Selecting a Community Currency*
Every time we add our own labour to a product or perform a service we expend energy and increase the overall entropy of the environment. Every time we exchange money for product or service, the legal ender we use represents payment for previous energy that we expended. Money, after all, is nothing more than stored energy credits.
Money can be anything that people in a community will accept as carrying on its basic functions, which are to provide a unit of value, a medium of exchange, and a store of value. Throughout history many different forms of money have been created with a number of forms being used simultaneously within the same community. Each form has various advantages and disadvantages. These need to be reassessed with modern technology and in the context of the objective of creating for individual communities an autonomous banking and monetary system.
Historically, units of value have been defined in terms of the weight of a given commodity of specified quality. Ideally, the commodity selected as a unit of value should also provide a stable value over time. As scarcity creates value and abundance reduces value, we need to select a commodity, the availability of which remains relatively stable in relation to all the other goods and services traded for money in the community. This requirement is described as the quantity theory of money. Simple stated this theory says that, other things being equal, prices will vary directly in proportion to the quantity of money in circulation.
Scarce, durable and dense metals, such as gold, silver, and copper, have been popular choices as hand-to-hand money. The selected metal would represent the currency in specie. When paper claims to such metal were created to become hand-to-hand money, the metal was referred to as the "hard' or "reserve" currency, as it represented the physically commodity into which the paper money could be converted.
If our objective is to create an autonomous community financial system, the community should produce the commodity chosen. If a community cannot produce the commodity used as its specie or reserve currency, then the stability of its financial system will depends both upon its trading activities with other communities and the relative abundance of the chosen commodity in the eternal communities.
A classic example of how the value of money and so prices can be changed within a community by external and distant activities is provided by the Spanish conquest of South America in the 16th century. The importation of vast amounts of gold and silver form the new lands had the result of decreasing the value of European money by up to five times. This example also illustrates how the stability of a community monetary system might still be affected by outside factors even if the community could produce the commodity used as a basis for it money system from its own resources.
The inflationary effect caused by an eternal increase in the availability of the commodity used as a currency can be very much reduced with certain types of commodities in the form of services, which will be considered later. There are two other important lessons of history, which are worth noting.
One is that different communities have used different commodities as money at different times and often there has been more than one type of commodity in the same community at the same time. The other and related lesson is that in many cases the commodity used as money has been consumable rather than durable.Throughout history gold, silver, copper and sometimes iron competed with each other in the same communities as money. In the United States during most of the 19th Century, both silver and gold were accepted as specie and/or hard currency for note issue. Congress established the parity value of gold and silver by specifying the weight of each metal required to be worth a dollar. But the market value of commodities changed at different rates. Such a situation required new legislation by Congress to recognise the realities of the market place in determining the relative values between the competing currencies.
Congress eventually overcame the problem by eliminating silver as an alternative currency at the end of this century. An alternative approach would be to do what national governments have done recently. They have allowed the relative value of their currency in relation to other currencies to be determined by market forces by allowing the exchange rate to float.
Before major discoveries of gold and silver were made in North America during the 18th Century, a number of other commodities were also used as money. Two interesting things about many of these commodities were that they were locally produced and had relatively limited lives as they were produced for the purpose of consumption. Grain, rice, tobacco, and cattle were common examples. Tobacco in specie was made legal tender in Virginia in 1642, and in 1727 became the reserve currency when tobacco notes were made legal tender. The notes promised to deliver to bearer on demand a specified weight of leaf of specified quality.The idea that money should have a limited life was put forward during the Great Depression in both Germany and the U.S.A. on the assumption it would force people to spend and so generate economic activity. An advantage of using a consumable commodity as a basis for a currency system is that is that it could provide a way of controlling the volume of money created and so inflation.
