Tag Archives: Iceland

A Monetary Reform Proposal for Iceland

I have recently received from several sources word of a new monetary reform proposal. This one, commissioned by the Prime Minister of Iceland, is titled, MONETARY REFORM A BETTER MONETARY SYSTEM FOR ICELAND, and is authored by Frosti Sigurjonsson.

I’ve taken the time to read only the Overview and summary portion, but that is sufficient to discern the crux of the Sigurjonsson proposal, which is this:

The Central Bank will be exclusively responsible for creating the money necessary to support economic growth. Instead of relying on interest rates to influence money creation by banks, the Central Bank can change the money supply directly. Decisions on money creation will be taken by a committee that is independent of government and transparent in its decision-making, as is the current monetary policy committee.

New money, created by the Central Bank, will be transferred to the government and put into circulation in the economy via increased government spending, by reduction in taxes, by repaying public debt or by paying a citizen dividend.

The Central Bank will also be able to create money for lending to banks for onward lending to businesses outside the financial sector.

Sigurjonsson indicates that his proposal draws heavily upon an earlier proposal titled, A Monetary Reform for the Information Age, by Joseph Huber and James Robertson (New Economics Foundation (2001)), which I critiqued early in 2002. That critique, along with subsequent dialog between the authors and myself, can be found at http://reinventingmoney.com/monetary-reform-information-age/.

Since both the Sigurjonsson proposal or the Huber/Robertson proposal advocate the same basic approach, I strongly believe that any serious consideration of either, should also consider my above mentioned earlier critique and subsequent dialog.

While I agree with much of what Huber and Robertson (and presumably, Sigurjonsson) say about the defects in the present money system, I believe that their proposed centralized “solution” does not go nearly far enough in solving those defects. Continuation of the money monopoly in (presumably) different hands does not get to the root of the problem. It is my view that the key to achieving more equitable and sustainable economic interrelationships lies in liberating the exchange process from monopolized money and banking, enabling the creation of competing currencies and credit clearing exchanges, and allowing the needs of traders themselves to determine the supply of exchange media (money) in circulation at any given point in time.

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How did Iceland recover? Report from Davos

In this three-minute interview, Iceland’s President Olafur Ragnar Grimson explains that their recovery from the economic crisis was based on actions that went against the orthodox prescriptions–Let the banks fail, introduce currency controls, provide support for the poor, don’t push austerity measures. Why are banks the “holy churches of the economy?”

Iceland takes a more rational approach to the finacial crisis

A Bloomberg report of February 28, 2012 describes the steps that Iceland has been taking to deal with their banking crisis. A basic feature of their policy has been debt relief  for homeowners. Here’s are some excerpts:

“Once it became clear back in October 2008 that the island’s banks were beyond saving, the government stepped in, ring-fenced the domestic accounts, and left international creditors in the lurch. The central bank imposed capital controls to halt the ensuing sell-off of the krona and new state-controlled banks were created from the remnants of the lenders that failed.

Legal Aftermath

Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.

Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.

That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.”

You can read the entire report at Icelandic Anger Brings Debt Forgiveness in Best Recovery Story

One wonders, why the same approach was not taken in the U.S.? I would venture to say that it all boils down to political power–who controls the government? Iceland is a small country, which probably accounts for the ability of the people to influence the government to an extent that seems impossible in a country like the U.S., where, instead of relieving the people, the government chose to relieve (reward) the banks that created the problem in the first place. It did that by shifting the excessive and unserviceable debts from the banks’ balance sheets to that of the government.

That, in turn, required a huge expansion in the national debt, but that will not and cannot solve the problem. It will only make matters worse because the world is losing its appetite for U.S. government bonds. When the Federal Reserve steps in as “buyer of last resort” we get a further debasement of the dollar and ultimately price inflation, which causes the savings of the middle-class to be wiped out.

The debt-money system has inherent in it a growth imperative. Banks create money on the basis of interest-bearing loans. The interest burden requires the creation of additional debts so that the interest can be paid. That cannot continue forever; debts must ultimately be forgiven.

