A space for conversations in a time of global disruption
Love of money, according to the Christian Bible, is the root of all evil .... but in fact there's a fairly simple technical reason underlying much of the evil it causes. There's a property of money which makes its most important functions hostage to the least important. It's a property which most people take for granted, one which textbooks describe as being essential - its durability.
The durability of money makes it hoardable, allowing people to use it as a long-term store of wealth .... but its primary functions are as a medium of exchange and (in abstract) as a standard of utilitarian value. Unfortunately when people hoard it they effectively take some of it out of circulation, which reduces the amount that is available as medium of exchange. That inhibits economic activity, and that in turn leads to general instability of prices; prices start to fall (because people lack the means to buy) which either results in a spiral of deflation (if the money supply is fixed) or in the creation of new money which subsequently leads to rising prices - in both cases compromising its function as standard of value.
The financial world has of course evolved mechanisms for bringing that money back into circulation; capitalist societies have 'interest' (other societies recognise interest as an insidious evil and have laws against usury, but rely on extensive patronage instead - which is probably even more pernicious). For practical purposes, those who have more money than they have any immediate need for are able to charge everybody else for the privilege of using it - and the result is a constant flow of wealth from the poor to the rich. This is one of the principal causes of inequality - only marginally less important to my mind than the inequitable control of land (in my view those two things are probably responsible for 90% or so of 'unnatural' inequality) - and it is only made possible by the fact that our medium of exchange keeps its value (its nominal value, that is) even when it's not circulating.
There are very good reasons why this came about. Money as an institution is not something that was ever 'created'; it evolved over many centuries before it was drawn fully into the sphere of government, and it's from that historical perspective that textbooks describe durability as one of its essential properties - it's hard to see how that evolution could have happened without that property. As long as money was a physical commodity, such as gold and silver, which could not be created at will, there was no possibility of separating its different functions. Once it began to be paper-based, however, separating those functions became at least a possibility; with electronic money we have reached a stage where it is entirely feasible. We can step beyond those historical limitations and create a monetary system in which those problems don't arise. But to do that we need to convince those who control it that that change is necessary.
I first started thinking about the subject in the early eighties when I wanted to understand why there seemed to be a link between unemployment and inflation (the mantra of the Thatcher government was that unemployment was the price we had to pay for bringing inflation under control). Because I was approaching it from that angle, positively looking for a flaw, I recognised almost immediately that the orthodox functions of money - medium of exchange; unit of account; and store of value - are in fact in conflict with each other. In my innocence I briefly imagined revealing this to a grateful world, but not surprisingly other people had already recognised it - and (also not surprisingly) the world had largely ignored them.
Largely, but not entirely. Some of the leading economists of the 1930s were admirers of Silvio Gesell who is regarded as the father of the idea; Keynes described him as a 'neglected prophet', and Irving Fisher tried to get his idea of 'stamped money' adopted at the federal level in the US. Local currencies based on the idea were in fact adopted by a number of communities in Austria and Germany, and in the US, during the depression of that time, and were very successful at stimulating the economies of the communities which used them - until they were banned (Bernard Lietaer, a modern proponent of the idea, includes a brief history of it in this article).
Gesell's proposal involved having notes stamped (for a small charge) at the end of each month in order for them to keep their value. It was perhaps the best that could have been done at the time, but it had the drawback that it didn't distinguish between money which was circulating at a healthy rate and money which wasn't circulating at all. It did encourage people to use it quickly, however, because nobody wanted to be the one holding it when it needed to be stamped. This was a time when people who had a bit of money were afraid to spend it for fear of worse times ahead - creating a self-fulfilling vicious circle - so it gave a huge boost to the local economies of the communities which used it.
In an ideal system cash which was circulating at the 'natural' rate would retain its full value, whereas stagnant cash would gradually lose value (I'm not going to go into the details of how that would operate, nor speculate about the best way of achieving it technically, because at the moment my primary concern is with the principle). Some people will question the focus on a physical property of money, when so much economic activity doesn't involve cash at all, but as long as money in the bank is convertible into cash on demand it is the properties of cash which ultimately determines how the system behaves. As long as people have the ability to store wealth as physical money, the banks would be unable to charge them for holding it (which is what would be needed to ensure that it circulates properly).
When I first recognised this as a problem it was the instability it causes which I was concerned about, but over the years I've come to see that the most pernicious aspect of it is the constant flow of wealth from the poorer to the richer. For a long time I've assumed that there was nothing I could do about it, because a monetary system needs a community of people who trade regularly with each other before it can even get off the ground - and when well respected economists (Willem Buiter, for example) have no success pushing the idea into the mainstream, I don't think there's much chance of me succeeding. In the last couple of weeks, however, I've realised there might be a way for me to at least get it onto the agenda - if I have the nerve to do it!
It's to do with the relationship between taxation and money. Money itself has no intrinsic value; the value it does have rests on people's belief that they will be able to exchange it for something for which they have some desire or need. The whole system relies on that confidence, but for the most part there's no actual obligation for people to use it - we are free to trade through barter, or through an alternative currency. With one exception; by denominating taxes in a particular currency the authorities create an absolute need for that currency - so in effect the tax system guarantees its value.
In the case of some taxes, income tax for example, this might be defensible because to some extent they can be regarded as 'optional' - in principle, if not in practice, people can avoid them by being largely self-sufficient and only trading through barter. But with land-based taxes, such as Council Tax in England, you become liable for them simply by occupying a house or piece of land. By requiring payment in a particular currency, the authorities are not only guaranteeing the value of the currency, they are also locking everybody in to using it. So if that currency is a prime cause of inequality, as I argued above, then the tax authorities are, in effect, guaranteeing the continued existence of serious inequality.
In a previous post, Imago Society, I wrote about the British courts' power to declare laws incompatible with the higher principles of the law, and suggested that in some cases such a declaration might lead to a constitutional crisis which could be used to bring about useful reform. I think a challenge to the legality of demanding taxes in a hoardable currency (i.e. a currency which encourages the flow of wealth towards the rich) would be one of those cases, and I think there's a good chance the courts would indeed recognise the link between interest and inequality. But the whole capitalist system has grown up around the phenomenon of financial interest, around the fact of those who have surplus money being able to charge other people for the privilege of using it. The government would not lightly switch to a form of currency which prevented that .... but equally, it would be a major step for them to ignore the courts.
I'll have to do a lot of preparation on it, but it should at least be easy to bring the issue before the court. The first step would be to ask the local council, when they send a council tax bill, to justify denominating it in a hoardable currency (but without withholding payment at this stage). Their initial reply would probably be reasonably polite, but after two or three exchanges I'd expect them to refuse to enter into further correspondence. The next step would be to withhold payment on the grounds that they had refused to give that justification - and wait for them to take it to court.
If I have the nerve to do it.
[Edit (August 2012): I wrote originally about challenging 'the legality of demanding taxes in a hoardable currency', but since then my perspective has changed slightly, and I now think that a challenge should focus on the legality of demanding taxes in a form which people have no natural capacity to supply. It's a case which would be easier to argue, and would still break the chains which bind us to the current monetary system. Having said that, I'm not keen to provoke that argument on my own.]