{Lehman still existed in 2007 dataset used}

The network of global corporate control
by Stefania Vitali, James B. Glattfelder & Stefano Battisto
28 Jul 2011 (v1), last revised 19 Sep 2011 (this version, v2)

“The structure of the control network of transnational corporations affects global market competition and financial stability. So far, only small national samples were studied and there was no appropriate methodology to assess control globally. We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.”

The 1318 transnational corporations that form the core of the economy. Superconnected companies are red, very connected companies are yellow. The size of the dot represents revenue (Image: PLoS One)

Revealed – the capitalist network that runs the world
by Andy Coghlan and Debora MacKenzie / 19 October 2011

AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters’ worst fears. An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy. The study’s assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

The idea that a few bankers control a large chunk of the global economy might not seem like news to New York’s Occupy Wall Street movement and protesters elsewhere. But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world’s transnational corporations (TNCs). “Reality is so complex, we must move away from dogma, whether it’s conspiracy theories or free-market,” says James Glattfelder. “Our analysis is reality-based.” Previous studies have found that a few TNCs own large chunks of the world’s economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy – whether it made it more or less stable, for instance.

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company’s operating revenues, to map the structure of economic power. The work, to be published in PloS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What’s more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world’s large blue chip and manufacturing firms – the “real” economy – representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a “super-entity” of 147 even more tightly knit companies – all of their ownership was held by other members of the super-entity – that controlled 40 per cent of the total wealth in the network. “In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network,” says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

John Driffill of the University of London, a macroeconomics expert, says the value of the analysis is not just to see if a small number of people controls the global economy, but rather its insights into economic stability. Concentration of power is not good or bad in itself, says the Zurich team, but the core’s tight interconnections could be. As the world learned in 2008, such networks are unstable. “If one [company] suffers distress,” says Glattfelder, “this propagates.” “It’s disconcerting to see how connected things really are,” agrees George Sugihara of the Scripps Institution of Oceanography in La Jolla, California, a complex systems expert who has advised Deutsche Bank.

Yaneer Bar-Yam, head of the New England Complex Systems Institute (NECSI), warns that the analysis assumes ownership equates to control, which is not always true. Most company shares are held by fund managers who may or may not control what the companies they part-own actually do. The impact of this on the system’s behaviour, he says, requires more analysis. Crucially, by identifying the architecture of global economic power, the analysis could help make it more stable. By finding the vulnerable aspects of the system, economists can suggest measures to prevent future collapses spreading through the entire economy. Glattfelder says we may need global anti-trust rules, which now exist only at national level, to limit over-connection among TNCs. Bar-Yam says the analysis suggests one possible solution: firms should be taxed for excess interconnectivity to discourage this risk. One thing won’t chime with some of the protesters’ claims: the super-entity is unlikely to be the intentional result of a conspiracy to rule the world. “Such structures are common in nature,” says Sugihara.

Newcomers to any network connect preferentially to highly connected members. TNCs buy shares in each other for business reasons, not for world domination. If connectedness clusters, so does wealth, says Dan Braha of NECSI: in similar models, money flows towards the most highly connected members. The Zurich study, says Sugihara, “is strong evidence that simple rules governing TNCs give rise spontaneously to highly connected groups”. Or as Braha puts it: “The Occupy Wall Street claim that 1 per cent of people have most of the wealth reflects a logical phase of the self-organising economy.” So, the super-entity may not result from conspiracy. The real question, says the Zurich team, is whether it can exert concerted political power. Driffill feels 147 is too many to sustain collusion. Braha suspects they will compete in the market but act together on common interests. Resisting changes to the network structure may be one such common interest.

The top 50 of the 147 superconnected companies
1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
10. Merrill Lynch & Co Inc
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
17. Natixis
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation
26. Lloyds TSB Group plc
27. Invesco plc
28. Allianz SE 29. TIAA
30. Old Mutual Public Limited Company
31. Aviva plc
32. Schroders plc
33. Dodge & Cox
34. Lehman Brothers Holdings Inc*
35. Sun Life Financial Inc
36. Standard Life plc
37. CNCE
38. Nomura Holdings Inc
39. The Depository Trust Company
40. Massachusetts Mutual Life Insurance
41. ING Groep NV
42. Brandes Investment Partners LP
43. Unicredito Italiano SPA
44. Deposit Insurance Corporation of Japan
45. Vereniging Aegon
46. BNP Paribas
47. Affiliated Managers Group Inc
48. Resona Holdings Inc
49. Capital Group International Inc
50. China Petrochemical Group Company

* Lehman still existed in the 2007 dataset used

Ownership Ties Among Global Corporations Strangely Resemble a Bow Tie
by Sophie Bushwick / August 8, 2011

Large international corporations can control a wide variety of smaller companies. For example, Scientific American is a publication of Nature Publishing Group, which is a subsidiary of the Georg Von Holtzbrinck Publishing Group in Germany. This group also owns a number of other publishers in the U.S., United Kingdom, and Germany, a pyramid that includes American suspense thrillers, British textbooks, a German weekly newspaper and more. But corporate pyramids like that of the Von Holtzbrinck Publishing Group do not stand alone: The web of relationships among companies is tangled and complex, as a July 28 paper published to pre-print blogarXiv.org reveals.

A team of ETH Zurich (Swiss Federal Institute of Technology Zurich) researchers used a network model to map the ownership relations among more than 43,000 transnational corporations, which do not identify themselves with one country but rather use a global perspective and employ an international roster of executives. Owning shares in a company grants the owner some direct control of that entity, and indirect control of any companies in the parent-company’s pyramid. By treating each major corporation as a node and drawing links between companies that owned shares of others, the researchers uncovered the tendrils of control that link one pyramid to another.

The links between nodes, shown above, represent influence that can flow two ways: any corporation could either influence or be influenced by any other corporation. Directly owning shares of a company gave a corporation more influence than indirect ownership, and the researchers assigned their links certain weights to reflect this difference. At first glance, the picture that emerged looks quite convoluted. However, the researchers discovered that the web of connections clustered into four different components that took the shape of a bow tie. In the illustration, red dots represent nodes, green arrows point from share-owner to the owned company, and the flow of control points in the direction of the most power.

The researchers observed a central cluster in which influence goes both ways between all the nodes, called the strongly connected component, or SCC, as shown above. Within the SCC, each member either directly or indirectly owns some of every other member’s shares. Second, there was the in group, companies that owned shares in various members of the SCC, but were not under the SCC’s influence: Influence “flowed” in but not out. Part three was the in-group’s opposite, the companies who were influenced by, but did not own shares in, the SCC companies—this became the out group. Finally, the fourth component of the network consists of the tubes and tendrils, or T&T, companies that remain separate from the SCC but may have ties to members of the in or out groups. The above illustration actually represents a generic version of a bow tie network, a category of network that can also be used to describe how Web pages are related. The researchers found that the corporate network looked more like the illustration below, which shows that the out group is much larger than the in group or even the SCC.

Only the tiny, elite in group gets to influence the SCC core without submitting to its influence at all. A significant amount of the corporations, however, still fall into the central strongly connected component, which indicates that many of the major market players have complex economic relationships with one another. “What are the implications for global financial stability?” said the researchers in their paper. “What are the implications for market competition?” The study may not have uncovered a corporate conspiracy, but it does show that corporations are not lone behemoths: They are inter-dependent and influence one another a great deal. Applying a scientific model to the market can help provide a clearer picture of how the world economy runs. And perhaps a hint at what our corporate overlords are wearing.

Image credit: Stefano Battiston et al., ETH Zurich (Swiss Federal Institute of Technology Zurich)

Who are the 1% and What Do They Do for a Living?
by Mike Konczal / 10/14/2011
There’s good reason to focus on the top 1%: they’re distorting our economy.

A lot of emphasis is on the “99%” versus the “1%” in these protests. But who are the 1% and what do they do for a living? Are they all Wilt Chamberlains and Oprahs and other people taking part in the dynamism of the new economy? Nope. It’s same as it ever was — high-level management and the financial sector. Suzy Khimm goes through the numbers here. I’m curious about occupations. I’ll hand the mic off to “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data“ by Bakija, Cole, and Heim. This is the latest and greatest report on occupations and inequality. Here’s a chart of the occupations of the top 1%:


Inequality has fractals. Let’s go into the top 0.1% — what do they look like?  Here’s the chart of the occupations of the top 0.1%, including capital gains:

It boils down to managers, executives, and people who work in finance. From the paper: “[o]ur findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005.”

For fun, there are more than twice as many people listed as “Not working or deceased” than are in “arts, media, sports.” For every elite sports player who earned a place at the top of the income pyramid due to technology changes and superstar, tournament-style labor markets that broadcast him across the globe, there are two trust fund babies.

The top 1% of managers and executives often means C-level employees, especially CEOs. And their earnings versus the average worker have skyrocketed in the past 30 years, so this shouldn’t be surprising:



How has this evolved over time?  Can we get a cross-section of that protest sign above?

Same candidates. There’s a reason the protests ended up on Wall Street: The top 1% and top 0.1% comprises all the senior bosses and the financial sector. One of the best things about Occupy Wall Street is that there is no chatter about Obama or Perry or whatever is the electoral political issue of the day. There are a lot of people rethinking things, discussing, learning, and conceptualizing the kinds of world they want to create. Since so much about inequality is a function of the legal structure known as a “corporation,” I’d encourage you to check out Alex Gourevitch on how the corporate is structured in our laws.

The paper notes that stock market returns drive much of the manager’s income. This is related to a process of financialization, something JW Mason has done a fantastic job outlining here. The “dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves,” and this is done by paying out more in dividends that is earned in profits. Think of it as our-real-economy-as-ATM-machine, cashing out wealth during the good times and then leaving workers and the rest of the real economy to deal with the aftermath.

Both articles mention chapter 6 of Doug Henwood’s Wall Street; anyone interested in how things have changed and where they need to go would be wise to check it out. It’s even available for free pdf book download here.

There’s good reason to focus on the top 1% instead of the top 10 or 50%. There is evidence that financial pay at this elite level is correlated with deregulation and the other legal changes that brought on the crisis. High-ranking senior corporate executives’ pay has dwarfed workers’ salaries, but is only a reward for engaging in shady financial engineering practices. These problems require a legal solution and thus they require a democratic challenge and a rethinking of how we want to structure our economy. Here’s to the 99% and Occupy Wall Street helping get us there.

{Mike Konczal is a Fellow at the Roosevelt Institute.}





The Large Families that rule the world / 18.10.2011

We are speaking of 6, 8 or maybe 12 families who truly dominate the world. Know that it is a mystery difficult to unravel. But what are the names of the families who run the world and have control of states and international organizations like the UN, NATO or the IMF?

To try to answer this question, we can start with the easiest: inventory, the world’s largest banks, and see who the shareholders are and who make the decisions. The world’s largest companies are now: Bank of America, JP Morgan, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley. Let us now review who their shareholders are.

Bank of America:
State Street Corporation, Vanguard Group, BlackRock, FMR (Fidelity), Paulson, JP Morgan, T. Rowe, Capital World Investors, AXA, Bank of NY, Mellon.

JP Morgan:
State Street Corp., Vanguard Group, FMR, BlackRock, T. Rowe, AXA, Capital World Investor, Capital Research Global Investor, Northern Trust Corp. and Bank of Mellon.

State Street Corporation, Vanguard Group, BlackRock, Paulson, FMR, Capital World Investor, JP Morgan, Northern Trust Corporation, Fairhome Capital Mgmt and Bank of NY Mellon.

Wells Fargo:
Berkshire Hathaway, FMR, State Street, Vanguard Group, Capital World Investors, BlackRock, Wellington Mgmt, AXA, T. Rowe and Davis Selected Advisers.

We can see that now there appears to be a nucleus present in all banks: State Street Corporation, Vanguard Group, BlackRock and FMR (Fidelity). To avoid repeating them, we will now call them the “big four”

Goldman Sachs:
“The big four,” Wellington, Capital World Investors, AXA, Massachusetts Financial Service and T. Rowe.

Morgan Stanley:
“The big four,” Mitsubishi UFJ, Franklin Resources, AXA, T. Rowe, Bank of NY Mellon e Jennison Associates. Rowe, Bank of NY Mellon and Jennison Associates.

We can just about always verify the names of major shareholders. To go further, we can now try to find out the shareholders of these companies and shareholders of major banks worldwide.

Bank of NY Mellon:
Davis Selected, Massachusetts Financial Services, Capital Research Global Investor, Dodge, Cox, Southeatern Asset Mgmt. and … “The big four.”

State Street Corporation (one of the “big four”):
Massachusetts Financial Services, Capital Research Global Investor, Barrow Hanley, GE, Putnam Investment and … The “big four” (shareholders themselves!).

BlackRock (another of the “big four”):
PNC, Barclays e CIC.

Who is behind the PNC? FMR (Fidelity), BlackRock, State Street, etc. And behind Barclays? BlackRock

And we could go on for hours, passing by tax havens in the Cayman Islands, Monaco or the legal domicile of Shell companies in Liechtenstein. A network where companies are always the same, but never a name of a family.

In short: the eight largest U.S. financial companies (JP Morgan, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, U.S. Bancorp, Bank of New York Mellon and Morgan Stanley) are 100% controlled by ten shareholders and we have four companies always present in all decisions: BlackRock, State Street, Vanguard and Fidelity.

In addition, the Federal Reserve is comprised of 12 banks, represented by a board of seven people, which comprises representatives of the “big four,” which in turn are present in all other entities.

In short, the Federal Reserve is controlled by four large private companies: BlackRock, State Street, Vanguard and Fidelity. These companies control U.S. monetary policy (and world) without any control or “democratic” choice. These companies launched and participated in the current worldwide economic crisis and managed to become even more enriched.

To finish, a look at some of the companies controlled by this “big four” group:
Alcoa Inc.
Altria Group Inc.
American International Group Inc.
AT&T Inc.
Boeing Co.
Caterpillar Inc.
Coca-Cola Co.
DuPont & Co.
Exxon Mobil Corp.
General Electric Co.
General Motors Corporation
Hewlett-Packard Co.
Home Depot Inc.
Honeywell International Inc.
Intel Corp.
International Business Machines Corp
Johnson & Johnson
JP Morgan Chase & Co.
McDonald’s Corp.
Merck & Co. Inc.
Microsoft Corp.
3M Co.
Pfizer Inc.
Procter & Gamble Co.
United Technologies Corp.
Verizon Communications Inc.
Wal-Mart Stores Inc.
Time Warner
Walt Disney
Rupert Murdoch’s News Corporation.,
CBS Corporation
NBC Universal

The same “big four” control the vast majority of European companies counted on the stock exchange. In addition, all these people run the large financial institutions, such as the IMF, the European Central Bank or the World Bank, and were “trained” and remain “employees” of the “big four” that formed them. The names of the families that control the “big four”, never appear.

{Translated from the Portuguese version by Lisa Karpova / Pravda.Ru}


Helium-3 Mmm, polarized helium-3 and neutron spin filters

Why the world is running out of helium
by Steve Connor / 23 August 2010

It is the second-lightest element in the Universe, has the lowest boiling-point of any gas and is commonly used through the world to inflate party balloons. But helium is also a non-renewable resource and the world’s reserves of the precious gas are about to run out, a shortage that is likely to have far-reaching repercussions. Scientists have warned that the world’s most commonly used inert gas is being depleted at an astonishing rate because of a law passed in the United States in 1996 which has effectively made helium too cheap to recycle. The law stipulates that the US National Helium Reserve, which is kept in a disused underground gas field near Amarillo, Texas – by far the biggest store of helium in the world – must all be sold off by 2015, irrespective of the market price.

The experts warn that the world could run out of helium within 25 to 30 years, potentially spelling disaster for hospitals, whose MRI scanners are cooled by the gas in liquid form, and anti-terrorist authorities who rely on helium for their radiation monitors, as well as the millions of children who love to watch their helium-filled balloons float into the sky. Helium is made either by the nuclear fusion process of the Sun, or by the slow and steady radioactive decay of terrestrial rock, which accounts for all of the Earth’s store of the gas. There is no way of manufacturing it artificially, and practically all of the world’s reserves have been derived as a by-product from the extraction of natural gas, mostly in the giant oil- and gasfields of the American South-west, which historically have had the highest helium concentrations.

Liquid helium is critical for cooling cooling infrared detectors, nuclear reactors and the machinery of wind tunnels. The space industry uses it in sensitive satellite equipment and spacecraft, and Nasa uses helium in huge quantities to purge the potentially explosive fuel from its rockets. In the form of its isotope helium-3, helium is also crucial for research into the next generation of clean, waste-free nuclear reactors powered by nuclear fusion, the nuclear reaction that powers the Sun. Despite the critical role that the gas plays in the modern world, it is being depleted as an unprecedented rate and reserves could dwindle to virtually nothing within a generation, warns Nobel laureate Robert Richardson, professor of physics at Cornell University in Ithaca, New York. “In 1996, the US Congress decided to sell off the strategic reserve and the consequence was that the market was swelled with cheap helium because its price was not determined by the market. The motivation was to sell it all by 2015,” Professor Richardson said. The basic problem is that helium is too cheap. The Earth is 4.7 billion years old and it has taken that long to accumulate our helium reserves, which we will dissipate in about 100 years. One generation does not have the right to determine availability for ever.” Soon after helium mining was developed at the turn of the previous century, the US established a National Helium Reserve in 1925. During the Second World War, helium was strategically important because of its use in military airships.

When the Cold War came along, it became even more important because of its uses in the purging of rocket fuel in intercontinental ballistic missiles. The national reserve was established in the porous rock of a disused natural gasfield 30 miles north of Amarillo, which soon became known as the Helium Capital of the World. A billion cubic metres – or about half of the world’s reserves – are now stored in this cluster of mines, pipes and vats that extend underground for more than 200 miles from Amarillo to Kansas. But in 1996, the US passed the Helium Privatisation Act which directed that this reserve should be sold by 2015 at a price that would substantially pay off the federal government’s original investment in building up the reserve. The law stipulated the amount of helium sold off each year should follow a straight line with the same amount being sold each year, irrespective of the global demand for it. This, according to Professor Richardson, who won his Nobel prize for his work on helium-3, was a mistake. “As a result of that Act, helium is far too cheap and is not treated as a precious resource,” he said. “It’s being squandered.”

Professor Richardson co-chaired an inquiry into the impending helium shortage convened by the influential US National Research Council, an arm of the US National Academy of Sciences. This report, which has just been published, recommends that the US Government should revisit and reconsider its policy of selling off the US national helium reserve. “They couldn’t sell it fast enough and the world price for helium gas is ridiculously cheap,” Professor Richardson told a summer meeting of Nobel laureates from around the world at Lindau in Germany. “You might at first think it will be peculiarly an American topic because the sources of helium are primarily in the US but I assure you it matters of the rest of the world also,” he said. Professor Richardson believes the price for helium should rise by between 20- and 50-fold to make recycling more worthwhile. Nasa, for instance, makes no attempt to recycle the helium used to clean is rocket fuel tanks, one of the single biggest uses of the gas. Professor Richardson also believes that party balloons filled with helium are too cheap, and they should really cost about $100 to reflect the precious nature of the gas they contain. “Once helium is released into the atmosphere in the form of party balloons or boiling helium it is lost to the Earth forever, lost to the Earth forever,” he emphasized.

What helium is used for:
Airships – As helium is lighter than air it can be used to inflate airships, blimps and balloons, providing lift. Although hydrogen is cheaper and more buoyant, helium is preferred as it is non-flammable and therefore safer.
MRI scanners – Helium’s low boiling point makes it useful for cooling metals needed for superconductivity, from cooling the superconducting magnets in medical MRI scanners to maintaining the low temperature of the Large Hadron Collider at Cern.
Deep-sea diving – Divers and others working under pressure use mixtures of helium, oxygen and nitrogen to breathe underwater, avoiding the problems caused by breathing ordinary air under high pressure, which include disorientation.
Rockets – As well as being used to clean out rocket engines, helium is used to pressurise the interior of liquid fuel rockets, condense hydrogen and oxygen to make rocket fuel, and force fuel into the engines during rocket launches.
Dating – Helium can be used to estimate the age of rocks and minerals containing uranium and thorium by measuring their retention of helium.
Telescopes – The gas is used in solar telescopes to prevent the heating of the air, which reduces the distorting effects of temperature variations in the space between lenses.

Mining the Moon
by Mark Williams / August 23, 2007

At the 21st century’s start, few would have predicted that by 2007, a second race for the moon would be under way. Yet the signs are that this is now the case. Furthermore, in today’s moon race, unlike the one that took place between the United States and the U.S.S.R. in the 1960s, a full roster of 21st-century global powers, including China and India, are competing. Even more surprising is that one reason for much of the interest appears to be plans to mine helium-3–purportedly an ideal fuel for fusion reactors but almost unavailable on Earth–from the moon’s surface. NASA’s Vision for Space Exploration has U.S. astronauts scheduled to be back on the moon in 2020 and permanently staffing a base there by 2024. While the U.S. space agency has neither announced nor denied any desire to mine helium-3, it has nevertheless placed advocates of mining He3 in influential positions. For its part, Russia claims that the aim of any lunar program of its own–for what it’s worth, the rocket corporation Energia recently started blustering, Soviet-style, that it will build a permanent moon base by 2015-2020–will be extracting He3.

The Chinese, too, apparently believe that helium-3 from the moon can enable fusion plants on Earth. This fall, the People’s Republic expects to orbit a satellite around the moon and then land an unmanned vehicle there in 2011. Nor does India intend to be left out. This past spring, its president, A.P.J. Kalam, and its prime minister, Manmohan Singh, made major speeches asserting that, besides constructing giant solar collectors in orbit and on the moon, the world’s largest democracy likewise intends to mine He3 from the lunar surface. India’s probe, Chandrayaan-1, will take off next year, and ISRO, the Indian Space Research Organization, is talking about sending Chandrayaan-2, a surface rover, in 2010 or 2011. Simultaneously, Japan and Germany are also making noises about launching their own moon missions at around that time, and talking up the possibility of mining He3 and bringing it back to fuel fusion-based nuclear reactors on Earth.

Could He3 from the moon truly be a feasible solution to our power needs on Earth? Practical nuclear fusion is nowadays projected to be five decades off–the same prediction that was made at the 1958 Atoms for Peace conference in Brussels. If fusion power’s arrival date has remained constantly 50 years away since 1958, why would helium-3 suddenly make fusion power more feasible? Advocates of He3-based fusion point to the fact that current efforts to develop fusion-based power generation, like the ITER megaproject, use the deuterium-tritium fuel cycle, which is problematical. Deuterium and tritium are both hydrogen isotopes, and when they’re fused in a superheated plasma, two nuclei come together to create a helium nucleus–consisting of two protons and two neutrons–and a high-energy neutron. A deuterium-tritium fusion reaction releases 80 percent of its energy in a stream of high-energy neutrons, which are highly destructive for anything they hit, including a reactor’s containment vessel. Since tritium is highly radioactive, that makes containment a big problem as structures weaken and need to be replaced. Thus, whatever materials are used in a deuterium-tritium fusion power plant will have to endure serious punishment. And if that’s achievable, when that fusion reactor is eventually decommissioned, there will still be a lot of radioactive waste.

Helium-3 advocates claim that it, conversely, would be nonradioactive, obviating all those problems. But a serious critic has charged that in reality, He3-based fusion isn’t even a feasible option. In the August issue of Physics World, theoretical physicist Frank Close, at Oxford in the UK, has published an article called “Fears Over Factoids” in which, among other things, he summarizes some claims of the “helium aficionados,” then dismisses those claims as essentially fantasy. Close points out that in a tokamak–a machine that generates a doughnut-shaped magnetic field to confine the superheated plasmas necessary for fusion–deuterium reacts up to 100 times more slowly with helium-3 than it does with tritium. In a plasma contained in a tokamak, Close stresses, all the nuclei in the fuel get mixed together, so what’s most probable is that two deuterium nuclei will rapidly fuse and produce a tritium nucleus and proton. That tritium, in turn, will likely fuse with deuterium and finally yield one helium-4 atom and a neutron. In short, Close says, if helium-3 is mined from the moon and brought to Earth, in a standard tokamak the final result will still be deuterium-tritium fusion.

Second, Close rejects the claim that two helium-3 nuclei could realistically be made to fuse with each other to produce deuterium, an alpha particle and energy. That reaction occurs even more slowly than deuterium-tritium fusion, and the fuel would have to be heated to impractically high temperatures–six times the heat of the sun’s interior, by some calculations–that would be beyond the reach of any tokamak. Hence, Close concludes, “the lunar-helium-3 story is, to my mind, moonshine.” Close’s objection, however, assumes that deuterium-helium-3 fusion and pure helium-3 fusion would take place in tokamak-based reactors. There might be alternatives: for example, Gerald Kulcinski, a professor of nuclear engineering at the University of Wisconsin-Madison, has maintained the only helium-3 fusion reactor in the world on an annual budget that’s barely into six figures.

Kulcinski’s He3-based fusion reactor, located in the Fusion Technology Institute at the University of Wisconsin, is very small. When running, it contains a spherical plasma roughly 10 centimeters in diameter that can produce sustained fusion with 200 million reactions per second. To produce a milliwatt of power, unfortunately, the reactor consumes a kilowatt. Close’s response is, therefore, valid enough: “When practical fusion occurs with a demonstrated net power output, I–and the world’s fusion community–can take note.” Still, that critique applies equally to ITER and the tokamak-based reactor effort, which also haven’t yet achieved breakeven (the point at which a fusion reactor produces as much energy as it consumes). What’s significant about the reactor in Wisconsin is that, as Kulcinski says, “We are doing both deuterium-He3 and He3-He3 reactions. We run deuterium-He3 fusion reactions daily, so we are very familiar with that reaction. We are also doing He3-He3 because if we can control that, it will have immense potential.”

The reactor at the Fusion Technology Institute uses a technology called inertial electrostatic confinement (IEC). Kulcinski explains: “If we used a tokamak to do deuterium-helium-3, it would need to be bigger than the ITER device, which already is stretching the bounds of credibility. Our IEC devices, on the other hand, are tabletop-sized, and during our deuterium-He3 runs, we do get some neutrons produced by side reaction with deuterium.” Nevertheless, Kulcinski continues, when side reactions occur that involve two deuterium nuclei fusing to produce a tritium nucleus and proton, the tritium produced is at such a higher energy level than the confinement system that it immediately escapes. “Consequently, the radioactivity in our deuterium-He3 system is only 2 percent of the radioactivity in a deuterium-tritium system.” More significant is the He3-He3 fusion reaction that Kulcinski and his assistants produce with their IEC-based reactor. In Kulcinski’s reactor, two helium-3 nuclei, each with two protons and one neutron, instead fuse to produce one helium-4 nucleus, consisting of two protons and two neutrons, and two highly energetic protons. “He3-He3 is not an easy reaction to promote,” Kulcinski says. “But He3-He3 fusion has the greatest potential.” That’s because helium-3, unlike tritium, is nonradioactive, which, first, means that Kulcinski’s reactor doesn’t need the massive containment vessel that deuterium-tritium fusion requires. Second, the protons it produces–unlike the neutrons produced by deuterium-tritium reactions–possess charges and can be contained using electric and magnetic fields, which in turn results in direct electricity generation. Kulcinski says that one of his graduate assistants at the Fusion Technology Institute is working on a solid-state device to capture the protons and convert their energy directly into electricity.

Still, Kulcinski’s reactor proves only the theoretical feasibility and advantages of He3-He3 fusion, with commercial viability lying decades in the future. “Currently,” he says, “the Department of Energy will tell us, ‘We’ll make fusion work. But you’re never going to go back to the moon, and that’s the only way you’ll get massive amounts of helium-3. So forget it.’ Meanwhile, the NASA folks tell us, ‘We can get the helium-3. But you’ll never get fusion to work.’ So DOE doesn’t think NASA can do its job, NASA doesn’t think that DOE can do its job, and we’re in between trying to get the two to work together.” Right now, Kulcinski’s funding comes from two wealthy individuals who are, he says, only interested in the research and without expectation of financial profit. Overall, then, helium-3 is not the low-hanging fruit among potential fuels to create practical fusion power, and it’s one that we will have to reach the moon to pluck. That said, if pure He3-based fusion power is realizable, it would have immense advantages.

Helium Shortage?
by Emily Jenkins / Aug 2000

There are two kinds of stable helium. You know the first one: It puts lift in birthday balloons, Thanksgiving Day parades, the Goodyear blimp. The other kind, an isotope called helium-3, may not be as familiar. It’s a naturally occurring, but very rare, variant of helium that is missing a neutron. Helium-3 is the fuel for a form of nuclear fusion that, in theory, could provide us with a clean, virtually infinite power source. Gerald Kulcinski, director of the University of Wisconsin’s Fusion Technology Institute, is already halfway there. Kulcinski is in charge of an “inertial electrostatic confinement device,” an experimental low-power reactor that has successfully performed continuous deuterium-helium-3 fusion – a process that produces less waste than the standard deuterium-tritium fusion reaction. The next step, pure helium-3 fusion (3He-3He) is a long way off, but it’s worth the effort, says Kulcinski. “You’d have a little residual radioactivity when the reactor was running, but none when you turned it off. It would be a nuclear power source without the nuclear waste.”

If we ever achieve it, helium-3 fusion will be the premier rocket fuel for centuries to come. The same lightness that floats CargoLifter’s CL160 will allow helium to provide more power per unit of mass than anything else available. With it, rockets “could get to Mars in a weekend, instead of seven or eight months,” says Marshall Savage, an amateur futurist and the author of The Millennial Project: Colonizing the Galaxy in Eight Easy Steps. The problem? We may run out of helium – and therefore helium-3 – before the fusion technology is even developed. Nearly all of the world’s helium supply is found within a 250-mile radius of Amarillo, Texas (the Helium Capital of the World). A byproduct of billions of years of decay, helium is distilled from natural gas that has accumulated in the presence of radioactive uranium and thorium deposits. If it’s not extracted during the natural gas refining process, helium simply soars off when the gas is burned, unrecoverable.

The federal government first identified helium as a strategic resource in the 1920s; in 1960 Uncle Sam began socking it away in earnest. Thirty-two billion cubic feet of the gas are bunkered underground in Cliffside, a field of porous rock near Amarillo. But now the government is getting out of the helium business, and it’s selling the stockpile to all comers. Industrial buyers use the gas primarily for arc welding (helium creates an inert atmosphere around the flame) and leak detection (hydrogen has a smaller atom, but it usually forms a diatomic molecule, H2). NASA uses it to pressurize space shuttle fuel tanks: The Kennedy Space Center alone uses more than 75 million cubic feet annually. Liquid helium, which has the lowest melting point of any element (-452 degrees Fahrenheit), cools infrared detectors, nuclear reactors, wind tunnels, and the superconductive magnets in MRI equipment. At our current rate of consumption, Cliffside will likely be empty in 10 to 25 years, and the Earth will be virtually helium-free by the end of the 21st century. “For the scientific community, that’s a tragedy,” says Dave Cornelius, a Department of Interior chemist at Cliffside. “It would be a shame to squander it,” agrees Kulcinski.

For helium-3’s true believers – the ones who think the isotope’s fusion power will take us to the edge of our solar system and beyond – talk of the coming shortage is overblown: There’s a huge, untapped supply right in our own backyard. “The moon is the El Dorado of helium-3,” says Savage, and he’s right: Every star, including our sun, emits helium constantly. Implanted in the lunar soil by the solar wind, the all-important gas can be found on the moon by the bucketful. Associate professor Tim Swindle and his colleagues at the Lunar and Planetary Laboratory at the University of Arizona have already begun prospecting. Swindle has mapped likely helium-3 deposits on the moon by charting the parts of the lunar landscape most exposed to solar wind against the locations of mineral deposits that best trap the element. But, says Swindle, when we really want a lot – when we’re rocketing to the Red Planet and back for Labor Day weekend – the best place to gas up won’t be the moon: “The really big source of it is way out.” In our quest for helium-3, we’ll travel to Uranus and Neptune, whose helium-rich atmospheres are very similar in chemical composition to the sun’s. If futurists like Swindle and Savage are right, the gas will be our reason for traveling to our solar system’s farthest reaches – and our means of getting there.

Closing of Helium Reserve Raises New Issues
by Sam Howe Verhovek  /  October 8, 1997

Of all the Federal programs that have ever come under attack, perhaps none has been more ridiculed or more reviled than the national helium reserve, here on the high plains of the Texas Panhandle. It is a collection of pipelines and pumps and vats and, most of all, a seemingly staggering amount of helium: 31 billion cubic feet, enough to supply current Federal needs for 100 years. ”Amazingly stupid, even by Government standards,” P. J. O’Rourke, the conservative humorist, said of the program, which forces Federal agencies to buy helium at inflated prices from the reserve. ”The poster child of Government waste,” said Christopher Cox, the California Congressman who led the fight to get rid of this veritable Fort Knox of helium.

But now that President Clinton has signed a bill that will get the Government out of the helium business and sell off the nation’s helium reserve to private industry, which has long claimed that it can supply helium more cheaply to agencies like NASA, the issue is turning out to be more complicated. In a vivid demonstration that cutting the Federal budget is rarely as easy or as simple as it seems, some experts are even daring to say it: maybe the helium reserve wasn’t such a dumb idea after all.

The jury is still out on just how much money will be saved by closing the operation near here, in part because the new law, for reasons that might prove daunting even for a Nobel laureate in economics, still requires the Government to pay an inflated price for helium. In some of the first contracts signed for privately supplied helium, irritated National Aeronautics and Space Administration officials note that the price, around $70 per thousand cubic feet, is roughly the same that they paid for helium from the reserve.

The American Physical Society, a prominent group of physicists, warns that getting rid of the nation’s helium stockpile is profoundly shortsighted. Though most people may think of helium as the thing that fills balloons and blimps, it is essential in all kinds of scientific pursuits, including the space program. For future generations, scientists say, it will be vital in the development of superconducting power lines, magnetically levitated trains, new kinds of generators and motors, and technology not yet even dreamed of. No one is predicting that the Government’s helium operation, in tumbleweed country about 25 miles north of Amarillo, will be magically revived. ”Everything you see here — it’s all going to go,” said Robert Robertson, an operator in the plant’s control room. ”The death warrant has been signed.” Nonetheless, even a cursory examination of the privatization of the Federal helium program, which the President set into motion when he signed the law a year ago, suggests that so far, instead of saving money, it has led to a messy accounting quandary in which the benefits are not yet clear.

Because the stores here are so large, the law requires that the helium, stored in a massive underground dome, be sold off slowly, over the next two decades, so as not to disrupt prices in the growing world market for helium. And in what, in effect, creates a secondary market in which Government agencies will bid for helium at above-market prices, the helium must be sold at prices that will fully pay off the $1.4 billion ”debt” the helium conservation program has accumulated since President John F. Kennedy helped begin it in the 1960’s so the nation’s space program would have a reliable supply. But because the debt is actually money that is owed by one Government agency to another, paying it off is basically a paper transaction intended to clear the helium reserve’s ledger. The Congressional Budget Office has already ruled that paying off the helium program’s debt will not do anything to reduce the national debt, currently at $5.3 trillion or so.

The bottom line, of course, is just how much money the Government will save by buying helium from private suppliers like the Exxon Corporation. Even the Helium Advisory Council, the industry group that has lobbied vigorously for privatization, says it is not easy to calculate the saving, partly because the new law has not yet cleared the way for the true privatization of the helium program, which would mean selling at market prices. Carl Johnson, chairman of the council, predicts that the closing will save money. But when he was asked just how much taxpayers would save annually and when they would start seeing the saving, he said, ”It’s a very difficult question, and I don’t even know how I would begin to answer it.” Representative Cox, a Republican from Orange County, Calif., who led the crusade to kill the helium program, was more definitive, saying the saving would eventually amount to about $24 million a year: $20 million from the greater efficiencies at private plants, compared with the antiquated complex here, and $4 million from lower helium costs.

But NASA, the main Federal recipient of helium, has yet to save any money because of the privatization. ”We were all in favor of helium privatization, but we missed something here,” said Steve Parker, a procurement official at the Kennedy Space Center in Cape Canaveral, Fla. ”Your question is, are we getting the savings we were promised? That’s a no. We’re still paying inflated prices for the accrued debt.” Meanwhile, because nobody knows what will happen to the world market price for helium in coming decades, no one can say for sure whether selling off the national reserve is a good idea in the long run. ”What it really boils down to is this: Do you think this is true debt that is costing the American taxpayers, or is it a cost of a strategic decision to conserve crude helium?” said Timothy R. Spisak, general manager of operations of the helium program here. ”Remember, you’ve still got an asset out here, 30 billion cubic feet of helium. If you sell it off, you don’t have it anymore.”

Colorless, odorless and largely inert, helium is unique among Earth’s 100 or so elements because it remains liquid even at just above absolute zero, which is roughly 460 degrees Fahrenheit. That makes it extremely useful as a pressurizer and a coolant. Robert L. Park, a professor of physics at the University of Maryland and the director of the Washington office of the American Physical Society, said that helium would have vastly increased uses in the future and that selling off the Federal reserve might one day be seen as a catastrophically heedless decision. He urged Congress to find some way to mandate an increase in the size of national reserves, even if they are held by private industry.

The supply-and-demand equation involving helium, which is nonrenewable, is extremely complex. The problem is that helium is a byproduct of natural gas and that it is not always economical for companies to extract it. Currently, only about half of the 6.7 billion cubic feet of helium taken out of the earth each year is separated from natural gas and saved. The rest disappears into the atmosphere. But critics of the Government reserve program say concerns about the current loss of helium are overblown. They say there is no reason that the future demand for helium cannot be met by private industry, which already supplies 90 percent of the helium used in the United States. “‘The physicists are right and more expert on the value to science of helium than any source you could consult,” Representative Cox said. ”But the physicists are not experts on economics and markets. And a great deal of what’s at stake here is the latter and not the former.”

In the Texas Panhandle, where the helium operation’s staff of 165 will be whittled to a skeleton crew of about three dozen in the next few years, there has long been a sense of local pride in the program and outrage over the national scorn heaped upon it. ”The public’s been misinformed,” said Trooper Barker, a worker at the plant. ”They think it’s all some big joke about putting gas in blimps. Well, I’ve never once had a blimp fly out here and say, ‘O.K., fill ‘er up.’ ” Mr. Barker said that once private industry took over the helium, it would find ways to raise the price, an opinion widely shared in Amarillo. ”If NASA calls tonight and says, ‘We need 20 tank cars,’ we’ll get it out of our plant tonight,” said Terry Byrd, the production and maintenance manager, during a tour of the site. ”Private industry might charge a premium to do that.”

The helium program has had its defenders over the years, but the widespread national criticism has often made them seem to be voices in the wilderness. In a column two years ago, Gregory Curtis, the editor of Texas Monthly magazine, said that the derision was undeserved and that the helium conservation program was ”in fact an example of government working at its best.” Mr. Curtis said workers and managers at the helium program were ”intelligent, efficient and proud of their work, exactly the opposite of the thick and lazy bureaucrats Federal
workers are often said to be.”

The program has often been on the verge of elimination. In 1993, Bill Sarpalius, a Democrat who was Amarillo’s Congressman, persuaded President Clinton to keep the program alive. The President, struggling to gather a majority for his budget bill, spoke to Mr. Sarpalius four times on the day of the vote. ”Sure I talked to the President about helium,” Mr. Sarpalius, who was later defeated for re-election, said at the time. ”I talk to everyone I can in the Government about helium. And when I had the opportunity to explain to him that this was not really a billion-dollar loss, that this is a program that makes money for the Federal Government, that there’s another side to this picture, he was fascinated by it. He was really interested in helium.”

Mr. Sarpalius voted with the President, and the program was spared another year. But in 1996, with a conservative Republican Congressman, William M. Thornberry, now representing Amarillo and sentiment rising against the program, its gradual elimination was approved. Sometime around 2015, all the helium now in the Federal reserve is expected to be owned by private industry. ”There will be savings,” said Representative Cox, who is the father of 3- and 4-year-olds. ”We won’t know how much until my kids are out of college.”

Helium Demand Ballooning / Oct. 19, 2007

The worldwide shortage of helium is resulting in rising prices and tight supplies for party supply stores, but it won’t deflate Macy’s annual tradition of floating gigantic characters down Broadway in New York City this Thanksgiving. An international helium shortage, warned about for years, has become more evident recently, industry experts said, as rising global demands for the lighter-than-air, nonflammable gas mean short supplies for low-priority, consumer-level uses. While helium is the second most abundant element in the universe, it is hard to find on Earth, where it is a byproduct of radioactive decay underground. Here, helium is extracted from natural gas. While all natural gas contains at least trace quantities of helium, the gas is distilled from only about seven percent of the natural gas extracted from the ground, and only a few plants worldwide have the capability of separating helium from other gases and purifying it. In the US, purified helium is commercially recovered from natural gas deposits mostly in Texas, Oklahoma and Kansas. It was first discovered in 1903 when an exploratory well in Kansas produced a gas that “refused” to burn. Some of the richest sources are under the Texas Panhandle.

Most people’s familiarity with helium may be through its use in festive balloons, which accounts for about seven percent of the helium market worldwide, but the vast majority of supplies of the gas are for more high-tech applications. Helium is essential for things that require its unique properties — its inertness, its incredibly low “boiling point” (-451.48 °F) and its high thermal conductivity. It exists as a gas except under extreme conditions. At temperatures close to absolute zero (-459.7 °F), helium is a fluid; most materials are solid when cooled to such low temperatures. Liquid helium is used to supercool magnets in MRI (magnetic resonance imaging) machines, representing 20 percent of all helium use globally. Liquid helium is also used to cool some thermographic cameras, which detect heat instead of visible light and are used by search-and-rescue teams can locate people among rubble or through smoke. Another 17 percent of the helium produced globally is used to provide an inert gas shield for laser welding.

Other applications of helium include: in supersonic wind tunnels; to provide lift for high-altitude scientific research balloons; to pressurize space-shuttle fuel tanks; in fiber optics, semiconductor, computer chip and flat-panel display manufacturing; as a protective gas in growing silicon and germanium crystals and in titanium and zirconium production; to create a nitrogen-free atmosphere, when mixed with oxygen, for deep-sea divers so they won’t suffer from “the bends;” in the study of superconductivity and to create superconductive magnets for particle physics research; and in metallurgy and analytical chemistry and in leak detection. Because helium won’t become radioactive, it is also used as a cooling medium for nuclear reactors.

The first laser invented, a helium-neon laser, is used today in laser eye surgery and laser pointers. The shortage is a result of a “perfect storm” of problems, with a new plant in Algeria ramping up production later than anticipated and with half the expected capacity, a plant in Qatar coming online slower than expected, and the world’s largest source of commercial helium, the Exxon Mobil plant in Wyoming, operating at only 80 to 85 percent of capacity because of plant problems. Also, the Bureau of Land Manaqement (BLM), which provides crude helium to the refiners that supply about 40 percent of US helium production, has put restrictions on how much crude helium refiners can take out of the BLM pipeline to process, Phil Kornbluth, executive vice president of Matheson Tri-Gas Global Helium in Basking Ridge, N.J., said on National Public Radio’s “Talk of the Nation” program last week.

The US government became interested in helium during World War I as a safe, noncombustible alternative to hydrogen for use in buoyant aircraft. In 1925 Congress created a Federal Helium Program to ensure that the gas would be available to the government for defense needs. The Bureau of Mines constructed and operated a large helium extraction and purification plant just north of Amarillo beginning in 1929. From 1929-1960, the federal government was the only domestic producer of helium. Because demand for helium increased during and after World War II, the government began offering incentives to private natural gas producers to strip helium from the gas and sell it to the government. Some of this helium was used for research, the NASA space program and other applications, but most was injected into a storage facility known as the Federal Helium Reserve.

By 1990 private demand for helium far exceeded federal demand, and the 1996 Helium Privatization Act redefined the government’s role in helium production. The BLM was given the responsibility of operating the Federal Helium Reserve and providing enriched crude helium to private refiners. The BLM’s facility near Amarillo provides crude helium to refiners that supply about 40 percent of helium supplies in the US, and almost 35 percent of the world’s helium production. The government’s strategic stockpile of helium in Amarillo, which held a three-year worldwide supply, is currently being sold off and will be mostly gone by 2015, Kornbluth said.

Under the 1996 Helium Privatization Act, by 2015 the secretary of the interior is to sell 850 million standard cubic meters (scm) from the Federal Helium Reserve, leaving 17 million scm, which represents a less than two-year supply. The Federal Helium Program’s original purpose, in 1925, was to ensure supplies of helium to the federal government for defense, research, and medical purposes. Over time, the program evolved into a conservation program with a primary goal of supplying the government with high-grade helium for high-tech research and aerospace purposes.

Party supply stores and florists around the country are complaining about increased helium prices and short supplies and its affect on their bottom lines. “It’s been affecting us since September 2006, and lately it’s been getting worse,” Lisa Dyer-Love, manager of Cook’s Balloonery in Westerville, Ohio, told the Columbus Dispatch. “The price of helium has gone up several times in the past year,” Matt Johnson, manager of Gases Plus, which supplies helium to party stores, car dealers and other consumers in Montana, told the Billings Gazette. “On average, when there’s been a price increase, it’s been 15 to 20 percent.” In September, industrial gas companies in Japan announced they planned to cut helium gas supplies by as much as 30 percent following significant shortages from US suppliers, a move that could have a detrimental impact on semiconductor manufacturing and electronics production in that country.

Earlier this month, Worthington Cylinders, a Columbus, Ohio-based supplier of pressure cylinders worldwide, announced a 6 percent price increase on all of its portable party kits, called Balloon Time Helium Balloon Kits, effective Nov. 1. “The current short supply and increased demand for helium has resulted in significantly higher helium prices. As a result, the company is forced to pass on its first price increase to the market in several years,” said Dusty McClintock, Worthington Cylinders vice president of sales. “The bottom line in terms of helium supply is that there is very little excess helium refining capacity, and domestic supplies of crude helium are growing ever tighter. Until overseas plants are fully online and/or additional plants are built, we’re potentially facing additional supply disruptions, if not shortages,” stated Leslie Theiss, manager of the BLM Amarillo field office in a January 2007 article on the BLM Web site. “For 350 days last year, the BLM’s crude helium enrichment facility was operating at full capacity, supplying more than 6 million cubic feet a day or 2.1 billion cubic feet per year. We can’t increase production because this would result in adverse impacts to the gas field, wells, compressors and other equipment.”

The Macy’s Thanksgiving Day parade already has enough helium stockpiled to keep its balloons flying this November, Director of Media Relations Elina Kazan told the media recently. Macy’s has faced a helium shortage before — in 2006, parade organizers reportedly decided to use fewer balloons as a result. Also, when the gas was unexpectedly unavailable in 1958, parade organizers filled the balloons with air and suspended them from cranes, according to the Macy’s Thanksgiving Day Parade Web site.

There may be relief coming, however. Gas companies Air Products and Matheson Tri-Gas announced this week they will build a liquid helium production plant near Big Piney, Wyoming, with an initial capacity of 200 million standard cubic feet per year. Production at the plant is expected to begin in 2009. The plant will be the 10th liquid helium plant operating in the US, and the first new US facility since 2000, the companies said. The facility would process natural gas from the Riley Ridge Field in Wyoming, the second largest helium-rich natural gas field in the US. Riley Ridge is believed to contain sufficient helium reserves to support production for decades. “We are enthusiastic about developing the helium reserves at Riley Ridge. Bringing on this new source, with very long-lived helium reserves, will enable us to further diversify our helium supply and enhance our ability to reliably serve our worldwide customers,” said John Van Sloun, general manager, Helium and Rare Gases, for Air Products. “We continue to see tightness in the supply of helium in the global market. The initial helium volumes expected from Riley Ridge in 2009 are relatively small, but this important new facility can produce additional product to help meet growing global demand.” Also, it was announced last month that Australia’s first-ever helium production plant will be built in the country’s Northern Territory at Darwin after a deal was reached between gas companies there. It is believed that the project will have the capacity to meet the entire country’s helium needs and also supply export markets.


The Impact of Selling the Federal Helium Reserve

The Helium Privatization Act of 1996 (P.L. 104-273) directs the Department of the Interior to begin liquidating the U.S. Federal Helium Reserve by 2005 in a manner consistent with minimum market disruption and at a price given by a formula specified in the act. It also mandates that the Department of the Interior enter into appropriate arrangements with the National Academy of Science to study and report on whether such disposal of helium reserves will have a substantial adverse effect on U.S. scientific, technical, biomedical, or national security interests.

This report is the product of that mandate. To provide context, the committee has examined the helium market and the helium industry as a whole to determine how helium users would be affected under various scenarios for selling the reserve within the act s constraints. The Federal Helium Reserve, the Bush Dome reservoir, and the Cliffside facility are mentioned throughout this report. It is important to recognize that they are distinct entities. The Federal Helium Reserve is federally owned crude helium gas that currently resides in the Bush Dome reservoir. The Cliffside facility includes the storage facility on the Bush Dome reservoir and the associated buildings pipeline.

Products, research rely on element
by Bob Secter  /  November 19, 2007

Helium, the second most plentiful element in the universe, is suddenly in short supply on this planet, and that means soaring prices for a lot of things. “Some customers have told me they’re just not going to sell balloons anymore because they can’t get helium,” said Chicago party wholesaler Lee Brody. “Everybody’s scrambling.” As raw materials crises go, the helium shortage clearly takes a back seat to the global oil crunch, but its repercussions go well beyond the cost of decorating birthdays or bar mitzvahs. The shortage shines a light on an obscure federal helium program critical to feeding the world’s growing appetite. To most of us, helium is just a novelty gas that floats blimps, bobs huge latex whales over car dealers and makes your voice sound like Daffy Duck when inhaled (which experts say is a really bad idea that
could lead to a collapsed lung). Demand for the gas has taken off in industry and scientific research in recent years, and the helium squeeze is being felt everywhere from university physics labs to plants in India, China, Taiwan and Korea that make today’s hottest consumer products. Japanese helium suppliers recently warned customers in the electronics industry to prepare for supply cuts of up to 30 percent.

Helium is less dense than air, which explains why it makes balloons rise. Sound waves travel faster through it. It is also noncombustible and can be liquefied to temperatures approaching absolute zero, properties that render it ideal for cooling metals that produce superconductivity or in processes that throw off a lot of heat. It is used to make flat-panel TVs, semiconductors, optical fibers and medical MRIs, and it toughens industrial welds. NASA uses a full train car load to pressurize a liquid fuel rocket. The U.S. government is the world’s No. 1 source, sucking helium out of a Texas reservoir it began filling after World War I when dirigibles were thought to be the coming thing. That stockpile will be empty in a decade, and new overseas sources have been slow to develop. “We’re pedaling as fast as we can here, but we just can’t produce enough,” said Leslie Theiss, manager of the Federal Helium Reserve near Amarillo. “One-third of the world’s helium comes from our little place here. That’s kind of frightening.”

In today’s increasingly interdependent global marketplace, the balloon business finds itself at the bottom of the helium supply chain. What began as spot shortages last year have grown chronic this year, said Kaufman, president of the International Balloon Association, a party industry trade group. Kaufman is also co-owner of M.K. Brody, a Chicago party wholesaler that often goes through 100 cylinders of helium in a week. The firm’s distributor recently put it on a weekly allotment of 33 cylinders. A standard tank with enough helium to blow up 400 average-size balloons cost $40 five years ago but $88 today, Kaufman said. He’s been told to expect another 50 percent price increase before Christmas. Cindi Cronin, who runs a Chicago party-decor business, said it’s become kind of a scavenger hunt lately to find helium. To stretch her supplies and save money, Cronin has started diluting the helium in balloon decorations with 40 percent air. “They still float, but not as long,” she said.

