The Future of Money | Chapters 7-8 | Bernard Lietaer (1999)

Reproduced from:

The Future of Money © Bernard Lietaer March 1999

Chapter 7: Some Practical Issues

“When a great innovation appears, it will almost certainly be in a muddled, incomplete, and confusing form…
For any speculation which does not at first glance look crazy, there is no hope.”
Freeman Dyson

“Chaos is creativity in search of form.”
John Welwood

“The future is like everything else,
It isn’t what it used to be”
Charles Kettering

It is not sufficient to invent or even implement a new currency. Because of money’s central role in our societies, a lot of different and powerful organizations and people have their say in this domain. As long as the complementary currency movement has remained marginal, it may have been ignored by the powers-that-be, such as tax authorities or Central Banks. However, if this process goes mainstream as recommended here, if we want to use complementary currencies as a systematic tool to address the issues raised by the Time Compacting Machine, it would be unwise to just assume away the concerns and objections that these organizations may want to express. This chapter will address these issues

It will also identify some elements for a European social policy using complementary currencies, and provide some pragmatic advise for people who may be interested in implementing their own complementary currency project.

This material is organized under four headings as follows:

  • Complementary Currencies, Legal and Tax Authorities
  • Complementary Currencies, Central Banks and Inflationary Pressures
  • For a European Social Policy Incorporating Complementary Currencies
  • Some Guidelines to Creating Your Own Complementary Currency

Complementary Currencies, Legal and Tax Authorities

The short answer to the relationship between complementary currencies and both the legal and taxation system is that there are no insurmountable obstacles. However, a few more words are warranted to support such a blanket claim.

Are Complementary Currencies Legal?

Most countries in the world have no legislation making it illegal for anybody to “agree within a community to use something as a means of payment.” On the other hand, most countries have also assigned the monopoly of “legal tender” to their banking sector under supervision of the Central Bank. All this means from a pragmatic standpoint is that you cannot force anybody to accept complementary currency to repay lawful debts, and that you should pay your taxes in the national currency.

The most complete study about the legality of complementary currencies was performed in the US by Professor Lewis D. Solomon from The George Washington University National Law Center. He has covered in exhaustive detail both the federal and state-by-state legislations concerning complementary currencies.2 Specific legal warnings include that one should not use the complementary currency across state lines, and that the physical design of the complementary currency should look significantly different from the normal national currency design in order to avoid confusion. When these simple precautions are taken, there are no legal constraints on anybody starting their own currency.

I do not know of a similar systematic study for Europe or other parts of the world. But the unhindered proliferation of complementary currency systems all over the world confirms that they are not breaking any laws.

What about Taxes?

A general taxation rule is that it is not the currency used which determines whether a transaction is taxable, but the nature of the transaction itself.

Whenever an activity is performed on a professional basis (a plumber doing plumbing), most countries will consider it as taxable, independently of the kind of currency used. And the currency in which taxes need to be paid is the “legal tender”, i.e. national currency. In contrast, if a transaction is simply people helping other people, most countries consider it as non-taxable. An important precedent has been set in the US, widely regarded as the toughest tax country in the world. Because of the predominantly social purpose, all transactions in Time-Dollars are now officially tax-exempt.

Yes, there are some people who may use complementary currencies as tax dodges. But these same people also illegally evade taxes owed on normal national currency transactions.

By the way, did you know that whenever you use a frequent flier ticket, in many countries – including the US – you are supposed to declare that also as taxable income? So, from this perspective the tax authorities consider such corporate scrip issued by airlines just another specialized kind of currency. Tax theory is ahead of economic theory in this case.

Finally, there are serious reasons, such as promoting local or regional sustainability, which would justify the use of local currency to raise local taxes. As at least part of a local or regional government function is to provide local or regional services, it could use the income raised to pay partially for such services in turn in local currency (sidebar).

Sustainability and the Choice of the Tax Currency

Local governments who are in favor of promoting local sustainability at any scale often forget that the most effective tool used to destroy local sustainability has been the introduction of a national currency to raise local taxes.

During the 19th century in Africa, when Britain decided to “open up” the local economies to British imports, it introduced a “hut tax” in national currency. The simple fact that each family unit was obliged to pay annually a tax denominated in national currency. also meant that it had to start earning an income in that currency, and therefore trade outside the local circles. The “hut tax” by itself was enough to attain in a few years time the objective of breaking up the local trading patterns which had kept the local economies self-sufficient for many centuries.


A city or region which desires to improve its local sustainability, but keeps raising its local taxes exclusively in national currency, is like a doctor who claims to cure an alcoholic by drinking more alcohol.

Complementary Currencies, Central Banks and Inflationary Pressures

Central Banks as well as most people currently involved in the complementary currency movement have tended to ignore each other. The former have tended to disregard local currencies as “below contempt” because of their marginal status and scale. As for the latter, few community activists seem fully aware of the exact role and powers of Central Banks.

At the popular level, Central Bankers often have bad press. Particularly in the US, they are the favorite target for conspiracy theories, old as well as new one. Subtitles of some recent books on the topic attract their readership with these interesting innuendoes. For example, Steven Solomon’s book has the tantalizing subtitle: How Unelected Central Bankers are Governing the Changed World Economy.3 Or William Greider’s Secrets of the Temple: How the Federal Reserve Runs the Country4, both implying secrecy and power. The exact role of Central Banks has been explained in the Primer.

However, combining power, secrecy, and an unpleasant outcome is bound to make the least savory interpretations flourish. Central banks would not be able to perform their current job of managing a nation’s currency without some power and secrecy. The need for the third ingredient – the unpleasant outcome – is best described by Paul Volcker in his characteristic humor : “a Central Banker should get suspicious as soon as somebody is having too much fun somewhere.” In other words, as inflation fighters, they are supposed to push on the brakes before the economy gets really good, and quite understandably neither the politicians nor the public like that.

Some of the brightest and most public-service minded professionals I have ever met were at Central Banks. However, they have both the power and history to snuff out anything as unorthodox as complementary currencies, as soon as too many people catch on to the idea. But this time there is a strong argument for them not to succumb to this reaction. There are now arguments proving that Central Banks have in fact an interest in tolerating – and in some circumstances even supporting – well designed complementary currencies.

Central Bank Reactions to Complementary currencies

Historically, Central Bankers have reacted to local currencies in three different ways:

  1. Most of the time — as long as they remain marginal, including now — they have simply ignored them as “below contempt”.
  2. Whenever they have become “too successful” for whatever reason, they have suppressed them by legal recourse if needed (this is what occurred in the 1930s in Austria, Germany and the US, as was shown in Chapter 5).
  3. For the first time, one Central Bank — the one in New Zealand — has gone exactly the other way by not only tolerating them, but seeing them as a device to reduce unemployment while keeping a tight rein on inflation in the national currency .The reasons for this important exception will explain why I claim that Central Banks have actually now an interest in accepting well-designed complementary currencies, even from their own perspective.

At this point, the vast majority of Central Banks may not even have noticed the phenomenon — the current developments are still below the radar beam of the official system. But that is just a matter of time. If the Information Age creates more structural unemployment and, therefore, more demand for complementary currencies, and as new technologies will soon increase the means to implement them, an explosion of complementary currencies should be expected.

From a Central Bank viewpoint, the critical concern is the relationship between complementary currencies and inflation. If large-scale use of complementary currency fuels inflation, legitimately they should block such development. However, if complementary currencies are not creating inflation, they should not. My thesis here is that well-designed complementary currencies do not contribute to inflation, and can even be used to reduce inflationary pressures on the national currency.

The main difficulty in thinking about inflation in the context of complementary currencies is that everything we have learned from the economic or monetarist perspective assumes implicitly that there is only one single currency system in a country. For example, within that frame of mind, the appearance of a second complementary currency may be interpreted as a simple local increase in money supply. All economists would immediately understand why such a process would create employment, but also (erroneously) conclude that complementary currencies would automatically add to inflationary pressures on the economy as a whole.

This reasoning would be valid if and only if the complementary currencies were all fiat currencies as are the dollar, the Euro or any other national currencies of today. There is indeed one type of complementary currency (the Ithaca HOUR of Chapter 6) which is such a fiat currency, and which could pose such a risk if it became in widespread use. However, it will be shown that other designs, including all mutual credit systems (e.g. LETS, Time Dollars) do not contribute to inflationary pressures.

Rather than argue from theory to prove this point, let us take three practical examples of increasing complexity.

In the case of simple barter exchanges, where no currency is involved at all, the only effect of such an exchange is who owns what. No inflationary pressures are arising from barter exchanges given that the overall quantity of goods and currency in circulation remain unchanged.

In the case of mutual credit systems (e.g. LETS or Time Dollars) the situation is in some respects similar to barter, because for every credit generated there is a simultaneous creation of a debit within the same community of consumers. The net amount of currency in circulation is therefore still the same, exactly as in the case of straightforward barter. In fact, from a monetary perspective, mutual credit systems simply facilitate multi-lateral barter, and have the same overall effect as a group engaging in triangular or multi-lateral barter.

