The short answer as to why banks are being saved is fear that the 1930 Depression
nightmare would again become a reality. Since banks enjoy the monopoly of creating money
through providing loans, bankrupt banks means reduced credit, which in turn results in a lack of
money for the rest of the economy. Without access to capital, business and the means of
production contract, which, in turn, causes mass unemployment and a host of collateral social
problems. Thus, when banks are in trouble, they can trigger what is know as a Second
Wave crisis, through a ferocious circle making a victim of the real economy: Bad banking balance
sheets => credit restrictions => recession => worse bank balance sheets => further credit
restrictions and so the spiral downward goes,

To avoid such a tailspin - governments feel the need to prop up the banks’ balance sheets.
This exercise is already under way. For instance, several major banks were able to refinance
themselves earlier in 2008, mainly by tapping sovereign funds. But, as the depth of the –
insolvency has become more obvious, this has become harder to do. Central banks will step in to
help by providing an interest yield - that makes it easy for financial institutions to earn a lot of
money, at no risk.

If we add in the Citibank bailout announced in November 2008 to all the previous packages
already approved, the total pledges by the American taxpayer of the bailout exceeds now $4.616
trillion dollars! In February 2009, the US Treasury Secretary Timothy Geithner has unveiled an
additional bank bail-out plan worth at least another $1.5 trillion9
The Bloomberg estimate is even
higher: 7.7 trillion, which amounts to $ 24,000 for every man, woman and child in the country.
10

The only event in American history that comes even close to the pledges made so far is World
War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion. It is hard to believe,
but true, that the US bailout could cost more than the inflation adjusted cost of the Louisiana
Purchase, the New Deal and the Marshall Plan, the Korean and Vietnam War, the S&L debacle,
NASA and the Race to the Moon combined!

The scale of the commitments made by European countries for the bailout of the
banking system is also without precedent, representing potentially a multiple of their annual
GDP. To give an idea of what we are dealing with, here is the ratio of the assets of the three
largest banks in each country that have now been guaranteed by their respective governments.
This ratio represent 130% of annual GDP for Germany; 142% of annual GDP for Italy; 147% of
GDP for Portugal; 218% for Spain; 257% for France; 253% for Ireland; 317% for the UK; 409%
for the Netherlands (2 largest banks); 528% for Belgium-Luxemburg; 773% for Switzerland (2
largest banks); and 1,079% of the GDP for Iceland (the first country that went -officially
bankrupt).

In short, governments, the world over, have just bled themselves dry to an
unprecedented extent, -- to the point that the Financial Times even wonders whether the
worldwide panic in October 2008 “is not about faith in the banks, but faith in the governments to
save them.”

There are two advantages in this approach compared to the previous one of nationalizing
the toxic assets. First, thanks to the fractional banking system by which all money is created,
when banks make loans to customers, they can create new money at a multiplier of the amount of
capital they actually have. Consequently, if a bank’s leveraging factor is 10, then injecting $1
billion in the bank’s capital makes it possible for it to create at least $10 billion in new money, or
carry $10 billion in problem assets. In fact, the multiplier is typically much higher. For instance,
Lehman’s and Goldman Sachs’ ratio of assets to capital were respectively 30 and 26. Some
European banks had even a higher leverage: BNP Parisbas at 32; Dexia and Barclays’ leverage
ratios are both estimated at about 40; UBS’ at 47; and Deutsche Bank’s a whopping 83.
16

Therefore, very conservatively put, it is 10 times more financially effective for governments to
bolster the balance sheets of the banks directly than to buy toxic assets.

Secondly, even if both strategies –bailing out the banks and re-regulation of the financial
sector – are implemented reasonably well, neither resolves the “Second Wave” problem: The
banking system will get caught in a vicious circle of credit contraction that invariably
accompanies the massive de-leveraging that will be needed. Depending on how the re-regulation
is implemented, it may actually inhibit banks from providing the finances needed for a reasonably
fast recovery of the real economy. In any case, given the size of the losses to be recovered, it will
take many years, in the order of a decade, certainly more than enough time to bring the real
economy into real trouble.

