3 - Assessment of the Local Economy

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In order to assess today's situation more easily, I will first consider the general context. I will then analyse the strengths and weaknesses of money and the so-called global economy before taking existing alternatives into account.

3.1 General context

The development of money and that of trade are closely related. Both have been beneficial to each other throughout the centuries. This is why I will go back to when money was created before describing today's situation and the nature of money.

3.1.1 Creation of money

Barter is the most ancient form of economic organisation but money was created relatively early on to ease economic exchanges. The first currencies were often commonly swapped goods which had a value in themselves and could be either used or exchanged (42). Economic activity developed thanks to the use of money. However, transport was not always easy and gold and silver slowly replaced commodities as currencies in most places. The face value of coins was that of the metal, which guaranteed its value.

Banks opened in order to enable people to deposit their money and withdraw it when needed, thus partially avoiding the risk of theft. Merchants travelled more and more to buy goods and thus had to carry large amounts of money. The considerable threat from brigand attacks gave rise to the apparearance of ways of replacing actual money. For instance, the Hansaetic League enabled traders to deposit a sum of money in one bank where they were issued with a receipt which they had to countersign once they had arrived in order to be able to make withdrawals in another bank. Notes issued by bans and bearing a promise to pay a given amount to the bearer (43) multiplied, hence the name bank notes (44). Because they corresponded to gold, people started to accept them as a means of payment though they were not legal tender.

3.1.2 Current situation

Today, central banks and mints have a monopoly in issuing bank notes and coins. The stocks of gold in central banks do not guarantee the value of notes any longer and the coins are made of cheaper metal and have virtually no value in themselves. Currencies have become notional. Nominal currencies are mere promises made by countries on their economies. This explains why some of them are called hard currencies and others not. Relatively recently, new means of transport like railways and aeroplanes have dramatically reduced transport time, thus signalling a significant development of international trade. Banking has had to adapt itself to new needs and money transfers now occur instantly on computers. We have entered the so-called global economy.

3.1.3 Nature of money

-Money can be defined as any asset that is generally acceptable in transactions and in the settlement of debts- (45) . This definition shows the variable nature of money and explain the difficulty defining what can be considered as such. In Britain, different categories have been defined.

M0 corresponds to notes and coins held by the public, cash in bank tills and bank operational balances at the Bank of England. M0, which is also called wide monetary basis, is held by the general public at around ninety per cent.

M1 corresponds to notes and coins held by the general public and all sterling sight deposits held by the private sector in United Kingdom banks.

M2 corresponds to notes and coins, non-interest-bearing sterling sight deposits held by the private sector in United Kingdom banks and interest-bearing deposits held by the private sector in United Kingdom banks and building societies for transaction purposes.

M0, M1 and M2 form what is called narrow money because it is easily available for everyday transactions.

M3 corresponds to notes and coins in circulation with the public and all private sterling deposits held by UK residents in United Kingdom banks.

M4 corresponds to M3 plus private sector holdings of building society shares, deposits and certificates of deposit (CDs) minus building society holdings of bank deposits, bank CDs, notes and coins.

M0 to M4 form broad money because it corresponds to money held for transaction and savings which can be converted relatively easily if needed without substantial loss. M4 is almost ten times higher than M0, which means that the whole system rests on confidence.

3.2 Positive aspects of money and global economy

Compared with barter, money shows four main strengths which make it possible to organise economic activities on a world-wide scale. This presents some advantages over a closed economy.

3.2.1 Strengths of money

Conventional money was designed to solve the weaknesses of barter. It was a considerable breakthrough because it showed four important improvements: currencies are a means of exchange, their ability to store value allows great flexibility, they are a useful unit of account and are helpful for credit operations (46) . This led to a significant growth in trade.

Medium of exchange
The use of a currency removes the need of a -double coincidence of needs- as in barter. Each person is able to sell goods or services to anyone with the confidence that the money earned can then be exchanged easily to purchase whatever needed. The number of potential economic partners is dramatically increased for everybody, which leads to a considerable reduction in the time spent in search of someone to trade with and to an increase in the global level of economic activity.

Store of value
Money is not perishable and can be stored easily in a convenient way in order to be used at a suitable time. This function of money is important for people whose income is seasonal, like farmers who earn money at harvest time and have to wait until the following year for their next earnings. When inflation is high, stored money loses purchasing power and in extreme cases like the 1929 crisis in Germany, people resort to barter.

