Responsibility to provide a stable medium of exchange

Phase 2 version (draft 2 amendments in bold):

Government fiscal accounting shall be based on an 'official unit of account' whose value may not be either a) arbitrary or b) controlled, wholly or in part, directly or indirectly, by private interests or by agencies outside Britain. Minutes or hours of passive labour shall be regarded as an acceptable official unit of account. This provision shall not constrain the continued use of an established non-qualifying unit of account during a reasonable transition period.

Government shall not issue any transferable debt unless a) its full value be limited in time to [no later than the end of the following fiscal period] and b) it loses all value at a steady rate [through the subsequent fiscal period].

Government may issue transferable debt instruments ('official currency') in payment for goods or services and shall accept it in settlement of taxes. The quantity of  official currency in circulation at any time shall not exceed anticipated total tax revenues for [the next eighteen months]. Parliament shall legislate to require that official currency be regarded as legal tender for private debts denominated in the official unit of account.

The time at which official currency starts and finishes losing value shall be variable according to a formula deemed by [an appropriate independent body] to encourage a velocity of circulation consistent with public demand for a stable medium of exchange.

[text below added in draft 2]

Government may issue non-transferable debt ('government securities') up to a limit recognised by [the appropriate independent body] as the maximum that the current generation might reasonably be deemed willing to repay. Such government securities shall only be issued to regulated financial institutions; shall be purchasable only in the official currency at a price which shall vary according to a formula deemed by [the appropriate independent body] to be consistent with maintaining a stable medium of exchange; and shall be redeemable only in the official currency.

Holders of government securities shall be regulated to ensure that any loans they make are consistent with maintaining a stable medium of exchange and with maintaining their own solvency. Government shall not guarantee any private debt which is not fully backed by government securities.


Phase 1 version:

Regulating the money supply has been regarded as a core function of government for many centuries but it is something which has developed haphazardly and, as we know from the experiences of recent years, it has never been done very satisfactorily. I believe some aspects of this should be entrenched in the constitution – but the exact nature of the responsibility needs to be analysed with some care.

My argument here is that the responsibility for the money supply is entwined with the state's powers of taxation and that the way it works currently is a major cause of both inequality and instability. I apologise in advance for the length and complexity of this post but it is, unfortunately, an intrinsically complex subject.

When the state assumes a responsibility, directly or indirectly, it has an obligation to do so in a way which does not favour one section of society over another. With our current monetary system, that obligation is violated because the form in which the medium of exchange is created leads to a flow of wealth from the poor to the rich. The reason for this is that the medium of exchange can effectively be taken out of circulation by those who have a surplus; as a result, the rich are able to charge others for the opportunity to use it.

To understand this, it's necessary to look briefly at a feature of the monetary system which we are all familiar with and take for granted but which is in fact fundamentally at odds with the natural economy: the payment of interest on savings. This is an essentially monetary phenomenon. In the natural world, if we wish to put something aside for the future there is a 'carrying cost' involved which effectively reduces its value to some extent. With money, however, not only does it not lose value, we actually expect its value to increase.

The reason it does increase – the reason people receive interest on money they put aside for the future – rests on the fact that money performs different functions which are not wholly compatible with each other. It acts as a medium of exchange, as a store of wealth and as an abstract standard of value. Those first two functions are in tension with each other – it performs its function as medium of exchange by circulating, but it performs its function as store of wealth by being taken out of circulation. That tension is behind much of the instability of the current monetary and banking system.

The quantity of medium of exchange cannot simply be increased (because that compromises money's function as a standard of value), so a mechanism is needed to ensure that money stays in circulation. That mechanism is the payment of interest, and it constitutes a flow of wealth from those who don't have much towards those who have a surplus. That flow of wealth has no natural cause; it rests entirely on the fact that the medium of exchange retains its (nominal) value indefinitely, and it would not happen in a society which separates those functions of money.

