Economics

Beyond Bailouts | How a Circulation Charge Can Help Save and Transform Global Finance

An Earth Shaking Wake-up Call
The global financial crisis has created tremendous uncertainty about the
future prospects of human society. Very few people saw it coming and
even fewer, if any, can say with much degree of certainty what will
happen next. National governments are currently injecting trillions of
dollars into their financial systems and the broader economy simply to
cushion the fall of equity prices, home values and employment rates.
Several countries have already sought emergency support from the IMF and
World Bank and several more may require extensive assistance down the
road. Yet these international institutions were neither designed nor
equipped to deal with crises of this magnitude.

Adding to our woes are the persistence of monumental global
challenges such as terrorism, environmental degradation and climate
change, which all must be confronted head on in the very near future.
Given their worsening trajectory, one may now look back and realize that
these problems were never going to be resolved from within the
parameters of a financial system so conducive to myopic decision-making
and growth for growth’s sake. Considering the awesome complexity of
global challenges and the urgency with which scientists proclaim that
humanity must change course immediately, then perhaps we will come to
view this financial crisis as an Earth-shaking wake-up call and timely
opportunity to align global systems and institutions with global
challenges and complexities for the first time.

While many financial experts and politicians are focused on bailouts
and the mainstream media is widely locked in to asking experts mundane
questions about when the economy will recover, it’s time for global
leaders and citizens to start asking the tough questions about what’s
next for global finance. What’s beyond the bailouts and efforts to keep
the global economy in one piece? Where do we go from here, not only to
get credit flowing, but also to create a financial system that works in
the service of all of humanity towards the effective resolution of
global problems?

New solutions will require new values and new financial instruments
to ground these values into the economic system. Without a practical
means to change financial wisdom and shift the logic of investment and
decision-making processes, new values are bound to remain peripheral and
idealistically oriented, rather than central and integrated operating
principles. One tool with the power to literally transform the economy
and help restore lending emerged prior to another economic crisis, the
Great Depression. Its inventor, Silvio Gesell, called it demurrage, a
French term borrowed from the shipping industry. We will simply call it a
circulation charge and explore its potential within the context that
matters most: our need to save and transform global finance.

A Circulation Charge
In 1932, the town of Wörgl, Austria, was suffering from a 35%
unemployment rate. The town’s mayor had a long list of projects and only
40,000 Austrian schillings in the bank to pay for them. Rather than
spend the money on what would amount to only a fraction of the work that
needed to be done, he used the schillings to back the creation of local
currency with a unique feature. The money was designed so that its
holder would pay a small fee each month to keep it valid for
circulation. Once the fee was paid, a stamp was placed on the back of
the paper note to certify it for exchange.

After printing these notes, the mayor of Wörgl then used this
currency to begin paying for public projects, thereby introducing it
into the town’s circulation. Yet, it was only after this money was spent
that the dramatic effects began to take hold. In less than two years
from the start of the circulation charge, Wörgl became the first town in
Austria to reach full employment. With the equivalent of a modest
number of Austrian shillings in circulation, money expert Bernard
Lietaer reported, “Water distribution was generalized throughout…. the
town was repaved, most houses were repaired and repainted, taxes were
being paid early, and forests around the city were replanted.” Clearly,
when a town begins to experience full employment during a depression and
citizens voluntarily decide to pay their taxes early, people will talk.
Within a short period of time, the town’s revitalization garnered
international attention and was branded the ‘miracle of Wörgl.’

The Science behind the Miracle
While a part of this marked turnaround came from the town’s revenues in
collecting fees from the circulation charge, this was not the most
significant force behind the dramatic transformation. Of greater
importance were the extraordinary contributions from Wörgl’s
increasingly engaged citizens. They were enabled to transform their
community and do what was previously thought economically unfeasible
after the average velocity of money throughout the town increased
fourteen-fold because of the monthly expiration date.

In other words, with the introduction of a circulation charge,
money changed hands fourteen times more frequently in the same period of
time than did the national currency, the Austrian shilling. An increase
in trade and activity of this magnitude represents a dramatic leap in
economic activity and confidence that simply cannot be replicated by
central governments through spending programs or tax cuts. The
achievement truly was a miracle, yet backed by solid innovation and
grounded economic strategy. Rather than rely on municipal governments or
centralized powers, the people of Wörgl had created the means to take
power into their own hands and directly accomplish things that would
never have occurred solely through the meddling of relatively arbitrary
and inefficient centralized bureaucracies. In
a time of financial gridlock such as ours, a circulation charge also
presents itself as an ideal economic tool to begin catalyzing lending
and thereby melt frozen credit markets.

