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Rethinking Money as a Force for Equity
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There is more money in existence today than there has ever been in the history of money.
For most of us, it certainly doesn’t feel that way, with millions of people behind on rent, more than $1.5 trillion in U.S. student loan debt outstanding, and by some estimates as much as to descendants of enslaved Black people in the United States.
Where would $12 trillion even come from? It’s a fair question. But as it happens, in just one month—April 2020 to be exact—the , on top of the $4 trillion already floating around the economy.
Where did all those new dollars go? For one thing, a flood of cheap credit fueled a homebuying spree, . The stock market had a record year in 2021, boosting fortunes for the Bezos-Buffett-Gates-Zuckerberg class, whose net worth is primarily in stocks. And, as The New York Times wrote in June 2021, “Even in a gilded age for executive pay, .â€
Redistributing wealth or income isn’t a new idea, but what if redistribution wasn’t necessary at all?
Last year’s bonanza of money creation was a combination of the Federal Reserve buying up a variety of assets (such as municipal bonds and other securities) and Congress spending unprecedented amounts of money into existence, all in response to the COVID-19 pandemic precipitating a temporary shutdown of the economy. All that money floating around somewhere has added urgency to calls for new wealth taxes. , supporters say, could allow for government to pay for the housing, the education, or the health care that is everyone’s right. That revenue could also help pay for investments in climate change mitigation or resiliency. And now there is more wealth to tax than ever before.
But that huge increase in wealth clearly wasn’t distributed in a way that met the needs of most nonwealthy people. And the relative ease of creating money puts even more urgency on the question of why we can’t ensure everyone has enough.
Redistributing wealth or income isn’t a new idea, but what if redistribution wasn’t necessary at all? What if the system that created money did it in a way that was more fair or more responsive to everyone up front?
Commerce Without Money
For Thomas Greco, the rest of us lost the money game from the very start, or close to the start, when elected officials decided there would be only one form of money, and that access to it would be mostly controlled by a relatively small group of powerful institutions: banks.
Greco says he first realized this in the late 1970s, when he was a professor at Rochester Institute of Technology, teaching business, economics, finance, and statistics. At the time, the business and economics worlds were consumed by an obsession with money and monetary systems because of the “,†a period of accelerating inflation rates from 1965-1982. ; some blamed the Federal Reserve for mismanaging the money supply, while others blamed high government spending tied to the Vietnam War, or repeated oil shocks and food shocks that rippled across the globe.
Greco came to view the Federal Reserve and the banking industry as effectively a cartel that unjustly and unnecessarily charges interest for the right to access money in the form of credit.
“That’s the fundamental flaw in the system, having a centralized banking cartel that is able to control money as credit,†Greco says.
About 97% of the dollars circulating in the U.S. economy today are created in the form of . Banks get permission to issue money as debt from governments, who charter those banks and back the money that they issue. Most of that money isn’t even printed, it’s simply recorded as entries in bank ledgers.
But it does say “Federal Reserve Note†on paper bills, and underneath that it says “The United States of America,†even though there is a very good chance it was a major bank like JPMorgan Chase or Wells Fargo that “created†the money in the first place, in the form of a loan to you, your employer, or to somebody who paid your employer who eventually paid you.
We want moneyless exchange to go viral.
Greco is hardly alone in his opinion that the banks have never been very good at deciding who should get access to money in the form of credit, and therefore access to most of the money that exists. Racial justice and fair housing advocates continue to fight against de facto redlining, the continued discrimination in bank lending against Black, Latino, and other communities of color, which was once reinforced by federal policy that began shortly after the Great Depression. Environmental justice advocates continue to call for banks to divest from fossil fuels, given the continued harm they cause to the planet.
Some who share goals around racial justice or meaningfully responding to climate change believe in new ways of creating money, or in reigniting the political debate around how society creates money. What Greco envisions is breaking up the effective monopoly that the banking system has on credit.
As Greco realized, it’s already common for businesses to issue credit to each other. When a grocer or other retailer orders from wholesale suppliers, the goods get delivered and the supplier sends the retailer an invoice that requires payment in 30, 60 or 90 days. The suppliers are effectively providing short-term, interest-free loans to vendors for the length of the invoice.
“There’s no reason why we can’t extend that business-to-business process on a multilateral exchange, like barter exchanges, bringing together a few hundred or a few thousand businesses to participate in this credit clearing process,†says Greco.