Unit of account
As the same unit is used to express all the prices, it is much easier to compare the respective value of goods and services as there is no need to make -cross-comparisons-. Moreover currencies are used to calculate incomes -for both individuals, businesses (turnover) and countries (Gross National Income)- and to express the balance of payments, which would be next to impossible with a detailed account for each good and service exchanged. Today, this is essential to any developed economy in order to levy taxes.

Standard of deferred payment
As money has the function to store value, it is very convenient for credit coperations. The value of a future payment can be defined easily. In order to guarantee its efficiency in case of inflation, there may be an indexing to compensate the loss of value encountered.

3.2.2 Advantages of a global economy

The boom in international trade which was made possible by cheap transport was mainly due to new opportunities. Choice dramatically increased and prices went down because of new market forces.

Economic growth
A global economy enables specialisation and thus an increase in production thanks to the theory of comparative advantage. Basically, it is beneficial for every country to produce what it is best able to produce and then to trade. This is valid even with no absolute advantage, i.e. if another country is more productive (47).

Increased choice
International trade enables traders to have more potential economic partners and consumers to be offered a wider range of goods and services than would be available to them otherwise. For example, without imports tropical produces would be unknown or very expensive because of very high production costs in greenhouses.

Lower prices
In a global economy, market forces can operate virtually undisturbed. No subsidies. Countries tend to specialise in the production of a small range of goods. This enables what is called economies of scales, i.e. the average cost decreases because of specialisation. As competition is fierce, profit margins tend to remain low in order to sell.

3.3 Problems with our global economy

This part refers to our global economy because it is perfectly possible to imagine another way of organising international trade on a world-wide scale. Conventional money is a determinant part of our way of organising trade and it is important to highlight its weaknesses before concentrating on the negative effects of how our global economy is organised. I have chosen not to separate the consequences of international trade itself from those of its particular organisation as international organisations have proved unable so far to solve problems and to entice all the countries to accept the same rules.

3.3.1 Weaknesses of conventional money

Inadequacy to real wealth
The classical economic conception states that -[a] nation's wealth consists of its stock of goods and services- (48) . It is however next to impossible to estimate for various reasons. First of all, a faithful inventory of all goods is difficult to establish and keep up to date since evolution is permanent: there are discoveries, losses, damage, etc. Secondly, the value of goods fluctuates according to their possible use, their rarity, their artistic or historical interest, which may be difficult to assess. Such an attempt with services is even more prone to fail. Skills are immaterial by nature, they can be acquired without the teachers losing them. On the whole, wealth fluctuates and is impossible to value.

Even at the time when a country's money supply reflected its stock of gold, there was no necessary link with wealth. Money cannot be a faithful image of a community's wealth because on the one hand wealth is both impossible to value and fluctuating and on the other hand money does not depend on it. There have been many attempts to adapt the quantity of money and monetarists for example considered it as a major instrument for their policy. Too large a money supply leads to inflation whilst a lack of money slows up the whole economic process. In both situations, money eventually becomes scarce, which gives rise to a precautionary demand, i.e. people save some money for unexpected needs. This decreases the amount of money available for transactions, thus increasing scarcity.

Interest rates
The usual process with money is to earn it first and then to spend it. Credit has been designed to allow people to borrow money and repay it later together with interest which is primarily aimed at compensating lenders for inflation and for the risk inherent in the uncertainty concerning its future rate and the borrower's solvability. However, the opportunity cost of credit often discourages people lacking money from taking part in trade even if they have tradable goods and services. This is particularly regrettable for people who wish to acquire new skills but cannot afford to pay high interest. In deprived areas, this often leads to a vicious circle where unemployed people have plenty of time but little cash. They spend less and soon banks close, thus adding to the problems of local shops and speeding up the marginalisation process. On the contrary, people and companies who have money tend to use it to speculate because the yield is better than that of investment and profits are possible in the short term.

3.3.2 Drawbacks of our global economy

Interdependence
National economies are influenced by what is happening to their economic partners, both in beneficial and detrimental ways, and even their internal trade may be affected. Unfortunately, these external disturbances do not occur with the same speed in case of crisis or recovery. In the former case, detrimental effects tend to spread very rapidly while recovery is generally greeted with scepticism at the beginning. By multiplying the number of economic partners of any one country and its foreign investments, international trade also multiplies external disturbances, which tend to be greater during crises than recoveries. Today's global economy means that national economies are dependent upon virtually all the others even if not directly.

