“Once upon a time there was a poor mother who lived alone with her son, Jack. All they had in the world was an old cow to give them milk. One day the cow stopped giving milk so the woman had to sell her. She told Jack to take the cow to market and to get as much money as he could for her.
On his way to market Jack met a man who wanted to buy the cow. He offered Jack five beans for the cow. Jack knew that his mother would be very angry if he sold the cow for beans. “They are very special beans” said the man. “They are MAGIC ! – they will bring you good luck!” Jack thought that he and his mother needed some good luck, so he gave the cow to the man in return for the magic beans.”
Jack’s tale begins with some economic truths: trade is grounded in the perceived fair value of an exchange of goods and services and, in times of hardship, people will accept forms of trade that they might not consider otherwise. Fortunately, the old man did not take advantage of Jack’s naive ideas of fair value, as the beans were indeed magic. (Why the man was willing to trade them for a spent cow remains open to question.)
Most of us make less fanciful decisions, and consider carefully whether an item we are purchasing is a good value, but until recently, most of us have not questioned the inherent worth of cash in pocket, the piece of plastic that represents funds in our account, the place where this money is kept, or the balance between trust and government regulation that keeps the entire system running. Since the financial crash things have begun to change. Kos diarists have examined the role the banks play on a personal level: skimming a little off every transaction, and assessing excessive fees. Others, particularly bobswern and gjohnsit, have assessed the banks’ culpability in crippling the system itself.
This trend has accelerated to the point that trust in banks is becoming increasingly difficult. Rolling Stone’s Matt Taibbi has shown the breadth and depth of manipulations meant to keep tight control of money in a few centers. He also shows exactly how national governments, their courts and regulatory authorities, have become helpless or even complicit in this process.
It’s now evident that there is a ubiquitous culture among the banks to collude and cheat their customers as many times as they can in as many forms as they can conceive,” he said. “And that’s not just surmising. This is just based upon what they’ve been caught at.
The foundation of the Capitalist system itself has been called into question, at least in its present incarnation. If governments can’t regulate their own money supply for the benefit of the majority of their own citizens, and banks abuse their position shamelessly on account of that, people will eventually turn elsewhere. I believe that the rise of virtual currencies, such as the Bitcoin, and alternative trading schemes, such as local scrip and barter exchanges, are symptoms of an economic system that is bent to the breaking point.
Part of the problem with how money works under Capitalism-as-practiced, is that it functions two ways: on one level as a medium of exchange and on another as the object of capital. Unfortunately these roles are diametrically opposed. Money is passed from one hand to another frequently as goods and services are bought and sold, but as an object, its role is to stay put, and hopefully attract other money to it through interest or speculation. Unfortunately, its latter job has become more important to the people who control most of it: the infamous 1%. Capital is currently sitting in a black hole sucking more money beyond the reach of individuals, and even businesses. Gjohnsit, in the diary “No, you aren’t crazy. The economy is busted” states, “Money velocity is one of the most basic measuring sticks for economic activity. The fewer monetary transactions, the less economic activity”. I am republishing his FED graph, which shows exactly how much velocity has slowed in the recent past.
Because money is not functioning properly on a small to medium scale, other forms of exchange are becoming more popular. If individuals and businesses are turning to these alternatives, it signifies the failure of Capitalism-as-practiced even more than street protests such as UK Uncut and the Occupy movement. The marketplace itself is beginning to judge the current system as not fit for purpose. Despite the fact that alternatives can be unstable, dependent on perceived value, and can also be subject to legal restraint should they become too successful, their use is increasing. From simple barter to internet currency, people are looking for workarounds.