The fact that money in its basic form can be physically taken out of circulation means that the money supply is partly under private control. The authorities don't have any direct means of adjusting the ratio between what is circulating and what is stored, and the indirect methods they do have are too crude to maintain a stable economy. They either rely on the very phenomenon – interest – which causes a flow of wealth from the poor to the rich, or they do it by increasing the money supply, causing inflation. In other words, instability is an inherent feature of the form of money we currently use.

Whether or not government should have an explicit obligation to actively provide a medium of exchange is debatable. My view is that what medium of exchange is used in private transactions is essentially a private arrangement which the law should oversee but not prescribe. What the state uses in the transactions it engages in itself, however, is not a private matter – and, in practice, what the state uses as medium of exchange will probably be what everybody else uses as well. The value of any currency rests on there being someone who is willing to accept it and the state can be regarded as a guarantor of whatever currency it accepts in payment of taxes.

In other words, the value of our existing money is underpinned by the fact that the state not only accepts it in payment of taxes but actually demands it. This locks us, as individuals and as a society, into an unfair and unstable financial system.

I've pointed out in other contributions – and – that the requirement that taxes be paid in money rather than labour reinforces the subservience of the poor to the rich. In this post I've argued that it also underpins a financial system which is inherently unstable. The reforms I'm proposing are aimed at remedying both aspects of this problem, but I'm concentrating here on the monetary reform which they would make possible.

The fact that financial interest, and its role in the 'rentier' economy, result from the susceptibility of money to being hoarded has been recognised for a long time, and proposals have been put forward for alternative currencies to get round the problem – most notably the system proposed by Silvio Gesell at the end of the nineteenth century, which required money to be stamped each month, for a small fee, in order for it to keep its value.

For the most part, however, this problem has been ignored by mainstream economists and bankers, though a number of prominent economists have considered it. In the 1930s, for example, Keynes referred to Gesell as a 'neglected prophet', and a few economists have also raised the issue in recent years, for example, Willem Buiter (currently chief economist at Citigroup). I believe most economists ignore it, however, because they consider the necessary solutions impractical for essentially political reasons.

There were in fact some communities which tried Gesell's stamped money during the Depression in the 1930s in Austria and the United States. In both places, I believe, the currencies were successful in stimulating local economies but were banned because of fears they would undermine national currencies. (This was at a time when memories of hyper-inflation were still raw, and when floating currencies – currencies not linked to some commodity like gold which is fixed in quantity – were a comparatively recent innovation.)

The problem in getting away from the ill-effects of this feature of the monetary system is that it requires a fundamental change to the nature of money; basically, cash would have to lose its value when it ceased to circulate. As well as this circulation-dependent or time-limited currency, there would also have to be a separate, intangible form of money for savings. (I say more about this below.)

While a time-limited medium of exchange is technically feasible (and these days could be done more elegantly and unobtrusively than in Gesell's system), such a major change to something which is so central to our lives is simply too much for most people to contemplate, especially when the need for it is not obvious – particularly since there are clear dangers in doing it carelessly. The benefits of the change are primarily societal, while its costs are individual; every individual who holds money naturally desires it to maintain its value, but if it does, society as a whole loses control of its medium of exchange.

The problem, therefore, is how to bring about a change which is both necessary and apparently inconceivable. The key to it, to my mind, is to create an environment in which a new time-limited currency can emerge as a competitor to the existing currency. In a contribution in the Local Government section I propose two reforms (designed to address other problems) which should enable this to happen:

  • Individuals should be able to choose between paying their taxes in money to higher-tier authorities or paying them, in labour (or money), to their lowest-tier authority.
  • Local authorities should be empowered to issue time-limited transferable tax receipts (up to a limit consistent with the taxes that individuals have opted to pay to them) in payment for goods and services; and required to accept such tax receipts, when tendered, as a substitute for labour owed them.