Helium is abundant in space, a byproduct of the nuclear fusion of stars. On Earth, it is locked largely in natural gas deposits and typically found only at trace levels too expensive to strip out and refine. By a quirk of geology, some natural gas fields in this country are blessed with robust helium concentrations. And that has made the United States to helium production what Saudi Arabia is to oil. Some of the richest sources are in the Texas panhandle, and that is where the federal government began stockpiling the gas in 1925. The Army considered it nearly as good as hydrogen to bring giant airships aloft and much safer, an assessment tragically borne out in 1937 when the hydrogen-filled Hindenburg erupted in flames over New Jersey and killed 36 people. In the 1990s, Congress decided the government should get out of the helium business. Federal law requires the stockpile to be sold off in about 10 years.

Private industry has been slow to pick up the slack. New production facilities in the Middle East have been plagued with problems and not produced hoped-for yields. “Demand is increasing overseas, and people are starting to get nervous,” said Maura Garvey, director of market research for Cryogas International, a Massachusetts-based trade journal that closely follows helium markets. She predicts helium supplies will remain tight through at least 2010 and possibly well beyond. Back in Amarillo, Theiss fears the day of reckoning for world helium supplies might be coming a lot faster than for oil or other nonrenewable commodities. “To our knowledge, nothing has been discovered to date that has the reserves we have here,” she said. “Exports have increased 50 percent in the last five years. If you’ve got a finite amount and a lot more suddenly starts going overseas, do the math. It’s not going to be good when we’re done here.”


Somali sea gangs lure investors at pirate lair
BY Mohamed Ahmed / Dec 1, 2009

In Somalia’s main pirate lair of Haradheere, the sea gangs have set up a cooperative to fund their hijackings offshore, a sort of stock exchange meets criminal syndicate. Heavily armed pirates from the lawless Horn of Africa nation have terrorized shipping lanes in the Indian Ocean and strategic Gulf of Aden, which links Europe to Asia through the Red Sea. The gangs have made tens of millions of dollars from ransoms and a deployment by foreign navies in the area has only appeared to drive the attackers to hunt further from shore. It is a lucrative business that has drawn financiers from the Somali diaspora and other nations — and now the gangs in Haradheere have set up an exchange to manage their investments.

One wealthy former pirate named Mohammed took Reuters around the small facility and said it had proved to be an important way for the pirates to win support from the local community for their operations, despite the dangers involved. “Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking,” Mohammed said. “The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”

Haradheere, 400 km (250 miles) northeast of Mogadishu, used to be a small fishing village. Now it is a bustling town where luxury 4×4 cars owned by the pirates and those who bankroll them create honking traffic jams along its pot-holed, dusty streets. Somalia’s Western-backed government of President Sheikh Sharif Ahmed is pinned down battling hard-line Islamist rebels, and controls little more than a few streets of the capital. The administration has no influence in Haradheere — where a senior local official said piracy paid for almost everything. “Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output,” said Mohamed Adam, the town’s deputy security officer. “The district gets a percentage of every ransom from ships that have been released, and that goes on public infrastructure, including our hospital and our public schools.”

In a drought-ravaged country that provides almost no employment opportunities for fit young men, many are been drawn to the allure of the riches they see being earned at sea. Abdirahman Ali was a secondary school student in Mogadishu until three months ago when his family fled the fighting there. Given the choice of moving with his parents to Lego, their ancestral home in Middle Shabelle where strict Islamist rebels have banned most entertainment including watching sport, or joining the pirates, he opted to head for Haradheere. Now he guards a Thai fishing boat held just offshore. “First I decided to leave the country and migrate, but then I remembered my late colleagues who died at sea while trying to migrate to Italy,” he told Reuters. “So I chose this option, instead of dying in the desert or from mortars in Mogadishu.”

Haradheere’s “stock exchange” is open 24 hours a day and serves as a bustling focal point for the town. As well as investors, sobbing wives and mothers often turn up there seeking news of male relatives missing in action. Every week, Mohammed said, gang members and equipment were lost to the sea. But he said the pirates were not deterred. “Ransoms have even increased in recent months from between $2-3 million to $4 million because of the increased number of shareholders and the risks,” he said. “Let the anti-piracy navies continue their search for us. We have no worries because our motto for the job is ‘do or die’.” Piracy investor Sahra Ibrahim, a 22-year-old divorcee, was lined up with others waiting for her cut of a ransom pay-out after one of the gangs freed a Spanish tuna fishing vessel. “I am waiting for my share after I contributed a rocket-propelled grenade for the operation,” she said, adding that she got the weapon from her ex-husband in alimony. “I am really happy and lucky. I have made $75,000 in only 38 days since I joined the ‘company’.”


A basic piracy operation requires a minimum eight to twelve militia prepared to stay at sea for extended periods of time, in the hopes of hijacking a passing vessel. Each team requires a minimum of two attack skiffs, weapons, equipment, provisions, fuel and preferably a supply boat. The costs of the operation are usually borne by investors, some of whom may also be pirates.

To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.

At least 12 other volunteers are recruited as militiamen to provide protection on land of a ship is hijacked, In addition, each member of the pirate team may bring a partner or relative to be part of this land-based force. Militiamen must possess their own weapon, and receive a ‘class B’ share — usually a fixed amount equivalent to approximately US$15,000.

If a ship is successfully hijacked and brought to anchor, the pirates and the militiamen require food, drink, qaad, fresh clothes, cell phones, air time, etc. The captured crew must also be cared for. In most cases, these services are provided by one or more suppliers, who advance the costs in anticipation of reimbursement, with a significant margin of profit, when ransom is eventually paid.

When ransom is received, fixed costs are the first to be paid out. These are typically:
• Reimbursement of supplier(s)
• Financier(s) and/or investor(s): 30% of the ransom
• Local elders: 5 to 10 %of the ransom (anchoring rights)
• Class B shares (approx. $15,000 each): militiamen, interpreters etc.

The remaining sum — the profit — is divided between class-A shareholders.


BY Ryan Hagen / April 20, 2009

The crew of the Maersk Alabama, having survived an attack by pirates in Somalia last week, has returned home for a much-deserved rest. But with tensions ratcheting up between the U.S. and the rag-tag confederation of Somali pirates, it’s worth looking to the past for clues on how to tame the outlaw seas. Peter Leeson, an economist at George Mason University (and an occasional Freakonomics guest blogger), offers a brisk and fascinating look at old-school piracy in his new book The Invisible Hook: The Hidden Economics of Pirates. Leeson agreed to sit down and answer some important piratical questions for us:

Q: The Invisible Hook is more than just a clever title. How is it different from Adam Smith’s invisible hand?
A: In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively.

Q: In the book, you write that pirates had set up their own early versions of constitutional democracy, complete with separation of powers, decades before the American Revolution. Was that only possible because they were outlaws, operating entirely outside the control of any government?
A: That’s right. The pirates of the 18th century set up quite a thoroughgoing system of democracy. The reason that the criminality is driving these structures is because they can’t rely on the state to provide those structures for them. So pirates, more than anyone else, needed to figure out some system of law and order to make it possible for them to remain together long enough to be successful at stealing.

Q: So did these participatory, democratic systems give merchant sailors an incentive to join pirate crews, because it meant they were freer among pirates than on their own ships?
A: The sailors had more freedom and better pay as pirates than as merchantmen. But perhaps the most important thing was freedom from the arbitrariness of captains and the malicious abuses of power that merchant captains were known to inflict on their crews. In a pirate democracy, a crew could, and routinely did, depose their captain if he was abusing his power or was incompetent.

Q: You write that pirates weren’t necessarily the bloodthirsty fiends we imagine them to have been. How does the invisible hook explain their behavior?
A: The basic idea is, once we recognize pirates as economic actors, businessmen really, it becomes clear as to why they wouldn’t want to brutalize everyone they overtook. In order to encourage merchantmen to surrender, they needed to communicate the idea that, if you surrender to us, you’ll be treated well. That’s the incentive pirates give for sailors to surrender peacefully. If they wantonly abused their prisoners, as they’re often portrayed as having done, that would have actually undermined the incentive of merchant crews to surrender, which would have caused pirates to incur greater costs. They would have had to battle it out more often, because the merchants would have expected to be tortured indiscriminately if they were captured.

So instead, what we often see in the historical record is pirates displaying quite remarkable feats of generosity. The other side of that, of course, is that if you resisted, they had to unleash, you know, a hellish fury on you. That’s where most of the stories of pirate atrocities come from. That’s not to say that no pirate ever indulged his sadistic impulses. But I speculate that the pirate population had no higher proportion of sadists than legitimate society did. And those sadists among the pirates tended to reserve their sadistic actions for times when it would profit them.

Q: So they never made anyone walk the plank?
A: There was no walking the plank. There’s no historical foundation for that in 17th- or 18th-century piracy.

Q: You write about piracy as a brand. It’s quite a successful one, having lasted for hundreds of years after the pirates themselves were exterminated. What was the key to that success?
A: There was a very particular type of reputation that pirates wanted to cultivate. It was a very delicate line to walk. They didn’t want to have a reputation for wanton brutality or complete madness. They wanted to be perceived as hair-trigger men, men on the edge, who if you pushed, if you resisted, they would snap and do something horrible to you. That way, the captives they took had an incentive to be very careful to comply with all of the pirates’ demands. At the same time, they wanted a reputation as being very brutal, as meting out these brutal, horrible tortures to captives who didn’t comply with their demands. Stories about those horrible tortures were relayed not only by word of mouth, but by early 18th-century newspapers. When a former prisoner was released, he would oftentimes go to the media and provide an account of his capture. So when colonials read these accounts in the media, that helped institutionalize the idea of pirates as these men on the edge. That worked marvelously for pirates. It was a form of advertising performed by legitimate members of society that again helped pirates reduce their costs.

Q: What kinds of lessons can we draw from The Invisible Hook in dealing with modern pirates?
A: We have to recognize that pirates are rational economic actors and that piracy is an occupational choice. If we think of them as irrational, or as pursuing other ends, we’re liable to come up with solutions to the pirate problem that are ineffective. Since we know that pirates respond to costs and benefits, we should think of solutions that alter those costs and benefits to shape the incentives for pirates and to deter them from going into a life of piracy.

Peter Leeson
email : pleeson [at] gmu [dot] edu






“We don’t consider ourselves sea bandits. We consider sea bandits
those who illegally fish in our seas and dump waste in our seas and
carry weapons in our seas. We are simply patrolling our seas. Think of
us like a coast guard.”

Somalia’s pirates flourish in a lawless nation
BY Jeffrey Gettleman / October 31, 2008

Boosaaso, Somalia: This may be one of the most dangerous towns in
Somalia, a place where you can get kidnapped faster than you can wipe
the sweat off your brow. But it is also one of the most prosperous.
Money changers walk around with thick wads of hundred-dollar bills.
Palatial new houses are rising up next to tin-roofed shanties. Men in
jail reminisce, with a twinkle in their eyes, about their days living
like kings. This is the story of Somalia’s booming, not-so-underground
pirate economy. The country is in chaos, countless children are
starving and people are killing one another in the streets of
Mogadishu, the capital, for a handful of grain. But one particular
line of work – piracy – seems to be benefiting quite openly from all
this lawlessness and desperation. This year, Somali officials say,
pirate profits are on track to reach a record $50 million, all of it
tax free.

“These guys are making a killing,” said Mohamud Muse Hirsi, the top
Somali official in Boosaaso, who himself is widely suspected of
working with the pirates, though he vigorously denies it. More than 75
vessels have been attacked this year, far more than any other year in
recent memory. About a dozen have been set upon in the past month
alone, including a Ukrainian freighter packed with tanks, antiaircraft
guns and other heavy weaponry, which was brazenly seized in September.
The pirates use fast-moving skiffs to pull alongside their prey and
scamper on board with ladders or sometimes even rusty grappling hooks.
Once on deck, they hold the crew at gunpoint until a ransom is paid,
usually $1 million to $2 million. Negotiations for the Ukrainian
freighter are still going on, and it is likely that because of all the
publicity, the price for the ship could top $5 million. In Somalia, it
seems, crime does pay. Actually, it is one of the few industries that

“All you need is three guys and a little boat, and the next day you’re
millionaires,” said Abdullahi Omar Qawden, a former captain in
Somalia’s long-defunct navy. People in Garoowe, a town south of
Boosaaso, describe a certain high-rolling pirate swagger. Flush with
cash, the pirates drive the biggest cars, run many of the town’s
businesses – like hotels – and throw the best parties, residents say.
Fatuma Abdul Kadir said she went to a pirate wedding in July that
lasted two days, with nonstop dancing and goat meat, and a band flown
in from neighboring Djibouti. “It was wonderful,” said Fatuma, 21.
“I’m now dating a pirate.”

This is too much for many Somali men to resist, and criminals from all
across this bullet-pocked land are now flocking to Boosaaso and other
notorious pirate dens along the craggy Somali shore. They have turned
these waters into the most dangerous shipping lanes in the world. With
the situation clearly out of control, warships from the United States,
Russia, NATO, the European Union and India are steaming into Somalia’s
waters as part of a reinvigorated, worldwide effort to crush the
pirates. But it will not be easy. The pirates are sea savvy. They are
fearless. They are rich and getting richer, with the latest high-tech
gadgetry like handheld GPS units. And they are united. The immutable
clan lines that have pitted Somalis against one another for decades
are not a problem here. Several captured pirates interviewed in
Boosaaso’s main jail said that they had recently crossed clan lines to
open new, lucrative, multiclan franchises. “We work together,” said
Jama Abdullahi, a jailed pirate. “Good for business, you know?”

The pirates are also sprinkled across thousands of square miles of
water, from the Gulf of Aden, at the narrow doorway to the Red Sea, to
the Kenyan border along the Indian Ocean. Even if the naval ships
manage to catch pirates in the act, it is not clear what they can do.
In September, a Danish warship captured 10 men suspected of being
pirates cruising around the Gulf of Aden with rocket-propelled
grenades and a long ladder. But after holding the suspects for nearly
a week, the Danes concluded that they did not have jurisdiction to
prosecute, so they dumped the pirates on a beach, minus their guns.
Nobody, it seems, has a clear plan for how to tame Somalia’s unruly
seas. Several fishermen along the Gulf of Aden talked about seeing
barrels of toxic waste bobbing in the middle of the ocean. They spoke
of clouds of dead fish floating nearby and rogue fishing trawlers
sucking up not just fish and lobsters but also the coral and the
plants that sustain them. It was abuses like these, several men said,
that turned them from fishermen into pirates. Nor is it even clear
whether Somali authorities universally want the piracy to stop. While
many pirates have been arrested, several fishermen, Western
researchers and more than a half-dozen pirates in jail spoke of
nefarious relationships among fishing companies, private security
contractors and Somali government officials, especially those working
for the semiautonomous regional government of Puntland.

“Believe me, a lot of our money has gone straight into the
government’s pockets,” said Farah Ismail Eid, a pirate who was
captured in nearby Berbera and sentenced to 15 years in jail. His
pirate team, he said, typically divided up the loot this way: 20
percent for their bosses, 20 percent for future missions (to cover
essentials like guns, fuel and cigarettes), 30 percent for the gunmen
on the ship and 30 percent for government officials. Abdi Waheed
Johar, the director general of the fisheries and ports ministry of
Puntland, openly acknowledged in an interview this spring that “there
are government people working with the pirates.” But, he was quick to
add, “It’s just not us.”

What is happening off Somalia’s shores is basically an extension of
the corrupt, violent free-for-all that has raged on land for 17 years
since the central government imploded in 1991. The vast majority of
Somalis lose out. Young thugs who are willing to serve as muscle get a
job, albeit a low-paying one, that significantly reduces their life
expectancy. And a select few warlords, who have sat down and figured
out how to profit off the anarchy, make a fortune. Take Boosaaso, once
a thriving port town on the Gulf of Aden. Piracy is killing off the
remains of the local fishing industry because export companies are
staying away. It has spawned a kidnapping business on shore, which in
turn has scared away many humanitarian agencies and the food, medicine
and other forms of desperately needed assistance they bring. Reporting
in Boosaaso two weeks ago required no fewer than 10 hired gunmen
provided by the Puntland government to discourage any would-be

Few large cargo ships come here anymore, depriving legitimate
government operations of much-needed port taxes. Just about the only
ships willing to risk the voyage are small, wooden, putt-putt
freighters from India, essentially floating jalopies from another era.
“We can’t survive off this,” said Bile Qabowsade, a Puntland official.
The shipping problems have contributed to food shortages, skyrocketing
inflation and less work for the sinewy stevedores who trudge out to
Boosaaso’s beach every morning and stare in vain at the bright
horizon, their bare feet planted in the hot sand, hoping a ship will
materialize so they will be able to make a few pennies hauling 100-
pound sacks of sugar on their backs.

And yet, suspiciously, there has been a lot of new construction in
Boosaaso. There is an emerging section of town called New Boosaaso
with huge homes rising above the bubble-shaped huts of refugees and
the iron-sided shacks that many fishermen call home. These new houses
cost several hundred thousand dollars. Many are painted in garish
colors and protected by high walls. Even so, Boosaaso is still a
crumbling, broke, rough-and-tumble place, decaying after years of
neglect like so much of war-ravaged Somalia. It is also dangerous in
countless ways. On Wednesday, suicide bombers blew up two government
offices, most likely the work of Islamist radicals trying to turn
Somalia into an Islamist state. Of course, no Somali government
official would openly admit that New Boosaaso’s minicastles were built
with pirate proceeds. But many people, including United Nations
officials and Western diplomats, suspect that is the case.

Several jailed pirates have accused Muse, a former warlord who is now
Puntland’s president, of being paid off. Officials in neighboring
Somaliland, a breakaway region of northwestern Somalia, said they
recently organized an antipiracy sting operation and arrested Muse’s
nephew, who was carrying $22,000 in cash. “Top Puntland officials
benefit from piracy, even if they might not be instigating it,” said
Roger Middleton, a researcher at the Royal Institute of International
Affairs in London. Actually, he added, “all significant political
actors in Somalia are likely benefiting from piracy.” But Muse said he
did not know anything about this. “We are the leaders of this
country,” he said. “Everybody we suspect, we fire from work.”

He said that Puntland was taking aggressive action against the
pirates. And Boosaaso’s main jail may be proof of that. The other day,
a dozen pirates were hanging out in the yard under a basketball hoop.
And that was just the beginning. “Pirates, pirates, pirates,” said
Gure Ahmed, a Canadian-Somali inmate of the jail, charged with murder.
“This jail is full of pirates. This whole city is pirates.” In other
well-known pirate dens, like Garoowe, Eyl, Hobyo and Xarardheere,
pirates have become local celebrities. Said Farah, 32, a shopkeeper in
Garoowe, said the pirates seemed to have money to burn. “If they see a
good car that a guy is driving,” he said, “they say, ‘How much? If
it’s 30 grand, take 40 and give me the key.’ ”

Every time a seized ship tosses its anchor, it means a pirate shopping
spree. Sheep, goats, water, fuel, rice, spaghetti, milk and cigarettes
– the pirates buy all of this, in large quantities, from small towns
up and down the Somali coast. Somalia’s seafaring thieves are not like
the Barbary pirates, who terrorized European coastal towns hundreds of
years ago and often turned their hostages into galley slaves chained
to the oars. Somali pirates are known as relatively decent hosts,
usually not beating their hostages and keeping them well-fed until
payday comes. “They are normal people,” said Said. “Just very, very

Somali Pirates Tell Their Side: They Want Only Money
BY Jeffrey Gettleman / October 1, 2008

Nairobi, Kenya — The Somali pirates who hijacked a Ukrainian freighter
loaded with tanks, artillery, grenade launchers and ammunition said in
an interview on Tuesday that they had no idea the ship was carrying
arms when they seized it on the high seas. “We just saw a big ship,”
the pirates’ spokesman, Sugule Ali, said in a telephone interview. “So
we stopped it.” The pirates quickly learned, though, that their booty
was an estimated $30 million worth of heavy weaponry, heading for
Kenya or Sudan, depending on whom you ask.

In a 45-minute interview, Mr. Sugule spoke on everything from what the
pirates wanted (“just money”) to why they were doing this (“to stop
illegal fishing and dumping in our waters”) to what they had to eat on
board (rice, meat, bread, spaghetti, “you know, normal human-being
food”). He said that so far, in the eyes of the world, the pirates had
been misunderstood. “We don’t consider ourselves sea bandits,” he
said. “We consider sea bandits those who illegally fish in our seas
and dump waste in our seas and carry weapons in our seas. We are
simply patrolling our seas. Think of us like a coast guard.”

The pirates who answered the phone call on Tuesday morning said they
were speaking by satellite phone from the bridge of the Faina, the
Ukrainian cargo ship that was hijacked about 200 miles off the coast
of Somalia on Thursday. Several pirates talked but said that only Mr.
Sugule was authorized to be quoted. Mr. Sugule acknowledged that they
were now surrounded by American warships, but he did not sound afraid.
“You only die once,” Mr. Sugule said.

He said that all was peaceful on the ship, despite unconfirmed reports
from maritime organizations in Kenya that three pirates were killed in
a shootout among themselves on Sunday or Monday night. He insisted
that the pirates were not interested in the weapons and had no plans
to sell them to Islamist insurgents battling Somalia’s weak
transitional government. “Somalia has suffered from many years of
destruction because of all these weapons,” he said. “We don’t want
that suffering and chaos to continue. We are not going to offload the
weapons. We just want the money.” He said the pirates were asking for
$20 million in cash; “we don’t use any other system than cash.” But he
added that they were willing to bargain. “That’s deal-making,” he

Piracy in Somalia is a highly organized, lucrative, ransom-driven
business. Just this year, pirates hijacked more than 25 ships, and in
many cases, they were paid million-dollar ransoms to release them. The
juicy payoffs have attracted gunmen from across Somalia, and the
pirates are thought to number in the thousands. The piracy industry
started about 10 to 15 years ago, Somali officials said, as a response
to illegal fishing. Somalia’s central government imploded in 1991,
casting the country into chaos. With no patrols along the shoreline,
Somalia’s tuna-rich waters were soon plundered by commercial fishing
fleets from around the world. Somali fishermen armed themselves and
turned into vigilantes by confronting illegal fishing boats and
demanding that they pay a tax. “From there, they got greedy,” said
Mohamed Osman Aden, a Somali diplomat in Kenya. “They starting
attacking everyone.”

By the early 2000s, many of the fishermen had traded in their nets for
machine guns and were hijacking any vessel they could catch: sailboat,
oil tanker, United Nations-chartered food ship. “It’s true that the
pirates started to defend the fishing business,” Mr. Mohamed said.
“And illegal fishing is a real problem for us. But this does not
justify these boys to now act like guardians. They are criminals. The
world must help us crack down on them.” The United States and several
European countries, in particular France, have been talking about ways
to patrol the waters together. The United Nations is even considering
something like a maritime peacekeeping force. Because of all the
hijackings, the waters off Somalia’s coast are considered the most
dangerous shipping lanes in the world.

On Tuesday, several American warships — around five, according to one
Western diplomat — had the hijacked freighter cornered along the
craggy Somali coastline. The American ships allowed the pirates to
bring food and water on board, but not to take weapons off. A Russian
frigate is also on its way to the area. Lt. Nathan Christensen, a Navy
spokesman, said on Tuesday that he had heard the unconfirmed reports
about the pirate-on-pirate shootout, but that the Navy had no more
information. “To be honest, we’re not seeing a whole lot of activity”
on the ship, he said.

In Washington, Geoff Morrell, the Pentagon press secretary, declined
to discuss any possible American military operations to capture the
ship. “Our concern is right now making sure that there’s a peaceful
resolution to this, that this cargo does not end up in the hands of
anyone who would use it in a way that would be destabilizing to the
region,” Mr. Morrell told reporters at the Pentagon. He said the
United States government was not involved in any negotiations with the
pirates. He also said he had no information about reports that the
pirates had exchanged gunfire among themselves.

Kenyan officials continued to maintain that the weapons aboard were
part of a legitimate arms deal for the Kenyan military, even though
several Western diplomats, Somali officials and the pirates themselves
said the arms were part of a secret deal to funnel weapons to southern
Sudan. Somali officials are urging the Western navies to storm the
ship and arrest the pirates because they say that paying ransoms only
fuels the problem. Western diplomats, however, have said that such a
commando operation would be very difficult because the ship is full of
explosives and the pirates could use the 20 crew members as human

Mr. Sugule said his men were treating the crew members well. (The
pirates would not let the crew members speak on the phone, saying it
was against their rules.) “Killing is not in our plans,” he said. “We
only want money so we can protect ourselves from hunger.” When asked
why the pirates needed $20 million to protect themselves from hunger,
Mr. Sugule laughed and said, “Because we have a lot of men.”

“The pirates adopt names like the National Volunteer Coast Guard,
which is used by a group that intercepts small boats and fishing
vessels in southern Somalia. Another of the four main piracy groups
along the coast calls itself the Somali Marines. Organized like a
military unit, with admirals, vice admirals and the like, the group
operates around Mogadishu.”

Q. & A. With a Pirate: “We Just Want the Money”
BY Jeffrey Gettleman / September 30, 2008

Somali pirates in small boats hijacked the Faina, a Belize-flagged
cargo ship owned and operated by Kaalbye Shipping Ukraine, on Sept.
25. Sugule Ali, the spokesman for the Somali pirates holding hostage
the Faina, a Ukrainian freighter loaded with weapons, spoke to me by
satellite telephone today from the bridge of the seized ship. In the
holds of the Faina, which the pirates seized on Thursday, are 33
Russian-built battle tanks and crates of grenade launchers, anti-
aircraft guns, ammunition and other explosives. American officials
fear that the weapons could fall into the hands of radical Islamist
insurgents who are battling Somalia’s weak government. My questions
were translated into Somali, and Mr. Ali’s responses into English, by
a translator employed by The New York Times.

Q. Tell us how you discovered the weapons on board.
A. As soon as we get on a ship, we normally do what is called a
control. We search everything. That’s how we found the weapons. Tanks,
anti-aircraft, artillery. That’s all we will say right now.

Q. Were you surprised?
A. No, we weren’t surprised. We know everything goes through the sea.
We see people who dump waste in our waters. We see people who
illegally fish in our waters. We see people doing all sorts of things
in our waters.

Q. Are you going to sell the weapons to insurgents?
A. No. We don’t want these weapons to go to anyone in Somalia. Somalia
has suffered from many years of destruction because of all these
weapons. We don’t want that suffering and chaos to continue. We are
not going to offload the weapons. We just want the money.

Q. How much?
A. $20 million, in cash. We don’t use any other system than cash.

Q. Will you negotiate?
A. That’s deal making. Common sense says human beings can make deals.

Q. Right now, the American Navy has you surrounded. Are you scared?
A. No, we’re not scared. We are prepared. We are not afraid because we
know you only die once.

Q. Will you kill the hostages if attacked?
A. Killing is not in our plans. We don’t want to do anything more than
the hijacking.

Q. What will you do with the money?
A. We will protect ourselves from hunger.

Q. That’s a lot of money to protect yourselves from hunger.
A. Yes, because we have a lot of men and it will be divided amongst
all of us.

Q. [There are 20 crew members, most of them Ukrainian, being held
hostage.] How are you interacting with the hostages? Eating with them?
Playing cards?
A. We interact with each other in an honorable manner. We are all
human beings. We talk to one another, and because we are in the same
place, we eat together.

Q. What if you were told you could leave peacefully, without arrest,
though without any ransom money. Would you do it?
A. [With a laugh] We’re not afraid of arrest or death or any of these
things. For us, hunger is our enemy.

Q. Have the pirates been misunderstood?
A. We don’t consider ourselves sea bandits [”sea bandit” is one way
Somalis translate the English word pirate]. We consider sea bandits
those who illegally fish in our seas and dump waste in our seas and
carry weapons in our seas. We are simply patrolling our seas. Think of
us like a coast guard.

Q. Why did you want to become a pirate?
A. We are patrolling our seas. This is a normal thing for people to do
in their regions.

Q. Isn’t what you are doing a crime? Holding people at gunpoint?
A. If you hold hostage innocent people, that’s a crime. If you hold
hostage people who are doing illegal activities, like waste dumping or
fishing, that is not a crime.

Q. What has this Ukrainian ship done that was a crime?
A. To go through our waters carrying all these weapons without

Q. What is the name of your group? How many ships have you hijacked
A. I won’t say how many ships we have hijacked. I won’t talk about
that. Our name is the Central Region Coast Guard.


“Our crew, who had been well trained and prepared, used water cannon, self-made incendiary bombs [Molotov cocktails or petrol bombs], beer bottles and anything else that could be used to battle with them. Thirty minutes later, the pirates gestured to us for a ceasefire. Then the helicopter from the joint fleet came to help us.”

Somali pirates in stare-down with global powers
BY Elizabeth A. Kennedy / Oct 15, 2008

Nairobi, Kenya — With a Russian frigate closing in and a half-dozen
U.S. warships within shouting distance, the pirates holding a tanker
off Somalia’s coast might appear to have no other choice than to wave
the white flag. But that’s not how it works in Somalia, a failed state
where a quarter of children die before they turn 5, where anybody with
a gun controls the streets and where every public institution has
crumbled. The 11-day standoff aboard the Ukrainian MV Faina begs the
question: How can a bunch of criminals from one of the poorest and
most wretched countries on Earth face off with some of the world’s
richest and well-armed superpowers?

“They have enough guns to fight for another 20 years,” Ted Dagne, a
Somalia analyst in Washington, told The Associated Press. “And there
is no way to win a battle when the other side is in a suicidal mind
set.” In Somalia, pirates are better-funded, better-organized and
better-armed than one might imagine in a country that has been in
tatters for nearly two decades. They have the support of their
communities and rogue members of the government — some pirates even
promise to put ransom money toward building roads and schools. With
most attacks ending with million-dollar payouts, piracy is considered
the biggest economy in Somalia. Pirates rarely hurt their hostages,
instead holding out for a huge payday. The strategy works well: A
report Thursday by a London-based think tank said pirates have raked
in up to $30 million in ransoms this year alone. “If we are attacked
we will defend ourselves until every last one of us dies,” Sugule Ali,
a spokesman for the pirates aboard the Faina, said in an interview
over satellite telephone from the ship, which is carrying 33 battle
tanks, military weapons and 21 Ukrainian and Latvian and Russian
hostages. One Russian has reportedly died, apparently of illness. The
pirates are demanding $20 million ransom, and say they will not lower
the price. “We only need money and if we are paid, then everything
will be OK,” he said. “No one can tell us what to do.”

Ali’s bold words come even though his dozens of fighters are
surrounded by U.S. warships and American helicopters buzz overhead.
Moscow has sent a frigate, which should arrive within days. Jennifer
Cooke of the Center for Strategic and International Studies in
Washington said hostage-taking is the key to the pirates’ success
against any military muscle looming from the U.S. and Russia. “Once
you have a crew at gunpoint, you can hold six U.S. naval warships at
bay and they don’t have a whole lot of options except to wait it out,”
Cooke said. The pirates have specifically warned against the type of
raids carried out twice this year by French commandos to recover
hijacked vessels. The French used night vision goggles and helicopters
in operations that killed or captured several pirates, who are now
standing trial in Paris. But the hostages are not the bandits’ only
card to play. Often dressed in military fatigues, pirates travel in
open skiffs with outboard engines, working with larger mother ships
that tow them far out to sea. They use satellite navigational and
communications equipment and an intimate knowledge of local waters,
clambering aboard commercial vessels with ladders and grappling hooks.

They are typically armed with automatic weapons, anti-tank rocket
launchers and grenades — weaponry that is readily available throughout
Somalia, where a bustling arms market operates in the center of the
capital. They also have the support of their communities and some
members of local administrations, particularly in Puntland, a
semiautonomous region in northeast Somalia that is a hotbed for
piracy, officials and pirates have told the AP. Abdulqadir Muse Yusuf,
a deputy minister of ports in Puntland, acknowledged there were
widespread signs that Puntland officials, lawmakers and government
officials are “involved or benefiting from piracy” and said
investigations were ongoing. He would not elaborate. Piracy has
transformed the region around the town of Eyl, near where many
hijacked ships are anchored brought while pirates negotiate ransoms.
“Pirates buy new luxury cars and marry two, three, or even four
women,” said Mohamed, an Eyl resident who refused to give his full
name for fear of reprisals from the pirates. “They build new homes —
the demand for construction material is way up.” He said most of the
well-known pirates promise to build roads and schools in addition to
homes for themselves. But for now, Mohamed says he has only seen
inflation skyrocket as the money pours in. “One cup of tea is about
$1,” he said. Before the piracy skyrocketed, tea cost a few cents.

Piracy in Somalia is nothing new, as bandits have stalked the seas for
years. But this year’s surge in attacks — nearly 30 so far — has
prompted an unprecedented international response. The Faina has been
the highest-profile attack because of its dangerous cargo. The U.S.
fears the arms could end up in the hands of al-Qaida-linked militants
in a country seen as a key battleground on terror. The United States
has been leading international patrols to combat piracy along
Somalia’s unruly 1,880-mile coast, the longest in Africa and near key
shipping routes. In June, the U.N. Security Council passed a
resolution that would allow countries to chase and arrest pirates
after attacks increased this year. But still, the attacks continue.
Dagne, an analyst in Washington, said that unless the roots of the
problem are solved — poverty, disease, violence — piracy will only
flourish. “You have a population that is frustrated, alienated, angry
and hopeless,” Dagne said. “This generation of Somalis grew up
surrounded by abject poverty and violence.”

Pirates die strangely after taking Iranian ship
BY Andrew Donaldson / Sep 28, 2008

A tense standoff has developed in waters off Somalia over an Iranian
merchant ship laden with a mysterious cargo that was hijacked by
pirates. Somali pirates suffered skin burns, lost hair and fell
gravely ill “within days” of boarding the MV Iran Deyanat. Some of
them died. Andrew Mwangura, the director of the East African
Seafarers’ Assistance Programme, told the Sunday Times: “We don’t
know exactly how many, but the information that I am getting is that
some of them had died. There is something very wrong about that ship.”

The vessel’s declared cargo consists of “minerals” and “industrial
products”. But officials involved in negotiations over the ship are
convinced that it was sailing for Eritrea to deliver small arms and
chemical weapons to Somalia’s Islamist rebels. The drama over the Iran
Deyanat comes as speculation grew this week about whether the South
African Navy would send a vessel to join the growing multinational
force in the region. A naval spokesman, Lieutenant-Commander Greyling
van den Berg, told the Sunday Times that the navy had not been ordered
by the government to become involved in “the Somali pirate issue”.

About 22000 ships a year pass through the Suez Canal and the Gulf of
Aden, where regional instability and “no-questions-asked” ransom
payments have led to a dramatic rise in attacks on vessels by heavily
armed Somali raiders in speedboats. The Iran Deyanat was sailing in
those waters on August 21, past the Horn of Africa and about 80
nautical miles southeast of Yemen, when it was boarded by about 40
pirates armed with AK-47s and rocket-propelled grenades. They were
alleged members of a crime syndicate said to be based at Eyl, a small
fishing village in northern Somalia.

The ship is owned and operated by the Islamic Republic of Iran
Shipping Lines, or IRISL, a state-owned company run by the Iranian
military. According to the US Treasury Department, the IRISL regularly
falsifies shipping documents to hide the identity of end users, uses
generic terms to describe shipments and operates under various covers
to circumvent United Nations sanctions. The ship set sail from
Nanjing, China, at the end of July. According to its manifest, it was
heading for Rotterdam where it would unload 42500 tons of iron ore and
“industrial products” purchased by a German client. At Eyl, the ship
was secured by more pirates — about 50 on board, and another 50 on

But within days those who had boarded the ship developed mysterious
health trouble. This was also confirmed by Hassan Allore Osman,
minister of minerals and oil in Puntland, an autonomous region of
Somalia. He headed a delegation sent to Eyl when news of the toxic
cargo and illnesses surfaced. He told one news publication, The Long
War Journal, that during the six days he had negotiated with the
pirates, a number of them had become sick and died. “That ship is
unusual,” he was quoted as saying. “It is not carrying a normal

The pirates did reveal that they had tried to inspect the ship’s cargo
containers when some of them fell sick — but the containers were
locked. Osman’s delegation spoke to the ship’s captain and its
engineer by cellphone, demanding to know more about the cargo.
Initially it was claimed the cargo contained “crude oil”; later it was
said to be “minerals”. And Mwangura has added: “Our sources say it
contains chemicals, dangerous chemicals.” But IRISL has denied that —
and threatened legal action against Mwangura. The company has
reportedly paid the pirates 200000 — the first of several “ransom
instalments”, but that, too, has been denied.

‘Toxic waste’ behind Somali piracy
BY Najad Abdullahi / October 11, 2008 / 12:21 Mecca time

Somali pirates have accused European firms of dumping toxic waste off
the Somali coast and are demanding an $8m ransom for the return of a
Ukranian ship they captured, saying the money will go towards cleaning
up the waste. The ransom demand is a means of “reacting to the toxic
waste that has been continually dumped on the shores of our country
for nearly 20 years”, Januna Ali Jama, a spokesman for the pirates,
based in the semi-autonomous region of Puntland, said. “The Somali
coastline has been destroyed, and we believe this money is nothing
compared to the devastation that we have seen on the seas.”

The pirates are holding the MV Faina, a Ukrainian ship carrying tanks
and military hardware, off Somalia’s northern coast. According to the
International Maritime Bureau, 61 attacks by pirates have been
reported since the start of the year. While money is the primary
objective of the hijackings, claims of the continued environmental
destruction off Somalia’s coast have been largely ignored by the
regions’s maritime authorities.

Dumping allegations
Ahmedou Ould-Abdallah, the UN envoy for Somalia confirmed to Al
Jazeera the world body has “reliable information” that European and
Asian companies are dumping toxic waste, including nuclear waste, off
the Somali coastline. “I must stress however, that no government has
endorsed this act, and that private companies and individuals acting
alone are responsible,” he said. Allegations of the dumping of toxic
waste, as well as illegal fishing, have circulated since the early
1990s. But evidence of such practices literally appeared on the
beaches of northern Somalia when the tsunami of 2004 hit the country.

The UN Environment Programme (UNEP) reported the tsunami had
washed up rusting containers of toxic waste on the shores of Puntland.
Nick Nuttall, a UNEP spokesman, told Al Jazeera that when the barrels
were smashed open by the force of the waves, the containers exposed
a “frightening activity” that has been going on for more than decade.
“Somalia has been used as a dumping ground for hazardous waste
starting in the early 1990s, and continuing through the civil war
there,” he said. “European companies found it to be very cheap to get
rid of the waste, costing as little as $2.50 a tonne, where waste
disposal costs in Europe are something like $1000 a tonne. “And the
waste is many different kinds. There is uranium radioactive waste.
There is lead, and heavy metals like cadmium and mercury. There is
also industrial waste, and there are hospital wastes, chemical wastes
– you name it.”

Nuttall also said that since the containers came ashore, hundreds of
residents have fallen ill, suffering from mouth and abdominal
bleeding, skin infections and other ailments. “We [the UNEP] had
planned to do a proper, in-depth scientific assessment on the
magnitude of the problem. But because of the high levels of insecurity
onshore and off the Somali coast, we are unable to carry out an
accurate assessment of the extent of the problem,” he said. However,
Ould-Abdallah claims the practice still continues. “What is most
alarming here is that nuclear waste is being dumped. Radioactive
uranium waste that is potentially killing Somalis and completely
destroying the ocean,” he said.

Toxic waste
Ould-Abdallah declined to name which companies are involved in waste
dumping, citing legal reasons. But he did say the practice helps fuel
the 18-year-old civil war in Somalia as companies are paying Somali
government ministers to dump their waste, or to secure licences and
contracts. “There is no government control … and there are few
people with high moral ground … [and] yes, people in high positions
are being paid off, but because of the fragility of the TFG
[Transitional Federal Government], some of these companies now no
longer ask the authorities – they simply dump their waste and leave.”

Ould-Abdallah said there are ethical questions to be considered
because the companies are negotiating contracts with a government that
is largely divided along tribal lines. “How can you negotiate these
dealings with a country at war and with a government struggling to
remain relevant?” In 1992, a contract to secure the dumping of toxic
waste was made by Swiss and Italian shipping firms Achair Partners and
Progresso, with Nur Elmi Osman, a former official appointed to the
government of Ali Mahdi Mohamed, one of many militia leaders involved
in the ousting of Mohamed Siad Barre, Somalia’s former president. At
the request of the Swiss and Italian governments, UNEP investigated
the matter. Both firms had denied entering into any agreement with
militia leaders at the beginning of the Somali civil war. Osman also
denied signing any contract.

‘Mafia involvement’
However, Mustafa Tolba, the former UNEP executive director, told Al
Jazeera that he discovered the firms were set up as fictitious
companies by larger industrial firms to dispose of hazardous waste.
“At the time, it felt like we were dealing with the Mafia, or some
sort of organised crime group, possibly working with these industrial
firms,” he said. “It was very shady, and quite underground, and I
would agree with Ould-Abdallah’s claims that it is still going on…
Unfortunately the war has not allowed environmental groups to
investigate this fully.”

The Italian mafia controls an estimated 30 per cent of Italy’s waste
disposal companies, including those that deal with toxic waste. In
1998, Famiglia Cristiana, an Italian weekly magazine, claimed that
although most of the waste-dumping took place after the start of the
civil war in 1991, the activity actually began as early as 1989 under
the Barre government. Beyond the ethical question of trying to secure
a hazardous waste agreement in an unstable country like Somalia, the
alleged attempt by Swiss and Italian firms to dump waste in Somalia
would violate international treaties to which both countries are

Legal ramifications
Switzerland and Italy signed and ratified the Basel Convention on the
Control of Transboundary Movements of Hazardous Wastes and their
Disposal, which came into force in 1992. EU member states, as well as
168 other countries have also signed the agreement. The convention
prohibits waste trade between countries that have signed the
convention, as well as countries that have not signed the accord
unless a bilateral agreement had been negotiated. It is also prohibits
the shipping of hazardous waste to a war zone. Abdi Ismail Samatar,
professor of Geography at the University of Minnesota, told Al Jazeera
that because an international coalition of warships has been deployed
to the Gulf of Aden, the alleged dumping of waste must have been

Environmental damage
“If these acts are continuing, then surely they must have been seen by
someone involved in maritime operations,” he said. “Is the cargo aimed
at a certain destination more important than monitoring illegal
activities in the region? Piracy is not the only problem for Somalia,
and I think it’s irresponsible on the part of the authorities to
overlook this issue.” Mohammed Gure, chairman of the Somalia Concern
Group, said that the social and environmental consequences will be
felt for decades. “The Somali coastline used to sustain hundreds of
thousands of people, as a source of food and livelihoods. Now much of
it is almost destroyed, primarily at the hands of these so-called
ministers that have sold their nation to fill their own pockets.” Ould-
Abdallah said piracy will not prevent waste dumping. “The intentions
of these pirates are not concerned with protecting their environment,”
he said. “What is ultimately needed is a functioning, effective
government that will get its act together and take control of its

‘We consider ourselves heroes’ – a Somali pirate speaks
Asad ‘Booyah’ Abdulahi, 42, describes himself as a pirate boss,
capturing ships in the Gulf of Aden and Indian Ocean.
Interview by Xan Rice and Abdiqani Hassan / November 22 2008

“I am 42 years old and have nine children. I am a boss with boats
operating in the Gulf of Aden and the Indian Ocean. I finished high
school and wanted to go to university but there was no money. So I
became a fisherman in Eyl in Puntland like my father, even though I
still dreamed of working for a company. That never happened as the
Somali government was destroyed [in 1991] and the country became

At sea foreign fishing vessels often confronted us. Some had no
licence, others had permission from the Puntland authorities but did
not want us there to compete. They would destroy our boats and force
us to flee for our lives. I started to hijack these fishing boats in
1998. I did not have any special training but was not afraid. For our
first captured ship we got $300,000. With the money we bought AK-47s
and small speedboats. I don’t know exactly how many ships I have
captured since then but I think it is about 60. Sometimes when we are
going to hijack a ship we face rough winds, and some of us get sick
and some die.

We give priority to ships from Europe because we get bigger ransoms.
To get their attention we shoot near the ship. If it does not stop we
use a rope ladder to get on board. We count the crew and find out
their nationalities. After checking the cargo we ask the captain to
phone the owner and say that have seized the ship and will keep it
until the ransom is paid. We make friends with the hostages, telling
them that we only want money, not to kill them. Sometimes we even eat
rice, fish, pasta with them. When the money is delivered to our ship
we count the dollars and let the hostages go.

Then our friends come to welcome us back in Eyl and we go to Garowe in
Land Cruisers. We split the money. For example, if we get $1.8m, we
would send $380,000 to the investment man who gives us cash to fund
the missions, and then divide the rest between us. Our community
thinks we are pirates getting illegal money. But we consider ourselves
heroes running away from poverty. We don’t see the hijacking as a
criminal act but as a road tax because we have no central government
to control our sea. With foreign warships now on patrol we have
difficulties. But we are getting new boats and weapons. We will not
stop until we have a central government that can control our sea.”

Somali pirates strike again / November 19, 2008 / 09:02 Mecca time

Somali pirates have struck again in the Gulf of Aden, hijacking
another ship a day after seizing a Saudi oil supertanker with a cargo
worth $100m. The Delight, a Hong Kong-registered vessel carrying
33,000 tonnes of wheat, was sailing to Iran with 25 crew members when
it was seized, Chinese state news agency Xinhua said. A spokesman for
the US Navy’s Fifth Fleet in the Gulf confirmed on Tuesday that the
Delight had been hijacked. A Hong Kong government spokesman said
“this could be a serious matter for us. We will deal with it”.

Saudi tanker anchored
News of the latest hijack came as the hijackers of the Saudi Sirius
Star – the biggest vessel ever hijacked – anchored the vessel off
Somalia. The vessel was seized in the Indian ocean off East Africa on
Sunday in the boldest attack by pirates operating from lawless
Somalia. “We can confirm the ship is anchoring off the Somali coast at
Haradheere,” Lieutenant Nathan Christensen, a spokesman for the US
Fifth Fleet, said on Tuesday. Haradheere is situated roughly in the
centre of Somalia’s coastline.

The supertanker had been heading for the US via the Cape of Good Hope
at the southern tip of Africa, instead of heading through the Gulf of
Aden and the Suez Canal. The hijacking occurred despite an
international naval response, including from the Nato alliance and
European Union, to protect one of the world’s busiest shipping areas.
US, French and Russian warships are also off the Somali coast. The
pirates have driven up insurance costs, forced some ships to go round
South Africa instead of through the Suez Canal and secured millions of
dollars in ransoms. Last week, the European Union, in its first-ever
naval mission, launched a security operation off the coast of Somalia
to combat growing piracy and protect ships carrying aid agency

Outrageous act
Prince Saud al-Faisal, Saudi Arabia’s foreign minister called the
hijacking of the Sirius Star an outrageous act and promised to back an
EU-led initiative to step up security in shipping lanes off Africa’s
east coast. “This outrageous act by the pirates, I think, will only
reinforce the resolve of the countries of the Red Sea and
internationally to fight piracy,” he told reporters in Athens. The
vessel owned by Saudi oil giant Aramco was fully loaded when it was
attacked on Sunday more than 450 nautical miles southeast of Mombasa.
The standoff comes as another ship is seized off the coast of Somalia.
According to the International Maritime Bureau (IMB), a Thai fishing
boat with 16 crew members has been hijacked. Noel Choong, head of the
IMB piracy reporting centre, based in Kuala Lumpur, said the ship was
seized in the Gulf of Aden on Monday. Eight ships have now been
hijacked in the past two weeks.

‘Hitting the jackpot’
Andrew Mwangura, co-ordinator of the East African Seafarers’
Association, said: “The world has never seen anything like this …
The Somali pirates have hit the jackpot.” The association, based in
the Kenyan port city of Mombasa, has been monitoring piracy for years.
Mwangura said he thought a hijacked Nigerian tug was a “mother-ship”
for the November 15 seizure. “The supertanker was fully loaded, so it
was probably low in the water and not that difficult to board,” he
said, adding that the pirates probably used a ladder or hooked a rope
to the side.

Pirates are well organised in the Horn of Africa, where Somalia’s
northeastern tip juts into the Indian Ocean. Somalia has had no
effective government since the 1991 overthrow of Mohamed Siad Barre,
the former president, touched off a bloody power struggle that has
defied numerous attempts to restore stability. This year, Somali
pirates have attacked 90 ships, more than double the number in 2007,
according to the International Maritime Bureau, and are still holding
16 ships and more than 250 sailors.

Somali Pirates Keep Hundreds of Hostages in Pirate City of Eyl
Heres a list of ten of the biggest vessels still in pirates’ hands.

1. Sirius Star / Hijacked November 17
Cargo: 2 million barrels of oil, value $100 million
Crew: 25 men

2. MV Karagol / Hijacked November 12
Cargo: 4,000 tons of chemicals
Crew: 14 Turks

3. MV Stolt Strength / Hijacked November 10
Cargo: Phosphoric acid
Crew: 23 Filipinos

4. CEC Future / Hijacked November 7
Cargo: Unknown
Crew: 11 Russians, one Georgian, one Lithuanian

5. MV Yasa Neslihan / Hijacked October 29
Cargo: Iron ore
Crew: 20 Turks

6. MT African Sanderling / Hijacked October 15
Cargo: Unknown
Crew: 21 Filipinos

7. MV Faina / Hijacked September 25
Cargo: 33 T-72 Russian battle tanks
Crew: 17 Ukrainians, 2 Latvians, one Russian

8. MV Captain Stefanos / Hijacked September 21
Cargo: Unknown
Crew: 17 Filipinos, two other nationals

9. Centauri / Hijacked September 18
Cargo: 17,000 tons of salt
Crew: 25 Filipinos

10. MV Great Creation / Hijacked September 17
Cargo: Chemical fertilizer
Crew: 24 Chinese, one Sri Lankan

Somali pirates transform villages into boomtowns
BY Mohamed Olad Hassan and Elizabeth Kennedy / 11.19.08

MOGADISHU, Somalia (AP) — Somalia’s increasingly brazen pirates are
building sprawling stone houses, cruising in luxury cars, marrying
beautiful women — even hiring caterers to prepare Western-style food
for their hostages. And in an impoverished country where every public
institution has crumbled, they have become heroes in the steamy
coastal dens they operate from because they are the only real business
in town. “The pirates depend on us, and we benefit from them,” said
Sahra Sheik Dahir, a shop owner in Harardhere, the nearest village to
where a hijacked Saudi Arabian supertanker carrying $100 million in
crude was anchored Wednesday.

These boomtowns are all the more shocking in light of Somalia’s
violence and poverty: Radical Islamists control most of the country’s
south, meting out lashings and stonings for accused criminals. There
has been no effective central government in nearly 20 years, plunging
this arid African country into chaos. Life expectancy is just 46
years; a quarter of children die before they reach 5. But in northern
coastal towns like Harardhere, Eyl and Bossaso, the pirate economy is
thriving thanks to the money pouring in from pirate ransoms that have
reached $30 million this year alone. “There are more shops and
business is booming because of the piracy,” said Sugule Dahir, who
runs a clothing shop in Eyl. “Internet cafes and telephone shops have
opened, and people are just happier than before.”