In practice, this means for most people in the US, in Europe, and in most other parts of
the world, in NYU Professor Nouriel Roubini’s words, “this recession will be long, ugly, painful
and deep.” We are only at the beginning of a long, drawn-out economic unraveling. The social
and political implications for such a scenario are hard to fathom. The last time we faced a
problem of this size and scope was in the 1930’s, and we didn’t deal too well with the problem at
that time. Still, there are important differences vis-à-vis the situation of the 1930s. So far, the
situation is less extreme economically, in unemployment and business bankruptcies, than what
happened in the early 1930s. On the other hand, governments are now a lot more indebted than
was the case at the beginning of the Great Depression; and today’s crisis is a lot more far reaching
globally than was the case then.

D. Nationalizing the Money Creation Process

Nationalizing the money creation process itself is an old proposal, if much less conventional
approach, that reappears periodically in the monetary reform literature, particularly during
periods of major banking crises.,. For historical reasons, the right to create money was transferred
to the banking system as a privilege, originally to finance wars during the 17th century.

So, contrary to what some people believe, our money isn’t created by the governments or the central
banks, it is created as bank debt. When banks are private, as they are in most of the world, the
creation of money is therefore a private business. If the banking system abuses this prerogative,
this privilege could or should be withdrawn. The logic is not new: money is a public good, and
the right of issuing legal tender belongs at least theoretically to governments.

So, while bailing out the banking system through nationalizing banks or nationalizing the
problem assets is the classical policy choice, it can also be expected that proposals for
nationalizing the money creation process itself will re-emerge, as they have in previous
predicaments, including the 1930s. Under a government run monetary system, the
governments would simply spend money into existence without incurring interest at its creation;
banks would become only brokers of money they have on deposit, not creators of money, as is the
case now.

For instance, the US constitution specifies that the power of issuing money is an exclusive prerogative of
Congress. There is a long list of famous quotes concerning this topic by various American presidents and
founding fathers. Here are some samples:

- "If Congress has the right under the Constitution to issue paper money, it was given to be used by
themselves, not to be delegated to individuals or corporations." (Andrew Jackson, when he
dissolved the Second Bank of the United States);

- “History records that the money-changers have used every form of abuse, intrigue, deceit, and
violent means possible to maintain their control over governments by controlling money and its
issuance.” (James Madison);

- “If theAmerican people ever allow private banks to control the issue of their currency, first by
inflation, then by deflation, the banks...will deprive the people of all property until their children
wake-up homeless on the continent their fathers conquered.... The issuing power should be taken
from the banks and restored to the people, to whom it properly belongs.” (Thomas Jefferson);

- “The Government should create, issue, and circulate all the currency and credits needed to satisfy
the spending power of the Government and the buying power of consumers. By the adoption of
these principles, the taxpayers will be saved immense sums of interest. Money will cease to be
master and become the servant of humanity.” (Abraham Lincoln);

- “The issue of currency should be lodged with the government and be protected from domination
by Wall Street. We are opposed to...provisions [which] would place our currency and credit
system in private hands.” (Theodore Roosevelt) ;

- “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is
controlled by its system of credit. Our system of credit is concentrated. The growth of the nation,
therefore, and all our activities are in the hands of a few men. We have come to be one of the
worst ruled, one of the most completely controlled and dominated Governments in the civilized
world no longer a Government by free opinion, no longer a Government by conviction and the
vote of the majority, but a Government by the opinion and duress of a small group of dominant
men.” (Woodrow Wilson, the president who signed in 1913 the Act creating the Federal Reserve )

Our own objection to this solution is that, even if governments were to issue the money,
while that might protect us from banking crises, but would nevertheless not solve the core
systemic problem of the instability of our money system. In short, it might protect us from
banking crises, but not from monetary crises.

V. Understanding Systemic Stability and Viability

The solution proposed below is new, and relates to the identification of the fundamental systemic
reason for our monetary and financial instability. Understanding this solution, however, requires
that we provide a scientifically-sound understanding of the nature of the structural cause of this
crisis, so that effective ways to address the trouble at the systemic level can be identified.

