Slide 1

Can Democratic Money with Environmental Values Reduce Market Failures

The 2008 global financial crisis and current uncertainties about the Euro provide evidence that the financial system is neither self-correcting nor capable of being reliably regulated.

The financial system has failed because modern money has become a belief system. It is based on ideology not logic. Today money no longer represents any single commodity like gold, silver, grain, tea, or cattle.

Nor does money represent any definable basket of commodities. Money has become disconnected from real things including the state of the environment. It exists only by the fiat of government. Why then do people believe that market forces established by fiat money can appropriately allocate resources of the planet? Visitors from another planet would find our belief in markets incomprehensible. Why should money that is not related to real things be used to determine how real things are distributed? Our visitors would conclude that money was a religion not subject to scientific validation.

However, monetary authorities are now recognizing fundamental problems in the financial system. The governor of the Bank of England and analysts from the International Monetary Fund has questioned why private banks can create fiat money out of nothing? In 2010 the governor of the Bank of England stated, “of all the many ways of organizing banking, the worst is the one we have today” .

The public should be asking governments why they accept the “worst” way of organizing banking? Governments around the world should be setting up committees of inquiry to ask at least three basic questions. Why is the financial system: (1) back to front, (2) upside down and (3) inside out?

Why is the system back to front?

The system is back to front because the private sector lends money to the government instead of the government lending money to the private sector. It is the government who defines what is acceptable as money described as “legal tender”. The government then licenses private banks to create money in the form of bank deposits. This is back to front. The government should be creating deposits to lend to the banks!

By reversing current arrangements the government would capture the profit of making money out of nothing. The government would also profit from the interest paid to them by the banks. Instead, the government only obtains profits from manufacturing notes and coins.

The notes and coins issued by governments typically represent only around three percent of the money supply. The cost of manufacturing notes and coins is only a minor fraction of their value. This provides the government with a profit. The other 97 percent of the money supply are bank deposits. Banks make a much bigger profit by creating deposits. They do this by making book entries in their accounts. If the financial system were not back-to-front this much bigger profit would go to the government. If the current arrangement were reversed, taxes could be significantly reduced. Bank profits would be reduced and a more cost efficient financial system created.

But much more importantly, if the government created deposits to lend to the banks, it would not need to borrow money from the private sector. The result would be that: (a) the government would not need to tax citizens to pay interest on borrowed money, and (b) the government instead of the banks would profit from creating money.

The political attraction of reversing the current back to front system is irresistible. The ability of the banking lobby to maintain the existing system is impressive. Money power has inhibited dissent. Influential economic commentators are muted. The teaching of economics has not questioned current practices. Would not an informed democracy demand reform?

One argument against governments creating money is that their central banks may not be sufficiently independent to limit money creation. This raises the question as to why should either the government or banks create money top down?

Why is the financial system upside-down and undemocratic?

Should not the people who create wealth like primary producers, investors, traders and their customers create money from the bottom-up? Before a printing press was imported into Australia and before gold was discovered, citizens created their own money. They did this by issuing handwritten “IOU” notes for the goods and services they purchased . The notes were counter signed by the suppliers to be used in turn by them to buy other goods or services. The notes began circulating as money with each user adding their signed endorsement. In this way money was created by mutual acceptance.

Thousands of private mutual credit systems exist in many forms today . Some are based on bartering time to create “Time Banks” . Others are described as “Local Exchange Trading Systems” or LETs . The oldest and biggest private bottom-up initiative is the Swiss WIR system established in 1934 that today has 70,000 businesses as members. Increasingly these bottom-up privately organized community credit systems are using digital money transacted through mobile phones. Cheap Chinese mobile phones used by hundreds of millions of Africans have the ability to transfer stored value from one phone to another without requiring a bank. The mobile phone service providers have computers like a bank to record the various types of stored value used by customers. Since 2008 the central banks of the Philippines and Bahrain have approved both domestic and international transfers of their fiat money between mobile phones.

