New Economic Perspectives Monday, July 25, 2011

MMP BLOG #8: TAXES DRIVE MONEY

By L. RANDALL WRAY

Last week we raised the following question: Where currency cannot be exchanged for precious metal, and if legal tender laws are neither necessary nor sufficient to ensure acceptance of a currency, and if the government’s “promise to pay” really amounts to nothing more than exchanging one 5 Dollar note for another 5 Dollar note, then why would anyone accept a government’s currency? This week we explore the MMT answer.

Taxes drive money. One of the most important powers claimed by sovereign government is the authority to levy and collect taxes (and other payments made to government including fees and fines). Tax obligations are levied in the national money of account—dollars in the US, Canada, and Australia, Yen in Japan, Yuan in China, and Pesos in Mexico. Further, the sovereign government also determines what can be delivered to satisfy the tax obligation. In all modern nations, it is the government’s own currency that is accepted in payment of taxes.

We will examine in more detail in coming blogs exactly how payments are made to government. While it appears that taxpayers mostly use checks drawn on private banks to make tax payments, actually, when government receives these checks it debits the reserves of the private banks. Effectively, private banks intermediate between taxpayers and government, making payment in currency (technically, reserves that are the IOU of the nation’s central bank) on behalf of the taxpayers. Once the banks have made these payments, the taxpayer has fulfilled her obligation, so the tax liability is eliminated.

We are now able to answer the question posed earlier: why would anyone accept government’s “fiat” currency? Because the government’s currency is the main (and usually the only) thing accepted by government in payment of taxes. To avoid the penalties imposed for non-payment of taxes (that could include prison), the taxpayer needs to get hold of the government’s currency.

It is true, of course, that government currency can be used for other purposes: coins can be used to make purchases from vending machines; private debts can be settled by offering government paper currency; and government money can be hoarded in piggy banks for future spending. However, these other uses of currency are all subsidiary, deriving from government’s willingness to accept its currency in tax payments.

It is because anyone with tax obligations can use currency to eliminate these liabilities that government currency is in demand, and thus can be used in purchases or in payment of private obligations. The government cannot readily force others to use its currency in private payments, or to hoard it in piggybanks, but government can force use of currency to meet the tax obligations that it imposes.

For this reason, neither reserves of precious metals (or foreign currencies) nor legal tender laws are necessary to ensure acceptance of the government’s currency. All that is required is imposition of a tax liability to be paid in the government’s currency.

What does government promise? What does a government IOU owe you? The “promise to pay” that is engraved on UK Pound notes is superfluous and really quite misleading. The notes should actually read “I promise to accept this note in payment of taxes.” We know that the UK treasury will not really pay anything (other than another note) when the five Pound paper currency is presented. However, it will and must accept the note in payment of taxes. If it refuses to accept its own IOUs in payment, it is defaulting on that IOU. What was it that President Bush said?

“There’s an old saying in Tennessee — I know it’s in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can’t get fooled again.”

Forgive him as he probably listened to Roger Daltry a bit too much back in his partying days. What he meant is that the sovereign can fool me once—shame on government—but it cannot fool me again. (That, folks, is what led to the creation of the Bank of England! A story for another day.)

This is really how government currency is redeemed—not for gold, but in payments made to the government. We will go through the accounting of tax payments later. It is sufficient for our purposes now to understand that the tax obligations to government are met by presenting the government’s own IOUs to the tax collector.

Conclusion. We can conclude that taxes drive money. The government first creates a money of account (the Dollar, the Tenge), and then imposes tax obligations in that national money of account. In all modern nations, this is sufficient to ensure that many (indeed, most) debts, assets, and prices, will also be denominated in the national money of account.

(Note the asymmetry that is open to a sovereign: it imposes a liability on you so that you will accept its IOU. It is a nice trick—and you can do it too, if you are king of your own little castle.)

The government is then able to issue a currency that is also denominated in the same money of account, so long as it accepts that currency in tax payment. It is not necessary to “back” the currency with precious metal, nor is it necessary to enforce legal tender laws that require acceptance of the national currency. For example, rather than engraving the statement “This note is legal tender for all debts, public and private”, all the sovereign government needs to do is to promise “This note will be accepted in tax payment” in order to ensure general acceptability domestically and even abroad.

I’m not qualified to comment on the above.

