money

Sixteen years ago, when he moved to Kenya, development economist Will Ruddick realized that many poorer communities are not as helpless as they might think. They may not have as much money to meet their needs, but they do have goods and services to offer each other -- cooking, tutoring, bike repair, taxi rides, and so forth. The real problem is the scarcity of a currency to enable exchange; the national currency, the Kenyan shilling, is not so plentiful in many neighborhoods.

So, working with small businesses and households, Ruddick and members of the group he founded, Grassroots Economics, set out to create what he calls "community inclusion currencies." One of his first experiments in this realm was the Bangla-Pesa currency in Mombasa, a community of 20,000 people on the Kenyan coast. The Bangla-Pesa is essentially a system of credit vouchers whose value is pegged to the Kenyan Shilling, but not convertible to it. Under certain rules, anyone can issue a Bangla-Pesa credit voucher for their goods and services.

As people use the vouchers to buy things, the vouchers begin to circulate and function as a kind of community-based money. The trick is ensuring a critical mass of participants offering a diverse range of goods and services; rules to prevent hoarding; and a brisk circulation of the vouchers. With 218 participating businesses and 87,000 vouchers now in circulation, the Bangla-Pesa mutual credit system helps thousands of people meet many everyday needs. 

Ruddick has gone on to create community currencies in over 80 communities throughout Kenya as well as in Cameroon and South Africa. Over 60,000 households are spending and receiving the equivalent of US $4 million in exchange. 

A key lesson from the projects is that a community can control its means of exchange to advance its own interests without relying on banks, the mainstream economy, or the national currency.  

I recently spoke with Ruddick on my Frontiers of Commoning podcast (Episode #48) to learn more about his experiments with community currency. He explained how his thinking about "re-inventing money" has evolved in recent years.

It takes a lot of effort by small-scale commons to get started, especially to raise and manage money, negotiate budgets, pay people, comply with tax laws, etc. That got easier with the rise of Open Collective, a new type of platform nonprofit that helps many types of collectives gather and spend money transparently.

You can consider Open Collective an infrastructure for commoning -- a backend system that makes it easier and more normal for people to manage money fairly, collectively, and with open accountability.

In the latest episode of Frontiers of Commoning, I speak with Alanna Irving, Chief Operating Officer of Open Collective, a nonprofit that handles the complicated, messy administrative and financial work for small, often-underfunded collectives. This work includes handling donations, providing fiscal sponsorship, making payments, and so forth, which are often too costly and complex for mutual aid groups, cooperatives, commons, and other small projects to manage.

Irving comes to the challenges of network-based governance with a wealth of firsthand experience.  She was an early member of Enspiral, the pioneering New Zealand group that developed new organizational structures and culture for their online community. That project had two notable offshoots that helped pave the way for Open Collective: the software platforms known as Loomio, for group deliberation and decisionmaking, and Cobudget, an app for managing shared spending and allocations of money within a collective. 

As an early participant in this journey, Irving became an expert in "distributed leadership" and peer governance in horizontal, networked organizations striving to live by open source principles. She also learned about cooperative governance.... technology that is designed to be participatory.... and radically collaborative uses of money.

Irving believes that it is entirely possible for people to self-manage themselves on horizontal networks, eliciting a diversity of talent and nurturing people's personal growth while serving the common good. But this challenge usually requires "hacking organizational structures with our values," as she puts it. 

In recent weeks, we commoners have lost three great visionaries. Each spawned robust institutions and movements to carry their visions forward; the continuing vitality of their projects confirm that their spirits remain very much with us. We should pause to reflect on and celebrate their towering contributions.

I'm talking about the British architect/philosopher Christopher Alexander, who invented the "pattern language" approach to urban design and building; Edgar Cahn, the creative American legal activist who invented timebanking and cofounded Antioch School of Law; and Gustavo Esteva, the post-development thinker and founder of the Universidad de la Tierra in Oaxaca.

