In a recent visit to Vancouver, Heat author George Monbiot suggested that one promising way to engineer the necessary changes to our government policies and our economy to help avoid the worst outcomes to the global warming crisis would be to create local currencies. The idea appears in his book and frequently in his newspaper essays. But it is a very abstract idea, as is the concept of currency itself. What does it mean to create a local currency? How does currency work? How was official national currency first invented? Finally, how is it that new local currencies would solve anything?

These questions and more need to be understood and explored long before any workable scheme for a local currency can ever be seriously approached. In pursuit of these questions, The Republic has been researching what is available in the bookstores (chiefly at Magpie, to be honest) regarding money, banking, and its origins. The results of this research have been as intriguing as the books are dull. Nonetheless, we’re convinced that local money is not only possible, but is as promising a solution to the big problems as Monbiot suggests it is. What appears below is one way that money can be understood from the point of view of someone thinking seriously about how to create a new local currency.

When a friend asks to borrow some money, you are limited in how much you can lend by how much you have. If another friend is leaving town for a year and leaves some money with you for safe-keeping, you might be able to lend that out as well, so long as you make sure you have it back in hand when the second friend returns to town and wants it back.

If a lot of people trusted you with their money, you could lend it all out to other friends, so long as you got it all back in hand before the others returned for it.

However, before long you would notice that only about one quarter of your friends ever show up at the same time wanting their money back. You would notice that you only ever need to have about a quarter of the money entrusted to you on hand at any one time. You could therefore conceivably lend out four times as much money as you held in trust without ever being in the embarrassing position of not having the money people wanted back.

You can’t actually lend out real money you don’t have, but you don’t really need actual money to loan it out. You could simply write down in an account book “$1,000” under the name of the person you’re “loaning” the $1,000 to, and viola, they now have $1,000 in their account. They don’t walk away with cash, but they can write a cheque for $1,000 to buy something from someone else, so long as the person accepting the cheque trusts that there is $1,000 in that person’s account with you. And when the cheque comes in, you simply scratch out the $1,000 entered in the one person’s column and write $1,000 in the other person’s column. There never was any real money, but everybody involved acted as though there was. This is how credit and chequing banking got started.

You can’t actually do that legally, but officially registered banks in Canada can, and this is what they do all the time. Whenever you get a loan from a bank, that bank has simply invented the money by making a notation in your account, and when cheques drawn on those accounts arrive, the bank simply makes notations in the books “moving” this make-believe money from one account to another. No real money ever need be printed.

For the longest time, banks in Canada were required to show they held in deposits at least 25% of the value of loans they created. Under Prime Minister Brian Mulroney in the 1980s, that requirement was lowered to 10%, enabling banks to create loans worth 10 times what they held in deposits. Under Prime Minister Jean Chretien, it was lowered to 5%, enabling banks to loan out 20 times what they held in deposits. Finally, under Prime Minister Paul Martin, it was lowered to 0%, enabling banks to create money for loans without any limit whatsoever.

There remains only one means by which the government can control the total amount of money created by private banks. Every day, banks are required to add up all the new money they invented and to pay the Bank of Canada a rate of daily interest on that new money at a rate called “the overnight lending rate.”

The Bank of Canada is a crown corporation and the overnight lending rate is adjusted each week by the governor of the bank, currently David Dodge. His job is to tinker with the bank rate to try to achieve certain balances in the economy. If he raises the bank rate too high, banks will stop creating new money in loans to businesses so much that no new jobs will be created and workers will be laid off. If he lowers the bank rate too much, banks will create and lend out so much new money to businesses that they will run out of new workers to hire, which will cause inflation as workers’ wages will then rise very quickly. Investors hate inflation because it erodes the value of their capital. They want the highest possible Bank of Canada overnight lending rate without causing so much unemployment that the compliant government in office will be thrown out at the next election. Wage earners, by contrast, want the lowest possible interest rates without causing so much inflation that investors will flee the Canadian economy.