For the past twenty-five years, major progress has been made on understanding what
makes natural eco-systems sustainable or not. This work is the natural extension of Nobel Prize
winning chemist Illya Prigogine’s, and Club of Rome cofounder Erich Jantsch’s work with self-
organizing energy-flow systems.
25
In fact, according to Kenneth Boulding (1981), many early
economists held energy-based views of economic processes. This changed when those who
favored Newtonian mechanics during the late 19th
century (such as Walras and Jevons) turned
economics into today’s familiar views on the mechanics of “rational actors” and the reliable self-
restraint of General Equilibrium Theory, an approach which completely dominates not only
practically all of today’s mainstream academic economic literature, but also the boardrooms and
political venues of the world.

The main point is that nature does not select for maximum efficiency, but for an optimal
balance between the two opposing poles of efficiency and resilience. Because both are
indispensable for long-term sustainability and health, the healthiest flow systems are those that
maintain an optimal balance between these two opposing pulls. Conversely, an excess of either
attribute leads to systemic instability. Too much efficiency leads to brittleness and too much
resilience leads to stagnation; the former is caused by too little diversity and connectivity and the
latter by too much diversity and connectivity.

Sustainability of a complex flow system can therefore be defined as the optimal balance
between efficiency and resilience of its network. With these distinctions we are able to define and
precisely quantify a complex system’s sustainability in a single metric. Indeed, there is now a
way of quantitatively measuring all the relevant components separately: total throughput,
efficiency, and resilience. Furthermore, the underlying mathematics are well-behaved enough so
that there exists only one single maximum for a given network system. The generic shape of the
relationships between sustainability and its constituent elements is shown in Figure 1. Observe
that there is an asymmetry: optimality requires more resilience than efficiency! (The optimal
point lies closer to resilience than efficiency on the horizontal axis).

Until recently, total throughput and efficiency have been the only means for us to identify the
relative success of a system, whether in nature or in economics. For example, in ecosystems, as in
economies, size is generally measured as the total volume of system throughput/activity. Gross
Domestic Product (GDP) measures size this way in economies and Total System Throughput
(TST) does so in ecosystems. Many economists urge endless growth in size (GDP) because they
assume growth is a sufficient measure of health. GDP and TST, however, are poor measures of
sustainable viability because they ignore network structure. They cannot, for example, distinguish
between a resilient economy and a bubble that is doomed to burst; or between healthy
development, as Herman Daly (1997) describes it, or explosive growth in monetary exchanges
simply due to runaway speculation.

D. Application to Financial/Monetary Systems
Viewing economies as flow systems ties directly into money’s primary function as medium of
exchange. In this view, money is to the real economy like biomass in an ecosystem, or blood to
your body: it is an essential vehicle for catalyzing processes, allocating resources, and generally
allowing the exchange system to work as a synergetic whole. Let us emphasize that the findings
described below are relevant for any network of a similar structure, therefore the applicability to
an economic network is not simply an analogy, but a direct application of the theoretical
framework described above. The connection to structure is indeed immediately apparent. In
economies, as in ecosystems and living organisms, the health of the whole depends heavily on the
structure by which the catalyzing medium, in this case, money, circulates among businesses and
individuals. Money must continue to circulate in sufficiency to all corners of the whole because
poor circulation will strangle either the supply side or the demand side of the economy, or both.

Even more ironically, whenever a banking crisis unfolds, governments invariably help
the larger banks to absorb the smaller ones, under the logic that the efficiency of the system is
thereby further increased. When a failing bank has proven to be “too big to fail”, why not
consider the option to break it up into smaller units that can be made to compete with each other;
similarly to what was done in the US, for instance, with the break up of the Bell telephone
monopoly into competing “Baby Bell’s”? Instead, what tends to be done is to make banks that are
“too big to fail” into still bigger ones, until they become “too big to bail”. This whole process is
illustrated in Figure 3.

E. The Systemic Solution
The systemic solution to our monetary crisis, therefore, is to increase the resilience of the
monetary system, even if at first sight that may be less efficient.

Conventional economic thinking assumes the de-facto monopolies of national moneys as
an unquestionable given. The logical lesson from nature is that systemic monetary sustainability
requires a diversity of currency systems, so that multiple and more diverse agents and channels of
monetary links and exchanges can emerge, as seen in Figure 5.

