Month: February 2015

Monbiot’s misguided monetary reforms

Joseph Schumpeter observed that “a sharply-defined type of social reform monomaniac sees money, its reform or abolition, as a social panacea”. These words came to mind while reading George Monbiot’s suggestion that alternative monetary arrangements hold the potential to transform Greece and release it from its current state of purgatory. Monbiot attributes ultimate responsibility for the unfolding Greek tragedy not to the Northern European states that have forced self-defeating austerity upon Greece, but to the “private banks” that have used European state institutions as their “intermediaries”.

While true that policy has been characterised by bailouts for the banks and austerity for the public it is plainly wrong to suggest that private banks are the ultimate puppet-masters driving European policy. Nonetheless, Monbiot suggests that the usurious grip of the bankers can be broken by introducing alternative monetary arrangements.

He highlights debates around the recently resurrected Chicago Plan which, in the 1930s, proposed that banks be forced to back all customer deposits with government-issued money. In so doing, banks would be deprived of their power to create money “out of thin air” and control of the money supply would be returned to its rightful owner – the state. Monbiot wrongly attributes the proposal to Martin Wolf of the Financial Times who is a recent convert to the plan following the lobbying of the campaign group Positive Money.

Monbiot goes on to claim that introduction of the plan would generate billions of pounds in government revenues. This mistakenly implies that the capability of private banks to create money somehow rules out the possibility of governments financing spending directly by paying for it with newly printed money. In fact, nothing about the current system prevents central banks from directly financing government spending. The obstacles that exist are legal barriers, erected to prevent government abuse of the power. Legal barriers are not irrevocable. Adair Turner has recently argued that such constraints should be relaxed in the UK, allowing a portion of the post-crisis quantitative easing to become permanent. What this amounts to is free money for the government produced at the printing press. Nothing about such public money printing requires that private banks be stripped of the capacity to also produce money.

Monbiot asserts that bank money creation somehow lies behind problems of environmental degradation. This is a dangerously confused point – albeit one which is made with increasing regularity. This view appears to rely on the false assertion that lending at interest by banks imposes an inescapable need for exponential growth in order to service the resulting debts.

Monbiot then presents his proposal for the salvation of Greece. Local currencies should be issued in combination with the “thrilling, transformative system that almost saved Europe from fascism … called stamp scrip”. In support of local currencies Monbiot uses the example of the Bristol Pound. His support of stamp scrip is based on the experience of towns in Austria and Germany in the aftermath of the hyperinflation of the 1920s.

Stamp scrip works by requiring currency to be stamped monthly at a price equal to a proportion of the face value of the note. This causes the value of the currency to degrade with time. Much the same effect could be engineered by imposing negative interest rates on bank deposits – or by raising inflation to a high enough level.

The point of such an approach is to prevent people from hoarding cash – to force them to spend their incomes. The problem in Greece is not that people are receiving income they do not spend. It is that their incomes have shrunk so much that they can no longer afford basic necessities. The poorest in Greece are accumulating debts, not hoarding. While there is a problem of hoarding, this excess saving is taking place in Germany, not Greece.

What about local currencies? Greece is currently locked in a showdown with the Troika which has two possible outcomes – either significant compromises are made by one or both sides or Greece leaves the euro. While the reinstated drachma might count as a new “local currency” it is not, I suspect, what Monbiot has in mind.

So what does he have in mind? The example he uses, the Bristol Pound, is trusted – and therefore stable in value – because it is 100% backed by sterling deposits. For every Bristol Pound in circulation a Bank of England pound is held on deposit at the Bristol Credit Union – a similar arrangement allows Scottish banks to issues their own notes. It is only the explicit backing of the British state which gives the Bristol Pound its value.

Such parallel currencies are feasible precisely because they do not threaten to undermine state-issued national currency: Bristol Council cannot fund itself by issuing Bristol Pounds. The same would not be true of Greece. The introduction of any parallel currency which wasn’t fully backed by euro balances with the ECB would amount to de facto suspension of the euro. This would almost certainly be a one-way ticket: if the currency was a success, why go back to the euro? If a failure, what are the chances of Greece being invited back?

This type of scrip currency arrangement is proposed by Flassbeck and Lapavitsas in their blueprint for Greek euro exit – they advocate the temporary introduction of state IOUs to augment the euros that would remain within the country if Greek exit become a reality. But such issuance would require both capital controls to prevent outflow of the remaining euros and a credible state guarantee that such IOUs would be redeemed. The proposal is intended only as a short-run stopgap while a new currency is prepared. Any attempt to impose such a system permanently without writing off debts to official creditors – it is these official creditors, rather than private banks, that the bailout aims to protect – would rapidly lead to a foreign exchange crisis as euros were used to service debts denominated in what would be essentially a foreign currency.

Monbiot is wrong about this being a showdown between the public and the banks. The current situation in Europe is a confrontation between states – and one in which there exists a massive imbalance of power between the protagonists. Whichever side prevails, the state – either the Greek state or the German state – will remain the dominant force in shaping society for the foreseeable future. No amount of monetary tinkering will change this.

[Edited: A shorter version appeared as a letter in the Guardian]

Jo Michell