In Harardhere, residents came out in droves to celebrate as the
looming oil ship came into focus this week off the country’s lawless
coast. Businessmen gathered cigarettes, food and cold bottles of
orange soda, setting up kiosks for the pirates who come to shore to
resupply almost daily. Dahir said she even started a layaway plan for
them. “They always take things without paying and we put them into the
book of debts,” she told The Associated Press in a telephone
interview. “Later, when they get the ransom money, they pay us a lot.”
Residents make sure the pirates are well-stocked in khat, a popular
narcotic leaf, and aren’t afraid to gouge a bit when it comes to the
pirates’ deep pockets. “I can buy a packet of cigarettes for about $1
but I will charge the pirate $1.30,” said Abdulqadir Omar, an Eyl
resident. While pirate villages used to have houses made of corrugated
iron sheets, now, there are stately looking homes made of sturdy,
white stones. “Regardless of how the money is coming in, legally or
illegally, I can say it has started a life in our town,” said Shamso
Moalim, a 36-year-old mother of five in Harardhere. “Our children are
not worrying about food now, and they go to Islamic schools in the
morning and play soccer in the afternoon. They are happy.”

The attackers generally treat their hostages well in anticipation of a
big payday, hiring caterers on shore to cook spaghetti, grilled fish
and roasted meat that will appeal to Western palates. And when the
payday comes, the money sometimes literally falls from the sky.
Pirates say the ransom arrives in burlap sacks, sometimes dropped from
buzzing helicopters, or in waterproof suitcases loaded onto skiffs in
the roiling, shark-infested sea. “The oldest man on the ship always
takes the responsibility of collecting the money, because we see it as
very risky, and he gets some extra payment for his service later,”
Aden Yusuf, a pirate in Eyl, told AP over VHF radio.

The pirates use money-counting machines — the same technology seen
at foreign exchange bureaus worldwide — to ensure the cash is real. All
payments are done in cash because Somalia has no functioning banking
system. “Getting this equipment is easy for us, we have business
connections with people in Dubai, Nairobi, Djibouti and other areas,”
Yusuf said. “So we send them money and they send us what we want.”

Despite a beefed-up international presence, the pirates continue to
seize ships, moving further out to sea and demanding ever-larger
ransoms. The pirates operate mostly from the semiautonomous Puntland
region, where local lawmakers have been accused of helping them and
taking a cut of the ransoms. For the most part, however, the regional
officials say they have no power to stop piracy. Meanwhile, towns that
once were eroded by years of poverty and chaos are now bustling with
restaurants, Land Cruisers and Internet cafes. Residents also use
their gains to buy generators — allowing full days of electricity,
once an unimaginable luxury in Somalia.

“Pirate Jama Shino in the Somali town of Garowe, threw the most lavish
wedding party for his second marriage and invited hundreds of people
from the local authorities and among citizens,” Hussameddin wrote.
“The bride and the young women who attended the party, said: “Marrying
a pirate is every Somali girl’s dream. He has power, money, immunity,
the weapons to defend the tribe and funds to give to the militias in
civil war,” – from an op-ed in the Egyptian paper, Al Ahram.

Somali pirates living the high life
BY Robyn Hunter / 2008/10/28

“No information today. No comment,” a Somali pirate shouts over the
sound of breaking waves, before abruptly ending the satellite
telephone call. He sounds uptight – anxious to see if a multi-million
dollar ransom demand will be met. He is on board the hijacked
Ukrainian vessel, MV Faina – the ship laden with 33 Russian battle
tanks that has highlighted the problem of piracy off the Somali coast
since it was captured almost a month ago. But who are these modern-day
pirates? According to residents in the Somali region of Puntland where
most of the pirates come from, they live a lavish life.

“They have money; they have power and they are getting stronger by the
day,” says Abdi Farah Juha who lives in the regional capital, Garowe.
“They wed the most beautiful girls; they are building big houses; they
have new cars; new guns,” he says. “Piracy in many ways is socially
acceptable. They have become fashionable.” Most of them are aged
between 20 and 35 years – in it for the money. And the rewards they
receive are rich in a country where almost half the population need
food aid after 17 years of non-stop conflict.

Most vessels captured in the busy shipping lanes of the Gulf of Aden
fetch on average a ransom of $2m. This is why their hostages are well
looked after. The BBC’s reporter in Puntland, Ahmed Mohamed Ali, says
it also explains the tight operation the pirates run. They are never
seen fighting because the promise of money keeps them together.
Wounded pirates are seldom seen and our reporter says he has never
heard of residents along Puntland’s coast finding a body washed
ashore. Given Somalia’s history of clan warfare, this is quite a feat.
It probably explains why a report of a deadly shoot-out amongst the
pirates onboard the MV Faina was denied by the vessel’s hijackers.
Pirate spokesman Sugule Ali told the BBC Somali Service at the time:
“Everybody is happy. We were firing guns to celebrate Eid.”

Brains, muscle and geeks
The MV Faina was initially attacked by a gang of 62 men. BBC Somalia
analyst Mohamed Mohamed says such pirate gangs are usually made up
of three different types:
* Ex-fishermen, who are considered the brains of the operation
because they know the sea
* Ex-militiamen, who are considered the muscle – having fought for
various Somali clan warlords
* The technical experts, who are the computer geeks and know how
to operate the hi-tech equipment needed to operate as a pirate –
satellite phones, GPS and military hardware.

The three groups share the ever-increasing illicit profits – ransoms
paid in cash by the shipping companies. A report by UK think-tank
Chatham House says piracy off the coast of Somalia has cost up to $30m
(£17m) in ransoms so far this year. The study also notes that the
pirates are becoming more aggressive and assertive – something the
initial $22m ransom demanded for MV Faina proves. The asking price has
apparently since fallen to $8m.

Calling the shots
Yemen, across the Gulf of Aden, is reportedly where the pirates get
most of their weapons from. A significant number are also bought
directly from the Somali capital, Mogadishu. Observers say Mogadishu
weapon dealers receive deposits for orders via a “hawala” company – an
informal money transfer system based on honour. Militiamen then drive
the arms north to the pirates in Puntland, where they are paid the
balance on delivery. It has been reported in the past that wealthy
businessmen in Dubai were financing the pirates. But the BBC’s Somali
Service says these days it is the businessmen asking the pirates for

Such success is a great attraction for Puntland’s youngsters, who have
little hope of alternative careers in the war-torn country. Once a
pirate makes his fortune, he tends to take on a second and third wife
– often very young women from poor nomadic clans, who are renowned
for their beauty. But not everyone is smitten by Somalia’s new elite.
“This piracy has a negative impact on several aspects of our life in
Garowe,” resident Mohamed Hassan laments.

He cites an escalating lack of security because “hundreds of armed
men” are coming to join the pirates. They have made life more
expensive for ordinary people because they “pump huge amounts of US
dollars” into the local economy which results in fluctuations in the
exchange rate, he says. Their lifestyle also makes some unhappy. “They
promote the use of drugs – chewing khat [a stimulant which keeps one
alert] and smoking hashish – and alcohol,” Mr Hassan says.

The trappings of success may be new, but piracy has been a problem in
Somali waters for at least 10 years – when Somali fishermen began
losing their livelihoods. Their traditional fishing methods were no
match for the illegal trawlers that were raiding their waters. Piracy
initially started along Somalia’s southern coast but began shifting
north in 2007 – and as a result, the pirate gangs in the Gulf of Aden
are now multi-clan operations. But Garowe resident Abdulkadil Mohamed
says, they do not see themselves as pirates. “Illegal fishing is the
root cause of the piracy problem,” he says. “They call themselves

‘Pirates Are Stronger Than Us’ – Eyl Mayor / 23 August 2008
“The mayor of a small coastal town in northeastern Somalia has
declared that local authorities are unable to stop pirates. Abdullahi
Said O’Yusuf, the mayor of Eyl in Puntland region, confirmed Radio
Garowe during a Saturday interview that four hijacked ships are being
held hostage near the town’s shores. “They are stronger than us,”
Mayor O’Yusuf said, while speaking of the pirates. He condemned
continued attacks on foreign ships traveling across the Indian Ocean,
while underlining that local authorities “cannot do anything” to stop
piracy. The Associated Press has reported that four ships – with
owners in Malaysia, Iran, Japan and Germany – and a total crew of 96
people are being held hostage by Somali pirates. Mayor O’Yusuf said
the pirates who hijacked the ships “are the same ones who received
ransom payments before,” referring to previous pirate attacks in the
region. According to the Mayor, pirates use ransom payments to “buy
houses in big cities” in different parts of the country.”

“Eyl is a town in the northern Puntland region of Somalia. The
prominent clans in the Eyl district are the Majeerteen and Leelkase
sub-clans of the Darod. Eyl is near the Hafun peninsula, the location
of most of Somalia’s casualties from the 2004 Indian Ocean Tsunami. As
of 2008 Eyl has become a pirate haven, with more than a dozen ships
being held captive by pirate crews. The Puntland government has
acknowledged that they are relatively powerless to stop pirate
activities. French commandos decided a hostage rescue in Eyl was too
dangerous, and carried out a rescue of two French sailors before they
could be taken there.”

Life in Somalia’s pirate town
BY Mary Harper / 18 September 2008

Whenever word comes out that pirates have taken yet another ship in
the Somali region of Puntland, extraordinary things start to happen.
There is a great rush to the port of Eyl, where most of the hijacked
vessels are kept by the well-armed pirate gangs. People put on ties
and smart clothes. They arrive in land cruisers with their laptops,
one saying he is the pirates’ accountant, another that he is their
chief negotiator.

With yet more foreign vessels seized off the coast of Somalia this
week, it could be said that hijackings in the region have become
epidemic. Insurance premiums for ships sailing through the busy Gulf
of Aden have increased tenfold over the past year because of the
pirates, most of whom come from the semi-autonomous region of
Puntland. In Eyl, there is a lot of money to be made, and everybody is
anxious for a cut.

Entire industry
The going rate for ransom payments is between $300,000 and $1.5m
(£168,000-£838,000). A recent visitor to the town explained how, even
though the number of pirates who actually take part in a hijacking is
relatively small, the whole modern industry of piracy involves many
more people. “The number of people who make the first attack is small,
normally from seven to 10,” he said. “They go out in powerful
speedboats armed with heavy weapons. But once they seize the ship,
about 50 pirates stay on board the vessel. And about 50 more wait on
shore in case anything goes wrong.”

Given all the other people involved in the piracy industry, including
those who feed the hostages, it has become a mainstay of the Puntland
economy. Eyl has become a town tailor-made for pirates – and their
hostages. Special restaurants have even been set up to prepare food
for the crews of the hijacked ships. As the pirates want ransom
payments, they try to look after their hostages. When commandos from
France freed two French sailors seized by pirates off the Somali coast
in September, President Nicolas Sarkozy said he had given the go-ahead
for the operation when it was clear the pirates were headed for Eyl –
it would have been too dangerous to try to free them from there.

The town is a safe-haven where very little is done to stop the pirates
– leading to the suggestion that some, at least, in the Puntland
administration and beyond have links with them. Many of them come
from the same clan – the Majarteen clan of the president of Somalia’s
transitional federal government, Abdullahi Yusuf.

Money to spend
The coastal region of Puntland is booming. Fancy houses are being
built, expensive cars are being bought – all of this in a country that
has not had a functioning central government for nearly 20 years.
Observers say pirates made about $30m from ransom payments last
year – far more than the annual budget of Puntland, which is about
$20m. When the president of Puntland, Adde Musa, was asked about
the reported wealth of pirates and their associates, he said: “It’s more
than true”.

Now that they are making so much money, these 21st Century pirates
can afford increasingly sophisticated weapons and speedboats. This
means that unless more is done to stop them, they will continue to
plunder the busy shipping lanes through the Gulf of Aden. They even
target ships carrying aid to feed their compatriots – up to a third of the
population. Warships from France, Canada and Malaysia, among others,
now patrol the Somali coast to try and fend off pirate attacks.

An official at the International Maritime Organisation explained how
the well-armed pirates are becoming increasingly bold. More than 30%
of the world’s oil is transported through the Gulf of Aden. “It is
only a matter of time before something horrible happens,” said the
official. “If the pirates strike a hole in the tanker, and there’s an
oil spill, there could be a huge environmental disaster”.

It is likely that piracy will continue to be a problem off the coast
of Somalia as long as the violence and chaos continues on land.
Conflict can be very good for certain types of business, and piracy is
certainly one of them. Weapons are easy to obtain and there is no
functioning authority to stop them, either on land or at sea.


“We want pre-emptive action against the mother ships before the
pirates carry out a hijacking,” said Captain Pottengal Mukundan,
director of the London-based International Maritime Bureau, which
monitors international piracy, referring to the ships pirates use as
bases from which to launch attacks. “The positions of the mother ships
are generally known. What we would like to see is the naval vessels
going to interdict them, searching them and removing any arms on
board. That would at least force the pirates to go back to Somalia to
pick up more arms before they could come back again,” he told Reuters
in an interview.

But the laws governing what navies can do to take on the pirates are
complex. Only if pirates are caught in the act of piracy — actually
boarding a ship and seizing it — can a naval ship intervene with the
full force of international law. Arriving 30 minutes after a vessel
has been boarded, when there is a degree of uncertainty over whether
those on board are pirates or not, is often too late, experts say.
Denmark recently had to return some suspected pirates to Somalia
because it couldn’t prove they were pirates after they were seized.

Mr. Mukundan said there were currently about four ‘mother ships’ —
seized dhows or other larger fishing boats anchored near international
waters — being used by pirates. The pirates live on the mother ships,
storing arms, fuel and other supplies on board, and then target ships,
which can include fuel tankers, by catching up to them in high-speed
boats and boarding them with rope ladders while heavily armed. Mr.
Mukundan acknowledged the legalities of taking on ‘mother ships’ were
tricky, but said it could be done if governments gave their naval
forces instructions to do it.”


“Piracy is an international crime consisting of illegal acts of
violence, detention, or depredation committed for private ends by the
crew or passengers of a private ship or aircraft in or over
international waters against another ship or aircraft or persons and
property on board. (Depredation is the act of plundering, robbing, or

In international law piracy is a crime that can be committed only
on or over international waters (including the high seas, exclusive
economic zone, and the contiguous zone), in international airspace,
and in other places beyond the territorial jurisdiction of any nation.
The same acts committed in the internal waters, territorial sea,
archipelagic waters, or national airspace of a nation do not
constitute piracy in international law but are, instead, crimes within
the jurisdiction and sovereignty of the littoral nation.

Sea robbery is a term used to describe attacks upon commercial
vessels in ports and territorial waters. Such attacks are, according
to international law, not true acts of piracy but rather armed
robberies. They are criminal assaults on vessels and vessel crews,
just as may occur to truck drivers within a port area. Such attacks
pose a serious threat to trade. The methods of these attacks have
varied from direct force using heavy weapons to subterfuge in which
the criminals have identified themselves on VHF radio as the national
coast guard.

These maritime criminals are inclined to operate in waters where
government presence is weak, often lacking in both technical resources
and the political will to deal effectively with such attacks.
International law permits any warship or government vessel to repress
an attack in international waters. In a state’s territorial waters,
such attacks constitute an act of armed robbery and must be dealt with
under the laws of the relevant coastal state. These laws seldom, if
ever, permit a vessel or warship from another country to intervene.
The most effective countermeasure strategy is to prevent criminals
initial access to ports and vessels, and to demonstrate a consistent
ability to respond rapidly and effectively to notification of such a
security breach.

Acts of piracy can only be committed by private ships or private
aircraft. A warship or other public vessel or a military or other
state aircraft cannot be treated as a pirate unless it is taken over
and operated by pirates or unless the crew mutinies and employs it for
piratical purposes. By committing an act of piracy, the pirate ship or
aircraft, and the pirates themselves, lose the protection of the
nation whose flag they are otherwise entitled to fly.

To constitute the crime of piracy, the illegal acts must be
committed for private ends. Consequently, an attack upon a merchant
ship at sea for the purpose of achieving some criminal end, e.g.,
robbery, is an act of piracy as that term is currently defined in
international law. Conversely, acts otherwise constituting piracy done
for purely political motives, as in the case of insurgents not
recognized as belligerents, are not piratical.

International law has long recognized a general duty of all
nations to cooperate in the repression of piracy. This traditional
obligation is included in the 1958 Geneva Convention on the High Seas
and the 1982 LOS Convention, both of which provide: “[A]ll States
shall cooperate to the fullest possible extent in the repression of
piracy on the high seas or in any other place outside the jurisdiction
of any State.””


Lucrative Piracy Business Thrives Off Somali Coast / November 18,

The seizure Monday of a supertanker carrying $100 million of crude oil
off the coast of Somalia is one of many ship hijackings by pirates of
late. A cargo ship flying a Hong Kong flag also was taken over in the
Gulf of Aden on Tuesday — the seventh hijacking in the area in 12
days, according to The Associated Press. The magnitude of recent
piracy attacks is rising, and an interactive map maintained by the
International Chamber of Commerce shows where these attacks are
taking place. Many are focused around the eastern Horn of Africa, but
piracy in the waters around Indonesia also has been frequent. J. Peter
Pham, director of the Nelson Institute for International and Public
Affairs at James Madison University, says the recent spikes in piracy are
“a crime of both opportunity and expediency.”

“Somalia has lacked a government, effectively, since 1991 and the
current interim government — the 14th of its kind in a decade and a
half — is tottering on its last legs, so there is very little control
to prevent lawlessness,” he says. “There is also the fact that
increasingly commerce is moving in this direction — the demand for oil
and other resources. Roughly 11 percent of the world’s petroleum flows
through these waters.” For Somalis, Pham says, “this is really the
best thing they have going for them economically. Piracy and ransom
this year will exceed more than $50 million — it’s Somalia’s largest

“The ship owners and insurers have found that it’s more cost-effective
to pay ransoms. They are currently averaging slightly over $1 million
per vessel, and that’s cheaper than buying a new ship,” Pham says.
“The Saudi tanker that was seized [Monday] was just launched six
months ago and cost $150 million to build and the cargo on board is
worth $100 million, so I suspect the ship owners will be willing to
pay some fraction of that to get it back.” Pham says that most tankers
of that size are not armed, or if they are, they have small side arms.
The pirates come in fast speed boats, circle the vessel and threaten
to blow it out of the water with rocket-propelled grenades or shoulder-
launched missiles. “Faced with that prospect, most captains — to save
the life of their crew and save the vessels — will surrender control
of the vessel to the pirates,” Pham says.

The world’s most utterly failed state / Oct 2nd 2008

Tipped off by friends in ports from Odessa to Mombasa, Somali pirates
captured a Ukrainian freighter, the MV Faina, in the Gulf of Aden and
steered it to Somalia’s coast. At first they demanded $20m for the
release of ship and crew. The captain died, apparently of
“hypertension”, and several pirates may have then killed each other
after a quarrel. This recent incident was only the latest in a long
list of similar outrages and highlights the growing menace caused by
the total failure of the state of Somalia, the ultimate cause of the
virus of piracy in the region.

The ship was carrying 33 T-72 Russian tanks, anti-aircraft guns and
grenade launchers. Lighter weapons may have been offloaded on the
Somali shore before an American warship arrived on the scene. Kenya
claimed ownership of the cargo but the manifest suggests its
destination was south Sudan, with Kenya’s co- operation in its
delivery to be rewarded in the future with cheap south Sudanese oil.
At midweek, a Russian warship was steaming to the scene to take
responsibility for its citizens on the ship.

The attack was only one of at least 60 off Somalia this year. Foreign
navies can intercept vessels captured by pirates, but the desolation
and length of Somalia’s coastline give them little chance of stamping
out piracy without much larger and better co-ordinated forces. In
cahoots with gangs in Yemen, Somali pirates look set to go on hitting
vessels heading into or out of the Red Sea or passing through the Gulf
of Aden: about 10% of the world’s shipping.

It is big business. The pirates are increasingly sophisticated,
handsomely bankrolled by Somalis in Dubai and elsewhere. They are not
yet directly tied up with the Islamist insurgents in Somalia, though
they may yet have to pay cash to whoever controls their coastal havens
in return for uninterrupted business, thus assisting the purchase of
weapons and fuelling the violence. The nabbed ships are mostly
anchored off the village of Eyl in Puntland in the north-east or the
pirate town of Haradheere farther south (see map) until a ransom is
paid, which is usually within a month of capture. The average ransom
has tripled since 2007, as has the number of ships taken. Some $100m
may have been paid to pirates this year. By comparison, the United
Nations Development Programme’s annual budget for Somalia is $14m.

Piracy is a symptom of the power vacuum inside Somalia. The country’s
“transitional federal government”, headed by a warlord president,
Abdullahi Yusuf, and a bookish prime minister, Nur Hussein, is
powerless to stop its citizens raising the Jolly Roger, just as it
cannot halt the resurgent jihadists, some with al-Qaeda connections,
who have taken control of much of southern Somalia, including the port
town of Kismayo. Hundreds of thousands have fled street fighting in
the north of Mogadishu to camps outside the city; some head south to
refugee camps in Kenya. About 9,000 civilians have been killed in the
insurgency in the past year, according to human-rights groups.

The UN’s envoy to Somalia, Ahmedou Ould Abdullah, a former foreign
minister of Mauritania, is overseeing peace talks in nearby Djibouti
between the transitional government and the moderate wing of the
Alliance for the Reliberation of Somalia (ARS), an Islamist group
headed by a former teacher, Sharif Ahmed. The aim is to create a
genuine government of national unity before elections next year.

A condition of any agreement is the withdrawal of the 7,000-odd
Ethiopian troops now in Somalia. Mr Ould Abdullah wants to replace
them and a separate 2,200-strong African Union force of Ugandan and
Burundian troops with 8,000 UN peacekeepers. Ethiopia, which is losing
men and money, would be happy with that, if the peacekeepers were
somehow shoehorned in without the jihadists taking advantage of a
hiatus. America agrees, but only if the deployment of blue helmets is
matched by an effort to build a new Somali national army. Mr Ould
Abdullah is also keen for the International Criminal Court in The
Hague to indict some of the worst warlords, to show they cannot murder
their opponents with impunity. But it is unlikely, in present
circumstances, that UN peacekeepers will ever arrive. If the UN cannot
produce half its promised force for Darfur, despite a detailed plan
for one, Somalia stands little chance of getting any blue helmets at

Feuding among Somali leaders makes matters worse. “Somalia is a victim
of its political, business and military elite,” says Mr Ould Abdullah.
“They’ve taken the country hostage.” A slender hope, backed by Britain
and some other EU countries, is that ordinary Somalis will eventually
force their leaders to put national interest above self-interest and
sign the proposed agreement in Djibouti. In any event, says another
diplomat, “There is no Plan B.”

As the peace talks limp on, the insurgency is getting stronger. It is
led by the Shabab (Youth), the armed wing of the Islamic Courts Union,
which ran Somalia with some success for a few months in 2006 until it
was smashed, at the end of that year, by the invading Ethiopians, with
American backing. The Shabab has since reconstituted itself, making
ground with tactics copied from Iraq: roadside bombings, the kidnap
and murder of foreigners, local aid-workers and peace campaigners, and
grenade attacks on video shacks showing films or football.

My enemy’s enemy is my friend
Its fighters come under the leadership of a wily red-bearded 70-year-
old jihadist, Hassan Dahir Aweys, and a former deputy commander of the
Islamic Courts, Mukhtar Robow. They are backed by Eritrea, which has
offered sanctuary to the radical rump of the ARS in its capital,
Asmara. Eritrea’s interest is not to help Somalia but to hurt its
bitter enemy, Ethiopia. The Shabab is also backed by fighters from the
Hawiye clan and by hungry young freelance gunmen who represent
Somalia’s huge lost generation. Half the population, 10m-odd before
the exodus, was born after Siad Barre’s regime fell in 1991. Since
then, it is guessed, only 10% have had even rudimentary education;
health care barely exists.

Few foreign governments have shown much interest in trying to end
Somalia’s woes. Diplomats charged with trying to do so are frustrated
and depressed. Meanwhile the suffering is mounting. The UN reckons
3.2m Somalis now survive on food aid. The piracy means that warships
have to escort ships bringing food. If fighting intensifies, that will
be harder—and manipulating food aid could become a weapon, as it was
during fighting in 1991 and 1992, when 300,000 Somalis starved to

BY Hari Jagannathan Balasubramanian / October 06, 2008

…as I now read Richard Dowden’s Africa: Altered States, Ordinary
Miracles, the political outline is becoming clear: one man rule from
1969-1991; then civil war; a failed American rescue attempt; and then
no government; and more recently, Ethiopia meddling in its affairs.
The excerpts I’ll present here, though, are images of a modernizing
Somalia, of how in the absence of a government, a free market thrived
in the 90s and filled the void.

“In 1999 I went back to Somalia to see what had happened.
Considering there was no state and civil war sputtered on, life was
not as bad as I had expected. In some ways it was a lot better. Those
few aid agencies that stayed on were no longer run by expatriate
overlords but staffed by Somalis. Not many foreign aid workers wanted
to be there. Somalis had also managed to get the economy going –
without a single cent from the World Bank or IMF. The new economy was
largely built around a worldwide telephone banking system – a truly
free market system and , at the time, by far the world’s cheapest and
most efficient. Several Somalis who had worked in telecoms in America
bought dishes and telephone equipment and set up phone booths in small
towns. From here, for a dollar a minute, people could call cousins and
aunts and uncles all over the world.”

And how the cell phone is the perfect device for the wandering Somali
herder wanting to learn market prices:

“Somali herders move around in a yearly pattern. In the dry
season, towards the end of the year, they go down to the coast as they
have done for centuries to sell some of their animals to traders who
take them across the Red Sea to the markets of Saudi Arabia. I have
watched them at the port of Berbera, herds of camels and sheep driven
to holding areas where herders have to buy fodder for them and pay for
water at the trough markets. These herdsmen are at a big disadvantage
while they wait to sell their animals. But the mobile phone has
rescued them. They can call up traders in Jeddah directly to find out
the market price of animals there. They now know when to come down
out of the mountains and sell. A week later I watch a herdsman on the
outskirts of Berbera driving his herd towards the port with herding
stick in one hand and in the other a mobile phone – perfect technology
for the nomad.”’

Telecoms thriving in lawless Somalia
BY Joseph Winter / 2004/11/19

Rising from the ruins of the Mogadishu skyline are signs of one of
Somalia’s few success stories in the anarchy of recent years. A host
of mobile phone masts testifies to the telecommunications revolution
which has taken place despite the absence of any functioning national
government since 1991. Three phone companies are engaged in fierce
competition for both mobile and landline customers, while new internet
cafes are being set up across the city and the entire country. It
takes just three days for a landline to be installed – compared with
waiting-lists of many years in neighbouring Kenya, where there is a
stable, democratic government. And once installed, local calls are
free for a monthly fee of just $10. International calls cost 50 US
cents a minute, while surfing the web is charged at 50 US cents an
hour – “the cheapest rate in Africa” according to the manager of one
internet cafe. But how do you establish a phone company in a country
where there is no government?

No monopoly
In some respects, it is actually easier. There is no need to get a
licence and there is no state-run monopoly which prevents new
competitors being established. And of course there is no-one to demand
any taxes, which is one reason why prices are so low. “The government
post and telecoms company used to have a monopoly but after the
regime was toppled, we were free to set up our own business,” says
Abdullahi Mohammed Hussein, products and services manager of
Telcom Somalia, which was set up in 1994 when Mogadishu was still
a war-zone. “We saw a huge gap in the market, as all previous services
had been destroyed. There was a massive demand.” The main airport
and port were destroyed in the fighting but businessmen have built
small airstrips and use natural harbours, so the phone companies are
still able to import their equipment. Despite the absence of law and
order and a functional court system, bills are paid and contracts are
enforced by relying on Somalia’s traditional clan system, Mr Abdullahi

Mobile target
But in a country divided into hundreds of fiefdoms run by rival
warlords, security is a major concern. While Telcom Somalia has some
25,000 mobile customers – and a similar number have land lines – you
very rarely see anyone walking along the streets of Mogadishu chatting
on their phone, in case this attracts the attention of a hungry
gunman. The phone companies themselves say they are not targeted by
the militiamen, even if thieves occasionally steal some of their
wires. Mahdi Mohammed Elmi has been managing the Wireless African
Broadband Telecoms internet cafe in the heart of Mogadishu, surrounded
by the bustling and chaotic Bakara market, for almost two years. “I
have never had a problem with security,” he says and points out that
they have just a single security guard at the front door. Mr Abdullahi
says the warlords realise that if they cause trouble for the phone
companies, the phones will stop working again, which nobody wants. “We
need good relations with all the faction leaders. We don’t interfere
with them and they don’t interfere with us. They want political power
and we leave them alone,” he says.

Selling goats on the net
While the three phone companies – Telcom, Nationlink and Hormuud – are
engaged in bitter competition for phone customers, they have co-
operated to set up the Global Internet Company to provide the internet
infrastructure. Manager Abdulkadir Hassan Ahmed says that within 1.5km
of central Mogadishu, customers – mostly internet cafes – can enjoy
service at 150Mb/second through a Long Reach Ethernet. Elsewhere, they
can have a wireless connection at 11Mb/s. He says his company is able
to work anywhere in Somalia, whichever faction is in charge locally.
“Even small, remote villages are connected to the internet, as long as
they have a phone line,” he says. The internet sector in Somalia has
two main advantages over many of its Africa neighbours. There is a
huge diaspora around the world – between one and three million people,
compared with an estimated seven million people in Somalia – who
remain in contact with their friends and relatives back home. E-mail
is the cheapest way of staying in touch and many Somalis can read and
write their own language, instead of relying on English or French,
which restricts internet users to a smaller number of well educated
people. Just two days after it was opened, the Orbit internet cafe in
south Mogadishu’s km5 was already pretty busy, with people checking
their e-mail accounts, a livestock exporter sending out his invoices
and two nurses doing medical research.

Video calling
And Somalia’s telecoms revolution is far from over. “We are planning
to introduce 3G technology, including live video calling and mobile
internet, next year,” says Mr Abdullahi. But despite their success,
the telecoms companies say that like the population at large, they are
desperate to have a government. “We are very interested in paying
taxes,” says Mr Abdullahi – not a sentiment which often passes the
lips of a high-flying businessman. And Mr Abdulkadir at the Global
Internet Company fully agrees. “We badly need a government,” he says.
“Everything starts with security – the situation across the country.
“All the infrastructure of the country has collapsed – education,
health and roads. We need to send our staff abroad for any training.”
Another problem for companies engaged in the global telecoms business
is paying their foreign partners. At present, they use Somalia’s
traditional “Hawala” money transfer companies to get money to Dubai,
the Middle East’s trading and financial hub. With a government would
come a central bank, which would make such transactions far easier.
Taxes would mean higher prices but Mr Abdullahi says that Somalia’s
previous governments have kept taxes low and hopes this will continue
under the regime due to start work in the coming months. Somalia’s
telecoms companies are looking forward to an even brighter future with
the support of a functioning government – as long as it does not
impose punitive tax rates or state control in a sector which obviously
needs very little help to thrive.

Ayn Rand Comes to Somalia
In the absence of government bureaucracy and foreign aid, business is
starting to boom in Mogadishu.
BY Peter Maass / The Atlantic Monthly / May 2001

The headquarters of Telecom Somalia is filled with the sights and
sounds of Mogadishu-style success. Customers pour through the
entrance, funneling past machine-gun positions that flank the front
doors. After a pat-down by security guards, who take temporary
possession of any guns and knives, they enter the lobby and line up at
the appropriate counters to pay their bills or order new service.
Clocks on a wall display the time in New York, Paris, London, Sydney,
and Karachi—reminders of an outside world that has pretty much left
Somalia for dead. Computer keyboards clatter as workers punch in
information. Customers chat and argue with one another in a gregarious
manner that makes the lobby feel like a town square—all the more so if
a goat that’s being herded down the street happens to stray inside.

Telecom Somalia is the largest company in Mogadishu. It has 700
employees, and it offers some of the best and cheapest phone service
in Africa. It also provides a clue to the possible resuscitation of
the world’s most famous failed state. In 1995, when the international
community decided to wash its hands of Somalia and the last United
Nations peacekeepers left the country, Mogadishu was a Hobbesian
horror show. It remains a miserable and unstable place, a city where
taxi drivers ruin their own vehicles, denting the body work and
smashing the windows, so that thieves will not bother to steal them.
But it is less dismal than it used to be, and better times may be on
the way, owing to a new generation of businessmen who are determined
to bring the lawless capital back to life.

Prime among the city’s entrepreneurial leaders is Abdulaziz Sheikh,
the chief executive of Telecom Somalia. When I visited him last
summer, in a small office on the fourth floor of the company’s
headquarters, he was being blasted by a hurricane-force air-
conditioner that nearly drowned out the constantly ringing phones on
his desk. “You need to be here twenty-four hours a day,” he said,
explaining that he lives as well as works on the premises. Sheikh had
the running-on-fumes look of a campaign chairman in a never-ending
race, but at least he appeared to be winning. Anyone can walk into the
lobby of his building, plunk down a $100 deposit, and leave with a
late-model Nokia that works throughout the city, in valleys as well as
on hilltops, at all hours. Caller ID, call waiting, conference
calling, and call forwarding are available. There are two other
cellular-phone firms in town, and the three recently entered into a
joint venture and created the first local Internet-service provider.
Not all battles here are resolved by murder.

Mogadishu also has new radio and television stations (one night I
watched the Somali equivalent of Larry King Live, in which the
moderator and his guest, one of the city’s leading Islamic clerics,
fielded questions from callers), along with computer schools and an
airport that serves several airlines (although these fly the sorts of
airplanes that Americans see only in museums). The city’s Bekara
market offers everything from toilet paper, Maalox, and Colgate
toothpaste to Viagra, sarongs, blank passports (stolen from the
Foreign Ministry a decade ago), and assault rifles. The international
delivery company DHL has an office in Mogadishu, where its methods can
be unorthodox: if a client has an urgent package that cannot wait for
a scheduled flight out of the country, the company will dispatch it on
one of the many planes that arrive illegally from Kenya every day
bearing khat, a narcotic leaf that is chewed like tobacco but has the
effect of cocaine.

Mogadishu has the closest thing to an Ayn Rand-style economy that the
world has ever seen—no bureaucracy or regulation at all. The city has
had no government since 1991, when the much despised President
Mohammed Siad Barre was overthrown; his regime was replaced not by
another one but by civil war. The northern regions of Somaliland and
Puntland have stabilized under autonomous governments, but southern
Somalia, with Mogadishu at its core, has remained a Mad Max zone
carved up by warlords for whom fighting seems as necessary as oxygen.
The prospect of stability is a curious miracle, not simply because the
kind of business development that is happening tends to require the
presence of a government, but because the very absence of a
government may have helped to nurture an African oddity—a lean
and efficient business sector that does not feed at a public trough
controlled by corrupt officials.

Similarly, the lack of large-scale (and often corrupting) foreign aid
might have benefits as well as drawbacks. Somali investors are making
things happen, not waiting for them to happen. For example, on the
outskirts of town, on a plot of land the size of several football
fields and surrounded by twenty-foot-high walls, workers recently
completed a $2 million bottling plant. Everyone refers to it as “the
Pepsi factory,” even though Pepsi is not involved. The project’s
investors say the plant will become a Pepsi factory: they figure that
if they begin producing soft drinks, Pepsi or some other international
company will want to get in on the market.

Many of the larger companies in Mogadishu, including the bottling
plant, have issued shares, although there is of course no stock
exchange or financial authority of any sort in the city. Everything is
based on trust, and so far it has worked, owing to Somalia’s tightly
woven clan networks: everyone knows everyone else, so it’s less likely
that an unknown con man will pull off a scam. In view of Somalia’s
history, this ad hoc stock market is not as implausible as it may
sound. Until a century ago, when Italy and Britain divided what is
present-day Somalia into colonial fiefdoms, Somalis got along quite
well without a state, relying on systems that still exist: informal
codes of honor and a means of resolving disputes, even violent ones,
through mediation by clan elders.

Of course, the lack of a government poses problems, especially with
respect to the warlords. Sheikh and his fellow businessmen have kept
them at bay by paying them protection money and by forming their own
militias. Those manning the machine guns outside Telecom Somalia are
employees of the company, and when the firm’s linemen go out to lay
new cables (they used to string overhead lines, but those got shot up
by stray gunfire), they, too, are protected by company gunmen. All of
this is costly, so the business leaders have taken steps to bring
about a new government—one that will keep its hands out of their
pockets and focus on providing security and public services. The
process began two years ago, when Sheikh and other entrepreneurs got
fed up with the blight of checkpoints, at which everyone was required
to pay small tributes to armed teenagers affiliated with various
warlords. The businessmen decided collectively to fund a militia to
get rid of the checkpoints, resulting in an armed force that is
overseen by the city’s Islamic clerics. Having succeeded in its main
mission, the militia now serves as an informal sort of police force,
patrolling the streets in an effort to stop petty crime.

With the checkpoints gone and the warlords weakened by the loss of a
key source of income, the business elite is bankrolling a transitional
government that was appointed at a peace conference last August. The
government does not yet control much more than the heavily guarded
buildings that are its temporary headquarters, but it has begun
deploying its own policemen in some parts of the city. The businessmen
are pooling their company security forces to bolster the government
and are trying to lure the warlords’ gunmen to its side with cash
incentives. In February one of the leading warlords, Mohamed Qanyareh,
agreed to support the government in exchange for ministerial posts for
himself and his allies.

If the business community succeeds in returning Mogadishu to something
resembling normalcy, it will have shown that a failed state, or at
least its capital city, can get back on its feet without much help
from the outside world. This would constitute not an argument against
outside intervention but, rather, a lesson that intervention doesn’t
have to be of the UN-led, billion-dollar variety. Before leaving the
city I met with Hussein Abdullahi, a well-educated businessman who
fled Mogadishu in 1991 and wound up in Toronto, driving a taxi. Three
years ago, during a return visit, he was struck by the fact that his
Somali friends were living better at home than he was in Canada, at
the bottom of the immigrant ladder. He decided to move back and now
manages a thriving pasta factory, a bread factory, and a medical
clinic. Sipping an ice-cold Coke in his office, Abdullahi offered to
share a secret that, he promised, could make me rich. A chubby man
with a beatific smile, he leaned forward conspiratorially. “Everything
is possible in Mogadishu now, everything,” he said. “If you have the
money and the knowledge, you can do whatever you want. It is virgin
here.” Perhaps so, but only in the way of scorched earth.

BY Tatiana Nenova and Tim Harford / 11/1/2004

Telecommunications: networks link up
Many local companies have teamed up with international giants such as
Sprint (U.S.) and Telenor (Norway), providing mobile phones and
building new landlines. Vigorous competition has pushed prices well
below typical levels in Africa, and Somalia now has 112,000 fixed
lines and 50,000 mobile subscribers, up from 17,000 lines before 1991.
Yet not all is well. Calling every phone subscriber in Hargeisa, in
the Northwest, would require connections from four telephone firms.
But firms in Mogadishu have now agreed on interconnection standards,
and those in Hargeisa appear to be following suit. The negotiations
were brokered by the Somali Telecom Association, set up with the help
of the United Nations and International Telecommunication Union (ITU)
and head-quartered in Dubai.[1]

Electricity: simple solutions yield results
Entrepreneurs have worked around Somalia’s lack of a functioning
electricity grid, payment systems, and metering. They have divided
cities into manageable quarters and provide electricity locally using
secondhand generators bought in Dubai. They offer households a menu of
choices (daytime, evening, or 24-hour service) and charge per

Water: access but not cheap or safe
Public water provision is limited to urban areas, but a private system
extends to all parts of the country as entrepreneurs build cement
catchments, drill private boreholes, or ship water from public systems
in the cities. Prices naturally rise in times of drought.
Traditionally, destitute families have not had to pay for water, while
the slightly better-off borrow funds from relatives. Nevertheless,
after several years of drought the United Nations estimates that many
families in the Eastern Sanaag have debts of US$50–100 for water.
Moreover, access to safe water is low even by African standards
because neither regulators nor the market have been able to persuade
merchants to purify their water.

Air travel: outsourcing safety
In 1989 the national carrier (partly owned by Alitalia) operated just
one airplane and one international route.[2] Today the sector boasts
about 15 firms, more than 60 aircraft, 6 international destinations,
more domestic routes, and many more flights. But safety is a concern.
Airports lack trained air traffic controllers, fire services, runway
lights, and a sealed perimeter against stray animals, and checks on
aircraft and crew are inadequate. The makeshift solution:
international outsourcing. Somali carriers lease planes, often with
crews from Eastern Europe (the largest, Daallo Airlines, leases a
Boeing from the United Kingdom, to boost customer confidence). And
they operate out of Djibouti, Dubai, and Nairobi, using the facilities
there to check aircraft safety.

Private courts: quick but limited
A recent effort to endow Mogadishu with a functioning court collapsed
when the court tried to levy taxes and take over the privately run
port of El Ma’an. In any case Somalia lacks contract law, company law,
the concept of limited liability, and other key pillars of commercial
law. In some cases Somalis have used offshore registration of
businesses to import legal concepts and services. More commonly,
disputes are settled at the clan level, by traditional systems run by
elders and with the clan collecting damages. Such measures are free—
and fast by international standards. In a case involving the
oppression of minority shareholders in a large livestock company, out-
of-court talks were preferred, the company continued to operate
successfully, and the dispute was settled amicably. But clan-based
systems deal poorly with disputes outside the clan. In a dispute
involving the telecommunications company Aerolite, the interclan
committee of elders awarded the plaintiff from a weaker clan an
unfairly small settlement, and since it was not enforced, he received

Currency: perfect competition for dollars [2001]
Sharp inflation in 1994–96 and 2000–01 destroyed confidence in three
local currencies. U.S. dollars are harder to forge, do not need to be
carried around in large fragile bundles, and, most important, retain
their value. The feeble capabilities of the central bank have allowed
free entry into the currency exchange business, which is as close to
perfectly competitive as is ever likely to be possible.

International fund transfers: hawala system
The hawala system, a trust-based money transfer system used in many
Muslim countries, moves US$0.5–1 billion into Somalia every year. A
person in New York wishing to send money to his family in Tog-waajale
gives the hawala agent in New York the sum in cash, paying a 5 percent
commission. The agent deposits the cash in a local bank account to be
transferred to the company bank account in Djibouti or Dubai, then
alerts the clearinghouse in Hargeisa, which passes details on to Tog-
waajale. When the recipient shows up, the local agent quizzes him
about his clan lineage using questions provided by the relative
overseas as security against fraud. The transaction is usually
completed within 24 hours. Hawala networks are unregulated and do not
always keep records of transactions, but they are coming under
pressure from efforts to combat money laundering.[3]

Savings accounts and traveler’s checks
Somalia has adopted the widespread African institution of rotating
credit associations, which rely on clan links for enforcement and
provide a safe haven for savings. More innovative is the system of
traveler’s checks for the pilgrimage to Mecca, or hajj. Nobody would
accept Somali checks, so Somali firms set up accounts in Saudi banks
and write checks to pilgrims that can be cashed in any branch.

Gaps in private sector provision
In some areas the private sector has made little progress. The Somali
road system, for example, is limited and in poor condition. For a
private supplier to build a road and collect fees to cover the costs
is apparently too hard, partly because of prohibitive transaction
costs and partly because fee-paying users are not the only ones who
benefit from roads. Primary education is another disappointing story.
Some 71 percent of primary schools are privately owned (typically by
parents or communities), but enrollment is just 17 percent. By
contrast, it is 82 percent in West Africa, where countries are richer
and more stable and the government is much more heavily involved in
the economy. Ideally, benevolent government would sort out both
problems. But government that is merely stronger might not help. Where
municipal governments along the Berbera–Hargeisa road have the power
to collect tolls, they do not spend them on maintenance. The failings
of the education system are partly because half of Somalis are nomads.
It is not clear that government would do much better, especially since
the private schools are locally acknowledged to be superior to those
run by local government. Rather than try to create a government system
from scratch, a better policy would be to improve the network of
higher-quality private schools.

The achievements of the Somali private sector form a surprisingly long
list. Where the private sector has failed—the list is long here too—
there is a clear role for government interventions. But most such
interventions appear to be failing. Government schools are of lower
quality than private schools. Subsidized power is being supplied not
to the rural areas that need it but to urban areas, hurting a well-
functioning private industry. Road tolls are not spent on roads.
Judges seem more interested in grabbing power than in developing laws
and courts. A more productive role for government would be to build on
the strengths of the private sector. Given Somali reliance on clan and
reputation, any measures allowing these mechanisms to function more
broadly would be welcome; credit and land registries would be a good
start. And since Somali businesses rely heavily on institutions
outside the economy, international and domestic policies supporting
such connections would help. For governments and aid agencies, the
capability of some business sectors to cope under the most difficult
conditions should give hope and guidance in other reconstruction
efforts. It may take less encouragement than is commonly thought for
stripped-down systems of finance, electricity, and telecommunications
to grow.

1. “Somalia Telecoms Boom without Government,” Somaliland Times, July
22, 2004.
2. United States Institute for Peace, Removing Barricades in Somalia:
Prospects for Peace(Washington, D.C., 1998).
3. Abdusalam Omer, “Supporting System and Procedures for the Effective
Regulation and Monitoring of Somali Remittance Companies
(Hawala)” (United Nations Development Programme, Nairobi, 2003).

Somaliland’s addict economy
BY Tristan McConnell / July 17, 2009

Somalia’s economy is dominated by trade in khat, a narcotic banned in the U.S. and much of Europe. Eye-popping, head-buzzing khat is loved by Somali men who chew the leaves for their stimulant effect. While most of war-torn Somalia’s economy is moribund, khat does a bustling trade estimated at well over $50 million annually. Doctors warn, however, that the drug is not only a drain on limited Somali resources but is also destroying lives.

Hargeisa is the capital of Somaliland, the northern territory nominally independent from Somalia which maintains peace and economic activity, especially the khat trade. Lounging on a rug on the second floor of an ostentatious glass and stone mansion overlooking Hargeisa, Mohamed Yusuf Moge, aptly known as “The Fat Mohamed,” lit up another cigarette. In front of him was a pile of leafless khat twigs. His eyes were wide and red-rimmed, a symptom of the leaves that have been chewed. “We bring in 80-tons of khat every day,” he said. “We have many vehicles and two airplanes for transporting our produce. We control the market: We are the De Beers of the khat industry!”

“We” is “571 Allah Amin,” a family business started 15 years ago that has grown to become Somaliland’s biggest khat importer. Moge is 571’s country rep. Although he would not reveal how much the company makes, it is estimated that its revenue is $320,000 a day. Downtown at the company depot, the second of the day’s trucks arrives from the highland farms of neighboring Ethiopia mid-morning. Thursday is the busiest day of the week because, as one man explained, Friday is the Muslim day of rest so everyone can sleep off their khat hangover.

As the khat truck pulled in, barrow boys and vendors crowded round the tailgate to unload the 70 kg sacks of khat wrapped in hay to keep it fresh. Inside are small bundles of shoots that are bought wholesale for $1 and sold retail for $1.50. “Business is good!” shouted Omar Hersi Warfa, 571’s depot manager, over the clamor. “We are working hard and people are chewing!” Khat vendor Shamis Abdullahi Nur, 50, squatting on the ground nearby, agreed. “Business is very good because of our security and peace,” she said as she directed a sack of khat to be loaded into the back of a beat-up station wagon for the drive across town to her stall. Others pushed smaller consignments away in wheelbarrows. “I’ve been selling khat for over 30 years and now is the best time. There was a time of war, a time when I was a refugee, but now you can see I am sitting here eating my mango,” she said with a sticky, happy smile

Street prices are highest in the early afternoon because this is gayiil time when most men chew the khat and shoot the breeze. They can be found sitting on carpets in shady spots close to khat kiosks, with an ashtray, a flask of sweet tea and a jug of water at their feet. Women often sell khat but are not invited to chew. But increasingly men are also chewing in the morning, the evening and throughout the night. The stoned man in a cotton wrap tottering in a daze along a crumbling potholed road with a fistful of green stems is a common sight. Some warn the national habit does psychological damage. In the mental wing of Hargeisa’s main hospital, a staff member walked past the patients, many of whom were chained to a bed or a post or sat staring vacantly on the floor. “The majority of the men here are affected by chewing khat, most are schizophrenic,” said Faisal Ibrahim.

Dr. Yassin Arab Abdi, the hospital’s chief doctor, said: “Chewing is part of it although there are many reasons for mental illness. Before they used to chew at a certain time for a few hours now there are four sessions 24-hours a day. These people are addicts.” Back at the khat mansion, “Fat Mohamed” Moge and his colleagues, however, extolled the virtues of the drug. “Khat plays a great role in our society. If there’s conflict people have to sit down, chew, talk about it,” Moge said. “It is not like a drug which destroys the mind. It is a stimulant. If you chew khat in the right manner it doesn’t affect you.” But, he admitted, “There are some guys who are addicted, this is because they are jobless and have nothing to do.”

Unfortunately this description applies to many Somali men. The last national government — a military dictatorship — collapsed in 1991. Since then the unrecognized state of Somaliland has declared itself independent while Somalia has descended deeper into war and chaos. Isolation on the one hand and war on the other have left the formal economy shattered with many surviving on remittances sent from relatives abroad. Yet it is not unusual for men to spend $5 or $10 a day on khat, making the habit a huge drain on very limited resources. The government’s entire annual budget is less than $50 million, around $14 a head for each of Somaliland’s 3.5 million citizens. Such is the love of khat that to outlaw it would be political suicide. Nevertheless a senior Somaliland politician, Musa Behe of the opposition Kulmiye party, said, “The Somali man works less because he chews khat. We won’t ban it but we need to raise awareness of the harm khat does.”

Profile : Somalia

Somalia has been without an effective central government since
President Siad Barre was overthrown in 1991. The self-proclaimed state
of Somaliland and the region of Puntland run their own affairs.
* Population: 8.7 million (UN, 2007)
* Capital: Mogadishu
* Area: 637,657sq km (246,201 sq miles)
* Major languages: Somali, Arabic, Italian, English
* Major religion: Islam
* Life expectancy: 47 years (men), 49 years (women)
* Monetary unit: 1 Somali shilling = 100 cents
* Main exports: Livestock, bananas, hides, fish
* GNI per capita: n/a

President: Abdullahi Yusuf Ahmed
Abdullahi Yusuf Ahmed, a former leader of the semi-autonomous Somali
region of Puntland, was chosen by Somalia’s interim parliament as
president of the Transitional Federal Government in October 2004. The
election took place in Kenya because the Somali capital was regarded
as being too dangerous. A former army officer and faction leader, Mr
Yusuf led a guerrilla movement in the 1970s aimed at ousting the
Somali dictator Siad Barre. In the 1990s he emerged as the pre-eminent
leader of his native Puntland region; he declared the territory
autonomous in 1998. He is said to have an authoritarian approach to

Somalia’s disintegration is reflected in its media, which is
undeveloped, fragmented and often partisan. Broadcasters and
journalists operate in an atmosphere which is hostile to free
expression, and often dangerous. In spite of this, diverse and more
professional media outlets have emerged in recent years – in
particular, FM radio stations with no explicit factional links. The TV
and press sectors are weak and radio is the dominant medium. There are
around 20 radio stations, but no national, domestic broadcaster. Many
listeners tune to Somali-language media based abroad, in particular
the BBC Somali service. In secessionist Somaliland and Puntland the
authorities maintain a tight hold on broadcasting.




