Advocates for changing the rules that currently allow banks to create a nation’s money supply would have governments take back that responsibility. Should that happen, most of the problems we defined earlier would be greatly reduced or even eliminated.

However, the financial elite within governments — and with power over governments — makes passage of such legislation all but impossible today.

So what can the rest of us do?

We would argue that even though this appears to be a political problem, the solution can come from business. The banks are businesses that profit from making money and would not willingly give up that position. So, in order to bring about the changes needed, we have to understand how dominant business players in any industry would react if threatened with a dramatic reduction in their profit-making potential. Unseating dominant players is the perennial dream of new entrants who wish to take over a market. Much has been written about ways to go about doing so, but the leading strategy for succeeding at this is called “disruptive innovation”, a term first introduced by Harvard business professor Clayton Christensen.

His premise is this: One rarely succeeds by directly attacking the powers that control an existing paradigm (they will almost always win). Instead, create a solution that solves a more bite-size problem, one that is off the radar of entrenched parties and therefore not perceived as a threat. Then grow that solution until it can address the larger problems, and ultimately replace entrenched systems when the new solution is too big and powerful to be stopped.

Or as Buckminster Fuller was known to say, “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

Following their advice will greatly increase the likelihood of a new solution being able to survive and ultimately flourish.

Applying those ideas to a new monetary system

The first thing that disruptive innovation theory tells us is that trying to directly produce a wholesale change at the national level will be near useless. Instead, we need to find ways to accomplish our goals on a smaller scale, one that can be implemented without invoking an “antibody reaction” on the part of the banks and would not represent a direct threat to their existing business model. And ideally it would be something that local communities can do on their own without interference from the government.

One key clue is that the banking industry as a whole is not interested in small loans to both individuals and businesses. It takes just about as much effort to approve and issue a small loan as a big one and there is just too little profit in those small loans. Profit is the chief driver of the banks, and anything that reduces profit is rejected and anything that enhances it is prioritized.

Given that fact, the banking industry has been increasingly moving away from small loans, as detailed in this 2012 FDIC study of community banks, creating an opening that we can exploit, without fear that the banks will think we are trying to take their lunch. Essentially, we would be taking the banks own natural inclinations and using that to our advantage. Fortunately, the majority of local economies everywhere are primarily tied to their local small businesses, the ones that want and need those smaller loans and capital infusions.

Small businesses account for the majority of jobs in most countries and, in the United States in particular, it is estimated that businesses with 20 or fewer employees account for over 50 percent of all jobs in the country — more than all government jobs, big business jobs, non-profit jobs and others combined! And companies that are less than five years old account for all the net new jobs, as all other job providers lose more jobs per year than they create.

And while credit is a key tool of businesses, both big and small, capital (investment) also plays a significant role. Big business has no trouble attracting credit from the banks, because the size of their transactions is profitable for the banks. Likewise, it is profitable for the banks to facilitate capital formation (investment) for big businesses. The opposite is true on both fronts for small businesses.

So, from a disruptive innovation standpoint, finding a means to provide money in the form of both credit and capital for small businesses represents a market the banks don’t really care about. Serving those markets would represent no threat to the banks, which would largely ignore any activity there just like all businesses ignore activities that do not represent a competitive threat to their core business.

And since credit and capital represent ways to get money to those small businesses, the question is, how can we craft a new money solution that enables us to inject credit and capital into small businesses and get more money to the rest of the community?

What is Money?

Local communities are the backbone of national economies yet most are starved for adequate financial resources. But saying that we need to find an alternate way to inject new money into those local economies begs the question, “What is money”?

Wikipedia defines money as, “Any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context.”

In essence, something is considered money if people accept it as money. That is at the heart of the alternatives to bank-created money. It turns out that money can be anything that its users want it to be. And there are generally no laws that prohibit citizens around the world from creating their own money, provided it is not deemed the national currency, generally called fiat money or fiat currency.

The key here is that governments authorize banks, and no one else, to create fiat money. This money is declared by a government to be legal tender, which means that the government will accept it in payment of fees and taxes and that all credit providers have to accept it as payment of debt obligations.

Alternative or complementary currencies

All other forms of money are called alternative or complementary currencies and they may be created by individuals, organizations and even governments — these are currencies that can exist alongside or in lieu of fiat currencies, and can be in paper or in digital form. When in paper form they are sometimes called scrip.

Most people have heard of Bitcoin. First introduced in 2009, Bitcoin is a type of digital alternative currency referred to as a cryptocurrency, based on blockchain technology. Because Bitcoin can represent a speculative investment, the SEC currently considers it, and other cryptocurrencies, as securities, meaning that the issuance of such is regulated accordingly.

Many people first learned of the idea of alternative currencies with the introduction of Bitcoin and realized that money can be created by private individuals and groups. Because this is likely the first time many have been exposed to alternative money, they often assume that this is the first time a non-government form of money has been used. 

Quite to the contrary, Alternative currencies have existed for millennia (even in ancient Egypt) and there are thousands of different versions in existence today, far outnumbering cryptocurrencies. In fact, the periods in history when economies were generally healthier than they are today, when there was a vibrant middle class and when extreme poverty was largely absent, were usually periods in which both fiat currencies and a “people’s” currency were available in roughly equal measure. This document, Complementary Currencies in Use provides multiple historical examples.

History shows that alternative currencies tend to grow in popularity when the national economy is in distress and fiat money is tight. A modern case in point can be found in Greece where local currencies have been popping up all around the country. Going back nearly a century we find numerous examples, specifically from the Great Depression.

This article provides a number of current and historic examples from around the world, and points out that while central banks and governments blocked many complementary currencies in the early 20th century (especially during the Great Depression), today, many governments are more supportive and recognize the positive role that complementary currencies can play. These examples demonstrate over and over that local projects can be implemented quickly and with dramatic results, demonstrating the viability of the disruptive innovation approach to change rather than attempting change at the national level.

The previous article includes a reference to President Franklin D. Roosevelt who was told by a respected economist that, “The correct application of stamp scrip would solve the Depression crisis in the U.S. in three weeks.” FDR then denounced complementary currencies fearing decentralization (thereby protecting the banks) and soon afterwards they were prohibited, until more recent times.

And finally, this article explores in greater depth the Austrian town of Wörgl, which during the Depression emerged from over 30% unemployment to near zero in a short period of time. That effort was so successful that it became widely known as the Miracle of Wörgl — until the Austrian Central Bank shut it down.  To this day, many point to the example of Wörgl and how a local currency can rapidly and dramatically improve a local economy, circumventing the ills foisted on us by the banking industry and our current economic paradigm.

Previous: Part 1 – What is Money?

Next: Part 3 – Implementing a Local Currency Program