| The triumph of the interest free economy | 0 comments |
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11 Nov 2008 @ 20:48, by Bart Klein Ikink
www.naturalmoney.org
A far more efficient economic system is possible
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Author: Bart klein Ikink
12 steps to freedom and wealth
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Summary
We live in an economic system that is very inefficient. The consequences of these inefficiencies are clearly visible
in the form of the credit crisis. Many companies will go bankrupt because of lack of demand, even though they make
useful products. Many people will become unemployed, so demand falls back even further. Governments and central banks
are intervening, which disturbs the functioning of markets. This enables inefficient companies to remain in business
when they benefit from government intervention and the intervention in the financial system by central banks.
Now we are at the point that the authorities have taken over most banks. In the future the state will place banks under
strict supervision, so that the state will decide who gets money and who does not. This is the global communist revolution
of October 2008.
It is possible to achieve a much greater prosperity, with maximum capital growth without inflation, large debts, economic
crises, unproductive government intervention and the unproductive part of the financial sector. Natural selection
will ultimately determine the most efficient economic system, despite the political power structures that still exist at
this moment. The investigation of alternatives and dissemination of knowledge will accelerate this process, but the
ultimate outcome will not change. The most efficient economic system is, I believe, a variant of the economy of the natural
order, which was first described by Silvio Gesell.
In this article I will show in 12 short steps how the economy of the natural order will work. Then I will give a real world
example of the economy of the natural order, showing that it works as described. Then I will illustrate the strength of the
economy of the natural order, using examples from history. On www.naturalmoney.org the theory is described in detail.
The charging of interest is the way to slavery. This is because people may be hoarding money for a rainy day. When more
people do this simultaneously, money is removed from circulation, weakening the economy. When this happens, even more people
will start hoarding money, because they expect times getting worse. This is the beginning of an economic crisis. Many
people will lose their income, and if they do not have money, they must borrow money against interest for unavoidable
expenses such as food. As a result, the situation becomes even worse.
Abolition of interest is the way to freedom. Free people are more productive than slaves. Abolition of interest will
therefore lead to greater prosperity.
The 12 steps
1. Interest on money should be banned. This is the only prohibition. Return on capital is a good thing, and should not be
abolished.
2. Raise a tax on money, for example, one percent per month. This is not a tax on wealth, so shares, real estate and money
lent, are not taxed.
3. Do not print more money, so there will be no inflation.
4. Because there is a tax on money, people will soon use the money to:
- to invest;
- to consume;
- to lend without interest.
5. Because on money lent, no interest may be charged:
- money will not be lent to unreliable individuals, businesses and structures.
- less money will lent and more money will be directly invested in equities and real estate.
- money will only be lent to reliable people, people with collateral and well-financed companies can borrow without
interest.
6. Therefore there will never be an economic crisis, because money is spent directly and there are no bad loans.
7. Because all money is directly used for investment or consumption, everyone is at work and the economy grows steadily at
maximum speed.
8. The financial sector is largely superfluous, and that is a good thing, because this sector produces nothing and
destabilises the economy. People working in financial services will get another job quickly, because the economy grows
steadily at maximum speed.
9. Governments also need much less to interfere with the economy. The people who did this work, will get another job quickly.
10. As the economy grows constantly at maximum speed, and because no more money is printed, prices will fall. Therefore
loans with zero percent interest will have a return that is probably higher than the interest rate you will get at the
bank now. The money you lent will be worth more when the loan matures.
11. If one country chooses to apply this system, it will attract capital from other countries since the return of loans
with zero percent interest rate is higher than the yield on interest in other countries (bizarre but true!). Therefore,
all other countries will need to do this, if one country has changed its money system in this way.
12. Now everyone is free. There is no fear in the economy. There will always be work for employees and there will always
be customers for viable businesses. Nobody is deeply in debt.
If you do think this will not work, you are wrong. It has been tried and it worked very well.
The miracle of Wörgl
On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl made economic history by
introducing a remarkable complimentary currency. Wörgl was in trouble, and was prepared to try anything. Of
its population of 4,500, a total of 1,500 people were without a job, and 200 families were penniless.
The mayor, Michael Unterguggenberger, had a long list of projects he wanted to accomplish, but there was hardly
any money with which to carry them out. These included repaving the roads, streetlights, extending water
distribution across the whole town, and planting trees along the streets.
Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he
deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known
as 'stamp scrip'. This requires a monthly stamp to be stuck on all the circulating notes for them to remain valid,
and in Wörgl, the stamp amounted 1% of the each note’s value. The money raised was used to run a soup kitchen
that fed 220 families.
Because nobody wanted to pay what was effectively a hoarding fee, everyone receiving the notes would spend them
as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value
in schillings. This offer was rarely taken up though.
Of all the business in town, only the railway station and the post office refused to accept the local money.
When people ran out of spending ideas, they would pay their taxes early using scrip, resulting in a huge increase
in town revenues. Over the 13-month period the project ran, the council not only carried out all the intended
works projects, but also built new houses, a reservoir, a ski jump, and a bridge. The people also used scrip to
replant forests, in anticipation of the future cash flow they would receive from the trees.
The key to its success was the fast circulation of scrip within the local economy, 14 times higher than the
schilling. This in turn increased trade, creating extra employment. At the time of the project, Wörgl was the
only Austrian town to achieve full employment.
Six neighbouring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a
special visit to see the 'miracle of Wörgl'. In January 1933, the project was replicated in the neighbouring city
of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different
towns and villages. Two hundred Austrian townships were interested in adopting the idea.
At this point, the central bank panicked, and decided to assert its monopoly rights by banning complimentary
currencies. The people unsuccessfully sued the bank, and later lost in the Austrian Supreme Court. It then
became a criminal offence to issue 'emergency currency'.
The town went back to 30% unemployment. In 1934, social unrest exploded across Austria. In 1938, when Hitler
annexed Austria, he was welcomed by many people as their economic and political saviour.
Natural Money in history
Using the concept of natural money, I will try to explain some historic facts, which puzzled historians for a long
time. Some intriguing historic questions are:
1. How could Western Europe become so powerful during the Middle Ages? They were backwards at the beginning, annihilated by
Black Death, and still came out on top.