In between these two extreme points lies all the action of social policy, government programs, scandals, the role of the media, the charisma of leaders, and political issues of the day. While all the myriad numbers by which government performance is measured, like currency exchange rates, productivity rates, and so on, fill the business pages of the daily papers and earn the kudos or the condemnation of analysts of all stripes, it is the unemployment and the inflation numbers that go straight to the front page of the papers and earn the election or loss of governments. If investors try to push the Bank of Canada rate too high, they will cause so much unemployment that Canadians will boot the government out of office at the next election. If the Bank of Canada rate is moved too low for investors’ comfort, causing too much inflation and erosion of their holdings, they will use the newspapers they own and other means to invent and pursue scandals, to raise intractable social issues like abortion and war that trap or embarrass elected officials, and otherwise encourage Canadians to boot the government out of office at the next election on the basis that they are “bad” or “incompetent” or “tarnish the image of the country,” or any of a number of other insults.

The ultimate tool investors have is their threat to move their investments out of the country if they can’t otherwise achieve the Bank of Canada rate they want. It’s a threat they raise daily at every opportunity. The whole thrust of globalization, and the recent push to “liberalize” and “harmonize” the international financial sector that we read so much about lately is only their attempt to make it easier for them to move their investments into and out of countries the better to make good on their threats to all national governments the world over to de-invest wherever national bank lending rates are not raised high enough for their liking.

Their achievements in this area in recent years have destroyed the balance between the interests of the wage earners and the interests of the investors, the balance between unemployment rates and inflation rates. It would be impossible to restore that balance using the same government, the same Bank of Canada, and the same banking and currency systems because investors have gotten powerful enough by now to effectively determine every possible elected government. Observers will have noticed that the last three Prime Ministers made their first official speeches to New York-based global investment companies. No one in office could possibly withstand the harsh wind of condemnation and ridicule that would be heaped on them through the investor-owned media if they proposed a more inflationary Bank of Canada policy. A candidate running for federal office on a platform of high inflation would be treated by sycophantic national media commentators as though he were a candidate who had publicly celebrated the terrorist attacks of 9/11.

The solution therefore is to create a new pseudo-currency system to run alongside the Bank of Canada system, one which would be as skewed to the interests of wage earners as the national official currency is to the interests of the investors.

Such a currency would have to be as overly inflationary as the official currency is overly “unemploymentary” in order to restore the overall historic balance in the economy as a whole. And just as wage earners have been excluded from any effective control over the official currency, so too would the new parallel currency have to be constructed in a way that excludes investors from any effective control over it.

All the other aspects of currency are easily looked after. We already know that money is just invented by banks, and that we can simply invent our own in the same way. Official money only works so long as enough people believe in it and accept it for their labours; otherwise, its just paper. So long as whatever is used as money can be used in enough places to get most of our daily needs fulfilled, like food stores and clothing shops, and so long as no one is cheating by counterfeiting it, we would be able to operate our own currency free from the burden of addressing the greedy interests of investors.

We can easily do this now by issuing whoever wants one an electronic debit card that can be used at any participating store, such as all those stores along Commercial Drive, and denominated in our own currency—like “Vaneasts,” maybe.

To get it going, we simply give everyone 1,000 Vaneasts at the beginning of the month to spend at whatever stores will accept Vaneasts for goods. If enough stores sign up to join, then other store owners will also accept Vaneasts, since it will mean they, in turn, can spend those Vaneasts at other stores they need to shop in themselves.

To discourage the hoarding of investors, card holders can be automatically given 1,000 extra Vaneasts each month thereby hyperinflating the currency and scaring off hoarding investors. To avoid the devaluing effects of inflation, each account can be automatically reduced by 3% of its remaining value each day. (This is easily done since all accounts are completely electronic, and no paper currency is in circulation, but it’s really just a form of taxation).

This way, by the end of the year, the total amount of Vaneasts in circulation remains generally stable, even while the hyperinflation built into the currency encourages local spending rapidly in neighbourhood stores, and discourages the hoarding of investors, and the consequent conservative attitudes that investors perpetuate. This is how creating our own local currency would enable us to redirect our own local economy toward more productive ends, like fighting global warming.