But if I might be allowed to make a tongue-in-cheek observation:

Some years ago I noted how often Ireland had changed currencies since the first use of money. And, with some liberty, each currency appeared to last a significant time less than its predecessor:

997 – English pound
1460 – different coinage, value diverged from pound
1701 – Irish pound fixed in value again
1826 – British currency introduced
1928 – punt introduced
1971 – decimalisation
2001 – euro

463 years
241 years
125 years
102 years
43 years
30 years

So you can take it from me, Ireland could well be out of the euro on the centenary of the rising!
——————————

INTRODUCTION

This newsletter touches on many aspects of money. I would like to emphasise two important points concerning the need for realism about the exercise of power.

The first is that our leaders will only be empowered to put through the necessary changes in the present money system against the opposition of powerful defenders of the status quo, if we compel our leaders to make the changes. See 4(1), paragraph 3, below.

The second is that, as so often, our approach needs to be based on both/and, not either/or.

It is not a question whether to support decentralised monetary innovation against mainstream monetary reform, or vice versa. Both are essential.

Decentralised innovation of money and finance will be an essential part of the world’s economic future, everywhere and at every level. Mainstream reform will be an essential prerequisite to decentralised monetary and financial innovation on any significant scale. See 4(3), 4(4) and 5 below.

1. CURRENT UK BACKGROUND

‘Greedy Members of Parliament’ have temporarily pushed ‘greedy bankers’ out of the headlines. After the elections last week for the European Parliament and local councils, the media are still largely dominated by short-term political questions such as the prospects for the Prime Minister and political parties, the next general election, and whether we need politicians to be more independent of the party line.

The scandal about MPs’ expenses has been seen as a possible opportunity to deal with more ‘fundamental constitutional questions’. But those tend to be the conventional constitutional issues – voting systems, House of Lords reform, citizen’s juries, citizens’ rights to ‘recall’ their MPs etc. See www.guardian.co.uk/commentisfree/2009/jun/03/political-reform-guardian-observer-survey.

Inward-looking politicians and political commentators don’t see that there are wider questions of constitutional significance too, e.g. how to limit the financial influence of big business and finance on public policy, or who creates the public money supply and who decided that commercial banks should create it as profit-making debt.

Heather Brooke’s successful use of the Freedom of Information Act to expose the scandal of MPs’ expenses sends a message of hope. Could the Act be used to expose some of those other scandals too?

See www.channel4.com/programmes/dispatches/articles/the-westminster-gravy-train.

2. ANOTHER BOOK NOW ON THE WEBSITE

The History of Money: From Its Origins to Our Time is the English text (www.jamesrobertson.com/books.htm#history) of my Une Histoire de L’Argent: Des origines à nos jours, Autrement, Paris 2007 – www.autrement.com/ouvrages.php?ouv=2746710306.

This short ‘Junior Histoire’ is about how money began, how it has evolved to the present day, what it has enabled humans to achieve, why so many people in the world today suffer from the way it works, how it may develop further, and how young people today might want it to develop. I am grateful to Autrement for permission to make it available here.

3. YES! MAGAZINE, SUMMER 2009, ISSUE 50

David Korten writes an introduction to this 64-page issue on The New Economy Starts Here: Why This Crisis May be Our Best Chance. It follows up his book at 4(1) below.

My article in this issue on Money from Nothing: Supplying money should be a public service, not a cash cow for banks is at www.yesmagazine.org/ article.asp?id=3498.

For more about Yes! magazine see www.yesmagazine.org.

4. FOUR BOOK REVIEWS

(1) David Korten, AGENDA FOR A NEW ECONOMY: From Phantom Wealth to Real Wealth, Berrett-Kohler, San Francisco, 2009, paperback, 196pp.

A splendid book. Although written for American readers, it is very relevant to other ‘developed’ countries and the world as a whole. “We will need to change virtually every aspect of how we structure and manage our economies. Instead of maximising the rate at which we turn useful resources into toxic trash, we will need to optimise the health and quantity of our stocks of real wealth” (p116).

At its core is a 12-point agenda for a real-wealth economy, including:

(1) Redirecting the focus of economic policy from growing phantom wealth to growing real wealth – by replacing financial indicators like GDP with indicators of real well-being as measures of economic success and failure. As Korten points out, this is inseparably linked with point (12) below.

(4) Reclaiming the corporate charter, to specify and monitor the public purpose and performance of business corporations.

(6) Rebuilding communities with a goal of achieving self-reliance in meeting local needs.

(7) Adopting policies that favour human-scale businesses owned by local stake-holders.

(9) Using tax and income policies to support equitable distribution of wealth and income.

