The Crime of Alleviating Poverty

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The Crime of Alleviating Poverty

A Local Community Currency Battles the Central Bank of Kenya

by Ellen Hodgson Brown / June 28th, 2013

Former Peace Corps volunteer Will Ruddick and several residents of Bangladesh, Kenya, face a potential seven years in prison after developing a cost-effective way to alleviate poverty in Africa’s poorest slums.  Their solution: a complementary currency issued and backed by the local community.  The Central Bank of Kenya has now initiated charges of forgery.

Complementary currencies can help eradicate poverty.

Proving that may be difficult in complex economies, due to the high number of factors influencing outcomes. But in an African slum with little of the national currency available, supplying residents with an alternative currency has a positive effect that is obvious, immediate and incontrovertible.

This was demonstrated when Will Ruddick, an American physicist, economist and former Peace Corps volunteer, introduced a complementary currency into a Kenyan slum called Bangladesh, near the coastal city of Mombasa. Will’s local development organization, Koru-Kenya, worked with over one hundred small business owners in Bangladesh, who agreed to give each other the equivalent of 400 shillings (about ?3.5 or $4.60) in mutual credit in the form of business vouchers called Bangla-Pesa. Half of the vouchers would be available for spending on each others’ products and services, and half would be spent into the community on public projects such as waste collection and health services.  Allocation decisions were democratic and transparent, and the new currency was backed entirely by the community’s own resources and insured by a system of group guarantors, not by the Kenyan government or a development agency.

The project was launched on May 11, 2013.  The immediate effect was an increase in sales of 22%. That meant increasing incomes and purchasing power by 22%.  These exchanges were of goods and services that without the additional currency would have been thrown away or gone to waste, not because they were unmarketable but because potential customers did not have the money to buy them.  Introducing Bangla-Pesa worked to move the economy forward at full capacity, connecting the community to its own resources when the only things lacking were those slips of paper called “money.” A compelling video on the project is here.

The successful Kenyan experiment quickly earned endorsements from the United Nations, The Hague and  the International Reciprocal Trade Association. Indeed, no other poverty alleviation or local governance program can compete with the cost-effectiveness of this approach, which is easily replicable in poor communities across Africa. The plan was to expand it to other villages in a democratic grassroots fashion so that it could provide a local medium of exchange for people throughout the continent. This would be done via mobile phones with a system provided by Community Forge, an organization based in Geneva that supports the development of community currencies worldwide.

But that plan was unexpectedly interrupted on May 29th, when Will and five other project participants were arrested by Kenyan police and thrown in jail.  Besides Will, who is married to a Kenyan aid worker and is a new father, the others include local community business owners who are parents and grandparents, a youth activist, a volunteer mother, and the caretaker of seven orphan children.

The police at first accused the group of plotting a terrorist overthrow of the government, claiming that Bangla-Pesa was linked to the MRC, a terrorist secessionist group. When that link was easily disproven, the Central Bank of Kenya was called in and charges of forgery were formally placed.  Will and his fellow suspects have been released for now on a bail of EUR 5,000 and await trial on July 17th.  If convicted, they face seven years in a Kenyan prison.

Despite these perilous circumstances, Will remains optimistic.  “The exciting thing,” he says, “is that these systems really do show a means of poverty reduction – and my hope is that after this case we’ll be allowed to spread them to slums across Kenya.  There have been years of precedent for Complementary Currencies as a solution to poverty, and today there is no doubting it.”

Successful Precedents from Switzerland to Brazil

Complementary currencies are endorsed by many governments worldwide. The oldest and largest is the WIR system in Switzerland, an exchange system  among 60,000 businesses – a full 20% of all Swiss businesses. This currency has been demonstrated to have a counter-cyclical effect, helping to stabilize the Swiss economy by providing additional liquidity and lending capacity when conventional credit for small businesses is scarce.

