Tuesday 7 January 2014

The strange design of money

We have lost too many pioneering green economists lately.  First David Fleming and then Richard Douthwaite, and now Margrit Kennedy, who died just before New Year.

Back in the mid-1980s, when I first got interested in the future of money, there was Tom Greco to read about local currencies, Michael Linton to read about for his pioneering currencies in Canada - but if you wanted a critique of the way money worked, then really there was just Margrit, and her book Interest and Inflation-Free Money.

I wrote about her work in my reader The Money Changers, and like so many others among the 'new economists' who emerged from the arid 1980s, she didn't start as an economist.  She was trained as an architect and came to the design of money via the design for communities.  It is peculiar, thinking back to that period, how little questioning there was about the basics of economics - certainly the basic design of money itself.

It was Margrit Kennedy who pointed out the mathematical flaw if all money is created with interest attached.  A penny invested at average rates of interest at the time of Christ would now be worth nearly 9,000 balls of gold, each equal to the weight of the earth.

Now, three decades later, I suppose the answer is that - for whatever reason - wealth doesn't build up quite like that.  Yet, Margrit was right that it tends to.  We know that Antwerp remained a banking centre three centuries after Antwerp ceased to be a major business centre. The rich tend to get richer, and the inexorable mathematics of interest goes some way to explaining it.

“The economic necessity and the mathematical impossibility create a contradiction ...which has led to innumerable feuds, wars and revolutions in the past,” she wrote.

That’s the danger of charging interest. Since most money in circulation is created via loans from banks, then nearly all money – except the notes and coins in our pockets – carries this burden because it has to be paid back some day, plus interest. Nature isn’t like that: it doesn’t grow nearly so fast. “The assumption is that growth is good and more is better,” said the green economist Paul Ekins in Wealth Beyond Measure. “It’s as if economists have never heard of cancer.”

More about this in my book Money Matters.

Three decades on, at least two things have changed.  The first is that only three per cent of money is created interest free, in the form of notes and coins.  When I was born, it was about 30 per cent.

The other things that has changed is that these issues, although not exactly mainstream, are at least familiar.  Groups like Positive Money have made this a respectable debate.  You are no longer dismissed as a lunatic fringe, even if you remain fringe, for asking about the implications of the way that money is created - mostly in the form of mortgages.

And if anyone is now asking if there might be a better way, that is partly at least thanks to the pioneering work of Margrit Kennedy. 

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