He notes the two following points as “arguably the most important”:

(11) Restructuring financial services to serve the real, not the phantom, economy; and

(12) Transferring to the federal government the responsibility for issuing money. (As Korten says, this is linked with (1) above because, without continuing growth of its money supply and GDP, an economy whose money is based on debt is bound to collapse.)

The book emphasises President Obama’s opportunity to preside over this historic revolution. But the inspiring final chapter, When the people lead, the leaders will follow, has a message for us all. It recognises that to enable Obama to succeed, he will have to “be confronted with a popular demand from below too powerful to be ignored”.

The fact is that, only if we find ways of compelling our leaders to lead, will they be empowered against defenders of the status quo to tackle the fundamental changes necessary for human survival and breakthrough to a new age in world history.

P.S. The next edition of this short, readable book should, in my view, include proposals on the future of the international money system. If left unreformed, it will frustrate the book’s vision of the future.

(2) Laszlo Zsolnai (ed), ETHICAL PROSPECTS: Economy, Society, and Environment, Springer Science-Business Media BV, 2009, hardcover, 309pp.

This book is about ideas and initiatives that lead toward responsible business practices, policies for the common good and ecological sustainability. I warmly recommend it, especially to readers with access to academic or other institutions that can afford to buy it.

Contributions by 27 practitioners and scholars from Europe, America and Asia “represent a diversity of fields including business ethics, philosophy, organizational science, systems theory, finance, management, economics, political science, and ecology”. Its chapter headings include The Good Company, Value Creation as the Foundation of Economics, Buddhist Economics for Business, and Ethical Banking.

My contribution explains why business ethics cannot avoid the question: “Can we resolve the present mismatch between money values and ethical values by reforming the way the worldwide money system now works?”; and answers “Yes, we can and must”. (I will e-mail a copy as a pdf file to anyone who asks me for “Robertson chapter in Ethical Prospects”.)

The Debate in Part 4 of the book corrects Bill Clinton’s slogan “It’s the economy, stupid”. The economy is only a means to achieving a society’s ends. We need to get our politicians, business leaders, and other ‘professionals’ to see that “it’s NOT the economy, stupid, it’s the society”.

I hope Laszlo Zsolnai’s collection of articles here will help to accelerate our understanding of money not as things, but as a system of interconnected systems; that it generates a practical calculus of value that strongly motivates the behaviour and lives of almost everyone in the world; and that our species survival will depend on our reforming it to reconcile the values it imposes on us with the values most of us hold.

(3) Thomas Greco, THE END OF MONEY and the FUTURE OF CIVILIZATION, Chelsea Green, Vermont, 2009, paperback, 268 pp.

Tom Greco has been for many years an acknowledged champion of free, decentralised, community currencies. I enthusiastically recommend the second half of his book to anyone who wants to know more about the case for them and the practicalities of setting them up.

I also applaud the first hundred pages. They offer a devastating criticism of the present “monopolistic control over credit, exercised through a banking cartel armed with government-granted privilege” which “allows wealth to be extracted from producer clients and, despite the trappings of democracy, the control of governments to be maintained in the hands of a few. Credit is allocated on a biased basis to favoured clients, including central governments, which distorts both the system of economic rewards and the exercise of political power”.

I agree wholeheartedly with that diagnosis of the problem.

It is when we come to what we should do about it that I question Tom Greco’s realism. He dismisses as unrealistic the aim of transferring to public agencies the function of issuing the public money supply debt-free in the public interest under effective democratic control at national and international levels. He assumes that national political power and global financial interests will successfully combine to stop that happening.

But it is surely even more unrealistic to hope that that problem can be by-passed by persuading people to drop out of the unreformed mainstream money system and rely on “private initiative and the creative application of new technologies and methods” instead. Can pioneers of the new local community currencies develop them quickly and widely enough to liberate millions, let alone billions, of us from our present dependence on the unreformed big banks and big governments to provide for our money needs?

If ever a sizeable number of people did look like succeeding in that, the unreformed big banks and governments would surely combine to stamp them out, as they stopped the growth of complementary currencies in the Great Depression of the 1930s.

A careful reading of the book encourages me to hope that Greco may be shifting from his earlier views on this point. In Chapter 19 on The Role of Governments in Establishing Economic and Financial Stability he does, in fact, set aside his selective pessimism about mainstream monetary reform. He advocates legislation to achieve what are many of its aims. He also hopes not to drive a divisive wedge between would-be allies, but to promote a deeper understanding between ‘reformers’ and ‘transformers’ in pursuing a common fundamental goal – ‘empowerment of people’ (p110).

The ‘both/and’ nature of what we need to do is clear: we need both to support complementary currencies and economic decentralisation; and we need to recognise that that won’t happen without either mainstream monetary reconstruction or the almost total collapse of human society in its present form.

P.S. Please also see Item 5 below.

(4) David Boyle, MONEY MATTERS: Putting the eco into economics – global crisis and local solutions, Alastair Sawday Publishing, Bristol, UK, paperback, 2009.

This handy new book on money by David Boyle provides an excellent guided tour, covering almost every aspect of the money system.

It contains eight Sections – on Metal Money, Information Money, Measuring Money, Debt Money, Mad Money, Local Money, DIY Money and Spiritual Money. Each Section contains between eight and fifteen two-page, bite-sized chunks, eg on ‘Gold: The barbarous relic’, ‘The lunacy of GDP: Why money isn’t everything’, ‘Great Crashes 5: the 2008 crash’ and ‘Greed therapy: The basis of the problem’.

As Charles Middleton of Triodos Bank says in his Preface, it explains clearly, concisely and entertainingly what Boyle thinks has gone wrong with our banking system and financial institutions.

I warmly recommend the book, but with a serious reservation similar to the one on the book immediately above.

Its fatalistic conclusion – that the faults of today’s dysfunctional money system lie much deeper than it is possible for us to change – is very disappointing. For more, see Item 5

5. THE ‘SANDBOX SYNDROME’

This is relevant to the books by Tom Greco and David Boyle reviewed at 4(3) and 4(4) above.

The ‘Sandbox’, as Michael Marien described it in 1983, is “an enclosed area where children safely play, while adults carry on undisturbed in their usual wicked ways. Two complementary forces promote this condition: adults place children in the sandbox to get rid of them, and children volunteer to play there because it is fun”. See the sixth paragraph at www.ghandchi.com/iranscope/Anthology/mm/sandbox.htm.

In the context of the two books under review, the adults who carry on undisturbed in their usual wicked ways are the leading people in big banks and big governments. They are delighted to see their children – fellow citizens – peacefully distracted and occupied in the sandbox, not taking an interest in their wicked ways. They may even give the children’s leaders some pocket money from time to time to keep the other children busy there, safely out of mischief!

Of course it’s true that the money values generated by the way the mainstream money system now works are in conflict with our non-money, ethical, emotional, aesthetic, spiritual and survival values. But that is a mismatch we must try to put right – as noted under book (2) above.

To ignore it, because it’s “a fundamental problem” and an “ancient mismatch between money and value”, is like accepting Mrs Thatcher’s TINA – “there is no alternative”. The way the money system now works has not been decreed by God or Nature. It is a purely human construct, open to us to change – given the necessary understanding and will.

Many people are capable and intelligent enough to:

understand how the development of money has been biased, as summarised for example at www.jamesrobertson.com/books.htm #history;
realise that the calculus of money values we have inherited from it has no foundation in objective reality;
understand, when its mechanics are explained to us, how its present workings produce perverse outcomes; and
see, therefore, how it needs to be reformed – systemically, as a system of systems, not with single ‘catch-all solutions that are supposed to solve everything’.
That will enable more of us to recognise its reforms as the necessary and only way to free ourselves and others from its domination, and allow us to develop decentralised alternatives that it won’t be able to stamp out – and then get down to the task of reforming it.

6. SOME URL’s WORTH VISITING

Monetary Reform

(i) http://opengov.ideascale.com/akira/dtd/3648-4049
IMPORTANT for US readers

(ii) www.ethicalmarkets.com/2009/04/10/revive-lincoln’s-monetary-policy/

(iii) www.nationaleconomy.net

Land Value Tax and Banking Reform

(i) http://the-free-lunch.blogspot.com/2009/05/land-value-tax-banking-reform.html
(ii) www.labourland.org/in_the_news/press_releases.php

Ethical and Sustainable Banking

(i) www.triodos.com/com/whats_new/latest_news/ press_releases/ global_alliance_launched
(ii) www.ekklesia.co.uk/node/9337

Local Currencies

www.usatoday.com/money/economy/2009-04-05-scrip_N.htm?loc=interstitialskip&POE=click-refer
Ethical Economics

www.ecopoliticsonline.com/index.cfm?action=journals &articlesID=6B732458-C2EE-11C0-43CA129336445AE3

“There is no positive economics, but only normative economics”.