The number of situations where such arrangements could be practical is quire limited. As one hour of one person's time may not be worth one hour of another's, a currency based on labour hours does not provide a useful unity of value. There is an additional problem created in modern societies where the output of goods and services produced by an hour of human labour depends very largely on the technology employed. The level of technology thus determines the value of labour.However, to increase productivity, improved, and so generally more expensive technology will be required. This in turn will require a greater volume of money to finance the purchase of the improved technology. Price stability can thus be maintained by having a financial system which will automatically create more money to finance improved technology which increases output so as to maintain the ration of the volume of money to the volume of goods and services. This illustrates one element of the very intimate relationship between technology, money and the financial system, which needs to be recognised in designing an autonomous banking and currency system. The volume of goods and services produced in modern communities is determined more by the technology than by the labour hours expended. As the volume of goods and services increases, the volume of money will also need to be increased to avoid prices decreasing.
Some of the more important issues to be considered in comparing the suitability of Kwhrs or gold as a basis for a monetary system are set forth in the Table Advantages of Kwhrs or renewable energy dollars over gold dollars.
|Evaluation||Kwhr dollars||Gold dollars|
|Unit of value||Kwhrs||Ounces/grams|
|Quality testing||Not required||Density|
|Intrinsic consumable||100%||Say 10%|
|Subjective value||Nil||Say 90%|
|Changes in consumption||Related to total economic value/GDP||Little relation to economic activity/GDP|
|Changes in production||Related to consumption/GDP||Little related to consumption /GDP|
|Rate of change in production||Relatively stable by region and in time||Fluctuates with region and time|
|Cost of storage||Not required||1% of value per year|
|Cost of insurance||Not required||1% of value per year|
|Cost of distribution||Increases with distance||Changes little with distance|
The renewable energy dollar would be far more democratic than gold dollars, as sun, wind, and/or wave energy is available to all communities in the world, whereas gold is not. It is also very democratic within communities since each individual could own his own renewable electrical energy source to supply his own needs and/or to supply to others.
In the United States, legislation known as PURPA (Public Utility Regulating Practice Act) compelled power utilities to buy and distribute power from individuals or groups who invest in generators to produce power from renewable energy sources. In principle, requiring the existing electric utilities with distribution facilities to pay a "fair' price allows decentralised small producers to sell power on a competitive basis. This legislation provides a mechanism for facilitating the creation of community-based renewable energy dollars.The total volume of paper primary energy dollars that could be created is directly related to the total installed capacity of electrical generators. The total installed capacity of electrical generators is, in turn, related to the total activity in the community. The volume of primary currency that could be created has physical limitations, which are related to the total volume of goods and services traded for money within the community. No such constraints and relationships exist with a gold-backed currency.
The new option provided by electrical power generation to create a unit of value and the attractions it offers are not presented with the idea that it should be the only basis for creating community currencies. A number of other options could also be used simultaneously and in competition. Some individual and/or communities may prefer to create and/or use other commodities as a basis for creating a currency.
However, the renewable energy dollar would appear to present a highly competitive option in providing a reference unit of value, whether or not it is also used to carry out the other functions of money in providing a medium of exchange and a store of value. If a community preferred to adopt a currency system based on gold, agricultural commodities, oil, or labour services, then kilowatt-hours of electricity could provide a universal reference unit of value between communities of the world and within communities.No doubt other reference units of value could emerge with improved technology, as has happened with reference units of weights and measures over the years. However, it is quite possible that the need for an even more universally stable unit of value may decrease with changes in technology for a number of reasons.
If we define an autonomous community as a modem nation state, then there are more complex forms of money, which can be considered. More complex forms of money can be created by basing a unit of value on a "basket" of commodities and/or services. The basket may well be all the goods and services exported by a country in a given time period to form what is referred to as a trade-weighted value of the national currency relative to other national currencies. This trade-determined basket is used to assess the relevance of the rate at which the national government will convert its currency into the currency of another government. The conversion rate is referred to as the parity value or foreign exchange rate, with the parity rate determined by the government as the official exchange rate.The value of anything, be it a commodity or a currency can never be determined by the producer or creator of the commodity or currency, but only by the consumer or user. Thus, if the rest of the world does not require any of the goods and services a country produces, no foreigner will need to purchase its currency, and its currency will have no value for foreigners. The nationalised monopoly money created by governments today only has value to foreigners to the extent that foreigners wish to purchase the goods and services produced by the country. No matter what a national government may say, it is foreigners - not the government - who determine the international value of a nation's currency. National governments may declare a rate at which they will exchange foreign currency into their own, but such official rates are still subject to market forces in the longer run.
