Monetary Systems for an Equitable Bioeconomy

* Article: Renner, A., Daly, H. & Mayumi, K. The dual nature of money: why monetary systems matter for equitable bioeconomy. Environ Econ Policy Stud 23, 749–760 (2021). doi

URL = https://link.springer.com/article/10.1007/s10018-021-00309-7

Abstract

"Money can be understood from an individual perspective as an abstract form of wealth. From a communal perspective, however, money is better regarded as a debt, a biophysical liability, a lien on future real income of the community. Proper recognition of this dual nature raises concerns over modern, aggressive practices of money creation. It provokes a general reassessment of current institutional agreements surrounding money. In this contribution, said agreements are shown to endow money with an unnatural power to preserve its function despite structural decay. The origin of money interest derives from such institutionally given, unnatural power, where it should be noted that interest itself leads to a strong temptation among entities with money issuance rights to issue more and more. Ultimately, considered together, the dual nature of money and the biophysical origin of money interest provoke the need for a societal reappraisal of which entities should properly be given the right to create money, and which are functioning as “legal counterfeiters”. If a transition towards a more sustainable, more equitable bioeconomy is to be realized one day, discussion over who those entities are and what their rightful role is must be reopened.

Contents

"The manuscript is organized as follows.

The section “The dual nature of money and its implications for sustainability” introduces the core rationale. Namely, it presents the dual nature of money. Though money is regarded as a form of wealth for individuals, money is a source of biophysical debt for the community to which those individuals belong.

The section “Money creation and the origin of money interest: two potential causes of rapidly increasing biophysical debt” discusses two potential causes of increasing biophysical debt:

• (1) the desire of all economic entities with the right to issue money to take advantage of said right, and

• (2) the privilege, given to money owners, to be able to expect positive interest on their money stock.

If we properly recognize the dangers of a disequilibrating increase in money stock insofar as such a thing threatens to disrupt the biophysical base of economic activities, two crucial decisions must then be made:

• (1) the decision over who should be entitled to issue legal tender and thereby receive the benefit of seigniorage, and

• (2) the decision over how to mitigate distributional inequalities, if and when money issuers create them.

The section “Who should be responsible for the issuance of money” addresses those two points, which are closely related to the discussion of who owns newly created money as an asset and who owns it as a debt as well as the discussion of how and when debt is to be repaid at what rate of interest. Finally, the conclusion section comments on the dual nature of money’s characteristic to inform the contemporary discourse on processes of rapid financial globalization."

Excerpts

The Dual Nature of Money

Herman Daly et al. :

"Money can be used to buy goods and services; hence, money is naturally regarded as a form of wealth from an individual perspective. On the other hand, the existence of money implies a community capable of providing goods and services in exchange for money and a corresponding process of economic production, consumption, and disposal running in biophysical deficit. That process is entropic, since useful energy and materials are consumed irrevocably in its course with fewer exhaustible resources remaining after (Georgescu-Roegen 1971). Real capital produced by economic processes, such as basic infrastructure, also unavoidably decays over time at a rate in tune with its size. This decay induces further irrevocable biophysical debt through its implication of the need for maintenance and renewal processes. For all these reasons, an increase in money can be regarded from a communal perspective as an increase in future biophysical liability.

We propose to term this essential aspect of money the dual nature of money. Money can be understood both as a form of wealth from an individual perspective and as a driving force of biophysical debt from a communal perspective. It’s worth stressing that “individual” and “communal” are contextual terms that can only be properly defined in relation to each other. A nation representing a “community” at one level of analysis may be better considered an “individual” at a second level of analysis, such as when considering the interface between a nation and, hypothetically, its economic bloc.

Soddy was perhaps the earliest scholar to properly and clearly grasp the dual nature of money. To wit, Soddy (1933a, p. 222) writes: “National securities and money are both wealth from the standpoint of the individual owner and […] debt from the standpoint of the community.

...

