Margrit Kennedy - Complementary Currencies and the Chiemgauer Project

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Margrit Kennedy - Complementary Currencies and the Chiemgauer Project

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  • Prof. Dr. Margrit Kennedy with Prof. Declan Kennedy Complementary Currencies and the Chiemgauer Project Prepared for the Tenth Annual Digital Money Forum The Tower of London, March 2007In this lecture I will pursue the questions: Why do we needcomplementary currencies and what could it look like? Firstly, I will describe three misconceptions mostpeople hold about money. Secondly, I will explain three results of thesemisconceptions. Thirdly, I will offer three possible solutions in termsof complementary currencies.What is money? Lets take the good news first. Money is one ofthe most ingenious inventions of humankind. It helps theexchange of goods and services and overcomes the limitationsof barter, thereby creating the possibility of specialization, whichis the basis of civilization. Why then do we have a moneyproblem?Here is the bad news. Throughout most of history, thecirculation of money has been based on the payment of interest.Interest leads to compound interest. Compound interest leads toexponential growth. And exponential growth in turn isunsustainable. Therefore, in order to understand how ourmonetary system works as an invisible wrecking machine sinceits inception, it is useful to understand three basicmisconceptions about money which almost everybody holds. 1
  • Misconception 1: Money with intereest andZunahme compound interest can grow forever c b There exist different growth patterns in the material realm a. natural growth alone can be termed sustainable a b. linear growth can be sustained temporarily Zeit c. exponentielles growth is soon coming to an end Source: H Creutz Margrit Kennedy1. To comprehend the Misconception, that Money based on interest can growforever we need to understand three generically different types of growth.Curve A represents the normal physical growth pattern in nature. Just likeplants or animals, we grow fairly quickly during the early stages of our livesthen begin to slow down, and usually stop growing physically around the ageof 21 - at an optimal size.Curve B represents a linear growth pattern, e.g. more machines producemore goods, more coal produces more energy, etc. This growth pattern is notso important for our analysis. It should be clear, however, that on a finiteplanet even this pattern will eventually create problems.Curve C represents exponential growth, the most important and generallyleast understood growth pattern, doubling its size at regular intervals. It maybe described as the exact opposite to curve A, in that curve C grows slowly inthe beginning, then accelerates continually faster and finally grows in analmost vertical fashion. Based on interest and compound interest, our moneyfollows an exponential growth pattern: at 3% compound interest it doubles in24 years; at 6% it takes 12 years; at 12% 6 years. To show that this isimpossible in the long term, let us take the example of one penny invested at5% interest in the year 0, which would be worth over 500 billion balls of goldof the weight of the earth in the year 2000, at the price of gold in this year -a practical impossibility. Without the compounding of interest the sumaccumulated would have been 1,01 . This shows, that it is not interest,which is the problem, but the compounding of interest. Since there is almostno practical possibility to prevent interest from compounding, we need to findanother solution to keep money in circulation. 2
  • 2. The Transparency Misconception Interest is paid only when we borrow money 1 Garbage Collection Fees Cost of interest on capital 12% 2 Drinking Water Costs Cost of interest on capital 38% 3 Rent in Public Housing Cost of interest on capital 77% Source: H Creutz Margrit Kennedy2. The Transparency Misconception can be summarized as:Interest is paid only when we borrow money.The difficulty to fully understand the impact of the interestmechanism on our economic system is, that most people think,all they have to do is to avoid borrowing money, and they willnot have to pay interest.What they dont understand is that every price we pay includesa certain amount of interest. The exact proportion variesaccording to the capital versus the labor, maintenance,administrative and other costs of the goods and services webuy. This ranges from a 12 % interest component for garbagecollection, (because here the share of capital costs is relativelylow and the share of physical labor is particularly high) to 38%for drinking water and up to 77% in the rent for public housing(over 100 years, which is the time houses in Germany mostlylast).On the average we pay about 40% interest in all the prices ofour goods and services. In medieval times people paid thetenth of their income or produce to the feudal landlord. In thisrespect they were better off than we are nowadays, wherealmost one half of each dollar goes to the people who owncapital as I will explain with the next misconception. 3
  • Misconception 3: Everybody is treated equally in the system Interest payments and Interest gains show large disparities: 80% of the population pays twice as much as they gain 10% gain more than twice as much as they pay Source: H Creutz Margrit Kennedy3. Since everyone has to pay interest when borrowing moneyand receives interest for savings, we all seem to be equally welloff within the present money system. However, when we take acloser look, there are indeed huge differences as to who profitsand who pays in this system. Comparing the average interestpayments and income from interest in ten equal parts of 2.5million households in Germany, we can show that 80% of thepopulation pay almost twice as much as they receive, 10%receive slightly more than they pay, and the remaining 10%receive more than twice as much interest as they pay, that isthe share the first 80% loses.This illustrates one of the least understood reasons why the richget richer and the poor get poorer, or The FairnessMisconception which holds that everybody is treated equally inthis money system.In Germany, in the year 2004 about 1 billion were transferredevery day from those who work for their money to those canmake their money work for them. But have you ever seenmoney work? In other words, in our monetary system we allowthe operation of a hidden redistribution mechanism, whichcontinually transfers money from the large majority to a smallminority, creating a social polarization which over time willundermine any democracy, because what use is the equalitybefore the law, without an equality before the money?(Question of a banker, who had worked for 36 years in theNational Central Bank of Argentina.) 4
  • Result 1: ContinualInflation Because of inflation, in the year 2001, every DM was worth only 20 Pfennigs and this was the most stable currency in the world! Source: H Creutz Margrit KennedyAs one result of this defect in our monetary system between1950 and 2001 every Deutschmark lost 80% of its value i.e. isworth exactly 20 Pfennig, and this was the most stable currencyin the world. For most people, inflation seems like an integralpart of any money system, almost natural since there is nocountry in the world without inflation. Because inflation isperceived as a given, economists and most people believeinterest is needed to counteract inflation, while in fact interest isthe major cause of inflation. About two years after every rise ofinterest follows a rise in inflation. Therefore, if we could abolishinterest we could also abolish inflation. In the present moneysystem we are faced with a dire choice: either economic orecological collapse. Only as long as public and private debtsincrease, following the pathological growth of the moneysystem, can the economy function,. This means, we needeconomic growth at about any cost, thus preparing an ecologicalcollapse of unprecedented proportions. 5
  • Result 2: Widening Gap in