Brazil is a global leader in using the complementary currency approach for poverty alleviation. Interestingly, its experience began in much the same way as Kenya’s: Brazil’s most successful community currency, called “Palmas”, was nearly strangled at birth by the Brazilian Central Bank. How it went from criminal suspect to official state policy is told by Margrit Kennedy and co-authors in People Money:

After issuing the first Palmas currency in 2003, local organiser Joaquim Melo was arrested on suspicion of running a money laundering operation in an unregistered bank.  The Central Bank started proceedings against him, saying that the bank was issuing false money.  The defendants called on expert witnesses, including the Dutch development organisation Stro, to support their case.  Finally, the judge agreed that it was a constitutional right of people to have access to finance and that the Central Bank was doing nothing for the poor areas benefiting from the local currencies.  He ruled in favour of Banco Palmas.

What happens next shows the power of dialogue.  The Central Bank created a reflection group and invited Joaquim to join in a conversation about how to help poor people.  Banco Palmas started the Palmas Institute to share its methodology with other communities and, in 2005, the government’s secretary for “solidarity economy” created a partnership with the Institute to finance dissemination.  Support for community development banks issuing new currency is now state policy.

The Legal Debate: Mutual Credit or Counterfeiting?

If the Kenyan court follows the example of Brazil, this could be the beginning of a promising new approach to poverty reduction in Africa. The Bangla-Pesa is backed by local resources, and the villagers were very happy to have it in order to move their products and buy the surplus of others within their community.

Viewed as a case of counterfeiting, however, there is historical precedent for harsh punishment.  In the mid-eighteenth century, when the Bank of England was privately owned and had the exclusive right to issue the national currency, counterfeiting Bank of England Notes was made a crime punishable by death. That was the era of Charles Dickens’ Tale of Two Cities and Bleak House, when supplementing the national currency might have helped relieve mass poverty; but it was in the interest of the Bank to control the market for currency and keep it scarce, in order to ensure a steady demand for loans.  When there is insufficient money in the system to cover the needs of exchange, people must borrow from banks at interest, ensuring the banks a handsome profit.

The converse is also true: when sufficient money is supplied to cover the needs of exchange, debt levels and poverty are dramatically reduced.

In this case, the physical Bangla-Pesa voucher looks nothing like the national currency, as it would need to in order to sustain a charge of forgery. The intent of complementary currencies, as their name implies, is not to imitate or compete with the national currency but to complement it, allowing for increased sales within the local community of existing goods and services that would otherwise go unsold. Today, the Bank of England itself acknowledges this role of complementary currencies.

The Bangla-Pesa experience demonstrates what policymakers often overlook: gross domestic product is measured in goods and services sold, not goods and services produced; and for goods to be sold, purchasers must have the money to buy them. Provide consumers with excess money to spend, and GDP will go up.  (In Kenya, where nearly half the population lives in poverty and mass unemployment, increases in GDP reflect extractive practices rather than local conditions.)

The common perception is that increasing the medium of exchange will merely deval‎ue the currency and increase prices, but the data show that this does not happen so long as merchandise and services remain unsold or workers remain unemployed. Adding liquidity in those circumstances drives up sales, productivity and employment rather than prices.

This was demonstrated in a larger experiment in Argentina, when the country suffered a major banking crisis in 1995.  Lack of confidence in the peso and capital flight ended in a full-scale run on the banks, which closed their doors. When the national currency became unavailable, people responded by creating their own. Community currencies at the local level evolved into the Global Exchange Network (Red Global de Trueque or RGT), which went on to become the largest national community currency network in the world.  The model spread throughout Central and South America, growing to seven million members and a circulation valued at millions of U.S. dollars per year. At the local government level, provinces short of the national currency also resorted to issuing their own money, paying their employees with paper receipts called “Debt-Cancelling Bonds” that were in currency units equivalent to the Argentine Peso.

Although these various measures increased the currency in circulation, prices did not inflate.  To the contrary, studies found that in provinces in which the national money supply was supplemented with local currencies, prices actually declined compared to other Argentine provinces.  Local exchange systems allowed goods and services to be traded that would not otherwise have found a market.