In the case of well-designed integrated payment systems — such as the Minneapolis Community Exchange Network system which was presented in the previous chapter — the argument is a bit more complex. In that case the currency is being issued in proportion to the spare capacity of the businesses participating in the system. The existing precedent is the well-known corporate scrip issued by airlines, the so called frequent flier miles.

Does issuing frequent flier miles increase the number of times a passenger will fly? The answer is, of course, yes.

However, does it create inflationary pressure on the airline airfares? The surprising answer is no. Not because the marginal cost for an additional passenger is practically nil (which is why they give these free tickets in the first place), but because any airline manager worth his or her salt will ensure that anybody using the free frequent flier ticket is sitting in a seat that would otherwise be empty.

That is why there are restrictions such as “no frequent fliers on Christmas or holidays, or on this route on week-ends,” etc.

This is exactly what happens with the Minneapolis C$D issued. A restaurant could accepts 50-50 national currency- complementary currency before 7 p.m. So there is no inflationary pressure on the restaurant’s prices, because it just uses space that would otherwise remain idle. In a competitive market, a restaurant would theoretically be able to afford to increase prices only when operating above capacity. This feature of enabling the businesses themselves to better manage the problem of their excess capacity – from a theoretical inflation control viewpoint – is one of the intriguing aspects of the complementary currency approach. Within a single-currency environment there is no easy way for the businesses to differentiate among customers to improve the use of their spare capacity in order to increase their productivity. For instance, what tends to happen with discount offers is that they end up cannibalizing the income from normal national currency customers.

This is not to say that the problem of inflation has been solved with this process. But we have shown at the very least that the normal monetary equations mislead us whenever complementary currencies instead of a single national currency are involved. It is clearly another game.

One could even argue that it will be possible to reduce inflation risks if well-designed community currencies are encouraged in an economy. That this is not just theory is demonstrated by the case of New Zealand. One would expect Central Bankers to react with suspicion when complementary currencies are appearing. The Governor of the Central Bank in New Zealand has an unusual contract with government. It stipulates that the Governor will automatically lose his job if the inflation rate on the national currency exceeds 2.5% per annum. This stipulation is one of the many original initiatives created when New Zealand decided to modernize its social and institutional systems a decade ago.

This contract has the advantage of concentrating the mind of the Governor on the main objective of his job: keeping inflation in control. The New Zealand Central Bank suddenly discovered that complementary currencies are useful to attain its inflation control objective. If in the pockets of highest unemployment people create a complementary currency to alleviate their own problems, then the political pressure to drop interest rates and potentially fuel inflation would also be reduced. Suddenly, the first Central Banker in favor of complementary currencies was born….

Central Banks whose main objective is to keep inflation in check, rather than to protect by principle or monetary dogma a monopoly of currency issuance, then a conclusion similar to the one in New Zealand should prevail.

Why New Zealand is right

There are several significant reasons to claim that the New Zealanders are on the right track. Several of these reasons are new: they reflect a changed political and technological environment.

The issue of geographic scale for monetary policy.

Let us assume for a moment that Governor Greenspan of the Federal Reserve becomes responsible for the economic well being of the poorest depressed area in Washington DC, instead of the country as a whole. Would he follow a different monetary policy than the one he does today?

He definitely would, and justifiably so.

One of the main problems when a Central Bank has to make decisions about the money supply is that they need to look at the economic situation over the entire country. From this perspective, what complementary currencies enable us to fine tune the medium of exchange to the local needs. This is why the New Zealanders and Australian governments are involved in creating complementary currencies in the worst unemployment areas of the country.

Information Age unemployment

Monetary policy has been one of the main tools used to counteract the effects of the well-known short-term business cycle over the past half century. Some specialists – most prominently Milton Friedman from the Chicago School of Economics – have claimed that Central Banks have miserably failed in attempting to do just that.

But if today’s unemployment issues are the result of a structural adjustment to the new production technologies of the Information Age, this puts us in a very different ball game. If this is correct, all monetary schools, not just Milton Friedman, will end up concluding that the traditional ways to fine- tune the economic cycle just will not work anymore.

Central Banks have interest in experimenting with new ways to solve this problem. It is clearly what New Zealand has decided to do, and it picked the right tool to do it. Historically, complementary currencies are the only tool that has proven to have worked when the situation was at its worst, like it was in the 1930s. Today, with the new information technologies and what we already know about the way complementary currencies operate, we can make such experimentation safer than ever before.

Back to the Future of Private Money?

History shows that it is easy for Central Banks to stamp out local community currencies. However, trying to protect the money monopoly in this way may resemble killing a measly fox to protect the chickens, while leaving a hungry pride of lions roaming around. A revealing sign that the official national fiat money may not have all the answers has been the large-scale reappearance of barter in

national and international exchanges. Conventional wisdom – in this case dating back to Aristotle5 – claims that barter is just a primitive form of trade which has no role in a developed economy. The postwar version of this practice, starting in trades with the Soviet Union or the Third World, was therefore initially attributed to the lack of hard currencies in these countries. However, this cannot be the real reason, because even in hard currency countries the process has suddenly been growing even faster. For instance, in 1992 there were already 520 barter exchanges in the US with thousands of members each. Several of the largest of these systems are going to go live on the Internet from 1999 onwards. Before this Internet expansion, the value of barter transactions in the US and Canada totaled almost $6.5 billion in 1994, and is increasing three times faster than normal exchanges. The magazine “Barter News” covers the industry’s development and now has 30,000 subscribers.6 It estimates the total barter at $650 billion in 1997, and now growing at an annual rate of 15%.

In Canada, the appearance of Mirville Tremblay’s sophisticated barter-credit cards shows that this process may actually go beyond exceptional transactions, and become a successful payment system in routine daily economic activities. The Federal Office of the Regional Development of Quebec has given its formal support to this initiative.7 That all this is not a fashionable fluke is confirmed by the growing literature on economic theory about how new information structures will make barter trade a trend of the future.8

Even more directly relevant for Central Banks than barter is the following observations by The Washington Post:

“In fact, one of the most intriguing financial phenomena of this decade will be the inexorable rise in the importance of ‘private money’ issued by companies to lock their customers into their ‘economic systems’. Once upon a time, this kind of private money – or scrip – was associated with railroad towns, the armed forces and the Great Depression. Today, think of these shadow currencies as the ‘scrip of the elite’. While Walt Disney, or say, American Airlines won’t have its own Paul Volcker or Alan Greenspan, these companies are going to be just as careful about managing ‘money supply’ and ‘inflation rates’ as their Fed counterparts. Just as the global economy has become more integrated over the past 20 years, America’s shadow economy of frequent-flier, frequent-caller and frequent-purchaser programs are also blending seamlessly.

The issue is no longer individual or frequent-purchaser programs to buy brand loyalty – it’s the gradual fusion of these plans to create a new kind of consumer-credit economy. It’s only a matter of time before a new generation of ‘central bankers’ emerges to coordinate the exchange-rate issues.

Citicorp credit card holders can ‘buy’ frequent-flier miles on American Airlines as well as hotel and rental car discounts. Selected American Express card holders can buy ‘membership miles’ on other frequent-flier programs or purchase phone time on MCI or Sprint via the Connect-Plus programs.

Corporate Scrips – frequent-flier points and frequent-traveler credits – are becoming ever more convertible to one another. This is an economy that is now worth billions – and growing.

“In the customer’s mind, it may well be currency,” said Alfred J. Kelly Jr., vice-president of frequent-traveler marketing at American Express Travel Related Services. “There is no question that you’ll see more partnerships between organizations as they try to provide additional value to customers. We’re trying to create segment-specific programs that not only provide value to our customers but also instill loyalty to us and our partners.”

For example, Kelly noted, if American Express customers want to have “convertibility” between Membership Miles credits and Connect-Plus, that’s something Amex’s ‘central bank’ might be prepared to arrange. All of a sudden, Amex credits begin to rival dollars as a means of payment to purchase both travel and communication. Private currencies are on the rise not just because companies are pushing them, but because they are what the customers want. If the ruble can be convertible, why not the American Airlines frequent-miles program?

Indeed, as sophisticated information technology continues to seep through the economy, the ability to grow and manage private currencies increases. It becomes both cheap and easy to track individual purchases and credits. “Just as people try to manage their credit cards, they will soon be managing their ‘credits’ to handle a variety of shadow currencies.”9

What will a Central Bank do about such private corporate scrip, or those that will appear on the Net- such as the already available NetMarket currency of Cendant ?

Should we not recognize that the Information Age has already created a much more fundamental question about the way national currencies will play their role in the future? The danger is that Central Banks may be tempted to clam down on what they can reach (i.e. the small scale, politically unprotected complementary currencies) rather than tackle the big changes which are politically better protected (i.e. corporate currencies).

An Appeal

The biggest threat to the experimentation and successful resolution of the issues revealed by the Time Compacting Machine through the creative use of work-enabling and/or community currencies is that their continual growth will be interpreted as a dangerous and contagious phenomenon by Central Banks.

