Australian Dollar Is Not Fit For Purpose
Deposition by Shann Turnbull for the Australian Senate. October 2014.
"To provide a framework of analysis for your inquiry I invite your committee to consider if official forms of digital money that represent around 97% of all money in Australia are fit for purpose? In this way the committee can establish criteria for evaluating existing1 digital currencies and a proposal for adopting a long term stable, democratic and sustainable form of digital money and unit of value referred to in this submission as $Z. This submission identifies ten reasons why Australian money is not fit for purpose and why $Z is fit for purpose offering twenty advantages.
There are two reasons for the existence of money:
1. To facilitate trade and investment without the cost and inconvenience of bartering.
2. Establishing a reference unit of value to allow markets to price resources for their efficient allocation.
Even though the Internet has greatly reduced the cost of bartering without money, Bank of England (BoE) economists concluded that the use of money still provides costs savings (Capie, Tsomocos, & Wood 2003). The matching of savers and investors through Internet crowd funding also requires money. However, central banks may not be needed as anticipated by King (1999: 47). This was confirmed last month by the BoE after 3:30 minutes in a YouTube presentation located at https://www.youtube.com/watch?v=CxDKE_gQX_M.
Textbooks typically describe money as performing three functions being:
a. Medium of exchange,
b. Unit of account,
c. Store of value
However, it is not logical for interest earning money to be both a medium of exchange and a store of value.
A currency that can increase its value by earning interest will create a bias for investment in money that is now just a social construct rather than in assets that can maintain and increase prosperity. Australian notes and coins, like Bitcoins, do not earn interest. But this is insufficient to create a level investment playing field between money and life sustaining commodities or productive investments that deteriorate with use and wear out.
To overcome this problem Gesell (1916) proposed that money should also depreciate like the goods it was suppose to serve. But for practical reasons supporters of Gesell issued currency notes that required stamps to be attached to them at specified times. This acted like a negative interest rate to obtain the support from Fisher (1933), Keynes (1936: 234), Suhr (1989) and Buiter (2009) et al. “Stamp Scrip” currency was privately introduced in many different forms in Europe and the US during the Great Depression (Fisher 1933). So successful were the private initiatives requiring a 2% usage fee per week that this provided the basis for the Bankhead-Pettengill Bill introduced into the US Congress on February 17, 1933 to get the economy out of the depression. The bill would have provided the US government with one trillion dollars of stamp scrip. However, President Roosevelt closed all the banks two weeks later and announced the New Deal. This replaced the Bill that would have replaced the Federal Reserve with the US Post Office who would have sold the stamps.
However, without a Great Depression, privately issued stamp scrip has again emerged since 2003 in Germany to prove its acceptance today (Gelleri 2009, Migchels, 2012). Mobile phone technology could make this type of money ubiquitous, as more citizens in the world own mobile phones than those who possess bank accounts.
The compelling political incentives for governments to introduce negative interest rate money arises from its ability to:
1. Reduce wealth inequality2;
2. Reduce the size and cost of the financial system;
3. Be given away to finance welfare, infrastructure and small businesses, as the usage fee raises sufficient revenues to cancel the money created.
4. Eliminates the need for either banks or the government to increase debt, or taxation to reduce debt. Like Bitcoin, negative interest rate money does not need to be created by creating debt. It is created out of nothing. It may be referred to as “helicopter” money.
The third reason may seem impossible. But history proves it has been practical, even with only private initiatives. The value of the usage fee for some of privately issued notes used in the 1930’s was 2% per week or 104% over a year. The notes issued could only be redeemed if 52 stamps valued at 2% of the note were pasted on the back of each note.
The issuer of the notes also sold the stamps and so could redeem the notes after a year for full value and still make a 4% gross margin from giving away the promissory notes. Merchants promoted the use of negative interest rate money even if they had to pay the weekly fee, as it was less than accumulated credit charges on every transaction during the week (Turnbull, 2009a).