“Due to its unrecognized status, The Republic of Somaliland has no
official contacts with any other nation. The current foreign policy of
Somaliland is to try to secure international recognition as a
sovereign, stable country, so that international aid can be more
readily secured. Somaliland was independent for a 3 day period in
1960, between the end of British colonial rule and its union with the
former Italian colony of Somalia which status then continued until the
unilateral declaration reestablishing its independence in 1991.
Somaliland’s claims to sovereignty rests on its former independent
status. In addition, the fact that the rest of Somalia is in a state
of chaos while Somaliland is under stable government also lends
credence to its claim. The attitude of the United Nations and the
African Union on the preservation of existing national borders has so
far prevented recognition of Somaliland, despite the examples of the
former status of British Somaliland, and the fact that Eritrea
successfully broke away from Ethiopia and became a recognized country.
An African Union fact-finding mission that visited Somaliland in early
2005 recently published a report that recommended favorable
consideration for recognizing Somaliland’s independence.”

“The population of Somaliland is estimated at around 3.5 million. The
average population growth rate is 3.1%. Population density is
estimated at approximately 25 persons per sq. kilometre. Fifty-five
percent of the population is either nomadic or semi-nomadic, while 45%
live in urban centres or rural towns. The average life expectancy for
the male is 50 and for females it is 55.

The Republic of Somaliland known as the Somaliland Protectorate under
the British rule from 1884 until June, 26th 1960 when Somaliland got
its independence from Britain. On July 1st 1960 it joined the former
Italian Somalia to form the Somali Republic. The union did not work
according to the aspirations of the people, and the strain led to a
civil war from 1980s onwards and eventually to the collapse of the
Somali Republic. After the collapse of the Somali Republic, the people
of Somaliland held a congress in which it was decided to withdraw from
the Union with Somalia and to reinstate Somaliland’s sovereignty.

The country has a republican form of government. The legislative
assembly is composed of two chambers – an elected elder’s chamber, and
a house of representatives. An elected President and an elected Vice-
president head the government. The President nominates the cabinet
which is approved by the legislature. There is an independent

One of the provisions of the National Constitution of the Republic of
Somaliland is the establishment of a Bank to carry out Central Banking
functions. The bank of Somaliland (Baanka Somaliland) was thus
inaugurated in 1994 together with appropriate Banking Laws, to insure
that Banking regulations are carried out to the letter. Board of
Directors has accordingly been appointed together with a Governor of
the Bank, Vice-governor, and a Director General. In addition, the Bank
of Somaliland besides its functions as Central Bank, runs the
activities of Commercial sector.

The Bank’s main objectives are detailed in Article 3 of the
Constitutive Law of Somaliland Bank as follows: Fostering Monetary
stability maintaining the internal and external values of the
Somaliland Currency and promoting credit and exchange conditions
conductive to the balanced growth of the economy of the Republic and
within the limits of its powers, it shall contribute to the financial
and economic policies of the state.”








“Our foreign service hang-ups about recognition are getting in the way
of us… to build adequately on the efforts of the Government of
Somaliland to create a modern, democratic state. In effect, we are
putting the interests of the warmongers in the south ahead of those of
the peace-builders in the north.”

Democracy comes of age in Somaliland
BY Stefan Simanowitz / Contemporary Review / Dec 2005

The rising sun reveals two long lines of people snaking towards a
small concrete polling station in Gabiley, a town in rural Somaliland.
Many of them have walked considerable distances and queued all night
in order to vote in these, the first parliamentary elections held in
the territory for nearly forty years. But although voters across the
country have turned out in force, and although the election is deemed
free and fair by international observers, the result will not be
officially recognised beyond its territorial borders. Indeed, in the
eyes of the international community, Somaliland is a country that does
not exist.

Since its unilateral proclamation of independence in 1991, Somaliland,
an area the size of England and Wales in the north of Somalia, has
struggled to gain international recognition. Whilst neighbouring
Somalia has all but ceased to function as an administrative, judicial
and territorial entity, Somaliland has taken important steps towards
creating a stable working democracy in one of the poorest and most
dangerous regions of the world. A new constitution was adopted in 2001
following a referendum. In 2002 local elections passed off peacefully,
and in 2003 free and fair presidential elections took place. Having
thus laid the foundations of a functioning democracy, the
parliamentary elections of 29th September 2005 were seen as the final
step in the democratisation process and an important milestone in the
transition from a traditional clan-based, single-party-dominated
political structure to a stable multi-party democracy. Many
Somalilanders also regarded them as the final prerequisite for
international recognition.

However, despite the fact that Somaliland may fulfil the requirements
necessary for recognition as a sovereign state, the question of
recognition will be determined by a number of external geo-political
factors. These factors include the African Union’s position on the
sanctity of colonial borders and Somaliland’s role in the so-called
‘war on terror’.

Somaliland was a British Protectorate for over eighty years during the
colonial period. In 1960, it gained independence but formed a hasty
union with the former Italian Somaliland to create the Somali
Republic. In 1969 Mohamed Siad Barre’s military coup brought Somalia’s
flirtation with democracy to an end and planted the seeds of a
secessionist struggle in Somaliland. This struggle culminated in a
brutal three-year civil war in which 50,000 people were killed and
half a million refugees fled. Between 1988 and 1991, Barre’s forces
massacred civilians, laid over two million mines and reduced cities to

In 1991, the overthrow of Barre’s regime plunged Somalia into a state
of anarchy from which it is yet to emerge. Somaliland, however, was
quick to declare independence and, over the years, it has managed to
establish itself as a model of stability, good governance and economic
discipline. Rival militias have been demobilised, mines have been
cleared and refugees have been repatriated. The war-ravaged
infrastructure has been rebuilt and Somaliland now boasts modern
airports, hospitals, ports, power plants and universities. There is a
free press and the central bank manages an official currency with
relatively stable exchange rates. An unarmed police force and
independent judiciary maintain order.

What is most remarkable about this progress is that it has been
achieved with virtually no external help. Whilst economic development
has been heavily supported by Somalilanders in the Diaspora, lack of
international recognition has meant that Somaliland does not qualify
for bilateral aid or support from international financial
institutions. This international isolation has not, however, resulted
in isolationism. Lack of access to external aid has forced this
country of 3.5-million people to become more self-reliant than many
other African states. This self-reliance is reflected in what is
perhaps the most significant of Somaliland’s achievements: its system
of government.

Rather than having a Western democratic model of governance imposed
on them from outside, Somaliland has managed to fuse Western-style
institutions of government with its own traditional forms of social
and political organisation. Its bi-cameral parliament reflects this
fusion of traditional and modern, with the Senate consisting of
traditional elders, and the House of Representatives consisting of
elected representatives.

However, with its history of ‘tribalism’ and internecine fighting, the
key challenge for Somaliland’s new parliament is to try and replace
clan-based politics with party politics. For its first twelve years,
Somaliland had no political parties but instead followed more
traditional clan-based forms of political organisation. Political
parties were introduced during the presidential elections and it was
hoped that the recent parliamentary elections would help to usher in a
representative system without allowing representation to be overtly
clan-based. Clearly, if clan loyalties were to take precedence over
party loyalties, parliament would be seriously weakened. The
traditional clan-based political system had resulted in an under-
representation of some clans and it was hoped that having just three
non-clan-based parties would reduce the extent to which clan
allegiance affected the selection of candidates and the way in which
people voted. A limited number of political parties would force
alliances between clans to develop thereby increasing integration and

In the traditional clan system it is the male elders who make
decisions, and during the nomination process, many candidates were
indeed selected by elders along clan lines. The male-dominated nature
of the selection process was reflected in the fact that only seven of
the 246 candidates were female. There was also evidence that political
parties often chose candidates based on their perceived popularity and
support base. Whilst the absence of voter registration makes it hard
to analyse voter patterns, it would seem from the results that there
is some evidence that regional voting patterns reflect clan
preferences. There is also evidence however, that alliances were
sought between subgroups of different major clans across regions under
the different party umbrellas. This would indicate that, although
tribalism inevitably played some part in the election, it has been

The election itself was very tightly fought. At one stage it seemed
inevitable that the president’s Democratic United National Party
(UDUB) would lose to the Solidarity Party (Kulmiye). However, UDUB was
able to use its powerbase as the governing party to maintain its
percentage of the popular vote, while Kulmiye lost considerable ground
to the Justice and Welfare Party (UCID). The close nature of the
result means that parliament will not be dominated by clan or party,
but will require much greater consensus-building coalitions. It will
nevertheless be interesting to see how party loyalties will be
negotiated against clan interests in the new parliament.

Election Day
Lack of international recognition meant that Somaliland was not able
to access forms of governance support commonly received by post-
conflict areas such as Iraq and Afghanistan. Nevertheless, the
elections were well organised and successfully conducted with over
800,000 voters turning out to the country’s 985 polling stations to
elect 82 members of parliament. This represents a turnout of over 90
per cent.

Like all elections in infant democracies there were some inevitable
teething problems of a practical, administrative and logistical
nature. The absence of a census and voter register meant that a
decision was made to allow voters to vote in any of Somaliland’s six
regions: the only requirements for voting being that voters were 16
years of age and spoke Somali. Inevitably, this led to widespread
attempts at underage and multiple voting. Due to the tradition of
women decorating their hands with henna it was decided that invisible
ink (and black lamps) should be used instead of indelible ink. This
generally proved an effective barrier to multiple voting; however
punishment for those caught varied. In some polling stations those
attempting to vote more than once were merely turned away, often only
to rejoin the queues. In other polling stations people had their shoes
and belts taken away and were made to sit outside the polling station
awaiting detention by the police. Whilst the fact that 30 per cent of
the population are nomadic makes census taking and voter registration
more difficult, there is confidence that both will be in place before
the local elections in 2007.

With illiteracy rates as high as 80 per cent and with many people
having had little or no experience of voting, substantial voter
education was attempted prior to the elections. In addition, ballot
papers had symbols beside the name of each candidate to make it easier
for those that could not read. On the day however, many voters, not
even knowing which way up to hold the ballot paper, chose to announce
their choice to the local chairperson, who marked the paper for them.
Whilst this compromised the secrecy of the voting process, it did not
seem to bother voters who were generally eager to talk about whom they
had voted for.

Shadow of Terror
The shadow that hung over the elections and continues to darken
Somaliland’s future is that cast by the threat of terrorism. On 25th
September the atmosphere in Hargeisa, Somaliland’s impoverished but
relaxed capital, changed. With the elections only days away, several
suspected Islamic militants were arrested following a shoot-out with
police. The following day a cache of arms, including heavy anti-tank
weapons, was discovered in the city. According to the Interior
Minister, one of the men arrested was a senior al-Qaeda operative
allegedly in the region to organise attacks on local leaders and
foreigners. This incident heightened fears of violence especially as
it coincided with the arrival of 76 international election observers
including potentially high-profile targets such as parliamentarians
from South Africa and Europe as well as a former US Ambassador. It
also provided a stark reminder of Somaliland’s precarious position in
the global war on terror.

Whilst Somaliland has managed to avoid the violent lawlessness and
extremism of Somalia, the discovery of Islamic militants in Hargeisa
does not come as a great surprise. Over the last two years, extremists
have murdered four foreign aid workers in Somaliland. Last month four
men were sentenced to death for murdering a British couple in 2003 in
a school they had built. Although the predominantly Sufi form of Islam
practised in Somaliland does not lend itself to extremism, concerns
have been raised by the presence of an increasing number of radical
clerics as well as the porous nature of the border with Somalia.
Mogadishu has become something of a haven for al-Qaeda-affiliated
fighters and Somalia was used as a transit point for the terrorists
who carried out the 1998 attacks on the US embassies in Kenya and
Tanzania, as well as the 2002 suicide bombing in Mombasa.

Whilst the threat of terrorism is clearly a problem for Somaliland, it
also presents an opportunity. Ironically, the discovery of al-Qaeda
operatives in the territory might do more to make Western governments
take notice of Somaliland than the free and fair conduct of their
elections. Somaliland is strategically positioned on the Gulf of Aden
and is also home to what could be an important navel base in Berbera.
Currently the only location in Africa where the US has a military base
is neighbouring Djibouti, and Somaliland is seen by the Americans as a
potentially important ally against the spread of extremism.

Somaliland is conscious that too close a relationship with the
Americans might not be popular with its population, but it also
recognises the advantages that collaboration with the US could bring
in terms of finance, security and long-term stability. By promoting
itself as a non-threatening strategic partner in the ‘war on terror’,
Somaliland could fast-track its entry into the international

Recognition and beyond
Even if the US were to support Somaliland’s right to self-
determination, it is unlikely that they or any other country will
recognise Somaliland without the approval of the Organisation of
African Unity. One of the OAU’s central principles is that African
colonial borders should not be redrawn. This is based on a well-
grounded fear that recognition of ‘separatist’ states could cause the
continent to descend into chaos. However, there is a strong argument
that by breaking a union that it had entered into as an independent
state, Somaliland would be reverting to, rather than redrawing its
colonial borders. It is also worth noting that despite its reluctance
to acknowledge secessionist states, the OAU has recently recognised
the newly formed nations of Eritrea and Western Sahara. It is also
important to note that thirty new countries have been internationally
recognised since 1990, although most of these emerged from the
dissolution of the USSR and Yugoslavia.

Despite OAU intransigence, Somalilanders remain optimistic about the
possibility of recognition and the benefits it will bring. As well as
giving Somaliland access to bilateral aid, recognition would finally
give access to the mining and oil companies eager to exploit
Somaliland’s proven natural resources. Large-scale extraction of oil,
coal, gemstones and minerals could transform this country where 43 per
cent of the population are living in extreme poverty. Whilst
international recognition is not a panacea that will lift Somaliland
out of poverty or eradicate its problems with health, education, food
insecurity, water supply, and HIV/AIDS, it would undoubtedly speed

Although there is still a distance to travel, Somaliland’s
accomplishments are impressive. It has created effective institutions
of state and attained a level of political maturity well beyond its
years. Somaliland provides a useful model of democracy that offers
lessons to us all. It reminds us that democracy is not a static,
prescriptive system but a living idea that is constantly adapting and
taking new forms. In Hargeisa, reminders of how far this small nation
has come are all around. When the rains come, a mass grave beside the
river is exposed. Bones protrude from the red earth, some still tied
at the wrist. Beside the airport road, a rusting Russian tank is
plastered with election posters: a reminder of Somaliland’s war-
ravaged past and a symbol of hope for a democratic future.

{Stefan Simanowitz is a writer and researcher. He was part of the
International Election Observer mission to Somaliland in September


“Following the pattern of the Booroma National Charter, which
formalized the birth of Somaliland during 1993, a new entity – the
Puntland State of Somalia – was established in July 1998 out of a long
Constitutional process that lasted more than two months. The
institutional recognition of the role played by the traditional
leadership in Puntland in the seven-year period of peaceful self-
government in a stateless situation, has come only at the end of this
process. However, the mediation role of the elders has not been so
successful in other regions of Somalia for several reasons. Generally
speaking, outside the Majeerteen context, Somali society lacks a
stable hierarchy of paramount chiefs, and it follows that mediation
can achieve only a local dimension. Nevertheless, in the northwestern
regions (Somaliland) a regionalist feeling has widely spread in the
last thirty years. In this part of Somalia, after the collapse of the
State, the elders have collectively expressed this feeling better than
the SNM, frequently paralyzed by leadership competition.

The local concept of State sovereignty does not naturally match with
the rigid concept of State territory. Instead, it should expand in the
‘official’ territory of other countries in a flexible way and wherever
members of its community are found. This is exactly one of the options
offered to end the conflict and to reconstruct Somalia by the LSE
consultant to the European Union during 1995. Today, is effectively
put into effect in all Somali regions without respect of internal and
external borders. From another point of view, it is a slide back to a
legal status of the community group, confirmed by a citizenship which
corresponds to kinship. These are new elements of extreme importance
to those who are directly or indirectly committed to developing
alternative solutions in the African context, split up between State
sovereignty and ethnic allegiance. What is advancing in Somalia is a
more flexible and a more restricted idea of what the State is and
means in Africa (and elsewhere).”


Badhan, Somaliland, August 18, 2007 – The semi-autonomous regional
state of Puntland (Majeerteenya) declared this week that the recent
formation of `Makhir state’ by eastern Sanag residents is `a load of
hoo ha and a dream’. In a press statement, The Puntland Minister of
Information, Mr Abdirahman Banga in recent press statement strongly
condemned last week’s declaration of a new state in eastern Sanag. Mr
Banga said that the people behind the declaration of Makhir State are
dreaming because it doesn’t exist.

The minister stressed that this area is 100% in the hands and control
of Puntland, though the area recently saw bloody clashes between
forces loyal to Puntland and Somaliland. Soon after the minister’s
statement, the self-appointed President of `Makhir’ state, Mr Jibril
Ali Salad, who used to be a Somaliland parliamentarian, spoke to the
local media in response to the minister’s statements. Mr Salad said,
“Puntland has no business to talk about our new state, and they are
powerless to stop us, and do not have the ability to even come here”.

“Makhir state is acknowledged by its people as a fully-fledged state
independent of Puntland and Somaliland,” added Jibril Ali Salad.
Makhir state was established last week in the Badhan district of
eastern Sanag and its president is Jibril Ali Salad, who up to early
this year was a member of Somaliland’s parliament House of
Representatives. Somaliland’s government has not made any comment
regarding this newly-established enclave inside its border.

http://www.dhahar.com/article.php?articleid=3583 [PHOTOS]
Environmental Protection Corps in Maakhir State of Somalia

The roots of the destructive nature of the charcoal trade in Sanaag
region was due to lack of rules and regulations stemmed from the
collapse of the central Somali Government. This finally came to an end
since the declaration of Maakhir State. The Environmental Protection
Corps (EPC) of Maakhir State is growing in numbers and contributing to
a larger slowdown of charcoal trade and illegal gaming of wild

The authority in Maakhir State has banned charcoal trade because of
the environmental destruction and desertification that it does to the
fragile Somali environment. Traders drastically cut entire swaths of
forests, and as a result the trade was flourishing due to the high
demand for charcoal in the Arab Gulf States and other countries in
Asia. These are the reasons why the Environment Protection Corps are
confronting the charcoal profiteers and their militia that have been
menacing the Gebi Valley and Sool Plateau.

It is important to highlight that the newly established Maakhir
Authority did not receive any international aid for this effort. This
largely local effort has made an immediate impact on preserving and
protecting the environment in the Gebi Valley and Sool Plateau. As
indicated by the President of Maakhir Jibril Salad in last Thursday’s
press release; ” Maakhir Administration used traditional conflict
resolution methods to stop the traders and their militia, however
these militia are heavily equipped with automatic firearms who would
not cooperate, but the most effective and successful method for
limiting the harmful distress of our environment was creating and
using the EPC forces.”

The EPC in Maakhir apprehended more than 80 criminals over the past 4
months and jailed them in the district of Dhahar. The administration
constructed a new program of materials, structures, and training to
educate militia while they are held in jail. Jama Dahir Kodah, one of
the program directors of the EPC, told the media that their next
sustainable occurring project is to implement a plantation program in
the region.

The EPC is divided into three forces in the following areas of Maakhir
State and the main base is in city of Dhahar, the capital city of
Boharo region, the new region in Sanaag that Maakhir created:
1) The first battalion is responsible for the protection in vast areas
which stretches from Baragaha-Qol in Southern Sanaag to Eilbuh in
Central Sanaag.
2) The Second Battalion is responsible for an area which stretches
from Dhahar to Western Part of Bari region of Somalia near Boosaaso.
3) The Third and most important battalion have bases along the highway
that links Maakhir to Puntland and does stop and search in suspected




African Union replaces dictators’ club
BY Paul Reynolds / 8 July, 2002

A new wind of change is blowing through Africa. The move from OAU
(Organisation of African Unity) to AU (African Union) is supposed to
be more than the dropping of one letter. It is supposed to represent a
shift from a “dictators’ club” to a people-based grouping. Everything
of course depends on implementation. And given the sad record – and
current problems, such as AIDS – there must be doubts about how much
can be achieved. AIDS alone is reducing life in some countries,
especially in southern Africa, to nothing more than an existence. Life
expectancies are being cut to levels unknown since the 19th Century.
The OAU was set up to develop Africa after colonialism – and to help
liberate Southern Africa from white rule.

The African Union reflects the developments in many parts of Africa in
recent years, as democracy has started to take hold and a new emphasis
has emerged which concentrates less on the battles of the past and
more on the need to improve the lives of ordinary people. The key
shift is that the principle of state sovereignty has been abandoned.

It was the central belief of the OAU that nobody should interfere in
anyone else’s business. That was especially convenient for dictators.
Now the AU has as one of its aims the promotion of “democratic
principles and institutions, popular participation and good
governance.” It will have the right to initiate a so-called “peer
review” of a country’s record, intervene if there is genocide and war
crimes and impose sanctions. Everything of course depends on

High hopes
Nobody is mourning the end of the OAU. Yet when it was founded in
Addis Ababa in 1963, Africa was full of pride and hope. Its leaders
were giants of their day. Africa was coming out of colonial rule and
many had led their nations to independence. It was a time to be bold.
One of the key figures was Dr Kwame Nkrumah, President of Ghana which
became independent (and dropped its colonial name the Gold Coast) in
1957. He believed that the African continent should be “united.” But
defining that unity was the problem. The OAU solved the problem by
praising unity in its language, but avoiding it in its practice. The
differences across the continent were just too many and the principle
which the OAU adopted, of non-interference and non-intervention,
simply meant that member states turned a blind eye to their

When one of the founding members, Emperor Haile Selassie of Ethiopia
gave a speech to the OAU, he was praised in its formal thanks for his
“wisdom.” When the man who overthrew him in 1974 (and later murdered
him and buried him under a latrine), Colonel Mengistu Haile Mariam,
subsequently welcomed delegates back to Addis Ababa, he was thanked
for his “warm and generous hospitality.” Colonel Mengistu went on to
declare his “red terror” in which tens of thousands of opponents were
slaughtered by his neighbourhood committees. It was one of the
tragedies of the OAU that all that happened in the city where it was
founded. There were coups all over the place – including Nigeria
(which had been the jewel in the British colonial crown in Africa and
the hope for parliamentary democracy), Libya (which brought Colonel
Gaddafi to power) and Uganda (in which Idi Amin rose to fame). Kwame
Nkrumah was overthrown in a coup himself. It symbolised the problems
Africa was having in developing stable government. The OAU could say
little and did nothing.

Even after the recent elections in Zimbabwe, it was still bringing
forth its usual kind of statement when it objected to possible
American sanctions: “We are dismayed by this report, which amounts to
interference in the internal affairs of a member state.” It was more
successful over the years in trying to mediate in conflicts between
states. It helped mediate a border dispute between Algeria and Morocco
and between Somalia, Ethiopia and Kenya. One of the ironies was that
the OAU insisted on preserving the borders drawn by the colonial
rulers which often reflected spheres of influence rather than natural
divisions. The view at the time was also that Africa needed time to
settle down. And after all, it was achieving good economic growth of
about 5% a year in the 1960s. And the crisis in Southern Africa, where
white rule was being confronted, was regarded as more of a priority
for the OAU.

Faith lost
But Africa began to fail. Economic growth gave way to debt repayments;
the pioneering efforts to improve public health were swamped by AIDS,
wars were unending and famine stalked the land. The people lost faith
in governments and governments lost interest in the people. According
to Bernard Otabil of West Africa magazine: “The people did not feel
that the OAU satisfied their aspirations. It did not involve people on
the ground. It was top heavy.” The Secretary General of the OAU, Amara
Essy, who has helped to bring the new African Union about, was
scathing about the old grouping: “The OAU is the most difficult
organisation I have ever seen”, he told New African magazine. Mr
Otabil believes that the African Union is on the right course because
it is less grandiose and hopes to be more community based. It is also
offering an economic dimension and seeks African integration into the
world economy. One of the main tasks for the AU will be to push
forward with Nepad, the New Partnership for Africa’s Development. This
offers a bargain with the West – you give us aid and we will put our
house in order. It is a long way from 1963.

African Union supports Somali split
BY Jean-Jacques Cornish / Feb 10 2006

Hopes of recognition for Somaliland’s 15-year independence have been
raised by the favourable report of an African Union mission that
visited the territory last year. The report, a copy of which the Mail
& Guardian has obtained, comes at a time when signs of a new
flexibility in African thinking on boundary issues are emerging. It
suggests that official African aid be tapped by this country of
3,5million people that was effectively destroyed by the Somali
dictator Siad Barre. With the fall of Barre in 1991, the former
British colony broke its union with southern neighbour, the former
Italian colony of Somalia. Since Barre’s departure, Somalia has been
without an effective government.

But Somaliland has pulled itself up by its bootstraps. It has had a
referendum to adopt a democratic Constitution and has organised
presidential and parliamentary elections. Independent international
observers have endorsed all of these. The Organisation of African
Unity refused to recognise Somaliland’s independence, citing the maxim
that there would be chaos if colonial boundaries were not observed in
post-independence Africa.

Unions between Senegal and Gambia, and Egypt and Sudan, among
others, have been broken without affecting the recognition of these
countries. The AU mission accepts this, stating in its report that
Somaliland’s “case should not be linked to the notion of ‘opening a
Pandora’s box’. As such, the AU should find a special method for
dealing with this outstanding case. “The lack of recognition ties the
hands of the authorities and people of Somaliland, as they cannot
effectively and sustainably transact with the outside to pursue the
reconstruction and development goals.

“Furthermore, given the acute humanitarian situation prevailing in
Somaliland, the AU should mobilise financial resources to help
alleviate the plight of the affected communities, especially those
catering for the internally displaced persons and the returnees.
Finally, given also the high potential for conflict between Mogadishu
and Hargeisa, the AU should take steps to discuss critical issues in
the relations between the two towns. That initiative should be taken
at the earliest possible opportunity.”

Iqbal Jhazbhay, an Africa analyst at the University of South Africa,
says the report illustrates a new mood in the AU, an organisation
Somaliland has officially applied to join. “The AU-sponsored peace
deal in Sudan allows for a referendum, five years from now, on whether
the south wants to go it alone. This could not have happened if it
were business as usual. The AU now goes for results, and takes account
of subjective facts and practical realities,” says Jhazbhay. “The AU
clearly recognises the stability created in Somaliland and the
infrastructural development. It is determined to bring peace to the
horn. It is looking at post-conflict reconstruction and it has the
capacity to handle these issues.”



by Julieta Aranda and Anton Vidokle

Time banking is not barter. Barter economies have been in practice throughout history, but the idea of using time as a unit of exchange only appeared shortly after the Industrial Revolution. The origins of time-based currency can be traced both to the American anarchist Josiah Warren, who ran the Cincinnati Time Store from 1827 until 1830, and to the British industrialist and philanthropist Robert Owen, who founded the utopian “New Harmony” community. While both systems are based on the principles of mutualism and the labor theory of value, Josiah Warren’s currency was explicitly pegged to time as a measure of specific goods or labor. For example, 3 hours of carpenter’s work would be considered equivalent to 3-12 pounds of corn. Meanwhile, Robert Owen’s currency simply bore an inscription referring to a number of hours, which presumably could be exchanged for however many pounds of corn a farmer would deem adequate or labor of any kind.

There have been other examples of alternative economies in recent history, most notably the “Notgeld” emergency money that appeared in Germany after the hyperinflation of 1923. Notgeld was unofficial “money” issued by cities, boroughs, and even private companies to compensate for a shortage of official coins and bills. As long as Notgeld was accepted, no harm was done, as it was understood to be a valid certificate of debt. Notgeld was actually more stable than real money, since its denomination was often pegged to material goods, such as gold, corn, meat, and so forth. The currency itself was purposefully made to be very pretty to encourage people to save the bills. This way, the debt would never have to be paid. Notgeld was printed on all kinds of material—leather, fabric, porcelain, silk, and tin foil. Since it was not legal tender, the only people who dealt in it were those who wanted to. As a result, it had a stabilizing effect on the official currency, which was still in circulation.

The first successful contemporary time bank was started in 1991 by Paul Glover in Ithaca, New York. Following his idea, people began to exchange time, which led to the creation of a time-based currency—the “Ithaca Hours,” which even local businesses began to accept, and which still flourishes. Time banking and service exchange have since developed into a full-fledged movement, usually centered around local communities.

Time/Bank at e-flux is modeled on existing time banks. Every Time/Bank transaction will allow individuals to request, offer, and pay for services in “Hour Notes.” When a task is performed, the credit hours earned may be saved and used at a later date, given to another person, or contributed towards developing larger communal projects. For example, if you happen to be in Beijing or Hamburg and need someone to help you shop for materials or translate a press release, you would be able to draw on resources from Time/Bank without exchanging any money.

Through Time/Bank, we hope to create an immaterial currency and a parallel micro-economy for the cultural community, one that is not geographically bound, and that will create a sense of worth for many of the exchanges that already take place within our field—particularly those that do not produce commodities and often escape the structures that validate only certain forms of exchange as significant or profitable.

timebank network schematic
http://www.inter10.net/?p=121 (Mihos’ timebank network map)




‘Hours’ type: First modeled in Ithaca NY in 1991, Hours currency is based on issuing paper currency to a core group of members who agree to accept it. It is usually roughly pegged to the national money (1 Hour = $10), but cannot usually be redeemed for it. The largest and most successful system is in Ithaca NY.

Time Bank: Time Banks are like LETS systems but denominate the currency in hours of service rather than national money. Everyone in the system values their time equally, and therefore the system operates outside the sphere of the IRS. Edgar Cahn is the founder of the Time Banks movement in the USA (www.timebanks.org). However, the idea of trading time dates back for many hundreds of years in some places (most notably Bali).

“A central database is kept with everyone’s “account” information. When services are performed, the parties log it on the website and the respective accounts automatically get credited/debited. The credits (known simply as Hours) exist only in this electronic form. We may print notes someday, but strictly speaking, those aren’t necessary. (75% of all U.S. dollars exist solely in electronic form, by the way.) We need not worry about squaring everyone’s account to zero on a day-to-day basis. The system can continue indefinitely, with people vacillating from plus to minus, staying put for a while, or whatever. Hopefully no one will keep a large negative balance for a long time. If that happens, other participants can suggest ways of earning hours to that person. If that doesn’t work, people can cease performing services for them. No one is ever under any obligation to trade, for any reason. Bottom line, if something isn’t worth the price, i.e. if so and so doing 2 hours of x for you isn’t worth 2 hours of your time, then don’t have them do it. Besides mutual agreement, there are really no hard and fast rules. The point of hOURS is not to constrain anyone or be a burden in any way, but to free up possibilities and potential. The website also serves as a sort of ‘yellow pages’ in which everyone can list the goods and services they have to offer, and those which they need, which can be just about anything.

Can goods be bought and sold under the hOURS system too? Sure, just remember an Hour of money represents an hour of time. Use that to determine what a desirable price would be. If an item can be readily reconceived of as a service (the service of providing that item) use that to determine the price. Businesses can get involved as well. So why isn’t the ‘h’ capitalized you may be wondering: Because both “hours” and “ours” are good names for the program. The first is obvious, but “OURS” captures some important features of it as well. It’s literally ours, belonging to the people involved. No bank or corporation has the ability to pull funding. No absentee owners siphon off rents and dividends. A community that uses hOURS is strengthened by the increased interpersonal contacts and becomes wealthier through two mechanisms mentioned above. We need not suffer any problems that come from the so called credit crunch, nor any problems stemming from the nature of that credit, such as its control by elites.


General principles
1. Give hOURS the benefit of presumption.
hOURS is better than the main economy in the sense of being saner and having a better social impact. In terms of scale and variety of opportunity of course, it still falls way short in comparison. So people obviously still need to use the dollar economy. But let that be your rationale – that you need to, even though it will constitute the lion’s share of your economic life. The point is, don’t let force of habit or force of mindset channel you into using the dominant system. Use hOURS whenever possible.

2. The actual Hours are created by the participants.
The units of currency, Hours, do not exist in a paper form, nor are they doled out by any sort of central issuing authority. They’re created simply by two or more participants getting together and performing services. This is a democratic form of money. You can think of the system as a sort of accountant/observer. For each Hour credited to someone, another is debited. The total amount of Hours (adding up everyone’s balance) is always zero. So if you think about it, someone, in fact usually about half the participants, will be in the red. There’s nothing wrong with that, that’s how it works. If people weren’t willing to have negative balances we wouldn’t have hOURS. So please don’t have any special aversion to that. Don’t bring “dollar-think” into the system. Dollar-debt and Hours-debt are not very comparable. A negative hOURS balance isn’t even a debt at all. It just means you haven’t yet accepted back Hours that you issued. You need not earn Hours first in order to spend them. Leaving the system in the red would be very uncool, but maintaining a negative balance, even for a long time, is fine. No interest is charged.

Each Hour, the unit of currency, represents an hour of time. The price of any service is the time spent performing the service.

3. Reckon time spent from the perspective of the provider(s).
This is mentioned for the case of transactions with more than two people, where it’s not immediately obvious. But it is obvious if you think about it for a minute. Suppose someone does 6 hours of plumbing work for two hOURS participants who live together. The total transaction amount is 6. The provider gets credited 6 and each recipient debited 3. It’s not that each recipient gets debited 6 and the provider credited 12. Imagine then the provider discovered a third participant living there, could they insist on being paid 18? No, why should that matter? It makes more sense to split it three ways, each being debited 2, much as you probably would, had you hired a plumber with dollars. Similarly if two people are performing a service together, they should both be paid in full. The recipient is getting more in such a situation. e.g. the plumbing is really difficult – it takes two people an hour to do. They each get credited a full Hour, and the recipient(s) debited two.

4. Count commuting time.
If someone has to travel to come provide you a service, that’s part of their effort. That might normally be disregarded in the mainstream economy, but that doesn’t mean it’s not real. The economy sweeps a lot of stuff under the rug. That’s the main reason we have environmental destruction; the costs of it don’t show up on anyone’s balance sheet. Let’s strive for an economy that brings things into the light of day. Ivan Illich came up with the concept of shadow work, which is uncompensated labor at the service of the market economy. Examples would be commuting and shopping. They do nothing to promote subsistence and independence. But they are demanded by the market system. Their cost is borne silently by those who perform them. hOURS has a “small is beautiful” streak. It’s good to buy local in order to avoid various transportation costs. When you can choose between providers, have a tendency to go with whomever’s closer. Bringing transporatation costs into the light of day can help us come up with other ways to minimize them, say by combining trips for example. An hOURS transaction with a long commute could be scheduled for when the provider would be making the trip anyway, for other reasons. Then the cost can be split. For simple services, (that most anyone can do) like plant sitting for example, you may wish to contact people who live nearby, even if they don’t specifically offer it, rather than someone who lives further away and does offer it.

5. “Returns”/Complaints
So far there has been a strong spirit of generosity in hOURS. Between that and open communication, most everything should be able to be resolved between the parties involved. In troublesome cases, appeal to Fred for help/ideas/mediation.

6. Consent is the primary value.
As long as all parties to a transaction are happy with the outcome, everything is fine. Other concerns are secondary. Were someone to get lost for 2 hours on their way to provide a service for someone else, it’s fine if they don’t want to include that in the transaction amount. No one should say “Yeah, but we’re supposed to count commuting time.” People should do what they want. Talk it out.

7. Share your knowledge and skills.
If in the process of performing a service you can teach the recipient to do it themselves so they need not call on you again, that would be an admirable thing. hOURS isn’t a perfect economic system, just a big improvement, and a way out. One weakness could be a tendency to be “territorial”. But we can decide not to be like that.

8. No ‘faceless’ organizational members
hOURS exists in order to forge a better economy. While it’s hardly our most important goal, we can take a bite out of the alienation caused by faceless corporations. Groups and businesses are more than welcome to have an account, but they need to designate someone to be “in charge” of it and serve as a contact person. Another reason for this is that hOURS will not be caught in the middle of any group that splits up and fights over the Hours. These rules even apply to joint accounts for married couples. Note that you could have separate accounts without inhibiting any kind of sharing you may wish to do. Hours may be given as a gift. So, someone could work off their husband’s debt, for example, by earning Hours and gifting them over to him.

9. Above all, ask questions.

Exact Change (Re: It’s (Not) a Living,” Meredith Broussard, March 27, 2003)
“The surprise of seeing the local, alternative currency program I started get mentioned in your last issue was definitely of the pleasant variety. Nonetheless, I felt I should write in to clarify two things. I’m not trying to start the system anymore. (H)OURS has been up and running for nearly two years now. And, like all local currencies around the world, (H)OURS is perfectly legal. It’s not counterfeiting as we don’t issue dollars. It’s illegal to make your own coins, and if you peg your currency to the dollar, you can’t print notes with a value of less than $1. We don’t do either.” –Fred Kittelmann, via e-mail

http://www.foreignexchangeportal.com/articles/issue13.html / March 9, 2004
“Fred Kittelmann has a vision to provide Philadelphia with an alternative system of trade that is socially, environmentally, and economically progressive. Last year, he started a local currency called hOURS, which stands for “helluva Organized United Reciprocation System.” Since then, over 100 people have joined, sharing their skills in a variety of areas including catering, psychotherapy, tutoring, babysitting, writing, gardening, and office assistance. Similar to Ithaca Hours, hOURS is an alternative local currency that people can use to exchange goods and services with other participants. hOURS is a “mutual credit” trading system that builds community and encourages people to share resources locally. But unlike other local currencies, hOURS is egalitarian in nature; all people’s work is valued the same – by the time spent working. hOURS is free and open to everyone.

Here’s how it works: individuals register with hOURS and list the goods or services they would like to offer, as well as goods or services that they need. Participants with common offerings/needs exchange the goods or services, paying with hOURS rather than US Currency. The provider’s account is credited with the number of actual hours they spent providing services, which they can then use to obtain services from another hOURS participant. hOURS can also be spent before they are earned, which stimulates use of the system. CASHours are used as a medium of exchange for physical goods, since they can not be directly translated into a time value. Nonprofit organizations can also participate in hOURS. Participants can donate their hOURS to local nonprofit organizations, which can use hOURS to obtain goods or services to further their missions.”

Fred Kittelmann
email : H_OURS [at] yahoo [dot] com

Why I created hOURS / by Fred Kittelmann

“The point of hOURS is to be an alternative economic system, in opposition to the competitive, monetized, capitalist, “free market” we’ve already got. hOURS is by no means intended as an ideal form of economic relations, but rather as a step along the way to unraveling all the nastiness. hOURS is of course also quite puny in scope compared to the dominant system, but others are doing similar things, and there is incredible room and potential for growth. We have to start somewhere and this is a good direction in which to proceed.

One more caveat, before I get comfortable on the soapbox. I’m amazed at how universal the appeal of hOURS has been. I’ve gotten near unanimous enthusiasm from a wide variety of folks. I don’t want to risk narrowing that appeal by emphasizing my own personal motivations, which are likely to be different from those of many of you. I would ask that you judge hOURS based on what it is: a system of reciprocation where people… Don’t judge it based on what I, think it is. In the long run that doesn’t matter.

The main means by which hOURS challenges the dominant system is by providing the opportunity to boycott the almighty dollar, indeed money in general. To replace dollars with another unit of currency, of our own creation, as other LETS’s do, would be to seriously weaken its potential. Presently, most people value money, a fictional construct, over real-life concerns such as working conditions, interpersonal relations and the environment. In conflicts between the above, people generally make decisions based on the “bottom line”. hOURS devalues money, making it less of a necessity in people’s lives. Thus it begins to tip the balance toward the “real” concerns, improving people’s quality of life.

You might ask, isn’t money good for people though? It depends on what’s meant by “people”. To think money can bring an improved standard of living is a narrow viewpoint. It helps whoever gets it, but only at the expense of others: either whoever gave it up, or in the case of more having been printed, everyone’s money becomes a little less valuable. Economic growth in general worsens the standard of living of the human race as a whole through effects like increased monetization, increased dependency on others, the destruction of non-exchange type means of providing for ourselves, and counterproductivity. Cars are a good example of the latter. If only a few people have them, the technology can enhance their quality of life by making transportation easier. But when everyone has a car it’s gridlock and no one goes anywhere. (To be fair, economic growth might not be 100% bad if the business enterprise created thereby, produces a product or service useful to the human species as a whole, and does so at a sensible level – But who has a job like that?!) hOURS is anti-growth and anti-money. By participating, people achieve a degree of autonomy from the big institutions which control the bulk of the money. If we can boycott money, we can boycott the Federal Reserve System, Wall Street, and big corporations. We won’t have to put up with any sort of moneylords, like bankers, that earn their living parasitically, presiding over transactions and skimming off the top. Even the government and professions like law and medicine would eventually be effected. Taken to its logical conclusion, a situation where everyone satisfies their material needs through hOURS rather than the current economy, such institutions lose all their power and surrender their ability to impact public policy and decide what sorts of activities people will engage in. Three cheers for that!!!

Financial empire, perhaps even hierarchy in general, is impossible under hOURS. We all have the same net worth (24/7) to spend as we see fit. The highest standards of living are possible, but fortune as a means of being able to dominate others is not. There’s little room for surplus value, or exploitation of any kind. One particular form of domination, made possible through the manipulability of an abstract concept like money, but impossible with the non-manipulability of units of time, is the wide discrepancy in how the work people do is valued. It’s not right that executives make thousands and thousands of times as much money as Wal-mart clerks do. (Especially when the latter actually do something useful by telling you what aisle such and such is in, but the former set policies that destroy the environment and make decisions like “let’s build bombs instead of bicycles”.) No wage discrepancies are legitimate. Even the neurosurgeon who saves someone’s life should not earn more than the clerk, for the former is not possible without the latter. No one can practice neurosurgery without a slew of others providing for their more mundane needs. Perhaps this is clearer if one considers a farmer rather than a clerk. If no one will grow enough food to feed others as well as themselves, we all have to be farmers. There can be no division of labor. The division of labor is a group effort in which everyone plays an equal part. Therefore everyone should be compensated equally. Neurosurgeons ought to be happy with the prestige and honor that comes with a special skill, and not feel the need to economically crush everyone else under their heel to boot. Turning back the clock a bit we can see an even better example than the farmer. What about the surgeon’s wife who cooks and cleans and so forth, whom he couldn’t do without? The dominant economy has, and continues to, define many people as not just worth less, but worthless. The homeless people on the street can’t even get that minimum wage clerk job. Full employment, according to the Federal Reserve Board, is actually 4% unemployment, a level they roughly maintain through manipulation of the money supply. True full employment would lead to a breakdown of workplace authority as the consequences of losing a job dwindle to next to nothing. hOURS rejects all that crap. In an hOURS world, everyone is welcome. Everyone is useful. And there’s no Fed to say otherwise.

Not that hOURS would be a utopia. It’s still a market type system, which has many problems. One is the matter of collective goods. Markets have no incentive to create any, and tend to destroy those inherent to the aboriginal human condition, like clean air. If pollution is a side effect of a business, no incentive to rethink things will naturally ensue, for it doesn’t show up on the bottom line, whereas dealing with it would. Exchanges are dissociated from their social context. Contrary to working by consensus, who the costs and benefits of economic activity get assigned to means everything. If making widgets in a certain way saves the company $10, but the side effect is that half the world gets cancer, it’s still rational from a business perspective; even more so if the company also makes cancer medications. By the way, it’s not necessary to believe business leaders would have to be monsters to act that way. Psychological mechanisms like denial and ego defense bypass that hurdle, allowing “the system” to operate according to its own logic. Then again, some such people really are monsters. One federal official, several years ago, lauded the destruction of the ozone layer as good for the economy because it would increase sales of sunscreen and sunglasses. And you know what, he’s right. (Bet you didn’t expect me to say that.) Here’s the critical leap to make: If the economy is a thing which makes destruction of the ozone layer ok, we need to get rid of it. We need the ozone layer. We need it bad. We don’t need the economy. (What, that’s crazy.) Here’s the critical observation to help make the leap: The word “economy” has a mystifying effect. It means both the bottom line concerns of sunscreen manufacturers (and other big businesses). And it also means the way we provide for ourselves. Having the word mean both helps narrow, private interest masquerade as the public interest. Believe it or not, we can provide for our material needs without destroying the ozone layer. One thing that makes me want to puke is all the exhortations to travel and fly, and all the corporate welfare being doled out to airlines in the wake of the terrorist attack. Believe it or not, we can provide for our material needs without flinging ourselves great distances through the air. In fact, our standard of living need not suffer at all because of it. Don’t let the two senses of the word muddle your head. In the one sense, the economy is a nasty thing that’s been kicking our asses daily. If we bring it down, how do we maintain an economy in the other sense? hOURS.

All right, returning from that slight tangent, another problem with market economies is that they radically increase the amount of competition in human relations and the general ill will that breeds. We see people getting attached to their niches in the marketplace. When people’s livelihoods become attached to their niches it generates a downright demented consequence: economic activity becomes about creating needs rather than satisfying them. The significance (size) of ones niche (economic territory) becomes more important to ones success than how well that role is fulfilled. My house has a very old furnace built so well it will probably outlast me. Good job satisfying needs, but bad for business – no repeat customers. Making crappy products designed to break down is rewarded under the market system. You get to sell replacements. This problem is also apparent in the efforts of professions to drive up the need for their services.

Though hOURS is such a market type system, there are a few reasons why it can mitigate problems like these nonetheless. 1) We don’t actually have a free market economy. We have corporate socialism, which is even worse. While a marketplace works to the advantage of the strong, (The New York Times gets more out of “the marketplace of ideas” than I do. Big business gets more out of a market economy than I do. The market is a fictitious claim of “level playing field” to help justify inequities.) on rare occasions it can fail to serve the interests of the powerful. When this happens though, the truth comes out; as such results are not allowed to stand. In other words, when Chrysler fails, it doesn’t. Add this to rampant corporate welfare and it’s clear we have a system of corporate socialism designed to serve monstrosities like Chrysler. An actual free market would be a step up. 2) Under hOURS, people won’t be motivated by scarcity. Scarcity makes people freak out. The supply of money is tightly controlled. hOURS can be generated by anyone at any time. Without the need to compete for a scarce resource, people are less driven to act unethically. With an hour being an hour, it greatly reduces people’s ability to increase the value of their wares through mean-spirited anti-social mechanisms (e.g. pillaging the water supply or other collective goods, propaganda and intellectual hocus-pocus making ones skills seem more desirable, etc.) 3) Another consequence of an hour being an hour is that people can shift market niches without a loss of value. Suppose people, under hOURS, got so good at promoting holistic health that people rarely got sick anymore. Loss of livelihood? Not so. They can earn just as many hours at their new bike building business. There will be no need to defend their original business by say, promulgating advertising to dupe people who don’t need their services into thinking they do need them, or doing a crappy job to encourage repeat business. But when someone moves from an area they have expertise to one where they don’t, isn’t this an overall loss for society as a whole? No, because that’s smaller than the overall improvement in social welfare associated with the health services being less needed. It’s just plain old moving on.

An ideal economy would have true reciprocity with concern for all. This is seen in primitive societies where mutual aid is so much the norm that saying “thank you” is frowned upon. (There’s an implication one didn’t expect the thankee to be so generous, and it makes you look like a rude miserly type who keeps careful track of debts and obligations instead of mellowing out.) hOURS clearly isn’t that, but we can use it to start cleaning up the mess. I’m optimistic about its chances for success because it’s an example of a paradigm of activism I developed called “activism from superiority”. The key feature is that “doing the right thing” is the better way to live; meaning that benefits naturally accrue to those involved, in this case the building of a supportive community, not having to pay taxes, and other advantages of relief from the crushing grip of moneylords. Such a framework is more conducive to building a mass movement than traditional efforts which need to acquire resources and work on motivations like guilt and sympathy. The “force of example” to others is stronger, and you get a sort of natural selection as the flow of resources, relatively speaking, favors those who participate over those who don’t. By utilizing the value in what people have to offer that our society considers “throwaway”, and building a community of resistance that withdraws support from the system and grows stronger because of it, we can make great change.”






June 4, 1999, Toronto.

“…those performing here tonight are artists, and you may wonder what an artist is doing getting involved in a project that has to do with the structure of money. Weren’t we all taught that Art and Commerce were polar opposites? But art has to do with symbolism — the human tendency to make one thing stand for another — and money is the most deeply symbolic thing there is. Money as such is, as Oscar Wilde said, perfectly useless. You can’t eat it, drink it, shelter yourself from the cold with it, wear it, or make love with it unless deeply disturbed. In and of itself, it has no emotions, no mind, and no conscience. It doesn’t put out flowers or have children, and it makes a lousy pet. It has meaning only when it circulates, and is exchanged for other things; and money doesn’t do that for itself. People do that, using money as a symbolic token.

We have all been brainwashed into believing that there is only one kind of money — one kind of wealth — and only one measure of human worth — how much money you have — and one kind of exchange — traditional buying and selling. And only one motive to do so — the Siamese twins of consumer greed and the profit motive. We’ve also been told all of this is controlled by a mysterious god called Global Market Forces, who is now beyond our control, but to whom we are forced to sacrifice our children. Thus if international commercial interests suck up our wealth, stomp out our magazines, trash our culture, and dictate what toxic chemicals we must eat and drink and breathe, it is the will of Global Market Forces, whose ways are dark, but who is thought to have our best interests at heart in the end.”

“This extraordinary idea was inspired by a very ordinary need for more money. Now, by advertising their talents or goods in the project’s newsletter, HOUR Town, consumers can find themselves in the money. And small businesses are reaping rewards, too, since the currency gives residents more incentive to shop locally.” –Entrepreneur Magazine, April 1996


Ithaca HOURS: Local currency ‘backed by relationships’
by Anne Ju / Ithaca Journal / October 19, 2005

As has always been the case, Ithaca HOURS aren’t backed by gold, silver or any other commodity. “Ithaca HOURS is backed by our relationships,” said Rebecca Nellenback, HOURS board member. “That’s what we want our town and our community to be.” HOURS users and those interested in joining will celebrate that fact at an annual meeting next Wednesday, from 7 to 8:30 p.m. at the Greater Ithaca Activities Center. The whole community is invited to learn about the local currency system, join at a discounted rate and, for current members, elect new board members.

It’ll also be a chance to promote the local nonprofit’s Web site, ithacahours.org, which recently went on the upswing by hiring a Web specialist. Board of Directors President Stephen Burke said they’re in the process of getting the 800-plus member directory on the Web, in part because of the worldwide attention HOURS continues to receive.

For example, just last year a representative from Japan’s Ministry of Finance stopped in Ithaca to talk to Burke about HOURS before boarding a plane to Washington for his next pit stop — with U.S. Federal Reserve Chairman Alan Greenspan. “That’s how seriously they were considering our local currency,” Burke said. Circulating in Ithaca now is about $100,000 worth of Ithaca HOURS, which translates to 10,000 HOURS, according to Burke. In recent years, the program has grown to the point where, at some businesses, employees can be paid part of their salary in HOURS.

At ABC Cafe on Stewart Avenue, employees can opt to be compensated an HOUR in exchange for an hour of labor. An HOUR of labor ends up slightly more than an hour’s wage in regular money, explained owner Ken Hallett. It’s only about 1 percent of the payroll that chooses that option, but it’s enough so that the restaurant, just two years ago, started giving customers the option of purchasing entirely in HOURS. “I think it was once we realized there were enough outlets for using them,” Hallett said. “The idea of using local currency, and having it staying in the community, was attractive.”

Another boost for HOURS has been the availability of $2,000 to $5,000 worth of interest-free HOURS loans, which have bolstered small businesses and also infused relatively large sums of HOURS into the community at once, Burke said. In general, encouraging people to earn and spend locally is, and always has been, the goal of Ithaca HOURS, according to Burke. It creates local wealth while freeing up one’s own money for savings. “It’s definitely a community spirit thing,” said Burke, who owns Small World Music on State Street and, of course, accepts HOURS. In America, “money is so divisive,” Burke said. “We want to turn that completely on its head,” he said.