The Central Banks have the power to crush these complementary currencies, and/or could muster the legal backing to enforce this power.

One of my reasons for writing this book was to make the case for Central Banks not to follow their first technical instincts in this particular case. There is more at stake here than meets the technical eye. This is a time where public service may require us to rethink business as to make an appeal to Another reason is to request the academic community to start evaluating the implications of multiple and, particularly, complementary currency systems. This is somewhat virgin territory, and we need a lot more knowledge about how dual currency systems (whether they are local or corporate scrip) will affect our economic processes. Part of the complexity is that each currency creates a market allocation system in its own sphere of activity, but in addition, they all interact in the same marketplace.

In contrast, multiple national currencies did not do that. Each country had its own privileged market area where its national currency reigned alone. The classical work done about multiple currencies within the same country, such as Gresham’s laws, suppose that one of the currencies is ‘good’ and the other ‘bad’, but what happens when both are ‘good’ within overlapping market segments? This is one of the many fields today where “there has been an alarming increase in things we know nothing about.”

What is at stake is quite substantial. If the cooperative economy is squashed — as it has been repeatedly in the past — we will be condemned to choose between two comparatively unpleasant possible futures: Hell on Earth or the Corporate Millennium. If on the other hand social experimentation with complementary currencies is allowed to happen, I believe we are half way to Sustainable Abundance.

How to Start Your Own Complementary Currency

The hard part of creating currency is not conceiving a new variation of complementary currency, nor even starting it. The hard part is having it accepted and used in your community. The national currencies have indeed history and habit on their side, not to speak of the law as “legal tender for all debts public or private”. Your local currency does not have these factors on its side, so it requires credibility of another nature.

Like for all currencies, the bottom line of what is most needed is credibility — without it nothing will happen. There are three keys to a successful implementation of the complementary currency system.

Three Keys to Successful Implementation

There are three key ingredients in the successful implementation of a complementary currency system: good timing, quality of local leadership and a valid design. A few words about each follows.

Good Timing

The Greeks had a special word for it: Kairos (“perfect time”) which they distinguished from just ordinary Chronos (time). The same initiatives by the same people can have very different results depending on timing. These “good timing” can be positive or negative.

For instance, as mentioned earlier, sudden increases in unemployment have created perfect timing for the rapid expansion of the complementary currency movement in Britain and France. The shocks to the national currencies in Argentina or Mexico has been the reason for the creation of complementary currencies in these countries.

On the other hand, the “right moment” may be simply the coalescence of the right group of people who decide to do something positive for their community, which brings us to the next key ingredient.

Quality of Local Leadership

Perhaps the most important factor to start a local currency is local leadership. Someone, or some group, is needed with the combination of vision, entrepreneurial capability and charisma. Vision to actually imagine that another way is possible, and to adapt whatever model is used to local circumstances. Entrepreneurial capability to decide to do something about the situation, and be effective at it. And finally, charisma to convince your community to follow you. If one of these three leadership characteristics is missing, it ends up as either “just talk” or a failed project, of which there are many. However, when these three capabilities are gathered in one team, they can generate the credibility that is crucial for a successful complementary currency system.

Remember, money ultimately is about trust, and thus about the trustworthiness of the people who will be promoting the system. It will also automatically determine the scale and nature of the project that becomes possible. If the leadership has credibility only over a small area of town, work at that scale. If it has the capacity to mobilize a whole region, then a complementary currency system of the size of the region becomes possible.

To conclude with this aspect, Lao Tzu’s comment is particularly relevant for grass-root movements “The best leadership is when at the end people claim they did it themselves.”

Valid Complementary Currencies Design

The last critical step is to choose among the wide variety of complementary currency systems that are available as prototypes today, the one that best fits your own requirements. The following table should help in such a selection. It provides a synthetic overview of the main characteristics of various currency systems reviewed so far.

Figure 7.1 Comparative Table of Various Currency Systems

The only new complementary currency system in this table is the ROCS (Robust Currency System) which synthesizes the most robust features of all the different systems. It is designed to be able to resist best any shocks in the monetary system, and will be described in more detail at the end of this section.

Each of these systems has characteristics which can be considered as advantages or defects depending on the circumstances. For example, tying the unit of the complementary currency to the national currency (as is the case for LETS, Wir and Tlaloc) has the advantage of making pricing easy for everybody including merchants, given that any product or service has the same numeric value assigned in both currencies. On the other hand, if the national currency gets into a crisis, the value of the complementary currency would depreciate in parallel. In this sense, the complementary currency’s role as backup system, as “spare tire”, is clearly less effective.

Depending on your priority, it may make sense to choose a currency that ties in with the national one, or one that does not. In the latter case, the unit that makes most sense is the hour. The hour is a universal standard, and almost all systems which do not tie their unit to the national currency are using it.

Another key decision is whether to use a fiat currency model (as Ithaca HOURS or WIR) or a mutual credit system (as LETS, Time Dollars, Tlaloc, or ROCS). There are two important reasons why mutual credit system will generally be preferable, particularly for systems that are designed to be able to be scaled up or replicated in large numbers. The two reasons are the following:

  1. All fiat currencies by definition are issued by a central authority, whether it is a “community central bank”, an individual person or a committee. The trickiest decision — as all Central Bankers will confirm — is to decide how much currency to issue. If too much is issued, inflation in the currency will be an immediate result, and people will resist accepting it. If too little is issued, the complementary currency can only perform part of its function.. In contrast, the main advantage of mutual credit systems is that the quantity of money is always perfectly self- regulating. As participants themselves create the currency at the moment of each transaction, there is by definition always the exact quantity in circulation. Furthermore, this quantity will automatically reduce as people engage in transactions in the opposite direction of their initial trade (i.e. someone who had a credit in one transaction, and uses the credit to purchase a good or service brings the balance back to zero). This self-regulating feature is important, because it eliminates the most tricky and treacherous decision in complementary currency management.
  2. The second reason is strategic. As mentioned above, the biggest danger to the complementary currency movement is a repression by Central Banks, as has happened in the 1930s. Central Banks have a legitimate role in keeping the inflation rate on the national currency in check. If there was a proliferation of fiat complementary currencies, this would indeed potentially impact the management of inflation on the national currency, as we saw in the section on Central Banks above. Mutual credit complementary currencies do not pose such a threat, and therefore could grow in importance over time without interfering with the Central Bank duties.

We are still in the very early days of the Information Age, and it is definitely too early to determine which is the “ideal” complementary currency system. Creativity and experimentation should therefore be encouraged. My personal favorite complementary currency system is the ROCS, because it brings together all the best features that provide robustness to the system. As of this writing, this currency has not yet been implemented to my knowledge.

Its choice of the Hour as unit of account makes it pretty universal, and safe against shocks to the national currency system. Its mutual credit aspect eliminates the risks of over-issuing that is intrinsic to all fiat currencies. What differentiates the ROCS from Time Dollars is that the rate of exchange of the hour is negotiated between the participants. Some people may consider that all people’s time should be equally valued. But this is utopian, as in practice it simply means that people whose services are significantly more valuable in the “normal” market place, like dentists or surgeons, simply will not accept Time Dollars in exchange for their services. .

Finally, ROCS would include the demurrage feature for reasons explained next.

Some Technical Lessons from the 1930’s usable today

One of the more interesting features successfully tested in hundreds of cases in the 1930’s (including Wörgl described in Chapter 5) – which have not been copied in the more recent systems is the idea of demurrage. This feature has nevertheless some very important and desirable effects.

One pragmatic disadvantage experienced in today’s complementary currency systems is that they typically have to depend on continuous sales efforts by the originators of the system. Many systems have simply died when the originators got tired of performing this task on a continuous basis. When a time-related demurrage system is used, every participant in the system becomes automatically a motivated sales person.

It should also be mentioned that there have been valid technical criticisms to the stamp scrip process of the 1930s. Handling stamps is inconvenient for everyone involved. Furthermore, there was a tendency in the 1930’s that the day before a monthly stamp was due, shops would suddenly get a massive inflow of the stamp scrip from people who preferred not to pay the stamp themselves.

Weekly stamps were designed to reduce that tendency, but it still happened on a smaller scale.

However, with today’s computer technologies, both of these inconveniences can be easily and efficiently eliminated . The vast majority of complementary currency systems today are computerized. It would be very simple to apply a small, continuous, time-related charge on all balances (credits and debits) in the list. For example, one could impose a charge cumulatively equivalent to 1% per month or more on a daily or even an hourly basis. With smart cards technology, this can easily be built into the card program itself.

For most of today’s applications I would recommend a charge in the order of 1% per month. Much lower values would probably have no effect on behavior patterns. Much higher ones could make the demurrage feature a reason for people to refuse to accept the currency. Some experimentation would be justified to fine-tune this aspect.

One last reason to apply demurrage to currency systems is that it also helps in switching the attention to longer term concerns. The next chapter will develop that aspect of demurrage in full detail.

