Today’s monetary and financial system has become manifestly dysfunctional on an unprecedented scale. Although the on-going crisis is the biggest since the 1930s, it certainly isn’t the first. The IMF has identified 145 banking crises, 208 monetary crashes and 72 sovereign debt crises between 1970 and 2010.[1] Furthermore, these different types of crises are in fact different symptoms of a common systemic problem: a banking crisis can lead to a sovereign debt problem (e.g. Ireland), a sovereign debt problem to a monetary crisis (e.g. Greece); and a monetary crisis to a banking problem. In total, there have been 425 systemic crises over the past 40 years; averaging out to more than 10 per year! Such crises have affected three-quarters of the 187 countries that are members of the IMF, many of them several times.
Until now, governments have kept on borrowing from the financial system to bail out banks. They have been tinkering at the margins with regulations, but always without touching the monetary structure itself. How many more crises do we need to live through, before systemic problems are addressed with systemic solutions?
Back in the 1930s, the U.S. considered two types of solutions:
- The “Chicago Plan” that would let governments issue the national money, and where banks would play only a brokerage role of allocating savings without creating money themselves. This radical solution was successfully resisted by the banking lobby.
- The separation between commercial and investment banking, which took the form of the Glass-Steagall Act of 1934. This Act has been formally repealed in the US in November 1999, and variations of it are currently being considered for reinstatement in the UK and the US. While such regulations would be an improvement for the countries involved, they clearly don’t go deep enough to address global instabilities. For instance, during the 30 years before the repeal of Glass-Steagall, no less than 367 systemic crises happened around the world.
However, we know now a lot more than in the 1930s about the conditions of stability of complex flow networks, of which the economy is an example. There is now peer-reviewed scientific proof that minimal structural conditions are indispensable for any complex flow network to be sustainable.[2] Specifically, a minimum diversity is a key condition for the stability of any complex flow network. The current monetary paradigm that assumes a single national currency is obviously in direct contradiction with this condition. So more and bigger crises will predictably manifest again.
Finally, the on-going financial crisis is only one of the planetary issues that humanity has to deal with today. Moving to a post-carbon economy to reduce the risk of climate change and species extinctions; dealing with the financial consequences of an aging society; reducing joblessness and poverty, are all additional and pressing issues in our times. Each of these challenges could be addressed with monetary innovations that, in addition, would provide the diversity that is needed to stabilize the global system. It is within the power of governments to choose what media they demand in payment of taxes, and thereby what kind of effort they require from their citizens. By demanding exclusively bank-debt money, they give away most of their power to resolve these issues.
Such monetary innovations would best be tested in smaller scales than the nation state, by giving cities or regions some autonomy in choosing the media they require for payment of some local taxes. Such a solution would be less risky for governments than the status quo, and less problematic for the banking system than a new version of the Chicago Plan. It would also ensure more flexibility to our post-industrial society to adapt to the challenges of the 21st century.
[1] Caprio and Klingelbiel, Bank Insolvencies: Cross Country Experience, Policy Research Working Papers no.1620 (Washington, DC: World Bank, Policy and Research Department, 1996); J. Frankel and A. Rose,“Currency Crashes in Emerging Markets: an Empirical Treatment, Journal of International Economics 4 (1996), pp. 351-366; Laevan, Luc and Valencia, Fabian, 2010, Resolution of Banking Crises: The Good, the Bad, and the Ugly, IMF Working Paper 10/146 (Washington: International Monetary Fund).(http://www.imf.org/external/pubs/ft/wp/2010/wp10146.pdf)
[2] Ulanowicz et al. “Quantifying Sustainability: Resilience, Efficiency and the Return of Information Theory” Ecological Complexity Vol 6, #1 (March 2009) pgs 27-36. Goerner et al. “Quantifying Economic Sustainability: Implications for Free Enterprise Theory, Policy and Practice Ecological Economics Vol 69 #1 (October 2009) pgs 76-81. Lietaer et al. “Is Our Monetary Structure a Systemic Cause for Financial Instability? Evidence and Remedies from Nature” Journal of Future Studies (February-March 2010).