But even that, by itself, is not sufficient to prevent a recurrence of the bubble-and-bust cycle. Money must be created interest-free. The best way to achieve that is by creating competing means of exchange like mutual credit clearing and private cooperative currencies.–t.h.g.

An Update on the Iceland Financial Crisis

Because of the way in which its people have responded to the financial crisis, tiny Iceland has drawn a lot of attention lately. Some pertinent information about this was provided in a previous post. Prof. Margrit Kennedy, author of Interest and Inflation Free Money, traveled to Iceland recently on a fact-finding tour. Her report below provides some additional insights. –t.h.g.

A Visit in Iceland

Margrit Kennedy. 23 September 2011

[English translation by Prof. Philip Beard, Ph.D.]

When I read an article two months ago about the state bankruptcy in Iceland and the public’s refusal to accept the government’s debt retirement plan, as a result of which the three largest banks became insolvent, I decided to travel to Iceland.  I wanted to find out whether the new, popularly-elected 25-member  Council, whose job was to formulate proposals for a new constitution, had made any statements regarding the monetary or financial system.  No such news had shown up in the several reports and English translations I’d gathered.

So a week ago, off I flew, after having received a few contact addresses from friends and having made three appointments with “Constitutional Council” members via email.  I stayed in Reykjavik from 9/13 till 9/19 and then went for a day to Solheimar, Iceland’s only eco-village, whose director had supplied me with these council members’ addresses.

Hardly had I arrived at my Reykjavik hotel when the first of my interlocutors showed up: Salvör Nordal.  A professor of ethics at Reykjavik University, she answered my questions patiently, and in about the first half hour filled me in on what all my later conversations would confirm: No, no one had said anything about the systemic monetary roots of the crash.  The Council’s discussions revolved around laying new groundwork for their democracy, environmental protection and protection of the commons, more transparency in governmental affairs and thereby better regulatory capacities.  She was glad to hear and watch my short presentation on the topic “Money rules the world!  — But who rules the money?”, and immediately said, “You must meet my friend in the finance ministry.  For sure, she’ll be fascinated by what you’ve got to say.”  Then she departed.  It was Tuesday evening.

The next day I met the man who had been elected to the Council with the most votes, the economist Prof. Sylfarson.  We had a short, congenial conversation of about an hour in which I learned that from where he stood, the situation in Iceland had returned to “normal”.  Before the crash everything had been more or less exaggerated: salaries, the value of the Icelandic crown, housing prices, the standard of living.  In his opinion his countryfolk were still doing well (which corresponded to my own first impressions), and Iceland was now catching up to the rules that every other European democracy had been practicing for decades, e.g. universal suffrage, transparency of public budgets, environmental laws, etc.

And no, the monetary system had not come under discussion.  Monetary matters remained pretty much as they had been, except that an index was now being applied to loans in order to reduce excessive credit demands.

He had never heard of complementary currencies, though he was very interested in the couple of examples I described to him and asked me to send him more information.

My third conversation partner was the young singer Svarvar, a friend of friends who had witnessed the so-called “revolution” but hadn’t taken part in it.  His opinion was that people had just been venting their fury at having all gotten poorer again, but he hadn’t seen much in the way of new values being adopted.

I could see, though, that the money theme fascinated him.  He brought a few of his friends to my talk at Reykjavik University that I had been invited to give by the dean of the engineering and natural sciences faculty, Kristin Vala Ragnarsdottir, and some of her colleagues.  They were all astonished that the room they’d chosen for the lecture turned out much too small.  But the concierge had already figured from the many phone calls he’d received that we would need a larger room, and had arranged for it.

