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How not to rethink money

I have a book review now up on of Bernard Lietaer and Jacqui Dunne's Rethinking Money: How New Currencies Turn Scarcity Into Prosperity. I wanted to like the book more, because I too like alternative currencies. Unfortunately Lietaer and Dunne make some very crankish arguments, suggesting that the phenomenon of a positive interest rate creates problems for the economy, and that a proliferation of free currencies will ameliorate those problems.


  1. Assuming they are not forced to use irredeemable currency, people have a choice: to lend or to hoard. Why should anyone lend unless the interest rate is not only positive but large enough to be worth the lender's while?

  2. From the article – "There is no 1:1 correspondence between checking accounts (one kind of bank liability) and bank loans (one kind of bank asset). Banks use only some of the funds given to them by depositors to make loans; the rest they mostly use to purchase securities and to hold reserves."

    I may be confused about this as well. I think the concept of a flexible money supply more or less demands we admit to the existence of debt as money. That is to say, each time a loan is given, some portion of it is deposited (though not necessarily in the same bank), and that deposit (originated from debt – the original loan) then forms the foundation for new debt, which turns again into new deposits. Some deposits are not even required to have a reserve. This is "debt based money" as I understand it, and I was not aware there was any disagreement as to its existence and origin. Further, many of these securities you mention are, in their turn, debt – Federal bonds, for example.

    I agree the repayment of all of the debt would not result in the total disappearance of money, but it's a moot point. The shortfall of money it seems to me would eventually cause enough trouble to cause every bit as much chaos, and no doubt alternative measures would proliferate, as they have in the past.

    Can you clarify for me at all your objection to this language of debt based money?

    What LETS and CES systems would purport to do is allow people to save present goods and services for future goods and services based on negotiated relative rates without the need for interest on the medium of exchange itself. The relative value of future goods and services might indeed suffer in comparison to present goods and services, but that would be independent of the medium of exchange itself, which I understand to be credits of some sort within the LETS or CES itself. This currency is not particularly useful to hoard, as it does not become scarce. Each new transaction creates credits and debits within the system irrespective of those that would be hoarded. Hoarding then simply means you did something or gave something and refused to take any good or service in exchange – hardly a winning proposition.

    Am I missing something here?

    Perhaps I shall have to read the book before making too many assumptions about what they wrote… =)

  3. I certainly "admit to the existence of debt as money" in the sense that banknotes and checkable deposits are debts (the issuing bank is in debt to their holders) that serve as commonly accepted media of exchange.

    Your statement about loans is kind of like a textbook description the "money multiplier" process, by which the M1 money stock expands via loan creation, so that the new M1 eventually created is a multiple of new base money H initially injected by the central bank. Except that you start in the middle, with unexplained loan creation. (Wasn't the bank fully loaned up before?) You should start with the exogenous event, an increase in H, which increases bank reserves, hence loans and deposits. You will arrive at the conclusion that M1 expands in proportion to H, ceteris paribus. The central bank is the font of monetary expansion, not the commercial banking system.

    I don't know what you mean by "interest on the medium of exchange itself." Banknotes don't bear interest. Checking accounts pay interest to the holder. Surely interest paid to the account-holder isn't something objectionable.

    Anyone who wants to use barter would be free to do so in my ideal world. With a free banking system in place I don't think there would be many takers for barter, though.

    1. Thanks. I seem not to be too far off then.

      As I mentioned though, isn't H (I usually see this expressed as MB) usually government debt these days by and large? Since its decoupling from gold, that appears to be the base money source.

      Until recently, checking deposits were actually banned from paying interest due to concern that banks competing for deposits would be harmful to the control of the money supply (Regulation Q), and even now the interest is negligible at best. The meaning though of the phrase, "interest on the medium of exchange itself" should be obvious I'd think. M1 increases as loans (which charge interest) are received, spent, and ultimately deposited, thus expanding M1. The interest on the debt far outstrips any purported interest the new demand account draws, therefore the majority of the money supply intrinsically depends on interest bearing debt.

      Again, I don't see this as at all outside the mainstream, and having it presented as such is confusing.

      You ask, "Wasn't the bank fully loaned up before?" We hardly know, do we? The banks know, and tend not to want to share that information. Whether any given bank was or not, though, the extent to which it was is the extent to which the medium of exchange is interest bearing debt, isn't it?

      LETS and CES are not supposed to function as barter, but I am seeing little new information here about that stuff, and need to go to other sources I think to more fully understand them. I'm not in a good position to explain them myself. I was thinking people here might have experience with them, or thoughts about them.

  4. I don't find it at all obvious that "interest on the medium of exchange itself" refers to interest on bank loans, since bank loans are not the medium of exchange. You are blurring the distinction between a bank liability (checking account balances) and a bank asset (loans). On the one hand you say that interest on checking deposits is negligible (which is true today). On the other hand you say that "the medium of exchange is interest bearing debt, isn't it?" These are inconsistent statements, because checking deposits are media of exchange.

