Balancing the Power of Money

(Menno Salverda *)

(October, 1999)

This paper has been produced as a follow up to the seminar "The Financial Crisis; Alternatives in Action" held in Bandung, Indonesia, September, 19-24, 1999, organised by Arena (Hong Kong), Akatiga (Bandung) and Selendang Lila (Jakarta). The writing of the article is based on 2 years work experience in Thailand with NGOs and People’s Organisations, seeking alternatives to the current monetary system.


We know that we can not always express ‘value’ in money terms; some activities or objects could be valued higher and some lower than the ‘price’ they bear. Nevertheless, our decision making processes with impacts on our economic and social lives, are rooted almost solely in the monetary sphere.

According to the 1998 United Nations Human Development Report, the income disparity between the top 20 and the bottom 20 percent of the world’s population is now 150 to 1, double what it was 30 years ago. The 225 richest individuals on this planet, have a combined wealth equal to the annual income of half of humanity. Income inequality of Thailand is one of the highest in the world, whilst Indonesia faces rising income inequalities since the onset of the crisis.

The national debt has in many countries exceeded what countries earn in the real economy, making it virtually impossible to repay those debts. The debt problem is not just prominent on a macro level; In Thailand, 4.7 out of the 5.7 million farming families in the country face long life cycles of debt.

Goods are transported enormous distances before they reach us as consumers. Britain for example will this year export 111 million litres of milk and 47 million kilograms of butter, while simultaneously importing 173 million of litres of milk and 49 million kilograms of butter. Why? We have arranged our pricing system such that this makes economic sense.

The role that money plays in causing these problems can not be underestimated. This article claims that reducing the power of money, is required to reverse the trend of alienation from the social and cultural settings in which our economic production takes place and to re-adjust the allocation mechanisms in order for resources to be distributed more fairly . Too often, we simply accept the current monetary system as a given – an immutable fact of nature. In fact, the monetary system is a fallible human creation. This article will look into some of the economic alternatives currently at practice. ‘Islamic Banking’, ‘demurrage’ or, the enactment of a tax on money, and Community Currency Systems, will allow us to re-examine what function money can and should play. But before this discussion, let’s start by taking a closer look at some traditional characteristics of money.

Credit and Interest Rates

Credit functions as a way to allocate financial resources to those in need of capital …money. At the same time we are led to believe that credit is not something which should be given for free. Hence, interest rates!

But why can credit not be free? Economists claim that interest rates are justified because of the ‘time preference of money’. This is a difficult term for a theory which tells us that people who are willing to give up consumption today by saving money, should be compensated for this (temporary lack of money) so they can consume tomorrow.

With positive interest rates people with money can make money without doing anything for it in return. People in need of credit, and the poorer parts of the population always are, borrow money provided by creditors. In order to repay this money plus an interest rate payment, borrowers obviously have to work. If their harvest is destroyed by a rainstorm or trampled by an elephant--risk factors in real life-- they have to work even harder. The rules of the game do not change of course—the debt only increases with time, so repay your debt or lose your land (collateral). Ubon Uwaa, an NGO leader in Northeastern Thailand, pointed out that the ‘cheap’ loans to farmers, through a government agricultural bank, with double digit interest rates, are unrealistic compared to the physical capacity of the climate, soil quality and suitable crops and inputs that are available to the farmers to repay the loan and interest.

Creditors do not face the risk of a harvest loss, or have to pay the cost of depreciation of machines (rust), stored seed (mildew), etc. Creditors protect themselves from risk by reserving the power to deny a loan to a farmer who is not ‘creditworthy’. With interest rates, money keeps its value and the creditor can sit back, relax and wait until the most profitable borrower walks in. The borrower does not have this same luxury; the rains are coming, the seeds need to be bought, and the buffaloes need fodder to gain enough strength to pull the plough. Remember, with a time preference of money there is an incentive to sell all your goods and stocks, you do not need immediately; after all, it is better to have money which you can put on a bank where it makes money, rather than to be stuck with goods, which reduce in value. More likely however, the farmer will have sold his/her goods already directly after harvest, in order to pay off debt (also termed ‘distress sale’ or ‘forced commerce’). The same NGO leader I referred to above, said that loan repayment schedules exceed income and expenditures of a farming unit. In effect, once a farmer goes into debt, he never comes out.

Box 1: Local Savings Groups in Southern Thailand

Some popular local savings groups in Southern Thailand aim to increase the welfare of their communities through reducing the reliance on the mainstream banking system. They charge very high interest rates on money lent to their members (interest rates higher than the mainstream banks!). The profits from these interest payments are used to create welfare funds, to which all members of the savings group (borrowers and savers) have equal access. True, this is a much better arrangement than borrowing from a mainstream bank, as profits paid in the form of interest are kept within the community.