This salutary effect was also observed in Bangladesh. “With Bangla-Pesa,” says Ruddick, “we’ve seen that a circulating community-backed interest-free credit is a low-cost, effective way to increase local liquidity and decrease poverty.”

The defendants just need to prove that in court. A crowd-funding campaign is being used to raise the money urgently needed for their defense. The link for contributions is here. To sign a petition begun by a delegation at The Hague supporting the Bangla-Pesa, click here.

• Jamie Brown contributed to this article.

Ellen Brown is an attorney in Los Angeles and the author of 11 books. In Web of Debt: The Shocking Truth about Our Money System and How We Can Break Free, she shows how a private banking cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Read other articles by Ellen, or visit Ellen's website.

This article was posted on Friday, June 28th, 2013 at 5:24pm and is filed under Brazil, Currency, Kenya.

http://dissidentvoice.org/2013/06/the-crime-of-alleviating-poverty/

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How the Fed Could Fix the Economy—and Why It Hasn’t

by Ellen Hodgson Brown / February 24th, 2013

Quantitative easing (QE) is supposed to stimulate the economy by adding money to the money supply, increasing demand. But so far, it hasn’t been working. Why not? Because as practiced for the last two decades, QE does not actually increase the circulating money supply. It merely cleans up the toxic balance sheets of banks. A real “helicopter drop” that puts money into the pockets of consumers and businesses has not yet been tried. Why not?  Another good question …

When Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was not yet chairman of the Federal Reserve.  He said then that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent),” he said, “that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Later in the speech he discussed “a money-financed tax cut,” which he said was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.

It seemed logical enough. If the money supply were insufficient for the needs of trade, the solution was to add money to it. Most of the circulating money supply consists of “bank credit” created by banks when they make loans. When old loans are paid off faster than new loans are taken out (as is happening today), the money supply shrinks. The purpose of QE is to reverse this contraction.

But if debt deflation is so easy to fix, then why have the Fed’s massive attempts to pull this maneuver off failed to revive the economy? And why is Japan still suffering from deflation after 20 years of quantitative easing?

On a technical level, the answer has to do with where the money goes. The widespread belief that QE is flooding the economy with money is a myth. Virtually all of the money it creates simply sits in the reserve accounts of banks.

That is the technical answer, but the motive behind it may be something deeper …

An Asset Swap Is Not a Helicopter Drop

As QE is practiced today, the money created on a computer screen never makes it into the real, producing economy. It goes directly into bank reserve accounts, and it stays there.  Except for the small amount of “vault cash” available for withdrawal from commercial banks, bank reserves do not leave the doors of the central bank.

According to Peter Stella, former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund:

[B]anks do not lend “reserves”. . . . Whether commercial banks let the reserves they have acquired through QE sit “idle” or lend them out in the internet bank market 10,000 times in one day among themselves, the aggregate reserves at the central bank at the end of that day will be the same.

This point is also stressed in Modern Monetary Theory.  As explained by Prof. Scott Fullwiler:

Banks can’t “do” anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any “fuel” to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its . . . interest rate target.

Reserves are used simply to clear checks between banks. They move from one reserve account to another, but the total money in bank reserve accounts remains unchanged.  Banks can lend their reserves to each other, but they cannot lend them to us.

QE as currently practiced is simply an asset swap. The central bank swaps newly-created dollars for toxic assets clogging the balance sheets of commercial banks. This ploy keeps the banks from going bankrupt, but it does nothing for the balance sheets of federal or local governments, consumers, or businesses.

Central Bank Ignorance or Intentional Sabotage?

Another Look at the Japanese Experience

That brings us to the motive.  Twenty years is a long time to repeat a policy that isn’t working.

UK Professor Richard Werner invented the term quantitative easing when he was advising the Japanese in the 1990s.  He says he had something quite different in mind from the current practice.  He intended for QE to increase the credit available to the real economy.  Today, he says:

[A]ll QE is doing is to help banks increase the liquidity of their portfolios by getting rid of longer-dated slightly less liquid assets and raising cash. . . . Reserve expansion is a standard monetarist policy and required no new label.