2. How could the Egyptians build pyramids? This required a great wealth and a great organisation.
3. Why did Rome collapse? They had the greatest civilisation and military organisation at the time.
Although the explanation is speculative, and not proven, there is some logic in it.
The rise of Europe
When the Roman Empire collapsed, Europe fell back into a dark period, called the Middle Ages. Money ceased to exist, because
gold and silver disappeared out of circulation. Europe was very fragmented and in general there was no central power
structure. Some local lords issued scrip currencies. Those currencies were valid for a limited period of time. After that
period, the people holding the currency, had to return it to the ruler and a tax was levied. Those new units were also valid
for a limited period of time. The actual value of the unit decreased slowly during the period and was the lowest just before
the tax was due.
Not much is known about money in the Middle Ages. What is known however, is that the people of the Middle Ages were deeply
aware of the temporality of human life. Memento mori was the motto of the people in the Middle Ages. This means: remember
the day that you will die. The charging of interest was strictly forbidden and people felt morally obliged not to do this.
Therefore, the people of the Middle Ages were inclined to spend their money fast.
If we assume this worked like in Wörgl, we may assume that Europe was building capital at maximum speed using full
employment. Europe had to start at a very low level. Also, the local lords waged many wars that were destroying capital.
But wealth steadily increased, faster than on any other part of the planet. When the crusades started, there was so much
wealth to spend on a useless war, that Europeans could battle the Muslims for centuries on their own ground, keeping long
supply lines, while the conquered land was not profitable. After that, Black Death annihilated about one third of the
population, but only one century later, the exploration and exploitation of the rest of the world by Europe had begun.
The building of the pyramids
In the bible there is a story about a pharaoh having a bad dream about seven fat cows being eaten by seven lean cows. This
dream was explained to the pharaoh. He was told seven good years would come and after that seven bad years would follow.
Joseph advised the Egyptians to store food on a large scale. They built storehouses for food. Farmers bringing in the food,
got receipts for corn. Bakers who wanted to make bread, brought in the receipts, which could be exchanged for corn. It did
not take long before the receipts where generally accepted as money. Because of the degradation of the corn and mice eating
it, the value of the receipts was steadily decreasing. This enticed people to spend the money fast.
The grain receipt system lasted for many centuries. It made sense to store food to provide for hard times. If we assume this
this worked like in Wörgl, we can assume that also Egypt was building capital at maximum speed using full employment.
At some point, irrigation systems were in place, houses were built, and there was nothing left to do. Because there was no
limit on the ego of pharaohs, and they were worshipped like gods, the pharaohs could use this wealth to build pyramids.
The people building the pyramids were probably no slaves but economically free men. The Egyptian civilisation lasted for
more than 2000 years, far longer than any civilisation ever.
The fall of Rome
Rome lasted only 700 years. The money system was based on gold and silver. In the beginning Rome was able to expand, and
therefore capital could grow faster than interest charges. But after 400 years the expansion was over, and slowly growing
debt was becoming a drag on the economy. The government was permanently short of funds. The value of money was
constantly devaluated. The military was also badly funded, and therefore other people could invade Roman lands. Debt was
destroying Rome.
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Money of the natural economic order
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Author: Bart klein Ikink
Problems in the current money system
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Do you ask yourself
What money exactly is?
Why experts are so afraid of a major economic depression caused by the banks going bankrupt?
Why businesses, consumers and governments are so deeply in debt, in spite of all our prosperity?
Why, despite all our prosperity, our social problems remain difficult to solve?
Why the rich become richer and the poor become poorer in the developed economies?
Why in the emerging economies it is possible that the poor get richer?
Saving money in the bank does not pay because the inflation is higher than the interest rate?
Why the government is increasingly intervening in markets, while this is not really a good idea?
Why capitalism seems to fail, even though it has brought us so much prosperity?
Why so many people earn their money in activities that serve no purpose, and some even become very rich?
Is there an alternative?
The economic problems we face now, again lead to a discussion of capitalism versus socialism. We have seen that both
economic systems have their limitations. Supporters of capitalism will argue that the problems we have, are caused by
government intervention in the market. Proponents of socialism will argue that the problems we have, are caused by too
little regulation of the market. Both arguments seem reasonable but they conflict. My conclusion is therefore that this is
a false debate, and that the real cause lies somewhere else.
In this short text I will try to show that the real cause lies in the nature of our money system. Then I briefly try to
explain that another money system is possible, and that it will work far more efficient than the current money system.
To get an understanding of the issue, you can view the documentary "Money as Debt" on our current money system,
before continuing to read. This documentary lasts 45 minutes and is viewable via the link below:
Link: Video "Money as Debt"
You'll be surprised how the system works, and also how utterly ridiculous it is. The documentary can be understood using
only common sense. You do not need to know economic theory, which often is not common sense.
Banks create money out of thin air when someone takes out a loan. Banks demand interest on money that did not
exist. This interest will, after deducting costs and dividends, be added to the equity of the bank, on which the
bank can make new loans, which makes debt grow even further.
How the current money system works
Almost all the money in circulation is created by bank loans. Characteristics of the current money are:
1. Banks create money out of thin air by making a loan. At the moment someone loans money, the money comes into
existence.
2. Banks demand interest on the money they lend.
3. All the money in circulation should raise interest for the banks. Because there is not enough money in circulation to
pay for the interest, not everybody can fulfil his or her obligations, unless new debts are created.
4. As a result, debts grow exponentially and so do the interest payments.
5. If the economy is growing slowly, serious problems arise. As the Western economies are in the mature phase, economic
growth is therefore relatively low, and the problem starts becoming acute. Therefore, it is also true that in emerging
economies, this problem has not yet come into play.
How banks create money out of thin air
When you go to the bank to close a loan, the money is made on the spot by closing the loan deal. In economic theory this
is the money-creating function of the banking system. The extent to which banks create money out of thin air depends on
the reserve ratio. When we start from a reserve ratio of 1:10, the practice is as follows:
1. To start with, a bank needs money that is created by the government in the form of banknotes or a balance at the
central bank. When the bank owns € 10,000 of this money, and the reserve ratio is 1:10, then the bank can create a € 9,000
loan, even though that money did not exist.