End of Economic Growth and Switch to Degrowth

(i) http://events.it-sudparis.eu/degrowthconference/en/

Download the final declaration

(ii) www.sd-commission.org.uk/pages/redefining-prosperity.html

James Robertson

8th June 2009

“Demagogic debates about the ideological differences between neo-liberalism, compassionate capitalism and social democracy are unhelpful. In truth, all competing economic philosophies are underpinned by the same reliance on growth and built to fail economic models.

The world needs to adjust to a new economic order and a world of reduced expectations. In the short run, the primary focus surely should be to dealing pragmatically with the GFC and its potentially devastating human and social costs. There will be time enough for recriminations and blame.”

This is the third of three parts.  I will hunt out the others for you.

—- EDIT: Found them—–
Part 1: The End of Ponzi Prosperity

Part 2: Whatever it Takes

“The first myth to dispel is that interest rates are currently low. Base rates may be low, but the rates that companies pay, as Warren Buffett has argued is at ‘record levels’.  He tells shareholders that “highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels.  Though Berkshire’s credit is pristine – one of only seven AAA corporations in the country – (its) cost of borrowing is now far higher than competitors with shaky balance sheets but government backing.”

Graham Turner shows that ‘average yields on loans for non-investment grade companies in the UK rose to 31.66% on the 4th March, 2009.’ These are bankrupting rates.

18th March 2009

Executive Summary

This submission does not generally address existing fiscal mechanisms; others have contributed exhaustively to those issues.  It focuses instead on new actions that address the current crisis but which would also strengthen our position in the face of an immanent energy crisis coupled with advancing climate change.

Despite the constraints of EMU membership, innovation is still possible – in fiscal mechanisms, in financing development and in complementary money systems.  We ask the Irish government to employ these innovations so as to lighten the burden on taxpayers, foster solidarity between the public and private sector and increase productivity and competitiveness. These measures are outlined briefly in the following action points.

Banking & Debt Reform in Ireland

1    Nationalise AIB and Bank of Ireland as, together with Anglo Irish, these banks carry the biggest portfolio of impaired property development loans now guaranteed by the Irish government; an action now unavoidable to restore credibility.

2    Separate out the impaired property development loans into a series of capital or equity partnerships, preferably LLPs (Limited Liability Partnerships).  This will remove substantial debt from the banks balance sheets.

3    Require that the banks and lending agencies offer the option of swapping existing mortgage obligations for shares in an equity partnership created for property owners in repayment difficulties and with negative equity.

4    Tighten regulatory oversight on bank lending and reserves to become similar to Canada’s that protected their financial sector from the worse effects of the crisis. Require that the financial sector executive remuneration and non-executive board members fees do not exceed more than 8 times the average full time wage paid by the bank and that bonuses are similarly bounded and are based on long term sustainable profitability of the institution.

5    Launch a set of special savings products offers (termed accounts, general savings accounts, SSIA-type accounts and/or bonds) in order to generate investment to provide the capital for essential, economically viable infrastructure projects.

6    After these reforms are carried out the previously nationalised banks should be privatized again.

7    The process of nationalization, reform and re-privatisation would not be necessary were Bank Ireland and Allied Irish Bank willing to undertake the reforms above on an agreed basis.

8    Extend the DIRT tax to cover the bond holders in all banks covered by the Irish government guarantee.

This reform can raise considerable immediate funds for the government as well as providing a relatively stable flow of funds in the future, reducing the risk of volatility in Exchequer receipts.

Climate  and Energy Measures

9    Create an independent Carbon Trust with the power to impose an upstream cap on carbon emissions from fossil fuels with permits necessary to import or mine fossil fuels (industrial peat extraction) under the excise duty controls as per Feasta proposal.

10    Distribute at least 66% of the permit income to citizens as their rightful share or dividend of an essential commons resources. A significant portion (33%) should be retained as a ‘children’s’ fund’ to provide investment for national infrastructure needed for their future in low carbon economy.

Land Value Taxation

11    Announce the phased introduction of an annual land value tax (LVT) that will replace existing transaction taxes such as Stamp duty and development levies.

12    Require that all sale and rental property transactions are recorded accurately in a central database and published to inform the valuation office and the general public.

13    Replace rates on commercial and industrial premises by an annual land value tax (LVT) including on empty and derelict sites, public buildings and charity owned land with commercial zoning.  This reform is achievable in 2010

14    Extend to zoned development land while abolishing development levies and Part V contributions.  Achievable in 2011.

15    Replace stamp duty on all property transactions and extend LVT to all residential dwellings when valuation records and estimates are completed. This is achievable for 2012.