Greco envisions a network of regional systems in which businesses buy and sell services to and from each other, they invoice each other, and regional systems act as a clearinghouse for invoices—he calls it a network of “mutual credit clearing mechanisms†or “commercial trade exchanges.†At the end of each day, each mechanism tallies up members’ invoices to and from each other—called “reconciling†in financial terms—so that at the end of every day, instead of a business paying the invoices it owes and taking payment for invoices it has issued, the system compares each businesses’ total amount owed versus issued, and each corresponding account rises or falls in value based on the daily difference.
For example, if a business issues 1,000 credits in invoices for the day, and it owes 800 credits on invoices for the day, then that day it adds 200 credits to its account. The next day it might issue 800 and owe 1,000, so 200 credits get deducted from its account. The key is that the business keeps producing goods or services to keep adding value into the system, allowing it to invoice others, which allows it to cover for the invoices it owes.
“What I foresee is commercial trade exchanges being cooperatively owned, organized as cooperative businesses or mutual companies where the members have the ultimate ownership and control,†Greco says.
While no system quite like this has ever existed in the U.S., something similar does in at least one place, and it helped inspire Greco’s vision—it’s known today as the WIR Bank system in Switzerland. It emerged during the Great Depression, when there was hardly any money floating around most economies in the world. Today the system has around , in hospitality, construction, manufacturing, retail, and professional services. But they’re concentrated in Switzerland.
“A problem with cooperatives or mutual companies is when they get too big, they’re harder for members to control, and boards start to operate for their own benefit as opposed to members,†he adds. “It happens with credit unions.â€
Greco envisions a highly evolved, regional, “multilateral barter system,†that doesn’t depend on a buyer and seller each needing to have something the other wants to exchange to conduct a transaction. That’s because the multitude of credit exchanges with other parties would allow for everyone’s accounts to reconcile at the end of the day without having to actually exchange money.
“We want moneyless exchange to go viral,†Greco says.
A Real Use For Cryptocurrency
From another perspective, maybe the problem isn’t just that there is only one acceptable form of money, but that there should be many more forms of money.
For around two decades, Ferananda Ibarra has been one of the leading thinkers and strategists around holochain—a less energy-intensive, mobile-device friendly alternative to blockchain, the software that undergirds cryptocurrencies like Bitcoin and Ethereum.
There are lots of technical ways of describing the differences, but one to keep in mind is this: with “traditional†blockchain, there must exist a network of servers capable of storing, searching, and updating a copy of the database of every transaction ever made within the network—which becomes a . With holochain, each user keeps a record of only their own transactions, which they own and nobody else can duplicate.
“Anything you create with blockchain you can create with holochain, except [holochain is] truly distributed,†Ibarra says, meaning that there is no centralized database of all transactions that must be stored and continually updated, sucking up wasteful energy and also creating a hidden privilege for those who have access to the upfront capital to acquire enough computing capacity to host blockchain networks.
Holochain software provides a way to build the kinds of currencies and exchange mechanisms that Ibarra sees as essential to moving beyond today’s flawed and severely limited currencies.
Markets are very good at producing, but very bad at choosing what to produce and why to produce it.
Today’s currency or money systems are poorly designed, in Ibarra’s view. They’re not able to account properly for the true costs and true benefits to people or to the planet, and, because of that, people and businesses aren’t able to make properly informed decisions about how to spend their time or effort.
“In our work at the MetaCurrency Project, currency is also defined as ‘current-see’—to be able to make a flow visible,†Ibarra says. “In nature, if I observe the flow, I observe the interdependence, I observe the relationship, I observe what flows create life and what flows destroy life.â€
In Ibarra’s ideal future, many currencies would get distributed not based on bank underwriting standards, but rather on .
“Anything you can have a unit of account for, you can have a currency for,†Ibarra says.
The idea is not so far off. around the country already receive credits for installing or financing the installation of solar panel. What if those credits instead simply accrued as some form of cryptocurrency that could be exchanged via holochain for something other than a discount on an electric bill? Ibarra says the is already working toward this model for cryptocurrency creation and exchange.
Or in a different scenario, what if a renowned artist’s reputation—verified via holochain records—could gain them access to housing, food, and drink in a given community that inspires them to create art by and for that community while the artist is there? In effect, the art created, whether for the public or private sphere, would be a means of exchange. And so communities also could be incentivized to produce housing, food, or drink in the same way the artist is incentivized to produce art. Those communities wouldn’t necessarily need to exchange currencies in the traditional sense. And we already talk about reputation as currency, for instance, when major cultural figures endear themselves to a community so deeply that “their money isn’t good†there any longer.