Barter on smaller and larger scales:
Several friends of mine have recently joined a barter club. To join, you must be vouched for by at least two club members, at which point you get a password and can post items for trade on the club’s Facebook page. The rules are complex, extensive, and moderated heavily to ensure that spammers and businesses don’t post under the guise of individuals. Cash purchases are strictly forbidden. However, sometimes a poster will list “specific consumables” in their list of acceptable trades. The most popular consumable is toilet paper. Everyone uses it and everyone knows its value. Reportedly however, most people can work out trades of some sort without resorting to using currency in any form, even toilet paper. Time bartering schemes work in a similar manner with services rather than goods the medium of exchange. Both they and local barter clubs are as much about community building with like-minded people as they are about avoiding corporate consumerism. They could be thought of as tribal in nature, requiring a level of trust that extends only to a small circle of people. However, their small scale means that they also don’t challenge current financial hegemony. Reciprocal Trade Association
Surprisingly, a much more extensive and organised form of barter exists: business-to-business barter exchanges. According to some sources, 1/3 of NYSE businesses use at least some forms of barter. The International
Reciprocal Trade Association, one of the certifying bodies, “made it possible for over 400,000 companies World Wide to utilize their Excess Business Capacities and underperforming assets, to earn an estimated $12 Billion dollars in previously lost and wasted revenues.” This is done through trade credits, a form of virtual currency, and is particularly useful for small businesses like printers, where labour costs make up a great deal of their budget, and businesses whose overhead is fixed, like hotels. Membership in the IRTA cover the costs of investigating the businesses involved, and keeping track of these trades for tax purposes. Trust is therefore delegated to the certifying authority, so its reputation is important, as is its stability. Interestingly enough, after supplies of the the metal-based Liberty Dollar were confiscated in 2009, and its promoter prosecuted, the IRTA felt the need to distance itself, insisting their “trade dollars” were “a legal and robust form of commerce in America”, sanctioned by President Reagan himself. Governmental authority is supported as taxes are paid. Even so, $12 billion does not pass through the hands of banks, so some challenge to the status quo is involved.
Scrips that work within a limited area often arise in reaction to economic trends that hurt a population cohesive enough to try to mitigate them. One recent example is the push against globalization, monopoly of big box stores, and other ways that big Capital tries to extract maximum profit while contributing minimally to the community. They are like local bartering and time-sharing schemes in that they are meant to reinforce local ties more than a substitute for national currency. In the past, local scrips arose during the Depression in both America and Europe, and some worked effectively to benefit the communities that used them. But they were mainly implemented because, then as now, the velocity of national currencies had slowed to a crawl. Unfortunately, the latter, when successful did challenge central banks authority, and became victims of their own success.
Many current UK initiatives, such as the Totnes, and Bristol Pounds have come from the Transition Town movement, which seeks to build robust local economies in a post peak-oil world. They are instituted to rebuild interpersonal relationships and ecological resilience. Totnes’ effort has been particularly successful, partly because Totnes is a fairly remote market town in Devon. The area has also been a magnet for Progressives since 1925, when Leonard and Dorothy Elmhirst set up an experimental school at nearby Dartington Hall. Because of its local success, the Totnes Pound has become an example to larger cities like Bristol. In Totnes, places where their scrip can be used are limited to local businesses and restaurants. However the Bristol Pound is morphing into a virtual currency, is banked by their local credit union, can be applied to energy bills, and is becoming more flexible. In this way, it is becoming more like earlier incarnations of local currency such as the Wara, which was used in Bavaria and Austria during the early 1930s.
The Wara was a form of Stamp Scrip, invented by Silvio Gesell, a German businessman, specifically meant to increase the velocity of money. Once a month, stamps worth a percentage of the value are affixed to the back of a note to keep it current. This makes it a form of monetary hot potato and discourages hoarding. The most famous examples of how this could restart moribund economies are those that took place between World Wars I and II, in Wörgl, Austria and Schwanenkirchen, Germany. In Wörgl, the mayor instituted it by depositing 40,000 Austrian schillings in a savings bank and issuing notes worth 98% of a schilling. They could theoretically be redeemed, but thrifty townspeople were inclined to keep the extra 2%. Initially it was put into place to finance local works projects, and stamp sales financed a soup kitchen.
Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump, and a bridge. The people also used scrip to replant forests, in anticipation of the future cash flow they would receive from the trees.
In Schwanenkirchen, a coal mine owner in the village of began to pay his workers in a form of Gesell’s scrip called the Wara. After the miners discovered that local merchants would accept it, they raised no objections.
When, after two years of complete stagnation, the workers for the first time brought home their pay envelopes, no one was interested in hoarding a cent of it; all the money went to the stores to pay off debts or for the purchase of necessities. The shopkeepers, too, were happy. Although at first they had felt a little hesitant about Wara, they had no choice, as no one had any other kind of money. The shopkeepers then forced it on the wholesalers, the wholesalers forced it on the manufacturers, who in turn tried to pass it on to those who carried their notes, or they exchanged it at Herr Hebecker’s mine for coal…So Wara kept circulating, a large part of it returning to the coal mine, where it provided work, profits and better conditions for the entire community. Indeed, one could not have recognized Schwanenkirchen a few months after work had resumed at the mine. The village was on a prosperity basis, workers and merchants were free from debts and a new spirit of freedom and life pervaded the town.