But there are some other consequences. First of all, with a pre-fixed interest rate, it is the borrower and not the saver carrying the risks of production. The borrower is after all not sure about the productivity of the money invested, while the amount of money to be repaid is pre-fixed. The interest rates being very high, they create even a bigger burden to the borrower. True, interest rates are a method to connect savings with investments as well as to create welfare funds, but not clear is why the burden of making these ‘community merits’ should be with the borrower and not the saver. Regulations, like limitations to the amount saved per member, would mitigate the increase of income inequality the levying of high interest rates could generate between borrowers and savers.

Another important effect of the levying of artificial high interest rates, is, that it implies that money needs to come from outside the community. This results in households focusing on selling goods and services for the outside market. Apart from being increasingly dependent on the outside market on which community members have no control, this will also lead to unsustainable production methods.

This article claims there are ways of connecting savings and investments more fairly and sustainably, for example through sharing profits instead of using interest rates .

One of the questions we should ask ourselves is the following. Why should people without any money be happy to pay interest to the people with money who lend it? Let’s turn this rationale on its head. Why don’t the lenders pay the borrowers a fee for using the money, because, without any borrowers, what would they do with their money?

Creating Money without Value

With money we buy goods and services. As such, money represents a ‘claim’ or ‘demand’ on the real economy. If we claim too much, the real economy can not cope with the pressure; it causes prices to increase or it leads to undervaluation of environmental or social capital. A balance is required between the real economy and the money economy, through which the claims are generated. We have seen that the levying of an interest rate is one factor causing the balance to be disturbed. But, it is not the only factor.

Since 1971, when the gold standard was abandoned, money has been created by fiat; it is not backed by anything material. Governments create money by issuing bonds. These are claims on the real economy; claims on taxpayers of the current and of the future generation. Often, debt figures of countries have exceeded the total annual income of the real economy in those countries.

The money creation process (read ‘debt-creating process’) is propelled through fractional reserve banking, practised by commercial banks. Through this mechanism, commercial banks are required to keep a certain percentage of deposits as reserves. With a fractional reserve requirement of 10 percent, commercial banks can issue 10 dollars in loans for every dollar deposit. These loans are then used to purchase goods and services, winding up as a deposit in another bank. Then the process starts all over again. In this way, most of the money we see in our pockets, or in our bankbooks, was created by commercial banks as debt -- not covered by gold or any other real resource or real value base. Its value is dependent on the trust people put in it. Nobody knows why people still do. Inevitably these increasing debts have to be serviced at some point -- by the real sector! This requires the real economy to grow faster and faster, inevitably at the expense of our stock of social, cultural and physical capital.

The madness of the monetary system is further illustrated by the fact that worldwide, for every $1 circulating in the productive economy, $20 to $50 circulates in the economy of ‘pure finance’—though no one knows the ratios for sure. The bidding of assets is another way of creating money without value: "As this growth [of money flows] occurs, the financial or buying power of those who control the newly created money expands, compared with other members of society who are creating value, but whose real and relative compensation is declining".

The Asian crisis of 1997, was created by a decade of excessive monetary inflows. The crash came with the realisation that the real economy could not possibly cope with this growth. Fingers were pointed at crony capitalists and foreign speculators, but not at a global money creation system, which drives this cycle of boom and bust.


Farms or any kind of business under the pressure of repaying debt, focus on activities which expedite profits. Profits which arise out of these kind of activities may often be made at the expense of the environment and social / cultural relationships. Cassava and eucalyptus trees are not popular because they are highly valued. On the contrary, they cause soil depletion. They are popular because they make money. Factors such as soil quality can not easily be quantified and are, therefore, externalised from the resource allocation equations of the money system.

Social relationships and cultural factors underlie many of our economic activities: like helping your old neighbour on the farm with weeding, or donating rice to the temple for the support of the poor. In mainstream thought, the time devoted to these activities is considered as money ‘lost’, and is, therefore, a threat to the capacity to repay debt. This implies that it is the cultural factors that prevent businesses making profit, or, in other words, the existing social system with its cultural factors should abide by the rules of money! (See also box 2)

Box 2: Urban Poor Women in Cicadas, Bandung, Indonesia

During my stay in Bandung, I was fortunate to visit a group of women, who live in the slum area of Cicadas. Akatiga, one of the NGO hosts in Bandung of the seminar I attended, studied the impact of the crisis on poor urban women in this area. Traditionally women manage the household and are responsible for the daily sustenance of the family. Men are responsible for the monetary expenses, which they earned in the textile factory. These traditional ‘male’ jobs have disappeared and only some, find, occasionally, work as a driver on a bicycle taxi, a becak. With no money income, women were forced to seek additional income from female (low-paid) jobs such as laundry, cooking, nursing, delivery services or opening a store. Women’s obligations as homemakers are not considered as ‘work', and are therefore not valued. Other than, loss of (men’s) income and increased pressure on women’s labour, a hike in prices of basic needs (i.e. rice 300 %) has further increased the burden on women.