“Economic incentives are not the only incentives,†Ibarra says. “Markets are very good at producing, but very bad at choosing what to produce and why to produce it.â€
A world of many ways to earn and exchange currency is not to be confused with simply replacing the dollar with Bitcoin, however. The idea would be to tie the creation of currency to things that add value to society, though it could be anything from farming to art.
The System Has Never Been Static
On the other hand, creating, recognizing, or exchanging many more kinds of currency, or moneyless exchange, may never leave the realm of think tanks and white papers or fringe experiments on the edges of society. Some goals may be achievable with significant rewiring of a financial system that is still based on the U.S. dollar.
Like many of her law school classmates, Mehrsa Baradaran remembers being told that money and the economy were the exclusive purview of the free market and the private sector. But after law school she went to work on Wall Street, and, ironically, that’s where she learned that nothing could be further from the truth.
During the aftermath of the financial crisis of 2008, the Federal Reserve first started expanding the money supply in ways it never had before—making emergency loans to help save some of the bankrupt financial firms that helped precipitate the crisis, even as others, such as Lehman Brothers, were allowed to fail. Then, as the economy plunged into the Great Recession, the Fed embarked on “quantitative easing,†also known as QE. That program involved the government buying up U.S. Treasury securities and mortgage-backed securities on the open market, which the Fed said would stabilize and rejuvenate the financial sector.
While economists continue to debate its ultimate impact, the combined effect of QE and the Fed’s post-crisis emergency lending programs was to create more dollars than anyone previously thought would ever be reasonable to create. Over the course of a year, the Fed created more than $1 trillion, an unprecedented amount at the time that nevertheless would be swamped by what the Fed created in 2020 through its pandemic recovery plans.
For Baradaran, who is now a law professor at the University of California, Irvine, the Fed’s actions in 2008 revealed how the banking sector really was always primarily a public sector operation. In her eyes, the problem wasn’t that Fed could create a trillion or more dollars in such a short time whenever it wanted. The problem was that it chose to create those dollars in a way that guaranteed the benefits would accrue almost entirely to the banks and other financial firms that precipitated the crisis in the first place.
If these are just policy decisions—and they are—then we can make different policy decisions with different outcomes and different benefits.
“A lot of us on the [political] left said, ‘Oh, wait a second, if this power exists, why not just use it for the things we want to see as a society?’†Baradaran says. “The Fed or Congress could have chosen instead to [have the Federal Reserve] buy and forgive all these predatory mortgages to homeowners, and it would have had the same effect of creating trillions of dollars out of thin air.â€
Rather than eschewing the money-creating power of banks and the Federal Reserve, or suggesting that some new currencies start to filter in alongside existing currency, Baradaran argues for restoring the role of politics in determining banking policies and regulations—harkening back to the Progressive Era when presidential candidates such as ran on platforms that centered on monetary policy.
“Even going back to Hamilton and Jefferson, monetary policy and banking was central to the constitutional project,†Baradaran says. “It was very much a political decision, not just the realm of technocrats and experts. I think that’s one of the moves of the neoliberal era, to make [monetary policy] just a matter of data and expertise as opposed to democracy.â€
In her 2015 book, How the Other Half Banks, Baradaran details much of the long political back-and-forth around money and banking in the U.S. And last year for the Washington University Law Review, she authored “,†updating and refocusing her argument on the Federal Reserve. The journal article argues for restructuring emergency relief programs or even creating ongoing programs for the Federal Reserve to lend directly to businesses or other entities, instead of only lending to banks as it has throughout most of its history. During the 2020 coronavirus pandemic, the Fed for the first time offered to make loans to local governments. The terms weren’t very friendly, however, so only four such loans were issued: two of them to the and two to the , New York City’s public transit agency.
But above all, Baradaran emphasizes that redirecting the money-creation power of the Fed or the banks it regulates would require reigniting the political battle over money.
“If these are just policy decisions—and they are—then we can make different policy decisions with different outcomes and different benefits, and different beneficiaries who are not only the banks,†Baradaran says.
Some, like Greco or Ibarra, don’t put any stock in state-backed money creation as a path forward. Baradaran maintains that history has shown state-backed money is the only kind of money that has ever had any lasting and substantial reach and impact. The time has come instead, she says, to reclaim democratic power over the people’s money. In her vision, the creation of money should more closely if not very closely approximate the wishes of voters—from racial justice to environmental justice.
“Money is a state project,†Baradaran says. “I’m not saying whether it should be, but it is. Theoretically we could have a money system that is not tied into state policy, but we’ve never in the history of the world ever had that. The origins of money have always been a state creation.â€
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