A remarkable peculiarity of money itself derives from the fact that money’s functional component can survive independently of its structural constituent. Such is fundamentally the case for all forms of money, from coinage crossing a checkout counter to savings stored at a bank. Consider the case of currency, which is most intuitive. The structural constituent of banknotes and coins are naturally subject to entropic degradation.Footnote1 Once structural decay does occur, however, the decayed constituent of currency tokens is typically freely replaced thanks to modern legal arrangements. For example, in Sect. 100.5 of the Code of Federal Regulations, United States law stipulates: “Lawfully held mutilated paper currency of the United States […] may be redeemed at face amount if sufficient remnants of any relevant security feature and clearly more than one-half of the original note remains” (NARA 2019). Money interest finds its origin in the “unnatural” perpetuation of the functional component of money, an aspect which is absent in the real goods for which money is exchangeable.

Soddy was perhaps the first to recognize quantitatively money’s inherent explosive nature, driven by the existence of interest. Soddy’s findings, being a basis of the “Macleod–Soddy–Allais” (MSA) relation, show that the present value of all interest payments between any finite point of time and the infinite point of time for a principal of A is equal to A. Money owners are thereby enabled to obtain an additional A units of interest payment over the course of redemption of the principal A. The MSA relation can be regarded as a fundamental factor of instability in modern financial markets, a factor that ultimately pushes the financial market in the direction of asset bubbles—related to the extensive creation of fictitious assets, running insolvency—a condition much more severe than running solvency, and general unsustainability. Naturally, entities entitled to issue money and money substitutes (“general liquidity”) cannot resist the temptation to issue ever more, circumstances allowing. As Soddy (1931, p. 25) put it, paraphrased by one of the present authors (Daly 1980, p. 474), “The ruling passion of the age is to convert wealth into debt in order to derive a permanent future income from it—to convert wealth that perishes into debt that endures, debt that does not rot, costs nothing to maintain, and brings in perennial interest.” Soddy’s point was that such a conversion is an illusion resulting from the dual nature of money and the fallacy of composition. While an individual can live off the interest on the debt that the individual owns, a community as a unitary whole cannot live off the interest on its members’ mutual indebtedness.”

(https://link.springer.com/article/10.1007/s10018-021-00309-7)

The Sovereign Money proposal

A. Renner et al. :

"In establishing a global economy where biophysical resources can hope to be distributed sustainably and equitably, there must, essentially, exist some form of democratic control over new money issuance methods. As discussed cogently by Huber (2017) and Huber and Robertson (2000), for example, ideas of “sovereign money” should be carefully considered as legitimizing alternatives to the modern money system. Sovereign money involves, first, declaring in law that all demand deposits are legal tender and that the current accounts of bank customers be taken off the balance sheets of banks—commercial banks must manage the current accounts of customers separately from their own money. Of course, under a sovereign money paradigm, it would still be possible for commercial banks to make loans by utilizing their own vault money or assets, independent from demand deposit accounts. Second, sovereign money involves the reorganization of central banks or treasuries or the establishment of a completely new organization, such that organization is given the exclusive right to create new money. The idea of the latter aspect is that said newly organized entity puts new money into circulation by spending it through bureaucratic administrative channels. Alternatively, following Huber and Robertson’s (2000) expansion on possible ways of introducing new money into circulation: (1) the newly organized entity puts money into a current account, which it manages for its government, (2) the government spends new money to further public interests, expenditures such as education and the redemption of national bonds or tax-reduction, and (3) the government is enabled to make interest-free loans to local governments for development purposes. The most pressing, fundamental point to emphasize is the need to enhance each citizen’s entitlement, such that the people share both the benefits and the costs of money issuance, an act that ultimately results in communal liability.

Such ideas on money sovereignty are simple enough, yet they appear to improve on the original ideas laid down in Fisher’s (1936) 100% Money in two respects. First, Fisher regarded cash as “actual physical money”, which was supposed to play the traditional role of gold. Under the current situation of incessant, large-scale money creation and annihilation by commercial banks, Fisher’s conceptualization of money seems narrow. Second, through changes in the prime interest rate, the bank reserve system was assumed in Fisher’s work to be an effective tool of controlling the money supply. It is now well known that such changes do not work to regulate the money supply.