Those reforms would essentially allow local authorities limited powers to create local currencies, associated with their revenue-raising power. However,  a proliferation of local currencies does have drawbacks sice there are undoubtedly huge advantages to having a single currency.

Or, more precisely, there are huge advantages to having a single standard of value; there are major advantages to having a single medium of exchange (along with some disadvantages); but there are major disadvantages to having a common store of wealth.

The advantages come from the possibilities for increasing the overall volume of transactions and easier access to forms of wealth which aren't available locally. The disadvantages come from the fact that money going out of a community can no longer stimulate trade within it, so there has to be some means of ensuring that outward flows are balanced by inward flows, which is very difficult with conventional, non-time-limited money.

With a time-limited medium of exchange, however, it would become much easier. I said above that, as well as the time-limited medium of exchange, there would also have to be a separate, intangible form of money for savings. This would be convertible on demand into the medium of exchange – but only at an exchange rate which would vary. The authorities would therefore have a variety of levers for managing the monetary system: the latency period of the medium of exchange (the time it keeps its full value for) and the speed at which it loses its value could both be varied in response to changing economic circumstances; exchange rates between the medium-of-exchange money and the intangible store-of-wealth money would also be variable; and those exchange rates could be different in different areas – making it relatively easy to attract investment funds into areas which were losing liquidity.

In this scenario, creation of the medium of exchange would be shared between local communities and central government, with local authorities deciding how much to issue, and central authorities regulating how soon it would start to lose value and also setting exchange rates. Creation of the store-of-wealth money would be largely controlled at a higher level.

I'm not entirely sure how this should be written into a constitution but the monetary system is so central to the operation of a mature society that I do feel it deserves to be included.

edited on Apr 15, 2015 by Malcolm Ramsay

Christine Farquharson Apr 7, 2015

To start off comments for this phase, here's a summary of the idea and of some of the comments from phase 1. Remember to keep voting for ideas and comments to indicate what you would like to see reflected in the final summaries of the ideas!

- Malcolm Ramsay's idea for the constitution: There should be 'a general requirement that legislation and policy respect the autonomy of future generations.' This includes ensuring that current governments limit borrowing to an amount that they could be deemed willing to repay. It also means creating a financial system with more levers, which are outlined in the original post:

(1) There is a fundamental tension between money's role as a medium of exchange (making purchases easy) and as a store of value (allowing people to save their assets). This is because money must circulate to be a medium of exchange, but it must be out of circulation to be a store of value. In order to resolve this, the financial system pays interest on deposits, but this has the effect of transferring resources from the poor to the rich. The government/central bank has no direct control over the ratio of money circulating to money held.

(2) When two private individuals transact, the law should not require them to use a specific currency. However, the government is the guarantor of the currency in which it accepts taxes. In practice, the government's currency is likely to become everyone else's currency, too.

(3) Some of these tensions can be addressed by introducing a time-limited currency (as occurred in some places in Austria, the US, and Canada during the Depression). In order to keep its value, the currency would have to be stamped or otherwise validated periodically for a fee. 

(4) To make this possible, there need to be conditions that allow local governments to set up a parallel currency to compete with other currencies. People should be allowed to choose whether pay their taxes to lower-tier governments in labour or money. Governments should be allowed to pay for goods and services with time-limited transferable tax receipts and would be required to accept these as payment.

(5) There would need to be a separate currency for savings that would keep its value over time. This would be purchasable with the time-limited currency but the exchange rate would vary, giving authorities another tool for monetary policy.

(6) In this scenario, the creation of a local medium of exchange would be shared between local authorities and central government. Local authorities would choose how much to issue, while central authorities would control how quickly it loses value and the exchange rate with the stable savings currency.

It would be really interesting to hear what some of the other members of the community think about this idea. Right now there are more people voting for/against than have commented, so it would be great to hear what motivated your vote and how you think the idea can be changed or made more concise.