16    Extend the LVT to all land in the state including farmland based on rentals yields and abolish all income tax on farming activities.  Achievable in 2012.

17    When economic recovery begins, all increase in land values should be captured by an increase in LVT so that a property boom never has a chance to develop again, and rising LVT revenues allow for the reduction of taxes on income and businesses.

Address Contraction in the Domestic Money Supply

18    Initiate a top level group to consider the design and implementation of an emergency complementary currency to fill the shortfall of euro in circulation because of the overhang of debt and continued contraction of liquidity in the euro system.

19    Develop a system of parallel VAT taxation reflective of the quid-denominated transactions. Permit the payment of LVT at least in part in quid to establish the value of the new complementary currency.

20    Support the development of other mutual credit cooperatives, barter systems or peer to peer transactions backed by a mutual insurance pool.

Pensions Policy

21    Pensions-provision relief should be gradually reduced to reflect the new investment environment of higher systemic risks and lower economic growth in the medium and long-run future

22    Extend pension and other tax reliefs to a wider selection of local investments such as renewable energy, municipal bonds for infrastructure which involve reducing Ireland’s dependence on fossil energy.

23    All pension taxation relief’s should be at the lower rate of income tax so that the well off do not benefit to a greater degree than the lower income groups.

24    As a partial recompense for the pension tax relief moratorium, the Exchequer should use future injections of capital into Irish banking system as the means for repairing the balance sheets of the Irish households.

25    Reclaim the commons for its owners – the people – to establish the capital base for a dividend that will provide economic security for everyone, especially in old age.

-End-

Feasta; foundation for the Economics of Sustainability
14 St Stephen’s Green
Dublin 2
Tel: 01-661 9572 / 086 8267555
Contact: Emer O’Siochru : emerosiochru@gmail.com
Project Manager Smart Taxes Network

Paul Grignon’s excellent Canadian video, “Money As Debt.”

My only gripe is the unnecessary comment at the very end that hints at conspiracy. No conspiracy is necessary to maintain the system.  Cognitive dissonance or the propensity to believe  in that which benefits your interest is entirely sufficient to blind otherwise intelligent people to manifest reality.

A powerful cause of dissonance is when an idea conflicts with a fundamental element of the self-concept, such as “I am a good person” or “I made the right decision.” …Dissonance can also lead to confirmation bias, the denial of disconfirming evidence, and other ego defense mechanisms. (http://en.wikipedia.org/wiki/Cognitive_dissonance)

We see the same self deception in the operation of land market which works hand in hand with money creation to perpetuate the unequal distribution of wealth and our undeniably unsustainable consumption and production.

New York City

February 7, 2009

The goal of any reform of the international monetary system which is the glue of the world’s financial and economic system is to achieve stability, which can only be accomplished by pursuing equity and sustainability. To reach this goal of an equitable, sustainable, stable monetary system quite a few reforms are being proposed to deal with the deepening financial and economic crises which will get worse, particularly if no proper and timely reforms are implemented. It is argued here that

1.    reforms that predominantly are national or regional in scope rather than global will not achieve those three monetary goals and
2.    reforms that do not simultaneously address themselves to the ever deepening climatological crisis will equally fail to make lasting impact.

Thus, it is proposed here that a genuine transformation in the international monetary system is to take place that addresses itself to both to the economic and climatological crises. The Terra International Monetary Union (TIMU) or TIMU architecture is presented here for serious consideration and ensuing policy development, particularly by the new Obama Administration.

Faced with the economic and climatological crises and their associated crises in food and fuel the year 2009 may become an axial year in the history of the planet and humanity. It is during this and the following years that humanity has to come up with wide-ranging measures that will set the economic and climatological trajectory of this new century. What is most needed in devising this road map are a deep understanding of  the crises’ origins and their vertical and horizontal interconnectedness, and the explicit adoption of  a set of integrated social and ecological values that provides the vision for this most important of journeys.

Following the findings of financial historians such as Niall Ferguson, Barry Eichengreen and of political economists such as Benjamin Cohen, applying the values and vision of the Earth Charter–the 21st century successor of the 20th century Universal Declaration of Human Rights– and using the EPE sustainable communities development’s planning framework of contextual sustainability, I have to come to the following conclusions. They will be listed here and explained below.

1.    Government, business and civil society are to seriously consider making carbon emissions permits the basis of a new international currency, so that ecological creditor nations in the global South are able, as a matter of historical justice, to receive the necessary funds for their economic development and for their policies and programs in dealing with the climate and energy crises.

