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Friday, July 21, 2006

Locally Sustainable Currencies?

Here's what happens when you write about things you don't understand. When the writer says "I admit that thinking clearly about money can be difficult," that should have been a signal to pick another topic:

A new kind of money, by Julian Darley, Alternet: The decline in the availability of cheap energy is likely to be accompanied by an equally ominous possibility of world financial meltdown. That we are facing both of these threats now is not an accident: energy and financial stability are intimately linked. I believe the solutions for dealing with these twinned threats are equally linked. To build an environmentally sustainable, monetarily stable world, we need to create an economy in which locally produced energy provides the backing for local currencies. ...

After years of oil-industry financed obfuscation, there is a broad scientific consensus that our profligate use of fossil fuels is producing global warming. And despite similar oil industry denials, there is a growing consensus that we are rapidly approaching Peak Oil, after which world oil output will go into permanent decline... After global Peak Oil, oil will still be available, but at ever increasing prices. ...

And here's the link to money: we have made the same limitless assumption about money, that the world monetary supply could grow without end as well. In both cases, we assumed that the growth in energy-use and in money supply was an unmitigated good.

There have been a growing number of voices warning us that both of these assumptions were wrong, that the notion of unchecked growth was leading us toward environmental and financial meltdowns. And while we have been making some progress in understanding the energy problem, there is virtually no mention of the role of money.

I admit that thinking clearly about money can be difficult. ... But though we may take money for granted, it is neither simple nor solid nor reliable -- far from it. Money is a complex and fragile construction, and as history has shown over and over again, money can become worthless almost overnight. In the long run, money has proven very difficult to manage -- it's a tricky and strange invention. ...

Today's global monetary system is based on currencies controlled by national banks, and the global trading system is mainly based on one of those currencies: the US dollar. This system leaves communities and individuals vulnerable to the fluctuations of the global market. The level of trade in a locale is heavily dependent on money that flows in from external sources. Any disruption to that flow can restrict trading activities locally. This potential shortage leads people to try and obtain more and more money, a quest which is ultimately unsustainable.

Money can be "backed" by all kinds of physical substances, like precious metals. Or money can be "fiat" ("let it be made") like most national currencies today, backed by nothing except faith and confidence -- or sometimes just confidence tricks.

Unlike a backed currency, a fiat currency can at least in theory quite literally expand for ever. There is no direct link to material reality to impose limits, only economic theory, which is devoted to eternal growth and doesn't like to deal with limits -- or reality -- at all. An unlimited currency along with unlimited growth and (so far) unlimited energy has allowed us to do almost unlimited damage to the planet. However, as the availability of cheap, abundant energy declines, energy will soon become the dominant partner in the relationship with money...

As energy becomes increasingly expensive and scarce, the colossal size and scale of our infrastructure, which has characterized the rise of industrialism, will selectively crumble and become unserviceable. It is only the energy subsidy from hitherto ever-increasing use of cheap fossil fuels that has allowed our current grandiosity. If this argument is correct, national currency reform will become an oxymoron. It will become apparent that local currencies must be created, currencies based on the resources of the locale -- be they abundant or austere.

Communities can further insulate themselves by de-monetizing as many goods and services as possible and try to produce as much of their vital needs as locally as possible, especially food (from local farms and processors) and renewable energy. Demonetizing means taking a product or service out of the market so that it does not need a monetary value. Hence the need either to stop using a product or to produce it yourself.

When you take a potato from your garden, if you are fortunate enough to have one, you don't pay yourself a dollar for the privilege -- you just clean it, cook it, and eat it. Demonetizing can also be done via barter, and this is in fact quite common in business, including in the industrialized world. But demonetizing flies in the face of globalization and the Industrial Revolution.

Communities that create such local or regional currencies will have a much better chance both of riding out the coming energy decline and of being buffered from any monetary or economic collapse that may happen for whatever reason. The sooner such systems are created, the more ready that region will be to withstand shocks and to avoid the terrible unemployment which severe monetary instability invariably brings.

Backing money with local renewable energy would cause the material economy to be constrained by the amount of energy available from the sun -- just like all other living things, which have been around far longer than we have. This limitation would undoubtedly mean that some places would be more suitable for human habitation than others. But since nature is now starting to teach us this lesson anyway, it would surely be a much better idea to plan for constraint than to wait for the energy and climate avalanches to hit us broadside, especially as we can now hear increasingly ominous economic and environmental rumbling.

I don't even know where to start. Even if this made sense, how would you back a currency with locally renewable energy? Would you be able to go to the local government and exchange money for wheat straw? Sunbeams in a jar? Batteries made with solar and river power? Firewood? There's a recipe for environmental disaster - make firewood money and see how fast the forests fall as people chop down trees to pay their bills. Who would price the conversion from money to energy and how can we ensure they would never devalue? If we make money wheat straw, what stops every farmer in the area from growing their own money rather than food and other goods, that is, who would control the supply to stabilize the currencies value? Variations in the supply of wheat straw would affect the currencies local value year to year.

As much as the writer wishes it to be otherwise, local currencies won't solve the problem he's worried about. The demonetization discussed is really about turning back the clock on specialization and trade, not about money itself which facilitates, but does not cause this to happen. Without a national currency, he believes, communities could not specialize to the same degree and would have to produce goods locally. The fall in production that results would be good for the environment.

But all that's needed is to price, say, New York dollars in terms of Los Angeles dollars, a trivial exercise if they are backed by the same thing (if one currency gives one bale of wheat straw per dollar, the other two, then the currencies will trade two for one), and it's not so hard even if they aren't backed by the same thing. While it may not be as efficient due to the problem of converting between currencies, and it would be difficult to spend your small town dollars in another state that has never heard of your town or currency, large volume traders would solve this quickly and innovations like electronic money with predetermined conversions between regions would make your local debit card work outside your local area (like using a debit or credit card in another country now - conversion is automatic).

He says "Backing money with local renewable energy would cause the material economy to be constrained by the amount of energy available from the sun." When money was backed by gold, the material economy was in no way restricted to the value of gold available in the world. Money can, after all, be respent again and again in a given time period so this does not constrain the economy as he believes. If one gold coin, or wheat straw coin, is spent at a store, paid out in wages, and spent again in a given time period, GDP will be twice the value of the gold or wheat straw backing it.

I want to solve these problems too, but I don't find proposals like this that can be  dismissed so easily by those opposed to tackling global warming and other issues helpful in getting us there.

    Posted by on Friday, July 21, 2006 at 09:00 AM in Economics, Environment, Monetary Policy | Permalink  TrackBack (0)  Comments (10)


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