Perhaps, the most challenging issue to be resolved before ideas related to “sovereign money” can possibly be realized is how to ascertain the actual money supply’s legitimacy and fairness. Consider how, whenever a niche for expansion of bureaucratic power emerges within a political institution, that niche tends towards a rapid occupation by newly created bureaucratic activities. Hayek (1990), one of the most trenchant supporters of free banking policy, heavily criticized the unnecessary expansion of public expenditure through government money creation. He identified government monopoly as the source of unnecessary inflation. The experience of reconstruction following the Great Tohoku-Kanto Earthquake in Japan illustrates some of the difficulties involved. Among reconstruction efforts, in total, the Board of Audit of Japan identified as inappropriate 326 out of 1401 “reconstruction projects”, totaling ¥1.3 trillion. More than 12% of the reconstruction fund was ultimately spent on projects having nothing to do with great earthquake damages (Mayumi 2020). Such a situation is common following the injection of a large quantity of general liquidity and, in this way, discussion on the distribution of newly created sovereign money can be understood as crucial. How to achieve a subtle balance between the production of goods and services on the one hand and virtual wealth, in Soddy’s sense, on the other, without disrupting the general price, is a moot point. This holds not only for those goods and services that constitute gross domestic product accounts, normally considered by economists such as Hayek, but also for other items such as land-related assets and financial assets."

(https://link.springer.com/article/10.1007/s10018-021-00309-7)

From the conclusion

"Almost 100 years ago, Soddy (1922, p. 30, emphasis added) fully recognized the dual nature of money and the dangers of an excessive expansion of financial sectors in his Cartesian Economics: The Bearing of Physical Science upon State Stewardship:

- You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [(compound interest in opposition to the entropy law)], against the natural law of the spontaneous decrement of wealth [(due to the entropy law)]. […] The significant and distressing fact is that this absurd law, with the concentration of money in the hands of trusts and combines of financiers, now tends to operate more and more fully every day.

This contribution provides a fresh revisit and expansion of those ideas. Our consideration does not address possible international arrangements, which could work to prevent an excessive expansion of the global money supply. Under the present flexible exchange regime, any change in prime interest rate adopted by any major currency induces far-reaching repercussions in the exchange rates of all other major currencies, as well as changes in investment decisions by companies and private financial agents. Furthermore, adjustments in exchange rates inevitably create capital transfers among those looking for global financial investment opportunities. Though nobody realistically knows how to deal with such circumstances, we do at least know that without international cooperation, any national-level decision on a new form of money supply system will quickly meet with ruin. The collapse of the Bretton Woods regime in 1971 is one exemplar. We seem to intuitively understand that too much expansion of general liquidity, translating to excessive levels of debt from the communal perspective, threatens potentially devastating economic consequences. However, these are extremely complicated issues to address. The Jubilee, for example, which in Judeo-Christian tradition was a point in time where all debts were to be automatically canceled, occurring in the “Sabbath of Sabbath years” or in other words after the passing of seven cycles of seven years, stands testament to the fact that excessive debt expansion is something that has troubled humankind for millennia.

At the international scale, it would be important to discuss not only a taming of general liquidity expansion but also a taming of interest differences between nations, which can often be found to provoke irrelevant international financial capital transfers (Mark 1934) and less than desirable situations for individual citizens of countries far away from the center stage of active financial transactions. On that note, in closing and looking towards future discussions, it is worth recalling that Keynes himself ultimately aborted his optimistic monetary reform scheme, discussed in his A Tract on Monetary Reform [Keynes (1923) 2013]. To wit, later in his career, Keynes (1933, p. 758) sympathized with the minimization of “economic entanglement among nations” and advocated to “let goods be homespun whenever it is reasonably and conveniently possible, and, above all, to let finance be primarily national.”

(https://link.springer.com/article/10.1007/s10018-021-00309-7)