited.

  The Terra, which would include gold as one of the commodities in the Terra basket (at levels that range from 5 to 10 percent of the basket's value), would avoid the pitfalls cited above. Terras would be issued only as inventory receipts and would be audited publicly to ensure that this remains so. Furthermore, it would be impossible to manipulate simultaneously all the commodities that are part of the Terra basket.

  In short, the Terra would provide benefits similar to those of the gold standard, without having its drawbacks.

  CLOSING THOUGHTS

  The Terra Trade Reference Currency is poised to more cost-effectively enhance barter and countertrade, currently already a multi-billion dollar industry. It does not require any new regulations or laws and provides a means to conduct business that otherwise might not take place, creating or saving jobs, and strengthening economies. The Terra TRC would automatically work to counteract the boom and busts of the business cycle and stabilize the economy by providing more cash during downturns, and cooling off inflationary pressures in the peak of an upturn. Most importantly, it will resolve the current conflict between short-term financial interests and long-term sustainability.

  Along with creating greater stability and predictability in the financial and business sectors, the Terra TRC provides a robust standard of value for trade. It makes available, for the first time since the gold-standard days, a robust international standard of value that is inflation-resistant.

  The Terra and other complementary currency proposals explored in previous chapters give some idea of the scope and diversity of how these applications can be used to resolve critical issues we face.

  CHAPTER EIGHTEEN - Two Worlds

  Two roads diverged in a yellow wood, and I—

  I took the one less traveled by,

  And that has made all the difference.

  ~ROBERT FROST

  We live in critical times, faced with a series of epic concerns that threaten humanity as never before. In a university commencement address, entrepreneur, environmentalist, and author Paul Hawken stated clearly what is demanded of us:

  Class of 2009: you are going to have to figure out what it means to be a human being on Earth at a time when every living system is declining, and the rate of decline is accelerating. Kind of a mind-boggling situation…but not one peer-reviewed paper published in the last thirty years can refute that statement. Basically, civilization needs a new operating system, you are the programmers, and we need it within a few decades.278

  Over the course of the last several decades, not one of the major megatrends facing our planet has been adequately addressed. In stark defiance of the growing awareness, concerns, and the many valiant efforts on the part of individuals, communities, non-profit organizations, and nations, each of the world’s major concerns have instead only gotten worse. This decline and the persistence of our megatrends is not by accident. It was foretold more than a decade ago in The Future of Money (Random House, 1999), during a period of relative economic and political calm, before the dotcom crash, before 9/11, before the wars in Iraq and Afghanistan, and nearly a decade prior to the Great Recession.

  In other words, the events and policies that took place over the course of this last decade, though having exacerbated our situation, were not in and of themselves the origins of our ongoing concerns. The root cause of our megatrends is instead directly linked to our centuries-old monetary paradigm.

  The continued lack of monetary rethinking will make the persistence of our major concerns and the continued degeneration of conditions as predictable and irrevocable in the coming decade as in the past. This was a core thesis back in 1999 and remains so today. The key difference between then and now is that the need to act is far more urgent and the time in which to do so is much shorter still.

  Our main focus throughout this book is to offer a sense of what is possible by venturing outside the confines of the current paradigm and exploring options available to us by rethinking money. In the pages that follow, we instead explore the approaches being taken within the given framework of the existing bank-debt monetary paradigm and the societal conditions that it portends. It should be understood that what is written below is not theoretical but has already begun to be set in motion. We repeat the claim made back in Chapter One:

  The kind of world we live in is directly linked to the type of monetary paradigm that is operational.

  DEBT-BASED STRATEGIES

  Summarizing the key conclusion of the previous chapters, the prevailing monetary paradigm can be simply stated as follows:

  all exchanges in every country around the world today take place through a monopoly of a single currency;

  that one currency takes the form of bank debt.

  For more than a generation, debt has been touted as the answer to all economic troubles. This is not only the case for individuals, but applies to corporations, governments, and the financial sector. That supposed solution is, however, now becoming less available, or not available at all, principally because excessive debt has itself become a big problem. The consequences of remaining trapped within this conventional monetary box under such circumstances are profound.

  Salvation Through Debt?

  How have we arrived at this outcome in which excessive debt has become such a widespread problem?

  At the individual level, getting in debt seems one of the few remaining rites of passage into adulthood. Getting one’s first credit card is often perceived as more important than casting one’s first vote, and buying a first house invariably means committing to a mortgage that is a substantial multiple of most annual incomes. Even if one doesn’t indulge in either of these rites, a substantial slice of one’s taxes is earmarked to pay interest on our government’s national debt. Over the past half-century, total private deb
t in America has increased dramatically, from around 50 percent of GDP in the 1950s to a staggering 300 percent today.279 This level has been reached, ominously, only once before: in 1929, just before the Great Depression.

  Accumulating debt has also become fashionable for corporations, a consequence of which has been the steady, continuous deterioration of corporate credit ratings. For instance, Standard & Poor’s median corporate rating went from “A” in 1981 to the current “BBB”—just one step better than “junk” status.280 It should be noted, however that corporate debt is far from uniformly distributed. Many American firms reduced their appetite for debt after 2000, with the end of the dotcom bubble and the spectacular demise of WorldCom and Enron. But the wave of leveraged buy-outs (LBOs) continued a bit longer, and left all companies involved with a lot more debt on their balance sheets.

  No industry has become more addicted to debt than finance. In America, while the non-financial sector increased its debt-to-GDP ratio from 58 percent in 1985 to 76 percent in 2009, the financial sector went from 26 percent to 108 percent over the same period.4 Furthermore, the financial sector steamedahead longer than all the rest, right up until the day of the financial crash of 2007-8. Indeed, leverage is just one way to further push the financial efficiency of the system: its capacity to increase throughput for a given capital base. This extra leverage contributed predictably to the fragility of the whole financial system. Ironically, this same debt led financial institutions to lose trust in some of their own colleagues, which in turn triggered the meltdown and brought down giants such as Bear Stearns and Lehman Brothers.