Christopher Alexander's Fearless Exploration into Aliveness and Design

I remember encountering Christopher Alexander's seminal book, A Pattern Language, in the late 1970s, a cultural moment that was erupting with all sorts of mind-blowing ideas. Alexander wanted to know why certain designs in architecture and urban spaces were consistently used across cultures and history. These include the proportions of space in rooms....the placement of windows....the design of public squares... the popularity of cafes in cities....among dozens of other forms. What accounts for their timeless appeal?   

Alexander and his coauthors came to see that beauty, grace, and spiritual satisfaction actually play vital roles in the design of everyday life and buildings. Certain designs embody aliveness! But that quality can only be seen through a certain prism, which is what Alexander set out to name and analyze. He called his method a pattern language.  

A pattern, in Alexander's view, describes "a problem that occurs over and over again in our environment, and then describes the core of the solution to that problem, in such a way that you can use this solution a million times over, without ever doing it the same way twice." 

Each solution is unique because the context of the problem -- the geography, culture, values, and history of the designers -- is always different. Yet there are regularities -- or patterns -- to be  identified and studied. In A Pattern Language, Alexander identified 253 interrelated patterns in urban and building design. 

As my late colleague Silke Helfrich and I began to think about the nature of commons as social systems, we saw how the pattern language methodology could help us explain how commons actually work -- because commons, like buildings, are not primarily about physical things. They are about the interactive social dynamics of humans as they engage with each other and the Earth.

Most people don’t really understand how money is created and what political choices are embedded in that process. As a result, the privatization of money-creation is largely invisible to public view, and the anti-social, anti-ecological effects of privately created, debt-based money go unchallenged. 

Mary Mellor, professor emerita at Northumbira University in the UK, wants to change this reality, as she explains in a recent essay, “Money for the People,” at the Great Transition Initiative website. Mellor, the author of Debt or Democracy and an expert on the development of alternative economies, writes that we must create new public circuits for money-creation so that we can direct money toward socially and ecologically needed activities, and not just the types of debt-driven loans that banks deem profitable. In other words, money-creation need not be controlled by private creditors in the course of creating debt.  

The average citizen knows that banks are too powerful and often predatory, but they may not realize that the state has largely ceded its power to create new money ("seignorage") to banks. Banks create new money out of thin air when they make loans. That money is not something they otherwise hold in a vault. It is literally created when a loan is approved. That is how banks make profits. 

The power to create new money is something that the government could feasibly control and administer itself, for the benefit of all.  But governments have surrendered their power of seignorage to the private banking system and its investors.

This has far-reaching, negative impact because, as Mellor explains, “It is the private, bank-issued money system that leaves us with a pernicious cycle of debt and growth. Money could encourage socially and ecologically sustainable production and consumption, but only if it ceases to be a creature of the market and is reclaimed as a social and public representation of value.”

Although it is widely assumed that governments are the source of all new money – through “printing it” – the so-called private sector is the source of most new money put into circulation.  In one of the most successful enclosures of the commons in our time, commercial finance institutions have captured the power to create most new money through their discretionary lending.  This power has become so normalized and pervasive that hardly anyone acknowledges the startling fact that commercial lending accounts for more than 95% of “new money” created.  Government has in effect surrendered its enormous power to use its money-creating authority for the public good.

Perhaps the leading champion for reforming the current money system is Mary Mellor, emeritus professor at Northumbria University in the UK and author of the recently published, eye-opening book Debt or Democracy:  Public Money for Sustainability and Social Justice (Pluto Press, 2015, distributed in the US by University of Chicago Press Books). 

Mellor recently published an oped piece in The Independent, the British newspaper, that summarizes some of the key themes in her book. Her essay focuses on the “myth of handbag economics” – the idea that government budgets are comparable to household budgets.  This distorts our understanding of how the money supply works, says Mellor, and inexorably leads governments to adopt fiscal austerity policies. 