2.    They are to seriously consider the adoption of  the monetary architecture of an emissions-based currency unit such as the one proposed in the Terra International Monetary Union to wit: its World Central Bank, its modified balance of payments schedule and the independent national Terra Administrations or Terra Boards in participating or TIMU Treaty nation states.

3.    Presently advocated reforms such as the International Clearing Bank (D’Arista), Global Green Dollars (Stiglitz), INTOR (Mundell) and similar efforts of non-emission based currency concepts are considered steps towards the emission-based currency concept of the Terra and its international and national monetary architectures.

The new international currency of the Terra (Latin for Earth) which  is based upon carbon emissions permits which are allocated following the Cap and Share methodology, is to function as a means of international exchange, a store of value and the accounting unit of carbon credits and debits.

Treaty nations will use a modified balance of payments schedule where carbon balances in the form of Terras are added to the many economic account lines in their current and capital flows accounts, so that both their economic and climatological balances are integrated in one place and considered of equal financial value. In order to avoid co-mingling the Terra currency with the national and other local currencies (LETS) each treaty state will establish an independent Terra Administration or Board that administers the carbon based international currency.  Much of the Treaty content can be based upon the FEASTA Draft of the Noordwijk aan Zee Treaty of 2000, organized by Ode Magazine with the assistance of Irish economist Richard Douthwaite and British artist Aubrey Meyer of Contraction and Convergence fame.

The World Central Bank (WCB) like a global European Central Bank carries out its administrative, monitoring and credit creation functions under the governance of the treaty nations. Though the treaty nations surrender some substantial sovereignty, the WCB is not a world government. It would be part of the UN system roughly in the same way the IMF is affiliated with the UN today. Some of the activities of the IMF can be transferred to the WCB, but not its weighted decision making, its subscription or capital structure and other elements.

A fourth major component of the TIMU system is its emphasis on bioregional economics. The present economic crisis has clearly shown that an export-oriented economy, particularly by developing nations to gain foreign exchange to pay for their debts and often to buy luxury items for their elites, is not workable. Even industrialized nations such as the USA and Germany are suffering huge decline in exports. Thus, placing priority on sustainable bioregional economies with a reduction of international trade is to be recommended. On account of the climate crisis frugal trade with a reduction in food, goods and services miles is to be pursued besides fair and free trade.

Two additional components of the TIMU architecture are 1. fixed exchange rates which are set annually by the WCB based upon the carbon price of the global carbon market; 2. the methodology of capping GHGs, particularly CO2 and its allocation as developed by the Dublin-based CSO www.capandshare.org
The politics of a TIMU Treaty are complicated and will entail heavy lifting by not only governments, but also business and, perhaps less so, civil society. A mobilization strategy is being developed based upon theories of my former Columbia sociology professor Amitai Etzioni in his Active Society.
At the highest level of UN decision-making a major support for TIMU seems to be forthcoming. On October 30 a day-long interactive Panel on the Global Financial Crisis was convened by General Assembly President Father Miguel D’Escoto Brockmann. There were several points of agreement that augur well for a serious consideration of the TIMU Treaty.  Member states

1. “recognized the need for deep changes in the governance of the international financial institutions”;

2. “made an urgent call for the United Nations to play a central role in the search for solutions”;

3. agreed that dealing with the financial crisis requires coordination with the climate, food and fuel crisis. Out of this high-level consultation the President’s Commission on the Reform of the Monetary and Financial System has emerged which made its first report on January 7. http://un.org/ga/president/63/commission/financial_commission.shtml

On January 15 during a briefing to the NGO community at UN Headquarters Dr. Michael Clark, senior advisor to the Commission, responding to my question about  the feasibility of having an international currency based upon carbon emissions permits allocated according to the cap and share methodology  and incorporating carbon balances into a modified balance of payments schedule, exclaimed “That’s brilliant.” The previous questioner, a Maryknoll sister, had asked how the President’s Commission was going to incorporate the climate crisis. His answer was tentative and, so, I think that was the reason that he was relieved by hearing the Terra proposal.
Though there are about a score of reasons why the TIMU proposal is a good one and whose time seems to have come, one of the most important reason is the transfer of Terras from  the North to the South, so that humanity is able to push forward with the MDGs. Given the poor outcome of the latest round in Funding for Development (FFD) in December at Doha—IMF and IBRD were even absent—TIMU’s financial flows would be an enormous leap forward in resolving the myriad of funding needs for UN programs, for funds in the form of Terras would flow from the ecological debtor nations in the rich North to the ecological creditor nations in the poor South.