Where central banks do not allow official legal tender to be used, informal units of value are adopted like talk time on the phone network. Mobile phones can store multiple units of value. Mobile phones can also convert one unit of value to another automatically according to the exchange rate. In addition, mobile phones are becoming digital purses that can be swiped liked debit cards at checkout counters to purchase goods and services.

Technology has now made it practical to adopt from the bottom up, unit values defined by real goods and services. This raises the question of why use official money that cannot be defined in terms of any one or more goods or service?

Why is the financial system inside out?

Government money is inside out because its value is determined inside society on a self-referential basis rather than by outside values determined by the environment.

The idea of using the environment to define economic value has appeal for a number of reasons. First, life cannot exist without environmental services. Second, environmental services would avoid the value of money being manipulated by governments, central bankers, trade between countries, speculation in currencies and other economic and human activities. Third, and most importantly, the use of local environmental services to determine economic values, prices and costs would then determine how market forces operate. This would create a powerful way for nature to provide feedback to humanity to sustain both together.

There are many ways of anchoring economic values to the services of nature. A number of ways could be used together to create competition between various currencies . These matters and the choice of service are considered in my other writings . For simplicity only the retail value of electricity generated from benign sustainable resources is considered here. Units of value determined in this way will be referred to as Sustainable Energy Dollars (SEDs=$Z) .

The value of $Z would vary around the world according to how well nature endowed the host environment with renewable energy. Economic values, prices and costs in each bioregion would accordingly be different. Market forces would then emerge to distribute the population of the world according to the carrying capacity of each region of the planet to sustain humanity.

The need to have a different unit of value in different environmental regions is considered next. Governments creating a national monopoly for their fiat money deny this possibility. Monopoly money creates major distortions in relative prices and costs and provides another reason why markets fail. This is a contributing cause of the Euro problem. It is a problem that also exists in fiscally integrated sound economies like Australia.

Monopoly money distorts prices

Australia illustrates how a currency monopoly over diverse regions creates major price distortions. Assume that the foreign exchange (FX) to finance imports in any region is proportional to its population. Around 10 per cent of Australians reside in Western Australia. WA earns 70 per cent of all Australian FX from the export of its primary products. This means that every man, woman and child in WA is earning six times the FX they require. In Eastern Australia 90 percent of Australian citizens are earning only one third of the foreign exchange for importing automobiles and electronic devices. If both regions possessed their own currencies the Western dollar would be worth over twice the value of the Eastern dollar.

With two currency regions, Eastern residents would obtain an incentive to migrate to the West to obtain a higher standard of living. Employment opportunities would arise for Eastern residents from exporting manufactured goods with tourist and educational services.

The distortions in relative prices of goods and services in each region would be far greater than those created by taxes and tariffs . It shows why the idea of a “free market” is nonsensical when governments establish a monopoly money regime. Central banking after all is a specialized form of central planning. Governments explicitly manipulate relative economic values of real assets in the economy by how they manage the cost and volume of their fiat money monopoly.

Since the 2008 crisis, central bankers in UK, US and Europe have created trillions of pounds, dollars and Euros out of nothing. The new money has been used to bail out bankers from excessive debts. But the new money is the same old type that earns interest described by The Economist as “Funny Money”. This compounds the global debt problem, fiscal cliffs and the threat of inflation as the growth in money outstrips real economic activities in the northern hemisphere.

Collateral damage is created in the southern hemisphere for exporters in sound economies. As northern countries debase their money the value of the Australian dollar appreciates. To assist exporters the Reserve Bank of Australia then “prints” new money to sell to foreigners instead of selling existing dollars . This helps reduce the value of the Australian dollar to assist exporters. It also creates a profit for the bank creating money out of nothing. The profits can then be paid as a dividend to the Australian government. It is a mystery how ideologues can believe that free markets exist.

Interest distorts markets

Another mystery is why governments allow bankers to create new monopoly funny money that can earn interest. The cost of creating new money is inconsequential compared with its ability to earn interest. Newly created notes and coins do not earn interest. Islamic bankers illustrate the practicality of interest free money. This avoids money obtaining an unbelievable magical ability to increase its value with the ticking of a clock independently of any changes in the real world.