2. A person who borrowed money, can use it for a payment. The recipient of the payment may bring the € 10,000 to his own
bank. Since this money has not been created by the government, the bank of the receiver, using a reserve ratio 1:10 may
only use 90 percent of the money for a new loan. On the basis of the € 9,000 that is in the bank's account, a new bank
loan of € 8,100 can be made.
3. The € 8,100 can be spent by the person who has borrowed it, and the recipient of that money may bring it to his own bank.
This bank can create a new loan of € 8,100 on the basis of the € 7,290. This process can be repeated endlessly, until the
original € 10,000 of the government has been used by the banks has been to create approximately € 100,000 out of thin air.
At the moment, reserve ratios of banks are even lower than 1:10, so that banks can create even more money out of thin
air with € 10,000 of government issued money.
Correction mechanisms in the current money system
Within the current money system, the following correction mechanisms exist:
1. When the economy is slowing, the deficits of governments increase. Because consumers and businesses are reluctant
to take on more debt, governments have to do it, because otherwise the economy would be slowing further.
2. When the economy is slow, central banks lower interest rates for consumers and businesses to encourage them to add more
debt. If the economy goes well, new debt is created in a faster pace, and central banks raise interest rates to curb debt
growth, because otherwise money supply is growing fast, which results in higher inflation.
3. Authorities are trying to regulate the banking system by imposing requirements for equity in relation to outstanding
loans and savings. Over the years, these requirements were increasingly stretched, because more debt was needed to keep
the financial system functioning.
4. When despite these measures, the financial system fails, government money can be created by running the printing
presses, using the following procedure, to mask the real nature of the activity:
- Governments spend money or buy bad loans so government debt is increasing.
- This debt is purchased by banks. If the government buys up bad loans, banks exchange the bad loans for government debt.
- The central bank prints government money and acquires the government debt from the banks. The central bank now holds the
government debt and collects interest on the government debt. If the central bank is an agency of the government, this is
printing money outright, because government is indebted to itself, so the debt does not really exist. If the central bank is
a private enterprise, as is the case in the United States, interest on government debt is a tax on the public to
benefit of the banks owning the central bank.
- The banks now have more government money on their balance sheets, so using the same reserve ratio, they can lend more
money.
The foreign countries are disregarded in this explanation. This would make it far more complicated. The matter is difficult
to understand even when ignoring foreign countries.
Problems with free markets in the current money system
If the government did not interfere with the economy and interest rates, markets will correct, but in a
rude way with businesses and banks going bankrupt, economic recessions and even economic depressions. In this process,
much useful capital is destroyed which could be productive if there was demand. The destruction of capital also results
in a destruction of wealth. Since we live a democratic society, this will not be accepted and such issues will automatically
lead to a strong call for government intervention and regulation.
Problems with government intervention in the current money system
Government interventions reduce the severity of economic recessions and economic depressions in the short term, but
create an ever bigger problem long term, namely increasing debt on which interest must be paid. When this issue was
raised, the famous economist Keynes, who was a strong supporter of government intervention, responded: "In the long run
we are all dead." In other words, it would not be the problem of his generation. Now we entered a vicious circle of ever
larger problems, which require more and more government intervention.
The money system promotes senseless economic activities
The financial sector is a significant portion of our economy. The share of the financial sector in the economy has
increased strongly in recent decades. Although the financial sector produces nothing, it is one of the major sectors of the
economy. This is because the financial issues regarding interest, create all sorts of complications. Many people are making
a living from dealing with those complications.
Because of interest payments and all kinds of unproductive activities that are the result of interest charges, the
living standard of many of people in the western world is decreasing. Many companies get into trouble due to financing
structures, and have to lay off people. These companies would be viable, when conservatively financed.
Interest rate products, known as derivatives, are called financial weapons of mass destruction by the world
famous investor Warren Buffet. If he makes this kind of statement, you can assume that the situation is extremely serious.
To deal with the effects of interest, there are officials who deal with the unemployment of people in times of economic
adversity, people trying to manage the economy, subsidizing sustainable investment and curbing unsustainable activities
that damage the environment or society.
When less useless activities would take place in the economy, the labour force could be directed to useful production
and services and solving problems in society.
The current money system causes many problems
It is clear that the current money system causes many problems because of interest, and that solutions are difficult to
find. The cause of economic problems lies in the nature of money. When more and more new debt needed to pay interest on
debts, it is clear that the problem is growing out of control.
To solve this problem we should create a new form of money, which automatically arranges the economy in a sustainable way,
needing less control of the government. Moreover, much less energy must be put into economic activities related to money.
These activities are of no use and are harmful to the economy and society
The money of the natural economic order
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A stunning example
In the past, money systems without interest on a small scale existed in various forms, with varying success. They still
exist today. The success of natural money will depend heavily on the rules of the system. The most stunning success story
is the Wörgl currency.
On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl made economic history by
introducing a remarkable complimentary currency. Wörgl was in trouble, and was prepared to try anything. Of
its population of 4,500, a total of 1,500 people were without a job, and 200 families were penniless.
The mayor, Michael Unterguggenberger, had a long list of projects he wanted to accomplish, but there was hardly
any money with which to carry them out. These included repaving the roads, streetlights, extending water
distribution across the whole town, and planting trees along the streets.
Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he
deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known
as 'stamp scrip'. This requires a monthly stamp to be stuck on all the circulating notes for them to remain valid,
and in Wörgl, the stamp amounted 1% of the each note’s value. The money raised was used to run a soup kitchen
that fed 220 families.
Because nobody wanted to pay what was effectively a hoarding fee, everyone receiving the notes would spend them
as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value
in schillings. This offer was rarely taken up though.
Of all the business in town, only the railway station and the post office refused to accept the local money.
