Well, immaterialism is back up again after a long hiatus, and this time we’ll try to be a little more regular! There has been a lot of important events that has happened in the interim, and the fact that we haven’t blogged on it is a failing we have to admit to. Apologies.
I was all set to write a post about Israel’s recent butchery orgy in Gaza, but I think there’s nothing new I can add right now to the debate. Prat (or Prathamesh, as his colleagues like to call him) will be coming out with a post on it soon. Let me just say that Israel’s actions blur the line between war crimes and State terrorism.
So on to something else. The financial crisis has been an event of importance for me simply because it has stimulated in me a huge interest in the field of economics, an interest that I can safely say motivates me to adopt a career in its pursuit. And now, I follow the world in looking at ways and means to tackle the effects of the crisis (Kaushik and I have had mucho debates on this already as regards the auto industry bailouts in the US). But here’s a nice article that really gets one thinking about alternative ways to solve the crisis. It comes from George Monbiot, a man better known for his views on the environmental crisis and a writer for the Guardian.
The idea behind the above article is the concept of alternative local currencies and how crucial their role could be in helping drag an economy out of crisis. Some earlier work in this regard had been done by Silvio Gesell, whose scheme for lifting a depression-hit economy out of the doldrums was outlined by Monbiot as follows:
But the projects that have proved most effective were those inspired by the German economist Silvio Gessell, who became finance minister in Gustav Landauer’s doomed Bavarian republic. He proposed that communities seeking to rescue themselves from economic collapse should issue their own currency. To discourage people from hoarding it, they should impose a fee (called demurrage), which has the same effect as negative interest. The back of each banknote would contain 12 boxes. For the note to remain valid, the owner had to buy a stamp every month and stick it in one of the boxes. It would be withdrawn from circulation after a year. Money of this kind is called stamp scrip: a privately issued currency that becomes less valuable the longer you hold on to it
The adoption of this scheme in an Austrian town in the 1930s was a huge success. The fact that there was a time limit on how long the value inherent in each unit of currency would remain valid stimulated spending:
Because they would soon lose their value, Wörgl’s own schillings circulated much faster than the official money, with the result that each unit of currency generated 12 to 14 times more employment. Scores of other towns sought to copy the scheme, at which point – in 1933 – the central bank stamped it out.
So is this a viable scheme? Please bear with me while I outline my thoughts on this, it involves a little bit of self-indulgent theorizing (which will end up making me seem smarter than I really am!)
Consider a situation wherein an economy is slipping into a depression with an associated deflation. Prices fall and consumers are reluctant to spend their money because they believe that prices will fall further and hence by hanging on to their currency, it will be worth a lot more tomorrow. Businessmen react to this drop in demand by cutting prices further.
In the event of a deflation, it makes sense to hoard money because the value of a unit of currency increases the more prices fall. A rupee goes a longer way the more prices fall. The problem stems from the fact that money is not just “an agreement within a community to use something as a medium of exchange”, it is also an indefinite store of value. Because one knows that money will very rarely fall to zero value (its value approaches zero only in times of hyperinflation, like in Germany in the mid 1920s and present day Zimbabwe), one holds on to money and thus arises an incentive to hoard money during times of deflation, and this reduction in demand further spurs the deflation.
That’s where Gesell’s currency idea helps. By making the value of the currency time-bound, it ensures that there is no incentive to hoard. The store-of-value function of money is rendered useless and it becomes purely a means-of-exchange. When you have a given stock of money that will lose its value at some later date, there is no alternative for you but to spend it all. And what an economy slipping into depression really needs is people spending their money, boosting demand and boosting confidence. The individual virtue of savingarge amounts of one’s income can work out to be a public vice if everyone saves too large a part of their incomes and no-one spends it.
Now if an entire country were to pull itself up out of a crisis, it would mean that every region in it (or at least a sizeable majority) had time-bound currencies. Its not enough if we had several alternative local currencies that were community-owned and not issued by greedy government and bankers; the moment one has a currency which serves a means-of-payment and a store-of-value, one is, in theory, succeptible to the risk of deflation and depression.
