The statue of Noel 'Crab' Nethersole stands outside the Bank of Jamaica, downtown Kingston.
Robert Buddan, Contributor
IT IS fairly commonplace now to say that globalisation has reduced the power of the state to manage national economies. Financial liberalisation of the world economy makes it difficult to manage national currencies.
Financial players have more autonomy to affect exchange rates. They do so by speculation on currency values. Like many currency markets, the Jamaican market can easily become a speculator's market.
Speculation makes national currencies lose their meaning in relation to the real economy. For example, at the time of writing, the Jamaican dollar had lost $15 against the US dollar since January yet the Jamaican economy grew by 3.4 per cent and 3.8 per cent in the previous quarter. National currencies are measured by speculation, that is, confidence in the dollar, not by real production. This is one reason why globalisation has caused financial crises and increasing poverty for many while the money marketers become richer.
MONEY AND ASSETS
The truth is that the amount of money in circulation in a country is never fully backed by the assets of that country. The value of money in circulation at any time depends more on the confidence people have in it. This confidence can rise and fall rapidly. It depends less on the real economy and its stock of food, energy and other resources.
Only a small amount of money (notes and coins) issued by central banks is ever backed by foreign exchange reserves. The value of money (confidence value) is as much provided by productive capacity and available resources as by strength of military and calculation of stock brokers and international money markets. As financial globalisation increases (money moves more speedily in and out of the country), central banks are increasingly unable to affect the value of the currency.
Currency speculation and derivatives trading are taking an increasingly dangerous role in determining the value of a national currency. The volume of currency that is exchanged globally is many times greater than the GDP of all the world's economies. One economist estimates that the annual GDP of the U.S. is turned over in the market every few days. Only a small part is related to real trade or investment. The rest is based on speculation in stock and currency markets, hedge funds and so on.
This is a virtual reversal of what was happening 20 years ago. This means that monetary stability depends more and more on speculative markets than what is actually being traded. Governments and central banks' intervention can only give signals at best. The funds they have for intervention are only a fraction of the total trading volume.
THE PROBLEM WITH MONEY
Part of the problem is that money is used for many different and often contradictory purposes. Its essential functions (medium of exchange; standard of value of the real economy) are contradicted by lesser functions (store value, deferred payment, tool of empire and speculation).
Another part of the problem is that money is anti-social. It does not primarily serve human needs. It gravitates to where profits are highest not where human needs are greatest. It is scarce for people who need it and plentiful among those who speculate on it. Democratic demands force governments to rectify scarcity through indebtedness. They become perpetual borrowers. They can only avoid default if growth at least matches debt. But since 1950, the growth of debt worldwide has been running at two per cent faster than economic growth. World debt is greater than world growth and currency speculation thrives on debt.
ECONOMIC DUALISM
Since money gravitates towards greater profits and away from greater need and since those with the greatest needs are more numerous than those with satisfied needs (but unsatisfied greed), a dualism arises. The 'greatest needs' part of the society fights itself over scarce money in a struggle to survive and the 'greatest greed' part of the society speculates with its abundance of money. There is a vicious cycle. The speculators take advantage by betting that the value of money will depreciate. In doing so, they buy up the stronger currency making it scarcer. To overcome scarcity, Government has to borrow more. Then the people with the greatest needs have to pay more taxes later to pay back the debt caused by the people with the greatest greed.
A SOLUTION
In a dual economy, one solution is to create a dual currency system. In this system there is a national currency and community (or parallel) currencies. The popular model for such a system is the Local Exchange Trading System (LETS) created in 1982 but earlier schemes go back much further. There are some 2,000 LETS schemes worldwide. Countries of North America, Europe and the developing world have used this system.
In this system, a community currency is issued by a local authority to be used within that community only, in a specified quantity only, without an interest-bearing function. Without the interest-bearing function it is not attractive to speculators and those who store money for profit. Without its free national mobility, it cannot leave the community and create scarcity. It does not act like conventional money. It remains in a community as a medium of exchange and as a value for goods and services against the real economy of the community. It complements schemes of community economic development and micro-credit funding.
COMMUNITY ECONOMICS
Local currencies mobilise the human and material resources in communities where conventional money is scarce. They do not leave the community and so have a multiplier effect within them. They create community markets. They induce import-community substitution. They increase community self-reliance and decrease dependency on high-interest commercial loans. Currency circulation is stable and might actually increase during national recessions.
Local currencies do not replace national currencies and so communities do not lose the advantages of national currencies such as greater economies of scale. Local currencies do not create inflation because they do not substitute trade but create new trade from idle resources. As businesses increase trade, more taxes are payable.
DEMOCRATIC ECONOMICS
The management of community currency can be done from the grassroots, giving it more democratic legitimacy. Credit unions and micro-credit institutions can take the initiative. Government can lend technical advice and use its influence among aid institutions to support the venture.
MPs who want to see their communities improve could join or start the initiative. They could take the initiative to Parliament to make laws that legitimise the local currencies. For instance, in the American case, the IRS had said there was no prohibition against local currencies as long as they were made to look different from the conventional currency, had a minimum value and were taxable.
The currency system could be people-managed. In one example of its use, the issuing institution was an association holding regular meetings to decide how much currency to issue and which community projects were to receive the local currency. A board of directors elected by the members was responsible for printing and issuing the currency.
NEW ECONOMICS
Economic science has not changed much although the reality of economics has changed radically since Adam Smith's time. In our time, community development, globalisation, currency speculation, anti-inflationary measures, the loss of currency value, the new principles of ecological economics, and the vast volume of 'dirty money' are among new conditions that suggest that we approach development in a new way. A new economics is needed to support development from below or at least development below. Very importantly, community currencies would substitute for 'dirty money' and the corruption of economies.
The main premise is that national single currencies are asked to fulfil too many contradictory functions and those functions can be uncoupled into a dual currency system to serve conventional economics on the one hand and community development on the other.
My own amateur economic ideas on a double-dollar currency system for Jamaica led me to research this subject further. I found a comprehensive report on the application of the principles by Stephen DeMeulenaere. The idea even has the pedigree of no less than Karl Polyani, Austrian economic historian, who recommended it (though it was older than him) in 1944. The idea is to localise money currency and build a network of community currencies. This would return money management to society through interdependent social institutions. Money would become the democratic property of civil society rather than the commodity property of capitalist society.
As long as money is managed by the rich and powerful, it will serve no one else. But a community currency system would create money for people who need it, with real economic resources to back it and which would have no speculative value. This seems a sensible way to manage the dollar.
Robert Buddan lectures in the Department of Government, UWI, Mona. E-mail: rbuddan @uwimona.edu.jm.
