Borsodi's Search For Honest Money
Robert Swann
[Reprinted from Green Revolution, Fall 1983.
At the time of this essay, Robert Swann was Executive Director of the
E.F. Schumacher society in Great Barrington, Massachusetts. He was a
close associate of Ralph Borsodi]
What was it that drove Ralph Borsodi at the age of 83 in 1967 to try
to launch a world wide non-profit and non-governmental banking program
which would provide credit to small farmers in poor countries? And
what motivated him a few years later to launch, almost
single-handedly, a local currency in Exeter, NH, an accomplishment
that brought reporters from Time magazine, Forbes and
many others to interview him in Exeter?
At the end of a long life of promoting, advocating and practicing
decentralism, Borsodi said, "Unless the dishonest centralized
government monopoly of money can be broken, no significant social
reform is possible." Moreover, he saw and predicted the end of
the present world wide monetary system which creates inflation, and
impoverishes the poor people of the world. It would not surprise him
to read the recent articles in the Wall Street Journal and
every other news magazine (Time lead: "Debt Bomb
Threatens World Financial System"). It was perfectly clear to him
that the international monetary system was headed for collapse and he
guessed that it might be the failure or the inability of the poor
countries to repay their debts to the IMF, World Bank, and the banks
of the industrialized countries that would trigger massive world wide
inflation and finally collapse of the present system. It would only
have surprised him that the system has held together as long as it has
with only patch work solutions.
It was for all these reasons that he spent the last years of his life
and his energy, often at great risk to his health, concentrated on how
to make a beginning towards breaking the monopoly of the central
government monetary system. All of the schemes which he devised were
designed to challenge that system. He had convinced J.P. Narayan, the
leader of the Gandhian Sarvodaya movement in India to help him launch
the International Independence Foundation, which would have provided
investors/depositors with a guarantee against government created
inflation, as well as small farmers with low interest loans (high
interest rates are today the primary reason for the highest rate of
bankruptcy among farmers in the U.S. since the great depression). When
that scheme was frustrated as a result of J.P.'s decision to
concentrate his energy on working with the relief program in India
where the failure of the monsoons had created havoc and starvation in
the state of Bihar, Borsodi decided to try to start a small
experimental program in India with some of his own money. He left by
way of London to initiate this program, but he was forced to give it
up when his strength gave out in London and his doctor ordered him to
return to the States.
But the problem and the need to make a beginning with an honest money
system continued to plague him. He considered writing a book and began
extensive research and written notes. But, finally, after two or three
years -- when he was reading the New York Times headline
announcing the increasing inflation -- he said to himself, "Why
write a book? Everyone writes books and no one pays any attention to
them." It was at that point that he decided to launch what he
later came to call "The Exeter Experiment."
He was in California at the time and immediately upon his return to
Exeter, N.H., his home, he contacted the president of the local bank,
a friend of his, to obtain his cooperation in the proposed experiment.
The bank president agreed to cooperate by having the bank act as a "money
changer" and to accept deposits for the experiment. As a "money
changer", the bank would simply agree to exchange dollars which
Borsodi would provide, for the notes ("Constants," Borsodi
called them) which Borsodi would issue. People wishing to join in the
experiment would deposit money in the Exeter Bank in a joint checking
account which would, then, be kept in Constants rather than dollars.
Since Constants were based on a "basket" of commodities and
an index of these commodities which Borsodi had developed, they were
in effect, protected from inflation. In addition, Borsodi issued
Constant notes as well as silver coins and sold them for dollars at
the Constant exchange rate.
To everybody's surprise, even including Borsodi, many people bought
Constant notes and made deposits in the bank checking account. At the
same time Constants began to circulate around the town of Exeter,
where restaurants and other businesses accepted them in payment. If
these businesses received more Constants in trade than they could use
for their own buying needs, the owners could go to the bank and
exchange them for dollars at the then going exchange rate. Since
dollars were going down in value relative to Constants as determined
by the index, those people holding Constants were reluctant to
exchange them since they would lose on the exchange. For this reason,
and, therefore, Borsodi did not have to keep many dollars on hand at
the bank for exchange purposes.
His objective was to invest the dollar deposits in most, if not all,
of the commodities in the "basket" (thirty commodities which
represented the most important commodities in World trade --
agricultural products, energy, and minerals). He began investing in
the most storable commodity available, silver (gold was still illegal
for U.S. citizens to buy at that time). Silver, with gold and
platinum, was and is, one of the metals which has been traditionally
associated with "real" money in the past. Borsodi, however,
wanted to eventually invest much more heavily in the other commodities
in the basket -- especially agricultural commodities such as wheat and
rice which are universally used and needed throughout the world. But
this part of his scheme would be the most difficult, he knew, because
he devised a complicated scheme which would have utilized expert "spot
market" arbitrages eventually. But that would involve literally
millions of dollars (or Constants) worth of grain and other products.
