Notes on Local Village Currency: Labor Standard of Value Versus Commodity Standard of Value
by Robert Swann, January 1979
Cambridge, Massachusetts
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Assessing a New Standard of Value
Economists have suggested many different proposals for a
setting a standard of value for monetary systems. Aside
from gold, which had been the traditional standard in most
parts of the world previous to the Bretton Woods Conference
in 1945, the two most frequent proposals have been a labor
standard and a commodity standard-other than gold.
At first glance, from the local villagers' point of view,
a labor value standard would probably be the most appropriate
option. Thus, in view of the fact that most villagers do
manual labor, it would seem reasonable that one hour of
work by one person should be equal to one hour's work by
another person. On closer examination, however, there are
several differences, which is probably the reason past experiments
using a labor standard did not succeed.
One difficulty immediately appears in the form of possible
distrust of or judgment about the effort some workers are
exerting. For example, one question that might come up is:
"Why should he and I receive the same amount, when he only
works half as hard?" Another is, "How do I know other people
are working as hard as I?"
A second difficulty concerns differences in age and physical
energy.
Assuming these difficulties can be overcome, yet another
problem is the question of whether or not a labor standard
can be expanded to include not only several villages but
an entire region (or beyond), where differences in real
or perceived labor values will grow in increasing proportion
with distance. Regional expansion of a labor standard also
may not be desired from the standpoint of purely local development.
In the long run, however, it will be necessary to do so
in order to keep development from reaching a certain level
and then stagnating.
In other words, a currency should ideally have "foreign
exchange" value-value beyond the local village-if an increasing
diversification of industry and regional self-sufficiency
are among the objectives. Put another way: What is the value
of currency unless it can be exchanged for something not
available in the local village? Otherwise, a simple barter
exchange system, clumsy as it is, may be quite adequate.
What I am suggesting here is a step above barter. I propose
the use of a simple, universally understood commodity such
as wheat, which can be employed beyond the local village,
and does not involve the difficulties of a labor standard.
It may be argued that a single commodity such as wheat also
involves a number of problems. Among them are: fluctuation
in price relative to other commodities; control of price
by government or monopolies; differences in quality of food
grains due to seasonal changes or local variations in growing;
and packing, storing, etc. Clearly, as one moves from the
purely local to the regional, and then to the world scene,
an ideal monetary unit for a standard of value would consist
of an increasing number of commodities, all of which could
be averaged into a single unit of measure through a statistical
indexing system.
Many economists and statisticians have proposed such a
system. Professor Irving Fisher of Yale University and Dr.
Ralph Borsodi, for example, have developed an index for
a world currency that would have a common value anywhere
in the world. The unit itself consists of twenty to thirty
common commodities, which by volume or weight are the most
important in world production. They include agricultural
commodities (primarily grains), metal (including precious
metals gold and silver), and energy sources (oil, gas, coal,
etc). Based on a theoretical analysis utilizing a computerized
system over a forty-year historical period, such an index
of commodities has been demonstrated to maintain a stable,
noninflationary value when compared with national currencies.
Our ultimate objective will be to develop such a universal
system using a commodity index of value. But for our purposes
here, it is suggested that in order to initiate a local
currency, a very simple commodity should be selected that
has as much universal value as possible, and for this reason
either wheat or rice seem the best choice. I suggest that
of the two, wheat is preferable. Having said that, however,
further research into this question may reveal a better
choice. In the U.S., for instance, we are considering wood
(lumber) as the single commodity.
Design of the Local Village Currency
Once a currency is decided upon, consideration should be
given to the quality of paper on which the currency is printed.
Poor quality will deteriorate rapidly with use. If possible
good quality paper, such as that which ordinary currency
is printed on, should be used.
However, a bookkeeping system can be substituted for actual
paper, at least during the first months (or even years)
while the decentralized system is being developed. Each
village may be advanced a certain amount of credit by the
ashram, or the regional bank, acting as the "central" bank
for the village system. This credit is kept on the books
of the village bank, or the village fund. Villagers can
receive credit for work performed for the village, and this
is entered as credit on the books of the village fund. Then,
when the villager wants to purchase something from the ashram
or village store (or other source of supply), the village
bank will issue him a note to him for the amount needed.
He will then use the note to make the purchase. This procedure
is similar to the "check" system used in banks, and has
been successful in the past.