Chapter 8: A Global Reference Currency – Making Money Sustainable

-“Senator, the ‘Survival of the Planet’ people are here to meet you”
– “Oh, I hate dealing with those single-interest groups!”
Cartoon by Bob Thaves (newspaper enterprise Association Inc.)

Bumper sticker

“Faced with widespread destruction of the environment, people everywhere are coming to understand that we cannot continue to use the goods of the earth as we have in the past. A new ecological awareness is beginning to emerge, which rather than being downplayed, ought to be encouraged and developed into concrete programs and initiatives.”
Pope John II

“It’s good business to anticipate the inevitable, and it seems to me inevitable, whether we like it or not, that we are moving toward an economy which must be limited and selective in its growth pattern. The earth has finite limits – a difficult idea for Americans to adjust to.”
John D. Rockefeller III

“On the bleached bones of dead civilizations are written the words: ‘too late’.”
Martin Luther King Jr.

Socialism collapsed because it did not allow prices to tell the economic truth. Capitalism may collapse because it does not allow prices to tell the ecological truth.”
Øystein Dahle, former Exxon vice president for Norway and the North Sea

“The main thing we miss today is universal money, a standard of value, a link between the past and the future, and the cement linking remote parts of the human race to one another.”
Robert Mundell, Nobel Laureate in Economics, at his acceptance speech in December 1999.10

One last time, we will play our game of “tell me what your objectives are, and we can design a currency that supports it.” This chapter deals with one last “money question”; i.e. “how can financial interests become compatible with long-term sustainability?” Another way to ask the same question: is a win-win approach possible for finance, business and society?

This issue may be the most important because even the survival of our own and many other species is at stake. As prominent French monetary theorist Jacques Rueff claimed “Money will decide the fate of mankind.”11 Will we have to see the last fish die, or the last rainforest cut down, before we realize that we will not be able to eat money?

It is presented in this late chapter because — in contrast with the new currency designs presented in the previous chapters — this proposal breaks new ground and has therefore no contemporary case to demonstrate it.

Some Questions for CEO’s

If you are a CEO or know one, obtain honest answers on the following two sets of questions:

  1. Will there be more monetary crises?
  2. Do such monetary crises affect your business?
  3. What do you plan to do about it?
  4. What is the time horizon you use to plan for your children?
  5. What is the time horizon you use in your business?
  6. What world will your and all other businesses leave to your children, given the difference in time horizon between question 4 and 5?

If the answers to these questions raise concerns, then the Terra project described in this chapter is for you.

This chapter starts with a brief status report on both the positive achievements of the Industrial Age and its negative impact on “Biosphere Earth.” This balance sheet makes clear the relevance of the question identified above.

Next, the limits of being able to convince business to do things which are not financially motivated ate identitied. (“Three Tools of Persuasion”).

Then I’ll show the direct relationship between one particular feature of the official national currency system – namely interest – and the phenomenon of short-term vision of the business world and Western society at large. A solution to the dilemma is then proposed both as a metaphor (“Far- Seeing Glasses”) and as a sound technical possibility.

Long-term Sustainability

There is a growing consensus that our current path is unsustainable. It has become unsustainable ecologically, socially and politically.

After a lifetime of study of the causes of the demise of civilizations, historian Arnold Toynbee concluded that only two common causes explain the collapse of twenty-one past civilizations: extreme concentration of wealth and inflexibility in the face of changing conditions. Over the past decades our civilization seems to have embarked on a path combining both those causes of collapse. But before showing the role of the money system in these issues, one should first look at the positive side of the ledger as well.

Positive Results of the Modern Money system

We should start by acknowledging that the Modern monetary system has played a key role in the extraordinary achievements of the Industrial Age.

If you want to industrialize, you need to concentrate enough resources for industry. Steel factories are not built on a small scale in a backyard — the Chinese tried and failed as late as the 1970’s. And to concentrate resources – to paraphrase Churchill’s quip about democracy – competition among private players is the worst system, with the exception of all others. Would you prefer to buy your next car, meal, or computer from non-competing producers?

This system has definitely been effective at instigating and propagating the Industrial Age around the world.

The truly exceptional achievements of the Industrial Age can best be appreciated by observing its impact on our species as a whole. Human life has been totally transformed by the process of industrialization. Just to bring into perspective what is so unique about the last two and a half centuries, consider the following graph. (Figure 8.1)

Figure 8.1 World Population (in millions)

The human population remained below the level of 400 million almost forever. There were actually several periods with significant population decreases: roughly from 10,000 to 8,000 BC, and at the end of the Middle Ages, when the Black Death took out at least 75 million people (including about a quarter of the European population). Human population grew to one billion for the first time during the first half of the 19th century. Then it took off.

We reached the second billion in 1925, the third in 1962, the fourth in 1975, the fifth in 1986, and the sixth in 1999. At this point it is clearly good news that the rate of growth has started to taper off. Most experts forecast that we are now doubling for the last time. We should attain the seventh billion in 2009 and the eighth billion in 2019. Global population is supposed to stabilize around 10 to 12 billion some time around the middle of next century.13

What has made this population explosion possible (again for better and for worse) has clearly been the Industrial Revolution, when human and animal force was replaced for the first time by fossil energy. The production of goods follows an even steeper curve than the population. Gross Domestic Product (GDP) per capita in the developed world multiplied by a factor of 20 between 1800 and today.

The standard of living has soared from bare subsistence to what our ancestors would have considered extraordinary affluence for many people in Europe, North America, and industrialized Asia. These are immense accomplishments which, whatever drawbacks they may entail, should still be recognized.

However, there is also another side to this balance sheet, which should be looked at squarely as well.

Status Report on Biosphere Earth

Until last century, Nature was perceived as a big, powerful, awe-inspiring force on which humans had very little if any impact. This has now dramatically changed. In 1996, the World Conservation Union, in collaboration with more than 600 scientists, published the most comprehensive survey so far on the status of animal life on earth. Their conclusion: 25% of mammal and amphibian, 11% of birds, 20% of reptiles and 34% of fish species surveyed so far are threatened with extinction.

Another 5% to 14% of all species are “nearing threatened status.” A 1998 survey concluded that 6,000 tree species, ten percent of all existing tree species, are now endangered as well.14

A report released by the United Nations in September 1999 based on assessments by 850 specialists around the world is that the rate at which humanity destroys the biosphere is still accelerating. “The full extent of the damage is only now becoming apparent as we begin to piece together a comprehensive overview of the extremely complex, interconnected web that is our life support system.”15

My personal balance sheet of all the above can be summarized in three points as follows:

  • The encouraging results on the positive side prove clearly that we can reverse the ecological degradation process if we so choose, but our window of time to do so is closing down.
  • The means used to encourage businesses and people to do so (i.e. mostly regulation and moral persuasion) are too narrow in both geography and scope to achieve sustainability.
  • Finally, the rest of this chapter shows that a change in our money system offers a pragmatic possibility to harness the massive energy of the global economy toward long-term sustainability.

The Three Tools of Persuasion

Why change our monetary system to attain long-term sustainability? Isn’t there a more direct way to attain this objective?

There are only three ways to persuade people or institutions to engage in any non-spontaneous change in behavior:

  • education and moral persuasion;
  • regulation;
  • and financial interest.

Over the past decades, as people started focusing on the issues of the environment, the first two ways have been emphasized almost exclusively.

History has shown that whenever financial interests contradict regulations, financial interests end up almost always as the winners. The permanent and mostly losing battles to enforce anti-smuggling or anti-drug regulations provide many case histories of what we should expect by relying exclusively on a regulatory approach.

Similarly, whenever financial interests run up against moral pressure, the battle is often even harder. Many people just decide that they either cannot afford, or do not care enough, to follow the moral advice when it personally costs them something..

It is apparent that large-scale changes in behavior should only be expected when all of these motivating forces are lined up in the same direction. For instance, recycling glass bottles or aluminum cans has become really effective whenever there were simultaneously:

  • regulations requiring people to recycle;
  • a public information campaign about the reasons to do so;
  • and last but not least, a refundable deposit of 5 or 10 cents per unit.

In short, the realigning of financial interests with long-term concerns is a necessary condition, but not a sufficient one, for a truly successful sustainability strategy.

The importance of realigning financial interests with long term sustainability is even more critical because many of the issues involved need to be addressed on a global level (e.g. global climate changes, acid rain, ozone layer, etc.) or it just won’t make much of a difference. And there is little chance that we can regulate or morally persuade the whole world. For example: by the year 2015, the Chinese are planning to emit as much carbon dioxide by themselves as the whole world does today. This forecast is based on coal-fueled electric power plants currently being built or already on the drawing boards in China. What can we do?

The well-known architect William Mc Donough claims that “Regulation is a signal that you have a design failure.” He asks the question: “Who is in charge of a ship?.” The answer is the designer, who has already built into the ship ninety percent of what the captain can do. I claim the same is happening to the business world: the design of the money system is pre-ordaining ninety percent of the investment decisions made or not made in the world. And regulations aiming at sustainability just try to correct the flaws built into our money system. Furthermore, regulations have proven so far mostly ineffective in reaching that goal.