This is the practical lesson from nature: allow several types of currencies to circulate among
people and businesses to facilitate their exchanges, through the implementation of complementary
currencies. These different types of currencies are called complementary because they designed
to operate in parallel with, as complements to, conventional national moneys. The structural
problem is the monopoly of one type of currency, and replacing one monopoly with another isn’t
the solution. As Edgar Cahn’s work with Time Dollars demonstrates (Cahn, 2004),
complementary currencies encourage a much higher increase the degree of diversity and
interconnectivity in the system, due to their ability to catalyze business processes and individual
efforts that are too small or inefficient to compete for national currencies in a global market place.
Several doctoral theses point to the same conclusion (Kelver, 2001; Schussman, 2007; Wheatley,
2006). This approach will certainly appear unorthodox to conventional thinking, but conventional
thinking is precisely what got us into this trouble to begin with. This insight can also resolve the
dilemma of what to do now about today’s systemic banking crisis.

VI. Our Proposal

Our proposal focuses here on what can and should be done most urgently to reduce the impact of
the financial crisis on the “real” economy, the one where businesses produce and sell non-
financial goods and services. It involves three components: a) actions by the private business
sector, b) decisions by national governments, and c) decisions by city and local governments.

A. The Business Sector
.
.
.
This is not an urban legend, but the true story of the WIR system. The country is
Switzerland and the sixteen founders met in Zurich in the year 1934. And the system is still
operating today. The annual volume of business in the WIR currency is now about $2 billion per
year. The American professor is James Stodder from Rensselaer University. His remarkable
quantitative study33
uses more than 60 years of high quality data to prove the points made in this
story. The WIR system is also now accepting deposits and making loans in Swiss Francs, as well
as in WIR.

It is propose here that businesses take the initiative of creating such Business-to-
Business (B2B) systems at whatever scale makes most sense to them.
.....
Additionally, businesses - should consider lobbying their respective governments to have them
accept their B2B currency in partial payment of business taxes. This could apply only
temporarily, i.e. for the period during which the banking system will not be in a position to fulfill
its traditional role of financing the real economy to the extent that is necessary. Partial payment of
taxes – it could be as little as 10% or 20% - would be the most effective incentive that
governments could provide to accelerate the widespread acceptance of this currency. The
lobbyists have a simple but powerful argument: governments have just spent trillions of taxpayers
money to save the banking system, in the hope that this would avoid spreading the contagion to
other businesses. The strategy proposed here doesn’t cost the government any money, will
actually increase tax revenue, and is the best systemic way to avoid spreading the rot anyway,
regardless of governments’ efforts to help the banks.

B. National Governments

There are two ways for a governmental entity to decide what percentage of taxes could be
payable in complementary currency. The first one is to determine how much that entity purchases
from the business sector. For instance, if 20% of the budget is for purchases from a specific group
of corporations, it could make sense to accept up to 20% of payment in the currency of that
specific group. Another approach is to levy taxes on a company in proportion to the volume of
business that it realizes in that currency. In other words, all dollar sales are taxable in dollars, and
all sales in complementary currency are payable in the corresponding complementary currency.
For example, if a company does 10% of its business in complementary currency, 10% of its taxes
would be payable in that currency.

C. Cities and Local Governments

There are two reasons why it is recommend allowing cities and local governments to choose
their own complementary currencies to implement this strategy. First, cities and local
governments will be the first governmental entities to get into still deeper trouble than they are
today; and second, they represent diversity and resilience at work. Given that this approach is
radically new, it is simply safer to test out a new system as a pilot at a city or local level, rather
than directly on a larger scale at the national level.

D. Some Pragmatic Considerations

E. Answering Some Objections

F. Some Advantages of the Proposed Approach

VII. Conclusion: Synthetic Table of the Options
The following table summarizes the implication of each of the five approaches to any large scale
systemic banking crisis, as described here. Those implications are different for different actors.
The following impacts are considered: the impact on bankers; on taxpayers and central
governments; on local governments; on the 2d wave effects, and on the systemic cause. The
different icons represent: