March 20, 2020

Katharina Pistor, Columbia Law School

Our money system revolves around debt. It combines state-issued legal tender with private debt instruments that in good times are money-like. Debt is a pledge on the future and debt-based money is based on the expectation that the future will produce positive returns.

The Coronavirus pandemic is a stark reminder that this is not always the case. Indeed, we are beginning to realize that the problem with our future now is not that it is uncertain, but that it will certainly be radically different from past expectations, even from our current imagination. Investors are selling assets as fast as they can, which is their way of taking back the bets they had made on the future. They are hoarding cash. Debt Money will dry up next and this will bring the economy to a grinding halt. Individuals and families without any cash (or bank deposit) reserves will be hit hardest.

The Trump administration has announced that it will send out dollar-denominated checks to all American citizens. As welcome as this government handout will be fore many, there are several fundamental problems with this strategy: First, payouts that are limited to tax payers, as currently envisaged by the GOP bill, will not reach the poorest of the poor; and even if they were included, most lack bank accounts to cash in their checks. Second, a one-time payment will not be enough given looming unemployment and the huge debt burdens too many households face. Third, richer households will hoard the dollar rather than spend them, thus dampening the effects of this liquidity boost.

As an alternative, I propose that governments should issue a new type of currency Free Dollars (Euros, Pounds, Yen) – a really free Libra – and they should issue them as central bank digital currencies, or CBDCs.^[1] Free Dollars (and their equivalents) should not be issued as a one-off payment; rather a first payment that puts Free Dollars in the hands of every person living in a given currency area should be followed by subsequent releases in response to effective demand.

Free Dollars should serve as a medium of exchange as well as a unit of account. In contrast to the greenback and other conventional currencies, they should not be designed as a store of value.^[2] Instead, a Free Dollar should lose a fraction of its nominal value unless it is spent within a set time period. This feature is comparable to negative interest rates that would permanently attach to unspent money. Its purpose is not just to fight a temporary deflationary episode, but to make money abundant throughout the economy. The government should accept Free Dollars for settling outstanding tax obligations, thereby firmly anchoring the Free Dollar as unit of account.^[3] Free Dollars should be issued in the form of digital money using mobile phones and online devices that are common already in many parts of the world, including in China and parts of Africa.^[4]

The Free Dollar’s demurrage feature – its slowly diminishing value — would ensure that a large fraction of the Free Dollar would actually be circulated, not hoarded. Even as the economy is in lock down, Free Dollars could be used to pay outstanding debt and taxes, to buy household necessities and acquire vouchers that promise future deliveries of goods and services. Once economic activities pick up again, Free Dollars would be readily available to boost spending throughout the economy.

The idea for Free Dollars takes its cue from cooperative forms of money that often emerge spontaneously in times of economic distress.^[5] That happened in Germany during the period of hyperinflation in the 1920s, in North America after the stock market crash of 1929 and on both sides of the Atlantic during the Depression, in Argentina after the meltdown of 2001, and again in North America and Europe after the financial crisis of 2008. Cooperative money allows everyone who has something to exchange to participate in the economy. They don’t have to be wage earners; neither do they need a bank account. What they do need is a viable currency with a high turnover, or velocity rate to participate in economic activities on their own terms. As Irving Fisher put it in the midst of the Great Depression,

“Free money may turn out to be the best regulatory of the velocity of circulation of money, which is the most confusing element in the stabilization of the price level. Applied correctly it could in fact haul us out of the crisis in a few weeks…. I am a humble servant of the merchant Gesell.”^[6]

A prominent example for free money was the “Wörgl” (pronounced Voergel), a currency that was issued in the 1930s by an Austrian city bearing the same name.^[7] Confronted with thirty percent unemployed and a collapsing economy, the mayor of Wörgl followed the recommendations of Silvio Gesell, a German autodidactic scholar, who had lived through the Argentine crisis of the 1890s and whose work would greatly influence Keynes.^[8]

The city of Wörgl issued Freigelt, or “Free money” to its citizens in the form of “labor certificates.” It deposited its remaining cash reserves (which had dwindled during the recession) with a local bank to back the certificates. To ensure that the Wörgl served its purpose as a medium of exchange, a stamp was affixed each month to the certificate at 1 percent face value. Furthermore, the Wörgl circulated at a rate of 12-14 times that of the national currency, giving credence to the high velocity of free money. The Wörgl survived only 13 months — not, however, because it did not deliver on its promises. In fact, the city’s economy prospered, unemployment went down and local businesses frequently paid their taxes early to avoid the stamp discount, leaving the city government with a revenue stream to spend. This successful social experiment in free money was shut down, because the central government reasserted its monopoly over money and threatened sanctions for its continued use.

Sovereigns guard their monetary sovereignty carefully. Yet, over the past decade, they have stood by as new forms of digital money, spearheaded by Bitcoin, were launched. These digital currencies turned out to be an experiment in form, but not in substance. Bitcoins were designed as a trustworthy medium of exchange; but they were kept scarce so as to protect their value. While they can be acquired though work, mining bitcoins is energy intensive, and thus hardly free. But the Achilles heel of Bitcoin is its convertibility into hard currencies. This turned Bitcoin into just another debt money: an asset that is held in the expectation of future gain.