Unfair competition
Today, virtually every Western politician agrees that market forces do not have the ability to lead to a satisfactory equilibrium but rather lead to a widening of the gap between upper and lower social classes and to environmental abuses. Many laws have been passed in developed countries in order to lower the side-effects of the free market ethos by introducing restrictions like minimum wages, maximum working time, social protection or pollution norms. However, a straightforward application of market forces is still the rule in international trade. International agreements aimed at protecting workers and ensuring fair competition have been signed but many third world countries have either opted out or not put them into practice.

Social and environmental problems
Fierce competition on an international level where market shares are hard to get and easy to lose lead many countries to a high level of specialisation which results in a boom in the amount of goods transported. Many of them come from thousands of miles away, thus damaging the environment during transport. Air flight is particularly detrimental in this respect. Competition has also enticed many new industrialised countries to adopt lucridously low or non-existent social and environmental standards. For example, children working in virtual slavery conditions twelve hours a day and six days a week for very little money are commonplace in Pakistan and neighbouring countries in order to produce fine carpets. The Malaysian and Amazonian forests are harvested in a way that prevents them from growing again in future and chemical waste is often dumped in the third world.

Crisis in developed countries
Thanks to low standards, new industrialised countries were able to offer very cheap labour and other production costs, which enabled them to be very competitive in comparison with Western companies. This resulted in their increasing their export share. As imported goods were cheaper in Western countries, they sold very well and threatened local companies who decided to -delocalise-, i.e. to move their production activities where they could have ten people or more working for them for the price of one at home and with no possibility of a strike. The major consequences of this are high unemployment, social crisis and increased taxation in the West in order to support unemployed people. Moreover, there are regular breaches of copyrights in countries where legal action is difficult and this undermines the competitiveness of innovative Western companies who invest considerable amounts in research and development.

3.4 Strengths and weaknesses of existing alternatives

Barter and commercial networks are the only significant alternatives to our conventional economy. This is why I will analyse them in turn.

3.4.1 Barter

Simplicity and adequacy to wealth
The simple swapping of goods and services is perfectly adapted to the fluctuating character of wealth because it originates directly from it and is thus by nature adapted to it. Moreover, there is no need for any specific organisation, which explains why barter is the most ancient form of trade. As people exchange goods and services they consider of equal value, there is no risk for anybody to lose out because of a system collapsing. However, some aspects of barter proved relatively inefficient and discouraged economic activity.

Low level of economic activity
The very idea of barter rests on a double coincidence of needs and therefore generally involves a long search for a person with whom to swap, if there is one at all. As no currency comes into account, it is difficult to assess the value of something, especially over a period of time. For instance when two pounds of potatoes are swapped against one pound of oranges in September and against two pounds in December, you do not know if the change is due to an increase in the value of potatoes, to a decrease in that of oranges or to both. To see whether the value of a particular item or service has been stable or not, you will have to compare its -exchange rate- against many other goods and services. Moreover, people who produce perishable goods will be forced into bartering them quickly either against something of immediate utility or against something possible to store and swap again when needed. This of course involves twice the trouble of searching for someone with whom to barter and of comparing values. All these characteristics are a strong impediment to the development of economic activities and entice people to resort to self-sufficiency.

On the whole, the tremendous strength of being adapted to wealth is partially offset by practical difficulties which make barter considerably time-consuming and difficult to use.

3.4.2 Commercial -barter- networks

Such networks represent an improvement compared with both barter and conventional currencies and not surprisingly, LETS are partly inspired from them. However, they also have specific features.

Efficiency
Commercial networks combine the main functions of money -outside standard of deffered payment- with the basic idea of barter. Practically, no cash changes hands, yet there is a means of exchange which is also a unit of account and a store of value. This is a highly efficient combination which enables such networks to remain attractive despite high fees and commissions.

Restrictive character
Only businesses can trade through these networks and private people cannot benefit from this successful concept. Moreover, members have to pay high entry fees -between sterling -300 and 400 in the United Kingdom- and a fixed commission of ten per cent on each transaction. Finally there is no direct contact and all trade take place through agents, thus increasing the risks of suspicion..

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Copyright Sidonie Seron 1995.
Permission to copy this document is granted on the following conditions:
Last Revised 21 March 1996 by Nigel Stewartof XTML