Some women’s groups have started informal mutual credit arrangements to help each other. This has increased a sense of community among its members. One homemaker mentioned to me that she does not charge her neighbour any interest; she knew that some day she would need some money herself. In another neighbourhood, some community members, in desperate search for money, have become gambling agents, causing enormous amounts of money to leave the community.

Since the monetary system does not factor social work into the economic decision-making process, the search for money is to the detriment of the social well-being of women. It has gone so far as to cause individuals to exploit their fellow community members through gambling schemes. The informal credit schemes, set up by women, are a way to reduce the dependency on the market over which community members have no control.

In this paper we do not judge social and cultural norms in a community. However, the morality of the profit-making business is fairly clear. Dependent on making money, it induces greed and undermines the values of externalities. What we need to do is to create another form of money which reduces our dependency on the national currency. A money which supports a more equitable allocation of resources, a money which does not determine our social relationships, a money which is used to represent values instead of prices. So, how do we create this new money?

In fact, we should be clear on one thing, which is, we do not need money! What we do need is the goods and services, for consumption or for working capital or even investment. The most important function of money is as a tool which allows us to procure those goods and services, what economists call the function of medium of exchange.

Interest free money

Money, designed to act as a medium of exchange, should be interest free. As pointed out above, borrowers and creditors are interdependent and a new framework should incorporate this realisation.

Islamic Banking

Islamic Banking is based on religious principles, one of the central tenets of which is that interest payments are a form of usury and are therefore, a sin. In allocating savings to investments, instead of using interest rates, Islamic banks work with the profit-and-loss-sharing principle. If there is a profit, lender and borrower benefit; if the harvest is destroyed, the lender and the borrower both share this loss. Thus Islamic Banking is a monetary system with the clear advantage that the risks (like harvest loss due to a storm) in the real economy are not entirely borne by the borrowers.

There are two more advantages of Islamic Banking. First, resources will be distributed more efficiently as the funds will go to where expected profits will be highest; not to the most creditworthy. Second, the money creation is in line with productivity levels in the real economy and therefore makes the system more stable.

Despite the advantages of risk-sharing over interest-based systems, Islamic Banking is not widely practised. It faces the difficulty of operating in an interest-based financial environment. In this environment, individuals would be able to cheat the system and not report their full profits to the bank. If the bank discovers this and refuses them further funds, the fund seeker does not risk being put out of business; they can still go back to the interest-based banks.

Furthermore, entrepreneurs with very promising projects might choose interest-based loans that would leave them a larger percentage of profits as compared to risk-sharing. In contrast, those who are less sure about the profitability of their ventures would prefer profit-sharing, as it would, at the least, relieve them of the obligation of paying a fixed return on the funds obtained. This would result in lower profits for Islamic banks than would be possible in a purely profit-sharing environment.

Linking the financial economy with the real economy, through interest free lending and sharing risks, encourages the creation of real wealth over purely monetary wealth. Nevertheless, it can be argued that while focusing on sharing profits, the system still does not allow for environmental and social factors to be incorporated in making economic decisions. Thus a small farmer, might not have access to Islamic funds as her expected profits are lower than the farmer in a next door village where soils are of better quality.

The lender-borrower relationship in Islamic banking has a parallel in CSA (Community Supported Agriculture). CSA is a marketing system where producers and consumers share the risks of production. As both consumers and producers are aware of their interdependence, just like borrowers and lenders in the Islamic banking system, consumers make advance payments of working capital to the producer and they see their investments repaid in agricultural output throughout the growing season.


