In Rethinking Money (Berrett-Koehler Publishers, 2013), authors Bernard Lietaer and Jacqui Dunne explore the origins of our current monetary system — built on bank debt and scarcity — revealing the surprising and sometimes shocking ways its unconscious limitations give rise to so many serious problems. But there is hope. The authors present stories of ordinary people and their communities using new money, working in cooperation with national currencies, to strengthen local economies, create work and so much more. Find out how Ireland initiated a mutual credit system to their advantage during a financial crises in the 1960s to 1970s in this excerpt from chapter 6, “Strategies for Banking.”
Of all the many ways of organizing banking, the worst is the one we have today. Change is, I believe, inevitable. The question is only whether we can think our way through to a better outcome before the next generation is damaged by a future and bigger crisis. — Sir Mervyn King, Governor of the Bank of England
Ordinary people all over the world have been rethinking money in an effort to resolve their pressing cash problems. Rethinking money leads us to reconsider the entire banking sector as the source of money and loans. This has generated some interesting and provocative innovations, some by clear intent, others by happenstance.
Dissatisfaction with the banking sector is at an all-time high. The Facebook movement Move Your Money materialized when Bank of America announced plans to increase its bank fees. Within 90 days, 5.6 million U.S. adults changed banks. “Of those switchers, 610,000 U.S. adults (or 11 percent of the 5.6 million) cited Bank Transfer Day as their reason and actually moved their accounts from a large to a small institution.”
Community Bankers of America said a poll of its 5,000 members found that nearly 60 percent of community banks are gaining customers who “are sick and tired” of the big financial institutions.
In functioning systems, nature leans more to resilience than efficiency. Ironically, whenever a banking crisis unfolds, governments invariably help the larger banks absorb the smaller ones, believing that the efficiency of the system is thereby increased. Instead, when a bank has proven to be “too big to fail,” why not consider the option of breaking it up into smaller units that compete with each other? This has been done in the United States before; for instance, the Bell Telephone monopoly was broken into competing “Baby Bells.” But more often, what tends to happen is that banks that are too big to fail are made into still bigger ones, until they become “too big to bail.”
In the midst of today’s widespread discontent and lack of access to credit, a number of successful solutions using cooperative currencies have popped up in various parts of the world. Perhaps one of the more entertaining and imaginative solutions spontaneously emerged out of dire necessity.
Ireland, during the decade between 1966 and 1976, experienced three separate bank strikes that caused the banks to completely shut down for a total of 12 months, virtually bringing the country to a standstill. It was impossible to cash a check or carry out any banking transaction while the banks’ doors were closed. Consequently, the population of Ireland could not access well over 80 percent of its money supply.
What arose from this seeming disaster was the largest spontaneous nationwide mutual credit system—with the local pubs acting as the center of commerce. Michael Linton commented, “The Irish are an imaginative bunch, and they soon realized if the banks were closed then nothing prohibits writing a check and using this check like cash. So they started writing checks that soon circulated, valued at their face-value, as if they were official money. A check would make the rounds between several people within a circuit facilitating business and people getting on with their daily lives.”
When official bank-issued checks were used up, individuals went to their local stationery shop or news agent for supplies and created their own checks. “Usually a guy would write out a set of checks, written in denominations of fives, tens, twenties, and possibly fifties, because these would be easier to negotiate. The idea caught on quickly. Now, a person from Cork wouldn’t necessarily take a Dublin check and vice versa. It was important in these transactions to know the people with whom you were dealing,” added Linton.
Money Backed by the Full Faith and Credit of Guinness
Employers soon became keenly aware that their employees needed access to cash to cover the critical needs of their daily lives. Some of the large employers, Guinness among others, issued paychecks in various smaller denominations, rather than one check for the entire salary. That way, they could be used as a medium of exchange, just like cash. Linton added, “Employers, particularly the brewers, started giving paychecks to their employees in denominated checks, and those checks became fully accepted at every drinking establishment in Ireland.”
Additionally, full paychecks for the entire amount of one’s wages, especially from trusted employers, could be readily used as an instrument of payment for goods and services. This is reminiscent of the story where the tourist comes to the inn and puts a $100 bill on the counter, and while he’s investigating the accommodations, several townspeople circulate the $100 to pay off their debts. But in this case, the pub owner or local merchant could validate the creditworthiness of the check.
Economics Professor Antoin E. Murphy of Trinity College Dublin reports, “The nature of the economy greatly facilitated the emergence of this new system. The Republic of Ireland had a population of only three million inhabitants. The small size of the population meant that there was a high degree of personal contact amongst members of the community. Where information was lacking at the personal level, a substitute collective information existed in the form of retail shops numbering around 12,000 and that well- known Irish institution, the public house, 11,000 of which exist in the Republic [which yielded] a pub to population ratio of 1:190.”
The close-knit nature of Irish life, even in the cities, meant that shop owners and publicans knew their regular clientele very well. As Murphy put it, “One does not, after all, serve drink to someone for years without discovering something of his liquid resources.”
He continued, “The Irish created an unregulated, totally anarchistic community currency matrix. They were operating on the basis of the Irish pound at the time. But there was nobody in charge and people took the checks they liked and didn’t take the checks they didn’t like. So the whole world just revolved around that simple fact. And, it worked! As soon as the banks opened again, you’re back to fear and deprivation and scarcity. But until that point it had been a wonderful time. High velocity, local circulation, and the pubs as the center of commerce.”
To sum up, the Irish developed a system that enabled them to get on with their lives during a very challenging time, with great success.
According to Murphy’s research, uncleared checks totaled £5 billion when the banks opened again for business. “The direct use of means-of-payment money (bank deposits) was removed from the transaction process. In the absence of this money, exchange activity remained relatively unaffected because the public was prepared to use undated trade credit as the instrument of exchange.”
Another variation of the mutual credit system was used to address a different banking crisis in another decade in another country. In this case, the banks threatened to suspend lines of credit, the lifelines of many businesses. The solution that arose is still in existence today. It is actually a major contributor to that country’s ongoing monetary stability and robustness. It is perhaps surprising to learn that the country where this happened is Switzerland, one of the world’s most economically conservative and stable countries.
This excerpt has been reprinted with permission from Rethinking Money: How New Currencies Turn Scarcity Into Prosperity, published by Berrett-Koehler Publishers, 2013.