One result is more money has to be created to pay the interest. This creates an imperative to promote growth or accept an inflationary spiral. A second result is that a bias is created for investments in money rather than in real assets that increase prosperity. A third result is inequality. Owners of money can increase their wealth without either the owner or their money improving society. Visitors from another planet would again become very puzzled.

Interest charges can double or even triple the cost of a loan over twenty or more years. Loans that could finance long life community assets like water, sewerage, toll roads and so on. In this way interest charges can double or triple prices for essential services. US monetary reformers have proposed for many years that the Federal Reserve Bank should provide interest free money for publicly owned assets. This would eliminate interest generated price increases.

Interest charges create a disproportionate bias against investments in renewable energy. This is because electricity from renewable energy requires an investment around three times greater than generators that burn carbon. Interest free money could make renewable energy more competitive than burning carbon in many environments. The replacement of interest earning money with a negative interest rate type of “demurrage” money would create a bias for investment in renewable energy. This could remove the need for carbon taxing or trading.

To remove the bias created by money earning interest the followers of Silvio Gesell introduced private cost carrying demurrage money into Germany in the 1920’s. When monopoly money dried up during the Great Depression the private issue of demurrage money in the form of “Stamped Scrip” spread throughout Europe to the US. It obtained the support of leading economists of the time like Keynes and Fisher . In the US, many communities privately issued demurrage money in the 1930s. The paper currency notes required a stamp to be attached each week valued at 2% of the face value of the note. The local council or chamber of commerce who issued the scrip would then sell the stamps. Over 52 weeks the issuer would obtain $1.04 for each dollar note issued. This allowed the notes to be redeemed after a year with 4% profit - even if the new money was initially given away! The cost to retailers was a fraction of the cost of using modern credit cards with a commission around 2 percent for every transaction.

Privately issued demurrage money has now emerged again in Germany. It is growing rapidly with a cost of 8 per cent a year . However, like the Swiss WIR and most other complementary currencies its value is tied to official funny money. What is missing is a way to anchor the value of alternative currencies to the real world to sustain them through financial crises. But even without a crisis market failure exist from prices not recognizing all the costs in allocating resources.

Prices distort resource allocation

Markets also fail because prices do not include costs imposed on society from exploiting resources that pollute and/or create harms like tobacco and asbestos. According to a former World Bank chief economist, atmospheric pollution from burning carbon has created “the biggest market failure the World has ever seen” . The introduction of a demurrage currency could ameliorate the “biggest market failure” without the need for carbon taxing or trading. Defining money in terms of renewable energy would change the relative prices of resources to minimize the problem. This would creates a compelling incentive for governments to facilitate the regional introduction of $Z.

To allow $Z to become widely acceptable its creditability would need to be guaranteed. It makes sense for the cost of the guarantee to be paid by its users as a demurrage charge. Mobile phones now make it practical to introduce demurrage money. With a guarantee, $Z could become a public currency freely convertible into other types of money. Convertibility has not been allowed for the Swiss WIR even though its value is defined by official money. Neither is the Swiss WIR a public currency.

Third party credit insurance provides a way to overcome the limitations of the Swiss WIR. The Sustainable Money Working Group is developing details of how this might be achieved as considered in my other writings . $Z could provide a basis for achieving an environmentally sustainable society without interest charges creating an imperative for unstainable economic growth.

Note: this article was first published on 26 February 2013 and then revised on 25 July 2013.


