Growing Economies with Local Currencies

History shows that local currencies can work, and aren’t ravaged by the inflationary trends that affect our current money supply.

| March/April 2013

We fear scarcity, the sense that there is never going to be enough for everyone. The sense of scarcity has driven human competition since the dawn of civilization—for water, for hunting territory, for women, for land. On Spaceship Earth, scarcity is a fact of life. Fossil fuels are increasingly scarce, along with sweet water, rainforests, precious metals and fine jewels. Other things will always be scarce—good pitching arms, original Rembrandts, Cliff Walk properties in Newport, operatic sopranos, true genius. When there are a lot of people who want very scarce things, the value of the scarce resource goes up relative to other resources—this is simple supply and demand economics.

Money is also scarce. There is never enough of it for everything people need. We all are so accustomed to money being scarce that it’s hard to imagine a world where there is enough money for everyone. One of the important lessons all students learn in Economics 101 is that when money supply increases, inflation increases, so there’s a good reason for money to be scarce—we don’t want its value compromised by too much inflation.

But what if inflation is only the result of too much of a particular kind of money—this bank-debt money we accept without question? There are other units of exchange that aren’t ravaged by inflationary trends. Is inflation the result of a lot of money in circulation, or is the type of money in circulation responsible for inflation? In fact, to retain its value, bank-debt money needs to be scarce.

Local Currencies in History

At least twice in history, a form of money has existed where there was no incentive to accumulate it as a store of value because it didn’t earn positive interest in bank accounts. Instead, it had the equivalent of a negative interest rate (known as demurrage)—the longer you held on to it, the more you would have to pay—similar to a parking fee on money. This gave people who were paid in this currency a strong incentive to spend it or to invest it—preferably in things that would continue to be valuable over the long term. The velocity of this type of money, in other words, was quite high. Since people didn’t hoard it, it also was not scarce—there is strong evidence that its existence fostered long periods of prosperity in Dynastic Egypt and during the Central Middle Ages (10th-13th centuries) in Europe.

In the first example, from Egypt, people would receive shards of pottery with a date on them when they put their grain into the storehouse. The longer the grain was stored, the more the charge was for the guards and waste as the grain spoiled. Called ostraka, these shards circulated alongside the precious metals rings and bars that were used for trade with foreigners. The Greeks, Egypt’s main trading partners at that time, would mock the plain clay Egyptian currency. Yet the Egyptians thought the Greek obsession with metals was strange, “a piece of local vanity, patriotism, or advertisement, with no far-reaching importance,” as Henry Ford noted in his 1922 autobiography My Life and Work. They would accept Greek coins, but only for their metal content. The ancient Egyptians enjoyed an abundant and prosperous life. They lived in a fertile valley, producing grains, meat, wine, and beer in quantities sufficient for all levels of society, and they were well-educated. They invested in quality public works and their irrigation systems were the envy of the world. When they built something to last, they built it to last forever—the pyramids and temples of this ancient culture survive today.

There is evidence that the money they used—this negative interest money made of plain clay shards—was at the root of the good life they enjoyed. The ostraka system, known as the corn standard system, was used for over 2,000 years until the Roman conquest of Egypt around 30 BC. When the Romans replaced the ostraka with their gold and silver, the long period of prosperity ended. From then on, positive interest charges accrued to Rome. Over time, this in turn changed Egypt into the equivalent of a developing country: poverty increased, as did the gap between the rich and the poor.

12/26/2013 1:45:00 AM

3/21/2013 8:15:16 AM

It’s one thing to justify the use of complementary currencies in our present-day world, and for some very good reasons. However, from an historical standpoint, Hallsmith & Lietaer are simply spouting nonsense about demurrage-based local currencies in history. The historical facts are these: the medieval monetary system in Germany (Bracteats) certainly did entail the regular recall of the thin metal coins with a deduction of the nominal. However, this form of regular ad hoc monetary depreciation (I would not use the term “demurrage” here) was not practiced in other European states. Cathedrals were built all over Europe and economic prosperity of some periods during the Central Middle Ages was hardly limited to Germany. Similarly, there is evidence that a demurrage-based payments system based upon corn did function during the Ptolemaic Period in Egypt (332 – 30 BCE). But there is not even a shred of evidence for anything similar in the Egyptian dynastic period. The pyramids were probably built in a centralised and repressive economic system that lacked money. When Hallsmith & Lietaer argue that the Ptolemaic corn exchange system can be projected backwards up to 2000 years or even more, they are simply talking out of their hat. Millions of ostraka were found in the Egyptian desert. These small pottery shards are showing texts (e.g. literary or religious) or notes concerning daily life, most of them without any relation to corn. So the ostraka found and translated have nothing to do with a monetary and payment system at all (based on corn, demurrage or whatever). A few of them were indeed receipts for the delivery of goods, such as wheat. But there is no indication that these receipts were ever used as a (complementary) currency for ordinary life for over 2000 years. A receipt for delivery of goods from person A to person B or for a tax payment is not the same thing as a means of payment. A corn-based payments system at that time would have required the delivery of a receipt as deposit, representing a claim to the wheat warehouse of the ostraka-owner. No legitimate Egyptologist supports the conclusions of Hallsmith & Lietaer. Most of the ostraka found in Deir el Medine, the city of the workers of the graves of the pharaohs, have been translated and the texts are available online through the University of Munich. According to the authors, these poor guys would have been paid with ostraka. Anyone tempted by this thesis can prove it wrong by simply reading the translated texts of these ostraka.

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