Our economics textbooks claim that corporations and individuals are competing for markets or resources. In reality, they compete for money, using markets and resources in this process. If we were able to redesign money in a way that favors long term vision, we could harness the massive resources of the global corporations in a direction of a more sustainable future.

Relationship between Money systems, Time Perception and Sustainability

Monetary specialist or Greens alike typically do not see any connection between the money system and sustainability. What follows will show that this is in fact an oversight.

The gentlest way to acquaint ourselves with that connection is through another short fairy tale for my godchild.

The Man with the Near-Seeing Glasses
(Fairy Tale for Kamir, 7 years old)

Once upon a time, in a very near place, there was a man who had been wearing glasses for so long that he even forgot he had them on. The main problem, however, is that his glasses, instead of correcting his vision, were making him so near-sighted that he couldn’t see anything further than his nose.

So he would bump against everybody or everything because they would always suddenly appear to him without warning, when it was too late to avoid the obstacle. He was getting worried enough about the problem that he went to consult a Scientist.

The Scientist listened to the problem carefully, then pulled out a very thick book about Optics filled with equations and diagrams. And he showed him that it was very normal that he would see better closer-up than far away. He explained something about the number of light particles decreasing by the square of the distance from which he saw them. The Man with the Near-Seeing Glasses did not quite understand the explanation, but he was very relieved to hear that there was a scientific reason which made it all very normal.

So he went on bumping against people, trees, even his own green front door and everything else which popped up suddenly when he was hitting them with his nose. After he hit a particularly hard red brick wall with his forehead, he was getting worried again and felt depressed about all the bumps he kept collecting. So he went to see a Psychiatrist.

The Psychiatrist told him to lie down on a big couch, and started asking him a lot of questions – how he got along with his father, with his mother, and his brothers and sisters. After he answered all these questions, the Psychiatrist told him that it was very normal that he was depressed, and asked him to come back every week for some in-depth treatment about all that.

One day, much later, as the Man with the Near-Seeing Glasses came back from his appointment with the Psychiatrist more depressed than ever, he bumped against his little five year old granddaughter who was waiting for him in front of his house. He was very happy to see her again, and they went in the house to play together.

As the little girl was playing horsy on her grandfather’s knees, she suddenly grabbed for the horse’s bridle and ripped off the Near-Seeing Glasses from her grandfather’s nose. Just as suddenly the Man discovered that he could see much further than his nose after all. His granddaughter’s smiling face was clear. The green door he’d smashed into last week was clear. He even noticed that the red brick stone wall needed some repairs where he had hit his head.

Seeing things beyond his own nose before bumping into them made a lot of sense after all.

We can now rephrase the relationship as follows: interest rates create a built-in tendency to disregard the future, to create a worldview with “near-seeing glasses.”. Furthermore, the higher the interest rate, the more that tendency prevails.

We have seen in Chapter 2 how interest rates are deeply woven into the very process of creating money in our prevailing money system.

Understanding the relationship between interest rates and time perception will be accomplished in the three following steps:

  • comprehend how capital allocation decisions are generally made through the financial technique of “Discounted Cash Flow”;
  • how such discounting of the future is one of the key underlying causes which create a direct conflict between financial criteria and ecological sustainability under our present money system;
  • and how the discount rate used in the Discounted Cash Flow technique is directly affected by the interest rate of the currency used in the cash flow analysis.

“Discounted Cash Flow” = “Discounting the Future”

“Discounted Cash Flow” is the technique generally used to financially decide on whether to invest in a given project, or comparing different projects among each other. It is presented in full detail in any Finance textbook.

What we need to understand about it here can be explained by a simple example. Let us assume that a particular project requires a $1,000 investment today, and that it will produce a net profit of $100 on the first day of each subsequent year for the next 15 years. Let us further make the assumption that there is no inflation during that period of time. Figure 8.3 shows what the real cash flow of that project would look like: it starts with a negative -1,000 when the cash outflow occurs today, and for each of the next 15 years we have the same amount of $100 shown on the positive side.

Figure 8.3: Actual Annual Currency Flow of a Project

To the financial analysts however, that same project will be looked at differently (Figure 8.4)

Figure 8.4 Discounted Cash Flow as Seen by Financial Analyst

He will still see the same – $1,000 in year 0.

But the income of $100 after the first year will only be worth $ 91 assuming the interest rate is a flat 10% per year for the entire length of the project. (All values are rounded to the nearest dollar for illustration purposes, since carrying lots of decimals would not modify the argument presented.)16

We all know that money in the future is worth less than money today. How much less depends critically on the “discount rate” applied to the project.

Our analyst knows he could deposit $91 in a bank today at a 10% risk-free rate of return, and automatically get $100 a year from now. Therefore the $100 a year from now is identical to $91 today. By the same line of reasoning, the second year’s $100 would only be worth $83, the third’s $75, etc. By the tenth year, the $100 inflow only represents to him $39; and in the fifteenth year a paltry $24.

So what looked like a perfectly reasonable investment, getting back $1,500 on a $1,000 investment of Figure 8.3, turns out as a lackluster project when looked at through the Near-Seeing Glasses of our financial analyst.

If we projected this on for a century, the last $100 would really be worth only 7 cents. Two centuries out we are looking at a few hundreds of a cent. No wonder that in our societies we do not usually think about the effect on our decisions “for the seventh generation”, a process which would require us to take into account two centuries in the future…

There is nothing wrong with the financial analysts’ eye sight or his reasoning. He just applies straightforward financial logic on a currency which has a positive interest rate.

Short-term Vision versus Sustainability

As this same reasoning applies to all financially motivated investments, it collectively creates the well-known pressure by the financial system for short-term returns at the expense of any longer term consideration — including long term sustainability.

When a corporate executive complains that financial pressures force him to focus only on the next quarter’s results, he is the victim of the Near-Seeing Glasses. When the Chinese say they cannot afford cleaner energy production technologies, they are really saying the costs of the long term future economic consequences discounted to today are negligible compared to the immediate cost savings made possible with the ‘dirty’ technologies they are planning to use. When a homeowner decides it is too expensive to install solar panels for heating his household water, she is implicitly saying that the cost of purchasing electricity or gas from the grid in the long run discounted to today is cheaper than the initial capital outlay required. When we build a house cheaply without appropriate insulation, we are really making the trade-off between the higher heating costs in the future discounted to today and the higher construction costs.

Relationship with Interest Rates

In the above explanation of the Discounted Cash Flow technique, we have made an assumption that the discount rate used is identical to the interest rate of the currency. In reality, the discount rate which should be used is the “cost of capital of the project.” Without getting into undue technicalities, there are not one but three components to that cost of capital:

  • the interest rate of the currency involved;
  • the cost of equity;
  • and an adjustment reflecting the uncertainty about the cash flow of the project itself.

The third component is completely project-related and therefore unaffected by the currency used. It would remain identical whatever the monetary system, and for the purposes of our discussion here will be ignored.

The first two, in contrast, are directly affected by the monetary system of the currency involved.

Here is the root-cause for the proverbial ‘short-sightedness’ of the financial markets, which forces corporations into making decisions which they know may hurt society and even business itself in the long run.

If a CEO of a corporation were tempted to think in longer-term social or ecological ways, he would soon be removed either by his board, or – if needed – by a new board after raiders have taken over. “A special breed of investors, the corporate raiders, specializes in preying on established corporations. The basic process is simple, though the details are complex and the power struggles often nasty. The raider identifies a company traded on a public stock exchange that has a ‘breakup’ value in excess of the current market price of the shares. Sometimes they are troubled companies. More often, they are well-managed, fiscally sound companies that are being good citizens and looking to the future. They may have substantial cash reserves to cushion an economic downturn and may have natural resources they are managing on a sustainable yield basis.“17 After the takeover, they change the policies to suit short-term gains, ironically often to service the interest on the enormous loans used to make the take-over in the first place. The net result: one more company has put on near-seeing glasses…

In summary, under the existing money system, longer-term thinking is not only less profitable, it is actually severely punished.

However, it is possible to design a monetary system which would dramatically lower the cost of capital through simultaneously reducing both interest rates and the cost of equity. And you will see how this process realigns financial interests with the long-term sustainability objectives.

Far-Seeing Glasses?

What happens when you reverse the way you look into binoculars? Suddenly, instead of bringing far objects closer, it makes everything look far away.

In our metaphor of the Near-Seeing Glasses positive interest rates were the feature of our current monetary system which created a generalized financial myopia, and made the future appear less relevant. And the higher the interest rates, the stronger the myopia. In other words, the result of positive interest rates is similar to what happens when one looks in binoculars the wrong way.

What would happen if we reversed the financial analyst’s glasses?

Remember the demurrage charges mentioned at the end of the previous chapter? Demurrage was the brainchild of Silvio Gesell (1862-1930), and were most recently used as an anti-hoarding device for the stamp scrip currencies of the 1930s. Gesell’s starting premise was that money is a kind of public service, like a bus ride. And that a small fee is charged for the time one hoards it. The word “demurrage” dates from the railroad days, and is the penalty that a client pays for leaving a railroad car unused, waiting to be loaded on his premises. The same applies today to container rentals.