Likewise, Facebook’s “Libra”, which the company hoped to roll out this year, was anything but free. It was designed as a for-profit currency, a “currency of currencies” that was to be backed by hard currencies and other assets denominated in hard currencies.^[9] Placed in a separately managed reserve, these assets were meant to produce interests, not for the Libra holders, but for the members of the Libra Association. The project was met with fierce political and regulatory backlash and seems to have been put on hold for now with Facebook turning to develop a digital infrastructure for digital currencies others might issue.^[10]

Still, the digital technologies private companies have developed might be used for a more egalitarian and sustainable money system. My own preference would be to open accounts for CBDCs for all people (not only citizens!) within a given currency area with their central bank. However, this might not be feasible in the short term, because outside China and a few other countries the necessary infrastructure is not yet in place. As an alternative, central banks might take advantage of the infrastructure some private companies have already developed. However, if governments choose this option, they should protect the data of their citizens from appropriation.

Free money could be issued by any community, not just the central government. Historically, free moneys emerged spontaneously in response to acute money shortages during economic downturns. This was true not only for the Wörgl, but also for other cooperative currencies, such as the credito, which emerged after the 2001meltdown in Argentina. Other community-based moneys emerged at different times in history for designated purposes, such as elderly or child care currency, energy conversation currency, local food-growing currency, among others. These moneys link unused resources with unmet needs and as such should be encouraged. Their viability could be further enhanced with the help of blockchain technology. Indeed, several municipalities have already seen bills on blockchain-based payment platforms introduced.^[11]

There is certainly room for more than one money. Ideally, different types of money should co-exist and be least partially interoperable, as this would greatly enhance the resilience of the money system. However, the convertibility of free money into conventional debt money must be restricted, because this would defy the purpose of free money. Obviously, this will create new governance challenges, such as setting conditions for convertibility and exchange rates, which would have to be worked out. For now, it is critical to set in motion the creation of moneys that facilitate economic exchange at every feasible level.

To be clear, issuing free money is not meant as a substitute for other much-needed government interventions, such as debt relief, social insurance schemes aimed at protecting businesses and their labor force, investments in health services, etc. Rather, the aim of this proposal is to show how we could harness the current political opening for rolling out a new form of money as the foundation for “sustainable abundance”.^[12] If there is a silver lining to this devastating pandemic, it is that it might serve to lay the foundations for economic and financial systems that are more equal and sustainable.

1. Facebook announced a new digital currency in June of 2019, The Libra (the Latin word for free), which, in fact, was designed as a for-profit currency of currencies. ↑

2. Gesell, Silvio. 1949. Die natürliche Wirtschaftsordnung. Nürnberg: Rudolf Zitzmann Verlag. English translation available at https://www.community-exchange.org/docs/Gesell/en/neo/. ↑

3. Whether or not you believe that governments need taxes to fund themselves, imposing an obligation on everyone that must be paid in the unit of account has been a key factor in anchoring a currency historically. See Desan, Christine. 2015. Making Money: Coin, Currency, and the Coming of Capitalism. Oxford: OUP. ↑

4. On the digitization of finance in China, see Zhang, Longmei, and Sally Chen. 2019. “China’s Digital Economy: Opportunities and Risks.” IMF Working Paper WP/19/16. In much Africa, M-Pesa, a mobile money rolled out by Vodafone and similar systems are in use. On recent trends in adding debt features to this payment system and their devastating impact on poor households, see Kevin Donovan and Emma Park, “Perpetual Debt in the Silicon Savannah”, Boston Review, 20 September 2019. ↑

5. See Lietaer, Bernard, and Jacqui Dunne. 2013. Rethinking Money: How New Currencies Turn Scarcity into Prosperity. ↑

6. Irving Fisher, “Stamped Scrip and the Depression.” Fourth Letter to the Editor, The New Republic, 74 (April 12, 1933): 246. ↑

7. Lietaer and Dunne (2013), Chapter 10. ↑

8. Dillard, Dudley. 1942. “Silvio Gesell’s Monetary Theory of Social Reform.” American Economic Review 32 (2):348-352. For a more recent assessment of Gesell’s work, see Ilgmann, Cordelius. 2015. “Silvio Gesell: “A strange, unduly neglected” monetary theorist.” Journal of Post Keynesian Economics 38:532-564. ↑

9. See my testimony to the House Financial Services Committee, 17 July 2019. ↑

10. “Facebook ‘rethinks’ plans for Libra cryptocurrency”, BBC 4 March 2020. ↑

11. New York City is among. On the ideas motivating the bill, see Robert Hockett. 2019. “The New York Inclusive Value Ledger: A Peer-to-Peer Savings & Payments Platform for an All-Embracing and Dynamic State Economy.” ↑

12. Lietaer and Dunne (2013), at 55. ↑