A local government body or a chamber of commerce typically issued the notes. The British Chambers of Commerce with Coops UK are members of the Sustainable Money Working Group (SMWG) formed in 2011 to replicate the practice of ensuring liquidity for their members3. The formation of the SMWG was motivated by concerns that Small and Medium sized Enterprises (SMEs) may again be denied funds if another financial crisis arises.
It is for this reason that the Australian government should immediately trial cost carrying mobile money as a supplementary currency to “remake the economy” (Turnbull 2009a), provide “financial lifeboats” (Turnbull 2011a), and finance infrastructure projects without the need to raise debt or taxes.
The second purpose of a currency is to provide a reference unit of value for market economies to allocate real resources. However, no reference unit of value now exists since President Nixon took the US off the gold standard in August 1971. Today no official currency of any nation can be defined in terms of any one or more specific goods or services.
The resulting monetary problems in the 1980’s led The Economist (1990b) to run a cover story on the need to tether currencies with a supporting article on “A brief history of funny money” (The Economist 1990a). It led The Economist in 1986 to establish “The Big Mac index” to compare the relative value of currencies (The Economist 2014b). However, The Economist (1991) also took up the proposal by Turnbull (1977) and used Kilowatt-hours of electricity to compare currencies.
It makes no sense to expect that economic values defined by a currency whose value cannot be defined in terms of any thing real to be able to efficaciously allocate real resources.
This means that no official currencies are fit for the purpose for efficient and effective resource allocation. Indeed they are counter-productive by providing an incentive for burning carbon rather than using renewable sources of energy (Turnbull 2010b). As noted above it also motivated The Economist to introduce their Big Mac index.
Altogether there are ten reasons why the Australian dollar is not fit for purpose as listed below as identified in Turnbull (2009b,c; 2011b; 2014). The reasons also contribute to the illogical structure of the financial system with its twelve “mysteries” described in Turnbull (2009b,c). The “mysteries” may explain why the Governor of the BoE stated: “Of all the many ways of organising banking, the worst is the one we have today” (King 2010: 18).
To mitigate all ten undesirable attributes, and protect the financial system from failure and so economic distress, it is recommended that the government immediately establish a basis for the issue of a supplementary cost carrying digital currency tethered, but not backed, to a local sustainable service of nature like renewable energy (Turnbull 2011a). Sustainable Energy Dollars (SEDs) are referred to as $Z in Turnbull (2012a; 2013a, 2014).
At present there is no standard of economic value to relate prices and market forces to the nature. The traditional approach is to define a basket of commodities. But no basket can be meaningful for all places all the time. Different commodities are required in different regions with the mix changing over time and with technological change. So the mix and nature of any basket will change over time as well as introducing additional uncertainties and imponderables on how the basket may be governed. A case in point is the LIBOR scandal.
While there appears to be no really satisfactory basis to define economic value, a most appealing compromise is the value of electricity generated from benign renewable energy sources in each bioregion. The consumption of energy is essential to sustain modern society and it correlates well with the quality of life and prosperity as illustrated by Gogerty & Zitoli, (2012). Unlike gold and other commodities renewable energy is available in some form in all areas of the globe.
In some locations electricity is generated from renewable sources and distributed to all members of producer/consumer cooperative with a single price for all members. Price determination is not only governed on a democratic basis by millions of customers but on a highly transparent basis (Turnbull 2012b). Once the investment in generating equipment has been made the operating costs are minimal over its operating life of 25 years or so. The cost of future production would be relatively stable and averaged over a rich mix of generators to further the stability of production costs independently of consumption or changes in production. This is because a tether need not be affected by changes in production or consumption.
Senators are invited to consider what better option they may have in defining a unit of value 25 years into the future to endow their children? Might Senators have more faith in Euros, English pounds, or US dollars? Central bankers, speculators, hedge funds, inflationary or deflationary forces and contagious economic crises would subject each option to change and/or manipulation. These uncertainties could be far greater than those associated with $Z.
Without the introduction of an ecologically grounded $Z the fall back position in a financial crisis could become Bitcoins. Bitcoins are not fit for purpose for six and half of the items marked with an asterisk. The role of Bitcoins for the other three and half roles is indeterminate.