Creating Community Economics with Local Currency
by Paul Glover [Founder of Ithaca Hours]

Here in Ithaca, New York, we’ve begun to gain control of the social and environmental effects of commerce by issuing over $110,000 of our own local paper money, to thousands of residents, since 1991. Tens of thousands of purchases and many new friendships have been made with this cash, and millions of dollars value of local trading has been added to the Grassroots National Product. We printed our own money because we watched Federal dollars come to town, shake a few hands, then leave to buy rainforest lumber and fight wars. Ithaca’s HOURS, by contrast, stay in our region to help us hire each other. While dollars make us increasingly dependent on transnational corporations and bankers, HOURS reinforce community trading and expand commerce which is more accountable to our concerns for ecology and social justice.

HOUR Town’s thousand listings are a portrait of our community’s capability, bringing into the marketplace time and skills not employed by the conventional market. Residents are proud of income gained by doing work they enjoy. We encounter each other as fellow Ithacans, rather than as winners and losers scrambling for dollars.

The Success Stories of 300 participants published so far testify to the acts of generosity and community that our system prompts. We’re making a community while making a living. As we do so, we relieve the social desperation which has led to compulsive shopping and wasted resources. At the same time Ithaca’s locally-owned stores, which keep more wealth local, make sales and get spending power they otherwise would not have. And over $10,000 of local currency has been donated to over 100 community organizations so far, by the elected HOUR board of directors.

As we discover new ways to provide for each other, we replace dependence on imports. Yet our greater self-reliance, rather than isolating Ithaca, gives us more potential to reach outward with ecological export industry. We can capitalize new businesses with loans of our own cash. HOUR loans are made without interest charges. We regard Ithaca’s HOURS as real money, backed by real people, real time, real skills and tools. Dollars, by contrast, are funny money, backed no longer by gold or silver but by less than nothing- $8.4 trillion of national debt.”

Paul Glover
email : paul5glover [at] yahoo [dot] com

‘[Glover is] founder of Ithaca HOURS local currency, the Ithaca Health Alliance, Citizen Planners of Los Angeles, author of several books and urban histories; degrees in Marketing and in City Management. After 35 years of community organizing on behalf of grassroots economic development and ecological repair started a consultancy called GreenPlanners.

‘Founder, Green Jobs Philly (Philadelphia, PA. 2008) network making it easy for Philadelphians to offer and request green jobs, green services, green grants, and green loans. Editor, Green Jobs Philly NEWS.’ “A reliable treasure trove of info on what’s going on right now in Philadelphia with anything related to the sustainable economy.” –Philadelphia Daily News 1/13/09

Prepare for the Best: A guide to surviving and thriving in Philadelphia’s new green future
by Paul Glover / Jan 28, 2009

Money: Give yourselves credit
Challenges: Extreme capitalism and extreme socialism trample humanity. Lack of cash and credit kills businesses, jobs and homes. Some folks still have lots of money, but most of us have less. Dollar power dwindles because dollars are backed by less than nothing: rusting industry and $10 trillion debt. So we’ll print real money — neighborhood currencies — backed by real people.
Next steps: Mutual enterprise systems (neither Wall Street nor Red Square) celebrate the spirit of regional enterprise when it serves community and nature. They applaud innovations — public and private and personal — that meet real needs. Local trading credits based on local land, skills, time and tools refresh the economy. Poverty is lack of networks more than lack of dollars, and Philadelphia has thousands of networks — business, professional, technical, fraternal, neighborhood, church, union, electoral, senior, youth, racial, sexual, athletic, hobby, family, friends. Woven together they’re a powerful base of regional trust, trade and wealth. Take your pick of neighborhood and sector currencies. Cities may not issue them but may accept them for taxes.

Local heroes: Philadelphia’s 83 credit unions, Valley Green Bank, e3bank, Equal Dollars, barter exchanges and gift economy, Philadelphia Regional and Independent Stock Exchange, Philadelphia Fund for Ecological Living (PhilaFEL).

World champions: Ithaca HOURS, Berkshares, LETS, Time Banking, National Federation of Community Development Credit Unions, Permaculture Credit Union, Grameen Bank microlending, Kiva, Robin Hood Ventures.

Big picture: Dollars control people; local currency connects people.

Chinese Government Studies Ithaca HOURS
by Paul Glover / January 2001

Ithaca’s local paper money, the Ithaca HOUR, has brought hundreds of media, tourists, activists, academics and dignitaries to Ithaca, since 1991. Two years ago, Madame Mitterand, former First Lady of France (and international socialist) visited for a day, preparatory to her visit to the President of the World Bank. Government officials and nonprofit representatives have purchased and spent HOURS, while speaking with residents about how local currency benefits them, and our community.

Last October, HOURS were visited by a high-ranking official of the government of the People’s Republic of China. Wen Tiejun wears several tall hats. He’s Chief Economist of the People’s Bank’s think tank, Senior Consultant of the State Information Center, chief of Economic Reform and Director of Research for Rural Development. He arrived from Beijing to assess the practicality and legality of Ithaca’s local currency. His report will be delivered to the President of the People’s Bank, Dai Xianglong, who will deliver it directly to China’s Premier, Zhu Rongji. Accompanying Wen Tiejun was a professor of sociology from Hong Kong, who returns to Ithaca this November.

Their visit was particularly exciting because it reaffirmed, at the highest level, the critique of global capital which has been one of the many reasons we’ve traded our own money. Wen Tiejun said that the Chinese government has become profoundly concerned about the domination of world trade by U.S. dollars. They understand that the dollar’s value is artificially inflated by U.S. military control of oil regions, extraction of irreplaceable natural resources, and by high consumer debt. “When the bubble breaks,” he said, “there will be chaos in markets. Millions of our rural poor could starve.”

China has been vulnerable to the same banking shocks that befell Thailand, Indonesia and Korea in 1997, as a result of global currency speculation. Food riots resulted. The International Monetary Fund has been pressuring China to replace socialist safety nets with market services, especially since China joined the World Trade Organization this September. Therefore the People’s Bank has been looking for a basis for stable money in an unstable world. Wen Tiejun sees HOURS as a useful tool, since local credits based on time have value which is as steady as the clock. Dollars, on the other hand, are no longer backed by gold or silver but by less than nothing– by a $5.8 trillion national debt. There is in fact not enough gold in the world to support a medium of exchange sufficient to transact the needs of six billion humans. As well, HOURS help stimulate extra trading and job creation, meeting needs on local levels that national currency does not reach. As one World Bank analyst said, the Chinese economy “badly needs a new engine of growth and job creation for tens of millions of rural migrants and laid-off urban workers” (China Watch, 5/8/98).

The Long March of Ithaca HOURS from local experiment to world standard of value will be successful if HOURS shift economic power to communities and workers, promote ecological reliance on regional resources, reinforce regional cultures, and stimulate equitable pay. In Ithaca, millions of dollars worth of HOURS have been traded by thousands of residents, including over 500 businesses (including a bank, movie theaters, bowling alley, health clubs, 55 farmer’s market vendors, doctors, lawyers, plumbers, carpenters, electricians, our hospital and our public library. HOUR grants have been made to 57 community organizations, and HOUR loans up to $30,000 value have been made interest-free.

A History of Ithaca HOURs
by Paul Glover / January 2000

HOURS were created by our community’s need and pioneer spirit. During the 1991 recession I designed prototype HOURS and began asking people to sign up to accept them. The first 30 people agreed. Had these folks said “that’s a dumb idea” or “you could get in trouble,” or had they just laughed, then maybe there’d be no HOUR money. Had there been no Farmer’s Market here, with lively vendors who saw HOURS as yet another way to barter, HOURS would have had a small food base. Catherine Martinez took the first leap of faith there, becoming the first person to accept an HOUR, for her samosa. Had the owners of two popular local movie theaters (Rich Szany & Lynn Cohen) not started taking HOURS from the beginning, at full price, then there’s have been no dramatic retail use of HOURS. Had Greg Spence Wolf not stepped in to earn HOURS cleaning these theaters, then maybe the theaters would have stopped accepting HOURS. Had the Alternatives Federal Credit Union not lent its fiscal credibility to HOURS, by accepting them for fees, acceptance of HOURS would have been slower. Michael Turback of Turback’s restaurant (the fanciest in town) accepted HOURS for full price. James Cummins of Littletree Orchards did likewise. These and dozens of other pioneers pulled lots of HOURS into circulation and spread them around.

Thousands more Ithacans have established HOURS by accepting them and spending them, and by explaining them to family and friends. Tens of thousands of conversations have defined local money and have carried it forward. History is made by public action like this, rather than by special leaders. The general public selects and rejects leaders daily, before knowing their names, without waiting to vote. History pushes individuals forward to meet human needs. That’s why credit for HOURS belongs to the community. Thus my own role, regarded as pivotal, merely was the tool of the community’s need. To emphasize this, I’ve declined to be interviewed on TV and most radio, in order to require media to showcase HOURS as a community process.

During research into our local economy in 1989, I noticed that a little county in South Dakota printed coupons for downtown merchant X-mas promotion, the first I had ever heard of local currency. Two years later, early in 1991, while drawing pictures with my girlfriend’s nieces, I sketched a cartoon “Ithaca Money” note. A few weeks later I saw a sample “Hour” note issued by British industrialist Robert Owen in 1847. This Hour was negotiable only at Owens’ company store and based, I discovered in 1993, on Josiah Warren’s “Time Store” notes of 1827.

On October 19, I bought a samosa at the Farmer’s Market with Half HOUR #751 from from Catherine Martinez– the first use of an HOUR. Neither of us knew what a Half HOUR was worth, since the $10/HOUR rate was then merely suggested. Several more Market vendors enrolled. Stacks of Ithaca Money were distributed all over town with an invitation to everyone to join the fun. Only 46 days after HOURS began, and only ten days after the Farmer’s Market closed for the season, GreenStar Co-op burned down. Local food vendors selling through GreenStar quickly organized a Mini-Market at Henry St. Johns school, and most of them decided to accept HOURS. This provided HOURS with a midwinter food base right from the beginning. Confusion arose about varied HOUR equivalencies ($5, $6, $8, $10, $12) and soon caused us to declare $10.00 as the standard. And it soon became apparent that a smaller denomination, and smaller note size, were needed. The Quarter HOUR was issued six months after we began.

Meanwhile, HOURS were being traded and discussed, and welcomed and ridiculed. A common jibe was, “printing your own money are you? Pretty good business– you must have a fat wallet!” So I showed them the disbursement sheets and explained serial numbers. Those who praised HOURS were thanked and invited to join us; those who criticized HOURS or found them threatening were invited, without resentment, to join if they came to feel differently, and many did so.

The HOUR Advisory Board incorporated as Ithaca HOURS, Inc. in 1998, and hosted the first elections for Board of Directors. Monica Hargraves, director of composting for Co-op Extension (and a former economics professor and economist with the Federal Reserve and IMF), was selected as Board chair.

Time Dollars at Work
by Edgar S. Cahn / Blueprint Magazine / April 1, 1999

Traditional entitlements are perceived as undermining the work ethic. If that is the case, is there a method of social service delivery where Americans see their role as contributors and co-producers of democracy, social justice, healthy communities, and strong families? Time Dollars, a new idea being introduced in communities around the nation and the world, do just that.

Time Dollars are private credits backed and distributed by local non-profit organizations. Time Dollars record, store, and reward transactions where neighbors help neighbors. People earn Time Dollars by using their skills and resources to help others – by providing child or elder care, transportation, cooking, home improvement. The idea is simple: One hour of service equals one Time Dollar. In turn, people spend Time Dollars to get similar help for themselves or their families when the time comes that they need it. Time Dollars can also be redeemed at clubs that gives people discounts on food or health care.

Time Dollars empower any person to convert personal time into purchasing power – stretching limited cash dollars further and matching unused capacity with unmet demand. They reinforce reciprocity and trust. They reward civic engagement and acts of decency in a way that generates social capital, one hour at a time. They are bringing people together in communities all around the nation.

There are many reasons why Time Dollars are an idea whose time has come: First, Time Dollars create the functional equivalent of an extended family in an era in which many families are too small, too fragile, or too dispersed to perform the functions we once counted on them to fulfill. Second, Time Dollars generate and reward the reciprocity and civic engagement that are the essential components of social capital. They can play a role in rebuilding the infrastructure of trust and caring that creates safe neighborhoods and healthy communities. Third, social programs – governmental, non-profit, and private sector – fail if they cannot generate sustained participation by the recipient: students, patients, beneficiaries, at-risk groups. If that participation and labor is essential, we need to define it as work and reward it accordingly. Fourth, government and human service professionals pay attention to people who bring problems, needs, and deficiencies. That inadvertently rewards dependency. We need to shift from “problem-centered” to “asset-centered” responses that enable even the most troubled to pay back by helping others and to secure rewards by using their strengths to contribute to the well-being of all. Fifth, Time Dollars can leverage the charity and pro bono work that businesses already provide by requiring recipients to pay for them in-kind – with volunteer work of their own.

Time Dollars supply a strategy for performing all of these tasks. The exchanges they generate, record, and compensate convert human capacity into the kinetic energy needed to strengthen families, rebuild community, and enhance the quality of civic life. Time Dollars are in use in more than 100 communities in 30 states and three countries (the United States, Great Britain, and Japan). Here are some snapshots of the most innovative practices:

Chicago: More than 1,000 students in 17 elementary schools have earned recycled computers loaded with software by tutoring younger students. The price: 110 Time Dollars (10 have to be earned by the parent). Older students, regardless of their own academic problems, expect and get high performance from younger students.

Washington, D.C.: For fifteen years, the pastor of a local Baptist church was relied on for guidance, comfort, or just a little conversation. However, when the Reverend – who suffers from diabetes – lost his right leg to an infection, he retired from the church. Overwhelmed by the sudden changes in his life, he lived as a recluse – refusing to leave his apartment. The local Time Dollar program helped him adjust to the seemingly insurmountable problems he faced. Once again an active member of the community, he earns Time Dollars by conducting prayer services for his fellow tenants, and he spends them to have his meals prepared by another volunteer.

Brooklyn: Seniors insured through Elderplan, a social Health Maintenance Organization, can cash in Time Dollars for a 25 percent discount on their health insurance by helping other seniors to remain self-sufficient. Seniors provide their own informal support system, including pain management seminars, telephone bingo, home repairs, shopping, rides, and peer counseling. Elderplan now offers a Time Dollar redemption catalog so members can cash in their Time Dollars for health and beauty equipment, taxi vouchers, and social events.

Baltimore: The Housing Authority has incorporated Time Dollars as part of the rent that residents have to pay through community service. Children can earn Time Dollars and pay up to 50 percent of the monthly Time Dollar rent.

Washington, D.C.: A Time Dollar Youth Court brings first offenders before a jury of their peers. Jurors earn Time Dollars as they hear cases and impose sentences that may include community service, restitution, an apology, writing an essay, and jury duty. They redeem the Time Dollars for computers recycled by other youth at three high schools. In those public housing complexes where a jury pool has been formed, a new peer culture enables one youngster to hold another accountable for their actions.

St. Louis: Grace Hill has established a network of stores where Time Dollars will purchase items such as toilet paper, tissues, shampoo, conditioner, bug spray, and detergent. There is even a resident college where Time Dollars pay the tuition.

Time Dollars are a way to compensate and reward the work that ultimately determines the future of this nation: the work that goes into building a vibrant democracy. For too long, we have taken such work for granted – treated it like pure water and clean air – as if it would always be available in abundance. Now we know that the values and virtues of civic life must be developed and carefully guarded. With Time Dollars we can create the currency for a society where reciprocal obligations are the coin of the realm.

{Edgar S. Cahn, Co-Founder and Co-Dean of Antioch School of Law and Special Counsel to Attorney General Robert Kennedy, is President of the Time Dollar Institute.}

Edgar Cahn
email : ecahn [at] udc [dot] edu

“A graduate of the Yale law school, Edgar entered the legal profession determined to use the law to achieve social justice. He started his career in government as special counsel and speechwriter for Attorney General Robert Kennedy under President John Kennedy. As part of that role, he was assigned by Kennedy to the Solicitor General’s office for the government’s amicus brief in civil rights sit-in cases. Edgar also worked to spearhead the first national campaign against hunger and malnutrition in the US, and in doing so, he authored an influential report entitled Hunger USA, which led to legislation enforcing shipments of food to severely malnourished communities on Indian reservations and in the southern United States. His work to fight hunger also involved initiating the earliest litigation to challenge the administration of the food stamp and commodities program, establishing the standing for potential recipients, and assisting in the preparation and defense of controversial documentary, “Hunger in America.”

In 1963, Edgar’s life and work seeking social justice first became known at a larger scale when the article he co-authored with his late wife, Jean Camper Cahn, titled “The War on Poverty: A Civilian Perspective” was published in the Yale Law Journal and became the blueprint for the National Legal Services program. Using their model and working closely with Sargent Shriver and the War on Poverty, Edgar and Jean co-created the National Legal Services program under the Office of Economic Opportunity in the Johnson administration.

Having left the government for work with the Field Foundation in 1968, Edgar founded the Citizens Advocate Center as watchdog on government whose primary purpose was to challenge the colonialism of the Bureau of Indian Affairs. That same year, he authored “Our Brother’s Keeper, the Indian in White America.” Leading American Indian activists did the research for the book, which was intended as a catalyst for change in national policy and which helped to spearhead the official adoption of Indian self-determination as national policy. In 1972, Edgar and his late wife created and founded the Antioch School of Law, which later became the UDC David A. Clarke School of Law and continues the tradition established in the Antioch days to emphasize social justice as a critical role for the law. As law-school deans, Edgar and Jean were the first pioneers of clinical legal education in the US, an approach which is now to be found in law schools throughout the nation.

In 1980 after a massive heart attack that nearly claimed his life, Cahn stepped outside of the law to create yet another social invention, a local, tax-exempt currency called Time Dollars, which are designed to validate and reward the work of the disenfranchised in rebuilding their communities and fighting for social justice. As a distinguished fellow at the London School of Economics, Edgar completed the work on Time Dollars that has led to Time Dollar initiatives being funded by government and major philanthropic foundations in the United States in areas as widespread as juvenile justice, community health, education, public housing, community building, wraparound services for children with emotional disorders, immigrant workers’ rights, and elder care. As the president and founder of the Time Dollar USA, Cahn’s experience with Time Dollars led him in 1995 to develop a radical new framework for social welfare and social justice that turns recipients of service into co-producers of change. He called this new approach “Co-Production.” An example of Co-Production principles at work can be seen in Washington, DC, his home city, where in 1996 he founded the Time Dollar Youth Court, whose mission is to enlist youth in changing the shape of juvenile justice in DC. Sanctioned by the DC Superior Court, the Time Dollar Youth Court is now among the largest youth courts in the nation. Its innovative design enlists more than 400 youth each year, the majority of them former delinquents, as active shapers of a new form of justice for DC youth.”

Money should work for us, not the other way around
What is money? Do we need more of it to solve some of the world’s problems? Or is money the cause of them? Ex-banker Bernard Lietaer thinks the latter is the case. And he has the solution: a new kind of money.
by Jurriaan Kamp | September 2005 issue

You have no idea what money is. Bernard Lietaer is too friendly and modest a man to say it that way, but this is the easiest possible way to sum up his message. If you did know what money was, then you—we—would see to it that we had a different monetary system. Everything revolves around money. It’s more than a cliché; it’s the daily experience of just about every world citizen not part of an indigenous tribe in the Amazon rain forest. And this daily experience involves, above all else, a continuous shortage of money. There is not enough money to send the children to school. Not enough money for hospitals, or to care for the ever-greater numbers of old people who are getting ever older. Not enough money to clean up the environment and keep it that way. There is a lot of work to do, but no money to pay for it. Who among us is not familiar with the feeling of wanting to contribute something but having “no money” to pay for that valuable contribution? The sad conclusion: If we just had more money, the world and our lives would be better. But Bernard Lietaer recommends another way around the problem: We could immerse ourselves in the meaning of money.

He sits on the edge of his chair and poses this question: “Have you ever thought about how much time you spend earning money, and managing or spending the money you’ve earned? And how often have you thought about what money actually is? We expend an enormous amount of energy—and frustration—on something we understand surprisingly little about.” What difference does it make, you might ask? Does it matter whether a fish knows it is swimming in water? Isn’t money like the weather: a given? You can’t change it. Lietaer, a business professor and former banker in Belgium, shakes his head. We are meeting on Cortes Island, off the coast of Vancouver, British Columbia, where he is attending a conference. “That is precisely the difference,” he says. “The weather, indeed, you cannot change. But money wasn’t created by God: We have forgotten that it’s a system designed by people. And I believe that this design, which dates from centuries ago, is at the root of most problems in our society. And the good news is that with a small change to the money system we can make an important contribution to the solution of a number of those problems.”

Lietaer’s proposal is to introduce—alongside the existing national currencies—complementary money systems on a large scale. Based on barter, these systems would fulfill needs and make transactions possible when “normal” money is unavailable. His idea is less revolutionary than it appears. In history, as well as in the world today, there are many successful examples of such systems—from the construction of European cathedrals in the Middle Ages and temples in Bali today to the present-day care systems for the elderly in Japan and airlines’ frequent-flyer programs. What these systems have in common is that they do not promote competition, but cooperation; they support community instead of undermining it; and they make possible important and valuable work. Lietaer says, “Complementary money systems put us in a position to be ourselves—to literally cash in on our talents. Even when there’s no official financial market for them.” According to him, the possibilities of such systems are virtually unlimited. “I’m not saying reformation of the monetary system will solve all our problems. But I know that money is one of the key functions. There is actually nothing that doesn’t have to do with money. It is an extremely vital element. I am convinced that within a generation we can realize great positive changes.”

Bernard Lietaer discovered the destructive effects of the prevailing monetary system while working in Latin America during the 1970s. “Enormous loans were being granted for senseless projects. The banks were throwing money around. I wondered if I was seeing things other people weren’t seeing.” As a professor of international finance at the University of Leuven in Belgium, he wrote a book about his experiences in which he predicted a major debt crisis. The book came out in 1979. In 1981 the crisis in South America broke loose. Lietaer’s belief that the global monetary system needed reform led him to the Belgian Central Bank, where for several years he was involved in the establishment of the “ECU,” or European Currency Unit, the precursor of the euro. He subsequently became general manager of a foreign-currency fund. His remarkable successes in that capacity attracted international attention. The influential U.S. magazine Business Week proclaimed him the world’s best currency dealer in 1991. Even more than that, Lietaer had become a genuine expert on money, privy to the deepest secrets of the financial world. He decided it was time to write new books. While teaching at the University of California in Berkeley and California’s Sonoma State University, in the 1990s, he worked on The Mystery of Money (Riemann Verlag, 2000) and The Future of Money (Random House UK, 2001). These books unravel the present concept of money and show how different approaches have different social consequences—including environmental and social sustainability.

According to economics textbooks, money is value-free. It is nothing more than a means of exchange and is regarded as having no effect on transactions. Lietaer contests that view. “Money isn’t at all value-free,” he argues. “The monetary system is programmed—albeit not deliberately—to cause certain behaviour. It promotes competition and short-term thinking; it forces economic growth; and it undervalues care, education and tasks crucial to maintaining a society. Economics theory teaches us that people compete for markets and raw materials; I think, in reality, people compete for money.” This competition is a direct consequence of the manner in which money is created. Banks put money into circulation by means of loans. For example, as soon as someone negotiates a 100,000-dollar mortgage, money is created and begins circulating in the economy. But then the bank expects the recipient of the loan to pay back a total of 200,000 dollars in repayment and interest over the next 20 years. But the bank does not create the second 100,000 dollars. The receiver of the loan must get hold of that money—the interest—one way or another, and this forces him or her to compete with others. It’s simple: Some people must lose money or go bankrupt in order to put others in the position to pay off their loans. At the same time, this collection of interest results in a concentration of wealth: Those who have money “automatically” get richer. In addition, the system forces society into an endless loop of economic growth: New money must constantly be put into circulation to pay off old loans. Lietaer says, “My conclusion is that greed and the competitive drive are not inherent human qualities. They are continuously stimulated by the kind of money we use. There is more than enough food and work for everyone. There is merely a scarcity of money.”

A monetary system driven by interest payments also blocks progress toward a sustainable economy. “The environment is a time problem,” Lietaer says. “A company like Shell undoubtedly has a better idea of the next century’s energy needs than any government. But within the current monetary system we cannot entrust Shell with the future. Shell has to make a profit today. A government bears the responsibility for the future of the society.” Business investments today are weighed against interest rates. This continually leads to short-term choices. “It is financially attractive to cut down trees, sell them and put the money in the bank,” Lietaer says. “Through interest, the money in the bank grows faster than the trees. Solar panels, by contrast, require investments that are only earned back over longer periods. The long repayment period makes these investments no match for the growth of money you can put in the bank today to earn interest. “You wouldn’t be able to build a cathedral (see box) within the existing monetary system. Those were investments over decades. And they ultimately had an extremely long-term yield: Eight hundred years later people still go to Chartres every day to see the labyrinth in the cathedral—and those people still make up the majority of the clientele of the city’s merchants.”

Businesses are trying more and more often to avoid expensive, competition-promoting money. Barter now accounts for almost 15 percent of world trade. And it’s increasing every year by 15 percent, while trade conducted with money is growing at just 5 percent annually. Barter is also the basis of the complementary money systems Lietaer advocates as a solution to the social and ecological disruption our current money system causes. The emergence of complementary money systems began 20 years ago in Canada with LETS, Local Exchange Trading Systems. Certain communities issued local currencies that people could use to exchange services. You might, say, repair your neighbour’s car and use the proceeds in local currency to pay someoneto paint your house. More than 5,000 such systems are now operating in communities of between 500 and 5,000 people worldwide. That’s just a drop in the bucket of the international monetary system. Bernard Lietaer, however, sees it differently. “Complementary monetary systems are no longer marginal solutions. It is true that they have no macroeconomic impact, but they have proven that they work and can change people’s behaviour. It’s like with the Wright Brothers when they proved airplanes could fly. They literally fell down and picked themselves back up again, and their constructions were rickety. But it worked, and so they paved the way for serious high-quality planes. This is the pioneering value of the LETS systems, too.”

The next major step for the complementary money systems will involve participation by businesses. “What else are frequent flyer miles besides a currency issued by an airline?” Lietaer asks. “Initially they were mainly meant to commit customers to a certain airline, but over time you could use them to buy groceries in the supermarket, book hotel rooms and pay your phone bill. And you can earn miles without even flying.” Greater involvement by business, Lietaer says, is crucial for a breakthrough of complementary money systems. In the United States, a system is in development in which health insurers will pay customers for healthy behaviour—for example, spending an hour in the gym. People can then use this payment to buy certain things: bicycles, organic food, preventive acupuncture treatments. “This isn’t just marginal messing around,” Lietaer says. “Everyone knows health care in the United States and other Western countries is a big problem that affects millions. Health care devours money. It is a remarkable system: It’s in the system’s interest that people get sick. After all, it can’t earn money otherwise. Healthy people are of no use to the health-care system, or more accurately, medical-care system. A complementary system can work the other way around: For instance, only a century ago in China, doctors were paid by their patients when they were not sick. And he paid them, and took care of them, when they were.”

In Japan, complementary systems have been developed for care of the elderly. People can earn credits by running errands for elderly people or helping them with housework. They can use the credits to buy extra help if they get sick, or send credits to their old mothers. “This is an example of how a complementary system can be used to solve a social problem,” Lietaer notes. “Almost 20 percent of the Japanese population is older than 65, and that percentage is rising. It is unthinkable that the care for this growing population of old people can be paid for under the current social-security system. Japan is solving this with a new complementary currency, which in addition supports the social structures in the country.” In Germany, authorities are collaborating with banks to develop a complementary money system for a million participants. In Brazil, a plan is afoot to finance education for poor families using a complementary currency. Bernard Lietaer enthusiastically offers example after example. “Money is nothing more than an agreement to use something as a means of exchange,” he says. “Money is not a thing. It is an agreement, like a marriage or a business contract. And that means you can always make a new and different agreement.” Lietaer knows money can change the world: “I choose to remain optimistic. I can see how a crisis in the dollar could cause the global economy to collapse. Don’t forget that in the last 25 years almost 90 countries have suffered severe currency crises. But I also know that together we have all the knowledge and means we need for a peaceful evolution. I want to help liberate that creativity. To design money that works for us, instead of us working for it.”

Bernard Lietaer
email : blietaer [at] earthlink [dot] net / bernard.lietaer [at] accessfoundation [dot] org

“…interviewees are Prof. Mitsuya Ichien from Kansai University (author of the most
complete surveys of the early complementary currency systems in Japan), Tsutomo Hotta
(founder of the Fureai Kippu systems), Toshiharu Kato (founder of the eco-money
systems), Eiichi Morino (founder of the WAT currency system), and several dozen local
activists of different grass-root systems in Japan…”

How Businesses Can Save Themselves from the Impact of the Banking Crisis
by Bernard Lietaer / November 4, 2008

Whatever governments do for the banks, credit will be a lot harder to obtain for businesses, for many years to come. The trickiest aspect of the current situation is the simultaneous, global nature, of the banking crisis. The world economy will predictably veer towards a simultaneous recession, which in turn will worsen the banks’ balance sheets, motivating them to further reduce credits, and so on, down a vicious spiral towards either a decade-long recession, or even a possible depression. Please, get ready now for a rough ride for an uncomfortably long time. What all this means in practice is that we have now entered the period of an unprecedented convergence of the four planetary megatrends – financial instability, climate change, unemployment and an aging society – that was described in my 2001 book, The Future of Money [1].

There actually exists a very successful precedent on what business can and should do in such an environment, even if it is surprisingly little known. In 1934, sixteen business people gathered in Zurich to create a mutual credit system among themselves, with a currency unit called the WIR, equivalent in value to the Swiss Franc. Instead of borrowing money from the banks to pay each other, businesses give credit directly to each other in that business-to-business (B2B) currency, and those credits are used to buy from other businesses in the system, or partially pay staff. The system still is operational today: last year’s volume of business in the WIR currency was about $2 billion per year and involves 60,000 members, a quarter of all Swiss companies. A remarkable quantitative study [2] proves that this system is actually the secret for the proverbial robustness of the Swiss economy. WIR expands automatically when there is a recession in Switzerland, and proportionally shrinks back again when there is an economic boom. More information on the current status of the WIR is available on the web.[3] We propose that businesses take the initiative of creating such B2B systems at whatever scale makes sense to them. The big advantage, compared to what happened in Switzerland in 1934, is today’s availability of very cost-effective information technologies that make it possible to implement this approach much more rapidly than in the 1930s.

{Bernard Lietaer has been active in the domain of money systems for a period of 30 years in an unusual variety of functions. While at the Central Bank in Belgium he co-designed and implemented the convergence mechanism (ECU) to the single European currency system. During that period, he also served as President of Belgium’s Electronic Payment System. His consulting experience in monetary issues on four continents ranges from multinational corporations to developing countries. More information on the author and some technical papers that provide the theoretical and practical backing for this proposal are available on www.lietaer.com.}

1 Lietaer, Bernard: The Future of Money: Creating new Wealth, Work and a Wiser World (London: Random House/Century, 2001).
2 Stodder, James: “Reciprocal Exchange Networks: Implications for Macroeconomic Stability”. Albuquerque, New Mexico: Paper presented at the International Electronic and Electrical Engineering
(IEEE) Engineering Management Society (EMS) August 2000,
3 www.WIR.ch and http://en.wikipedia.org/wiki/WIR_Bank

“Earthly goods and wealth belonged to the empire. Inca people gave the empire taxes in the form of goods and labor. There was apparently no Inca money as we know it, but much of the commerce was done through a barter system. When there were famines and droughts, the empire’s vast storage areas could provide for everyone.”

“According to Ferreira and Chamot “The social system of the Incas had an ancient Andean origin based on the ayllu, an extended family group with a common ancestor. The economic system was also based on ancient social structures and can be explained through several principles, namely reciprocity, redistribution, and vertical control.” These authors also add: “Redistribution , a practice employed by the state, ensured that all agricultural goods not exchanged by reciprocity were to be distributed in the different areas of the empire in the case of bad crops.”In essence, the government of the Inca functioned as a safe guard against mass starvation.”

“A brilliantly clear-sighted analysis of how on-going money innovations in dozens of countries around the world are proving that they can resolve key societal problems such as: jobless growth, community breakdown, the economic consequences of an aging society, the conflict between short-term financial thinking and long-term sustainability, and monetary instability itself. This book provides pragmatic solutions to each one of these issues. The debate it will create will be a contentious and passionate one. Lietaer starting point is that money is only an agreement within a community to use something as a medium of exchange. This agreement is being placed under an unprecedented strain, due to a wide range of factors (from the creation of cybermoney and currency speculation to social and political issues). This momentum of change could become even faster, and the effects more brutal, if the instability of the monetary system continues to spread. And the indications are that it will. The global monetary crises of the 1990s (Mexico, Russia, Asia and Brazil) proved that our money system is now sick, and that this affects everything. After all, money plays the role of modern society’s central information system – equivalent to the nervous system in our own bodies. In order to prevent a global monetary meltdown, a unique vision of sustainable abundance, and the mechanisms for achieving this, is proposed.
{London: Random House Press Release, 27/10/1999}

Creating New Wealth, Work, and a Wiser World
by Bernard Lietaer / January 2001

Your money’s value is determined by a global casino of unprecedented proportions: $2 trillion are traded per day in foreign exchange markets, 100 times more than the trading volume of all the stockmarkets of the world combined. Only 2% of these foreign exchange transactions relate to the “real” economy reflecting movements of real goods and services in the world, and 98% are purely speculative. This global casino is triggering the foreign exchange crises which shook Mexico in 1994-5, Asia in 1997 and Russia in 1998. These emergencies are the dislocation symptoms of the old Industrial Age money system. Unless some precautions are taken soon, there is at least a 50-50 chance that the next five to ten years will see a global money meltdown, the only plausible way for a global depression.

The Information Age has already spawned new kinds of currencies: frequent flyer miles are evolving toward a “corporate scrip” (a private currency issued by a corporation) for the traveling elite; a giant corporation you never heard of is issuing its own “Netmarket Cash” for Internet commerce; even Alan Greenspan, Chairman of the Federal Reserve, foresees “new private currency markets in the 21st century.” Exorbitant compensations are paid to the very few at the top: it started with movie stars and sports heroes, and has now spread to top lawyers, traders, doctors, and business leaders. In the 1960’s CEO’s salaries were only thirty times greater than those of the average worker, compared with two hundred times today. Is this the dawn of a society where “Winner-takes-all” or a short-term last gasp of the transition out of the Industrial Age?

1,900 local communities in the world, including over a hundred in the US, are now issuing their own currency, independently from the national money system. Some communities, like in Ithaca, New York, issue paper currency; others in Canada, Australia, the UK or France issue complementary electronic money. The value of barter transactions — exchanges which do not use any money as medium of exchange – totaled almost $6.5 billion in 1994 in the US and Canada, and is increasing three times faster than normal exchanges. The magazine “Barter News” covers the industry’s development and now has 30,000 subscribers. It estimates the total barter worldwide at $650 billion in 1997, and growing at an annual rate of 15%.

All of the above is part of an irreversible process of change in our money system and our societies. We are now in a transition period, an interval of great risk but also of great opportunity. The risks are not only financial, some of the emerging money technologies could create a society more repressive than anyone of us thought possible. More importantly major opportunities are also becoming available: now more than ever it has become possible to address some of the most critical issues of our times, such as enabling more meaningful work, fostering cooperation and community, even realigning long-term sustainability with financial interests. None of this is theory, real-life implementations have pragmatically demonstrated such results. Combining these innovations can make available a world of Sustainable Abundance within one generation.

Specifically in Europe, the traditional ways to handle unemployment are increasingly failing. In areas with high unemployment, people have already demonstrated that living conditions can be significantly improved by creating their own complementary currencies instead of just relying on welfare. Surprisingly, it is in fact not the first time that such solutions have been successfully implemented in the Modern world. During the 1930’s many thousands of such initiatives were operational in the US, Canada, Western Europe and other areas affected by the Depression. Complementary currencies could become a key tool to buffer a region from the shocks caused by failures and crises in the official money system. Finally, this approach is a win/win for both locally owned businesses and society at large.

The degradation of the environment due to short-term financial priorities can similarly be addressed with pragmatic money innovations. Short-term thinking is shown not to be due to human nature, but to the prevailing money system. It is also possible to reverse this process, by using a currency designed specifically for multinational trade and contracts which would make long-term thinking a spontaneous process, focusing the attention on long-term sustainable solutions without the need for regulations or taxation. Historical precedents have proven such results, some of them lasting over several centuries.”

Complimentary Currencies for Social Change
An Interview with Bernard Lietaer
by Ravi Dykema /  August 2003

What is money? And how well does it work to solve society’s ills? Bernard Lietaer, author of the upcoming book Access to Human Wealth: Money beyond Greed and Scarcity (Access Books, 2003), has made a life’s work of exploring these questions. Lietaer has been involved in the world of money systems for more than 25 years, and his experience in monetary matters ranges from multinational corporations to developing countries. He co-designed and implemented the convergence mechanism to the single European currency system (the Euro), and served as president of the Electronic Payment System in his native Belgium. He also co-founded one of the largest and most successful currency funds.

Lietaer is the author of nine books on money and finances, including The Future of Money (Random House, 2001), The Mystery of Money (Riemann Verlag, 2000) and a book for kids, called The World of Money (Arena Verlag, 2001). Formerly professor of international finance at the University of Louvain, Lietaer is currently a fellow at the Center for Sustainable Resources at the University of California, Berkeley. Beginning this fall, he will be a professor at Naropa University. Here, Lietaer shares his views on the shortcomings of our conventional currency system, the benefits of creating a complementary currency, and ways to effect lasting social change.

RD: You’re very experienced on the world stage with currencies and money-it’s the world you’ve moved in much of your life, right?
BL: Yes, both in the area of conventional money such as the Euro and more recently with less conventional money systems. Below the radar beams of official thought, there has been a resurgence all over the world for the last 15 to 20 years of what I call complementary currencies, currencies that are operating on a smaller scale than the national level, and that can solve social, environmental and education problems.

RD: People think of someone who works with currencies as being a materialist. Yet it sounds as if your interests are towards social change through complementary currencies. How did you come to be interested in this other dimension?
BL: The reason I went to the Central Bank in the first place was to check whether it was possible to improve the conventional money system from within. I had been working for a number of years in South America, and I had seen the damage that the existing money system has created on a huge scale in Latin America.

RD: You thought it was the money system and not just the governments?
BL: It’s a chicken and egg story: unstable currency equals unstable government. There is practically no way today for a developing country to have a reasonable monetary policy within the current rules of the game. Joseph Stiglitz, Nobel laureate in economics and formerly head economist at the World Bank, makes the same claims in his book Globalization and Its Discontents (Penguin, 2002). Whether you fix your currency to the dollar or let it float, you end up with an unmanageable monetary problem, like Brazil, Russia or Argentina have experienced. Eighty-seven countries have gone through a major currency crisis in the last 25 years. Their fiscal policies are imposed by an International Monetary Fund (IMF). I am afraid that if the United States had to live by the rules that are imposed on, say, Brazil, the United States of America would become a developing country in one generation. It’s the system that is currently unstable, unfair and not working. The majority of humanity has gone through a recent monetary crisis at least once already. We’re living here, in America, in an island of perceived stability. And even that is an illusion. We could have a run on the dollar under the current rules. We are dealing with an unstable system, an ailing system. Back in 1975, I had come to the conclusion that there would be a systemic series of monetary crashes, starting with Latin America. And that’s why I wrote my book on how the money system was not working and its impact on Latin American development, Europe, Latin America and the Multinationals (Praeger, 1979). I predicted that the first crash in Latin America would be in the early 1980s. It actually happened in 1981 in Mexico. Since then we have had more than 80 other countries undergoing similar monetary crises.

RD: So someone’s not connecting the dots-or are they?
BL: Let me put it this way. The powers that be have no interest in connecting the dots. If a new international monetary meeting like Breton Woods were held, the first point on the agenda would be the role of the dollar. So the United States has no interest in such a meeting. The dollar is in a very privileged position.

RD: But it would be anyway, wouldn’t it, because we’re a dominant economic player?
BL: I don’t want to spend a lot of time and energy attacking the existing system. It is an obvious fact that America is the sole super power. But when people say, “Well, there are fiscal crises in other countries because the governments are less stable,” my question is, “How long would any government last in a country if you had to repeatedly cut back on education programs, social programs, building roads and all other programs?” How could that make a stable democratic government possible? Like I said, it’s a chicken and an egg sequence. There is no way of winning in the current monetary game, particularly for the less developed countries. It’s not accidental that investments in the Third World have dropped proportionally by a third since 1975. Currently, investments happen mainly between developed countries, and that trend isn’t going to create a sustainable world anytime soon.

RD: So the Third World is just being abandoned?
BL: Yes. Entire continents. Africa for instance has been dropped off the world economic map for most practical purposes.

RD: And re-envisioning and re-engineering money itself could change this?
BL: Correct. And the good news is that such re-engineering of money has started to happen if one knows where to look.

RD: Do a lot of other people share your views?
BL: Most people haven’t looked at what’s happening in monetary innovations today. What do you think a frequent flyer mile is, but a currency issued by an airline? In Britain, you can go to J. Sainsbury, the largest supermarket chain, and use British Airway miles to buy your goods. Initially, it was only designed as a loyalty scheme for people taking planes. Today, you can earn this currency without ever taking a plane. On Visa cards you get miles. And you can use them to pay long-distance telephone calls, taxis, restaurants, hotels. First, let’s define what a currency is, because most textbooks don’t teach what money is. They only explain its functions, that is, what money does. I define money, or currency, as an agreement within a community to use something as a medium of exchange. It’s therefore not a thing, it’s only an agreement-like a marriage, like a political party, like a business deal. And most of the time, it’s done unconsciously. Nobody’s polled about whether you want to use dollars. We’re living in this money world like fish in water, taking it completely for granted. Now the point is: there are many new agreements being made within communities as to the kind of medium of exchange they are willing to accept. As I said, in Britain, you can use frequent flier miles as currency. It’s not a universal currency, it’s not legal tender, but you can go to the supermarket and buy stuff. And in the United States, it’s just a question of time before privately issued currencies will be used to make purchases. Even Alan Greenspan, the governor of the Federal Reserve and the official guardian of the conventional money system, says, “We will see a return of private currencies in the 21st century.”

RD: In other words, private currencies are coming back. How would that change the circumstances for poor people, for the Third World?
BL: I gave you that first example-a commercial loyalty currency-only because it would be familiar to most of your readers. But in addition to those commercial private currencies, there are now more than 4,000 communities around the world that have started their own currency for social purposes as well. For example, there are about 300 or 400 private currency systems in Japan to pay for any care for the elderly that isn’t covered by the national health insurance. They are called “fureai kippu” (caring relationship tickets). Here’s how they work: let’s say that on my street lives an elderly gentleman who is handicapped and cannot go shopping for himself. I do the shopping for him. I help him with food preparation. I help him with the ritual bath, which is very important in Japan. For this help, I get credits. I put those credits in a savings account, and when I’m sick, I can have other people provide such services for me. Or I can electronically send my credits to my mother, who lives on the other side of the country, and somebody takes care of her. Here is an agreement within a community to use as medium of payment something other than national currencies, to solve a social problem. And it makes it possible for hundreds of thousands of people to stay in their homes much longer than they otherwise could. Otherwise, you’d have to put most of these people into a home for seniors, which costs an arm and a leg to society, and they’re unhappy there. So nobody’s winning. In contrast, Japan has created a currency for elderly care. In the United States, Florida is the only state that has the same density of elderly people as Japan does-18 percent of the population is more than 65 years old. But Florida is a model for our collective future. Colorado will be there in 2020. Germany will be there in 2006, France in 2008, Britain in 2012. Partly because of the baby boom generation, and partly because of the fact that health care has improved and people live longer. If you put all of these elderly in homes for seniors, you’d go bankrupt. Japan has been looking for another way, and has found it by introducing a monetary innovation. Let me give you other examples, already operational here in America today. There are now several hundred “time dollar” operational systems in the United States. The unit of account is the hour. I do something for you. I have a credit for an hour, while you have a debit for an hour. If I can use my credit with someone else, this creates a currency between us. For those people who are willing to give some of their time, the money manifests automatically. It doesn’t quite work that way with dollars, does it? One of the two of us has to get dollars by competing for them somewhere outside of our community. Time dollars are helping in a lot of communities where conventional money is scarce: in ghettos, retirement communities, high unemployment zones, student communities. There are 31 states in America that are paying employees to start such time dollar systems, because it solves social problems. There are some operating in Chicago, fairly big ones in Florida. For example, in Chicago, there are entire neighborhoods that used time dollar systems to create a neighborhood watch system that got rid of drugs and gangs. It’s working, it doesn’t cost anything to the taxpayer, it doesn’t create a huge bureaucracy, and it encourages the solution of the local problems by and with the very people who know most about them.

RD: What do they use their time-dollar credits for?
BL: Well, it’s a closed circle. If I do something for you, I have a credit, which I can use with any member of the community that is part of the system. I can’t buy cars or pay my telephone bill with this system because the suppliers of such items don’t participate now in such systems; but I can obtain services-so I could have my car repaired, my house painted, my kids mentored. The inventor of the time dollar system is Edgar Cahn, who’s the author of No More Throw-Away People (Essential Works Ltd, 2000). He claims that if you can’t compete in the dollar economy, you’re thrown away. He shows how a time dollars system provides a solution to this process, because it operates in parallel with the conventional competitive economy, and it creates an environment where everybody can contribute.

RD: So you envision a world where there are a lot of these alternative currencies?
BL: I don’t call them alternative, because they aren’t intending to abolish or replace the national currency. I’m not claiming that we could or should abandon national currencies or the competitive economy. This is a complementary currency system. It facilitates exchanges additional to the normal system. It makes it possible to match unmet needs with unused resources.

RD: I can’t see how you’d be able to pay your rent with that.
BL: Well, in Ithaca, New York, there is a currency called Ithaca hours, and some people pay part of their rent with it. Not all of it: for some it is 50/50, for others it is 80/20. And the landlord or lady can go to the farmer’s market and buy his vegetables and his eggs.

RD: So the big things-transportation, housing, food-are those covered in the concept of complementary currency?
BL: It all depends on the agreement you’re making, and whom you are succeeding in including in that agreement. Let me give you a real-life example. In Curitiba, the capital city of the State of Paran in Brazil, if you bring pre-sorted garbage, you are given bus tokens. So in Curitiba, public transport is clearly part of their complementary currency system. It depends on the agreements you have with your landlord, with the transportation company, with the university, with the business community. It just depends on who wants or is willing to participate. You can’t force anybody to accept this currency. They are not what is technically called “legal tender.” I call them “common tender”: commonly accepted as payment for debts without coercion of legal means.

RD: I understand that the government wants to get its chunk out of barter transactions, just as if they were a cash transaction.
BL: Yes, and those taxes will need to be paid in “legal tender”, i.e. dollars. The tax issue has nothing to do with the currency you use in an exchange, but with the kind of transaction you’re performing. Say I’m a plumber. I come to your house and fix the plumbing. And you give me a nice cake in payment. I’m supposed to declare the value of that cake and pay taxes on it, because I’m in the plumbing business. Now say I am a professor at a university. I come to your house. I fix your faucet. You give me a $100 bill. I’m not obliged to declare it because I’m not in the plumbing business. As I said: it is not the currency used that determines whether a transaction is taxable or not, but the nature of that transaction. Interestingly, there is one complementary currency, the time-dollar system that we talked about earlier, that is officially tax-free in the United States. It’s used only to resolve social problems, and the IRS has ruled that time-dollar systems are tax-free.

RD: I think complementary currencies, barter included, should be tax-free, because they offer solutions to a social problem.
BL: Then I suggest you go and lobby for passing such a law. Currently that’s not what the law says in the United States. The use of complementary currencies is fairly recent. It took off only in the last 15 years. Even in 1990 there were less than one hundred complementary currency systems worldwide. Today there are over 4,000. It’s definitely catching on.

RD: And you would like to see it continue to expand?
BL: I think it is a useful tool to solve a number of our problems. It makes it possible to truly create a more gentle society. I spent last summer in Bali. People are remarkably artistic in that island. Their communities are unusually strong. They have festivals that are totally mind-blowing, and can last a month. They’re having a good time. It’s a comparatively non-violent society. And what I found is that it isn’t a simple coincidence that they have been using a dual currency system for many centuries. All these unusual
characteristics of Bali turn out directly to be nurtured by their dual money system. I am publishing a detailed paper on how this mechanism works in the forthcoming issue of Reflections, the journal of the Society of Organizational Learning at MIT.

RD: How does the money system lead to those outcomes?
BL: Practically all Balinese participate in a dual currency system. The first is the conventional national currency (the Indonesian Rupiah); the second is a time currency where the unit of account is a block of time of approximately three hours. This second currency is created and used within the “banjar”-this is a community entity consisting of between 50 and 500 families. It is in each banjar that the decisions are made democratically to launch any big community project. It could be to put on a festival or build a school. For each project, they always make two complementary budgets: one in the national currency, and one in time. That second currency-called “narayan banjar” (meaning work for the common good of the community)- is created by the people themselves. They don’t have to compete in the outside world to obtain that second currency, and it fosters cooperation between the members of the community. I call it a yin currency-it’s more feminine in nature. And it complements the national currency, which is a competitive currency and therefore of a yang, or masculine, nature. Here’s why it works: poor communities don’t have a lot of national currency, but they tend to have a lot of time. In rich communities, the opposite tends to be the case-people have more national currency, but less time. In either case, each banjar is capable of creating extraordinary events just by budgeting and using more of the kind of currency-national or time-in which they are rich. This balance is a key contribution to the unusually strong community spirit that prevails in Bali. And it’s not just because they’re Hindus. There are almost a billion Hindus in India, and they don’t behave that way. Here is an example of how a currency can make a difference.

RD: We have a strong emotional attachment to money, and we worry about it. So how we relate to money influences who we are and how we think of ourselves.
BL: Yes, you’re right. But it is interesting that societies that are using different kinds of currency have also very different collective emotions concerning money. The generally accepted theory-dating back to Adam Smith-is that money is value neutral. Money is supposed to be just a passive medium of exchange. It supposedly doesn’t affect the kind of transactions we make, or the kind of relations we establish while making those exchanges. But the evidence is now in: this hypothesis turns out to be incorrect. Money is not value neutral. Let’s return to the example of the fureai kippu that I was mentioning earlier, the elderly care currency in Japan. A survey among the elderly asked them what they prefer: the services provided by people who are paid in yen, the national currency; or the services provided by the people paid in fureai kippu. The universal answer: those paid in fureai kippu, “because the relationships are different.” This is one example of evidence that currency is not neutral. Another example: there is typically a reluctance among friends to pay for help provided by using national currency. If a friend is helping you move or paint and you pay him with national currency, it just doesn’t feel right. Interesting isn’t it?

RD: So people feel differently about complementary currencies than national currencies?
BL: Yes, there have been surveys in several countries that prove this to be the case. Conventional currencies are built to create competition, and complementary currencies are built to create cooperation and community, and it’s important to be aware that both can be available to make our exchanges. According to Paul Ray’s (author of The Cultural Creatives, Harmony Books, 2000) study, 83 percent of Americans believe that the top priority should be to re-build community, and yet the kind of currency we use in our transactions is precisely one that eliminates community. The word “community” comes from Latin, “cum munere.” “Munere” is “to give,” and “cum” is “among each other”-so, community means “to give among each other.” In short, it turns out that dollar exchanges tend to be incompatible with a gift economy. Complementary currencies are.