Alternative money systems attempt to re-link the money economy to the real economy. Silvio Gesell, a money reformer who formulated his "natural economic order" in 1890, claims that as money is a public good, it should be accessible to anyone in need and must not be hoarded. A fee on money (‘demurrage’, or a sort of negative interest rate) is levied and is justified by the argument that if money represents goods, it should depreciate in value just as fast as goods do; money should "rust". Creditors should face the same risks as producers. If money ‘rusts’, creditors will be forced to make financial resources available to the ones in a position to use it. As a consequence, a demurrage charge increases the rate of circulation. Suddenly the ‘time preference of money’ has been turned upside down; money becomes worth less over time and the real economy gains in importance. In a demurrage economy, making money, is not the main priority of the economic actors, and neither is making profits, at least not necessarily in the short term. Money functions as a medium of exchange and as a means to invest, where profits can be reaped at a future date. As such, individuals have greater opportunity, to value social exchanges.

Community Currency Systems

Community Currency Systems (CCS) are mutual credit-creating systems, specifically designed for local communities. Members of the system create their own money, which they use to exchange locally available goods and services with each other. Trade with the outside takes place in national currency.

HOURS-based community currencies employ a piece of paper (‘notes’ or ‘coupons’) as the medium of exchange, while LETS (Local Employment and Trading System) use credits and debits in an account ledger, with no physical representation of the currency. The value of these currencies is determined by members of the community. Variously, the value has been tied to the national currency; equated to an hour of labour; or allowed to determine itself through members’ exchanges.

It is estimated that worldwide there are over 2000 LETS-type community currency systems, where total number of members varies from as small as 20 to over 2000. Trade in these systems still happens mainly in the services sector, although many also have small businesses participating. Currently about 100 ‘note’-type systems operate in North America. In the HOURS system in Ithaca New York, monthly trade volume is estimated at 6,000 HOURS (60,000 US$) between 1,500-2,000 people. In Third World countries, systems have started in Mexico, Argentina, Paraguay and Senegal.

As in the case of Islamic Banking, CCS are interest-free, credit-creating systems. Some systems charge demurrage. Community currency practitioners claim that community currencies fulfill the two most essential functions of money. They provide:

-a standard of measure, to compare the value of goods and services, and

-a medium of exchange, to facilitate the exchange of goods and services.

In a CCS, community currency is created when community members exchange goods and services with eachother. This money can not be spent outside the community and it will thus circulate within the community, creating more economic activity through the multiplier effect.

The accounts of sellers and buyers increase or decrease by the value of the goods and services traded; no more community currency is created or is needed to realise this trade. In this way, the system relinks the real economy with the financial economy.

Apart from creating this stability, CCS also has the advantage of allowing goods and services to be given a value independent of the price set by the outside market. This can include social obligations, as in the case of the household managers in Cicadas (see box 2), or valuing local education in indigenous knowledge, as planned in Yasothon (see box 3). Admittedly, it remains very difficult to fully quantify such activities, but it is easier to value externalities within a community then to try to internalise them using a macro economic model (due apologies to environmental economists, who, instead of reducing the power of money, try to appreciate the value of environmental and social concerns!).

Box 3: Community Currency Systems in Thailand

The financial crisis of 1997 has started discussions in Thailand about the real benefits of the boom of the decade before the crisis and on alternative paths of development which would prevent such a crisis from happening again. NGOs and People’s Organisations in Thailand have shown an increasing interest in Community Currency Systems (CCS). The TCCS project has, for the last two years, explored ways to implement a CCS in Thailand.

After having attended a seminar about CCS, some villagers from Yasothon province in the Northeast of Thailand, have decided to learn more about how the system works and to try to set up such a system. A small group of villagers have taken up the task to prepare the implementation and generate enough interest amongst the 495 households, spread over 5 villages, which have been designated as a pilot community. The members of the 5 villages, have strong geographical, economic, social and cultural links. In the future it would be possible to incorporate another 4 villages nearby, if they so wish.

Community workers are working with villagers to prepare the launch of a hybrid system early in 2000. A hybrid system is a combination of a LETS and a ‘notes’ based system. It works as follows: those who want to become members of the CCS, go to the community bank, where they can open an account. They can withdraw community currency, interest free, from this account. The money will be in the form of a note called 'Bia', named after a sea shell used as currency before the introduction of metal coins. These notes will carry pictures of culturally and socially significant events designed by local school children, symbolising the fact that this money does not carry just a monetary value. By withdrawing 'Bia', money has been created which can then be used with whomever wants to accept it. It should be noted that the 'Bia' can be spent by villagers who are not members of the system (who do not have an account), however, it can not be spent outside the community. It is unlikely that somebody who lives outside the community, would actually accept the 'Bia' unless she is a regular visitor.

