Debt-based money and wealth concentration

Former central banker and currency trader Bernard Lietaer has criticised the global monetary system for “concentrating wealth upwards”, a position that should be uncontroversial given that, according to Oxfam, last year 26 people owned as much as the 3.8 billion people who make up the poorest half of humanity. Intuitively we understand that debt lies at the heart of the problem, but how exactly does the present system produce such inequality? The following features of the debt-based monetary system suggests how at every level it works to concentrate wealth:

1. Credit worthiness- loans are readily available to the wealthy and scarce to those on lower incomes deemed to be higher credit risks.
2. Compound interest - the wealthy benefit from potentially exponential rises in interest income on large bank deposits as interest is earned both on the principal sum of a deposit and all previously accumulated interest. This incentivises the wealthy to hoard capital in low risk deposits and interest bearing assets like bonds rather than invest capital in risky business ventures, slowing the circulation of money in the wider economy.
3. Leverage - access to credit and financial expertise allows the wealthy to use debt to amplify returns from trading low risk securities, for example allowing an investor with £1000,000 of capital to earn a 2% profit on a £10,000,000 security. 
4. Asymmetric information- access to exclusive and timely knowledge about complex financial markets and products enables wealthy investors to take advantage of upward or downward movements in market prices.
5. Cantillion effect- new credit issued by banks typically goes to credit-worthy individuals and institutions first, who are able to spend the new money before this increase in the money supply inflates the prices of goods and services in the economy. Those who receive new money later, either indirectly through the wider circulation of money spent by early recipients of credit or directly through knock on demand for new credit, are only able to spend after prices have inflated. This relative difference in spending power between early and late recipients of new money works to distribute resources and incomes to the wealthy.
6. Global capital - wealthy investors can deploy capital internationally, and typically do so to profit from indebted less developed countries with weaker, more unstable currencies. When a government meets its international debt obligations, a portion of that country's wealth is siphoned off in interest payments to foreign creditors, but if these debts, which are denominated in stronger overseas currencies, become un-repayable in the weaker currency of a less developed country, the resulting loss of confidence in bond and foreign exchange markets leads to a sell off and devaluation of that currency, causing domestic prices and incomes to fall relative to those in countries with stronger currencies where international creditors are based. This gives foreign creditors and investors the purchasing power to buy up the country's assets cheaply, redistributing wealth and resources away from the poorer indebted country to holders of capital in richer countries (see Dollar Risk: Hot Money and the East Asian Currency Crisis).
   
   

From Greed to Green: Bernard Lietaer's global demurrage currency

Bernard Lietaer is a monetary thinker who is already envisioning a post dollar crisis world. His proposal, a global demurrage or negative interest rate currency backed by a basket of commodities, running alongside local, national and regional currencies, is presented here:

In his proposal, as summarised in this white paper on the terra, countries transfer ownership of excess production of important commodities such as gold, oil, wheat, copper, tin, and carbon credits to a private trade alliance in exchange for a currency, the terra, 100% backed by those commodities. A 3-4% annual demurrage fee for holding the terra pays for its operating costs and incentivises users to spend the currency into circulation rather than hoard it.

In his presentation, Lietaer describes our present interest bearing monetary system as 'patriarchical', which he deems problematic in three main ways:

1) In enforcing a monopoly where only one form of money is lawful among a community of users (eg a national currency) the resilience that comes from diversity is sacrificed for efficiency, making this 'patriarchal' money inherently unstable.

2) The time value of money, the interest income forgone today to receive cashflows from an investment project in the future, has two main effects in his view:
a) it promotes short termism, making it more profitable or less costly to bring future cash flows forward to the present, focussing firms on next quarter's results rather than long term returns.
b) compounding interest ultimately requires firms to grow faster than the ever rising cost of capital, converting more and more natural resources into goods and services at an unsustainable rate.

3) Interest bearing money has socially negative consequences. It is necessarily scarce (see The State, Debt and the Value of Fiat Money), forcing competition among money users and tending to concentrate wealth upwards into the hands of a few.

For Lietaer, a 'matrifocal' monetary system is by contrast diverse and therefore stable, abundant in supply and distributive in effect.

Lietaer's implied thesis is that 'monetary system design' is a powerful factor in cultural evolution, which  he believes can be directed to nurture desired ethical instincts, for him represented in the transition from 'Greed to Green'.  But his prescription - a global demurrage currency 100% backed by a commodity basket - by itself only partly delivers the outcomes he desires.

Yes, demurrage would encourage investors to think longer term. If holding demurrage money costs the user (as opposed to earning him interest) and does so at an annually compounding rate, then an investment project that returns 0% a year, for example, would be profitable and increasingly so over the very long term.

But:

1) The terra as global complimentary currency is necessarily a post crisis solution, not a factor that would stabilise the present system

The terra's 100% commodity backing gives it an "inflation resistance" that might work to add a stabilising layer to the international monetary system, but why would money users prefer a demurrage currency that costs money to hold over currencies that earn interest.  The acceptance of the terra as an "international standard of value" therefore would have to follow a serious failure in the global monetary system, which Lietaer  predicts will come from a dollar crisis, creating conditions where national currencies would stand in relation to the terra as soft currencies do to hard currencies today, in other words without the purchasing power or exchange rate stability for international trade.

2) A global demurrage currency in the conditions described above may deliver an ecologically sustainable economy but is unlikely to address the scarcity, social competition and wealth concentration created by the present system of interest bearing money:

If conditions were such that the terra became the international currency of choice, then it would deliver the goal of an ecologically sustainable ecomony in three ways. It would constrain the overall supply of money available for international trade since new terras are only created when countries produce excess commodities in exchange. By withdrawing excess supply of oil, wheat, copper and tin from consumption markets the terra would likely support a rising trend in the price of these commodities, raising the cost of living and slowing growth. This price effect may be counterbalanced by declining demand in commodity poor countries poor opting to contract their economies to earn terras in exchange for carbon credits. But whether through supply constraint or falling demand the overall quantity of resources converted into goods and services might be expected to decline relative to world population growth.

Therefore there will be scarcity and social competition in the new monetary ecology Lietaer envisages. And concentration of wealth and power? If Lietaer's proposed system produces the above effects, presumably intended given his perspective and ultimate goal, then capital accumulation would likely become more difficult. Would not those who have accumulated capital under the present monetary system consolidate their gains? What do the historical examples of demurrage money cited by Lietaer - Ancient Egypt and the European middle ages from 1000 to 1300 - tell us about the kind of society that may result?