RD: Are you saying that you can’t have community if you’re using dollar exchanges?
BL: I’m saying that exclusive use of a competitive programmed currency in a community tends to be destructive for the community fabric. This isn’t theory. We’ve seen this happen at the tribe level, with the collapses of traditional societies. I’ve seen one happen myself in Peru among the Chipibo in the Amazon. That tribe had been in existence for thousands of years. When they started using the national currency among themselves, the whole community fabric collapsed in five years’ time. The same thing happened here during the 19th century in the Northwestern United States and Canada, in the traditional indigenous societies. The moment they started using white man’s currency among themselves, the community collapsed, the traditional fabric broke down.

RD: Do you think complementary currencies really can transform our planet?
BL: Yes. Bali is a perfect example that long-term use of a dual yin-yang currency system creates a different society. Thirty percent of a Balinese adult’s life happens in the space of the yin, feminine currency, which is the time currency. In contrast, we spend close to 100 percent of our time in the masculine, yang, competitive currency. That 30 percent of time spent on community activities creates another society, where everybody can become an artist, where the community fabric is stronger, where the social safety net is reliable, where abandonment is unknown. It nurtures an extraordinary feeling of trust and a higher quality of life.

RD: And you think this kind of culture and community can exist in other places, with completely different religions and cultures?
BL: The short answer is yes. We have evidence from Japan, Germany, Mexico, Brazil and the United States to show that complementary currencies make a difference in the way people relate to each other.

RD: In a really transformed world, would a community be using multiple complementary currencies as well as the national currency?
BL: Not necessarily. What has started to happen recently is an integration-many of these services that were using highly specialized complementary currencies are beginning to integrate into a single, local social-purpose currency. For example, youngsters who are taking care of the elderly in Japan using their credits in partial payment for tuition at the university, so we’re solving two problems at the same time. It provides an additional way of making things happen that otherwise is not available when national currency is scarce. Remember, complementary currencies simply enable additional matches between unmet needs and unused resources.

RD: Does the internet and electronic transfer systems offer a means for the creation of complementary currencies?
BL: I am convinced that the reason complementary currencies are developing now because of cheap computing. Do you really think American Airlines would have frequent flyer miles if they needed an army of clerks trying to keep track of your miles? I don’t think so. But today anybody with access to a PC can start a currency system. It isn’t a coincidence that about 95 percent of the social purpose complementary currencies are electronic.

RD: So can we buy an off-the-shelf program for creating a currency?
BL: Sure. There are even different freewares already available. One of them is for operating a LETS (Local Exchange Trading System). Another one that is free of charge is to start a time dollar system. We are in the process of incorporating a non-profit foundation in Boulder, the Access Foundation, whose purpose is to provide independent information on all the different complementary currency systems that are available worldwide, and on its website one will be able to download the corresponding softwares. This website (www.accessfoundation.org) is planned to be operational early this fall. Currently, our biggest problem with money and currencies is unconsciousness. We are not aware of what we are doing around money. We haven’t really thought about what money does to us-we believe it’s neutral, so it doesn’t matter. But it’s not neutral: it deeply shapes us and our societies. The first thing that has to happen before complementary currency systems can effect real change on a larger scale is a shift in consciousness and awareness.

RD: You mean, we need to be aware of how money works?
BL: Let me ask you this. Have you taken an inventory of the number of days you spend in life getting ready to make money? And when you have money, to manage the money or spend it? But then, think about how many hours you’ve thought about what money is. I suspect not very much. We are spending a huge amount of energy to get something about which we have surprisingly little understanding.

RD: Well, it’s like the rain. It’s something you adapt to.
BL: Yes, except that rain is not man-made. That’s precisely the difference. We’re treating money as if it is God-given, like rain or the number of planets in the solar system. But it isn’t. If you don’t like the quality of rain, there’s not much you can do about it. If you don’t like your money system, maybe you can do something about it. Assume that a Martian lands in Denver on the wrong side of the tracks. He ends up in one of the ghettos and finds that the houses are run down, the kids not taken care of, the elderly in trouble, and the trees dying. He sees all these things, and discovers that there are people and organizations absolutely equipped and ready to solve every one of those problems. So this Martian asks, “What are you waiting for?” The answer: “We’re waiting for money.” “What is money?” the Martian inquires. “It’s an agreement in a community to use something as a medium of exchange.” Don’t you think he may leave the planet believing there is no intelligent life here? The point is: if money is an agreement within the community to use something as a medium of exchange, we can create new agreements, can’t we? That is exactly what people are already doing all over the world. So why don’t we do it here? If we’re waiting for conventional currency to solve all our problems, aren’t we waiting for Godot?

RD: Is this your whole campaign now? Are you through with Belgian Central Banks?
BL: I’m trying to contribute to a consciousness shift regarding money. I believe that by a small change in the money system, we can unleash huge improvements in our social system. It’s the highest leverage point for change in our society, and surprisingly few people are looking at it. If you start a new complementary currency system, it can become self-perpetuating and facilitate additional transactions forever. You know the saying, if you want to feed someone, give him a fish. If you want to really help him, teach him how to fish. This is just a fishing lesson-what you do with it is up to you. You can take big fish or small fish, or you can choose not to fish at all. You decide what issues you want to deal with in your community, and there is a currency system that can help you with it.

Cultural Sustainability in a Globalizing World: the Bali Exception
by Bernard Lietaer (Center for Sustainable Resources, University of California at Berkeley, USA) + Stephen DeMeulenaere (Rural Economic Development Consultant, Indonesia) / Draft – August 2002

Executive Summary
It is generally accepted that massive tourism and a vibrant indigenous culture are mutually exclusive. Bali has so far proven to be an exception to this rule. This article explores a hitherto overlooked socio-economic mechanism behind that exception. It is a dual complementary currency system used for  centuries by highly decentralized and democratic decision-making organizations. The reasons why such a dual currency system is so effective in mobilizing popular cultural creativity is investigated, and its potential applications in areas in the world other than Bali are described.

Defining the Problem
The process is well known, and has been observed all around the world: massive tourism and an authentic and living indigenous culture simply cannot coexist. Increasing numbers of tourists tend to ultimately destroy the exotic culture they came to experience in the first place, as the locals begin increasingly display their culture only for tourist money.  Many major tourist destinations have gone through this process: Italy and Greece during the 19th century when it became part of any gentlemen’s education to make “the tour” of the classical European civilizations (and from where the word “tourism” derives). Mexico, the Caribbean, Hawaii, Tahiti, Fiji and other Pacific Islands are well-known examples of the same process during the 20th century. Since the late 1970s, many studies have reported a systematic conflict between two desirable aims: cultural integrity and economic development through tourism. Most development plans even highlight the need for a formal trade-off in tourism between socio-cultural costs and economic benefits.[1] This built-in conflict can been summarized succinctly as “Tourism and paradise…are incompatible. For as fast as paradises seduce tourists, tourists reduce paradises…Hardly has the last paradise been discovered than everyone converges on it so fast that it quickly becomes a paradise lost.”[2]

Nevertheless, Bali seems to be an exception to this rule, where increasing numbers of tourists have not led to a corresponding destruction of Balinese culture.  This article will describe one key but generally overlooked tool that is systematically used in Bali to achieve that difference.

It is organized in seven sections as follows:
–       The Bali Exception
–       Some Insufficient Reasons proposed for this Exception
–       The Banjar as a key organization structure
–       A double currency (national currency and time currency) as the key implementation tool.
–       How the dual currency system supports cultural sustainability
–       Applicability in Other Areas than Bali
–       Conclusions

The Bali Exception
Almost everybody has heard of Bali as the “Last Paradise”, a reputation dating back to the time when Westerners first discovered it at the end of the 16th century.[3] In counterpoint, every generation during the 20th century has announced the imminent demise of the Balinese’ exceptionally rich traditional cultural heritage.

The first figures published by the Bali Tourist Bureau reported 213 visitors during the year 1924, when the local population was estimated around one million. When in the 1930s the number of visitors reached for the first time thousand per year, travel brochures entitled “Bali: the Enchanted Isle” suggested to visit Bali soon because  “in another ten years, it may be spoiled by that insidious modernism.”[4]  In the 1950s, after the Indonesian independence, the warnings would become more pressing: “This anachronistic relic of the Hindu soul is, after ten centuries, about to lose its exceptional traits. Let us hurry while there is still time, and contemplate it closely before it gives in to the contagion of modern Indonesia.”[5] In 1971 the first “Bali Tourism Development Plan” coolly predicted that by the time its project would be completed in 1985 “the cultural manifestations will probably have disappeared, but Bali can still retain its romantic image as a green and sumptuous garden.”[6] When in 1994, tourism traffic increased to over 2 million for the first time, the forewarning was repeated: “How much more tourism can the island take? …It is now clear that the unbelievably complex social and religious fabric of the Balinese is at last breaking down under the tourist onslaught.”[7] Today well over 4 million tourists[8] visit that small island of 3 million inhabitants, and are still overwhelmed by the vibrant pageantry of the thousands of religious festivals and other cultural events organized every year by the Balinese for the entertainment of the Balinese gods and themselves. Indeed, it still is true today that “at their temple feasts they combine two good purposes, namely to please their gods and amuse themselves. I would even say that these two things are identical with the Balinese.”[9] This is unlike other tourist destination sites – Hawaii, Tahiti or Fiji  – where the indigenous culture has died out to the point where traditional dances for instance, are now organized exclusively for tourists. In contrast, out of the 5,000 dance groups listed with the provincial authorities as performing in Bali, less than 200 are maintained for tourist performances, and the other 4,800 for temple time.[10]

It should be made clear from the outset that we are aware that:
–       Bali or its culture has changed under the pressures of modernization and tourism;
–       And that these millions of tourists have had negative effects on the environmental, social or cultural fabric in Bali.
Several good publications are available that are making an inventory of such damaging impacts.[11]

But what we and many other observers claim is that “tourism has not destroyed Balinese culture”[12] as it did in so many other places. Bali has been able to maintain a specifically Balinese social, cultural and religious environment against all odds; better than other major tourist destinations. In 1936, Margaret Mead in her first letter from Bali noted that “Bali seems to have learned through a couple of thousand years of foreign influences just how to use and how to ignore those influences. Accustomed to an alien aristocracy, accustomed to successive waves of Hinduism, Buddhism, and so on, they let what is alien flow over their heads.”[13] Fifty years later, this point is still valid: “Beset by invaders for millenniums, the Balinese are responding to the latest incursions as they have to past incursions, by becoming more like themselves. The fabric of Balinese society is too strong and too flexible to be rent by easy money.”[14] Another informed observer concluded that the difference is that in Bali: “The newly available consumer goods have not dethroned ceremonial expenses as a source of prestige and sign of status: the money earned from tourism feeds a competition for status that is expressed in the staging of ever more sumptuous and spectacular ceremonies – much to the delight of the tourists.”[15] This article will explore through what mechanism Bali has been able to achieve that result.

Some Insufficient Reasons
Some claim that that the Balinese exception is simply due to the fact that Balinese are somehow inherently and mysteriously different. “Bali will always be Bali. In the past, a hundred years ago, today, and even a hundred years from now…Tourism is for Bali, not Bali for tourism.”[16] Others see the religion (mainly Hinduism), the complex caste system, or racial characteristics as the explanation of that difference. Others still claim that the management of the complex irrigation systems for the rice agriculture imposes strong cooperation among all its users, thereby creating a strong social fabric at the local level.

Without denying that all these reasons can and do indeed play a role in the Bali exception, we feel that by themselves, none of them are really convincing because none of them – or even their combination – are really unique to Bali. After all, there are hundreds of millions of Hindus around the world where a similar caste system prevails; and they have not exhibited the same level of cultural resilience and creativity as the Balinese. Similarly, Bali shares with other parts of Asia a complex racial composition resulting over several millennia from successive invasions of Austronesian, Indic, Malay, Javanese and other ethnicities; as well as its irrigation and rice agriculture. Even the historical familiarity with foreign or colonial rulers, first noted by Mead, is clearly not unique to Bali.

So, is there a systemic explanation for the Bali exception? To find out, the authors made during the Summer of 2002 a series of interviews – conducted mostly in Bahasa Indonesia – with local traditional Balinese leaders. The geographical focus was on the area of and around Ubud, generally considered as the “cultural capital” of Bali, because the interface between the indigenous culture and tourism is particularly intense in that region.

On the basis of this research, we propose that the key towards Bali’s exceptional cultural resilience results from a combination of two key traditional tools generally used all over Bali: the first consists of specific local organization structures, and the second of a dual currency system systematically used by those organization structures. The organization structures are well-known from the anthropological literature: the Banjar social organization, and a less formal structure called the Sekhe (pronounced say-keuh). But the key role of the dual currency system used by both those structures has tended to be overlooked until now.  Both will be explained next.

The Banjar and the Sekhe Structures
The Banjar is the fundamental civil unit in Bali, operating in a decentralized, democratic, cooperative manner at the local level. Banjars are typically geographically bounded on one side by a major road, on two sides by secondary roads and on the end by a river, which irrigates the Banjar’s rice fields and forest which supplies food and raw materials for the many ceremonies held each year. In a small village, there is often only one Banjar; in larger towns, there may be several. In Ubud for instance, there are four Banjars in the town itself, and 9 additional ones in the immediately surrounding villages.

The Banjar structure having been amply described in the anthropological literature[17], we can be brief here. It has been succinctly defined a “residential entity whose responsibilities are at once legal, fiscal and ritual.”[18] This paper will focus particularly on its socio-economic and cultural functions.

The Banjar head, the Klian Banjar, is elected by a majority vote of the members, and “is more an agent than a ruler”[19]. He can also be dismissed at a members’ meeting by majority vote. He receives no remuneration for this function.  Each member is equal and has one vote, there is no special status granted to wealthier members of the Banjar.  Each thirty-five-day Balinese month on the average, the Kulkul bell (a wooden gong) summons the council members to the dedicated meeting place, the Bale Banjar, to decide on the next month’s activities. Special meetings can also be convened whenever necessary.

At such meetings, both new activities are proposed and on-going projects are reported on. At the same time, the contributions of time and money are decided upon for each project.  However, if a majority of members becomes opposed to a particular project for whatever reason, it is revisited at the next monthly meeting to discuss whether or not to continue with it.

In the Ubud area each Banjar has between 750 and 1200 members, who are represented at the council by the 150 to 260 male heads of each household. The four Banjar of Ubud itself have recently agreed on a single written rule book, Awig-awig, which defines the operation of the Banjar. But notwithstanding this common rule book, each Banjar tends to keep its own style and focus depending on its leadership and the socio-economic background of its members.

In the less formal structures of the Balinese countryside, the main Banjar rules are part of the adat, the traditional code of conduct. And although the overall system is very similar all over Bali, lots of small local variations in rules can be observed.

The Sekhe (literally: “to make one”) is less formal and less permanent than the Banjar. It could be defined as a “Balinese activity club”. For example, most traditional orchestras (gamelan) or dance groups take that form. Some are formally created by a Banjar council and involve members of only that specific Banjar; many result from individual initiative and include members from various neighboring Banjars. A few evolve into successful for-profit cooperative ventures (like the 200 dance groups that perform for tourists). Many in the Ubud area focus on the development of the arts (like the Sekhe initiative by a young member of the Banjar Tengah involving now 57 members from 4 different Banjars to resurrect in Ubud the almost lost tradition of bamboo gamelan). The objective of most is to have a lot of fun (like the ones created to build huge kites in the windy season, sometimes running in the yearly kite competitions)[20].   All Sekhe stand or fail on their own merits and leadership, and on their capacity to attract the enthusiasm of other participants.

What Sekhe has in common with Banjar is that they are both part of the traditional social system (‘adat’), and are widely used all over Bali: there are more than 3,000 Banjars operational in Bali, and an unrecorded multiple of that number in Sekhe. But most importantly, both use the dual currency system described next.

An Overlooked Tool: a Dual Currency System
In our meetings with the local Balinese leaders, we were repeatedly told that it is not something special about the Balinese or Hindu religion itself, but the strong system of mutual cooperation, the Banjar, that has maintained Balinese culture despite the large and increasing numbers of tourists coming to the area.

Some quotes:
– “Banjar is stronger than religion in keeping community and culture together.” Pak Agung Putra, Klian Banjar Tengah.
-“Banjar is what holds the community, each other, together.” Pak Ketut Suartana, Klian Banjar Sambahan.
– Banjar is the most fundamental organization that keeps the Balinese character intact.” Pak Wayan Suwecha, Klian Banjar Kelod.

But what holds the Banjar together?
The intriguing answer is that a key element, usually overlooked, is a dual currency system, which gives both the Banjar and the Sekhe structures an exceptionally flexible capability to mobilize local resources. The first of these two currencies is the Rupiah, the conventional national Indonesian currency. The second one is Time. A unit of Time is approximately 3 hours of work in the morning, afternoon or evening; and the kulkul gives a special summoning for people to gather when joint work is called for.

On the average, each banjar starts between seven and ten different projects every month, big and small. And for each project, the expected contributions of each family unit – in Rupiah and in time – are taken into account. In the poorer banjars, the Rupiah constraint is typically the more binding, while in the richer ones the opposite may happen.

In most cases, there is no problem finding enough people to contribute the time needed to complete an activity, and thus contributions of Time are not recorded.  In some Banjars, however, where there is a scarcity in the contribution of Time or when there are complaints from some members about the lack of contribution by others, the Klian Banjar records every contribution of Time. Those who cannot contribute their share of Time are asked to either send a substitute person, or to pay in Rupiah at an amount of between 5,000 and 10,000 Rupiah (.50 to 1.00 US Dollar) for each time block missed.  The more organized Banjars in Ubud like Banjar Sambahan make the amount of Rupiah of such substitution cost a formal decision at the initiation of each project – when it is felt that everybody’s physical presence is deemed important the substitution cost is higher than for other projects where that is less the case.

Western observers may have missed the importance of this dual currency system because they themselves come from a culture where a monopoly of national money is taken for granted. Even the remarkably insightful historical analysis of Clifford Geertz[21] seems to have missed the role of the Time currency in shaping and maintaining the local social fabric so strong in Bali in the past centuries as well.

But our interviewees themselves are quite clear about this: “Time is a form of money.” The majority even make the point that “Time is more important than Rupiah” for keeping the community strong in the banjar.

The importance of these time exchanges can also be expressed on the negative side: the main form of punishment meted out by the banjar is not a Rupiah fine, but ostracism, the exclusion from the banjar of someone who refuses three times in a row to respect the community decisions. “The Balinese still say today that to leave the Banjar council (krama) is to lie down and die.”[22] And the reason given why such ostracism is so serious is “when they have an important family ceremony, like a cremation, then nobody will give Time for helping them in the preparations.” In short, depriving someone of Time from the community is considered the ultimate retribution.

But why is such a dual currency system so important to keep community spirit and their collective cultural expressions strong?
How a Dual Currency Supports Cultural Sustainability
A Banjar leader with a more philosophical inclination described the dual currency system as being in Yin-Yang relationship, referring to the Taoist concept of complementarity.  One of these currencies, the normal Indonesian national currency in this view is of a Yang nature because it cannot be created within the community but has to be earned  by competing in the outside world. The other – Time that everybody in principle has as the same birthright – is Yin because it is generated within the community, on an egalitarian basis, and generates cooperation. It is also something that you can’t accumulate and store like conventional money: use it or lose it.

Western languages do not have words describing the Yin-Yang concept, so we will have to use the Oriental word for it. Taoism conceived all forces in complementary pairs like earth-heaven, water-fire, exhaling-inhaling, pushing-pulling, etc. Although obviously separate forces, they are really seen as parts of a single ultimate unity, and therefore necessary to each other. In the specific money and societal context of this paper, the Yin-Yang notion refers to the polarities of cooperation-competition, egalitarian-hierarchical, feminine-masculine, etc. Figure 2 provides a summary of some of these complementary aspects. It includes some of the philosophical aspects that are underlying this worldview, because they are coherent with other important aspects of the Balinese culture. For instance, to a Balinese, the Divine is not only transcendent but also immanent – present everywhere in everything – not just in the temple compound or invisible in the heavens.

This figure can be read from up to down to focus on the internal coherence of each philosophical framework; or horizontally to see the polarity between the different worldviews. What is important to realize is that from a Balinese perspective both views are equally valid, and they spontaneously developed a dual currency system that supports both worldviews.[23] This figure also highlights therefore the differences with our Modern Western culture, where a monopoly of a Yang currency and a Yang coherence has long been considered self-evident.

An interesting difference in attitude can also be observed towards the two currencies: specifically a very flexible Yin attitude prevails towards the Yin currency. If, for example, someone has a sick child that interferes with providing time, nobody will object to him or her not contributing an equal share in time commitments. What matters is the good will underlying one’s actions…

One can see why such a dual currency system within a democratic structure like the banjar provides a lot more flexibility than when on has to operate within only one currency system as is the case in most other parts of the world, including the “developed” ones. People who have a lot of conventional money tend to have little time, and people with little money tend to have more time. So the dual currency mechanism enables some automatic leveling among the social classes.

Furthermore, this dual currency system provides more flexibility in the choice of projects that get approved by the council. In poorer communities projects that require a lot of time are favored by the banjar; and in rich ones the more expensive Rupiah projects tend to pass. For example, we found one single project in a rich banjar that had a Rupiah budget of 1.2 Billion (equivalent to 1.2 million US$). But even the poorest banjar we interviewed has a large group performing at their temple a great kecak dance, which requires a lot of manpower but no expensive garments or props. In short, in both cases, a lot of local resources can get mobilized to meet whatever the community chooses to focus on. And in all cases, a mixture of Rupiah money and Time money are always involved, just the proportional mix tends to vary. This explains why, in Bali, large-scale religious or cultural events involve practically everybody, and are not limited to elitist social groups as tends to be the case elsewhere. This dual currency system may therefore be the real secret for the cultural resilience of Balinese society.

Note that this system goes also beyond cultural events. We found banjars who support their primary schools or even build themselves roads, when the central government isn’t responsive to their demands. There are of course limitations to the substitutability of the two currencies: the cement or other materials needed for such works remains part of the Rupiah budgets.

Applicability in Areas Other than Bali
Community associations that bring people together to plan, budget and implement projects in a fully democratic and participatory way are certainly not specific to Bali. What is more rare, however, is the use by such grass-root structures of a Yin complementary currency, Time, which operates in parallel to the normal cash economy.  We believe that it is the marriage of these two concepts, the highly decentralized democratic structure of the Banjar and its use of a dual complementary currency that has enabled and continues to enable the Balinese culture to withstand the external pressures that otherwise would obliterate its rich cultural heritage.

While the combination of a decentralized democratic organization structure and the use of Yin currency is rare, it is not totally unique to Bali, however. One of the authors has recently completed the first major study for the Provincial Government of East New Britain in Papua New Guinea on the contemporary uses of the traditional shell money[24]. The key conclusion was that the use of shell money, issued locally through an organization of families, also there maintains a stronger local economy, culture and society particularly in times of downturn in the national economy.

We can therefore argue that such an approach critically contributes in maintaining the local economy, culture and society particularly whenever external forces are threatening them. By making use of a Yin complementary currency in the context of a traditional society the culture is continually nurtured, even while the people pursue market-oriented activities. It helps avoiding the degradation that normally occurs once the traditional culture is abandoned, or worse, sold off for tourist consumption in the pursuit of these commercial activities.

It is intriguing that there are many places where either one of these concepts separately are currently operational – decentralized democratic organizations, or complementary currencies. It is only their combination that remains comparatively rare.

Highly decentralized cooperative and democratic institutions are very common in many countries, including many of the local NGO’s for example.

On the complementary currency side, the use of non-conventional currencies has been spreading worldwide over the past decades. There are many traditional forms of exchange functioning throughout the Third World[25], and more surprisingly in the last decade we have seen similar activities develop exponentially throughout the First World. While there were less than a hundred such modern systems operational in the world in 1990, today there are well over 4,000.[26]  For instance, Local Exchange Trading Systems (LETS), Time Dollars and Time Banks use different forms of Yin complementary currencies. In Japan the federal government has been supporting pilot projects throughout the country to facilitate the rebuilding of community and local social capital, and the caring of one for another. Several of these exchanges make use of smart cards that process the Yin-type complementary currency.

The Balinese case study reveals that the potential for local democratically representative organizations to mobilize their membership with complementary currency systems could be quite substantial. One key ingredient would be that the membership truly and democratically participates in the selection of the projects for which their time and money would be used. Otherwise, the legitimacy of the projects would quickly be questioned. The resilience of the Balinese approach derives clearly from genuine grass-root support for every activity that the community has decided upon, and the possibility to stop any project whenever a majority in the community starts questioning it.

We obviously do not claim that dual currency systems are a panacea to solve all problems, social, cultural or otherwise. But by embedding culture and society within the economy and ecology of an area, through community associations using a Yin complementary currency, we see the possibility to get one step closer to Karl Polanyi’s vision of an economy that functions in harmony with the culture, society and environment of the area.[27]  This has been picked up by contemporary economists[28] to be called the “New Traditional Economy”, which maintains culture and society while allowing people the freedom to pursue market-oriented activities.

Most existing economic theory has as hidden hypothesis that all exchanges need to be facilitated through a monopoly of a centrally controlled currency. Furthermore, it is assumed that any currency used is implicitly value-neutral: it is supposed not to affect the transactions or the relationships among the people using it. As the English put it: “A fact is a fact, and is more respectable than the Lord Mayor of London.” And the Balinese exception provides enough facts – historical and contemporary – that should force us to put a big question mark behind both those implicit assumptions of conventional economic theory.

It is a fact that many transactions and additional activities occur in Bali thanks to the existence of the complementary Time currency systematically used at the local level. This Time currency doesn’t replace the national currency, but operates as a complement to it, and makes possible a strong involvement of even the poorest communities in the rich cultural activities of the island. The Balinese themselves claim that its existence plays a key role in creating the proverbially “strong community fabric” evidenced in their island.

Nobody is saying that community currencies all by themselves are a panacea for third world poverty and cultural degradation. A complex web of interrelated but independent, decentralized but united groups holds the Balinese society together.  But at the core of this network lives the Banjar and the Sekhe, and their dual currency system.

In a large-scale survey of the American public, no less than 83% considered that the top priority in the US should be to “rebuild community”.[29] This suggests that the automatic assumption that the dollar is the only monetary tool relevant to solve all problems, especially those of a community nature, may need to be questioned, even in the US.

Finally, one of the most frequent complaints about globalization has been that it entails an erosion of cultural specificities around the world. A  dual currency system could be of interest to those who want to rebuild a sustainable social fabric or strengthen their cultural diversities in any country, independently of its degree of economic development.

[1] Two specific conferences were the landmarks of these realizations in their respective fields. The systematic conflict between socio-cultural integrity and tourism was the main conclusion from the first conference of the American Anthropological Association devoted to “Tourism and Cultural Change” in 1974. The need for trade-offs between these two variables was the main conclusion of the joint UNESCO/IBRD “Seminar on the Social and Cultural Impacts of Tourism” held in Washington in 1976. See Smith V.L. ed. Hosts and Guests: the Anthropology of Tourism (Philadelphia, University of Pennsylvania Press,  1989);  and Picard  M. Sociétés et Tourisme: Réflexions pour la Recherche et l’Action. Paris: Unesco, 1979).
[2] Iyer, Pico Video Night at Kathmandu and Other Reports from the Not-So-Far-East (New York: Knopf,  1988) pg. 30
[3] The Westerner who first discovered Bali was the Dutchman Cornelius Houtman in 1597. After a long sojourn on the island, several of his crewmembers decided to stay, establishing the reputation back in Holland that a new “paradise” had been found. “The Last Paradise” became the title of the first book in English on Bali, published in 1930 by the American journalist Hickman Powell. See Covarrubias, Miguel Island of Bali (first edition: New York: Knopff, 1937; republished 1998 in Singapore: Periplus).
[4] quoted in Picard, Michel Bali: Cultural Tourism and Touristic Culture (Singapore: Archipelago Press, 1996) pg 37.
[5] Durtain, L. Bali, la fabuleuse et la charmante (Paris: Les Oeuvres Libres, 1956) pg 21.
[6] SCETO:  Bali Tourism Study. Report to the Government of Indonesia (Paris, UNDP/IBRD, 1971) Volume 2, pg 162.
[7] Dalton B.  Bali Handbook (Chico: Moon Publications, 1990) pg 35-36.
[8] Source for data for Figure 1: Directorate General of Tourism and Bali Government Tourism Office. Disconcertingly, there are no exact statistics of the number of tourists visiting Bali, the only firm number being total foreigners arriving directly by international flights. These rose from 23,000 in 1970 to 1,468,000 in 2000. 95% of those direct arrivals report that they come for vacations, and 30% are on a repeat visit. However, this doesn’t capture foreign or Indonesian tourists arriving via Jakarta on internal Indonesian flights, the ferry arrivals or even the cruise ships mooring at Benoa or Padang.  The estimates of total tourism arrivals range therefore between 2.5 and 4 million for 1994; and between 4 and 5 million for 2000. The lower number being the official Tourism Office estimate, it is the one we have been using in our graph.
[9] de Kleen  T. Bali: its dances and customs (Sluyter’s Monthly, 2, 1921) pg 129.
[10] Picard, Michel Bali: Cultural Tourism and Touristic Culture (Singapore: Archipelago Press, 1996) pg 138.
[11] See for example for recent opinions by Balinese themselves: Ramseyer, Urs & I Gusti Raka Panji Tisna Bali Living in Two Worlds: A Critical Self-Portrait. (Basel: Schwabe Verlag, 2000); or by foreigner observers Vickers, A. Bali: A Paradise Created (Berkeley: Periplus Editions, 1989).
[12] Norohna, R. Paradise Reviewed: Tourism in Bali in Tourism: Passport to Development? Perspectives on the Social and Cultural Effects of Tourism in Developing Countries (ed. E. de Kadt. New York: Oxford University Press, 1979) pg 201. See also Cohen E. “Authenticity and Commoditization in Tourism” Annals of Tourism Research 1988, 15/3 pg 371-386; Macnaught T.J. “Mass Tourism and the Dilemmas of Modernization in Pacific Island Communities” Annals of Tourism Research 1982  9/3: pg 359-381; McTaggart W.D. “Tourism and Tradition in Bali” World Development 1980 8 pg 457- 466.
[13] Mead, M. Letters from the field 1925-1977, ed. R.N. Aschen (New York: Harper & Row, 1977) pg 161.
[14] Elegant R. “Seeking the Spirit of Bali: Despite Fast Food and Discos, the Old Ways Live” The New York Times March 8, 1987 Travel Section, pg 9.
[15] Picard, Michel Bali: Cultural Tourism and Touristic Culture (Singapore: Archipelago Press, 1996) pg 64.
[16] Declaration of the Governor of Bali, Ida Bagus Oka, excerpt from Bali: Apa Kata Mereka (Denpasar, 1991) pg. 11
[17] Geertz, C. “Form and variation in Balinese Village Structure” American Anthropologist 1959, Vol 61: pgs  991-1012. Geertz H. & Geertz C. Kinship in Bali (Chicago: University of Chicago Press, 1975). Guermonprez, J.F. “On the Elusive Balinese Village: Hierarchy and Values Versus Political Models” Review of Indonesian and Malaysian Affairs 1990, Vol 24 pg 55-89. Warren, C. Adat and Dinas: Balinese Communities in the Indonesian State (Kuala Lumpur: Oxford University Press, 1993).
[18] Picard , Michel Bali: Cultural Tourism and Touristic Culture (Singapore: Archipelago Press, 1996) pg 12
[19] Geertz C. Negara: the Theater State in Nineteenth Century Bali (Princeton: Princeton University Press, 1980) pg 49.
[20] That fun is the main objective of such competitions is illustrated by the fact that the first prize of the biggest competition in Bali – the  Kite Festival at Padanggalak – amounts to 1.5 million Rupiah; while the Rupiah cost of the kites ranged in 2002 between 5 and 30 million Rupiah. See Wahyoe Boediwardhana “Beautiful kites fluter in Bali’s skies” Jakarta Post (Thursday, August 1, 2002 pg 18)
[21] Geertz, C. Negara: the Theater State in Nineteenth Century Bali (Princeton: Princeton University Press, 1980).
[22] Geertz C. Ibid. pg. 49.
[23] For other historical examples of dual currency systems and their collective psychological impact, see Lietaer, B. Mysterium Geld (Munich: Riemann Verlag,2001) , also available in Japanese with Diamond Press.
[24] DeMeulenaere, S. Week, D. & Stevenson, I. The Standardisation and Mobilisation of the Tabu Traditional Shell Currency (Papua New Guinea: Assaí Study, July 2002) 54 pgs.
[25] For more information about Community Exchange Systems in the Global South, see http://ccdev.lets.net
[26] A full discussion of such modern systems is available in Lietaer B. The Future of Money (London: Random House, 2001) and on http://www.transaction.net/money/
[27] Polanyi, K. The Great Transformation: the political and economic origins of our time (Boston: Beacon Press, 1944).
[28] Rosser, B. and Rosser, M.  “The New Traditional Economy: A New Perspective for Comparative Economics?” International Journal of Social Economics, 1999; and Comparative Economics in a Transforming World Economy (Chicago: Richard D. Irwin,, 1996).
[29] Ray, P. and Anderson, S. The Cultural Creatives (New York: Harmony Books, 1999). Also, The Integral Culture Survey: A Study of the Emergence of Transformational Value in America (Research Monograph sponsored by the Fetzer Institute and the Institute of Noetic Sciences, 1996).

Community Currencies: a New Tool for the 21st Century
by Bernard A. Lietaer

The three most important concerns of our contemporaries in the developed nations are remarkably convergent–unemployment, the environment, and community breakdown–and there are strong indications that these same issues will remain on top of the agenda well into the next century. Emerging technologies promise to keep unemployment a major issue, even if all Western economies get out of recession. By 2010, China will introduce as much carbon dioxide in the atmosphere as the entire world does today. And community breakdown is one of the most systemic, deep, and complex societal trends of the past 30 years, with no signs of any reversal. Precisely because we will have to live with these issues for the foreseeable future, only a long-term structural approach can successfully resolve these problems. Here I show how community currencies could contribute to tackling all three problems and also permit us to “retrofit” economic motivation to desirable human behavior.

1. Aligning Moral and Economic Incentives
There are three main ways to induce nonspontaneous behavior patterns: moral pressure, coercion, and economic incentives. For example, recycling glass bottles can be promoted by education, by regulations, or by incorporating a refundable deposit in the purchase price. A combination of all three incentives is obviously the most effective strategy. When these incentives conflict, problems will arise. For instance, when there is an economic incentive to do something a regulation or law prohibits, we need costly and permanent enforcement systems. Even in the presence of such enforcement systems we expect smuggling and many more imaginative forms of cheating to occur. More evident are cases where moral pressure is supposed to overrule economic interests. Consider, for instance, the well-known saying, “Money is like manure; it does good only if spread around.” This sentiment has been espoused in less florid language by most religions for a long time. However, this moral pressure is diametrically opposed to the concept of receiving interest on money, which provides a built-in incentive to hoard currency. Whenever there are such structural contradictions many people are unable to afford, or simply do not care enough, to follow the moral advice. It is possible, however, to design a coherent and operational currency system so that this apparent structural contradiction disappears. In other words, by questioning some traditional implicit assumptions, we can realign the moral and economic incentives so that they are in harmony.

2. Functions of Money
To understand community currencies we need to better understand what money does. We will see that a community currency should fulfill at least some of the key roles of any currency, and that a well-designed community currency can even fill some of the roles that the “normal” national currency does not. Since the breakdown in 1972 of the Bretton Woods system, the world has been living with pure fiat currency–that is, there is nothing material backing the currencies of the world. Nonetheless, money has continued to fulfill a number of different functions, only two of which are essential:
-A standard of measure. We compare the value of the proverbial apples and oranges by expressing each of them in dollars, for example.
-A medium of exchange that is more efficient than other forms– barter, for instance.

Money has sometimes played three other roles in the past, and happens to play them today as well:
– A store of value. Historically, this has only rarely been the case. For example the word capital derives from the Latin capus, capitis, which means head, and referred to heads of cattle just as is still done today in Texas or among the Tutsi in Africa: “He is worth 1,000 head.” Another example: in Egypt through the Late Classical period, and in Europe throughout the Middle Ages and until the late 18th Century, wealth was stored mainly in land and its gradual improvements.
– A tool for speculative profit. Most emphatically today when more than 95 percent of all currency transactions in the world are motivated by speculation, and less than 5 percent are for trades of goods and services. This has been systematically possible only since August 1972, when President Nixon created the floating currency nonsystem we now have.
– A tool of empire. The control by the former Soviet Union of the external trade of Comecon countries via the “convertible ruble” is a recent example.

Though we tend to take for granted that money serves all the functions we are used to–which today means all five functions for the U.S. dollar–it is important to realize that money really needs to serve only the two essential functions in order to be an efficient currency.

3. Conflicts Among the Functions of Money
In fact, the secondary functions money serves invariably end up hurting the two essential ones. Some examples follow.

Store of Value Versus Medium of Exchange
At first sight, it really is convenient to have money also play the role of store of value. However, there is a formidable hidden cost: this identity significantly exacerbates the boom-bust economic cycle.

The theory of time preference of money, which describes the rational trade-off between consumption today and saving for the future, explains this: When someone expects higher uncertainty in the future, a larger proportion of his or her wealth is logically kept as savings, and less is thus available for immediate consumption. Therefore, at the first signs of a recession, anybody who has money will logically save more and consume less, thereby exacerbating the recession for everybody else. In boom years, consumer optimism prevails, and people will tend to simultaneously dip into their savings to buy big-ticket items such as cars and houses, thereby pushing the boom into an inflationary period. While other factors also play a role in the creation of business cycles, it has been proven many times that consumer confidence significantly exacerbates the problem. Providing incentives to ensure that the medium of exchange does not also incorporate the store of value function would therefore automatically dampen this boom-bust tendency of the current system.

Speculation Versus Standard of Value
Joel Kurtzman’s ‘The Death of Money’ convincingly describes why and how the speculation on currency undermines currency’s role as a standard of value. If, for example, a German company wants to invest in a plant in India, the biggest uncertainty lies not in the risks of the business itself but in what currency to use to make cash-flow projections: rupees, dollars, or Deutsche Mark? The initial investment is in Deutsche Mark, and the proceeds will be generated in rupees, but at what exchange rate can one match the two to determine the expected rate of return? While there are some tools available to manage this risk for short-term transactions, they often are not available for the long-term risks typical in plant investments, or they are simply too expensive. The net result: fewer cross-border investments, particularly in Third World countries, thereby reducing the worldwide efficiency of resource allocation. We will never be able to determine how many investments have not occurred because of this, but all indications suggest they are quite substantial.

Tool of Empire Versus Medium of Exchange
Recent history provides a telling example of the potential conflict inherent in these two functions of money: Before the collapse of communism, there was no need for anybody to stand guard next to a plant in Poland to ensure that it would not establish closer trade relationships with the West than the Soviet Union felt comfortable with. Having the Comecon currencies convertible only in rubles was an automatic and sufficient guarantee.

4. Problems with Interest
Another feature of today’s money that we take for granted is that money produces interest. This process has become universally accepted in the West only over the past century. Indeed, for more than a thousand years all three major religions emphatically prohibited any interest on money because they considered it usury. It is only since the end of the l9th Century that the Catholic Church, for instance, “forgot” about the sin of usury.(note 2) This happened to coincide with the period when the Church itself, which for centuries used to be the largest landowner in Western Europe (that is, it was a capital user), found itself with financial assets instead of land (that is, it had become a capital supplier).

However, the problem with interest does not relate to any of these “moral” historico-religious reasons. Interest on money constitutes one of the most systematic causes of our destruction of the global environment. Consider as metaphor, for example, the life of a tree (or any other living resource): Because of interest, the net present value of any income far away in the future is negligible. So, it literally pays to cut down a tree and put the proceeds in a savings account instead of letting it grow for another decade or century. Similarly, the only types of tree worth planting commercially are the fastest-growing varieties such as pine. (Nobody plants redwoods for commercial reasons.) So even when we plant trees, we are systematically losing biodiversity.

5. Reprogramming the “Invisible Hand”
Let us assume now that we develop a currency whose sole objective is to fulfill the two main roles of money: standard of value and medium of exchange. To discourage its use as a store of value, we build in a “booster” mechanism: when someone earns the equivalent of $100 in this currency, we give him or her a purchasing power of $110 if the money is used today. It would be worth only $109 tomorrow, $ 108 the day after tomorrow, $100 on the tenth day, and $90 in twenty days, and so on.(note 3) Now, what would happen? The following patterns would become manifest: A structural incentive to separate the functions of medium of exchange and store of value would be achieved, with the advantage of reducing the boom-bust cycle. People would invest or spend this money soon, and those who receive it would in turn do the same. Therefore, additional economic activity would occur, and additional jobs would be created. Decisions would be highly decentralized, given that any recipient of the currency would become actively involved in spreading the currency and thereby activating the job creation process.

The most important structural shifts would occur in the way people would spontaneously start saving and investing. Because the booster concept discourages the use of currency as a saving device– particularly if such currencies are in widespread use– something else needs to be used to store value. The conceptual key to understanding this shift involves changing the “arrow of time” in the investment process. Under the present system, the discounted present value of any investment has to be higher than the interest rate of a risk-free government bond. This implies that anything that produces value more than twenty years in the future is basically worthless today, thus providing a systemic incentive not to care about the long-term consequences of our actions. Under the proposed system, the incentive works in the opposite way: income in the future would become more valuable than income today, thereby automatically prioritizing the long-term implications of today’s actions.

Once the basic necessities of life are covered, the logical uses of money in this new context would include investing in ways that will reduce expenses in the future (pay back mortgages, improve home insulation, improve energy efficiencies, start one’s own food gardens) and investing in anything that will keep, or increase in, value (land improvements, trees and forests, and any- thing else that grows over time). To prepare a nest egg for your grandchildren’s college, one logical step is to plant a small forest or have a “savings account” that invests in such activities. New liquid forms of savings would immediately be offered by the more agile financial institutions as soon as the demand for liquidity in the fixed assets just mentioned increased. This could stem the trend toward disintermediation, because government bonds would yield much lower returns. In general, stocks would be preferred to bonds, thereby making access to investment capital at low leverage the dominant way of financing businesses.

Consumption patterns would evolve toward products with longer lifetimes. Assume that one has $100,000 available and two types of cars are offered for sale: the usual car of today, which costs $20,000 and lasts four years, and one costing $100,000 that lasts twenty years. In today’s currency environment it is logical to buy the short-lived car because one can put the $80,000 balance in a savings account and get more value in the long run. With the proposed alternative currency it is logical to buy the long-lived car. Today nobody builds such a car because there is no demand for it. But in the future, it could spontaneously become the type of car in greatest demand. Note that the total income of the car manufacturer is the same over twenty years (assuming no inflation), but that the burden on the environment is much lower. According to the same logic, people would tend to build houses intended to last forever–and spontaneously invest in further insulation and other improvements whenever they have extra cash.

It is important to recognize that there would be no need to provide tax incentives or otherwise “educate” people to do all these things. We just reprogrammed the “invisible hand” of financial self-interest to provoke these actions. Today, many people try to convince others to act in an ecologically responsible way, but it is in the financial interest to do the opposite. With the proposed system, economic self-interest pulls automatically in the direction of ecologically sound actions. Only by such realignment of economic and moral motivations can we expect truly massive changes in behavior patterns.

6. The Validity of “Booster” Currency
The idea of a “booster” currency is just a variation of what has been variously described in the Anglo-Saxon literature as “stamp scrip” or “stamp currency” and in the German literature by “Wara” (merchandise currency) or “Frei Geld” (free money). Its theoretical concept was originally developed by Silvio Gesell about a century ago. Gesell was an Argentine businessman and economist who has been neglected by many theoretical economists because of the–at first sight–unconventional nature of his “charge” or “demurrage” concept. Gesell’s initial premise was that money as a medium of exchange should be considered a public service good (just as public transportation, for instance) and, therefore, that a small user fee should be levied on it. Instead of receiving interest for retaining such a currency, the bearer in fact pays interest. In Gesell’s time, stamps were the normal way to levy such a charge. Now, the generalized use of computers in payment and accounting systems, as well as the availability of electronic debit cards, would make this procedure much easier and convenient to implement.

Is such an unconventional concept as “charge money” a theoretically sound one? The answer is a resounding yes, and is supported by economists of no lesser stature than John Maynard Keynes. Chapter 17 of Keynes’ General Theory of Employment, Interest and Money analyzes the implications of such money, and provides a solid theoretical backing to the claims made by Gesell. Keynes specifically states: “Those reformers, who look for a remedy by creating an artificial carrying cost for money through the device of requiring legal-tender currency to be periodically stamped at a prescribed cost in order to retain its quality as money, have been on the right track, and the practical value of their proposal deserves consideration.(note 5) He concludes with the prescient statement that “the future would learn more from Gesell than from Marx.” (note 6) The second part of his statement is now accepted fact. Might he also be correct on the first part?

7. Historical Precedents
The vast majority of the books on economic and monetary theory or history never mention the possibility of such “negative interest” or “demurrage money.” Even the monumental History of Interest Rates, which covers interest from Sumer to today, does not mention it once.(note 7) Is this concept then just a theoretical idea, or is it a practical possibility? In fact, history records the remarkable ability of this concept to adapt to different cultures and circumstances–and to generate spontaneously the behaviors we are trying to promote.

Recall the biblical Joseph, who interpreted the Pharaoh’s dream and saved Egypt from “seven lean years” by stockpiling food. Why would the Egyptians have kept Joseph in such high regard for inventing stockpiling? Its use had been widespread since the beginning of the agrarian revolution several thousands of years earlier. Might there have been more to it than the Bible mentions? These stockpiles were also the basis of the Egyptian monetary system. Each farmer who contributed to the stockpile would receive a piece of pottery having an inscription of the quantity and date of delivery of his contribution, which he could then use to purchase something else. These receipts, or ostraca, have been found by the thousands and were in fact used as currency. However, what the Bible missed is the key to the system: there was a time charge on these receipts. For instance, if someone wanted to redeem an ostraca of ten bags of wheat after six months, he would only receive nine bags. This demurrage charge reflected the costs of guarding the depot and quantities lost to rodents. So we can understand that Egyptian farmers would never hoard this currency but invest in what was most handily available to them: improvements on their land and irrigation systems. This currency was used in Egypt for more than a thousand years, until the Romans forcibly replaced it with their own banking and currency system, more “modern” and having positive interest rates. Note the apparent consequences of this change: As long as negative interest currency was used, the Egyptians built monuments that would last forever and maintained their agricultural system in remarkable condition, making it the breadbasket of the Ancient World. All this quickly disappeared when the Roman currency was generalized. Since then, Egypt has remained for two thousand years a “developing” country.

The Middle Ages
What triggered the exceptional economic and spiritual prosperity in Europe, particularly from 1150 to about 1300, when the extraordinary blossoming of all the cathedrals took place? Few people are aware that this period coincides with the existence of the brakteaten monetary system, under which local lords issued silver plaques that were called back on the average every six to eight months and reissued a bit thinner, amounting to a demurrage rate of about 2-3 percent per month over this entire period. People would therefore automatically invest in anything that would last almost forever: improved land, tapestries, paintings, or cathedrals. From an economic perspective, cathedrals made sense as an investment in the future. There was fierce competition among cities to attract pilgrims from all over the Christian world, and cities competed for cathedrals, just as today they compete for Walt Disney Co. investments. The main difference, of course, is that cathedrals were also symbols of faith, masterpieces for thousands of craftsmen who chose to remain anonymous, and designed as lasting beauty. Is it a coincidence that cathedrals flourished as the most grandiose symbols of community solidarity in Western history, yet declined as soon as the brakteaten system was replaced with the king’s monopoly on the creation of currency? While the previous examples might be discounted because they seem to apply only to pre-capitalistic economies, the following examples bring us to modern times.

The 1930s in Germany
In 1930, Herr Hebecker, owner of a small bankrupt coal mine in Schwanenkirchen, Bavaria, decided in a desperate effort to pay his workers in coal instead of Reichsmark. He issued a local scrip– which he called “Wara”–redeemable in coal. On the back were small squares where stamps could be applied. A bill would remain valid only if the stamp for the current month had been applied. This negative interest charge was justified as a “storage cost.” The workers paid for their food and local services with these Wara. For example, the baker had no real choice but to accept them, and convinced his wheat suppliers to accept them in turn. The process was so successful that by 1931 this Freiwirtschaff (free economy) movement had spread through all of Germany, involving more than 2,000 corporations and a variety of commodities as backing for the Wara. But in November 1931, the German Central Bank, on the basis of its monopoly on currency creation, prohibited the entire experiment.

The 1930s in Austria
In 1932, Herr Unterguggenberger, mayor of the Austrian town of Worgl, decided to do something about the 35 percent unemployment of his constituency (typical for most of Europe at the time). He convinced the town hall to issue 14,000 Austrian shillings’ worth of “stamp scrip,” which were covered by exactly the same amount of ordinary shillings deposited in a local bank. After two years, Worgl became the first Austrian city to achieve full employment Water distribution was generalized throughout, all of the town was repaved, most houses were repaired and repainted, taxes were being paid early, and forests around the city were replanted. It is important to recognize that the major impact of this approach did not derive from the initial project launched by the city, but instead had its origin in the numerous individual initiatives taken in the process of recirculating the local currency instead of hoarding it. On the average, the velocity of circulation of the Worgl money was about fourteen times higher than the normal Austrian shillings. In other words, on the average, the same amount of money created fourteen times more jobs. More than 200 other Austrian communities decided to copy this example, but here again the Central Bank blocked the process. A legal appeal was made all the way to the Supreme Court, where it was lost.

Stamp Scrip in North America
Emergency currencies have a longer history in America than most people realize. They seem to appear with a curious regularity– the 1830s, 1890s, and 1930s–coinciding roughly with the bottom of the long-term economic cycle called the Kondratieff wave. I will concentrate on the last period because it is the best-documented example. The theoretician behind the movement in the United States in the 1930s was Irving Fisher of Yale University. He had analyzed the Worgl case in Austria and published various articles about its success. Subsequently, more than 400 cities, and thousands of communities or organizations all over the country, issued one form or other of emergency currency. Many were stamp scrip, involving the application of a stamp at prescribed intervals (monthly, for example). There was also a movement to issue this stamp script officially nationwide: Senator Bankhead of Alabama presented a bill to the Senate on February 18, 1933, and Representative Petenhill of Indiana presented a bill to the House of Representatives on February 22, 1933.

During this time Irving Fisher approached Dean Acheson, then Undersecretary of the Treasury, to obtain support from the Executive branch for the same idea. Acheson asked the opinion of one of his Harvard professors, who advised him that the system would work but that it would imply strongly decentralized decision making, which he should check out with the President. Soon thereafter, President Roosevelt prohibited any use of “emergency currency” and announced the New Deal centered around a grandiose centralized plan of large construction projects. These examples all show that the concept worked in the modern world whenever it was allowed and correctly implemented.

8. Community Currency
“If you want people to fight, throw them a bone; If you want them to cooperate, have them build a tower.”
–Saint-Exupery, Citadel

Today, local currencies are again mushrooming all over the world in an impressive diversity and increasing sophistication. As Hazel Henderson has pointed out, the key to the success of a community currency, just as for any currency, is trust. In this case it is trust in your neighbors, in the community as a whole, and in the community’s leaders. My focus here is limited to emphasizing that once you have decided to have a community currency, why not use the best design available? It is important that community currencies concentrate exclusively on the two key functions of money–standard of value and means of exchange–and therefore discourage the use of this money as a store of value or a means of speculation. The best way to ensure this, in particular for the more sophisticated electronic forms of local currency now coming online (for example, the Minneapolis Commonweal experiment), is to build in a booster or another form of the demurrage concept.