Werner contends that the Bank of Japan (BOJ) intentionally sabotaged his proposal, adopting his language but not his policy; and other central banks have taken the same approach since.

In his book Princes of the Yen (2003), Werner maintains that in the 1990s, the BOJ consistently foiled government attempts at creating a recovery. As summarized in a review of the book:

The post-war disappearance of the military triggered a power struggle between the Ministry of Finance and the Bank of Japan for control over the economy.  While the Ministry strove to maintain the controlled economic system that created Japan’s post-war economic miracle, the central bank plotted to break free from the Ministry by reverting to the free markets of the 1920s.

… They reckoned that the wartime economic system and the vast legal powers of the Ministry of Finance could only be overthrown if there was a large crisis – one that would be blamed on the ministry.  While observers assumed that all policy-makers have been trying their best to kick-start Japan’s economy over the past decade, the surprising truth is that one key institution did not try hard at all.

Werner contends that the Bank of Japan not only blocked the recovery but actually created the bubble that precipitated the downturn:

[T]hose central bankers who were in charge of the policies that prolonged the recession were the very same people who were responsible for the creation of the bubble…. [They] ordered the banks to expand their lending aggressively during the 1980s.  In 1989, [they] suddenly tightened their credit controls, thus bringing down the house of cards that they had built up before….

With banks paralysed by bad debts, the central bank held the key to a recovery: only it could step in and create more credit.  It failed to do so, and hence the recession continued for years.  Thanks to the long recession, the Ministry of Finance was broken up and lost its powers. The Bank of Japan became independent and its power has now become legal.

In the US, too, the central bank holds the key to recovery. Only it can create more credit for the broad economy. But reversing recession has taken a backseat to resuscitating zombie banks, maintaining the feudal dominion of a private financial oligarchy.

In Japan, interestingly, all that may be changing with the election of a new administration. As reported in a January 2013 article in Business Week:

Shinzo Abe and the Liberal Democratic Party swept back into power in mid-December by promising a high-octane mix of monetary and fiscal policies to pull Japan out of its two-decade run of economic misery. To get there, Prime Minister Abe is threatening a hostile takeover of the Bank of Japan, the nation’s central bank. The terms of surrender may go something like this: Unless the BOJ agrees to a 2 percent inflation target and expands its current government bond-buying operation, the ruling LDP might push a new central bank charter through the Japanese Diet. That charter would greatly diminish the BOJ’s independence to set monetary policy and allow the prime minister to sack its governor.

From Bankers’ Bank to Government Bank

Making the central bank serve the interests of the government and the people is not a new idea. Prof. Tim Canova points out that central banks have only recently been declared independent of government:

[I]ndependence has really come to mean a central bank that has been captured by Wall Street interests, very large banking interests.  It might be independent of the politicians, but it doesn’t mean it is a neutral arbiter.  During the Great Depression and coming out of it, the Fed took its cues from Congress.  Throughout the entire 1940s, the Federal Reserve as a practical matter was not independent. It took its marching orders from the White House and the Treasury—and it was the most successful decade in American economic history.

To free the central bank from Wall Street capture, Congress or the president could follow the lead of Shinzo Abe and threaten a hostile takeover of the Fed unless it directs its credit firehose into the real economy. The unlimited, near-zero-interest credit line made available to banks needs to be made available to federal and local governments.

When a similar suggestion was made to Ben Bernanke in January 2011, however, he said he lacked the authority to comply. If that was what Congress wanted, he said, it would have to change the Federal Reserve Act.

And that is what may need to be done—rewrite the Federal Reserve Act to serve the interests of the economy and the people.

Webster Tarpley observes that the Fed advanced $27 trillion to financial institutions through the TAF (Term Asset Facility), the TALF (Term Asset-backed Securities Loan Facility), and similar facilities. He proposes an Infrastructure Facility extending credit on the same terms to state and local governments. It might offer to buy $3 trillion in 100-year, zero-coupon bonds, the minimum currently needed to rebuild the nation’s infrastructure. The collateral backing these bonds would be sounder than the commercial paper of zombie banks, since it would consist of the roads, bridges, and other tangible infrastructure built with the loans. If the bond issuers defaulted, the Fed would get the infrastructure.