From a financial perspective, a demurrage charge on money is mathematically equivalent to a negative interest rate. For reasons that will become clear soon, I will call this time related charge a “sustainability fee”. Now, what would such a sustainability fee or demurrage charge do to the eyesight of our financial analyst?

The same project described in Figure 8.3 would suddenly appear to him as described in Figure 8.5

Figure 8.5: Financial Analyst’s View of Figure 8.3 with a Cash Flow expressed in a Currency with a Sustainability Fee (or Demurrage Charge)

This is not just true because of a mechanical application of the equations of Discounted Cash Flow. Even if it looks strange at first sight, even if it contradicts what we are used to with our normal currencies, it still makes perfect financial sense.

Let us assume that I give you a choice between 100 units of an inflation-proof currency charged by a sustainability fee, today or a year from now. If you do not need the money for immediate consumption, and you have guarantees about my creditworthiness over the next year, you should logically prefer the money a year from now. The reason is that by receiving the money only in a year’s time, you will not have to pay the sustainability fee for that year. In technical terms,

discounted to today’s value, the 100 units will be more valuable a year from now than if you received them now. They will be worth exactly 100 plus the sustainability fees.

When sustainability-fee-charged currencies are used, the future is becoming more valuable with time, exactly the opposite of what happens with our normal positive-interest-rate currencies.

There remain two fundamental issues to be addressed :

  • How could such an idea be implemented? Who could take the initiative for such a new global currency system in the foreseeable future?
  • Is such an unorthodox money system sound? What would be its economic consequences?

A Global Reference Currency (GRC) and the Terra Unit

I will call a Global Reference Currency (GRC for short) the generic concept of a currency which is not tied to any particular nation state, and whose main purpose is to provide a stable and reliable reference currency for international contracts and trade.

Furthermore, I will propose as unit of account for one particular type of GRC the Terra, which aims at firmly anchoring that currency to the material/physical world. Remember, one of the reasons that the global currency casino can churn as wildly as it does is the disconnection between the financial world and physical reality, a link which was severed by President Nixon in 1971. In this role, the Terra would be akin to the gold standard in the 19th century.

The Terra is defined as a standard basket of commodities and services particularly important for international trade, and their relative weight in the standard basket would ideally reflect their relative importance in global trade.

For instance, the value of the Terra could be defined as

1 Terra =

1/10 barrel of oil (for example Brent quality and delivery)

+ 1 bushel of wheat (Chicago Mercantile Exchange delivery)

+ 2 pounds of copper (London Metal Exchange delivery)


+ 1/100 ounce of gold (New York delivery)

(Note: the specific commodities, their quality, delivery standards, and their respective weight in the Terra unit are proposed here as simple examples. In practice, this would be part of a negotiated agreement among participants.This standard could also include services, or indeces aiming at increasing further its stability.)

The Terra has four key characteristics:

  • This currency can be made inflation-proof by definition. Inflation is always defined as the change in value of a basket of goods and services, therefore to the extent that the basket composing the Terra can be made representative of global trade automatic inflation-proofing is obtained.
  • The value of this new Terra currency could easily be translated into any existing national currency. Anybody who wants to value the Terra in his or her own national currency just has to look up the prices of those internationally traded commodities which are part of the basket. These prices are already published in the financial sections of all the major newspapers in the world, and are available in real-time on the Net everywhere.
  • More importantly, this currency is also automatically convertible in any existing national currency without the need for any new international treaty or agreement. Anybody who is paid in this currency would have the option to just receive the basket of commodities delivered in pre-arranged facilities (such as the already existing delivery places for the different futures markets, for example.) These existing commodity markets could also be the place to obtain cash in the conventional national currencies for the products delivered, if this is desired. We should expect that – as the system proves reliable and credible – fewer and fewer people would feel the need to go through this process of cashing in the receipts.
  • But the most important reason for our purposes here, is that the sustainability fee is ‘naturally’ embedded in the money system. It therefore guarantees the full integration of the proposed currency in the existing market system of the “real” economy in all its aspects.

There are indeed real costs associated with storing commodities, and the sustainability fee would simply be the cost of storing the basket of commodities agreed upon. These storage costs (and therefore the sustainability fees) have been estimated in a detailed study for a Commodity Reserve Currency at 3 to 3.5% per annum.18

Note that these costs are not new additional costs to the economy as a whole. These same costs are indeed already factored in the current economy. What is proposed is simply transferring these existing costs to the bearer of the Terra, thereby giving them the useful social function of a sustainability fee.

Economic Tech Talk

Economic textbooks define money in terms of its functions, the three most important of which are: Standard of Value, Medium of Exchange and Store of Value (definitions in Appendix A).

Since 1972, there is no international standard of value. In this sense, a GRC simply restores that function for those who choose to use it as a contractual currency.

The role of medium of exchange would be played by either the GRC or conventional national currencies at the choice of the parties—just as today’s decision of which national currency is to be used for an international payment..

Finally, the store of value function would not be played by the GRC. It could be played by instruments in conventional national currencies, or by new specialized financial products which would create liquidity from investments in productive assets.

This functional specialization shows how the GRC plays a role complementary to the conventional national currencies.


The behavior dynamic that the GRC induces is similar to the “good” aspects of inflation while avoiding its “bad” ones. Economists have noted that a moderate amount of inflation can actually have a good impact on the economy. For instance, the 1980s inflation in the US provoked a negative net return on fixed income instruments, thereby encouraging investments in productive projects. However, inflation also implies regressive effects such as the erosion of all price agreements and the redistribution of wealth from the financially unsophisticated majority to a sophisticated minority.

The demurrage fees of the GRC therefore obtain the positive effects of inflation, while avoiding its negative ones.


Fisher’s classical velocity of money equation provides another way to illustrate the impact of the GRC.

T = Sum (PG) = QV

(where T = total economic exchanges; P = Prices; G = Goods and services exchanged; Q= quantity of money and V = velocity of money circulation).

For a given quantity of money in circulation (a given Q), the demurrage feature of the GRC increases V. To the extent that the Terra unit is expressed in terms of a representative basket of commodities and services, it keeps P constant by definition.

Fisher’s equation therefore shows that the total with the introduction of a GRC goods and services exchanged would necessarily increase, thereby improving overall economic well-being.


Finally, the use of a GRC in complement with conventional national currencies would automatically tend to counteract the prevalent business cycle, thereby improving the overall stability and predictability of the world’s economic system. This is so because corporations have by definition an excess of raw materials when the business cycle is weakening. They would therefore tend at this point of the business cycle to sell more raw materials for storage to GRC Inc., which would pay for them with Terra. The Terra would be used immediately by these corporations to pay their suppliers, so as to avoid the demurrage charges. These suppliers in turn would have a similar incentive to pass on the Terra as medium of payment. The spread of this increased incentive to trade with this currency would therefore automatically activate the economy at this point in the cycle. On the contrary, when the business cycle is in a boom period, corporations have a systematic incentive not only not to sell new inventories to the Countertrade Alliance, but even to cash them in to have access to the raw materials themselves. This would reduce the amounts of Terra in circulation when the business cycle is at its maximum thereby cooling off the economy at this point. At the peak of the cycle, it is even possible that no Terra remain in circulation at all (which does not preclude their continued use as contractual reference currency).

Both Keynes and Friedman have shown that with conventional money, the velocity of money is pro-cyclical (each for different reasons: the former on the basis of changes in interest rates, the latter on the basis of the predominant role of Friedman’s “Permanent Revenue” in determining the demand for money). The fact that the quantity of Terra in circulation would be countercyclical with the business cycle would therefore tend to counteract the pro-cyclical nature of the conventional money system.

In summary, the introduction of a GRC would tend to automatically dampen the business cycle by providing additional monetary liquidity in counter-cycle with the business cycle relating to the conventional national currencies.

Theoretical and Practical Soundness

The sidebar on “Economic Tech Talk” synthesizes the idea for those who prefer a purely economic language.

Conceptually, the Terra is the combination of two ideas a currency backed by a basket of raw materials which has been proposed by many top economists of every generation19, including a.o. the contemporary Economic Nobel Price laureate Jan Tinbergen on the one side; . and sustainability fees as originally proposed by Silvio Gesell under the name of demurrage charges on the other.

This second idea — demurrage charge on currency, — was formally endorsed by no less an authority than John Maynard Keynes. He claimed that demurrage not only makes sense from a theoretical viewpoint, but is actually preferably to our normal currencies. Chapter 27 of Keynes’ main work, the General Theory of Employment, Interest and Money explicitly states that: “Those reformers, who look for a remedy by creating artificial carrying cost for money through the device of requiring legal-tender currency to be periodically stamped at a prescribed cost in order to retain its quality as money, have been on the right track, and the practical value of their proposal deserves consideration.”20

A Federal Reserve Official Recommending Demurrage?

The US currency should include tracking devices that let the government tax private possession of dollar bills, recommends Marvin Goodfriend, a senior vice president and policy advisor at the Federal Reserve of Richmond.