The majority of the present systems simply use a “zero interest” concept. In contrast, the majority of local currencies implemented in the 1930s explicitly built in the demurrage idea, typically through the process of requiring periodic application of stamps. Stamps are a primitive way of achieving the desired objective; today, with smart cards or electronic accounting for local exchange (LETS) systems, demurrage could be achieved much more effectively and conveniently by simply programming a small charge on outstanding balances.

This small step would have several substantial benefits:
Every participant in the local currency system will become a motivated promoter. One of the features that many organizers of LETS systems have noticed is that over time the originators tend to remain the dominant force promoting the system to new users. Some systems simply die when their original promoter is no longer available for this. Paul Glover, the founder of the Ithaca HOUR money system, mentioned that he spends a good deal of his time convincing new participants to accept the money.(note 10) This is typical, because the other members have no major incentive to actively promote new participants: they can just keep the currency until they have some use for it.

In contrast, in Worgl or in Swanenkirchen in 1930, each participant was personally motivated to convince his butcher, baker, or cousin to accept the money. One of the reasons that local currencies have multiplied in number today but have not spread as widely as in the 1930s is this structural difference in motivation for member participants. More jobs will be created. Community currencies now tend to create no more jobs in the community than normal currencies. This was not the case in Worgl, for instance, where we noticed that every shilling of Worgl money created fourteen times more jobs than a normal national Shilling.

Community spirit will be fostered. In many cases, the motivation for introducing community currencies today is often less to create jobs than to foster community spirit. Community currencies are indeed one of the most effective tools to achieve this. The word community appeared first in written English in 1283. It is etymologically derived from the Old French and Late Latin, where it referred to a group of monks who owned, operated, and lived from the fruits of their monastery. In other words, it referred to the material organization of a self-contained economic entity. Benedictus of Aniane (5th Century) felt that such a process would automatically support the sharing of the spiritual objectives of their members. Consciously promoting more frequent interactions and interdependencies with your neighbors has therefore long been successful in generating this elusive quality of community spirit. Building in the booster concept or another form of demurrage would increase the density of these interactions and therefore also spread its benefits.

Hoarding will become ill advised. Some community currencies have experienced the hoarding phenomenon. Sometimes this is even interpreted as a sign of success, because such behavior reproduces more closely the use of “normal” currency. But every time someone hoards the community currency, he or she is depriving others of its benefits. In addition, as was shown earlier in the discussion of conflict between the store-of-value and medium- of-exchange functions, there are even structural reasons why hoarding should be avoided.

Ecologically sustainable practices will occur spontaneously on a collective level. While other avenues can be used to promote sustainable behaviors, including regulations and education, why should we not use all the available tools? Reprogramming the “invisible hand” to push for ecologically sustainable behavior would be extremely helpful. These benefits will become generalized only if and when demurrage currency becomes the dominant currency. This circumstance is less farfetched than it appears, for some community currencies could play the role of prototype experiments in preparation for a new Bretton Woods agreement.

{Bernard Lietaer is currently a Research Fellow at the Center for Sustainable Resources of the University of California at Berkeley. He is working on a book about the Future of Money, about which a free online conference has coalesced at http://www.transaction.net.}






Don’t Save Ford And General Motors
BY Henry Blodget  /  Nov. 7, 2008

President Elect Obama, you’re about to get your first big economic test: Cave to the anguished cries of the crippled US car industry and waste tens of billions of taxpayer dollars postponing the inevitable. OR: Just let the crippled companies finally go bankrupt. Ford, GM, and Chrysler are done for regardless, Obama. Bailing them out yet again won’t fix them. It will just prolong the agony.

The companies’ problems result from:
* Their inability to build cars (cars, not trucks) Americans love
* Their inability to restructure their way out of their pension and union obligations
* Their inability to compete on their own merits.

Throwing another $25 billion of taxpayer money down the rat hole won’t do anything other than postpone the crisis. Just let the companies go bankrupt, Obama. That’s what bankruptcy is for. Let the shareholders and debt holders take the hit. Not the American taxpayers. Ford, GM, and Chrysler will continue to make cars. They will continue to employ Americans. (When airlines go bankrupt, they keep flying). Most importantly, they will finally be able to do the major restructuring that they have been postponing for decades. Help retrain the workers, obviously.  Help bail out some of the pensions.  But don’t blow your first tough test on the economy and bail out an industry that should have died 20 years ago.”

Would a G.M. Bankruptcy Save Taxpayer Money?
BY Michael de la Merced  /  February 16, 2009

As General Motors and Chrysler race to pull together their restructuring plans ahead of a government-mandated deadline on Tuesday, one of the top academic experts on distressed debt and bankruptcy is calling for the Obama administration to dispense with niceties and push the carmakers into bankruptcy.

If done right, the move could help ensure that taxpayers remain first in line for repayment, according to Edward I. Altman, the Max L. Heine professor of finance at New York University’s Stern School of Business. “The question is, does the Obama administration have the courage to take that next step?” Mr. Altman told DealBook on Sunday.

It is a stance that Mr. Altman, who is the director of N.Y.U.’s credit and debt markets research program, has publicly espoused for some time. Chief among his concerns now, however, is not only reaching a way to restructure G.M. and Chrysler in the least painful way for the companies, but also to protect the billions of dollars in government money lent to the companies.

The Treasury Department — which The New York Times reported Sunday is now taking the lead in negotiating with the carmakers — already has hired an investment bank, Rothschild, and two law firms, Cadwalader, Wickersham & Taft and Sonnenchein, Nath & Rosenthal, as advisers.

One of the goals of these advisers is to ensure that taxpayers fall in the top layer of G.M.’s capital structure, a person close to the Treasury department told DealBook. The $13.4 billion that G.M. received in December was made in a way that ensures that the government is what is known as a senior secured lender, with assets backing up the loan. But in another, smaller batch of multibillion-dollar loans, the government falls behind several banks in terms of being repaid, this person said.

To remedy that, Mr. Altman proposes this: the government force G.M. into bankruptcy, then provide what is known as debtor-in-possession financing for the carmaker, probably through a bank or finance firm like General Electric’s GE Capital. Mr. Altman pegs the necessary amount at about $50 billion, given G.M.’s cash burn rate of about $2 billion a month.

The money would ideally be doled out in increments, with G.M. needing to hit certain milestones to receive the next infusion of cash. “Basically, the idea is that we’re going to stop throwing good money after bad,” he said. “I think it’s very important that the government take a stand on this somewhere. Otherwise, it’s going to continue.”

There’s a specific reason the government should provide the DIP financing, according to Mr. Altman. In bankruptcy, such a loan is given priority status over all other claims, and only rarely has a company defaulted on a DIP loan. (One banker specializing in DIPs describes them as “belt-and-suspenders financing.”) Yet the market for DIP loans has only recently started to crack open, with much of the money coming from companies’ existing lenders instead of new capital.

Moreover, Mr. Altman points out, the largest DIP loan on record is the $8 billion lent last month to Lyondell Chemicals. Cobbling together a bank consortium to provide $50 billion would prove unwieldy, given the troubles in the banking industry, making the government the ideal source of the financing. However, it should still try to twist the arms of banks that have received federal bailout money to stump up some of the needed money.

Much of the opposition against pushing the likes of G.M. into bankruptcy is the disruption that such a huge event would cause. But Mr. Altman discounted those worries, saying that if the process was done right, the markets would recover. Important steps are actions that have already been discussed, including some sort of guarantee for auto warranties, even in the worst-case event of a G.M. liquidation.

More importantly, bankruptcy will finally allow G.M. to save costs and more effectively bargain with its various counterparties, including suppliers, auto unions and bondholders. “The markets might be a little freaked out, but things have softened up a bit,” he said. “There will probably be some reaction on the part of the markets, but look at what the bonds are selling for. They’re already at below-average bankruptcy levels.”






Exclusive Q&A with Chelsea Sexton about the EV1, why the Prius gets a ‘C’, and who really killed the electric car
BY Sebastian Blanco  /   Jun 22nd 2006

You don’t have to spend much time talking with Chelsea Sexton to realize she is passionate about electric vehicles. Sexton has been part of the EV debate that started in the 1990s with the debut of General Motor’s first mass-production all-electric vehicle, the EV1. Sexton worked for GM, leasing the EV1 to customers and working on marketing strategies, until late 2001, when she was laid off and GM stopped the EV1 program. The EV1’s story is told in the new film “Who Killed The Electric Car?”, which features Sexton and others talking about the strange fate of the cars that were once hyped by Hollywood stars, then found a fanatic consumer base, and are now out rusting in the desert. Sexton found time for an exclusive Q&A with AutoblogGreen.

ABG: Do you think “Who Killed The Electric Car?” accurately portrays the EV1 story?
Sexton: I do, actually. I’ve been really proud of Chris [Paine, director] and Dean [Devlin, executive producer]. That is part of what has enabled all of us to have a good level of trust going into it because it is their story, too. The director and the executive producer were both drivers of these cars [EV1s]. We knew they’d do right by the story. I’ve been really impressed with how well Chris told that complex story in a precise and compelling way.

ABG: How did you get involved in the film?
Sexton: (laughs) I leased them their cars. I’ve known Chris for about nine years and I actually leased Dean his car but also his father Don Devlin was one of my very first drivers, the guy to whom the film is dedicated. In some ways, Don is responsible for our ability to tell the story with such accuracy because he was, from the very beginning, saying the auto companies do not want to do this and he made us pay attention all along. It was very rewarding to get to tell the story for Don in the end.

ABG: There is a scene in the film where you go see an EV1 in an underground parking garage, I think in a car museum. Is this the last EV1 in existence?
Sexton: No. There are about 40 that GM gutted and donated to museums and universities, basically in an effort to get some brownie points in the end, I guess. The Peterson [Automotive Museum] got one of them. Another one that is kind of making a lot of waves right now is the one in the Smithsonian because they got the only intact car, but they just removed it from display. The Washington Post wrote a big article on it a few days ago. The other interesting component is the wing that the EV1 sits in was paid for by General Motors. GM donated $10 million to the museum and now, on the eve of the film coming out, they remove the car. There’s no conspiracy theory involved, but it certainly is a big coincidence.

ABG: The films shows there was quite an activist movement to save the EV1, and you were part of this group. How should activists approach such battles in the future?
Sexton: I think, more and more, it’s imperative that consumers ask for what they want and not settle for the status quo. Part of that comes from having worked within the industry and I know how it works. The typical industry model for automotive is, “We’re gonna build something and convince the customer that they want it” not, “Let’s ask them what they want and build it.” This is one of those cases where this was absolutely been proven. Just last year, as a good little example, Life and Times [Los Angeles-area PBS show] did a story on auto enthusiasts and they went to Hummer and to Prius and they came to us last at the vigil. While they’re setting up we were just chatting, and they said, “We just went to Toyota and we asked them about all this grassroots demand for plug-in hybrids and the Prius seems like the obvious first car to start with and people are making them in their garages. Why don’t you build a plug-in Prius?” and they said, “Because we don’t have to. So many people are buying the gas-burning version we don’t need to build anything else.” That’s sort of the perfect distillation. As long as we buy what they’re making, they won’t make anything else. It is necessary that consumers get involved, whether that’s protesting or grassroots pressure or simply voting, not just politically but with your wallet and not buying something that isn’t truly what you want. We have to get involved if we’re going to end up seeing in the showrooms the cars that we really want to drive. Because that’s what it’s about in the end. It’s not about, Oh my gosh, this one little car. It’s about the choice that consumers have been denied. I’d never tell a Hummer driver that, “You can’t have the choice to drive a Hummer.” Choice is one of the cornerstones that we hold up as an American value. Similarly, we want the same choice, to drive something cleaner, especially something that has been proven to be viable in the market.

ABG: And people were interested in driving the EV1. Was this because it was a zero-emission vehicle?
Sexton: People buy cars for different reasons, many of them emotional. A lot of reasons people buy products in general are not necessarily the most logical on paper arguments. But there is absolutely a segment of folks who want a car that is clean or a car that is smooth and quiet, or a car that doesn’t pollute or a car that doesn’t rely on the Middle East. I mean, if you as Jim Woolsey [former head of the CIA, currently a partner in Booz Allen and works with Set America Free and Plug-In America, where Sexton is director] why he wants one of these cars, it has nothing to do with the environment. He’s an environmentalist, but that’s not his primary motivation. It’s all about domestic energy. There are more and more, as time goes on, all kinds of varying reasons why people like these cars, which is what makes it such a common ground, technologically.

ABG: The movie ends by showing the plug-in hybrid as the next best car. What do you think the future of electric cars will be in America?
Sexton: I think for pure electrics, the next stage is going to come out of the smaller companies, the Teslas of the world. That car is wicked fun to drive; it’s a very cool little car. In terms of the major automakers, I see them first going to plug-in hybrids, partially because there is a very broad market for it and partially simply because it’s not a purely electric car and there is such an emotional fight right now. The more we want them the more they’re not going to make them and it’s almost come down to that particular fight over principle. So they are more likely to make plug-in hybrids, and that’s fine. In our experience, the best way to get people to use less oil is to give them the option to use none, even if that’s just for twenty or forty miles a day. That still gets most people through their daily commute and when you need to go further you have that back-up tank that you can put gasoline in, and eventually we’ll be putting ethanol in or biodiesel or something else. I’m fine with the plug-in hybrid. I don’t see it some sort of compromise in a bad way.

ABG: What kind of car do you drive?
Sexton: I drive a Saturn. I’ve had about eight of them. I won’t buy a hybrid, so I drive a good little economical gas car, as little as possible and I won’t buy another car until I can buy one with a plug on it. Mostly, it’s just what working in the industry and watching what we were showing and then watching the sort of diluted products that we came out with. I use the analogy of accepting Cs from your kids when you know they can get As. In the case of the Prius, paying thirty grand for that C? I’ll wait until there’s a plug-in hybrid available or an electric car.

ABG: Finally, who do you think killed the electric car?
Sexton: No single snowflake in an avalanche feels responsible. I certainly think that some foes played a bigger role than others, but I don’t think that any one of those suspects could have done it alone. It’s a matter of a confluence of events and people, industries and companies acting in their own best interests and people not asking enough questions. Also there was a certain amount of complacency. I don’t have just one suspect. I know some folks do, but having been in the middle of it, I know it took more than one.


Power Q&A: Chelsea Sexton
The bubbly star of “Who Killed the Electric Car” explains why General Motors is still her favorite car company, even after they laid her off and buried the EV1.”
BY Jen Phillips  /  April 21, 2008

Mother Jones: What is the most promising new energy source?
Chelsea Sexton:Well, there is a lot of low-hanging fruit in the existing renewable energy sources, like wind, solar, geothermal. And one of the things that will enable those sources the most is actually the deployment of plug-in cars, because they provide a way to store this renewable energy that currently we don’t have on the grid.

MJ: What’s the most overhyped energy source?
CS: Probably nuclear.

MJ: If you had $1 million, where would you invest it?
CS: I would probably invest it in batteries, or in things to enable the smart grid.

MJ: What do you think it will take for renewable energy to go mainstream?
CS: Economics and awareness, really. We often find that policymakers try to drive this from a grid perspective, but what really accomplishes it is pulling—the consumer is pulling. For instance, about 50% of the people who drive EVs currently went out and got solar panels because their awareness of where their energy was coming from was heightened, and they wanted to complete that cycle. Whereas if you are pushing it from the grid, you already have electricity coming out of your wall now. Most consumers don’t really care where the electricity is coming from, or they don’t care enough to pay more for it, because their end-use experience is the same. So the use of renewables in general will be driven by wanting different gadgets, or wanting to be able to do different things with those gadgets.

MJ: Does there need to be more public awareness of the different options that people have in terms of places for them to get energy?
CS: Oh, absolutely. Absolutely. Industry in general, whether it is auto industry or utility industry, tends to fall back on this “we want to do what consumers want” type of argument. “We aren’t building better cars because consumers aren’t asking for them.” Consumers can’t ask for what they don’t know is possible, whether that is wind energy or electric cars. We didn’t know we wanted iPods until they were available. Who looked at their Walkman and said, “Gee, I wish this were the size of a deck of cards and I could watch TV on the thing”? It just wasn’t something that we even thought to ask for. So we have to raise awareness of these other things so that people can then go out and ask for them or seek to actually do them.

MJ: Do you have a favorite personal energy-saving tip?
CS: I try to take up less space in the world. I live in an apartment. I don’t drive if I don’t have to. I use less of whatever I can. But at the same time I’m a big fan of technology and technology’s potential to enable that sort of efficiency. You know, electric cars can help you drive 100 miles on the energy equivalent of a gallon of gas.

MJ: And what kind of car do you drive?
CS: A little Saturn. I won’t buy another car until I can buy something with the plug on it.

MJ: When do you think we’re going to see the last gasoline-powered Hummers?
CS: We are going to see large vehicles for decades. But what we are already starting to see and what I think will continue is the trend of making those large vehicles more efficient. We are starting to see hybrid Tahoes and Escalades, because consumers are limited in their willingness to compromise. You have to give them alternatives so they can have their cake and eat it too. And there’s no reason we shouldn’t be making all of those vehicles hybrids, and then plug-in hybrids, and I think we will start to see that. A lot of that will be driven by consumer demand. People are starting to get more enthusiastic about smaller cars, but we will also see one way or the other what the enthusiasm is for more efficient big cars.

MJ: Have you seen any recent activity on the plug-in front? Any developments?
CS: Yeah. I would consider all of the automaker enthusiasm for plug-ins a recent development. You know, only a year and a half ago, maybe, there were no plug-ins being talked about by the automakers. GM remains the only automaker to have announced plug-ins for production and they’ve announced two in the Saturn Vue and the Chevy Volt. Ford is doing a plug-in hybrid test-pilot program with SBC. Toyota announced 400 cars for another test program. And it’s one of those things where people really, really, really have to get involved because CRB is proposing to reduce the number of zero-emission vehicles automakers are required to build by up to 90%, which automakers love, but the rest of us, not so much.

MJ: What one policy change do you think would get us furthest toward cutting either fuel consumption or increasing fuel efficiency in the U.S.?
CS: Well, CAFE has proven to be a nonstarter. Honestly, that’s not terribly effective. The most effective policies, and there are multiple ways to go about them, are the ones that make products available. At this point, the most useful policy would be one that puts cars in showrooms.

MJ: So there’s no use giving people tax credits if they can’t find that kind of vehicle in their town.
CS: Exactly. I mean, it’s a chicken-and-egg thing. Automakers don’t want to build cars unless they are sort of incentivized. R&D pilot programs are useful, but we had anchored very firmly in that camp, and we have put off actually doing anything until R&D has been done to death, so it’s nice to continue to provide funding for those sorts of things. But we really have to yank it back toward actual production and commercialization of these technologies. You know, fuel cells obviously are 20 years away. But plug-ins and biofuels are much closer. And I think we really ought to be emphasizing the near-term technology and not so much on the R&D. We can’t afford to wait.

MJ: Do you have a favorite car company that you think is being really innovative?
CS: As ironic as it is at this point, I would have to put my money on GM. [Sexton was laid off by General Motors when it killed the EV1 electric car program she was working on.] And trust me, I’m the last person that ever thought I’d be saying that, but they are the ones that are the most aggressive right now about actually not talking and more doing. And they absolutely still have to come through, and I am cautiously optimistic until there is a car in my driveway from whomever. Nobody else has actually put their money where their mouth is and said “We are going to build cars by this date,” so I think they deserve some credit for that.

MJ: Would you rather live next to a nuclear power plant or a coal-burning plant?
CS: Well, I’m within walking distance of an oil refinery. I’m not sure either one of them would be a significant difference. Probably nuclear if I had to make a choice.

MJ: Is that just because the chances of an accident are smaller than with coal, which is putting stuff in the air everyday?
CS: Basically, yes. The health impacts are less immediate with nuclear, but I’d want to avoid either one.

Tales of the 14th Floor  /   Nov. 19, 1979

Across between a fortress and a cathedral, the General Motors world headquarters in Detroit is as impregnable as the corporation it houses. The company cultivates an image of efficiency and dignity, taking special care to preserve an aura of sacrosanct wisdom in its most senior executive offices on the 14th floor of the building. But an entertaining and surely controversial new book makes that aura look more like a fog as it lifts some of the confidentiality from the world’s largest industrial corporation.

On a Clear Day You Can See General Motors (Wright Enterprises; $12.95) was written by J. Patrick Wright, former Detroit bureau chief of Business Week. But by all accounts it is drawn from the words of John Z. (for Zachary) DeLorean, a 17-year GM veteran who abruptly quit a $650,000-a-year job as group executive for cars and trucks in 1973. DeLorean, now 54, had a good shot at the GM presidency. But apparently his fast life, long hair and penchant for marrying young women (thrice) and divorcing them (twice) did not fit the GM mold.

He and Wright agreed to co-author the book shortly after DeLorean left. Wright interviewed the executive at length, got DeLorean’s personal papers and says that “anything of a substantive or controversial nature is either on tape or appears in John’s handwritten notes. It’s airtight.” But DeLorean backed out of the project; he has started an auto plant in Northern Ireland and may want GM’s help in securing parts and dealers. After years of frustration, Wright took out a $50,000 second mortgage on his house and published the book himself. The work is presented as DeLorean’s first-person account, and he now says that he generally would not repudiate it.

DeLorean’s kiss-and-tell story of GM in the ’60s and ’70s depicts senior GM executives as men hemmed in by tradition, swamped in paper work, and totally in thrall to their company careers. Invention and flair, he charges, have disappeared from GM, which “has not had a significant technical innovation since the automatic transmission.” The path to the top, he asserts, required a cultivated subservience. He says, “It was called ‘kiss-my-assing’ when it was done by a supplier to a customer, and ‘loyalty’ when it was done inside GM.”

According to the book, high managers were directed from above to give contributions to the company’s political campaign fund in assigned amounts up to $3,000. The checks were made out to cash. Ranking executives made every effort to have their meal checks and other expenses picked up by obsequious subordinates so that if shareholders’ inquired at the annual meeting, the brass could boast of modest expense accounts. Spying on a competitor was not unknown.

DeLorean alleges that in the early 1960s, Chevrolet had two moles working in Ford’s product-planning area. “For a price,” he says, they “passed on new product information. “The excessive emphasis on cost cutting,” he recalls, “produced an aberrant method of evaluating performance. At one time the assembly plant in Tarrytown, N.Y., year in and year out produced the poorest quality cars of all 22 GM U.S. assembly plants. In some instances, Tarrytown cars were so poorly built the dealers refused to accept them.” Yet because of consistently low production costs, DeLorean contends, the plant manager got one of the highest bonuses among all GM managers.

In the most serious charge, DeLorean contends that GM knew about the safety problems of the Chevrolet Corvair before production began and failed to remedy them. Claims DeLorean: “Charlie Chayne, vice president of engineering, along with his staff, took a very strong stand against the Corvair as an unsafe car long before it went on sale in 1959.

He was not listened to but instead told in effect: ‘You’re not a member of the team. Shut up or go looking for another job.’ ” DeLorean says he feels that the decision makers were “not immoral men.” But, he adds in Wright’s book, “these same men in a business atmosphere, where everything is reduced to costs, profit goals and production deadlines, were able as a group to approve a product that most of them would not have considered approving as individuals.”


GM and Chrysler’s restructuring plans today both lay out what would happen if they were forced into bankruptcy. Both try to make the case that it would be a disaster. GM’s says, “Quick has seldom been the pace of bankruptcy proceedings in this country.” The details are in Appendix L, where it lays out among other things how the brand would be damaged in the “RoW” (Rest of the World). Chrysler has a whole chapter titled “Orderly Wind Down Scenario.” Though it reads more like a threat.

* 29 manufacturing facilities and 22 parts depots closed immediately.
* 40,000 direct Chrysler U.S. employees lose their jobs.
* 3,300 dealers with 140,000 employees go out of business.
* $7 billion in outstanding auto supplier invoices go unpaid.
* 31 million vehicle owners lose significant value, warranties, parts, and service.

Chrysler is asking Congress for an additional loan of $5 billion, on top of the $4 billion loan it already got. The company has announced that among its three core brands, it will discontinue the PT Cruiser, the Dodge Durango and the Chrysler Aspen. GM, meanwhile, says it may need as much as $21.6 billion. It, too, promises to make cuts, including killing off its Saturn, Saab and Hummer lines. As you can see from the poll, GM has several lines to choose from. Which brings us to the poll. If you were in the captain’s seat at GM, which one brand would you remove?

Why we can’t let sputtering GM die
BY Jon Markman  /  January 23, 2009

“Remaking the U.S. industry must involve cheaper, lighter, safer cars that demand less — or no — fossil fuel. How hard is that? From India come reports that Tata expects to release a $2,500 car called the Nano later this year. Perhaps our automakers need to learn how to produce autos like breakfast cereal — not exactly disposable but not meant to last 200,000 miles either. If there were changes in consumption patterns, the 85 million barrels of oil consumed by the world today would need to ramp up to 120 million barrels by 2030. Since most oil fields are believed to be near their peak of production, either this fuel would need to be replaced or there are going to be a lot of fuel-deprived Nanos on the side of the road.

I’m going to shock you now by reporting that General Motors actually has some pretty good ideas along these lines. Larry Burns, the company’s head of research and strategic planning, has apparently been locked in a closet with his No. 2 pencil for a while and not permitted to push his ideas into production, but he’s been hitting industry meetings with a set of ideas that look like they deserve a hearing.

Shifting the auto industry into drive
Burns, who has a doctorate in civil engineering to go with his 35-year pedigree in Detroit, says he believes the automakers have an extraordinary opportunity now to start fresh and revolutionize personal mobility in the U.S. starting in 2010 in ways similar to the revolution that his forebears launched in 1910.

In a recent presentation, Burns noted there’s no need to invent anything new. There are already ideas that are technologically doable and appear to be economically viable if done in mass production. Vehicles are not much different than they were a hundred years ago: powered by petroleum and internal combustion engines, controlled mechanically and hydraulically, and operated independently of each other.

Cars for the next century would have a new genetic foundation in which they would have electric drives and electric motors, would be controlled by electric sensors and would be aware of each other in an unprecedented way. GM has these vehicles ready to go now, with Chevrolet’s new Volt, an electric car, and its Equinox, powered by fuel cells.

New, proven technology provides higher energy with greater power density than seen previously, increasing range while allowing fast recharges out of a common wall socket. If you had to pay only 2 cents per mile, or 80 cents a day, imagine how much money that leaves for purchases of other stuff. Hydrogen fuel cells, meanwhile, are a well-understood technology, too, and for less than the cost of a new Alaska oil pipeline, Burns figures that conveniently located service stations could be deployed in the 100 largest U.S. cities and every 25 miles on interstates, putting hydrogen within reach for 70 per cent of the population.

Connected vehicles, meanwhile, would be aware of each other on the road to prevent collisions, and, combined with GPS devices, could actually drive themselves with a sort of sixth sense by understanding the speed of similarly equipped cars around them, a process called V2V communication. In a V2V world, vehicles constantly broadcast their positions and velocities in a quarter-mile radius, detecting road conditions up to 10 car lengths ahead — permitting the vehicle to sense sudden stopping, potential intersection collisions and lane changes. Connected cars could ultimately be cheaper to build because occupant protection is one of the main drivers of vehicle mass. Burns says that if cars don’t crash, the steel content of cars can be safely reduced, enhancing the opportunity to run electric vehicles farther and faster.

If the U.S. government provides the money to bridge the auto industry into this new world, the use of up to $1 trillion in funds would be well worth the cost. So let’s stop beating ourselves up with what has gone wrong in the past and start building toward the next 100 years.”



General Motors (GM) was founded in 1908 in Flint, Michigan, and grew to be the largest corporation in the world. Its market capitalization reached $50 billion in 2000. In the past week, its market capitalization dropped below $1 billion to levels last seen during the 1920s. The story of General Motors is the story of America. In 1953, at the peak of its dominance, its President, Charles Wilson, declared before Congress that what was good for the country was good for GM and vice versa. Its rise to power and decline towards insolvency parallel the rise and fall of the Great American Republic. Overconfidence, hubris, lack of courage, foolish decisions made, and crucial decisions deferred have been the hallmarks of GM and U.S. GM’s stock price reached $1.77 last week, a 71 year low. It peaked at $100 during the Dot Com boom in 2000 and was still at $50 in 2007. The market has voted and it says GM is bankrupt.

American carmakers have seen their market share drop from 85% in 1985 to 43% today. GM’s market share peaked at almost 50% in the 1960’s. It reached a historic low of 19.5% in January. Its sales plummeted 49% from a year ago. GM has too much debt, too much bureaucracy, too many plants, too many car lines, too many employees, and too many future healthcare and pension obligations. Of course, the only way a company can be in such a disastrous position is through decades of mismanagement. The only logical solution is for GM to enter a pre-packaged bankruptcy with financing provided by the U.S. government if bank financing is unavailable. Shareholders and bondholders will be wiped out. They made a bad investment. Plants will be closed, UAW contracts restructured, management replaced, employees fired, debt written off and future obligations reduced. A much smaller viable company that can compete in the 21st Century would exit bankruptcy in a year or two. A profitable, low market share is preferable to a high market share with billions in losses.

The decline of GM is a testament to how poor strategic decisions over the course of decades will ultimately lead to collapse. The United States has followed the GM model of failure for the last three decades. The U.S. has too much debt, too much bureaucracy, too many government supported industries, too many agencies, too many employees, and $53 trillion of unfunded future liabilities. See any similarities to GM? Can the U.S. avoid the fate of GM, or is it too late? If we can learn the important lessons of the GM decline, it may not be too late to reverse our course. Or we can continue on the current path and follow the advice of Will Rogers: “If stupidity got us into this mess, then why can’t it get us out?”

Meteoric Rise
By the early 1920s, General Motors had surpassed Ford Motor Company (F) as the largest car company in the U.S. under the leadership of Alfred P. Sloan. He created the concept of annual styling changes that kept consumers coming back. He also established a pricing structure for each of GM’s brands from lowest to highest (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac). The idea was to keep a family coming back to GM over time as they became wealthier. He was a pioneer who drove GM to become the largest and most profitable industrial enterprise the world had ever known. His words reflect that spirit: “There has to be this pioneer, the individual who has the courage, the ambition to overcome the obstacles that always develop when one tries to do something worthwhile, especially when it is new and different.”

In the midst of the Great Depression, Mr. Sloan was able to keep General Motors profitable. That is an indication of a smart, realistic businessman who didn’t make poor decisions during the Roaring 20s. GM’s results during the heart of the Depression, when one-third of all dealers went broke, according to Automotive Daily News were:
* 1929 Net sales – $1,504,404,472 Net income – $248,282,268
* 1930 Net sales – $983,375,137 Net income – $151,098,992
* 1931 Net sales – $808,840,723 Net income – $96,877,107
* 1932 Net sales – $432,311,868 Net income – $164,979

By 1936, GM managed to increase car sales to 1.7 million and to 2 million by 1941, before converting operations to military requirements. Only an executive like Sloan comfortable in his own skin and tolerant of other opinions would speak the following words: “If we are all in agreement on the decision – then I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.”

The best business decisions are made after open debate that includes dissenting opinions and arguments. Only great leaders allow this type of decision making. Alfred Sloan led GM for over 30 years, retiring in 1956. GM’s profit in 1955 had reached $1.2 billion ($8 billion in today’s dollars). It was on top of the world.

On Top of the World
During World War II General Motors produced armaments, tanks, vehicles, and aircraft to help the Allies to victory. During the 1950s, GM became the largest corporation in America and became the 1st company to pay taxes over $1 billion in a single year. In 1955, GM employed 624,000 Americans. In the copy of the 1955 GM Annual report below, it shows that only 27 cents of every dollar of revenue was paid to employees. The GM business model was very profitable. Their market share peaked at 54% in 1954, the same year they sold their 50 millionth automobile. After the retirement of Sloan, a visionary leader failed to materialize. GM began to show signs of overconfidence as the 1960s arrived. They started to believe their own press clippings. They failed to heed the advice of another well known auto man Lee Iacocca: “The most successful businessman is the man who holds onto the old just as long as it is good, and grabs the new just as soon as it is better.”

Peter Drucker, the world renowned management guru, wrote a detailed analysis of General Motors in 1946 called Concept of the Corporation. His suggestions to management and the UAW were scoffed at by both parties. He suggested the automaker might want to reexamine a host of long-standing policies on customer relations, dealer relations, and employee relations. Among his specific recommendations was for GM’s hourly workers to assume more direct responsibility for what they did, adopting a “managerial aptitude” and operating within a “self-governing plant community.” The UAW’s powerful president, Walter Reuther, greeted that notion this way: “Managers manage and workers work, and to demand of workers that they take responsibility for what is management’s job imposes an intolerable burden on the working man.” Reuther did not fall into the “visionary” category.

Glory Days
As the 1960s began, GM began decades of reacting to competitors rather than showing the way. As the European car makers introduced smaller cars, GM introduced the Chevrolet Corvair. This car later was attacked by Ralph Nader, who wrote the book Unsafe at Any Speed, which led to congressional auto safety hearings. Speed took precedence over safety. GM continued to maintain its worldwide dominance through the 1960s into the 1980s. New car controversy plagued the company during these decades. Every decade, a major new product line was launched with defects of one type or another showing up early in their life cycle. In every case improvements were eventually made to fix the problems, but the resulting improved product ended up failing in the marketplace as its negative reputation overshadowed its eventual quality. Again, Lee Iacocca’s wisdom went unheeded at GM: “In the end, all business operations can be reduced to three words: people, product, and profits.”

GM forgot that superior products developed by superior people lead to profits. The 1970s were marked by more disastrous product launches. Who could forget the Vega? Quality was not job one for GM. The last major strike by the UAW also occurred in 1970. After that, management continually gave in to the union demands in all future contract negotiations. They promised tremendous pension benefits, lifetime healthcare benefits, huge pay increases, and onerous work rules that gave management no flexibility. GM evidently didn’t have any bean counters who could extrapolate past a five year horizon. If they had, they would have seen that they would eventually have an unsustainable cost structure with more retirees being paid than workers on the assembly line. The troubling facts were ignored because GM still had a 45% market share during the 1970s. GM’s U.S. employment reached 618,365 in 1979, making it the largest private employer in the country. Worldwide employment broached 853,000. It has been downhill ever since.

In 1983, in an epilogue to 1946’s Concept of the Corporation, Peter Drucker wrote: “GM may, within a decade, develop into a true transnational company that integrates markets of the developed world and their purchasing power with the labor resources of the Third World.” And “while it is much too early even to guess what GM’s labor relations will look like,” he added, “the assembly line, that symbol of industry during the first half of the century, will, by the year 1990 or the year 2000, probably have faded into history.” Mr. Drucker underestimated the lack of vision and foresight of GM management. They continued to follow the old ways until it was too late. Japanese carmakers arrived like a freight train during the 1980s and have never let up. GM has essentially been in a death spiral for the last 30 years. Throughout the 1980s, GM rolled out more duds like the Chevrolet Citation, Chevrolet Cavalier, and Pontiac Sunfire.

Decline of an Empire
Roger Smith ran GM from 1981 until 1990. During his reign, GM’s market share dropped from 46% to 35%. His biggest claim to fame is being the subject of Michael Moore’s first documentary Roger & Me, which was extremely critical of his laying off of thousands of employees in Flint, Michigan. He took over GM in 1981 while it was losing $750 million, its 1st loss in 60 years. Poor product quality, labor unrest and lawsuits over unsafe vehicle designs affected sales volumes in the early 1980s, which led to GM losing market share at an alarming rate to foreign automakers. In 1981, U.S. Union autoworkers responded to the Japanese threat by bashing Japanese automobiles with sledgehammers. I’m sure this made them feel better, but it was a futile and useless gesture. Smith attempted to institute Japanese manufacturing techniques, but the ingrained bureaucracy resisted change and foiled his efforts. A culture of mediocrity and poor quality led to continuous decline rather than continuous improvement. The acquisition of EDS from Ross Perot in 1984 was a failure. Perot attempted to change the culture of GM, but failed. Perot liked to say that getting GM moving again was like teaching an elephant to dance.

General Motors had a chance to take a commanding lead in the mid 1990s. It developed the 1st electric car, the EV1 in 1996. Instead of taking advantage of this opportunity to change the automotive world, GM scrapped this car and destroyed all of the models. It decided the future was in trucks, SUVs, and Hummers. It continued to roll over to the unions every time a contract came up for renegotiation. This ultimately led to an average hourly labor cost of $73.26 for GM by 2006, a 65% premium to what the Japanese pay their autoworkers.

GM sold its soul to the devil of debt and high margin, low mileage vehicles. SUVs generated a profit of $10,000 to $15,000 per vehicle, even with GM’s bloated cost structure. Rather than improve its assembly line efficiency, product design & quality, or solidify its balance sheet, it chose to use its GMAC subsidiary to make loans to subprime borrowers at 120% of the car’s value. After 9/11, GM showed its dedication to the flag by giving cars away with 0% financing. Amazingly, when you provide 0% financing to people with 550 credit scores you can sell millions of Escalades and Hummers. While Rome was burning GM management continued to fiddle. There hundreds of Presidents, Vice-Presidents, and Directors continued to fly around in their fleet of 7 corporate jets. As Rick Wagoner and his top cronies secluded themselves in executive suites on the 14th floor of their palatial headquarters, eating steak and lobster in their executive dining room, served by minions, GM was rotting from within.

Giving away cars for free was so successful, GM decided to parlay its expertise into giving homes away for free. It bought Ditech in 1999, just in time to catch the greatest housing bubble of all time. Ditech was a pioneer in offering 125 percent loans, in which the borrower could get more than the property was worth. It specialized in no-documentation mortgages and stated income loans. How could lending someone 125% of a home’s value with no proof of income or assets possibly go wrong? To quote Claude Rains from Casablanca, “I’m shocked, shocked to find that gambling is going on in here!” GMAC surprisingly lost $8 billion in the last two years. Luckily, the American taxpayer has stepped in to provide GMAC with $5 billion of TARP so it can continue to allow GM to sell more cars at a $2,000 loss per car. No need to worry, it’s hired some Wall Street wizards from Citicorp who have figured out that they can make it up on volume. Paul Kedrosky recently provided a fascinating look at how two decades of profits could be wiped out in seven months. With 260,000 remaining employees, the end is near for this fallen giant.

A corporate governance study at ragm.com sums up the reasons for GM’s decline: “The history of GM is an instructive story in how success can breed failure; how being the biggest and the best can lead to arrogance and an inability to adapt. GM was the premier car company in the world for so long that it failed to see the need for change. The company was so used to being leader that it couldn’t contemplate following others. It was this mindset, this overwhelming belief that it was GM’s divine right to be the most successful automobile company on earth that condemned the company to two decades of disaster. When GM did finally see the need to adapt, it did so with wild ineptitude, spending tens of billions in the 1980s for little reward.”

General Motors has lost $72.5 billion in the last three years. Why is the American taxpayer propping up this failed entity?

Long Road to Ruin
Bill Gross, one of the wisest and deepest thinkers in the financial world, wrote a report in May 2006 that compared the plight of GM with the plight of the United States. Mr. Gross’s words of almost three years ago ring even truer today: “I think it is important to recognize that General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy. Their mistakes have resembled this nation’s mistakes; their problems will be our future problems. If the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the un-competitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. Perhaps the most significant comparison between GM and the U.S. economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions. Reportedly $1,500 of every GM car sold in dealer showrooms goes to pay for current and future health benefits of existing and retired workers, a sum totaling nearly $60 billion. The total future healthcare liability for all U.S. citizens can be measured in the tens of trillions.”

General Motors failed to find a solution to its problems. CFO Fritz Henderson admitted in 2006 that, “I have a social security system hooked to our balance sheet.” The reason he had a social security system hooked to his balance sheet was because previous management had made commitments that could never be kept in the long run in order to keep the party going in the short run. Sounds like GM management would do extremely well in government jobs.

Eroding Competitiveness
The United States peaked as a manufacturing economy in 1960, with manufacturing employees making up 26% of the workforce. They now make up less than 10% of the workforce. Total manufacturing jobs peaked at 19 million in the late 1970s and now have plummeted below 14 million and continue to fall. The U.S. decided to outsource manufacturing jobs because we were going to do the thinking for the world. Why get your hands dirty creating things when our brilliant MBA trained geniuses could turn loans to deadbeats and frauds into AAA rated Mortgage Backed securities? The U.S. decided to take the easy path of financial engineering rather than the hard path of creating products that other countries would buy.

The trade deficit caused by decades of choices by government and industry reached $677 billion in 2008. These deficits were always unsustainable. Borrowing from the Chinese and Japanese to buy stuff produced by China and Japan could never go on forever. Instead of realizing this imbalance and taking actions to gradually rebalance the world financial system, our financial leaders and Federal Reserve reduced interest rates and encouraged the imbalance to grow, until it collapsed in 2008. Now their solution is to lower rates to 0%, devalue the currency, and encourage further borrowing. Sounds like choices made by GM in 2001. The Sage of Omaha, Warren Buffett explained the dilemma: “In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce — that’s the trade deficit — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.” The mortgage is now due.

Uncompetitive Labor Costs
By devaluing the currency and producing never ending inflation while manipulating the CPI statistics to understate true inflation, the government and Federal Reserve attempt to keep America competitive through gimmicks rather than hard work and sacrifice. When the country produced products that the world wanted, median family income rose at an annual rate of 3.7% above inflation. Since 1970, using government manipulated inflation statistics median family income has been stagnant. If a true inflation factor was applied, the median family has lower income today than they had 30 years ago. The only way people have “achieved” a better life is through the use of debt, which has been encouraged by the government, Federal Reserve and banks. This encouragement led to the collapse of the great American Ponzi scheme in 2008.

American families will see their real household incomes plunge in the coming years to 1970 levels. The backlash against immigrants, both legal and illegal is likely to intensify over the next few years. The decades of allowing our economy to be hollowed out and shipped to China is coming home to roost. Besides weapons and movies, what does America produce that anyone wants? Our financial geniuses have essentially brought down the worldwide financial system by selling foreign countries MBSs, CDOs, etc. That has been our contribution to the world in the last eight years. Now, we have delegated the responsibility of our corporations to the U.S. government bureaucracy. Lee Iacocca explained years ago how well the government runs things: “One of the things the government can’t do is run anything. The only things our government runs are the post office and the railroads, and both of them are bankrupt.”

Rather than address the structural problems of our healthcare and social security systems, our government politicians push off the issues until after the next election. They have been doing this for 30 years. This is why David Walker has described these cowardly politicians as displaying “laggardship” rather than leadership. Our elected leaders flounder from crisis to crisis using stopgap methods to plug holes in the ship of state while ignoring the huge iceberg on the horizon. There is one thing I am sure of. The deficits projected by the CBO over the next four years will be hundreds of billions higher. They haven’t taken into account emergency stimulus packages 2 & 3.

While the U.S. Titanic steams full speed ahead toward the iceberg of unfunded Social Security, Medicare, and Medicaid liabilities, our politicians spend our tax dollars on digging holes and then filling them up again. As these future unfunded liabilities continue to rise, the government’s solution is to print money, keep interest rates at 0%, devalue the dollar, and hope for the best. The U.S. depends on foreigners to buy more than 50% of our newly issued debt. When you owe $10.7 trillion to others, you usually don’t get to dictate the terms. Today, the U.S. is asking foreigners to lend us money for 30 years at 3.5% while telling them that we will pay them back in dollars that will be worth 30% less in the next five years. Even a Wall Street CEO could figure out this isn’t a good investment. The U.S. will default on this debt. It is just a matter of when.

Bill Gross laid out the choices for the U.S. in 2006: “How are we to pay for this future burden of healthcare and social security expenses? Aside from contractual legislative changes to both areas (which are surely just around the corner), the way a reserve currency nation gets out from under the burden of excessive liabilities is to inflate, devalue, and tax.”

The U.S. is hard at work on inflating and devaluing, while Mr. Obama is working on the details of the taxing. The Burning Platform for GM has already collapsed. The Burning Platform for the U.S. is a ten alarm fire. Collapse is imminent, unless a leader with guts and courage is willing to lead the U.S. back to fiscal sanity. If you believe in fiscal sanity, please join me at TheBurningPlatform.com.

{Disclosure: No position.}

Is American Car Patriotism Dead?
BYJeffrey Feldman  /  February 18, 2009

When I was growing up in the suburbs of Detroit, my family only bought American cars.  We were not particularly patriotic.  We never had a flag pole in our yard.  But we only had American cars in our garage.   I wonder, as GM executives arrive again on Capitol Hill, how many families are left who still adhere to American car patriotism? Not many, I suspect.  And this leads me to a strong, if not sobering prescription for GM.

To succeed again, GM must do more than build good cars. GM must find a path from ‘buy American’ to ‘buy green’ and then it must become that path.  It must not only find a way to market itself as a premier car company for transportation invested in environmental stewardship, but also create the means for millions of Americans to identify anew with their products as the country embraces a more sustainable economic and cultural story.

GM of all companies has probably benefited the most from this kind of automotive nationalism.  At one point, the main focus of their TV marketing was swapping the word ‘Mom’ for ‘Chevrolet’ in the jingle, “Baseball, Hot Dogs, Apple Pie, and…Chevrolet.”

Personally, I think American car patriotism is not such a bad idea, but I can see why fewer and fewer people go in for it these days.  Try asking any potential car buyer under 40, for example, if they would buy an American car.   Irrespective of their political persuasion, that under-40 potential buyer is likely to offer up something about going green–the environment and trust. Deep down they may have memories of buying American cars when they were kids, but times have changed.  Buying American is what our parents did.  Buying green is what we do now.  Or is it?

What if, for example, President Obama were to use the bully pulpit to rekindle American car patriotism?  “American car companies are building the cars that Americans need,” he could say at his next press event. “So if you need a car, buy one from GM, Ford or Chrysler.”  Even if Obama did say that, though, I doubt the resulting media stir would translate into car sales.

The problem is the new frame that defines our thinking on car sales.  The big story on buying cars has shifted in the past few years from ‘buy American’ to ‘buy green,’ but GM has not shifted with it. Ford is already well under way towards refocusing their brand and they are not taking bailout funds at this point.  Plus, Ford has a prominent executive who bears the company name and is genuinely a leader of new green thinking. But GM? Not so much.

Take a look at GM’s website and you see a company that talks big change, but is oddly out of sync with the new vernacular.  GM speaks a different language than a country of consumers seeing the world anew threw green tinted glasses.   GM may throw around hopes of  new fuel cells and adding a few more miles per gallon to current models, but they also talk about the enduring need for trucks.  They sound like a company weighed down by nostalgia far more than they are buoyed by innovation.   And this says nothing about the quality and value of the cars they produce, which is higher than at any other time in the company’s history.

GM is suffering from a brand-identity problem, and a severe one at that.  When I close my eyes and think of the most “un-green” large-scale manufacturing company in America, for example, GM is right up there in my list of three or four.  Is that fair?  Probably not.   God knows I would still give my left kidney for a 1978 Corvette.  Still, the fact remains that when most people today think of GM, they do not think of sustainability.

While GM is busy trying to convince the country through PR that it is poised to become a major player in the new era of sustainability, more and more Americans look at GM as the company that symbolizes the old era of gas guzzlers and SUVs.

All this means that the path to survival for GM–not to mention prosperity–is more than a matter of finding a way to put high-capacity batteries into production vehicles in the next 2 years.  Given enough cash, they could probably do that.  For GM to thrive again, the company must drop its past reliance on American car patriotism and embrace the new ‘green’ ethic that is pushing Americans to reinvent themselves.

What might this look like if GM actually underwent such a radical transformation? Imagine, for example, if tomorrow GM announced that it was changing the mission of its company to something like this: Meet the world’s transportation needs with the goal of protecting global water resources for future generations everywhere?

Now, if I were to sit down with a GM executives tomorrow, and advise them to change their mission statement to emphasize transportation and water stewardship (just one possibility of many) instead of just selling cars, they would tell me that I was being unrealistic and that I should find a way to ‘balance’ the economy with the need to protect the environment.   And that is what makes GM a company of the past–a company hiding from change behind a cloak of American car patriotism that is rapidly diminishing.

Ford has already made the shift from ‘cars’ to ‘transportation’ and from ‘earnings’ to ‘stewardship’ in their corporate vision. GM has not even begun. And yet, for a company of GM’s size to benefit from the kind of economic investment and recovery the Obama administration has set in motion, it must do more than just take buckets of government money and apply it to the holes in its rickety financial roof.  GM must reinvent and revolutionize the very meaning of “GM” in the American mind. To all those GM executives who would respond to this challenge by saying, “We have already done it!”  My answer is: Sorry, but…no you have not.  The truth is in the hearts and minds of the American consumer when it comes to GM, not in the damage control of the GM PR machine.

I am optimistic, if not a bit nostalgic.  If GM would start tomorrow to build that path from ‘buy American’ to ‘buy green’–the next 5 years could be the most exciting time the American consumer has ever known.  The innovations that could hit the market as a result of a completely reinvented GM would be virtually limitless. The Detroit Auto Show could become the biggest world stage for green technology ever known.  Michigan could become the center of a new green manufacturing movement.  The result would be a radical shift in how we experience and how we think about American cars and how we think about being American. The choice is up to GM–the real choice.  I hope they make it.



The Believer  /  BY Andrew Corsello

{As a founder of PayPal, Elon Musk made $250 million in an Internet minute. But then he got bored. He wanted a bigger challenge. Much bigger. So he asked himself: What are the three largest, most important, most difficult challenges of our time? The answer: solar power, space travel, and electric cars. Then he tried to tackle all three at once}

But Elon doesn’t want to go inside and doesn’t understand why the others do. It’s beautiful out here in the dark. Elon and his siblings and cousins start to argue. Come on, Elon. No! Come, Elon! I won’t! Please, Elon. Tosca, the 3-year-old, starts to yell, then cry. Then she blurts out what the other children are thinking. “Elon, I’m scared!”

Tosca’s mummy has come outside to see what the tears are about. Huddled there on the porch are Tosca and Kimbal—the middle sibling, fifteen months Elon’s junior—and the cousins. And there at the tree line is Elon. The light has mostly waned, but Elon, he’s so white, skin as pale as a fish’s belly, and Maye Musk can see his face so clearly. Beaming. Euphoric. Because he knows. Elon hasn’t been bickering with his sister and brother; he has been evangelizing. And now he raises both arms to make sure they can see, as well as hear, the good news. “Do not be scared of the darkness!” Elon Musk calls out to them from the wilderness. “There is nothing to fear—it is merely the absence of light!”

Though Elon has been issuing such pronouncements for several years, it seems to Maye Musk that the distinct way her son has of inspecting the world around him—so precise, so sober—was fully formed even before he could speak. A carefulness was evident, a stillness. Now, at 6, he is creative and imaginative, but not in a fanciful way. Other than a fondness for comic books and Tolkien, he doesn’t engage in make-believe, doesn’t make things up. There are no imaginary friends—a surprise, since he doesn’t have many real ones—or monsters in the closet. Elon simply isn’t interested in things that are not there. Only in things that are, or plausibly could be. Facts. Elon needs facts the way he needs air.

And so he reads. Four, five hours a day, even as a first grader. He forgets nothing he reads. Tosca will say, “I wonder how high up in the sky the moon is!” and Kimbal will respond, “A billion kilometers!” And Elon, smiling, sharing, will say, “Actually, it is 384,400 kilometers away.” His siblings will stop and look at him then, and Elon, interpreting the silence as an invitation, will add, “On average.”