When people ran out of spending ideas, they would pay their taxes early using scrip, resulting in a huge increase
in town revenues. Over the 13-month period the project ran, the council not only carried out all the intended
works projects, but also built new houses, a reservoir, a ski jump, and a bridge. The people also used scrip to
replant forests, in anticipation of the future cash flow they would receive from the trees.
The key to its success was the fast circulation of scrip within the local economy, 14 times higher than the
schilling. This in turn increased trade, creating extra employment. At the time of the project, Wörgl was the
only Austrian town to achieve full employment.
Six neighbouring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a
special visit to see the 'miracle of Wörgl'. In January 1933, the project was replicated in the neighbouring city
of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different
towns and villages. Two hundred Austrian townships were interested in adopting the idea.
At this point, the central bank panicked, and decided to assert its monopoly rights by banning complimentary
currencies. The people unsuccessfully sued the bank, and later lost in the Austrian Supreme Court. It then
became a criminal offence to issue 'emergency currency'.
Unterguggenberger was opposed to both communism and fascism, championing instead what he referred to as
'economic freedom'. Therefore, it was deeply ironic that the Wörgl experiment was first branded 'craziness'
by the monetary authorities, then a communist idea, and some years later as a fascist one.
The town went back to 30% unemployment. In 1934, social unrest exploded across Austria. In 1938, when Hitler
annexed Austria, he was welcomed by many people as their economic and political saviour.
The 1920's had already seen a scrip currency called the 'wara' in the German town of Schwanenkirchen. This saved
the town's economy and kept a coal mine operating. It started circulating more widely, and became part of a
movement called 'Freiwirtschaft' (Free Economy), based on the ideas of the economist Silvio Gesell.
Central to Gesell's ideas was the use of a hoarding fee of the kind used in Wörgl (technically known as
'demurrage'). The soundness of such an idea was affirmed by John Maynard Keynes in his 1936 work 'General
Theory of Employment, Interest and Money'.
The success of the Wörgl currency inspired the well known American economist Irving Fischer to write an article which
was published nationwide. Many towns copied the idea. The Americans however used a far higher tax rate (2% a week instead
of 1% a month) which undermined the confidence in the stamp scrip currencies. President Roosevelt abandoned the idea
completely in the New Deal. It is therefore very important to do this the right way, otherwise it will become a failure.
Perhaps the most groundbreaking feature of demurrage is that it is intrinsically anti-inflationary. Whereas
conventional currencies are progressively devalued by interest, anti-inflationary money steadily increases in
value. As each monthly stamp is added, the value of the note effectively increases by the stamp amount. This is
technically equivalent to a negative interest rate.
The present short-term focus of investments, and the consequent lack of long-term vision are exacerbated by
interest-driven currency devaluation that, from a profit perspective, reduces the appeal of longer-timescale
projects. The use of a demurrage currency gives an edge to those working for sustainability, because a rate
of return is achieved simply by lending out money. When money is repaid (remember these are non-interest
currencies), it will have increased in value owing to the money saved by having avoided paying the monthly
demurrage fees. This has the potential to enable investment in highly beneficial but economically marginal
activities such as earth repair.
A recommended book that covers scrip currencies and more fully explains this 'negative interest' principle is Bernard
Lietaer's 'The Future of Money'. In case the ending of the Wörgl story was disempowering, it must be said that the number
of complimentary currencies around the world is undergoing an exponential growth. As of 2000, there were more than 2,500
in operation.
Defining money
It is not easy to define money by its properties, because there are so many forms of money. It is more easy to define money
by its use. Aristotle already saw the dual nature of money: money is a medium of exchange and a store of wealth. Those are
conflicting uses. The store of wealth function hampers the medium of exchange use.
Gold and silver were chosen as money because they were an excellent store of wealth. This is a problem. A simple solution is
therefore: gold and silver should be a store of wealth and money should only be a medium of exchange. Therefore, gold and
silver should not be money.
Natural money is the search for monetary Holy Grail: the most optimal form of money in terms of efficiency. The term
"natural money" is chosen because it is derived from the Natural Economic Order. In general the term for money from the
Natural Economic Order is "free money", but this includes a wide variety of money types. Therefore it is very confusing to
use the term "free money" for the search of the optimal solution.
Characteristics of the money of the natural economic order
Silvio Gesell is the founder of the theory on the money of the natural order. The naturalness of this money, lies in the
fact that it is taking into account human nature. Greed is on the one hand, a motivator for people to perform, but on the
other hand it is a force that can lead to deception, destruction of nature, society and economy. The economy should work
in a way that these matters are resolved, while achieving a desirable result for individuals, society and nature.
The current theory in this document has been derived from the work of Gesell and improved during extensive discussions with
many individuals on internet message boards.
Money from the natural order has the following characteristics:
1. The money supply is not growing or decreasing without deliberate action. There is no money creating activity by financial
institutions. The value of the money is also constant. Apart from fluctuations in available goods and services, there is
basically no inflation or deflation. The money supply can only be changed by the government issuing the money. There is
however, no strong incentive to increase money supply, as will be shown further on in this text.
2. Natural money is not a form of debt, but a medium of exchange which may be covered by a basket of goods and services.
3. Money may only be lent without charging interest. Charging of interest in any form is prohibited.
4. A tax is levied by the government on the money in circulation. This is a tax on money, and this money comes back into
circulation by government expenditures.
The valuation of the natural money unit
The valuation of the natural money unit is one of the most important topics. The money supply should be based on a rule
that does not change. But you can never trust the government. So when you lend your money for any period of time, the same
value should be paid back.
The guarantee of value is essential in a money system without interest. That means that when lending money, additional provisions
must be made that guarantee the value of the loan. The loan can be valued in the following ways:
1. As a part of the money supply (for example: 0,00000001% of money supply). Because money supply is known to the public,
this could easily be calculated.
2. As a basket of goods and services. This will cover the loan in the case the money system changes. The basket of goods
and services should be paid in cash when the loan matures. These baskets should include a wide range of goods and services,
in order to prevent price fluctuations of individual goods and services or manipulations of prices of individual goods and
services, from affecting the value of the loan.
Examples of possible money supply rules are:
1. Money supply is constant at all times.
2. Money supply is growing or shrinking with population.
3. Money supply is growing or shrinking with coverage (for example: stored food supplies).
Keeping money supply constant at all times is the most simple rule, and therefore probably the best. Never will there be
any debate about what money supply should be, and how much it should grow. Debating this is a waste of time because the
economy will do well when the money supply is constant. Because there will probably be deflation in a natural money economy,
it is probably also better not to cover the money supply with gold or any other commodity. Doing this will force the price
of gold or the used commodities upward, because of the deflation, creating an excess reserve of gold or the used commodities.
The value of the money unit should not be expressed in a traditional money unit, such as the Euro or the Dollar. The exchange
rate should be determined by markets alone.
A natural money system with money taxation stabilizes the economy
In a natural money system without interest with money tax, money is not created by financial institutions. The government
levies a tax on the money and returns this money into circulation in the form of government spending. Any form of cash,
both in accounts and in the form of bank notes, is subject to the tax. All loans that exist are created with existing money
that is lent. Even though the money may not be lent at an interest rate, people will still be inclined to lend money,
because there is a tax on money and the money keeps its value. This means:
1. There is always money available to be borrowed by creditworthy companies and people. Because no interest may be
charged, there is no reward for taking the risk that the loan will not be repaid. There will be no unwise lending and
borrowing that may destabilize the economy.
2. Should the economy weaken, which is unlikely because no money is withdrawn from circulation by interest payments,
the economy may be fuelled by raising the money tax. After all, people will be more likely to spend their money. With
natural money, higher money taxes are an incentive for the economy. This means that when a government is faced
with rising deficits because of a weakening economy, increasing the tax on money reduces the deficit while energizing the
economy. This shows that there is no strong incentive for the government to increase money supply.
3. People who are unable to pay back a loan, will not get a loan. Ultimately, this is in their own interest, and in the
interest of society. No one benefits from large groups of people that are so deeply in debt that they can never recover.
The optimal tax rate is around 0,5% to 1% a month. Lower tax rates may slow the economy and higher tax rates will undermine the
confidence in the currency.
Natural money promotes sustainable investment choices
When interest on money is charged, money in the future is worth less than money now. This has a major impact
on investment choices. Interest promotes investments that are unsustainable and wasteful. If no interest was charged,
sustainable investments would be more attractive.
For example: you want to build a house and you have the choice between a house of € 100,000 with a yearly energy cost of
€ 5,000 or a house of € 200,000 with a yearly energy of € 2,000. When the interest rate is 10 percent, the cost for a cheap
house with high energy consumption is as follows: € 10,000 plus interest € 5,000 energy is € 15,000 per year. The expensive
house with low energy costs: € 20,000 interest plus € 2,000 energy is € 22,000 per year. If you do not have to pay interest,
the expensive house with low energy cost will be cheaper.
Employment
Natural money should lead to full employment. Because money is circulating in the economy constantly, everybody
who is ready, able and willing to work, will get a job. If there is unemployment, it is not because of a recession or a
depression. Therefore the price of labour would fall until full employment has been reached again. This is much easier to
do because expectations about future business and employment are far more constant, so less employers and employees will
have to change their expectations.
A stable economy needs less intervention
When the economy is stable, capital is not destroyed by lack of demand for products and services that are useful. Also,
everybody is fully employed, eliminating the need for government assistance of people without income. Moreover, if
sustainable investment choices are rational economic decisions, the government does not need to encourage them. Wealth is
steadily increasing using the maximum potential. Therefore, government does not need to interfere with the economy.
The role of the banks with natural money
With natural money, banks continue to exist. Banks will have to comply to the following rules:
1. Banks may not invest for their own profit and risk money that has been entrusted to them. They may only lend money
without charging interest.
2. You can hold your money in the bank in the form of a current account, on which the government tax is levied. You will
hold the money you need in the short term in this type of account.
3. You can hold money in the bank in the form of deposits or savings accounts. The bank lends this money without charging
interest. Holding such deposits or savings accounts may be attractive because you can avoid the money tax in this
way, and the value of the money is not eroded by inflation. It is likely that you pay a fee to the bank for intermediation
costs. Banks may offer different types of savings accounts. The most restrictive accounts do have the lowest fees and
offer the highest degree of tax avoidance.
4. The bank may only charge intermediation costs to the saver and not to the borrower, since the bank may be enticed by high
fees to take on risky loans. This is a very essential feature of natural money.
5. You can participate in the stock market through mutual funds or you can buy stocks. This is an attractive alternative.
Since there are less strong economic cycles, and companies are conservatively financed, a diversified portfolio of shares
is much less risky than in the current money system. People will invest in shares far more often.
Systems theory perspective
Try to imagine that the economy is a system, just like the human body. All parts of the system need each other to operate
properly. Try to imagine that money flowing in the economy is like blood flowing in the body. In this case it would not
make sense that a kidney is saying to the liver: This is my blood, you may borrow it with interest. It also does not make
sense for parts of the body to hoard blood because there might be no blood flowing in the future. Strangely enough, economists
think this makes sense.
Systems theory conflicts with economics. Charging interest makes sense to economists, but interest presses the weakest
spots in the economy the hardest. This is because the weakest borrowers have to pay the highest interest rates. If
engineers build planes like that, they would fall from the sky. Therefore according to systems theory, the economy could
be far more efficient when the weakest spots are not pressed, capital would only be built and not be destroyed, recessions
and depressions did not exist and full employment is a constant state of the economy.
The fundamental soundness of natural money
A government issuing natural money might be tempted to issue additional currency. But this is not a rational thing to do.
First of all, tax income should increase because there is no inflation and money is circulating faster. So there is no
rational reason to destroy the system that is bringing wealth. It simply does not make sense. Should the economy slow, and
tax income diminish, which probably will not happen, the economy can be revitalised by raising the money tax. This has the
same effect as issuing additional currency. Furthermore, if loans are guaranteed as a percentage of money supply, nobody can
be harmed. Therefore, from a logical point of view, natural money is the most fundamentally sound money that can exist in
the real world.
Money supply is inflexible (fixed) so banks always have to pick the best borrowers. This will prevent the economy from
overheating when there is a sudden burst in demand for capital. This will also eliminate the bust that will eventually
follow.
If the money supply does not increase or provisions are made to guarantee the value of the loan, the growing wealth will
lower the prices of goods and services and therefore the value of the loan will increase in real terms. This is an interest
on capital, based on the growth of wealth of the society as a whole. It is therefore highly probable that you get a positive
return out of lending money without interest. Because the natural economy will be stronger than a traditional economy with
interest on money, the return on money lent will probably be higher in a natural economy without interest than in a
traditional economy using interest on money. If traditional economies must compete with natural money economies for capital,
they do not stand a chance as soon as the positive return on zero interest is discovered.
Natural Money in history
Using the concept of natural money, I will try to explain some historic facts, which puzzled historians for a long
time. Some intriguing historic questions are:
1. How could Western Europe become so powerful during the Middle Ages? They were backwards at the beginning, annihilated by
Black Death, and still came out on top.
2. How could the Egyptians build pyramids? This required a great wealth and a great organisation.
3. Why did Rome collapse? They had the greatest civilisation and military organisation at the time.
Although the explanation is speculative, and not proven, there is some logic in it.
The rise of Europe
When the Roman Empire collapsed, Europe fell back into a dark period, called the Middle Ages. Money ceased to exist, because
gold and silver disappeared out of circulation. Europe was very fragmented and in general there was no central power
structure. Some local lords issued scrip currencies. Those currencies were valid for a limited period of time. After that
period, the people holding the currency, had to return it to the ruler and a tax was levied. Those new units were also valid
for a limited period of time. The actual value of the unit decreased slowly during the period and was the lowest just before
the tax was due.
Not much is known about money in the Middle Ages. What is known however, is that the people of the Middle Ages were deeply
aware of the temporality of human life. Memento mori was the motto of the people in the Middle Ages. This means: remember
the day that you will die. The charging of interest was strictly forbidden and people felt morally obliged not to do this.
Therefore, the people of the Middle Ages were inclined to spend their money fast.
If we assume this was a kind of Wörgl situation, we may assume that Europe was building capital at maximum speed using full
employment. Europe had to start at a very low level. Also, the local lords waged many wars that were destroying capital.
But wealth steadily increased, faster than on any other part of the planet. When the crusades started, there was so much
wealth to spend on a useless war, that Europeans could battle the Muslims for centuries on their own ground, keeping long
supply lines, while the conquered land was not profitable. After that, Black Death annihilated about one third of the
population, but only one century later, the exploration and exploitation of the rest of the world by Europe had begun.
The building of the pyramids
In the bible there is a story about a pharaoh having a bad dream about seven fat cows being eaten by seven lean cows. This
dream was explained to the pharaoh. He was told seven good years would come and after that seven bad years would follow.
Joseph advised the Egyptians to store food on a large scale. They built storehouses for food. Farmers bringing in the food,
got receipts for corn. Bakers who wanted to make bread, brought in the receipts, which could be exchanged for corn. It did
not take long before the receipts where generally accepted as money. Because of the degradation of the corn and mice eating
it, the value of the receipts was steadily decreasing. This enticed people to spend the money fast.
The grain receipt system lasted for many centuries. It made sense to store food to provide for hard times. If we assume this
was a kind of Wörgl situation, we can assume that also Egypt was building capital at maximum speed using full employment.
At some point, irrigation systems were in place, houses were built, and there was nothing left to do. Because there was no
limit on the ego of pharaohs, and they were worshipped like gods, the pharaohs could use this wealth to build pyramids.
The people building the pyramids were probably no slaves but economically free men. The Egyptian civilisation lasted for
more than 2000 years, far longer than any civilisation ever.
The fall of Rome
Rome lasted only 700 years. The money system was based on gold and silver. In the beginning Rome was able to expand, and
therefore capital could grow faster than interest charges. But after 400 years the expansion was over, and slowly growing
debt was becoming a drag on the economy. The government was permanently short of funds. The value of money was
constantly devaluated. The military was also badly funded, and therefore other people could invade Roman lands. Debt was
destroying Rome.
Limitations
Natural money without interest with money tax has a number of restrictions. These restrictions are acceptable when we
realize that the charging of interest is very harmful for the economy, society and nature.
Some limitations of a natural money system are:
1. The power structures are trying to sustain the current system. Both governments and financial institutions benefit from
the current money system. Therefore it may not be easy to reform the money system.
2. The number of funding options is decreasing. There is no compensation for the risk of loans not being repaid. Companies
can raise capital by issuing shares or by borrowing money without interest. Only companies that are creditworthy, may
qualify for loans. All other companies will need to attract capital by issuing shares until they are creditworthy enough
to be able to borrow money without interest.
3. Businesses that need flexible financing, need to allocate capital in advance by issuing shares or borrowing money.
This will introduce additional costs because the company has to pay taxes on money. This cost can be passed on to the customers
because all companies in the same business should be in the same situation. Those companies may use liquidity pools or
use banks to alleviate this problem, but this will not guarantee the availability of all the required capital when needed.
4. A natural money system without interest does a great appeal to the rationality of human beings. The drive for people
to get rich without working is eternal. A purely rational man would never participate in a lottery or a pyramid game. Yet
there are many people doing just that.
The greatest danger that always remains, as long as natural money will function, is that interest in some way
will be reintroduced, possibly in a disguised way. People will wonder: Why does the borrower not have to pay compensation?
Why should the owner of the money pay a fee and not the borrower? Political and business interests will try to use this
feeling for their own purposes.
With natural money, you can never insure loans, which are promises to pay, because this introduces a moral hazard.
The insurance fee is a form of interest. You can however insure collateral if it is not money in any form.
Various structured products will be invented and financial interests will try to influcence decision makers to allow such
products. We must realize that any commission that a borrower pays, is interest. Interest can manifest itself in different
forms. If there is no resolute legislation and enforcement, possibilities will be stretched and irresponsible risk taking
will come back.
Natural money with money tax and no interest is an uncertain experiment when introduced on a large scale. It
may have implications that are difficult to foresee. These consequences can be both favorable as unfavorable. In any case,
this is an economic revolution the world has never seen before. Therefore this should be done with a great understanding
of the plan, with great care, and also with no compromise whatsoever. When this money system is introduced in a time of
crisis, and there is no time for a proper preparation, mistakes will probably be made, and the chance of success will
greatly decrease. As a general rule, the tax rate should be around 0,5% to 1% a month.
From an engineering viewpoint, using systems theory, a natural money economy seems to be the most efficient market economy
possible in the real world. If this is true, this has far reaching consequences. Societies implementing this system will not
destroy capital but build capital constantly at maximum speed using full employment. Also those societies do not waste
resources on financial activity or government intervention. Therefore those societies should be far more wealthy. As a
result those societies become more powerful, and therefore natural money systems will replace all other money systems,
maybe just because they are only natural. If this is true, banking interests will never succeed in preventing natural
money from being introduced worldwide.
Natural money can be choosen by a group of people deliberately. It can be selected in an unconscious process, like in ancient
Egypt. It can be enforced by a rulers, like in Europe in the Middle Ages. Natural money can be used on a small scale, a large
scale, or even worldwide. Natural money can be used in a democracy but it can also be used in a totalitarian state. Natural money
assumes only economic freedom but it does not assume political freedom. Even though government intervention in the economy
is not needed, it does not require a specific size of government. The extra wealth created by natural money can flow to the
citizens, but it can also flow to the state, which may use it for its own purposes. Therefore, natural money is not "good"
or "bad" in itself, but only a very powerful concept.
If you understand the message and you understand the situation we are in, you see that our society is in great danger.
Bankers and governments may ward off collapse, but this comes with a staggering price tag of ever increasing inflation and
moral hazard. This will in the end eat away the fabric of our society. Therefore the time for action is now. First of all,
the knowledge must be spread. What to do next, is up to you.
Frequently asked questions
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Questions about money supply and debt
Question: If the money supply is constant, will it be possible for the economy to grow?
Answer: The value that is created in the economy, is within certain limits not dependent on the money supply. If the economy
is doing well, and the money supply does not change, prices may decline. However, a strong increase or decrease the money
supply can be harmful to the economy. Because the calculation of inflation rates is subject to manipulation, it is
questionable whether there was any economic growth in the mature economies in recent years. Only money supply can be
objectively measured.
Question: Why is it that the economy collapses, if debt is not increasing?
Answer: This is because nearly all the money in circulation has been created by banks with the intent to charge interest.
If no new debt is added, the money supply will decrease by interest payments, even though the existing debt is not repaid.
For example: When a bank money supply of € 1,000,000 is in circulation, and nobody pays of debts and nobody adds new debts,
and the interest rate is 10%, there is only € 900,000 in circulation after a year. Another year later, only € 800,000 is in
circulation. After 10 years there is still a debt of € 1,000,000, but the money supply is 0. Not all the money will
eventually disappear from circulation, because not everybody can repay his debts, because many people and businesses will
already have gone bankrupt. Of course in reality the bank has costs, pays interest to depositors and pays dividends, but
even then, when no new debts are added, the money supply will decrease.
Question: Is it not wise to proceed on the gold standard, to curb the growth of debt?
Answer: With gold or silver being money, the existence of interest on money cannot be avoided, because coins can be
hoarded and stored. Therefore it is not possible to raise a money tax. At that moment there is no incentive to lend money
without interest. If we return to the gold standard, and the system of banks charging interest still exists, the money
system will evolve into a situation like we have now. People will not accept that banks go bankrupt and that there is a
process of creative destruction with strong economic growth alternating with recessions and depressions. They will then ask
for government intervention. The gold standard will therefore not lead to a natural order that is stable. Moreover, when
the value of money is subject only the value gold, all sorts of manipulation are possible, like we see the gold market.
Therefore it is wiser not to base the value of money on gold alone.
Question: Why is it that the problems in the financial system come to light right now?
Answer: If an economy is developing fast, the economy can grow faster than debt, and the leverage will make interest work
positively for the development of wealth, because the extra growth above the interest adds to prosperity. That we see in
emerging economies, but also in many European countries in middle of the last century. Once the economy turns into a mature
phase, the economy is barely growing. Economic growth becomes a mere statistical fiction. The growing debt will eventually
be a drag on the economy. In 1971 the link between gold and money, which over the years had become increasingly
detached, was completely deserted. Financial innovations have since then created the possibilities for debt to grow further.
This did not seem a problem until debts have become so large, that many people get into financial troubles, and therefore
the financial system is at risk.
Question: The banks have lost thousands of billions of euros. Where has all the money gone?
Answer: A small part was paid in the form of profits and bonuses. The profits amounted to tens of billions, but hundreds
perhaps thousands of billions of euros have been lost. Because almost all the money in circulation is covered by the
balance sheets of banks, much of the money is in danger of annihilation. Economists and bankers call this a "liquidity problem".
Questions about money without interest charges
Question: May capital not earn interest?
Answer: It is only natural for capital to earn interest. Only on money interest should not be charged. Therefore, in a
natural money system, money should not be capital.
Question: Is money without interest charges not just money for free?
Answer: The money we have now is money for free, since banks create money out of thin air. Moreover a loan you pay back
later will have less value because of inflation. So if you are closing a mortgage with an interest rate of five percent,
while the money supply grows at a rate of 15 percent, you actually get money for free when you borrow. Money without
interest is not free money, especially if the money supply is constant. The current system penalizes savers if interest
rates are low and penalizes borrowers if interest rates are high. Money without interest does not favor anybody.
Question: How does a money system without interest charges eleminate excessive risk taking?
Answer: This is done in the following ways:
1. Since there is no allowance for risk, money will only be lent money to creditworthy people and businesses.
2. Moreover, because there is no interest, interest payments do not erode the creditworthiness of companies and people.
Because the market solves many problems in this way, the government has a smaller task in managing the economy. Less
people and companies do go bankrupt.
Question: Is a saver worse off without interest?
Answer: The interest rate the bank pays is usually lower than inflation, and almost always lower than the growth of the
money supply. When the value of money is constant, and you will get the same amount of loan money back, you will be better
off.
Question: Is a borrower worse off without interest?
Answer: If the interest rate on the loan is lower than inflation a borrower will be worse off without interest. This is
usually only the case with mortgages but not with other types of loans.
Question: In Japan, interest rates have been zero percent for years. Is Japan an example of a natural money system?
Answer: Although the interest rate in Japan is very low, this is not a natural money system without interest using money tax.
The money system in Japan is similar to the money system in the western world. About 20 years ago, the banking system in
Japan had been inflated by increased credit growth. Since then interest rates dropped to around zero percent to prevent
a collapse of the system by debt payments and interest charges.
Question: Do islamic countries have a natural money system?
Answer: While charging interest is forbidden in Islam, like it was the case in Christianity, this does not mean that the
Islamic world has a natural money system.
Questions about banking in a natural money system
Question: Should the banks be nationalized?
Answer: Banks have a special function in society because they manage the money system. In any case, the banks must not be
permited to use money entrusted to them for investing or taking risk. They must use these funds to make loans without
interest. They can operate for their own risk, for which banks could get an allowance, or they can mediate loans for which
they could get a fee. A bank should therefore still be a private company.
Question: Are my savings still safe at the bank?
Answer: The economy will be more stable. Bankruptcies and bad debt are a rare phenomenon. When banks operate on behalf of
depositors, this means that when certain loans cannot be fully repaid, the depositors loose a part of their money. When
banks operate for their own account, the equity of the bank can absorb the losses.
Economic questions
Question: Should the government protect business and employment protection against competition from abroad?
Answer: Competition from abroad is not the cause of the financial crisis. Therefore, to counter competition from abroad is
not the solution. Especially when all countries have natural money systems, inbalances of payments between countries
are less prevalent. Countries will no longer lend to each other more than can be repaid.
Question: Does natural money make international trade more difficult?
Answer: It is more difficult to have deficits or surplusses on the current account for a longer period of time. When a
country pays another country in natural money for goods or services, the other country is encouraged to lend
out the money or use the money for investment or consumption in the issuing country. If this is not attractive, the other
country may buy gold in the issuing country at market prices. This diminishes the gold reserve of the first country so the
price of gold will rise in the first country. Therefore products of the first country become more attractive to other
countries. This is the natural gold standard. If this is too cumbersome, which it probably is, countries can dispose of
their surplus natural currencies using the foreign exchange markets.
Question: Is it not possible to abolish the money creating by banks, but allow the charging of interest?
Answer: In this case there is a closed-circuit of money, but there are two major disadvantages:
1. In times of economic crisis, people will take their money away from banks and start hoarding money. This will disrupt
the economy even further. The citizens will then ask for government intervention, and the money system will gradually
develop into the system as we have now.
2. Interest reinforces the contrast between rich and poor. The rich usually have money, while the poor need it.
In that case, the poor must borrow at an interest rate. The poorest pay the highest interest rates. Because the supply of
money is constant, they become even poorer money wise. If the economy is booming, and many new goods and services are
supplied, and prices are falling faster than interest rates, the poor might get richer in terms of goods and services, but
this is generally not the case. The result is that interest in overall, make the rich richer and the poor poorer.
Social unrest is lurking.
Questions about the transition to a natural money system
Question: When will the transition to the new money system be possible?
Answer: Probably change will come when the problems are seriously enough, and enough people know what the actual cause
of the situation is. The stakes are high. Banks will try to create a new system with interest charges.
Question: How should the transition to a new money system take place?
Answer: When a country or region as a whole would like to convert to a natural money system, it could be done as follows:
1. A money supply number must be determined. It is not necessary to change the money supply
2. All balances of savings and debts should be matched. The current savings will be smaller than the debts, so after scoring
all positive and negative balances, a negative balance may remain. Many debts in the old system can never be repaid.
Question: How do debts in the old system convert into the new?
Answer: In principle, all debt denominated in fiat currency is not worth more than the currency itself. There is no
coverage. You are therefore at the mercy of the authorities issuing the currency, which are the national authorities.
In principle, this transition should be regulated by the markets.
Political questions
Question: Why do economists advise governments to spend money when the economy is not doing well?
Answer: The current system of fractional reserve banking money with interest charges needs increasingly more debt to to
operate. When consumers and businesses do not go into debt because they are reluctant to do so, government should
do this, because otherwise the fractional reserve money system would collapse.
Question: Why did the government encourage strong growing debts of consumers and businesses?
Answer: Growing government deficits were seen as economic weakness which could undermine confidence in the currency.
Therefore governments encouraged that more and more debts were incurred by consumers and businesses. As a result,
the government managed to show relatively low deficits. This situation exists in many countries having a housing bubble,
including the Netherlands. The United States was the main benefactor of the current monetary system because the dollar was
the reserve currency, and it was the United States which had the greatest motivation for continuing this system as long as
possible.
Question: Why did economists not see this coming?
Answer: There have been economists, who have seen it coming, but most economists did not expect this to happen. Economics
does not take into account that a human is a social being which is very essential for understanding humans. Economics is
therefore a complex pseudo-science, with all kinds of irrational assumptions, the most important of which is: the existence of the homo
economicus (economical thinking human). On the existence of the homo economicus much of economic theory is based. The homo
economicus does not exist, and a lot of economic theory is dubious at best, but actually politically motivated. As economists
are mostly paid for by special interests, they rarely manage to have an independent view.
Question: Is a tax on money not a tax on the rich?
Answer: The tax on money is no tax on capital. Stocks, real estate and money lent are not subject to this tax. This tax is
aimed at keeping the money in circulation, so the economy will not falter. Its purpose is not to redistribute income.
Question: Is inflation not a money tax?
Answer: Inflation is not the same as a tax on money in the natural money system. Inflation is generally caused by the
increase of money supply. The increase in money supply in the current system is needed to keep the economy going, because
the debt also continues to grow and interest thereon should be paid. In a natural money system, the money supply does not
grow, and there is no inflation.
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Category: Economics, Financing, Banking
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