Indeed, a very well-thought-out proposal for creating a currency based on a basket of commodities was developed in the United States early in the 1970s by Ralph Borsodi. Borsodi based his proposals on work that he had done with the world-renowned Yale economist Irving Fisher in the 1930s. A number of elements of this proposal were field tested in the small community of Exeter in New Hampshire for 18 months daring 1973 to 1974.
A paper certificate called a "Constant" was created as hand-to- hand money,
with the local banks allowing accounts denominated in Constants to be opened.
The value of the Constant was based on the market value of a basket of 25 commodities.
The commodities and their amounts were listed on each certificate. They included
such items as iron, aluminium, coal, oil, wheat, and sugar, with their relative
volume reflecting the relative global production/consumption of each community.
The purchasing power of the certificate was based on the value of the specific basket of commodities and so remained constant relative to the average price of these commodities. During the term of the Exeter experiment, the purchasing power of the Constant increased relative to the U.S. dollar as the latter value decreased with the small level of inflation that existed at the time. The vital element missing from the Exeter experiment was the ability to obtain physical delivery of the specified commodities in exchange for surrendering the certificate.
The development of a monetary system based on the Borsodi experiment could provide a highly attractive, non-government-controlled, and competitive alternative to the existing government funny money systems to provide a choice of currencies within a nation. It could thus underpin financial stability by providing a fall back system for the present monopoly systems of national governments. However, because the Borsodi system is dependent upon advanced commodity markets, it may not be practical to set it in place during a collapse of the existing system, since commodity markets, in particular, and the economy, in general, could be in turmoil. The Borsodi system may also have less relevance to less well-developed economies and smaller communities seeking a simple, stable, and independent monetary system.For these reasons we need to explore further the renewable energy dollar concept and other simple, commodity-based monetary systems, that could be used by most communities - on their own initiative - in the event of a collapse of the government monopoly money system. Such systems could well be developed and tested as a community alternative in competition with existing government funny money, as was done in the Exeter experiment.
Tobacco-growing areas could create and use tobacco dollars; other areas might create and use wheat, oil, coal, timber, or wool dollars, according to those commodities important to the area. Credit notes/money could also be based on manufactured goods or services. It is not uncommon to find bus, railroad, or airline organisations creating promissory notes to deliver travel service in the future for payment today, that is, an advance-payment ticket. If these were made negotiable, they could be used like money. The notes created would provide the finance to produce the goods and services required.Financing the means of production by such means also keeps the ability of a community to produce in step with its ability to consume and/or export. It also means that it is the private sector rather than the public sector that determines what type and how much of each type of currency is required in the community. This would eliminate the intrinsic inflationary structure of the present arrangement, where it is the government sector that determines the volume of money created. Governments will always find it easier to print money than either to increase taxes or reduce their spending.
*First published in Handbook of tools for community economic change, ed. Ward Morehouse, 1983. The Handbook was produced by the Intermediate Technology Development Group of North America for a series of six day seminars on 'Tools for Community Economic Self-reliance' presented in the USA by the E.F. Schumacher Society from 1982 to 1984. The concept of creating Kwhr dollars was first published as an Opinion contribution 'Let the Market Correct Itself', The Australian, Op. Ed., p.8, May 25, 1977, Sydney.
Selecting a local currency became a Monograph published by the Australian Adam Smith Club, June 1983 and republished in Native Self-Sufficiency, Seventh Generation Fund Tribal Sovereignty Program, Vol 7 #1 Spring, USA, 1984.
The article was reproduced with the name 'Creating a Community Currency', as Chapter 21 in Building Sustainable Communities: Tools and Concepts for Self-Reliant Economic Change, C. George Bennello, Robert Swann, Shann Turnbull, Edited by Ward Morehouse, Bootstrap Press of the Intermediate Technology Development Group of North America Inc. 167-77, New York, New York, 1989, Revised second edition 1997. An abridged version of 'Creating a community currency' was published in World Citizen News, Washington D.C., 6:7, pp. 5-7, September, 1992.
1. 1 Jeremry Rifkin, Entropy: A New World View, New York: Viking Press, 1980