    Again, the process that increases M1 does not begin with loans being made. It begins with new bank reserves. Don't blame bank loans for a growing M1.

    I asked whether the bank was fully loaned up in your hypothetical scenario of loan expansion. I wanted to know what you were assuming to explain why the bank decides at a certain time, and not sooner, to expand its loans.

    1. The loans are the source of the deposits. I am not "blurring the distinction". I am merely pointing out the relationship they have one to another in the process of producing the expanded money supply you yourself described as "textbook". Again, I simply do not see the confusion.

      Banks are allowed to have excess reserves. They are not required to be fully loaned up. As such, it is the bank that decides. One can argue that banks decide not to expand their portfolios for a host of reasons to do with regulation. This puts some of the onus back on the government, it is true, but it does not change the fact that the banks are the ones who decide to lend, and this lending has to take place in order for the money supply to expand.

      The Fed can perform open market operations to expand MB until it turns purple, but if banks do not lend, there is no expansion of the monetary supply.

      1. Loan expansion and deposit expansion go together when banks lend out excess reserves during the money multiplier process. We are agreed on that. "Interest on the medium of exchange itself" is still a bad label for that. (1) Again, because the interest you are talking about is on the loans, not on the medium of exchange. (2) Because the rate of interest on loans is (as a first approximation) irrelevant to the quantity of deposit creation.

        Actually, a banking system with excess reserves does not have to expand loans to create deposits. It can alternatively create deposits by buying securities.

        Since 2008 M1 and M2 have not expanded in proportion to MB mostly because the Fed is paying interest on reserves. The Fed is deliberately "sterilizing" its open-market operations. Secondarily, demand for business and consumer loans is weak while firms and households seek to deleverage. [Later addition: And supply of loans is weak while banks seek (and/or regulators pressure banks to make) fewer loans in relation to capital.]

        1. Well, I read and comprehend everything you are saying, and even agree, except to say I still find it impossible to figure out your objection to the terminology used in the book. At some point we have to be allowed to discuss openly the relationship between interest bearing loans, deposits, and money multiplication, whatever you wish to call that.

          I certainly do agree that much of the mischief in monetary policy though comes from the government's regulation of it. What I wonder though is where the government would get its taxes without such a regulated monetary supply. If the government taxes in bank notes that are unregulated, and the banks go down, the taxes go down as well. Does the government begin again accepting payment in kind and payment in work? Ultimately, the government has a very strong interest in regulating the money supply, and the history of this goes back to Rome at the very least – inflating gold coins by cutting them with base metals…. It's an ancient problem.

          I think I agree with you that the idea of paying interest on reserves is bad.

          Fundamentally I am for decentralization. Our stock markets and commodities markets seem to me to be a good model for how all the rest of our markets should work. An intermediary exchange good treated as money and pegged to a number of different commodities might be preferable, but it just seems to me the minute you peg money to anything else, you create a situation where that thing, or those things, then become more under demand than they were originally precisely because they now have the added value of being a well accepted medium of exchange. Maybe it is a "problem" with no solution.

          I guess ultimately I'm just not sure what exactly it is you are proposing, and why you have this issue with acknowledging that there is a fairly direct link with interest bearing loans and much of our money supply as it exists through money multiplication, not to mention MB being composed mostly of debt to begin with.

          1. In what media of exchange would government accept tax payments, facing multiple private banks of issue? Same as they do now: in any checks that clear at 100 cents on the dollar. There's no good rationale in tax collection for any further restrictions. Free banking systems, with competition among multiple issuers, have a good track record of par acceptance. The long-standing temptation of governments to debase the coinage, or pay bills by printing paper money, does not represent an interest in regulating the money supply (in the literal sense of making it more regular), but in exploiting the revenue potential of having its own legal monopoly over money supply.

            I don't think paying interest on reserves is necessarily bad. What's bad is paying interest at a rate so high that it creates an unsatisfied excess demand for base money (quantity of MB demanded exceeds actual MB) at the current level of nominal income.

            If it were true that demand to hold gold were higher under a gold standard, that wouldn't be a problem provided nothing prevents the purchasing power of gold from staying at the level that equates quantity demanded to quantity supplied. (It isn't necessarily true because under a fiat standard people stockpile gold as an inflation hedge.)

            What am I proposing? Free banking, just as the name of the blog indicates. Google for and read some of what I've published on the topic.

            To repeat, I don't have an "issue with acknowledging" the link between loans and bank-issued money. They sit across the bank balance sheet from one another, and the latter finances a share of the former (as well as financing other bank assets). What I argue against is thinking that this link is a problem per se. Or, as Lietaer and Dunne suggest, that the existence of a positive interest rate on loans is a problem.

