Richard Douthwaite's

Design Proposals for Global Synergy

(Extracted from his paper Increasing Global Synergy)

Design conclusion 1:

In order for governments to be able to be largely unconcerned whether economic growth takes place or not, they need to be able to create money and spend it into circulation. More generally, sustainability requires that the money supply should cease to be dependent on people going into debt. Money creation should be taken out of the hands of the commercial banks entirely. Instead, all money should be spent into use by national or local governments. This approach is suggested in a recent book, Creating New Money, by James Robertson and Professor Joseph Huber.

Design conclusion 2

Countries should operate two currencies, one for savings, one for trade. Capital and current money flows should be kept apart. Both should have independent floating exchange rates so that governments need never be concerned about current account deficits or the need to attract foreign investment.

Design conclusion 3

The amount of money in circulation and hence the rate of inflation would be totally under a government’s control if it spent the exchange currency into circulation and taxed it back again. It could allow an inflation rate of between 3% and 8% per annum while the economy was changing during its move to sustainability. This rate would be controlled by having the government create all the exchange currency and spend it into circulation. Near zero inflation would be acceptable once sustainability had been attained and the economic system had ceased to change.

Design conclusion 4

The distribution of scarce, vital commodities cannot be left to an unregulated world market. The growing scarcity of oil and gas means that rationing is required for all fossil fuels. The rationing system should be based on everyone’s right to a share in the planet’s capacity to absorb carbon emissions.

Design conclusion 5

Rather than allowing a select group of countries to provide the world with its money, it would be fairer to have an international institution do so in order to share the seignorage gains among the currency’s users. Remarkably, such a currency already exists. The press called it ‘paper gold’ when it was first issued by the IMF in 1969 since its official name, Special Drawing Rights (SDRs), was somewhat boring.

SDRs came about because it did not make sense to mine gold and keep it in bank vaults to use as the basis of the world’s money when account book entries could do just as well. Each SDR’s value was based on a weighted average of the value of the currencies of the largest exporting IMF members and each issue was shared out among IMF members according to a quota based on the country’s national income and the amount of international trade it did.

No SDRs have been issued since 1981 although a majority of the member countries of the IMF would have liked to see that happen. Each country’s vote in the IMF is weighted according to its quota and 85% of the total weight of votes has to be in favour of a proposal before it is considered passed. As the US has 17% of the total voting weight, SDRs cannot therefore be issued without its approval. That will never be given because if the reserve currency system carries on as it is, the US can expect to be able to get an indefinite cost-free loan of perhaps 70% of the world’s new money. If, on the other hand, SDRs are issued, the US share of the money given out internationally will be its quota, a measly 17%.

Essentially, SDRs are a version of the international currency, the bancor, (i.e., bank gold) proposed by John Maynard Keynes and the British delegation at the Bretton Woods Conference in 1944. Like SDRs, bancors were to be reserved for exchanges between central banks but, rather than their value being fixed in terms of a basket of other currencies, they were defined in terms of gold. The US also went to Bretton Woods with a plan for a world currency, the unitas, but as the Nobel-prizewinning economist Robert Mundell once put it “academic internationalist idealism fell prey to economic national self-interest” and both rival schemes were dropped. Instead, the US imposed a system under which the liquidity required for world trade was to be provided by gold and by dollars linked to gold at a fixed rate, $35 dollars an ounce. By so doing, America effectively made itself the world’s bank.

The link between the dollar and gold was, of course, broken unilaterally by the US in 1971 after it had spent more many dollars into circulation internationally to pay for the Vietnam war than it had gold in Fort Knox to back them. Fearing that the dollar’s value had become unsustainable, holders led by the French under President de Gaulle rushed to convert them to gold before a devaluation happened. A run on the bank began and the manager, President Nixon responded by refusing the holders of the promissory notes he had issued what they were due. He defaulted by ‘closing the gold window’, thus ending any fixed relationship whatever between the dollar and gold. This destroyed the key feature of the Bretton Woods system which, in retrospect, seems to have served the world reasonably well. What emerged in its place was a totally-unthought-through arrangement which allowed the defaulter, the world’s richest and most powerful country, to reap a massive benefit by creating the majority of the global money supply with no formal constraints at all. This is the system that has to be re-designed.