The critical political question that is rarely asked, said Mellor at a policy workshop last September, is: Who controls the creation and circulation of money?

She notes that the government, as the sovereign, has the authority to issue new money – an ancient authority known as seignorage.  But in practice, governments have surrendered this authority to the commercial banking sector, whose lending creates nearly all of the money in circulation as debt. 

Banks create money out of thin air by issuing new loans.  They need not have those specific sums of money on hand, in a vault. They need have only a small fraction of reserves of the total sum lent, as required by “reserve banking” standards. In this way, bank lending quite literally introduces new supplies of money into the economy based on strictly private, commercial standards – i.e., banks' assessments of borrowers’ ability to repay the debt with interest.

Mellor believes that we need to recover the power of public currency to meet public needs.   By “public currency,” she means “the generally recognized and authorized public currency created through a public money circuit that originates in central banks and government spending.”  Privately created currency is money designated as public currency that is issued through the banking sector as loans.  It is the fact that bankers are creating the public currency when they make loans that makes the state liable to honor that money when banks go into crisis.

One of the more complicated, mostly unresolved issues facing most commons is how to assure the independence of commons when the dominant systems of finance, banking and money are so hostile to commoning. How can commoners meet their needs without replicating (perhaps in only modestly less harmful ways) the structural problems of the dominant money system?

Fortunately, there are a number of fascinating, creative initiatives around the world that can help illuminate answers to this question – from co-operative finance and crowdequity schemes to alternative currencies and the blockchain ledger used in Bitcoin, to reclaiming public control over money-creation to enable “quantitative easing for people” (and not just banks). 

To help start a new conversation on these issues, the Commons Strategies Group, working in cooperation with the Heinrich Böll Foundation, co-organized a Deep Dive strategy workshop in Berlin, Germany, last September.  We brought together 24 activists and experts on such topics as public money, complementary currencies, community development finance institutions, public banks, social and ethical lending, commons-based virtual banking, and new organizational forms to enable “co-operative accumulation” (the ability of collectives to secure equity ownership and control over assets that matter to them).

I’m happy to report that a report synthesizing the key themes and cross-currents of dialogue at that workshop is now available.  The report is called “Democratic Money and Capital for the Commons:  Strategies for Transforming Neoliberal Finance Through Commons-Based Alternatives,” (pdf file) by David Bollier and Pat Conaty.

You could consider the 54-page report an opening gambit for commoners to discuss how money, banking and finance could better serve their interests as commoners.  There are no quick and easy answers if only because so much of the existing money system is oriented towards servicing the conventional capitalist economy.  Even basic financial terms often have an embedded logic that skews toward promoting relentless economic growth, the extractivist economy and its pathologies, and the notion that money itself IS wealth. 

That said, commoners have many important reasons for engaging with this topic.  As we put it in the Introduction to the report, “The logic of neoliberal capitalism is responsible for at least three interrelated, systemic problems that urgently need to be addressed – the destruction of ecosystems, market enclosures of commons, and assaults on equality, social justice and the capacity of society to provide social care to its citizens. None of these problems is likely to be overcome unless we can find ways to develop innovative co-operative finance and money systems that can address all three problems in integrated ways.”

It’s hard to find many co-operatives with the kind of practical sophistication and visionary ambitions as CIC – the Catalan Integral Cooperative -- in Spain.  CIC describes itself as a “transitional initiative for social transformation from below, through self-management, self-organization, and networking.”  It considers the state unable to advance the public good because of its deep entanglements with market capitalism -- so it has set about building its own working alternatives to the banking system and state. 

Since its founding in May 2010, CIC has developed some 300 cooperative projects with 30 local nodes, involving some 4,000 to 5,000 participants.  You can get an idea of the impressive scope of CIC’s work through this interview with Enric Duran by Shareable magazine in March 2014. It’s fairly clear that CIC is serious about building a new global economic system – and not just as a rhetorical statement.  CIC builds real, working alternatives, showing great sophistication about politics, law, economics and digital platforms. 

