The,,Soproni Kékfrank : Case Study of a Hungarian Complementary Currency




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2. 1. Money: theoretical anchorage


Economics textbook defines money as any kind of object or record generally recognized as means of payment for the exchange of goods and services; it is a set of assets people use to purchase goods and services from other entities.4 Money fulfils three main functions which distinguish them from other assets: it serves as a medium of payment or exchange, as an account unit and as a store of value of goods and services. (Fuchs – Tuleja, 2005: 209-213)

Contemporary money exists in three basic forms: coins and notes - circulating within a national economy referred as ‘currency’; and deposit money (i.e. bank money - held in bank accounts), which is considered to be the quantitatively prevailing form in which contemporary money exists. (Fuchs – Tuleja, 2005)

There are different kinds of money, amongst others: commodity money which takes the form of a commodity with intrinsic value (e.g. gold) and fiat money without intrinsic value as a physical commodity, established as valid money by government decree, used and accepted as a payment form for the transactions. (Stonecash et. al., 2011) The fixed links between money and gold were cut by the President Nixon in 1971, when the gold-exchange system of the Bretton Woods agreement (1944) under which the gold and other major currencies were convertible into dollars, (i.e. system based on commodities), had been abandoned. (Douthwaite, 1996) Consequently nearly all money systems are based on fiat money.

The value of currencies fluctuates in response to the market impulses and central banks’ interventions. In order to strengthen the position of the national economy in the international market, central banks adjust interest rates and the amount of money in circulation by introducing new money into economy through sale or purchase of financial assets or through varying the discount rate (interest rate) at which they lend to commercial banks. Commercial banks then lend money at commercial interest rates. The difference between commercial interest and discount rate - decreased by the banks’ operating expenses creates banks’ profit. (Douthwaite, 1996; Votruba, in preparation)

Commercial banks play a significant role in the money creation process, as they create money through granting loans on which interest is paid. Then money is repaid by the client to the bank with an additional payment. The concept designated by Votruba (in preparation) as ‘the paradox of interest’ describes the situation which logically ensues from this process: the amount of money lent out (i.e. created) by the bank is always lower than the amount the bank gets back (i.e. loan + interest). This fiat debt based money system implies the situation of impossibility to repay the debt and necessity to create new money for new loans which results in exponential growth of the amount of money in circulation. (Ibidem, in preparation; Kennedy, 1995) In other words: since the prevailing portion of money in circulation is issued as loans, borrowers can only obtain the money to cover interest payments, “if other borrowers have borrowed sufficiently more.” (Douthwaite, 1996: 165) Furthermore, these additional borrowings carry interest as well; “the necessity to pay interest on these additional borrowings means that the economy needs to expand if the proportion of world income which is paid over in interest to the lenders is not to increase.” (Douthwaite, 1996: 165) The system is dependent on borrowing money, but in order to keep the interest payment on the level that does not impoverish the borrower, the economy has to grow.5

The exponential growth of the amount of money in circulation, however, is unsustainable in the longer term. This is why necessity calling for a reform has been arising. The arguments summed up are presented in the next subchapter.

2. 2. The ‘Trouble with Money'


The discussion on the contemporary money system is topical nowadays and encourages its critics, as well as supporters, to identify the main challenges.

Margrit Kennedy explains misconceptions about money. Among others, the fact that the interest is only paid when money is borrowed, which is not true, as it is hidden in every price paid. (1995: 8) Another common misconception is that all the people are equally affected by the interest. However, there is difference between who profits and who pays in this system, and what Kennedy sums up as: "the rich get richer and the poor get poorer". (1995: 9) David Boyle, a senior associate at the New Economic Foundation 6 in London divides the critics in: “those who are horrified at the lack of money in the right places”, who demand various different forms of free money; “those who are appalled at the consequences of too much money in the wrong places”, calling for money rooted in the real world; and another related class of “those who believe that the way money is created is basically wrong.(Boyle, 2002: 83) This subchapter takes a brief inside to the topic of the trouble with money.

The Greek philosopher Aristotle sees trouble with money in the fact that it is corrupt. In his critical essays he calls money nomisma, because as it is man-made, its value is not derived from nature, but from law: “For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural”. (Aristotle, 1999: 17)

A German merchant, a social activist and an influential 20th century money heretic Silvio Gessel, belongs to the Bolye’s group viewing the difficulty with money as a result of the fact that “there isn’t enough of it”. (Boyle, 2002: 21) According to him, the unnatural aspect of money comes from the fact that it grows in value when not being used, whilst other commodities lose value within the course of time.

Malcolm Ian Sinclair, the 20th Earl of Caithness, a British Conservative politician and member of the House of Lords, sees the trouble with money in the debt-based money supply. According Boyle’s classification he represents the group of economic critics of the identifying the problem as there is “too much money in the wrong places.” (Ibidem, 2002: 51). In his 5th March 1997 speech he gave in the British House of Lords, the Earl identifies it is banks that cause the decrease of the money value (through the way they create money).7 (The Earl of Caithness, 1997, in Boyle, 2002)

Nadia Johanisová, a Czech teacher of Economics at the Masaryk university, who supports the economic alternatives, sees the fact that most of new money getting into the circulation had originated in a form of a debt as a key problem of the contemporary economic system. In accordance with Richard Douthwaite and Margrit Kennedy she points out that the growing amount of money in the circulation stimulates the production to keep the debt-based system of money creation working. (Johanisova, 2008: 82)

John Ruskin, an English philanthropist, social thinker, poet and artist in his famous aphorism says: “there is no wealth but life.” Money is always subservient to this principle. It is to promote life including all its powers of love, of joy and of admiration, to create beauty and reality. If not so, it must be changed. (Ruskin, 1985) In his book of essays - Unto this Last – he describes the principles of political economy:

Capital signifies ‘head, or source, or root material’ – it is material by which some [...] good is produced. It is only capital proper [...] when it is thus producing something different from itself. It is a root which does not enter into vital function till it produces something else than a root: namely, fruit. [...] but capital which produces nothing but capital is only root producing root, bulb issuing in bulb, never in tulip; seed issuing in seed, never in bread.” (1985: 218)

This is how Ruskin sees the functions of money and metaphors his perception of the 19th century monetary system. There are a numbers of thinkers searching for the system to make money work for people, where it is a good servant, not a master8. The next chapter introduces their alternatives.
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