Part 2 - 'A Way of Escape'
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Essentially my analysis of the global economic situation can be
encapsulated by the idea of 'too much money, but in the wrong place'.
The uncontrolled creation of credit, coupled with a failure of
distribution of resources to many people and areas of activity where
major benefit would result, has created a situation of inequality
coupled with inflationary pressures. The chosen method of controlling
these inflationary pressures - higher interest rates, artificially
held-down prices of essentials, and the cheapening of labour, has
distorted investment decisions and favoured holders of money over
borrowers. This has increased intra and international inequality yet
further.
A New Monetary System
If money is not a given, and if it is responsible for so much of our
problems, we must examine whether there is not a better way. In theory
money could be removed altogether and replaced by a system of
multilateral barter, taking advantage of modern database and
communication technology, which linked together all ‘buyers and
sellers’. While I have no doubt that such a system should form part of
the solution, it is likely that some form of physical money will be most
convenient for small transactions, and that some form of currency
denomination will be required for stored value to avoid the unnecessary
stockpiling of real goods that could be usefully used. Is there a better
way of distributing money, than our current methods? What is required is
a system which matches money to real production capacity, both in
aggregate and in location. Since the banks contribution to real
production is in reality a small administrative one, it is quite absurd
that they are able to reap such rewards for their ability to create and
then lend money at interest. The banks must revert to their original
role as intermediaries, matching individuals’ desire to store temporary
excess funds with those able to make productive use of those funds. For
this service the banks can quite reasonably charge, but they must
ultimately come to operate on the basis of 100% reserves. Clearly as the
real economy grows there will be room, and possibly the need, for new
money to keep the economy flowing smoothly. Since, as it circulates,
money is ultimately a claim on goods and services produced by the whole
economy, new money must be produced on behalf of the whole economy, by
the government, and by no-one else. How that new money is distributed
must also be decided on behalf of the whole economy. If a general rise
in productivity, then its use to create public services or as a general
distribution may be appropriate, if a particular sector of the economy
is responsible then the issue may be weighted appropriately.
A Better Distribution of Money
That deals with the money glut problem, but doesn’t solve the money
distribution problem which has resulted in the apparent fall of material
and living costs to levels which encourage appalling waste of natural
resources and of human potential. Part of the solution here would be to
bring relative price changes into perspective, by no longer using the
Retail Price Index as the sole measure of the changing value of money.
While it may be an accurate measure of changes in the cost of ‘physical’
living, it fails to reflect changes in the cost of setting up or running
a business, access to the legal and financial systems or the real
benefits of having more money than required for immediate needs. Because
of this, so-called ‘real’ values are a misleading guide to the levels of
resources flowing to universal services such as education, the NHS and
welfare provision. A more complete measure of changing prices, which
truly reflected the relationship between the money supply and real
output, would both guide the appropriate money creation rate, and allow
more transparent resource allocation decisions between the private and
public sectors and between the components of the latter. Local economic
development where needs are unmet and human resources underutilised
could create new value which would justify the input of new money, which
could often usefully be in the form of Local Exchange Trading Schemes
(LETS). To help people make the best use of the new money they now had
access to, such community enterprises as Credit Unions should be
encouraged and empowered.
Business by the people, for the people
Perhaps the most important change in our economy which will correct the
faulty distribution of money, is a fundamental change in the directing
of businesses and financial institutions. I firmly believe that a
business run to achieve aims set by all those involved, whether
investors, employees or customers, will broaden those aims to take into
account the wider community. Such businesses will have patterns of
remuneration that more truly reflect the skills and input of those
involved, while taking more account of sustainability and of social
impacts. They will become more stable and sustainable themselves, by
becoming less reliant on short-term profitability as their reason for
existence and by encouraging greater personal investment when times are
more difficult. Such personal investment of labour and resources, on the
expectation of future return, can help replace the reduction in
available loan capital. An economy consisting of such businesses will be
truly more efficient, by making better long-term use of human and
material resources and by becoming less susceptible to short-term market
vagaries.
Avoiding the Interest Rate Dilemma
You may note that I have made no mention of the direction interest rates
should take! Indeed under such a system as I have described interest
rates should be little above a market valuation of the opportunity costs
of lenders. This would be comprised of modest administration and
development costs for the banks as ‘intermediaries’, and compensation
for the risk of loss and the loss of liquidity from cash. The broader
base of corporate governance has the potential to reduce the costs of
borrowing for projects of particular benefit, such as schools and
hospitals, where the lenders are likely to see personal tangible
benefits. If the money supply is controlled directly by democratic
government to conform to the long-term real growth rate, there would be
no need to alter minimum interest rates centrally. This will create a
more stable economic environment for long-term investment in business
projects of real benefit. Gordon Brown wants ‘no more boom and bust’.
This is the way to achieve it.
Global Co-operation
I am guilty of abstracting temporarily from the global economy. Carrying
out the policies I have described unilaterally, will cause foreign
capital and businesses to depart our shores. It is arguable that such a
price may be worth paying, particularly given the loss in any case of
many inward investment jobs in recent months. But with improved global
financial and economic co-operation it is in any case unnecessary.
Current proposals for global financial reform, go beyond the
self-evident need for greater accountability and transparency in the
international banking system to consider the need for a more proactive
‘lender of last resort’ acting to support countries in danger of
incipient financial collapse in the same way that the Bank of England
provides support to the UK banks if they run low on cash.
Getting back to real prices
But from my description of the root causes of the current crisis, it
should be evident that such a body will have a never-ending task. Indeed
such is the partial insight of the US Republicans who will ensure that
such proposals never come to fruition. And even if they did, the long
term costs of its operations would be further impoverishment of the
people of the countries receiving its loans. No, first we must tackle
the root cause of the developing world’s difficulties, which are
currencies and commodities pushed artificially low by the economic power
of the industrialised nations. This is an exact parallel with our
domestic relationship between the big supermarkets and the farmers.
Various approaches are possible. Indexation to keep import and export
prices in the same relation to each other is one. Ultimately there seems
little sense in not moving toward a single global currency, in effect if
not in name. Despite the illusion of sovereignty given by national
currencies with floating or artificially pegged exchange rates, they
simply exaggerate pre-existing economic power balances, whether this be
in favour of developed over developing countries or George Soros’
‘Quantum Fund’ over a moderate-sized country’s central banks as
demonstrated by the ERM debacle of 1993. An international ‘lender of
last resort’ will be beneficial, but it should be modelled not on the
banks but on Credit Unions, providing cheap loans with a reasonable
expectation of repayment, in return for saving.
The people’s globalisation
Once all countries can make the maximum use of their own material and
human resources for the benefit of their own people and can trade with
other countries, irrespective of size and level of development, on equal
terms a new era of ‘people-friendly’ globalisation will be ushered in.
New levels of co-operation between nations and their peoples can occur
which should reduce global tensions and shift the balance of power in
the developing world away from the ‘kleptocrats’ and towards genuinely
democratic institutions.
But will it fly?
It is easy to point to various aspects of such a plan and say this or
that ‘will never work’, but there is only one global economy, so we will
never know for certain until it is tried. The evidence that the current
system is not working, and has internal inconsistencies which ensure
that it never can, should now be there for all to see. We don’t really
have much to lose, and we have the world to gain. It may be better odds
than investing in a hedge fund’s mathematical formulae!
Diarmid Weir
djgw@febl.abel.co.uk
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