There are three ways in which the new currency could be put into circulation. It could be lent, spent, or given away. The disadvantages of lending the money into use are that:

i) The new money would only go to ‘sound’ borrowers. In other words, it would go to the financially strong.
ii) As the loans were repaid, the amount of money in circulation would shrink, reducing the size of the world economy unless new loans were taken out. But new loans would not be taken out unless the world economy was buoyant. As a result, issuing the new money this way would reinforce the present system’s growth imperative, the prime cause of its unsustainability.
iii) The interest charged on the loans would reduce the amount of money in global circulation. If the world economy was not to contract, additional loans would have to be taken out. This would cause the ratio of debt to gross world product to increase, eventually to unsustainable levels, unless the world economy grew, in real terms, at the same percentage rate as the rate of interest charged. This would heighten the growth imperative.

The new currency could certainly be spent into use over the years at a rate which would not cause a global inflation by being used to pay for, say, greatly expanded activities by the United Nations and to relieve Highly Indebted Poor Countries of their debt. However, this approach would make it unlikely that the new currency would displace the present reserve currencies entirely. All it could hope for would be to capture the seignorage gains resulting from rising levels of world trade which would otherwise go to the reserve-currency-issuing countries. Very little of the new money would trickle down to the poor.

Design conclusion 6

The new world currency should be issued by being given into circulation on a scale that would immediately make it the main world currency and allow the reserve currencies to be returned to their countries of origin to clear international debt.

SDRs were given into circulation but, as we noted, they were allocated on the basis of a country’s IMF quota which is related to its importance in world trade. This was scarcely equitable as the strong got the lion’s share of the new money. For reasons of equity, any new international currency issue should be distributed to countries on the basis of their populations on some agreed date.

Design conclusion 7

The distribution of the new currency should be on the basis of population rather than economic power.

To deliver the maximum level of human welfare, every economic system should try to work out which scarce resource places the tightest constraint on its development and expansion. It should then adjust its systems and technologies so that they work within the limits imposed by that constraint. In line with this, an international currency should be linked to the availability of the scarcest global resource so that, since people always try to minimise their use of money, they automatically minimise their use of that scarce resource.

What global resource do we most need to much use less of at present? Labour and capital can be immediately ruled out. There is unemployment in most countries and, in comparison with a century ago, the physical capital stock is huge and under-utilised. By contrast, the natural environment is grossly overused especially as a sink for human pollutants. For example, the Intergovernmental Panel on Climate Change (IPCC) believes that 60-80% cuts in emissions of one category of pollutants - greenhouse gases, which come largely from the burning of fossil fuels - are urgently needed to lessen the risk of humanity being exposed to the catastrophic consequences of a runaway global warming. If this is the most serious resource threat facing humankind at present, it should become the basis of the new world currency.

Design conclusion 8

The supply of the new world currency should be limited in a way which ensures that the overall volume of world trade is compatible with the most crucial area of global sustainability.

If the overloaded sinks were to be taken as the basis for a new world currency, an international Issuing Authority would supply governments with the new money, emissions-backed currency units (ebcus), in amounts in proportion to the size of their populations. It would maintain the value of the currency in relation to the emissions permits issued to everyone in the world on the basis described above by supplying additional permits to whoever presented it with a specific amount of ebcus. This would fix the value of the ebcu in relation to a certain amount of greenhouse emissions and through that to the use of fossil energy.

The issue of the ebcu money would be a once-off, to get the system started. If a buyer actually used ebcus to buy additional emissions permits from the Issuing Authority in order to be able to burn more fossil energy, the number of ebcus in circulation internationally would not be increased to make up for the loss - the ebcus paid over to the Issuing Authority would simply be cancelled and the world would have to manage with less of them in circulation. This would cut the amount of international trading it was possible to carry on and, as a result, world fossil energy consumption would fall. In other words, the level of international trading at any time would always be compatible with achieving the CO2 concentration target. If renewable energy output grew or the efficiency with which fossil energy was used was improved sufficiently rapidly, it would be possible for world trade to increase.

Essentially, the system is a version of the Bretton Woods arrangement which President Nixon destroyed except that the right to burn fossil energy has replaced gold and ebcus play the role of the US dollar.

Design conclusion 9

Tariff barriers, high transport costs or some other sort of protection such as the twin currencies described earlier, are necessary if a region or a country is to develop or maintain a diverse, and thus more sustainable economy.

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