In a 34-page paper he argues that this demurrage charge will discourage “hoarding” currency, deter black market and criminal activities, and boost economic activity during deflationary periods when interest rates hover near zero.21

The motivation and the proposed mechanism for this application is obviously different from the ones I propose here. I think that the likelihood that Mr. Goodfriend’s idea will be acceptable to Congress is low, but this shows at least that the concept of demurrage i starting to attract an intriguing amount of attention.

Keynes concluded with the most amazing statement that “the future would learn more from Gesell than from Marx.”22

Surprisingly, some officials of the Federal Reserve today seem to have their own reason to agree with him (sidebar).

The best recent contemporary analysis of Gesell’s thesis is provided by Dietrich Suhr.23

He proves that our normal positive interest rate currencies create systematic misallocation of resources, while zero interest rate or sustainability fee charged currencies do not. He also provides solid answers to some of the criticisms levied against sustainability fee charged currencies.

These people were in favor of different parts of the GRC proposal for a variety of valid reasons – other than sustainability – such as monetary stability, lessening the volatility of business cycles, and reduction of international inequalities. A Global Reference Currency such as the Terra would also cumulate these advantages, in addition to the benefits of the sustainability fee idea with its long-term sustainability aim.

It is also important to understand that people would not need to handle the commodities themselves when making or receiving payments in Terra, exactly as someone owning a futures contract in copper does not have to handle copper itself. A Terra is simply a warehouse receipt giving the right to receive the value of the basket of commodities in whatever currency he or she deals in. The Terra would therefore be capable of being transferred electronically just as today’s national currencies; it would simply be stable and inflation-proof, something which today’s national currencies have proven not to be.

Historical Precedents

Note that the idea of a commodity backed currency combined with a sustainability fee is not really new. An early form of it was applied in Pharaonic Egypt. It was the secret of the remarkable stability of the Egyptian monetary system, which has not been reproduced by any civilization ever since.24 It created economic stability and abundance for over a thousand years This historical record also demonstrates the remarkable capacity of sustainability fees to foster sustainable growth which can last over several centuries. This topic will be discussed elsewhere.25

Implementation Options

There are several ways by which a Global Reference Currency could be implemented. For instance, one could theoretically attempt to obtain a consensus for a GRC reform among the governments of the world via a new Bretton Woods agreement or via a reform of the International Monetary Fund (IMF).

However, the political realities today are such that it is highly unlikely that such a new consensus could be reached by governments. Private conversations with top executives at the Bank of International Settlements (BIS) and the IMF have confirmed that a fundamentally new monetary initiative could only be taken by the private sector in today’s geopolitical circumstances.

Furthermore, real decision-making power today lies more with multinational corporations than with governments anyway. The most important time priorities that require shifting if sustainability is to be achieved are those of the global corporations, and therefore a buy-in from the corporate world would be necessary in any case. This is why the strategy proposed here is to convince a group of key corporations to set up the Global Reference Currency themselves as a service for anybody who wants to trade internationally.

GRC as a Business Initiative

The GRC makes sense as a business initiative for a number of reasons which will be presented next.

Barter Standardization

The simplest way to understand the GRC from a business viewpoint is to see it as a standardisation of barter. The growth in barter exchanges, both internationally and domestically, has been remarkable. Over the past two decades barter has grown to a large-scale mainstream activity, and has even become a core activity for many businesses involving media, travel, hotels, and international trade. A 1995 survey estimated the amount of barter globally to US$590 billion per year. The Asian and Russian crises of the late 1990s are bound to further increase barter exchanges. Some business sectors have already developed standard units of exchange specific to their business. For instance the International Air Transport Association (IATA) has been using for more than two decades its own global unit of account to settle payments among its member airline corporations.

Similarly, “hotel-rooms” and “TV Spots” are gradually evolving as standard industry-specific barter units.

The next logical step is to develop standardized barter units designed to operate on the Net. In this sense, the Terra or any other GRC unit would simply be a cross-industry barter unit. However, this barter unit could also be designed to provide three additional benefits as follows:

  • A well-designed barter standard would be more robust than currently existing national currencies, and could become useful as an international standard of value for contractual and international payment purposes beyond barter.
  • By having the basket backed by an actual stock of the commodities involved, this system would behave in a powerful counter-cyclical way with the business cycle.
  • Finally, by transferring the storage costs of the basket to the bearer of the currency, this currency would re-align financial interests with longer-term concerns as shown above.

The relevance for business for each of these three benefits is explained next.

International Standard of Value

The problem of a lack of international standard of value was first identified by Hogart and Pearce: “It will not be long before the world comes to recognize anew that it is no more possible to conduct affairs without a proper standard of value than it would be to conduct affairs without an agreed unit of length or weight.”26

One consequence of the lack of an international standard has been the growing importance of currency risks. These risks are now typically larger than political risks (e.g. the possibility that a foreign government nationalized the investment), or even market risks (e.g. the possibility that clients do not want the product).

In a 1992 survey of U.S. Fortune 500 corporations, all participants in the survey reported that foreign exchange risks is now one of their main concerns.27 Furthermore, 85% reported that they needed to use expensive derivative strategies to attempt to reduce this foreign exchange risk. It is significant that the firms engaging most in such hedging were also the largest and most sophisticated.28

One important aspect about which no surveys have been made is that many foreign investments end up not being made at all, simply because the currency risk cannot be covered, or its coverage is too expensive. These opportunity costs are detrimental not only to the corporation involved but to society at large as well.

All this was already the case before the recent spate of monetary crises. The monetary emergencies in Asia (1997), Russia (1998) and Brazil (1999) have brought the whole issue to a new level of gravity. The following quotes provide a feeling of the seriousness of currency instability risks today as seen by monetary authorities:

  • “We are in a situation which is indeed dangerous” (Sept 6, 98) Michel Camdessus, three times Director General of IMF
  • “This is an unprecedented situation” Rubin, US Secretary of Treasury (Sept 98)
  • “This is the most serious financial crisis since World War II” Bill McDonough, President NY Federal Reserve at the IMF Meeting (October 98), statement which President Clinton repeated verbatim a few weeks later.

A GRC such as the Terra would therefore reduce operational costs under normal monetary circumstances, and in addition constitute a very robust back-up system in case of further major monetary instabilities.

An Antidote to the Risk of Depression

For the first time in over 60 years, the possibility of a global recession beyond the control of monetary authorities cannot be dismissed. As Paul Krugman put itProblems we thought we knew how to cure have once again become intractable, like temporarily suppressed bacteria that eventually evolve a resistance to antibiotics. …There is, in short, a definite whiff of the 1930s in the air.”29

The GRC system could be managed in a way to have a powerful counter-cyclical economic effect with the official money system, thereby contributing to the reduction of risks of a major global recession. This is so because the inventories backing the Terra would logically be growing during a recession, as corporations always have larger amounts of available inventories at such times.. This would automatically ncrease monetary liquidity in Terra at this point of the business cycle. During a boom period, the reverse would happen: inventories and Terra generated monetary liquidity would both drop. The GRC system would therfore tend to automatically counterbalance the conventional business cycle. Introducing this system would specifically be helpful to avoid the longer-term recession or even depression that many fear.

Business and the Environment: A Business Viewpoint

A Global Business Network special report on Sustainability concluded that “Industry and environment can no longer be compartmentalized. The global environment system and the socioeconomic system are now coupled – the fate of one is tied to the fate of the other. If conventional industrialization keeps growing, it risks bringing down the ecosystem; if the ecosystem crashes, it will bring down the economy.

The industrial system is highly vulnerable if there is a serious ecological breakdown. Multinational companies are tuned like Grand Prix racing cars for better and better lap times. They assume the racetrack will be perfectly smooth, without obstructions. Industrial installations, buildings, plant, energy transmission lines, are all designed for a narrow set of climatic and ecosystem assumptions – conservative maximum wind loading, moderate earthquake resistance, a steady flow of resources.

But we now know, from studies of such things as Arctic ice cores, that nature is certainly capable of far more severe disturbances that the recent, relatively narrow range of climatic variation has led us to assume. This puts the operational basis of today’s industrial society directly at risk from possible global ecological breakdowns and accompanying widespread natural disaster.”30

As we saw earlier (Chapter 1), the insurance industry has been the first major sector to have its bottom line directly hit by this connection. But while it is the first, it is clearly not the only sector concerned.


It may sound strange at first sight to have businesses perform this function of creating a currency as a public good. However, it is useful to remember that the so-called “national” currencies are in reality also a form of corporate currencies, issued by private banks as explained in the Primer and Chapter 2. Note also that the banking and financial services industry are not excluded from the GRC process: the more creative financial institutions would be providing Terra denominated services , exactly as they do today for any foreign exchange account.