CIC has now started Fair.Coop to help build a set of free economic tools that will “promote cooperation, ethics, solidarity and justice in our economic relations.” A key element of the Fair-Coop vision is a cryptocurrency, Faircoin, which has been designed to adapt the block-chain technology of Bitcoin with a more socially constructive design. (Faircoin relies less on "mining" new coins than on "minting" them in a more ecologically responsible, equitable ways.)

Many skeptics might scoff at the brash, utopian feel of this initiative.  But in many respects, Faircoin is the ultimate realism. CIC correctly recognizes that the existing monetary system and private banks pose insuperable barriers to reducing inequality and ensuring productive work and wealth for all. The only "realistic" alternative to existing fiat currencies and foreign exchange is to invent a new monetary system!  Fortunately, thanks to the pioneering examples of Bitcoin and other cryptocurrencies and the evolving powers of software, that idea is actually within reach these days.

This and other questions are addressed in “The Weightless Marketplace:  Coming to Terms with Innovative Payment Systems, Digital Currencies and Online Labor Markets,” a just-released report that I wrote for the Aspen Institute’s Communications and Society Program. The report distills the more salient points raised at a three-day conference last August that brought together leading players in banking, financial services and online labor platforms.   

Most of the conference participants are in the business of inventing or adapting to new types of digital payment systems or data-based services. They include major players like JP Morgan Chase, Intuit and VISA as well as upstarts such as Bitcoin, ID3 and the identity-management service Personal.

The basic story in digital markets is the ongoing elimination of “friction” in making transactions – reducing the barriers of geography, time and transaction costs. Hence the title “the weightless marketplace.”  “Reducing economic friction” has been the story of the World Wide Web from its beginnings, of course, but the trend is now reaching new levels of intensity and disruption.  My role, as rapporteur, was to represent the diverse points of view while providing my own interpretive synthesis. 

Perhaps the most fascinating points of discussion revolved around Bitcoin.  Notwithstanding the controversy surrounding it, Bitcoin’s basic functionality and soaring popularity have some serious implications for banks, credit card companies, PayPal and other payment systems. Peter Vessenes of the Bitcoin Foundation noted that digital technology can move value to anywhere in the world, at any time, using just 100 bytes of data.  And it can do it at very little cost – much less than the per-transaction charges levied by credit cards, for example.

Critics charge that Bitcoin facilitates illicit transactions, money laundering and terrorist activity, not to mention tax evasion.  Vessenes replied that Bitcoin is “way less anonymous than cash” – because the permanent global ledger of transactions for each Bitcoin is accessible and can be used to help identify buyers and sellers.  Another reason that Bitcoin is controversial is that it represents a potential threat to the sovereignty of nation-states, because it could undermine their monetary and fiscal policies.  That’s why regulation of Bitcoin is inevitable, many agreed.

But apart from Bitcoin’s fate, the larger question may be how existing banks and financial companies will respond to the coming “democratization of money.”  Several factors are fueling this trend, according to Gartner, the consulting firm:  individual access to massive, high-speed flows of information, the proliferation of mobile computing (smartphones, tablets, etc.), the rise of the cloud, and the social commons of highly specialized communities of interest.

The Green Party of England and Wales really knows how to stake out some fresh territory in their national politics!  At the autumn conference, the Greens adopted a resolution calling for “a programme of reform to remove the power to create money from private banks, and to fully restore the supply of our national currency to democratic and public control so that it can be issued free of debt and directed to environmentally and socially beneficial areas.” 