(There are seperate issues dealing with local currencies which I will not go into here, partly because too much space has been taken up already and also because I havent read enough on the topic.)
There are other concerns too. Let’s take the model of time-bound currencies further. Assuming that even after such an economy using this currency pulls itself out of this crisis, it continues to use this currency. Now this rash of spending can easily push an economy into inflation and soon hyperinflation. Such a currency would have to be replaced by a more stable currency once the economy recovers.
Moreover, currencies of this sort will tend to localize trade to fixed regions and inter-regional trade might not occur. Consider two regions, each with their own time-bound currency. A trader in region A wishing to do business in region B will put up some of his currency to exchange for region B’s currency. He can receive his cash and immediately purchase what he wishes in Region B and bring it back home. But why would anyone accept currency from Region A unless he wished to purchase something from Region A in a time period before the currency loses its value? The problem is akin to one in a barter economy; I can exchange the knife I made only when someone else is in need of a knife. Modern currency allows one to stagger purchase decisions.
The problem of exchanging these currencies can be solved by having an outside commodity such as gold, which has a certain intrinsic value in itself and retains this value for some time. Thus Trader A (from region A) can exchange his currency for gold, take it to Trader B (from region B), exchange this gold for region B’s currency and then carry out his purchases. Trader B can then take this gold to region A and use it at a later date, since the gold does not lose its inherent value. But the moment one has an outside commodity with an intrinsic value into which these currencies can be converted, a commodity whose value lasts over a long period of time, one is implicitly saying that the currencies themselves are no longer time-bound. Agents can now exchange their currency for gold and hoard it, leading to the same theoretical problems as outlined above. The hoard of the commodity would retain its value for as long as the commodity itself retains its value. The only way to solve the problem of exchange of time-bound currencies introduces the very same problem that led to the introduction of time-bound currencies in the first place.
Moreover, when there is no incentive to save, businesses would never save any of their profits to invest in capital goods and no-one would be able to save enough money to afford durable goods, houses etc.
The central idea that arises then is that a reduced desire to spend can push a depressed economy further into deflation, and an increased willingness to spend by agents can solve the problem. The issue is not so much an alternate currency free from the depradations of Big Bankers and Greedy Government. One does not need an alternate currency to stimulate recovery, one needs a plan wherein the desire to spend amongst consumers and businesses alike is restimulated. Keynesians put much stock in the Government to stimulate this recovery, and it is easy to see why. One needs an entity willing to undertake productive activity without expectations of profit to stimulate a depressed economy.
The exact methods by which a Government can push a deflating economy into an upswing has spawned literature enough to fill libraries. The point itself, that Government is necessary to pull an economy out of recession, is hotly debated within academics as well as within the public sphere. It is quite ironic however, to see private commentators urge the Government to increase spending in the economy whereas the private sphere was against the farmers’ bailout on the grounds that it put pressure on the fiscal deficit.
The reason why I wote so lengthy a piece was because I wished to illustrate an important point; the fallacy in separating the political from the economic. A stable national currency issued by a Central Bank does not necessarily imply that it will be misused by the financial and the political community. The current political system and the passiveness of agents within it have led to a state of affairs where the financial and political community have drawn advantages from it. A political defect has been interpreted as being an economic defect and the solution given therefore is an economic solution. Is this because one thinks that in the domain of theory, fields must not be allowed to intersect and economic problems can only have economic arguments? I don’t know if that’s the case, but my point is that there is nothing wrong in positing political solutions for economic problems. The economic issue of an economy blowing itself into a bubble till it bursts due to the actions of private, disaggregated individuals can be solved by a tough and responible Government held firmly in check by an active, intelligent, conscious citizenry. Of course it is not the only solution, but there is nothing wrong in pure theoretical terms to put this forward as a solution and explanation.
Economics, after all, did have its roots in “Political Economy”.