There actually exists a historical precedent for an international initiative taken by buiness people: the Hanseatic League (1367-1500). (see sidebar)

Historical Precedent for Business Creating Multinational Framework

At a time of strong fragmentation in Northern Europe, merchants in different independent cities (Bremen, Koln, Hamburg, Bruges, the Baltics, etc.) got together to create their own legal trading framework (the Hansa), complete with its own standard currencies and even its own international courts of justice to settle disputes. All of this completely outside of the official political/governmental system. That system lasted for well over a century, six times longer than the current floating exchange experiment.

The Hansa was defined as an official institutional structure in 1367, after more informal experiments covering over a century. This system was remarkably successful in attaining its objectives. However, the merchants in each harbor would spend as much energy impeding access to the system for other merchants competing with them in their own market, as working at expanding their markets overseas. It also purposely excluded traders from specific countries. It finally fell apart at the end of the Fifteenth Century when Dutch and English traders, shippers and fishing fleets – originally excluded from the system – successfully challenged this monopoly.

If the road of a private initiative is taken to implement a GRC of some kind, it would therefore be important to set up from the beginning guarantees for a truly open market access for all participants in international trade, independently of size or origin, to avoid having to repeat that part of the Hansa history.

However, the contemporary version of such a function would also be significantly different from the historical Hansa. It should be global rather than regional, it should be an open public service system rather than a cartel, and it should be using contemporary legal and financial concepts and communication technologies (i.e. Internet) to implement it.

What it really boils down to is the question of whether business leaders are willing or capable to take responsibility to reform the current monetary system by a private initiative that would help make business truly sustainable. The word “business” in Swedish is “Näring Liv” (literally “Nourishment of Life”). A Terra initiative by an alliance among businesses would be one way whereby it also could be made more true. It would also be a deeply effective way for business leaders to escape the perpetual conflict between stockholders’ priorities and their own personal concerns for long-term sustainability, whether these concerns arise from public pressure, personal ethics, or their own grand-children’s future.

“The world is not given to us by our parents.
It is loaned to us by our children”

(Panel at the Biodiversity Hall of the NY Museum of Natural History)


Some people may be surprised at the proposal made in this chapter, proposal that seems all in favor of multinational corporations. Particularly after I made clear in the “Corporate Millennium” (chapter 4) that there are some risks in the creation of a new de facto monopoly of private corporate currencies. However, my proposal is not to create such a monopoly. Instead a global corporate currency is recommended at the same time as the introduction of local complementary currencies with social aims (chapters 5 to 7). Furthermore, I am convinced that we will not create a world of Sustainable Abundance without the involvement of the corporations, organizations which have become today the most important shapers of our future, whether we like this or not.

The issue here is one of balance, and such a balance will not be achieved by excluding the most active components of our society. How all the pieces of the puzzle, including the Global Reference Currency, fit together to create such a balance aiming at generating Sustainable Abundance, is the topic of the next and last chapter.


Table of Contents










  1. Title of Introduction of Rueff, Jacques The Age of Inflation translation by A. H. Meeus and F.G. Clarke (Chicago: Henry Regnery Co., 1964)
  2. Solomon, Lewis D.: A Handbook on Community Currencies (Barrington Mass.: The E.F. Schumacher Society, 1995)
  3. Solomon, Steven: The Confidence Game: How Unelected Central Bankers are Governing the Changed World Economy (New York: Simon and Schuster, 1995)
  4. Greider, William Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Touchstone, 1987)
  5. Aristotle wrote the oldest known text explaining the “natural superiority” of money over barter exchanges. “When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported the surplus, money necessarily came into use. The various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something that was intrinsically useful and easily applicable to the purposes of life; for example, iron, silver and the like. Of this the value was first measured by size and weight, but in process of time they put a stamp upon it to save the trouble of weighing and to mark the value” Politics , I, iii
  6. Applegate, Jane “Firms learn to be creative in bartering” Los Angeles Times (Friday, March 19,1993)
  7. Tremblay, Mirville “La carte de crédit-troc: une solution a nos problèmes économiques Policity Options (Montreal, Canada) March 1994 pgs 19-23 or Joyal, Andre “Entrevue of Miville Tremblay, concepteur de la carte de credit-troc” Agora (Quebec, Canada, mai 1995 pgs 10-13.)
  8. See for instance Amann, Erwin & Marin, Dalia “Risk-sharing in international trade: an analysis of countertrade” The Journal of Industrial Economics Volume XLII (March 1994) pg. 63-77. Williamson, Stev & Wright, Randall “Barter and Monetary Exchange under Private Information” The American Economic Review March 1994 pgs 104-123 Taurand, Francis “Le troc en Economie Monetaire” L’Actualite Economique, Revue d’analyse economique Vol 52 numero 2, Juin 1986.
  9. Schrage, Michael : “Frequent-Purchaser Programs Emerging as the Currency of the 90’s” The Washington Post, Friday, July 10,1992
  10. Wall Street Journal, Oped page, December 10, 1999.
  11. Title of Introduction of Rueff, Jacques The Age of Inflation translation by A. H. Meeus and F.G. Clarke (Chicago: Henry Regnery Co., 1964)
  12. Estimates by Edouard Parker, presented in Sunter, Clem The High Road: Where are we Now? (Cape Town: Tafelberg, Human and Rouseau, 1996)
  13. McKibben, Bill “A Special Moment in History” Atlantic Monthly (May 1998)
  14. BBC World Report August 24, 1998.
  15. Klaus Toepfer, head of the the UN Environmental Program in the Report presentation in Nairobi.
  16. The exact mathematical factor for discounting a cash flow with a discount rate d on year N is 1/(1+ d) at the N th power. Most textbooks on Finance have an appendix with the pre-calculated tables for these factors.
  17. Korten, David: When Corporations Rule the World (San Francico: Berret-Koehler Press, 1995) pg. 208
  18. Estimate of the cost of a 27 global commodity reference currency by Albert Hart of Columbia University, Nicholas Kaldor of King’s College in Cambridge, UK and Jan Tinbergen of the Netherlands School of Economics: The Case for an International Reserve Currency (Geneva: presented on 2/17/1964 (Document UNCTAD 64-03482).
  19. See for example: Harmon, Elmer Commodity Reserve Currency (New York: Columbia University Press, 1959); Graham, Benjamin World Commodities and World Currency (New York: McGraw Hill, 1944) and Storage and Stability (New York: McGraw Hill, 1937); Albert Hart of Columbia University, Nicholas Kaldor of King’s College in Cambridge, UK and Jan Tinbergen of the Netherlands School of Economics: The Case for an International Reserve Currency (Geneva: presented on 2/17/1964 (Document UNCTAD 64-03482); St Clare Grondona Economic Stability is Attainable (London: Hutchison Benham Ltd, 1975); Ian Gondriaan How to Stop Deflation (London, 1932); W.S. Jevons Money and the Mechanism of Exchange (1875).
  20. Keynes, John Maynard, The General Theory of Employment, Interest and Money, (London: MacMillan,(1936), p. 234.
  21. details in and synthesis in,1283,32121,00.html
  22. Keynes (1936) Chapter 32, p. 355.
  23. Suhr, Dieter, Capitalism at Its Best: The Equalisation of Money’s Marginal Costs and Benefits; (Augsburg, Germany: Universität Augsburg, 1989).
  24. The remarkable story of the Egyptian monetary system and its effects will be discussed at length in The Mystery of Money. The best source on the Egyptian monetary system is: Preisigke, Friedrich, Girowesen im Griechischen Ägypten enthaltend Korngiro, Geldgiro, Girobanknotariat mit Einschluß des Archivwesens, (Strassburg: Verlag von Schlesier & Schweikhardt, 1910); reprinted: by Hildesheim (New York: Georg Olms, 1971).
  25. See The Mystery of Money: Beyond Greed and Scaricty in which two historical precedents of the impact of demurrage currency on society and economic well-being are studied at length: Egypt and the Central Middle Ages (10th to 13th) century. A connection will be shown between demurrage-charged currencies and the unusual prosperity of the Central Middle Ages, to the point where this period has sometimes been called “The First European Renaissance” and the “Age of the Cathedrals”.
  26. Hogart, W.P. and I.F. Pearce I.F., The Incredible Eurodollar London: George Allen and Unwin, 1982), pp. 130-131.
  27. Dolde, Walter “The Use of Foreign Exchange and Interest Rate Risk Management in Large Firms” University of Connecticut School of Business Administration Working Paper 93–042 (Storra, Conn. 1993) pg 18-19. Specifically, there was also consensus that interest rate risks were an order of magnitude less important than foreign exchange risks.
  28. Dolde, Walter “The Use of Foreign Exchange and Interest Rate Risk Management in Large Firms” University of Connecticut School of Business Administration Working Paper 93–042 (Storra, Conn. 1993). The 85% of the firms that routinely have to hedge have a capital averaging at $8 billion, compared to $2.5 billion for the 15% which never hedged (see exhibit 1 pg 23-24)
  29. Krugman, Paul “The Return of Depression Economics” Foreign Affairs (January – February 1999) pg. 42-74.
  30. Tibbs, Hardin “Sustainability” Deeper News (Global Business Network: January 1999) pg 29.

One thought on “The Future of Money | Chapters 7-8 | Bernard Lietaer (1999)

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.