Sunday, March 21, 2010

Book Review: The End of Money and the Future of Civilization

I got through the first 11 chapters of this book and then put it down for many months, having read all these same concepts before in different forms and thinking the rest of the book would be equally redundant in my overflowing complementary currency library. Months later, I picked up this book again and realized that it contained some important perspectives and lessons on where complementary currencies are headed and lessons from the past that provide good guidance for currency system design best practices. I will get to some of those key points later.

I want to advise the newcomer to currencies of some qualifications. Tom Greco has a pretty specific purpose in mind it seems- capturing a significant portion of the formal economy with more decentralized, sustainable and equitable currency and credit systems. This is not the only purpose alternative currencies are intended to serve, though it is definitely one of the most important goals in my mind. However, there is also the domain of the informal economy, which as its name suggests is less guided by firm regulations and more by social norms, relationships and trust.

In many countries, the informal economy is still a significant portion of the overall economy and supplies many people with most of their basic needs. Our informal economy in the US in my opinion is underdeveloped (or has been diminished over time by the dominance of the formal economy and the centralized monetary system). Community currencies can also serve to organize and develop the informal economy. Community currencies are often marked as failures, but upon questioning the past participants, it is noted that there were many positive outcomes other than qualitatively high levels of trading through the system. In interviews and case studies, it is often noted that community is developed and trades start to take place outside the system. It, to some extent, fulfilled its function (reconnecting community for informal trading) and then dies. Some of course never even fulfill this function, and developing an informal economy in an area with a highly developed formal economy is quite the challenge. Relationships, trust, quality of life all need to be reprioritized in a culture that values profit and efficiency above all else. This book still has some lessons that may apply in this realm, but some caution is advised in applying Greco’s maxims to every kind of alternative means of exchange.

Greco points us in the direction of some the top thinkers in currencies (Greco being one of them of course) towards business to business mutual credit clearing. Too many currency projects have aspired to bring radical cultural change and at the same time convince local business to get involved, though business is often an afterthought in the design process. Greco proposes a business mutual credit clearing first as a foundation which is easy for businesses to understand, operate within, and benefit from without having to make operational and ideological leaps and bounds. He describes mutual credit clearing in easy-to-understand language, as well as its myriad benefits. Without access to low or now interest credit, few small local businesses will be able to get off the ground, weather economic storms, expand their operations, or do things like energy audits and retrofits.

Greco provides a lot of insight into the very high failure rate of currency projects (though not much higher than small business failure rate) that I concur with based on my numerous interviews and readings of currency case studies. Some of the key points to take home from past lessons of currency design problems- currencies often fail to thrive because inadequate reciprocation between members, as well as inadequate scale and scope of operation. These attributes reduce confidence in and value of the currency. If the currency can’t be spent where you need it, then it is useless, less useful even then inflationary national currency.
Inadequate reciprocation arises, according to Greco, from system design flaws and management issues. System design flaws can include “improper basis of issue of credits or currency, inadequate account limits (overissuance of currency in relation to an issuer’s productivity and demand for their goods or services), and lack of a clear agreement between issuers and users of credits or currency.”

He identifies some important management issues that have caused currencies to fail: “lack of accountability and transparency, inadequate management procedures and controls, overreliance upon volunteer administrators, and failure to respond to internal or external threats.”
Inadequate scale and scope arise from “failure to achieve critical size of the participant base, to narrow an assortment of goods and services being offered, failure to attract participants from all levels of the supply chain, and failure to gain wide acceptance among the mainstream business community.” This leads to the “empty store syndrome” as someone mentioned about our pilot phase time exchange today – “I want to trade, but there is nothing I want to buy.”

He provides some specific guidance on issuance. “Anyone who offers goods or services for sale on the market is qualified to issue currency.” You must be able to sell in order to get credit/currency and the amount of credit should be based on a relatively short time scale (i.e. how much you might be able to sell in a few months). Also, many currencies fail to recognize what Greco emphasizes in his “pull not push” approach, “most of the issuing power (lines of credit) should be allocated to those businesses in the community that you wish to have accept the currency- the ones at which people wish to spend their currency, the ones that sell what everyone wants to buy.” This approach pulls the currency along getting people to really want to earn/buy the currency in order to spend it on highly desirable goods rather than fluffy services. The push approach is the route most novice currency projects take, trying to encourage keystone businesses as an afterthought and trying to push the currency on people for idealistic reasons. But currencies are an economic medium used to buy real goods that people need to survive and perhaps they should address this primary purpose first, with the qualifications I outlined in the beginning pertaining to the informal community economy.

He notes as we all now know, it is easier to get these projects off the ground during times of scarcity. But applying this theory, it is also easier to implement these projects in sectors of the economy or specific geographic areas or with populations that are lacking in national currency. He advises to spread these projects across different sectors of the economy, demographics and a wide enough geographic area so as to be functional and not continue to be marginalized by categorical deficiencies.

Seeing the broader picture, Greco promotes a long-term plan of import substitution, an alternative payment medium from trusted issuers (independent of political and banking institutions) on a regional basis, support structures that strengthen the local economy (investment, finance and education), and develop an independent value standard and unit of account (i.e. not the US dollar, but perhaps a basket of commodities).

There are many gems in this book, including very useful details if you are considering designing an effective and robust currency system for your region. But beware, you won’t see them until halfway through the book, so keep reading. It’s worth it.

About the author: Tom Greco is a community and monetary economist, educator and former college professor at Rochester Institute of Technology. He is a leading authority on cashless exchange systems, monetary history and theory, credit clearing systems, complementary currencies, statistical analysis, and community economic development. Tom is the author of several other important books on currencies, including “Money: Understanding and Creating Alternatives to Legal Tender” and “New Money for Healthy Communities.”

He will be speaking at the Green Festival in San Francisco on April 10 at 12pm
and at the California Coop Conference in Santa Rosa on April 9 at 1:30pm

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