Just the facts. They’re all Elon needs. What he doesn’t seem to need is a mentor, or even encouragement. Sometimes he fires questions at his father, an electrical and mechanical engineer. Problem is, many of his questions involve computers, which Errol Musk dismisses as “toys that will amount to nothing.” His son calls this opinion “very silly” and, at the age of 10, buys his first computer and begins teaching himself how to program it. Two years later, he sells his first piece of software—a video game called Blastar—for $500.

Intelligence like Elon’s—self-originating, self-sustaining, seemingly parentless—provokes a reflexive question from everyone who encounters it. Where does such a child come from? It’s also a rhetorical question. The better thing to ask is: Where does such a child go?

This is the more relevant question not only because it is answerable but because it can and must be asked and answered now. Now—when we are more uncertain about one another, and about ourselves, and about our direction, than we have been in decades—it is important for us to hear a story like Elon Musk’s. As a reminder. And as a bracing slap to the face.

Because when children like Elon Musk attain the kind of self-awareness that leads to questions about environment—Where in the world can I go for the license and the room to do what I must do? Where in the world are my peers?—they always, and still, come to the same conclusion.

Elon Musk knew when he was a child. A remarkable conviction for a child to have, and all the more so because there was no specific dream attached to it. There was no “to build rocket ships” or “to make millions” or “to design computer software.” Instead, Elon (pronounced ee-lon) had this thought, consciously, literally, and at the age of 10: America is where people like me need to go. That is where people like me have always gone. A place that was the photographic negative of apartheid South Africa, a place less encumbered than any in the world, ever, by fear.

“It is as true now as it has always been,” says Elon Musk, the man who is endeavoring—as preposterously as he is credibly—to give the human race its biggest upgrade since the advent of consciousness. “Funny how people seem to have forgotten that. But almost all innovation in the world takes place in the United States.”


By the time he’s 10, he’s reading eight to ten hours a day. Elon reads and Elon retains, and his retention armors him. When the negative injunctions, You can’t and You won’t, come at Elon the way they come at all children, tens of thousands of times and in every conceivable form, sometimes overt and hard, sometimes insidious and soft, he simply doesn’t hear them. Another couple of decades will pass before his biography fills in the specifics, but Elon Musk—the metamorphic intellect, the stuntman brazenness, the aura of immanence—is already there. The 24-year-old physics Ph.D. candidate at Stanford who drops the program after forty-eight hours to become a software programmer who sells his first venture, a media-software company called Zip2, for $307 million? There. The propulsive personality that, within weeks of that sale, starts X.com, an online-banking company that morphs into PayPal before being sold to eBay in 2002 for $1.5 billion? There. The 30-year-old autodidact who then dispenses with digital ephemera in order to become a man, a rocket man, a rocket scientist, and creates Space Exploration Technologies, a company whose short-term purpose is to commercialize an endeavor—orbital rocketry—that has previously been the province of a handful of nations and huge aerospace concerns (Northrop Grumman, Lockheed Martin, Boeing, etc.) and whose long-term aim is, yup, a mission to Mars? There. The 32-year-old entrepreneur who decides it’s time to gin up some ambition already and wean America off the teat of foreign oil while combating global warming, and in 2004 makes himself the controlling shareholder and, eventually, CEO of Tesla Motors, manufacturer of the world’s first all-electric sports car? There. The 34-year-old penitent who realizes he’s just not doing his part, greenhouse-gas-wise, and becomes the chairman and controlling shareholder of SolarCity, turning the company into one of the nation’s biggest installers of solar panels? There.

The above reads as a chronology, which it is, but much of it is also a simultaneity: Elon Musk is currently helming three companies, all of them start-ups, each of them created to address an intractable global problem, two of them on the cutting edge of entirely different engineering technologies, and none of them in even remotely related industries. He is doing so as a businessman (he devised the business plan for SolarCity, which is run by his two cousins, and is the chief executive of the other two) and as a financier (having put more than $100 million of his own money into SpaceX and $55 million into Tesla), and that’s something.

But really, it’s nothing, because he’s not just the vision guy or the money guy or the marketing guy, although he’s all of those, too. He’s also designing the stuff. At each of his companies, he knows what the engineers—chemical, mechanical, electrical, structural—know and what the software programmers know, and he does what they do. When the brushed-aluminum pedal of the Tesla Roadster is floored, unleashing 650 amps and 14,000 rpm from the car’s 6,831 lithium-ion cells and launching it from zero to sixty miles per hour in 3.9 seconds, the engine roars like…a cell phone on vibrate mode—a phenomenon made possible not only by Elon Musk’s money but by his mind. Likewise, the “CTO” in his official SpaceX title is descriptive, not ceremonial: Elon Musk taught himself how to design and build rockets. “I’d never seen anything like it,” says Chris Thompson, explaining what persuaded him to leave a senior position at Boeing to oversee “structures” at SpaceX. “He was the quickest learner I’ve ever come across. You had this guy who knew everything from a business point of view, but who was also clearly capable of knowing everything from a technical point of view—and the place he was creating was a blank sheet of paper.” Musk says (as do the rocket scientists he works with) that after founding SpaceX, it took him “about two years to get up to speed.” How is such a thing possible?

Books. They did for Elon what they’d always done. They gave him what he needed—facts. And, less obvious but just as crucial, they took away what he didn’t: fear, or even any kind of hesitation.

Did you see what Elon did this fall? It was big. It almost, but not quite, made up for what he did in August, when one of his Falcon 1 rockets failed to make orbit and ended up dumping James Doohan’s ashes—Scotty’s ashes—in the Pacific Ocean. The achievement might have slipped under your radar, though, because it came at the very end of September, just before the bottom truly fell out. Most of us had already assumed the fetal position by then, thrust our eyes into the softs of our elbows, anything to avoid looking at our latest 401(k) statements. So know this: On September 28, Elon Musk did something that had never been done before, and which experts had repeatedly said could never be done: launched a privately funded rocket built from scratch into Earth orbit. Previously, only nine nations (and the European Space Agency) had independently done such a thing—each after decades of trial and error, dozens of failed launches, and billions (of dollars, rubles, francs…) invested. Musk’s Falcon 1 rocket, built for $100 million by a company with fewer than 150 employees, succeeded on only its fourth attempt.


Walk into the giant hangar housing the offices of SpaceX and you will immediately find your eye drawn to a large glass-walled space named after Wernher von Braun, the Teutonic creator-god of rocketry and, like Elon Musk, a naturalized American citizen. Spend an hour or two at the company and you’ll realize that von Braun refers less to a room than a state of mind. “We’ll take it to the von Braun”—that’s the argot, the invocation, in the face of any conflict that requires immediate resolution. Engineers at SpaceX talk about takin’ it to the von Braun the way toughs in dive bars talk about takin’ it outside.

It’s early November, late in the afternoon on election eve, as the dozen men who make up SpaceX’s senior design team file into the von Braun Room. (Yes, they’re all men, ranging from their early twenties to early fifties. Two wear wedding rings; all but Elon sport metal watches chunky enough to deflect gunfire.) There is every reason to believe that this will be a truly terrible meeting for Elon Musk. Actually, meetings are terrible almost by definition in Musk’s view. Meetings, he’s fond of saying, are what happens when people aren’t working.

But this Monday afternoon is special, thanks to Tesla. October has just proven to be the single worst month for the auto industry in twenty-five years. Despite being a new kind of company making a new kind of car, Tesla isn’t immune from what is ailing Detroit. People aren’t buying cars, period, much less $109,000 electric sports cars with a 244-mile range—a fact not lost on the venture capitalists Tesla relies on for financing. In recent weeks, Musk has had to close Tesla’s engineering office in Michigan, lay off 20 percent of the company’s staff (mostly from the Michigan office but also from the Silicon Valley headquarters), and announce a significant production delay in Tesla’s Model S—the $57,000 sedan that Musk (and those venture capitalists) have been hoping will broaden the company’s client base.

Yet more: That announcement about the S has nearly coincided with another, on the blog of Elon’s wife, the fantasy novelist Justine Musk, that he has left her and their five boys (4-year-old twins and 2-year-old triplets) for a 23-year-old English actress named Talulah Riley. “By all accounts she is bright and sweet and of course beautiful, and about as personally responsible for the death of my marriage as she is for the dynamic that played out inside it. In other words, not very,” Justine wrote. “Also, she is not blonde, and I do find this refreshing.” (After initial publication of this story, Elon contacted GQ to clarify that he and Riley met only after he had filed divorce papers, and that he has his boys several days a week at his home; in an e-mail, Justine confirms the custodial arrangement, and that Elon “has always insisted that he met Talulah on the July 4 weekend following his June 16 filing for divorce.”) And about a week after that, a Tesla employee leaked information to a popular Silicon Valley blog about how low morale at Tesla had sunk, and revealing the proprietary fact that the company—which has taken more than a thousand deposits from buyers who haven’t yet received their Roadsters—was down to its last $9 million in liquid reserves. The same day the blog item appeared, Musk issued a statement confirming the $9 million figure while announcing his intention to bolster Tesla’s cash with at least $20 million in additional financing. Then, in search of the leaker, he sent a computer-forensics team to seize and search the computers of various employees. The only redeeming pieces of news about Tesla? Leonardo DiCaprio, Matt Damon, and George Clooney are all having their Roadsters delivered this week.

Today, Elon and his SpaceX engineers are takin’ it to the von Braun to discuss a fine point of reentry physics, per an exchange in one of the day’s earlier meetings.

engineer #1: Would you VPPA?
engineer #2: [lustily] Naaaaaah, I’d probably go to soft plasma.
elon: You always get misplaced diameters with that.
engineer #2: What if the heat shield attached to the Dragon’s base…
[A prolonged exchange of glances; a clear consensus that there are sometimes feelings for which there can be no words.]
elon: We’ll take it to the von Braun.
[Satisfied nods from all. Exeunt, pursued by a bear.]

Now Musk sits, his engineers loosely grouped around him, waiting for one of them to begin a PowerPoint presentation. He just misses being extremely handsome, and somehow, by just missing the extreme of handsomeness, he also just misses being merely handsome. Yet Elon Musk draws eyes the way an extremely handsome man does, for two reasons. The first is that he is unusual looking, in a boyish and pleasant way. The second is that physically, Elon Musk is a very, very still human being, and there is something arresting about that. Or as one Silicon Valley blog recently put it, “The liquored-up consensus at San Francisco watering hole Joey & Eddie’s last night: Tesla Motors CEO Elon Musk is actually kind of hot.”

“The economy is shit,” he says, apropos of nothing and everything. Though Elon Musk almost never raises his voice and doesn’t now, his tone is unmistakably…chipper. “Do you realize what that’s going to do to the value of secondhand machines? They’ll be in the toilet! We can get an EB welder on-site!”

It’s the damnedest thing. The world is shit. Elon’s world is shit. Yet when Elon asks, “Should we buy a welder?” he seems to be doing so in the same way a 10-year-old asks, “Should we ride the roller coaster now?” Here in the von Braun, everything that comes out of his mouth, whether in the form of a question or comment, is about building, hiring, investing. If and when the present woes of the world are acknowledged—the economy is shit!—the point is to exult in how easy that’s going to make things.

But then the fun time is over and the meeting begins in earnest. The issue at hand involves the physics of reentry on the Falcon 9—the larger and more ambitious successor to the Falcon 1 that SpaceX put into orbit in September. SpaceX is all about making orbital rockets that are both cheap and reusable—in other words, rockets that can survive the hellfires of atmospheric reentry. The adherence to one-time-use technology is the reason space exploration has always been the province of governments and their contractors. (Even the space shuttle is only partly reusable—and still costs $450 million per launch.) The commercial viability of SpaceX is therefore less about getting rockets into Earth orbit than reliably getting them back. Without reusability, there can be no economy of scale, and if there can be no economy of scale, there can be no SpaceX.

Though SpaceX already has several Falcon 1 contracts lined up with government and private satellite makers, it is the Falcon 9—scheduled to be test-launched from Cape Canaveral this summer—that could transform the aerospace industry. With its single engine, the seventy-foot Falcon 1 can send payloads of 1,400 pounds or less into low Earth orbit (up to about 1,200 miles above the planet’s surface). The 180-foot F9, with its nine engines and its Dragon capsule, is designed to catapult eleven tons of cargo—or up to seven people—22,000 miles into the sky. What that will cost, at least initially: about $40 million per launch—somewhere between a third and a half of what NASA is accustomed to paying. An important breakthrough came in late December, when NASA awarded SpaceX a $1.6 billion contract which calls for the F9 to take cargo (and only cargo) to and from the International Space Station between 2010 and 2016.

The PowerPoint presenter mentions reentry temperatures and the need for “restoring the pitch moment.” All par for the course. But then he says it. “So we want to make sure there’s room enough for the avionics.…”

“There is shitloads of fucking room there,” Elon says quietly. Then, for clarity, he adds, “There is shitloads of fucking room there.” He’s not angry. This is just what Elon does; as nature hates a vacuum, Elon hates an inaccuracy. Without a trace of defensiveness, the engineer whom Elon has corrected explains the calculations underlying his previous statement. There’s some back-and-forth on that. On paper, the language can look a bit violent (“If people do anything that contributes to this [rocket] stage not being recoverable,” Elon says at one point, “they will find their work undone”). Spoken, it’s a purely informational exchange.

Will the molten slag cause any problems?
Nah, it’ll all be blowin’ off so hard…
If we think of this as an upside-down Dragon…
If we need three inches of cork, how the fuck will the inflatable survive?

And so it goes. It’s quite something to see a group of human beings offering themselves up in the service of facts the way these men are. Here in the von Braun, it is possible to comprehend the facts—all those mind-blowing technological facts—as molds into which these men have poured their lives, and not the other way around. Then it is over. There is no announcement of this fact. Elon doesn’t say “Good work, people” or “Okay, that’s it for now” or even “We’re done.” He just rises to his feet, saying “Yup” as he does, wheels around a walks off. Yup. From anyone else, it would read as a scornful dismissal.

He returns to the cubicle that serves as his office, I follow at a distance. He’s already at his desk, eyes fixed to the monitor of his desktop computer, when I arrive. I stand there for a bit, waiting for, I don’t know, some kind of permission. Then I sit. Elon Musk is working at his desk and I am seated five feet from him, facing him, watching. Minutes pass. I cannot determine whether he is unaware of my presence or just indifferent to it—only that whichever the case, it is entirely so.

Finally, just for kicks, I ask, “Was that fun?” Meaning the von Braun. Elon doesn’t hear the question. Just keeps looking at his screen, his fingers chattering away at the keyboard. Ten seconds pass. His mother has warned me about this. “We’ll all be out to dinner with him, and someone will say, ‘Let’s see a movie after dinner. Elon what movie do you want to see? Elon? We’re talking about a movie.’ But Elon’s not eating. He’s just sitting there. Thinking. ‘Okay, Elon’s not with us for a while, we’ve got to let him be wherever he is. Let’s, the rest of us, talk about the movie.'”

Eventually the fingers slow, then stop. Elon turns in his chair. His mouth does not move, yet somehow there is a smile. “Yeah,” he says. “I liked that. Actually, I liked that a lot.”


Something remains to be said about the nature of Elon Musk’s ambition, something that makes the man either a sublime or comic figure. Or perhaps both. Because according to Musk, the point of SpaceX is not to make money. The point is that mission to Mars. And that mission, as well as the Martian colonization to which it leads, still isn’t the end-all Elon has in mind. There is a larger imperative.

According to Elon Musk, there are such things as “epochal moments.” As he defines them, epochal moments are not moments “in” human history. They’re larger. Rarer. Musk says the first epochal moment in the grand human ascent was “the advent of the single-celled organism. The next was the emergence of multicelled life. Then the differentiation into plants and animals. Then the move onto land. Then mammals. Then consciousness.” To Musk, epochal moments are make-or-break moments; either there is a great leap forward or there is extinction. One does not fuck with epochal moments. And now, Elon says, for the first time since we humans began peering at our own reflections and wondering Who?, another epochal moment is upon us: We’ve got to get off this rock—soon—or face oblivion.

“I founded SpaceX and put much of my fortune in it because I really believe it is a matter of when and not if, and that when is probably a lot sooner than most of us are comfortable thinking about,” Musk says of the end of life—all life, not just human—on Earth. There is a constant motion in his eyes as he says this. Actually, the motion is present even when he’s not prophesying the end-time. While his gaze remains fixed, the irises and pupils of his eyes—small, gray, wide-set—never stop moving. Very rapidly, almost imperceptibly, horizontally. Vibrate and even shiver overplay it, make it seem like a leer or tic when it is neither, and unappealing, which it isn’t. When Elon Musk speaks, the colored parts of his eyes shimmer with attentiveness. He seems less like a person who is speaking than one who is listening. “I’m not saying we’ll do it, to be sure. The odds are we won’t succeed. But if something is important enough, then you should do it anyway.

“Things have happened quickly,” he continues. “It took us millions of years to evolve into what we are, but in the last sixty years, with atomic weaponry, we’ve created the potential to extinguish ourselves. And if it’s not us, it will inevitably be something else. If not a meteorite in the relative short term, then the expansion of the sun’s corona. It will happen.” Yeah, man, the corona. Guy needs to lay off the comic books or go into movies, right? (Oh, wait—he already did that when he and two of his PayPal co-founders were producers on Thank You for Smoking.) But he’s not done. “It’s important enough to be on the scale of life itself, and therefore goes beyond the parochial concerns of humanity,” Musk says of our interplanetary destiny. “We’re all focused on our little things that are of concern to humanity itself. People think of curing AIDS or cancer as being very important, and they are—within the context of humanity. But curing all forms of cancer would improve the average life span by only two to three years. That’s it.” In other words, while eradicating disease is a worthy pursuit, and would extend the lives of individual human beings, my life’s work is extending the life span of life itself.


How does a person say the kinds of things Elon Musk is fond of saying and not conjure a man stroking an albino show cat while reclining in the control room of his volcanic lair? Yet he doesn’t. This neutral, disarming tone of his has always been part of his gift, his ability to make grandiose pronouncements without coming across as arrogant or show-offy (as an adult) or obnoxious or precious (when he was a child). Part of this may be physical. In addition to being soft-voiced, Musk has an unusually small mouth that barely moves, if it moves at all, when he speaks. There’s a vaguely ventriloquistic effect. To listen to Elon Musk speak is to encounter words that somehow feel displaced from motive; he never seems to be attempting to prove anything about himself. There is a drawing power in that.

People follow Elon Musk. Many things about the man amaze, but none so much as the way he gets people to follow him. The pattern is constant: Elon declares his intentions and asks people to join him. Without exception, those intentions are ludicrous; without exception, the people he’s wooing are bright, older and more experienced than he is, and safely ensconced in lives they find fulfilling. Yet these people forsake the secure and the known to follow Elon Musk. It has been this way since he was a teenager.

Only a few months after Musk left South Africa at the age of 17, his sister, Tosca, announced to their mother that she intended to join him in Canada. (Elon was unable to immigrate straight to the United States—only to Canada, where his mother had been born and still had citizenship.)

“Elon is 18, you’re 15,” said Maye Musk, pointing out the obvious.
“Elon will look after me,” Tosca told her mother.

Tosca, it turned out, had absorbed more than a little of what her older brother had told her years before about the absence of light; Maye Musk returned from a trip to find that her 15-year-old daughter had not only managed to put their house on the market, but to sell it. “I think we must leave now,” Tosca explained. Elon was expecting them.

Nearly a decade earlier, Maye Musk had taken her three children and, as she now puts it, “run away” from her husband. (Elon says he and his father have been in “limited touch” ever since. “Quite an astute engineer, although he’s gone a little crazy later in life. I don’t think he has all his cookies in the jar.”) In the years following her divorce, Maye had built dual careers as a model and a dietitian. If she chose to emigrate, the South African government would freeze all her assets—even the money from the house sale. The choice filled her with panic. Don’t worry, Tosca assured her mother, “Elon knows everything.” How could Maye argue with that? Elon really did know everything, which meant there was nothing to fear. Which was why Maye Musk packed a bag and, with her two younger children, followed her eldest child across an ocean.

It was the same twelve years later when Musk started SpaceX and began recruiting. Some of those who came gave up senior, secure, lucrative positions at places like TRW and Boeing to come work at SpaceX with Elon Musk—an Internet entrepreneur with no background in rocket science. “It was a can-do attitude combined with the fact that he knew what he was talking about and was happy to be corrected if he didn’t,” says Tom Mueller, the man who now oversees all “propulsion” at SpaceX. “You couldn’t say no to it.” Others left places like Google and Microsoft to come work at SpaceX, and later at Tesla, because Musk liked the way their minds worked and convinced them that they, like he, didn’t need physics Ph.D.’s to build rockets and cars.

Perhaps the most remarkable thing about Elon Musk’s drawing power is that, as strange as it may seem, he is not a particularly charming or charismatic person. Charm and charisma require, first, the desire to be charming and charismatic and, second, the ability to execute; both of these require energy. And Elon, a man deeply attuned to the physics of his energy—its caloric and intellectual and financial and historical value—simply isn’t interested in using it to light up a room. And yet there is some…thing whereby Elon Musk enters a room and both the space and the other people in it suddenly seem distilled. What is that—and how does it obviate the questions about charm and charisma and even likability?

Here’s how: Elon Musk’s leadership, his ability to inspire and motivate the people who work for him, derives completely, and only, from his knowledge. The knowledge—the millions upon millions of facts that he has not forgotten—is itself a form of charisma, that infectious “thing you just can’t put your finger on” that we normally expect to see in the form of “star power.” Ironic, that the man with the intelligence and the will to take the human species to Mars and beyond would lack star power. And strangely assuring that he doesn’t need it. What he needs is to persuade the smartest engineers in the world to come work for him. Star power can’t do that. Facts can.

In the end—although it is patently ridiculous to speak of any kind of “end,” seeing as how Elon Musk is still three years shy of 40—all those facts add up to a kind of dazzling mosaic. Of…? Well, that depends on who you are. If you are Elon or one of the people working with him to build his cars and his rockets, it is an image that convinces—an image without metaphysical content: He doesn’t have faith that he can do it; he knows. Because Elon knows everything.

But if you are just…a citizen, and especially if you are an American citizen weary of soul after eight years of a national leadership not only incurious about but hostile toward science, even if this man fails to midwife the next epochal moment in the great human ascension, or even to deliver an affordable all-electric car that helps kill this country’s oil addiction, the mosaic image of Elon Musk’s life is one that galvanizes: This guy had to come here to attempt that.

Brothers, sisters, fellow earthbound humans, if that doesn’t wake you up, you’re already extinct.

Monkey Business: Keith Chen’s Monkey Research
BY Stephen J. Dubner and Steven D. Levitt  /   June 5, 2005

Adam Smith, the founder of classical economics, was certain that humankind’s knack for monetary exchange belonged to humankind alone. ”Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog,” he wrote. ”Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that.” But in a clean and spacious laboratory at Yale-New Haven Hospital, seven capuchin monkeys have been taught to use money, and a comparison of capuchin behavior and human behavior will either surprise you very much or not at all, depending on your view of humans.

The capuchin is a New World monkey, brown and cute, the size of a scrawny year-old human baby plus a long tail. ”The capuchin has a small brain, and it’s pretty much focused on food and sex,” says Keith Chen, a Yale economist who, along with Laurie Santos, a psychologist, is exploiting these natural desires — well, the desire for food at least — to teach the capuchins to buy grapes, apples and Jell-O. ”You should really think of a capuchin as a bottomless stomach of want,” Chen says. ”You can feed them marshmallows all day, they’ll throw up and then come back for more.” When most people think of economics, they probably conjure images of inflation charts or currency rates rather than monkeys and marshmallows. But economics is increasingly being recognized as a science whose statistical tools can be put to work on nearly any aspect of modern life. That’s because economics is in essence the study of incentives, and how people — perhaps even monkeys — respond to those incentives. A quick scan of the current literature reveals that top economists are studying subjects like prostitution, rock ‘n’ roll, baseball cards and media bias.

Chen proudly calls himself a behavioral economist, a member of a growing subtribe whose research crosses over into psychology, neuroscience and evolutionary biology. He began his monkey work as a Harvard graduate student, in concert with Marc Hauser, a psychologist. The Harvard monkeys were cotton-top tamarins, and the experiments with them concerned altruism. Two monkeys faced each other in adjoining cages, each equipped with a lever that would release a marshmallow into the other monkey’s cage. The only way for one monkey to get a marshmallow was for the other monkey to pull its lever. So pulling the lever was to some degree an act of altruism, or at least of strategic cooperation.

The tamarins were fairly cooperative but still showed a healthy amount of self-interest: over repeated encounters with fellow monkeys, the typical tamarin pulled the lever about 40 percent of the time. Then Hauser and Chen heightened the drama. They conditioned one tamarin to always pull the lever (thus creating an altruistic stooge) and another to never pull the lever (thus creating a selfish jerk). The stooge and the jerk were then sent to play the game with the other tamarins. The stooge blithely pulled her lever over and over, never failing to dump a marshmallow into the other monkey’s cage. Initially, the other monkeys responded in kind, pulling their own levers 50 percent of the time. But once they figured out that their partner was a pushover (like a parent who buys her kid a toy on every outing whether the kid is a saint or a devil), their rate of reciprocation dropped to 30 percent — lower than the original average rate. The selfish jerk, meanwhile, was punished even worse. Once her reputation was established, whenever she was led into the experimenting chamber, the other tamarins ”would just go nuts,” Chen recalls. ”They’d throw their feces at the wall, walk into the corner and sit on their hands, kind of sulk.”

Chen is a hyperverbal, sharp-dressing 29-year-old with spiky hair. The son of Chinese immigrants, he had an itinerant upbringing in the rural Midwest. As a Stanford undergraduate, he was a de facto Marxist before being seduced, quite accidentally, by economics. He may be the only economist conducting monkey experiments, which puts him at slight odds with his psychologist collaborators (who are more interested in behavior itself than in the incentives that produce the behavior) as well as with certain economist colleagues. ”I love interest rates, and I’m willing to talk about their kind of stuff all the time,” he says, speaking of his fellow economists. ”But I can tell that they’re biting their tongues when I tell them what I’m working on.”

It is sometimes unclear, even to Chen himself, exactly what he is working on. When he and Santos, his psychologist collaborator, began to teach the Yale capuchins to use money, he had no pressing research theme. The essential idea was to give a monkey a dollar and see what it did with it. The currency Chen settled on was a silver disc, one inch in diameter, with a hole in the middle — ”kind of like Chinese money,” he says. It took several months of rudimentary repetition to teach the monkeys that these tokens were valuable as a means of exchange for a treat and would be similarly valuable the next day. Having gained that understanding, a capuchin would then be presented with 12 tokens on a tray and have to decide how many to surrender for, say, Jell-O cubes versus grapes. This first step allowed each capuchin to reveal its preferences and to grasp the concept of budgeting.

Then Chen introduced price shocks and wealth shocks. If, for instance, the price of Jell-O fell (two cubes instead of one per token), would the capuchin buy more Jell-O and fewer grapes? The capuchins responded rationally to tests like this — that is, they responded the way most readers of The Times would respond. In economist-speak, the capuchins adhered to the rules of utility maximization and price theory: when the price of something falls, people tend to buy more of it.

Chen next introduced a pair of gambling games and set out to determine which one the monkeys preferred. In the first game, the capuchin was given one grape and, dependent on a coin flip, either retained the original grape or won a bonus grape. In the second game, the capuchin started out owning the bonus grape and, once again dependent on a coin flip, either kept the two grapes or lost one. These two games are in fact the same gamble, with identical odds, but one is framed as a potential win and the other as a potential loss. How did the capuchins react? They far preferred to take a gamble on the potential gain than the potential loss. This is not what an economics textbook would predict. The laws of economics state that these two gambles, because they represent such small stakes, should be treated equally.

So, does Chen’s gambling experiment simply reveal the cognitive limitations of his small-brained subjects? Perhaps not. In similar experiments, it turns out that humans tend to make the same type of irrational decision at a nearly identical rate. Documenting this phenomenon, known as loss aversion, is what helped the psychologist Daniel Kahneman win a Nobel Prize in economics. The data generated by the capuchin monkeys, Chen says, ”make them statistically indistinguishable from most stock-market investors.”

But do the capuchins actually understand money? Or is Chen simply exploiting their endless appetites to make them perform neat tricks? Several facts suggest the former. During a recent capuchin experiment that used cucumbers as treats, a research assistant happened to slice the cucumber into discs instead of cubes, as was typical. One capuchin picked up a slice, started to eat it and then ran over to a researcher to see if he could ”buy” something sweeter with it. To the capuchin, a round slice of cucumber bore enough resemblance to Chen’s silver tokens to seem like another piece of currency.

Then there is the stealing. Santos has observed that the monkeys never deliberately save any money, but they do sometimes purloin a token or two during an experiment. All seven monkeys live in a communal main chamber of about 750 cubic feet. For experiments, one capuchin at a time is let into a smaller testing chamber next door. Once, a capuchin in the testing chamber picked up an entire tray of tokens, flung them into the main chamber and then scurried in after them — a combination jailbreak and bank heist — which led to a chaotic scene in which the human researchers had to rush into the main chamber and offer food bribes for the tokens, a reinforcement that in effect encouraged more stealing.

Something else happened during that chaotic scene, something that convinced Chen of the monkeys’ true grasp of money. Perhaps the most distinguishing characteristic of money, after all, is its fungibility, the fact that it can be used to buy not just food but anything. During the chaos in the monkey cage, Chen saw something out of the corner of his eye that he would later try to play down but in his heart of hearts he knew to be true. What he witnessed was probably the first observed exchange of money for sex in the history of monkeykind. (Further proof that the monkeys truly understood money: the monkey who was paid for sex immediately traded the token in for a grape.)

This is a sensitive subject. The capuchin lab at Yale has been built and maintained to make the monkeys as comfortable as possible, and especially to allow them to carry on in a natural state. The introduction of money was tricky enough; it wouldn’t reflect well on anyone involved if the money turned the lab into a brothel. To this end, Chen has taken steps to ensure that future monkey sex at Yale occurs as nature intended it.

But these facts remain: When taught to use money, a group of capuchin monkeys responded quite rationally to simple incentives; responded irrationally to risky gambles; failed to save; stole when they could; used money for food and, on occasion, sex. In other words, they behaved a good bit like the creature that most of Chen’s more traditional colleagues study: Homo sapiens.

Keith Chen
email : keith.chen [at] yale [dot] edu

Cost of coitus: Male monkeys pay for sex  /  Jan 2, 2008

Selling sex is said to be humankind’s oldest profession but it may have deep evolutionary roots, according to a study into our primate cousins which found that male macaques pay for intercourse by using grooming as a currency. Michael Gumert of Nanyang Technological University in Singapore made the discovery in a 20-month investigation into 50 long-tailed macaques in Kalimantan Tengah, Indonesia, New Scientist reports on Saturday. On average, females had sex 1.5 times per hour. But this rate jumped to 3.5 times per hour immediately after the female had been groomed by a male — and her partner of choice was likely to be the hunky monkey that did the grooming.

Market forces also acted on the value of the transaction. If there were several females in the area, the cost of buying sex would drop dramatically — a male could “buy” a female for just eight minutes of nit-picking. But if there were no females around, he would have to groom for up to 16 minutes before sex was offered. The work supports the theory that biological market forces can explain social behaviour, the British weekly says. “There is a very well-known mix of economic and mating markets in the human species itself,” said Ronald Noe of France’s University of Strasbourg. “There are many examples of rich old men getting young attractive ladies.”

Macaque monkeys ‘pay’ for sex
BY Colin Barras / 02 January 2008

Sex has probably been a commodity for as long as human society has existed, and perhaps even longer. The “oldest profession” seemingly has pre-human evolutionary roots. “When the opportunity arises, male macaque monkeys groom females to ‘pay’ for sex,” says Michael Gumert of Nanyang Technological University, Singapore.

Gumert looked at research on a 50-strong group of long-tailed macaques in Kalimantan Tengah, Indonesia, that covered a 20-month period. He found there was an increase in sexual activity after bouts of male-to-female grooming. On average, females had sex 1.5 times per hour, but immediately after being groomed by a male partner, this rate jumped to 3.5 times per hour. After grooming, the female was also less likely to offer herself to males other than her grooming partner (Animal Behaviour, DOI: 10.1016/j.anbehav.2007.03.009).

“My interest in this study stemmed from Trivers’s theory of reciprocal altruism,” says Gumert. In the early 1970s, Robert Trivers suggested that an organism will provide a service benefiting another, as long as it gets something back at a future date. But Gumert suspected that if the payback involved sex, the value would vary depending on the context – like all commodities in economics – a finding not predicted by reciprocal altruism. Sure enough, if there were several females in the area, the value of sex would drop – a male could “buy” a female for just 8 minutes of grooming. But if there were fewer females than males in the area, a male would have to groom his partner for up to 16 minutes before sex was offered.

A two-player interaction, such as is usually considered in reciprocal altruism studies, doesn’t make sense in this “general mating market”, says Ronald Noë of the University of Strasbourg, France. Noë and Peter Hammerstein of Humboldt University in Berlin, Germany, formulated biological market theory to better explain the kind of social behaviour Gumert identified in macaques. Market forces have a powerful influence on behaviour, says Noë. “There is a very well-known mix of economic and mating markets in the human species itself,” he says. “There are many examples of rich old men getting young attractive ladies.”

Yet prior to Gumert’s study, the evidence that market forces influence mating in nature has been scant – the only other clear example was in wood mice. “Many studies that fail to find biological market effects were performed in captivity,” says Gumert. “It is quite possible that the confinements of captivity alter or remove the effects of a social market.” For instance, there is no migration within captive communities, so the value of commodities such as sex remains stable, which makes market forces difficult to identify, he says.

Gumert says macaque males are very “short-termist” in their thinking. “Some work is showing that monkeys really don’t have the capacity to wait for long-term trades and therefore trades probably only occur in the immediate sense,” he says.

Michael D. Gumert
email : gum@ntu.edu.sg

Monkeys pay for sex too
BY Jennifer Viegas  /  21 December 2007

Male macaques exchange grooming for the right to mate with females whose fur they have cleaned, a study has found. The findings, from a study of long-tailed macaques, presents the first evidence of its kind that a “social market” influences sexual interaction in a non-human primate. The research by Michael Gumert, of the Division of Psychology at Nanyang Technological University in Singapore, and colleagues, has been accepted for publication in the journal Animal Behaviour.

“I found that the amount of grooming a male performs on a female during a sexual interaction is related to the supply/demand ratio of females per male around the male-female pair at the time of the grooming,” says Gumert. Put another way, male monkeys – especially lower status ones – have to groom more to get more action when fewer females are around. Grooming in macaques involves using the teeth and hands to pick through the fur of the recipient to remove dirt, tangles and parasites. The activity often sexually excites the monkeys, particularly the males, so many scientists suspect it evolved into foreplay in humans.

Indonesian study
Gumert, analysed a wild population of long-tailed macaques at Tanjung Puting National Park in Indonesia, from 2003 to 2005. During this period he documented 243 male-to-female grooming sessions, most of which were directed at females who were receptive to mating. The “grooming before sex” bouts lasted anywhere from a few seconds to a half hour or more, with the durations frequently linked to either the number of potential other partners or to the status of the groomer or recipient. According to Gumert, “rank does not remove the market, it only skews it.”

“Powerful individuals can take more and give less than low-ranked individuals can,” he says, suggesting that such corruption of the fair trade ideal appears to be an inherent facet of primate social life that can apply to everything from monkey sex to human politics. High-ranking females can also skew the system because, in the case of macaques, they demand more attention before they agree to mate.

Since males often have their work cut out for them, they also try to first “flirt” with females, using facial gestures before they approach. “Being anthropomorphic, this may be like winking or smiling,” says Gumert. “The male bows and bobs his head, raises the eyebrows and smacks his lips at the female.” He also found that females will groom males at times, but that this behaviour doesn’t appear to be linked to sex. Gumert suggests it instead may serve to forge bonds with certain males, which could later protect the female’s offspring from other aggressive males without such a vested interest in her family.

“Well done” study
Professor Frans de Waal, a psychologist from Yerkes Primate Center at Emory University in Atlanta says the new study is “very well done and nicely applies the biological market concept to something new – exchange of grooming for sex, or sex for grooming.” De Waal adds: “We all know that primate males often do a bit of grooming before they mate with females, and that they groom very little if the female isn’t fertile, but it is good to see such a thorough, quantified account of it.”

Gumert experienced a similar fair trade in his own life, when he married an Indonesian woman in a traditional village ceremony. He provided nuptial gifts to her family, as well as a small dowry. “I received no material gifts [in return],” says Gumert, “but I did get to marry my wife.”

Payment for sex in a macaque mating market
BY Michael D. Gumert / 5 November 2007.

Abstract: “In primate sexual relationships, males and females can cooperate through social trade. Market-like trading of sexual activity has been theorized, but no data have yet been presented that clearly show its existence. I collected data to test whether biological market theory could account for exchanges of male-to-female grooming and sexual activity in longtailed macaques. I explored male-to-female grooming, rates of sexual activity, and grooming–mating interchanges, which were male-to-female grooming bouts that directly involved mating. Male-to-female grooming mainly occurred when females were sexually active, and males groomed females longer per bout when mating, inspection, or presentation of female hindquarters was involved. Moreover, male-to-female grooming was associated with an increase in female rates for all forms of sexual activity, where in contrast, female-to-male grooming was associated with decreased rates of mating in the groomed males. Males did not preferentially mate with swollen females or invest more grooming in them during grooming–mating interchanges, as swellings did not seem to be a reliable indicator of female fertility. Rank status was correlated with grooming payment during grooming–mating interchanges in favour of higher-ranked males and females. In support of a biological market interpretation, the amount of grooming a male performed on a female during grooming–mating interchanges was related to the current supply of females around the interaction. The results provided evidence of a grooming–mating trade that was influenced by a mating market.”

You scratch my back, honey, and then maybe… / 04 December 1999
“Female wood mice demand to be groomed in return for sex, according to scientists at the University of Oxford. Grooming in mammals is usually a reciprocal behaviour, where both parties devote roughly equal amounts of time to it for mutual benefit, such as removing parasites. However, Pavel Stopka and David Macdonald analysed hundreds of hours of film showing wood mice grooming and found that males spent more time grooming females than vice versa ( Ethology, vol 105, p 982). Stopka and Macdonald believe that a “biological market” operates, where females demand grooming in return for sex, as there are more males wanting sex than fertile females. “Wood mice are promiscuous, and grooming is the only resource males offer,” says Stopka.”

BY S. P. Henzia & L. Barrett / 21 June 2002.

Abstract: “We used data from adult female chacma baboons, Papio cynocephalus ursinus, to provide the first test of hypotheses on interchange trading and the structure of a biological market (Noë & Hammerstein 1994, Behavioral Ecology and Sociobiology,35, 1–11) within a primate group. The interchange commodities selected were grooming and handling of infants less than 3 months of age. Patterns of grooming in relation to infant handling showed strong evidence for interchange. Grooming for infant access was initiated by potential handlers and was significantly likely to be nonreciprocated. More critically, the data show that infant ‘supply’ created a market effect: grooming bout duration (the price ‘paid’ for handling) was inversely related to the number of infants present in the group. In addition, there was an inverse relationship between grooming bout duration and the rank distance between mothers and handlers, suggesting that higher-ranking mothers could demand a higher price for infant handling. Where rank distance was high, females were able to handle infants without grooming. Dominance could thus be used to disrupt the infant market effect. If biological markets models are to be fully applicable to primate groups (and those of other social mammals) then the potentially distorting effect of dominance needs to be incorporated into the framework.”



Apps for Democracy: 2 Days Left to Compete
BY Ellen Miller

“The District has been getting major kudos for its IT projects and
which are well-deserved. DC’s data catalog, for instance, has tons of
open data feeds (more than its share about crime, alas), and provides
real-time data from multiple agencies. The District puts it online to
act as a catalyst to encourage agencies to operate more responsively
and timely.

Vivek Kundra, Washington, D.C.’s chief technology officer, launched a
contest (with substantial financial prizes!) titled Apps for
Democracy. DC is looking for useful Web applications using the
District government’s data catalog. The winning designers who create
the best widgets, Google Maps mash-ups, iPhone apps, Facebook apps,
and other digital utilities will split $20,000 in $2,000 to $100
allotments. If interested, you’ll have to work fast. The deadline for
submissions is tomorrow (Wednesday November 12th).”

Vivek Kundra
email : octo@dc.gov

District of Columbia Launches Open Innovation Challenge
October 15, 2008

Today the District of Columbia Chief Technology Office of the Officer
(OCTO) announced “Apps for Democracy,” an initiative to develop new
software applications to make the DC government’s data more accessible
and useful for the general public and the government. Register for the
contest at http://apps08.eventbrite.com.

The District collects and maintains vast stores of data on every
aspect of government operations, from government contracts to crime
statistics to economic development and much more. The District has
already organized and published this data in a real-time data catalog
at http://data.octo.dc.gov. The new initiative will solicit the best
and most cost-effective ways to package and present this data for easy
viewing, analysis, and repurposing by the public.

Technology developers are invited to compete in creating applications
for popular consumer technologies like iPhones, Facebook, Map Mashups
and others. Developers must use open source programming. The contest
is open to the general public and will run for a month from October 14
through November 14, 2008. The District will host a kick-off on
October 16 and will conduct five open “Innovation Labs” each weekend
to help contestants find collaborators. The contest will conclude on
November 13 with an awards ceremony to unveil the winning
applications. Additional contest details and guidelines for entries
can be found at http://www.appsfordemocracy.org.

The contest will serve as a catalyst to visualize the District’s data
so it will be useful to the citizens of DC, improving their quality of
life; foster innovation in the DC technology community resulting in
startup formation and growth; solve the technology challenges of OCTO
through more cost effective open collaboration; and work towards a new
model for government/private sector cross collaboration that can be
utilized repeatedly to solve our challenges and serve as an example
for other governments.

“The Apps for Democracy contest is part of our drive toward digital
democracy in the nation’s capital,” said District CTO Vivek Kundra.
“Especially in these difficult economic times, it’s crucial to the
government’s mission to find more efficient and impactful methods for
delivering an even higher level of service for a fraction of the cost.
We are ushering in a new age of participatory democracy, one in which
technology is developed by the people for the people.”

DC’s Apps for Democracy: Helping Coders Help the Man (with one small complaint)
BY Matthew Burton / October 24, 2008

“Because this is timely, I reserve the right to say some presumptuous/
incorrect things that I never would have said had I had time to think
it over, as I usually do when I post things here. The Washington, DC
Chief Technology Officer just launched a project called Apps for
Democracy, a contest to create apps with DC’s data catalog.

I love this project. DC doesn’t get much revenue to work with, so this
project makes a lot of economic sense–the tools they will get out of
this contest would, through the standard contracting route, cost about
40 times the $20,000 in prize money they’re giving away. But the
economics, I’m guessing, is what sold the mayor on the project. I bet
the initial motivation was much different: the CTO’s office
understands that the public will create better tools, and more
quickly, than government contractors can. They know that the benefits
of opening their data far outweigh the speculated, yet unproven,

Also, I can tell the CTO likes to experiment. That’s really gutsy,
because an inevitable byproduct of experimentation is failure. This is
why most bureaucrats hate experimentation and would prefer to coast:
sure, you won’t make progress by doing things the same way, but at
least you can’t screw up!

This CTO (Vivek Kundra is his name) gets it. This is exactly the kind
of stuff a CTO should be doing. There are rumblings of such a position
being created under a presumptive President Obama. If it happens, I
hope they use Apps for Democracy as a model for this title: more
technology, less chief officer. Technology is about experimentation,
not red tape. A new bureaucratic position should have an eye for
counteracting the increased bureaucracy it will inevitably engender.
Projects that delegate power to the public are a great way to do that.

I’m excited about Apps for Democracy, but I have some reservations,
which I voice below. As a segue, here are a few possibilities for app
* Use the Speed Detector GIS data to build an iPhone app that
alerts drivers to their presence (though that won’t go over well with
the mayor’s budget office)
* Use the Bicycle Lane and Bike Routes GIS data to build a Google
or Yahoo! Maps mashup that creates cycling-friendly directions
* Use the Trails, Trails NPS, and Crime Incidents data to create
safe jogging routes
* Mash any public safety data–Crime Incidents, Juvenile Arrests,
etc–with a SIMILE timeline to spot trends
* Use that same public safety data to spot correlations between
incidents and the proximity of other facilities; for example, maybe
juvenile arrests near banks spike in June, while arrests near current
construction projects spike in December. (Whether the revelations
would be valuable, we cannot say. But I’m sure sociologists and
criminologists would find it interesting.)
* Use any number of the tourism- and transportation-oriented data
files to make the ultimate online day planner for washington.org.

I guess some of those ideas are decent. The problem is, I’m just a
citizen. So most of my ideas are for public-facing tools. Only one or
two would improve District operations. Public-facing tools are great,
and the project is accepting them, but is that really the spirit of
this project? I see it differently. The goal here is to help
government, and I imagine Kundra is hoping people will create tools
that do that. As the CTO, his job is to “develop and implement the
District’s IT infrastructure” and provide “technology solutions to
improve services.” What he really wants are tools that help the DC
Government do its job better. This project can yield a slew of neat-o
iPhone apps, but remember: projects like Apps for Democracy ultimately
happen because of the possible budget savings, and if the project
doesn’t deliver on that front by cutting internal IT costs, there may
not be an Apps for Democracy ‘09. So he has to deliver at least one
great new tool for the inside.

What to build, what to build…there are surely countless opportunities
for improving DC’s systems and data management. The problem is,
people like me don’t have the good ideas, because we don’t experience
the day-to-day frustrations of the problems we’d be fixing. We don’t
understand the environment. We don’t know what’s lacking.

The most beneficial tools will probably never be thought of by the
general public. People with no understanding of municipal water
systems can’t (or don’t) ponder ways to revolutionize the DC Water
Authority. Even more important, even if I did have the idea, I would
have little incentive to build it on my own. Unless I understand the
good that will come from creating that tool, I’m not going to spend
time on it. Someone at the Water Authority needs to say, “We need a
tool that will do X, Y, and Z, and it would help us because _____.”
The _____ is the most important part. I’d love to help DC, but only if
I know I’m helping. That’s why there needs to be a way for DC
employees to share ideas with developers. Has this project been
promoted to District employees? The project site is not targeted at
them: it grabs the attention of tech firms and indy developers, but
there’s no mention of the end user. Do they have a forum for voicing
ideas? Whip up a way for those developers to team with District
employees so we can put together something that really changes your
business. What do you say, Mr. Kundra?

UPDATE 10/25 : After posting this, I sent an email to Apps for
Democracy project manager Peter Corbett to tell him about it. He wrote
back in less than an hour saying he’d already read it:

I just read that, Matt and it’s a really good post. I just sent it
to Vivek. We have http://apps08.ning.com up for collaboration purposes
and I suggested to Vivek that he broadcast to dc.gov that we need
ideas from them about what they need built!

I often complain that although the federal government is finally
abandoning clunky enterprise software for more modern Web tools, their
procurement model has not changed: they still rely on the slow,
expensive, clunky contracting route instead of trying the more agile,
release early-release often approach that makes Web tools great in the
first place. But the speed and content of Peter’s response, and his
allowing me to post it here, are all signs that this is a much
different DC software project. I like it.”

Related: Why I Help “The Man,” and Why You Should Too

Mayor Fenty Announces Three National Awards for the Office of the
Chief Technology Officer
NASCIO honors bring OCTO award count to 10 in 2008
September 29, 2008

Mayor Adrian M. Fenty announced today the National Association of
State Chief Information Officers (NASCIO) has honored the Office of
the Chief Technology Officer (OCTO) with three national information
technology (IT) awards. The new honors bring the District’s total IT
awards to 10 in 2008.

NASCIO named OCTO the winner of its Recognition Award in the IT
Project and Portfolio Management Category, an award for state
initiatives that develop governance processes, policies and systems
for the efficient management of IT investments from concept, funding,
implementation and operation to retirement.

The award-winning project was the “stock market model” developed by
Chief Technology Officer (CTO) Vivek Kundra for managing the
District’s IT investments. Kundra’s innovative idea was to manage IT
projects as a portfolio of stocks, with each project as a company, its
team as the management, its schedule and financial status captured in
market reports and customer satisfaction as the market reaction. By
applying these stock-market practices to government technology, Kundra
was able to identify problem projects early and either switch managers
or kill the projects, freeing resources for more promising
initiatives. Earlier this year Kundra was honored for his ground-
breaking stock market model by both the MIT Sloan CIO Symposium,
which recognized Kundra among outstanding IT innovators, and by
InfoWorld Magazine, which named Kundra among the nation’s top
25 CTOs.

NASCIO also awarded OCTO its Recognition Award in the Government to
Business Category. This award recognizes innovative applications that
reduce business costs for regulatory compliance, help companies
establish and grow a business, or improve day-to-day government-to-
business interactions.

OCTO’s winning project was its Certified Business Enterprise (CBE)
online Resource Center. District CBEs are businesses certified by the
District’s Department of Small and Local Business Development (DSLBD)
to participate in the District’s contracting program. The program
directs spending to District-based businesses to create local jobs,
strengthen the local economy, and increase the District’s tax base. To
maximize participation and benefits from the program, DSLBD needed a
user-friendly, comprehensive online certification and contract
compliance application. OCTO developed the application in consultation
with DSLBD, the District’s Office of Contracts and Procurement (OCP)
and the Office of the City Administrator (OCA). The result was a
application that:
* Allows qualified business owners to submit online applications
for CBE certification;
* Enables DSLBD to process the applications via the District’s
* Provides a transparent and efficient process to verify agency
compliance with CBE participation requirements;
* Tracks prime contractor payments to subcontractors to verify
compliance with CBE participation plans; and
* Provides outreach tools to inform the CBE community about
upcoming business opportunities, training classes and DSLBD/District
business events.

The site has enhanced agency and prime contractor compliance with
District CBE requirements, it has dramatically increased the accuracy
of DSLBD data and it has improved the efficiency of certification
processing and compliance tracking.

The third NASCIO award OCTO won was the Recognition Award in the
Government to Citizens category for governmental applications that
provide innovative and/or more efficient services to citizens. OCTO
won the award with its CapStat “Building A City That Works” website.
The site supports CapStat, a cross-agency accountability program
launched by District Mayor Fenty. The Mayor and City Administrator
hold regular meetings with agency directors to review agency
performance data, assign action items, and hold the managers

The CapStat website is central to the program. CapStat meetings are
recorded by video and broadcast on the site. The site offers
performance data from CapStat sessions as well as agency performance
reports. It is updated after each session to provide links to full-
length session videos, resulting action items, and a revised schedule
of upcoming topics. The site offers data catalogs and live feeds on a
wide variety of District performance measures, such as violent crimes,
service requests, permits, and many more. An interactive map
illustrates the reports and shows, for example, where each crime
occurred or which buildings received permits. By providing the
detailed data District leaders need to assess agency performance and
hold managers accountable, and by creating a vehicle for the District
to share all of this data with the public, the CapStat website has
played a vital role in delivering on Mayor Fenty’s commitment to
transparency and accountability in District government.

“For my administration, improving services for citizens and ensuring
accountability and transparency in government are paramount goals,”
said Mayor Fenty. “These important awards from NASCIO, along with
many other recognitions OCTO has received in the past two years,
testify to the key role technology plays in meeting our objectives for
the District.”

“I’m honored by these awards that reflect the evaluation of our peers
around the country,” said District CTO Kundra. “We have assembled some
of the smartest and hardest working people at OCTO so the District can
lead the nation in innovation and service delivery.”