Unfortunately the mayor of Wörgl and the coal miner in Schwanenkirchen were a little too successful. Surrounding villages were jumping on board, and visitors from abroad were studying how to apply similar approaches. This was too much of a threat for the German and Austrian Central banks. In 1931, the German government ended use of the Wara by emergency decree, and in 1933, the Austrian government did likewise, first claiming that the idea was crazy, then Communist, and then Fascist. Ironically, their insistence on central control led to a lot of unfortunate “craziness” later on when high unemployment and desperation led the people of these countries to adopt those very philosophies, to no good end.
Obviously, the more the line between magic beans and genuine currency becomes blurred, the more likely the irate Giant of Central Authority is to come swarming down howling for blood, which brings us to the cautionary tale of the Liberty Dollar, and the recently fashionable Bitcoin, neither of which are based on a trusting community, both of which appeal to libertarians and individualists, and only one of which is (or was) backed by anything of intrinsic value.
Sound Currency versus Magic Beans
The Liberty Dollar was the brainchild of Bernard von NotHaus (seriously), more of a countercultural DFH than a libertarian. However, like a lot of very reactionary people, he believed that money should always represent something of genuine value such as precious metals. From 1998 through 2007, silver, gold, and copper coins were issued and notes printed, backed by metals housed in a secure warehouse in Coeur d’Alene, Idaho. Memberships in the scheme could be purchased allowing a discount. Merchant who would accept them were also offered a discount. Regional offices were set up, $60 million dollars worth of Liberty dollars went into circulation, and the FBI began to take notice. Von NotHause defended himself, saying the coins and notes did not have the words “legal tender” anywhere on them and were therefore a form of voluntary barter currency. Since the scrip looked like money, and could be used as money, the DOJ begged to disagree, and was quoted as saying “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country”. Von NotHaus was convicted in 2011 and could face 15 to 20 years in prison, a $250,000 fine and confiscation of £7 million in precious metals. He is still awaiting sentencing in a borrowed mansion in Malibu, and is quoted in the NYT as saying:
The thing that fires me up the most, is this is what happens: When money goes bad, people go crazy. Do you know why? Because they can’t exist without value. Value is intrinsic in man.
So if stable valuation based on physical reality is important, why has the Bitcoin been in the news lately, and why have investors such as the Winklevoss twins gone to the trouble to buy up $11 million worth of them? Bitcoins were launched in 2009 by someone under the nom de guerre of Satoshi Nakamoto, who may or may not actually be a consortium of programmers. Their value not insured by a central bank, based on the value of precious metals, or on the value of labour. Bitcoins are backed up by, well, nothing. They are manufactured out of thin air by a process known as “mining”, which consists of allowing your computer to be used as part of a system to record and document Bitcoin transactions. The mining process becomes more time consuming and less remunerative as time goes on, so early adopters, and those with proportionately larger computing power have had a definite advantage. The only thing that makes them at all attractive as a medium of exchange is that, like gold and limited edition Beanie Babies, only a certain amount will ever exist. In its early history, the Bitcoin carried a whiff of scandal, as the preferred and untraceable medium of exchange on the notorious drug website Silk Road, and as a way for the Iranians to get around the trade embargo leveled against them. Recently, their price spiked, reportedly because panicked Cypriots were trying to exchange them for Euros, but possibly because they had been widely covered in the media. Then they abruptly tanked when their security protocols came into question. Nonetheless, they have drawn attention in a way that more stable B-to-B barter exchanges and local currencies have not.
The US Government considers them a possible threat, purportedly because they could be used to fund drug dealers and terrorists or support unpopular regimes such as Iran and North Korea. Most economists think their volatility limits their usefulness, though Stanford’s Caroline Hoxby wrote: “First part is right: value derives from belief others want to use it for trade. Second part is not obvious: beliefs could stabilize or not.”
While their anonymous nature may have made Bitcoins initially attractive to people who did not want to run money through banks, they have come to appeal to the same contrarian demographic as the Liberty Dollar, simply because they are not a national currency reliant on the integrity of whatever central bank is responsible for them. Unlike barter schemes and community currency, they represent a complete lack of trust. If they have a community of adherents, it consists of fellow skeptics. At this point, people are willing to consider trading for beans in the hope that they will prove to be magic. All of these alternative forms of exchange are Anti-Capitalist in nature because Capitalism is simply not working for ordinary people and businesses dealing in goods and services. If a significant proportion of the population, across the political spectrum, is coming to this conclusion, governments should pay attention. The marketplace is talking.