Malcolm Ramsay Apr 7, 2015

Thank you for the excellent summary, Christine. Having seen my linked proposals in the Devolution and Local Government sections voted down, I'd been thinking this was too complex and potentially controversial to be worth pursuing any further. I must confess, I had been wondering whether it would be worth my while coming to the convention (having joined the project primarily for the debate). Now you've made me think again!

I'm focusing initially on a couple of (relatively simple) proposals I made in the Judiciary section and will come back to this when I've posted refined versions of them. What is the protocol for refining ideas? Do we edit the original and post a comment inviting new comments, or should we just put forward a refined version in the comments?

Christine Farquharson Apr 7, 2015

I'm glad to see that there's some debate going on for this idea! 

Great question - during the refining phase, you as the original author of this idea should be able to edit the idea itself. Everyone else can confirm, withdraw, or change their vote on the idea, which - along with the comments - should give you a sense of whether the community likes the direction the proposal is moving in.

In this case, since there's a substantial amount of background material that is important to your argument, the best thing might be to try to draft a concise statement of what the constitution should say at the top of your post and leave the rest of the text underneath for the benefit of people commenting. Thanks for your participation!

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Tom Austin Apr 7, 2015

Yes, 'Malcolm'.

May I throw two rocks into the tranquil pond.

1) Should Local Government come to grow from the ground-up, could not the local-currency idea form part of that?

2) The separation of the Banking System. Might it help all round, if we had local banks -  the German model, the 'Bank of Dave' idea?

Malcolm Ramsay Apr 7, 2015

Thanks for the rocks, Tom, but I'm going to let them sink for now (hoping they won't disturb the monster lying at the bottom of this 'tranquil pond'). I'd certainly like to see a ground-up government but I think that's too radical for the current crowd. The most I'm hoping for is that the project will inject some new ideas into mainstream debate.

Malcolm Ramsay Apr 9, 2015

I wish I'd raised this earlier but it stayed firmly at the back of my mind in phase one. A tax-related medium of exchange can't easily be divorced from the unit of account the government uses, so the first provision I'm proposing is a constraint on that:

Government fiscal accounting shall not be based on any unit of account whose value is either a) arbitrary or b) controlled, wholly or in part, directly or indirectly, by private interests or by agencies outside Britain. Minutes or hours of passive labour shall be regarded as an acceptable unit of account for denominating tax liabilities and government spending. This provision shall not constrain the continued use of an established non-qualifying unit of account during a reasonable transition period.

Does anyone see any objection to this?

Andrew Bulovsky Apr 12, 2015

Thank you for the language you've proposal, Malcolm. Is there anything else you'd like to add?

Do others have ideas for this?

Malcolm Ramsay Apr 13, 2015

I've just posted draft clauses covering unit of account and transferable debt instruments and expect to post the rest, covering non-transferable debt, tomorrow.

Andrew Bulovsky Apr 13, 2015

Looking forward to it!

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Malcolm Ramsay Apr 15, 2015

Thinking about this stuff is like wading through deep mud but I have just posted the additional clauses on non-transferable debt along with some minor amendments to what I'd posted before.

I'd be interested to know what people think and any objections anyone has. The proposal has been voted down a couple of times since phase 1 ended but nobody's given any indication why.

I'm not sure what votes mean at this stage. I've seen different things from different moderators in the other sections; some saying that (except where there are competing proposals) it's only the wording of the proposal that's being voted on now, others suggesting that anything with negative votes won't go through to the convention. What's the position here?

Tom Austin Apr 16, 2015

Malcolm, might it be possible to separate your wonderful notion of 'payment by non-monetary means' from the wider economics panaceas?

The Institute for new Economic Thinking has groups working on all (most?) aspects of Economics...

Project 5, perhaps?

Malcolm Ramsay Apr 16, 2015

Thanks for the link, Tom. I'll look at it more closely once I'm less wrapped up in this project.

My 'Voting with your taxes' proposal didn't get through but 'Obligation to pay taxes' is still live –

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