The Experiment, then, was obviously limited in scope. Unless some
large bank, or large corporation would step in and involve itself in
helping to launch a new, independent and genuine world, as well as
local currency, the Experiment would remain just that, an experiment.
Whether Borsodi, really expected the Experiment to expand to a world
level, I do not know. But it did not happen and again his doctor told
him he would have to give up the very difficult job he had taken on in
the Experiment with only a small handful of inexperienced volunteers
to help him.
As one of the volunteers helping Borsodi in the Experiment and also
involved in the International Foundation attempt, I have continued
over the years to search for ways in which this Herculean effort of
Borsodi's could be carried forward. In an objective evaluation of the
Exeter Experiment, it seemed to me that several aspects of the
experiment had been developed successfully and could be duplicated
elsewhere. One of these was the strategy of utilizing small local
banks as the administrative agent for starting a new monetary system.
As Borsodi often pointed out, local banks are not the problem in
themselves. The problem is that they have to deal with dollars only
and the issuing of dollars is a monopoly of the centralized government
controlled system. Local banks provide an important and needed service
in accepting deposits, making loans, keeping accounts, and collecting
payments on loans.
The second lesson which I think the Exeter Experiment demonstrated,
was the interest which people had in using a new kind of currency
which was not subject to government created inflation. (As one Exeter
citizen put it, "Whose money is funny anyway, his money or the
government's?") Local businesses also accepted the money in
payment, partly because they knew that customers might go elsewhere if
they didn't, partly because some of them, at least, realized that the
creation of a local currency would be in their interest, and in any
case, they knew that they could go to the bank and exchange Constants
for dollars if necessary. Certainly, at this level, the bank
involvement helped tremendously to give confidence to the whole
project, and the merchants in particular. Further, people seemed to
realize that here was money, unlike government money, which was backed
by something real -- the commodities themselves, all of which were
listed on the notes, and they could also see on a week by week, or
month by month basis, as the index (or the exchange rate between
dollars and Constants) was published, that Constants were gaining in
value against dollars. This also increased confidence.
Two years after moving from Boston to Great Barrington, in discussion
with a group of like-minded people, we decided that we might make a
beginning in the process of issuing a local currency by first
capitalizing on Borsodi's demonstration of the value of involving a
local bank. But we felt it would be a mistake to initiate this process
with a local currency itself. For one thing, we had not proven
ourselves to local bankers, they would not necessarily have confidence
in us. We would have to create that confidence, and that would mean
creating an organization.
Moreover, going back to the original International Foundation concept
of Borsodi's, we realized that creating a local currency, in and of
itself, was not of tremendous value, unless it could be tied to the
purpose of creating greater local or regional self-reliance, and thus
be used for decentralizing the present system. After all, this was the
major purpose behind the original Foundation, and, in one sense, the
creation, or issuing of a non-inflationary currency was important
primarily because it would attract investment of dollars into a
decentralized framework of development. The fact that out of this
scheme would come a local currency was, from the point of view of
local development, almost secondary. In other words, if as is
presently true all over the world, local deposits in dollars were not
sucked out of the local area into the huge metropolitan areas and into
the big corporations which can afford to pay the highest interest
rates, then even dollars could be made to serve a more useful purpose.
Out of this thinking grew the SHARE program which stands for
Self-Help Association for a Regional Economy. Like the Exeter
Experiment, the SHARE program utilizes the administrative services of
a local bank. Like the Experiment, depositors put their money in a
joint account at the bank. Unlike the Experiment, but like the
International Foundation, the primary purpose of this money (dollars)
is to collateralize small loans to local producers (farmers, small
businesses, cottage industries, etc.) What is most unique about the
SHARE program is the criteria which are used by the SHARE loan
committee for making a loan. The primary criteria, aside from sound
financial considerations is that the loan will increase local
self-reliance, but in addition the criteria include ecological
considerations as well as encouraging distribution of profits to
workers and to the community as a whole. What are the advantages of
the SHARE program?
1. Although the bank makes the loan and collects
payments, the decision on the loan is made by the SHARE board
elected by the members.
2. Low interest to borrowers -- about two-thirds the going bank
rate. This is possible because the SHARE depositors take the risk
and the bank only receives a fee for its administrative services.
3. Depositors receive the same rate as the usual 90 day notice
savings deposit account (about 6%).
4. 4. Depositors are assured that their money is being used locally
to improve or encourage the local economy, and this helps them
eventually also.
5. A system of peer Associations (Agriculture, Small Business,
etc.) is established which first approve the loans and secondly
monitor them and provide technical assistance if necessary. This
system provides the best guarantee against bad loans.
But we recognize that the SHARE program, which is very much like a
Credit Union, is only the first step towards creating a local currency
and thereby an independent local economy. It's major advantage, from
this perspective, is that it is building a base, a constituency of
depositors in the community and confidence in community -- as well as
developing a strong working relationship with the local banks,
merchants and farmers in the area.
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