It is obvious, however, that there would be an advantage
in having actual printed notes or currency with a standardized
form and shape. The following are suggestions regarding
its form and content:
To a considerable degree, it should be made to conform to
the size and denominations of rupees so that it will not
appear too unfamiliar. Nevertheless, it should be distinguishable,
and its color, font, and images should be clearly different.
Perhaps it should be marked with a special stamp of Gandhi's
image and the ashram or village name. Each note could be
hand stamped, at least at first, in order to insure that
counterfeiting would not take place. The design of the stamp
could be made hard to duplicate.
The notes would be denominated in numbers equivalent to
rupees so that they would be easy to exchange. A certain
year, for example 1972, could be used to fix the exchange
value with rupees. One local unit (Gandhi note?) would equal
one rupee in 1972. From that point on the exchange value
would fluctuate as the rupee devalues.
More important, however, would be the selection of a commodity
on which to base the value of the currency. This commodity
would be printed on the currency and clearly state its exchange
value. For example, if wheat is chosen as the commodity
for redemption, then one unit of currency would be equal
to a certain weight in wheat. This would have to be worked
out in relation to the value of wheat in 1972 as measured
in rupees. Then, currency will be printed with the inscription:
One unit of Gandhi currency is equal to one kilo of wheat
(or some such measurement), and is redeemable by the central
bank (ashram or regional village bank) for that amount of
wheat.
Criteria for Selection of the Redemption Currency
Traditionally gold has been used as the commodity for redeeming
currency. This is obviously based on the fact that gold
is easily stored, has a high value for its weight and size,
and is much coveted in all parts of the world. However,
we want to get away from gold as a standard and to base
currency on commodities that have greater value in every
day life. Nevertheless, it must be kept in mind that the
virtues of gold are the same virtues we seek in any commodity
for redemption purposes.
For example, storage can be a problem if the chosen commodity
is perishable, or if it's very bulky relative to its value.
For this reason, wheat presents some problems as a redemption
commodity. It is both bulky and perishable. Nevertheless,
if we keep in mind that redemption is provided only as a
means of creating confidence in the currency, and is to
be expected except in unusual circumstances, then we can
design a redemption system that will minimize the problem
of storage for a commodity such as wheat.
Redemption Requirements
We can require, for instance, that only a set minimum quantity
of currency units can be presented for redemption. The minimum
could be set to represent a convenient weight of measure
such as a bushel, or one hundred pounds, etc. Furthermore,
a discount rate, or fixed fee charge for redemption could
be set, which might be as high as 5 percent. Both such measures
would reduce the tendency for redemption.
How to Issue an Alternative Currency
As indicated, the ashram or regional bank could initiate
the currency by paying partial salaries to its workers in
the new currency. Initially, no more than 20-30 percent
of salaries might be paid in the new currency. As confidence
in the currency grows, a higher percentage of salaries-perhaps
along with an increase in salary-could be paid in the new
currency. However, it will be important not to increase
the amounts issued beyond the productive capacity of the
ashram to furnish the goods (mostly food) or services needed
by the workers. In this way, agricultural workers might
be paid more in new currency than other workers, providing
that their labor contributes directly to an increase in
agricultural production.
In order to create a "reserve" system for banking, each
ashram or village could require (or request) each farm family
to contribute a small portion of its wheat production. This
amount could be stored and used as the reserve fund in case
of excess redemption needs. According to banking theory,
at least five times the value of the amount of wheat kept
for this reserve could be issued as new credit for productive
purposes. This is only true, however, if the productive
purposes are for short-term needs such as crop production.
Only in this way can inflation be prevented. Let us not
follow the example of the government and issue money for
long-term credits that add to the inflationary problem.
Long term needs, such as the labor cost of building dams
or housing, should be met directly out of the savings funds.
A Final Word
Let us keep in mind at all times that what we are doing
is creating a monetary unit that arises naturally out of
the labor expended by each person. Only a productive person-a
worker-can create real or honest money. What the government
is instead doing is creating dishonest or counterfeit money
to pay for the vast hordes of bureaucratic workers, most
of whom are creating nothing of real value to society. Even
worse, the present national governments are creating money
to pay for their vast expenditures on military hardware
that eventually could destroy the world.
For more information, please contact the
E. F. Schumacher Society:
140 Jug End Road | Great Barrington, MA 01230 USA
Phone: 01.413.528.1737
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