The ten reasons why Australian currency is not fit for purpose arise because:
1. *It does not provide a stable unit of value as changes arise from domestic policy settings, foreign financial crises, speculators, hedge funds, currency manipulators, including central bankers involved in currency wars.
2. *It does not provide long-term predictable unit of value to provide a basis for a long-term stable economy.
3. *Its value cannot be controlled by Australians to further the interest of Australia and as a result the currency has become overvalued to reduce international competitiveness in manufacturing, tourism, and the export of educational and other services (Heath 2012a,b, Gilder 2014).
4. It creates a bias for not investing in “procreative” assets that increase the standard of living by making “nature yield her resources more abundantly” (Moulton 1934: 11/12).
5. It creates a bias for not investing in intellectual procreative property as all intellectual property has limited life - unlike official money.
6. It creates a bias for not investing in productive assets that maintain our standard of living (Suhr 1989).
7. *It does not carry a usage cost/negative interest rate as supported by Buiter (2009), Fisher (1936), Gesell (1916), Keynes (1936: 234), Suhr (1989) to create a level investment playing field between the currency and productive assets.
8. *It has a value not defined by any one or more real goods and services, so it is disconnected from the real economy for efficiently allocating real goods and services by market forces (The Economist 1990a, The Economist 1991).
9. It is not created by producers of wealth* but by banks and the government who consume wealth (Turnbull 2012b).
10. *It is a national monopoly that distorts resource allocation between different regions of the nation with diverse economic endowments to sustain modern human society in their bioregions (Mundell 1961; Turnbull 2010b; The Economist 1991).
A table comparing 13 operating characteristics fiat currencies, gold backed and $Z is provided in Turnbull (2011b: Table 1). Set out on the next page is a Table from (Turnbull 2014) that compares existing official Australian monopoly “funny money” with $Z created by bio-regional cooperative authorities consistent with the proposals of (Turnbull 2012b).
The adoption of bioregional tethers would create a global unit of account ($Z) but one whose value would be determined by the local endowment of benign sustainable energy. As a consequence market forces would be created to distribute the global population on a sustainable basis. It would also enhance the integrity of crypto currencies by minimizing the time required to validate transactions on a decentralized basis. Financial crises could no longer arise on a global basis. Like cash, notes and Bitcoins, $Z would not create debt. But unlike cash, notes and Bitcoins, $Z would be self-liquidating.
During the last three centuries the financial system has proved not to be self-regulating or even subject to reliable regulation (Turnbull 2011a). The cover story of The Economist (2014a: 7, 47-52) presented “A History of Finance in Five Crises & how the next one could be prevented”. The secretary-general of the Basel Committee stated that another crisis "will be impossible to avoid" (Drummond 2011). Many commentators expect a new crisis with Martin Wolf from the Financial Times anticipating it will be “Monstrous”.
However, like most other leading commentators on the financial crisis, neither Wolf nor Harvard Professor Kenneth Rognoff (2014), who reviewed Wolf latest book, considered any of the ten reasons identified above why official money is not fit for purpose. Until policy advisers switch their focus from the structure and management of banks to the structure and management of what is used as money there would appear to be little basis for either avoiding another crisis or establishing a more equitable, democratic and sustainable society (Turnbull 2013d).
Notwithstanding the international warnings of another crisis the terms of reference of the current Australian Financial Inquiry has neglected raising the question if the nature of Australian currency is fit for purpose? The need for the Financial Inquiry terms of reference to include this question was presented in Turnbull (2013b) and discussed in a seminar organized by the Sustainable Money Working Group at the University of NSW last December (Turnbull 2013c).
In conclusion, the committee is encouraged to recommend to the government and the parliament that:
A mobile phone application is created by the Government to allow Treasury to trial the issue of cost carrying digital money directly to the mobile phones of voters to provide them and the economy with a financial lifeboat in the event of another financial crisis. Also to provide the means for collecting taxes.
The government develops or encourages bioregional arrangements to tether value of cost carrying digital currency on a transparent and democratic basis to the generation of electricity from benign sources of renewable energy."