In his opus The Natural Economic Order, Silvio Gesell introduced the
concept as an economic tool to effectively solve the problems of
hoarding, interest and inflation. It was his original thinking that
served as the basis for the successful stamp scrip currencies in
Germany, Austria and America during the Great Depression. His work
garnered notable recognition and approval from many of his
contemporaries, including some of the most acclaimed economists of the
20th century, including John Maynard Keynes and Irving Fisher.

Going Global
Today, as members of the G20 and architects of the global Bretton Woods
II convene to consider new financial instruments for building the 21st
century economy, a circulation charge should be at the top of their
list. A validation fee of this sort addresses the essential design flaws
of the current economy that make it utterly impossible to reconcile
finance with environmental sustainability and the alleviation of
poverty. These flaws include compulsive exponential economic growth in a
world of finite resources, the myopic discounting of the future and a
regressive redistribution of wealth into the hands of the world’s
wealthiest via the interest on money.

A circulation charge effectively goes to the root of these problems
by changing the qualitative nature of how we hold money. It inherently
shifts financial thinking towards longer time frames. It creates a
natural incentive to lend money without the need for interest, which
would mitigate compulsive exponential growth, lessen the costs
associated with borrowing and investment and reduce social disparities.
It is precisely by shifting these central financial dynamics that
markets can naturally begin reversing the inequalities between the rich
and poor, facilitate investments in alternative energy infrastructure
and create a more resilient financial system.

The implementation of a circulation charge in the global financial
system will require profound, unprecedented cooperation between nations.
Much like any other global instrument, it will rely on widespread
adoption and integration to take hold and succeed. It is for this reason
that the G20, as a relatively broad and diverse group of nations, is an
excellent starting point for considering this tool. In addition to
serving as a catalyst for restoring lending and confidence in markets,
it would simultaneously enable a pragmatic shift within the financial
system towards achieving the 21st century objectives of sustainable development and the alleviation of poverty.

A circulation charge could be integrated into the financial system
through its simultaneous adoption by several nations for their
currencies. The tool itself, however, is more naturally predisposed to
function as an integral part of a global currency. In fact, it could
enable the realization of a global currency by transcending the present
weaknesses in monetary policy that arise out of current national fiat
currencies and policies. These limitations characteristic of today’s
national economies include exponential growth, interest rates, hoarding
and inflation. The diverse economic conditions of nation-states within
the current economic paradigm mean that national monetary policies are
often divergent and frequently irreconcilable. It is therefore only when
a global currency is realized that the problems inherent to national
currencies are likely to be resolved.

A fully digital currency would also strongly support the efficient
and stable adoption of a circulation charge within a relatively short
time period. If digitized, the currency could be programmed to
automatically deduct the circulation charge instantly, at the time of
its expiry date, from anywhere in the world. A digital currency would
also enable a faster velocity of money in circulation, greater control
and oversight of the money supply and the real-time monitoring of
demand. The currency itself, as we saw in the case of Wörgl, also
carries the power to quickly restore full employment and effectively
decentralize wealth and power into the hands of citizens.

A circulation charge enables the adoption of a monetary policy of
zero interest and the creation of a money supply equal to demand. Under
such conditions, a global currency could transcend the limitations of
national currencies and the arbitrary power and problems that emerge
when a national currency, such as the US Dollar, functions as the
international reserve currency. A digital global currency with the above
characteristics could be far more effectively regulated by global
institutions, such as a United Nations agency designated to oversee
international currency stability.

While the parameters of this article can merely serve as an
introduction to a very broad and important subject, it brings to light
the urgent need to recognize that our relationship with money is at the
very heart of our global crisis. The consideration and implementation of
the requisite financial tools will require the world’s leading nations
to forge a common vision for a global economy. Integrating global values
and instruments such as a circulation charge into the heart of their
monetary policies can help ensure the constant circulation of money and
thereby help restore economic activity, lending and the opportunity to
catalyze a free market system far more aligned with solving planetary
challenges. These are precisely the qualities that will help enable
global cooperation and insulate the international community from the
inherent dangers that are destined to emerge in the midst of worsening
global economic conditions.

A circulation charge also reveals the very real potential to align
and reconcile global finance with global values and visionary thinking.
Getting there, however, will require bold new approaches in economics
and a broader understanding that money is a social creation of the
utmost power and importance in our lives. Its understanding and control
can no longer be left in the dark corners of arbitrary or centralized
power. The true value of money in our lives must be consciously
recognized and mastered by all engaged global citizens as a precondition
for successfully enabling global transformation. When we do this
much-needed work, we will truly hold in our hands the power to change
the world.