  • King, M. (2010: 16,18), Banking: From Bagehot to Basel, and Back Again, The Second Bagehot Lecture, Buttonwood Gathering, New York City, October 25, p. 16, available here
  • Benes, J. & Kumhof, M. (2012), The Chicago plan revisited, International Monetary Fund Working Paper, WP/12/202, August 1, available here
  • Butlin, S.J. (1968), Foundations of the Australian monetary system 1788-1851, pp. 26 & 32: Sydney University Press, Sydney.
  • Complementary currencies resource centre, website
  • Cahn, E. & Rowe, J. (1992), Time Dollars: The New Currency That Enables Americans to Turn Their Hidden Resource – Time – into Personal Security & Community Renewal, Rodale Press, Pennsylvania.
  • Nishibe, M. (2001), On LETS, English translation posted here
  • Greco, T. (1994), 60 years of the WIR economic circle cooperative: Origins and ideology of the Wirtschaftsring, WIR magazin, September, available here
  • USAID Frontlines: For Mobile-Savvy Filipinos, Mobile Banking is a Crucial Bridge"
  • "Zain Bahrain Launches Zain Wallet"
  • Capie, F. H., Tsomocos, D.P. & Wood, G.E. (2003), E-barter versus fiat money will central banks survive? Bank of England Working Paper no. 197, available here
  • Hayek, F. A. (1976), Choice in Currency: A Way to Stop Inflation, Occasional Paper 48, The Institute of Economic Affairs, London
  • Turnbull, S. (1983), Selecting a community currency, Options, June, Australian Adam Smith Club: Sydney
  • Turnbull, S. (2009), ‘How would the invisible hand handle electronic money?’ in Lynne Chester, Michael Johnson & Peter Kriesler, eds Heterodox Economics’ Visions Proceedings of refereed papers, Eighth Australian Society for Heterodox Economists conference (SHE) The University of New South Wales, Sydney, December 7-8, 2009, available here
  • Turnbull, S. (2012), ‘Might sustainable energy money have a future?’ Refereed paper presented to the 11th conference of the Society of Heterodox Economics, University of New South Wales, December 3, available here
  • The Economist, (1991), ‘When the Price is Wrong’, February 2nd–8th
  • The Economist, (1990), ‘Currency Reform: A brief history of funny money’, January 5th –12th
  • Heath, J. (2012), ‘RBA moves to limit rise in Aussie dollar’, The Australian Financial Review, October 29, p. 3
  • US House of Representatives Bill (1999), H.R. 1452 (106th): State and Local Government Economic Empowerment Act, available here
  • Gesell, S. (1916), The Natural Economic Order, translated by Philip Pye, 2002: available here
  • Keynes, J.M. (1936) The General Theory of Employment, Interest, and Money. New York: Harcourt Brace Jovanovich, 1964, available here
  • Fisher, I. (1933), Stamped Scrip, Adelphi & Co. New York, available here
  • Real Currency (2012), ‘Regional Currencies in Germany: the Chiemgauer’, February 2, available here
  • Stern, N. (2006), The Economics of Climate Change: The Stern Review, Cabinet Office, London: HM Treasury, London
  • Green Money Working Group, website
  • .
  • Turnbull, S. (2009), ‘Remaking the economy’, posted March 18th, Online Opinion, available here
  • Turnbull, S. (2010) ‘Money, Renewable Energy and Climate Change’, Financiële Studievereniging Rotterdam, (FSR Forum), 12:2, pp.14–17, 19-22, 24, 25, 28-29, February, Erasmus University, Rotterdam. Working paper (2008) available here
  • Turnbull, S. (2010), ‘How might cell phone money change the financial system?’ The Capco Institute Journal of Financial Transformation, 30:33-42, November, available here
  • Turnbull, S. (2011), ‘How to cope with the next financial crisis’, Australian Broadcasting Commission: The Drum, 25 August, posted here
  • Turnbull, S. (2012), ‘Who should create money and credit?’ Public Banking Institute Newsletter, Issue No. 13, May 30, posted here
  • Turnbull, S. (2012), ‘ISTC 2012: Building Your Financial Lifeboat?’ Post conference Media Release (Unnamed as author) July 27th, available here
  • Turnbull, S. (2013) ‘Achieving environmental sustainable prosperity’. In: Karagiannis Nikolaos & John Marangos, (eds.), Toward a Good Society in the Twenty-first Century: Principles and Policies, Volume 2, Basingstoke, UK: Palgrave Macmillan, available here


#1 Denis White 2014-01-22 23:13
An excellent analysis and set of prescriptions for making a better economic system!

If you would like to post a comment on this blog, please sign in or register.