It took a little time to get the crowd moved to the new room, but an atmosphere of high spirits and goodwill prevailed.  Obviously the 150-200 guests, many overflowing into the hallways, expected I’d be talking to them about something important.  And I later learned that two translators had already published parts of my first book in Icelandic; they proudly showed me their published articles, replete with graphs.  They didn’t know each other, but had each motivated a sizeable number of people to come to the talk.  I could tell from their questions how deeply concerned they were about this topic, and I agreed to meet with the “hard core” of a few grassroots groups on Sunday evening at one of their gathering places to discuss action strategies.

That evening at dinner I had the pleasure of a conversation with the personal adviser of the Economics Minister about the drama that had led up to the near-total collapse of Iceland’s financial and economic system.  This evening was the preparation for my discussion with the minister and the government’s chief economic adviser on Monday, shortly before leaving Reykjavik.

It was an important meeting for me, and for these two leading specialists as well.  As it turned out, they had never before so clearly perceived the role of interest and compound interest in the lead-up to the collapse, even though they’d been confronted with it practically every day since 2006.  And their serious countenances showed that they were taking it to heart.  Their comments indicated however that it would take considerable time before these new insights could be applied to political practice.  Germany, they said with mild regret, had no doubt been among the hardest hit by the whole matter.  [Translator’s note: It’s unclear how this last sentence relates to the preceding line of thought.]

But I did have the feeling that they were open to new solutions.  Most impressive for me was the evening I spent with representatives of perhaps seven grassroots initiatives, of whom at least three had been trying for years to get the money topic on people’s radar screens, with little prior but now greater success, to judge by their growing membership figures and the fact that they’re now “being heard” in the media.

The main topic was action strategies.  Lots of concrete questions: How can we change this and that?  What’s the best way to introduce complementary currencies?  How can we reduce the debt burden that’s been forced upon our poorer citizens?

I told of our experiences with barter circles, regional currencies, and the WIR system, and described our successes in the Chiemgau and Vorarlberg regions.  And I promised to send them written summaries of the key ingredients.

In any event we shall stay in contact, exchanging news of problems and successes.  As I left I had the feeling of having sown some seeds – having nourished the hope and the knowledge that new pathways lie before us, and what they might look like.

Overall a newcomer to this country notices little of its bout with bankruptcy.  You do see several unfinished skyscraper projects, especially near the seacoast and on the way to the airport.  But very few people or neighborhoods look genuinely poor.

With the help of the 2.1-billion euro credit from the IMF, the country has once again just barely avoided total breakdown.  Now people are rolling up their sleeves and saying, “We’ll make it back.”  I certainly hope they will, because I have become very fond of the Icelanders in the week I spent with them.

The best, most concrete outcome of this trip would be for the grassroots groups to enjoy a new level of attention, understanding, and perhaps even active support for their efforts at introducing new systems – systems that prove that we can run our monetary affairs without interest.

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Here is a link to a tv interview of Prof. Kennedy by Egill Helgason, which was aired on Icelandic television on Sunday the 25th of September 2011: http://silfuregils.eyjan.is/2011/09/26/fjarmalakerfi-sem-leidir-til-glotunar/

More about Iceland’s ongoing revolution

This article, Iceland’s On-going Revolution, by Deena Stryker, provides additional information and inspiration.

Iceland, a case that deserves careful study

Iceland was one of the first countries to experience the financial crisis that plagues the world. It seems to be the canary in the coal mine, and as such, it may be showing us not only what is in store for the rest of us, but also a way out of our dilemma.

In this series of 5 videos, Prof. Michael Hudson explains very clearly what happened to Iceland and shows it to be an example of the pattern that is being played out in the rest of the world.

In the time since that interview was recorded, the people of Iceland have taken action that may get to the root of the problem. Instead of bailing out the banks and rewarding those who caused the problem in the first place, Iceland has, according to one of my correspondents:
– Totally recalled its government.
– Nationalized its main banks.
– Decided not to honor the claims from the UK and Holland due to their speculative policies.
– Created a popular assembly to rewrite its constitution.

Strangely, there has been very little about that in the media.

I would very much like to see reports that detail these actions, so I invite any of my readers who find them to pass them on by making comments to this post–t.h.g.