In conclusion, the confluence of the economic and climatological crises and their ever deepening impact on all people and societies in the global North and South is a grand opportunity for rethinking and transforming the international monetary architecture. Such international monetary system would become the glue of a transformed international financial and economic system replacing the present international economic system that still enriches the few, impoverishes the many and endangers the planet. The proposed Terra International Monetary Union or TIMU system could be an essential part of a comprehensive approach to dealing with the global economic recession and the climate crisis, while also expediting humanity’s transition into  sustainable societies which will lead to greater purchasing power and quality of life not only in the global North, but especially in the global South.

RESOURCES AND FOLLOW-UP ACTION

Resources for the TIMU project will be available in medio February at www.timun.net while http://groups.yahoo.com/group/TIMUgroup/?yguid=72581814 is open for participation. Readers are strongly urged to become part of the TIMU Working Group now and, later on, of the Institute in order to carry this enormous challenge of TIMU forward. Every reader is invited to sign the International TIMU Petition and have his/her network, physical or online, do the same. An important source of worldwide activities on monetary reform can be found on www.ethicalmarkets.com. There this SPS is listed together with two other outstanding statements. The website also shows the excellent work that Dr. Hazel Henderson has been doing for many decades. It is not only her widely acknowledged understanding of economics and monetary matters that shines through, but also her ethical commitment as expressed  in her use of the integrated value system of the Earth Charter.

Finally, those who are interested in the full description of the TIMU architecture and its politics to implement it  can purchase a hard copy or an electronic one of my book TIMU: The Transformative Monetary Approach to Resolving the Global Economic and Climatological Crises  from Cosimo On Demand Publishing, New York City, the publication date of which will be Summer 2009.

“Action does not spring from information, but a readiness for responsibility.”
Dietrich Bonhoeffer

An American sociologist, Dr. Frans C. Verhagen, who teaches on sustainable communities at Pace University, New York, has just launched a website, http://www.timun.net/,  to promote a global currency “based upon carbon emissions permits which are allocated following the Cap and Share methodology”.  Dr. Verhagen’s currency is called the Terra. This is doubly unfortunate as not only will it be confused with Bernard Lietaer’s proposed currency with the same name but also because the word sounds like “terror”. I have not yet checked to see how this Terra differs from the ebcu. The attachment sets out the case for the new money.

I am in touch with Dr. Verhagen, who certainly seems to be pushing the idea hard, which is great.
http://www.feasta.org/forum/posting.php?mode=reply&t=799

This post includes an attachment. You can download it from the following link:
http://www.feasta.org/forum/viewtopic.php?p=1254#1254

I propose to extend the WIR concept from B2B to B2C. The “framework of trust” for the WIR comes from a legal charge over the assets and undertaking of WIR members, to which Bernard refers. I am taking a different approach in order to assimilate individuals and to allow them to receive interest-free (but not cost free) credit from businesses generally.

As I set out here http://www.slideshare.net/ChrisJCook/petro-clearing-january-2009-farsi-4-presentation

in Iran a month ago I proposed a framework of trust consisting of a consensual agreement I call a “Guarantee Society”.
Since both sellers and buyers on P2P credit terms benefit from the mutual guarantee they both make a provision into a “Default Pool” in mutual/common ownership. The outcome is an exact analogy to Keynes’ Gesellian proposal for his Bancor/ International Clearing Union proposal at Bretton Woods where both holders of debit AND credit balances are charged, and the system may be stable.

The difference from the Bancor etc is that in a P2P “Credit Clearing Union” architecture there is no centralised “issuer” of credit.   The sources of credit will be:

(a) Individuals and businesses (multiple individuals) – backed by their “labour” (ie unqualified labour/ calorific value); “intellectual capital” (as I refer to the accumulated knowledge and experience, and inherent talents and sheer gumption” we all have while we live); and by the use value of “Intellectual Property” (objectified knowledge in private ownership);

(b) Land in common ownership and private use – through the “unitisation” I believe will (must – there is no workable alternative) replace mortgage-backed loans ;

(c) Renewable energy in common ownership and private use – where I believe that the use of unitisation of energy, and of what I call a “Petro” Energy standard could become the benchmark for global trade – and to which end I am working in Iran, as you see.

The key, as Bernard Lietaer says, is to utilise the capabilities of IT, and I would say that the P2P phenomenon demonstrates how this is capable of spreading “virally.  I have no doubt that P2P Credit and P2P Investment can and will spread virally because the “value proposition” wipes the floor with the conventional model.