Quantitative easing as practiced today is not designed to serve the real economy. It is designed to serve bankers who create money as debt and rent it out for a fee. The money power needs to be restored to the people and the government, but we need an executive and legislature willing to stand up to the banks. A popular movement could give them the backbone.  In the meantime, states could set up their own banks, which could leverage the state’s massive capital and revenue base into credit for the local economy.

Ellen Brown is an attorney in Los Angeles and the author of 11 books. In Web of Debt: The Shocking Truth about Our Money System and How We Can Break Free, she shows how a private banking cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Read other articles by Ellen, or visit Ellen's website.

This article was posted on Sunday, February 24th, 2013 at 5:20pm and is filed under Banks/Banking, Economy/Economics, Japan.

http://dissidentvoice.org/2013/02/how-the-fed-could-fix-the-economy-and-why-it-hasnt/

Web of Debt: The Shocking Truth about Our Money System and How We Can Break Free

by Ellen Hodgson Brown

Synopses & Reviews

Synopsis:

Web of Debt unravels the deceptions in our money scheme and presents a crystal clear picture of the financial abyss towards which we are heading. Then it explores a workable alternative, one that was tested in colonial America and is grounded in the best of American economic thought, including the writings of Benjamin Franklin, Thomas Jefferson and Abraham Lincoln. If you care about financial security, your own or the nation's, you should read this book.

Synopsis:

EXPLODING THE MYTHS ABOUT MONEY Our money system is not what we have been led to believe. The creation of money has been privatized, or taken over by a private money cartel. Except for coins, all of our money is now created as loans advanced by private banking institutions — including the private Federal Reserve. Banks create the principal but not the interest to service their loans. To find the interest, new loans must continually be taken out, expanding the money supply, inflating prices — and robbing you of the value of your money. Web of Debt unravels the deception and presents a crystal clear picture of the financial abyss towards which we are heading. Then it explores a workable alternative, one that was tested in colonial America and is grounded in the best of American economic thought, including the writings of Benjamin Franklin, Thomas Jefferson and Abraham Lincoln. If you care about financial security, your own or the nation's, you should read this book.

Read the Introduction for an eye-opening look at what's really going on with your money!
Or listen to it here...

Excerpts

Introduction

Table of Contents

Foreword by Reed Simpson

Chapter 1 — "Lessons From
The Wizard Of Oz"

Chapter 5 — "From Matriarchies of Abundance to Patriarchies of Debt"

Chapter 22 — "The Tequila Trap: The Real Story Behind the
Illegal Alien Invasion"

Our money system is not what we have been led to believe. The creation of money has been "privatized," or taken over by private money lenders. Thomas Jefferson called them “bold and bankrupt adventurers just pretending to have money.” Except for coins, all of our money is now created as loans advanced by private banking institutions — including the privately-owned Federal Reserve. Banks create the principal but not the interest to service their loans. To find the interest, new loans must continually be taken out, expanding the money supply, inflating prices — and robbing you of the value of your money.

Not only is virtually the entire money supply created privately by banks, but a mere handful of very big banks is responsible for a massive investment scheme known as "derivatives," which now tallies in at hundreds of trillions of dollars. The banking system has been contrived so that these big banks always get bailed out by the taxpayers from their risky ventures, but the scheme has reached its mathematical limits. There isn't enough money in the entire global economy to bail out the banks from a massive derivatives default today.

Web of Debt unravels the deceptions in our money scheme and presents a crystal clear picture of the financial abyss towards which we are heading. Then it explores a workable alternative, one that was tested in colonial America and is grounded in the best of American economic thought, including the writings of Benjamin Franklin, Thomas Jefferson and Abraham Lincoln. If you care about financial security, your own or the nation's, you should read this book.

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http://www.webofdebt.com/

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