The CCS organisers, believe that community members will be able to rely on Bia for their exchange of local goods and services, thereby reducing national currency expenses and dependency on credit. Furthermore, the 'Bia' will circulate within the community, creating more economic activity, as opposed to the national currency which leaves the community very quickly in its search for higher profits. In effect the use of ‘Bia' stops the leaking of resources from the community. If villagers choose to increase their use of ‘Bia', an incentive will have been created to support local economic activities. This would make investments in, for example, herbal production and indigenous knowledge more likely.

It should be stressed that the CCS organisers do not seek to isolate the pilot villages from the outer world. CCS are a tool to increase bargaining power in trade relations with other markets by first strengthening the local economic base. One might suggest that a CCS could be undermined by free-riders (cheaters), but experience so far has shown that social controls prevent this from happening. Nevertheless to prevent problems in the initial phases the organisers have decided that a credit limit be imposed on the amount members can withdraw from their accounts. By turning this argument on its head, a strong case can be made that the co-operation and trust which the process of establishing a CCS engenders is vital to the accumulation of social capital.

It must be noted that community currency systems are backed by the resources within the community, including the labour of its members and the trust, members have in each other. Luis Lopezllera, an experienced NGO worker and CCS practitioner in Mexico, mentioned that the objective of CCS should be: "to teach people the forgotten values of the social and cultural ingredients of our lives, now predominantly undermined by poisoned money!".

In this respect, we can learn a great deal from indigenous exchange systems, like reciprocal labour systems, which were based in a gift economy. Reciprocity does not mean to borrow money and to go into debt; rather, it means a complex web of social relationships between members of a community (and sometimes outside) to exchange goods and services, based on mutual benefit, responsibility and interdependence. There was no money and no time preference involved. (Note: philosophically we can probably still speak of money whose value is determined by the gift economy.) It should be noted that in a gift economy investments do not easily take place as the connection between savings and investments is not really established. Should a community choose to investment in a local business, the required capital may be mobilised through a profit-sharing arrangement.


The power of money is responsible for income inequality, social degradation and the destruction of the environment. The excessive power of money expresses itself through interest rates, the creation of money by banks as debt and the inability to incorporate externalities and real risks in the economic decision making processes through which resources are allocated.

Interest based money increases in value, transferring all the risks from money makers (creditors) to producers (who are also borrowers). Governments and bankers are responsible for creating enormous amounts of money, as debts. These debts function as claims on the real economy, and hence put pressure on people to repay those claims, in taxes; often there is no choice but to jeopardise social obligations, such as looking after your children, and sell national resources, such as tropical forests. Trillions of dollars move around global markets every day; most of it (over 98 %) as speculative money in the currency and stock markets, not in the markets where you buy your food. The size of the money economy has no relationship with the real economy or anything of value. Reducing the power of money would allow us to re-assess what we value and base our activities on those values.

Islamic Banking bases its monetary system on sharing risks in the real economy between debtors and creditors. Those profits generated by investors using Islamic funds in the real economy are shared. Thus, the growth of the money economy is linked to the profitability of real activities, rather than a fixed interest rate and ever-increasing debt. However, it is not clear whether such systems are able to incorporate externalities into the allocation of financial resources or whether the pressure to produce profits remains higher than compared to the ability of the real economy to satisfy those same demands.

The second alternative discussed was demurrage. Not so much a system, demurrage is a theoretical tool to be incorporated into a more equitable monetary system. Charging a fee on money causes money to lose its value over time, forcing users to invest in the real economy rather than in the monetary economy. Those in possession of funds with no inventive idea how to use it will be more likely to invest it with someone who does not have money, but needs it to invest in some kind of economic activity.

Community Currency Systems have the potential to create interest-free mutual credit, based on an understanding of interdependency and mutual responsibility between community members, creditors and debtors, consumers and producers. Apart from creating only as much money as the real economy requires, CCS allow an independent assessment of values. In other words, CCS have the potential to incorporate externalities.

CCS is different from the other alternatives, in that it has the potential to work independently from the pressures of the global market. A community does not have to wait for the money creators to change their course against their self-interest, and reform the monetary market. Communities can start a system right now. Although in essence political, since a CCS may change the position of the actors in the economic landscape, the practise of the system does not necessitate confrontation with policy makers. Remember that it is not the objective of CCS to replace the national currency. Rather an attempt is made to increase self-reliance thereby increasing bargaining power in relations with other actors. As such they are seeds planted, of which the benefits can be used by other communities, monetary reform campaigners and development workers.

*) Menno Salverda is a member of the Thai Community Currency Systems Project (TCCS), a joint initiative of the Japan Foundation Asia Centre (JFAC), the Local Development Institute (LDI), Focus on the Global South, CUSO and VSO. For more information about community currencies, or the project, contact, or visit