Bold thinking!  The Greens explain why the existing banking system is so pernicious: 

"The existing banking system is undemocratic, unfair and highly damaging.  Banks not only create money, they also decide how it is first used – and have used this power to fund financial speculation and reckless mortgage lending, rather than to finance investment in productive businesses.  Through the interest charged on the loans on which all credit is based, the current banking system increases inequality.  It also regularly causes economic crises:  banks create and lend more and more money until the level of debt becomes unsustainable, boom turns to bust, and the taxpayer bails out banks that are ‘too big to fail.’  Finally, the need to service the growing mountain of debt on which our money is based is a key driver of unsustainable economic growth that is destroying the environment."

The right to create money and profit from it is known as seignorage.  Banks currently enjoy this right and exercise it through their lending, which creates most of the money in circulation.  Governments have effectively let banks privatize control of the money supply.  In so doing, governments have forfeited the opportunity to provide debt-free lending to support productive enterprises and public needs as opposed to fueling boom-and-bust speculation and relentless economic growth that destroys the environment.

Reclaiming seignorage for public benefit has been a serious idea among many progressive economists for years.  A notable figure in this regard is James Robertson, the founder of the new economic foundation in Great Britain, in 1986, who has championed this issue for years.  Robertson’s most recent book Future Money explains how re-gaining public control over how new money is created and circulated could result in “an annual savings to all citizens of the UK of £75bn, and second in a one-off benefit to the public purse totalling £1.5bn over a three-year transition period.”

Gavin Andresen, the lead scientist for the Bitcoin Foundation (and one of its only two staff members) sat down with a few of us at the UMass Amherst Knowledge Commons meeting on Wednesday.  Having read so much hype and misinformation about Bitcoin over the past few months, I was excited to have a chance to talk to someone directly connected with this brilliant experiment in algorithmic institution-building.  Bitcoin is, of course, the digital currency that has been in the news a lot recently because of its surging value among traders – and its dramatic crash.  

For months the dollar value of a Bitcoin fluctuated between $20 and $50….but in mid-March the conversation rate soared to around $250 before crashing last week to $140 and then $40 yesterday.  (Today it was back up to $95.)  This kind of stuff is catnip to the mainstream press, which otherwise doesn’t know much or care much about Bitcoin.

Andresen, a self-described geek in his forties with a pleasant manner and trim haircut, strolled into the small conference room in his black rugby shirt and jeans.  Six of us proceeded to have a wide-ranging, fascinating chat about the functional aspects of Bitcoin, the political and social values embedded in its design, and some of the operational challenges of making Bitcoin a new kind of universal currency. 

For those of you who want a quick primer on Bitcoin, I suggest the New Yorker profile  by Joshua Davis in the October 10, 2011, issue; a terrific recent critique by Denis Roio (aka Jaromil), a Dutch hacker who is working to code new sorts of digital money; or the Wikipedia entry on Bitcoin. 

Bitcoin is of special interest to me for its remarkable success at solving a serious collective action problem – how to create a digital money so secure and authenticated so that no one can steal its value and ruin it as a stable, trusted currency? 

The problem that Bitcoin solves as a matter of algorithmic and cryptographic design is the “Byzantine General’s problem,” which has been described as “the problem of reaching a consensus among distributed units if some of them give misleading answers.”  As one reference describes it, the problem has been compared to the problem of various generals deciding on a common plan of attack:  “Some traitorous generals may lie about whether they will support a particular plan and what other generals told them. Exchanging only messages, what decisionmaking algorithm should the generals use to reach a consensus?  What percentage of liars can the algorithm tolerate and still correctly determine a consensus?” 

Bitcoin solves this classic problem of achieving coordinated action without reliable communication or excessive (or any) defections.  Much of this success stems from the startlingly solid cryptography of the system.  The other safeguard, Andresen explained, has been Bitcoin’s “get big quick” strategy.  If enough Bitcoins can be put into circulation quickly, then it becomes much harder for any faction to corner the market in Bitcoins or to compromise their integrity.  This is important because the viability of any currency depends upon the ability of the issuer to prevent counterfeiting or theft -- a kind of free riding on the social trust that any community invests in its currency.