            Finally, MB (the monetary base) is currently composed mostly of interest-bearing reserves, but I wouldn't say that it is composed mostly of debt "to begin with," i.e. as a matter of course. MB consists of fiat money, none of which was debt in the US up to 2008. In 2008 the Fed began to pay interest on the bank-reserves part of MB, treating reserves as debt. Soon bank reserves grew to become more than half of MB. But I suspect that you weren't thinking of interest-bearing reserves. I suspect that by "composed of debt" you meant "matched on the other side of the Fed's balance sheet by interest-bearing assets." That seems to me a much clearly way to describe it.

  5. Yes, and here is a case in point, if you have any faith in this source at all.

    Here the case is laid out that the current bank refusal to lend could be countered by the Fed buying assets from non banks, leading in essence to nationalization. In other words, the banks may be playing right into the hands of socialists by refusing to lend.

    In what way is this article misrepresenting the case? Maybe that will clear things up.

  6. There's got to be a better way than shrinking the horizontal rows and moving the tread progressively to the right as people reply to each other.

    I know libertarians like to highlight government in their postings, but its a bit excessive making it the only word to fit on a line.

  7. "The book embraces community currency projects that charge a "demurrage fee" for holding a currency note too long, to penalize its use as a store of value and thereby to confine its use to that of a rapidly circulating medium of exchange. This idea is historically associated with Silvio Gesell, not cited in the book, another monetary crackpot."

    Obviously you don't think much of Gesell or negative interest money. There is one application of it, however, I think might be useful:

    1. The public debt is now $17 T;

    2. The govt is running deficits and will need to raise the debt limit, which will again raise the price level and reduce 1/p, the purchasing power.

    Would it not be a sensible for the Treasury, without borrowing, to simply print up negative interest currency to pay its bills? The demurrage would be a revenue stream which could pay down the existing debt. Once the debt is paid in its entirety, the demurrage could be used to fund the govt.

    Writing as a retailer, I would not mind being stuck with the 1%/month demurrage since I think this high velocity "hot potato" money could increase my sales significantly.

    1. Tell ya what. Stand over there, on that pile of dry straw. Hold out your left hand and take this, yes that's a fuse and it's a stick of dynamite. Now hold this in your right hand. Yes, it's throwing off sparks, I know. Just be careful not to light the straw or the fuse!

      So far, hyperinflation has not been in the cards. And I am sure the central bankers can manage a new experiment in trying to create rapidly rising velocity much better than holding a spritzing sparkler and a stick of dynamite. For one thing, there are no uncertainties in the market and for another all market processes are simple linear, scalar, static, and stateless…

        1. My analogy was intended to be pithy and humorous. My point is not. If the central planners think to stimulate a higher velocity they may find the line where they get a highly nonlinear response.

          I do not believe hyperinflation is going to occur soon. My prediction is that gold will slip in and out of backwardation, before it becomes permanent ( and then the gold bid on the dollar will be withdrawn. Via what I call "commodity arbitrage" dollar holders desperate to get some gold (dollars->crude, crude->gold) will drive the price of commodities up to any arbitrary level. People may call this "hyperinflation" but it will having nothing to do with either the quantity of money nor the velocity. Consumers will be the driver of this process.

          But if the central bank begins to actually punish savers in nominal terms, that could tip the system over into exponentially rising velocity and the flight into real goods.

          A VERY dangerous game that I hope they do not ever attempt to play.

  8. Actually, if negative interest money was circulating, people could save ordinary money in their mattresses and it would appreciate as the debt was paid down. Gold, of course, would then revert to its 1792 value of $19.79 If one multiplies $19.79 times 23 (CPI) gold ought to be worth ±$450/oz instead of $1550 or whatever. Silver on the other hand @$29 is equal to the 1792 price of $1.292929 x CPI and unlike gold, is without blown up speculation.

    1. Another pithy analogy: using consumer prices to "adjust" gold is like using gummy bears to "adjust" the reference meter stick, the one made of platinum and under glass in Paris…

      Many forces operate on consumer prices, some pushing downwards such as the orders and orders of magnitude of efficiency improvement made since 1792. Some push prices up, such as taxes and labor law, litigation and environmentalism.

      We need an objective unit of measure. The price of buggy whips hedonically adjusted to be the price today of driving shoes or whatever is not it. We need a numeraire, a unit of account which does not vary by the productivity of manufacturers, consumer taste, changing technology, or the whims of government.

      Got gold?

  9. Come to think of it, the hoarding of regular non- demurrage cash would cause this cash to disappear. Gresham's law would apply since regular cash would be better for savings. Also, after 100 months the stamp money would be paid and would disappear into mattresses as well and appreciate risklessly. The accumulation of household savings in this way would fund new investment.

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