the plan for the future
July 4, 2009 - December 21, 2012
Author: Bart klein Ikink
The core issues of financial markets are uncertainty and the resulting instability. For a significant part uncertainty and instability in financial markets are caused by charging interest on money. Opportunistic parasites exploit information differences and turn them into profits as they often have lower levels of uncertainty resulting from information advantages. With Natural Money, the economy will be more stable and the balance sheets of businesses will be less leveraged. This results in lower levels of uncertainty, and consequently lower profits for opportunistic parasites. In this way financial markets can allocate capital more efficiently to the benefit of everyone.
Currently the financial system is saturated with debt. Debt could go out of control because of interest on money. Interest is an allowance for risk so without interest on money debt levels cannot go out of control. Another consequence of interest on money is wealth inequality. Interest on money causes wealth to concentrate as the poor pay interest to the rich. The wealth inequality leads to a distortion of democratic principles because money can buy officials, politicians and judges. Governments and banks are the core of the interest based financial system because they together control the creation of money.
The financial System should be simple so most people can understand finance. The power to create money must be taken away from banks and governments and should be the right of the citizens. Practically this means that a government can create money after consulting the citizens in a referendum. There are many competing Natural Money currencies so currency mismanagement will be punished quickly. This will result in better decisions, possibly after an initial phase of errors. The transparent design of the Natural Financial System combined with the performance of the Natural Economy will ensure that the natural economies will perform better than interest based economies.
This document outlines the design of the Natural Financial System. It covers subjects like the social and economic consequences of the introduction of Natural Money, the legal framework and organisation structure for the agents operating in the Natural Financial System, the legal framework for the financial markets and the legal framework and organisation of Natural Money banks. Finally a draft of a possible transition to the Natural Financial System is given.
The financial system has failed
Debts could grow out of control because of credit and interest on money [+]. Interest is an allowance for risk, so risk and risk perceptions are important quantities of the interest based financial system [+]. This made it possible to create schemes to profit from information differences at the expense of others. Risky debtors can borrow more if they are willing to pay high interest rates, while compound interest aggravates the problems of troubled debtors, making debt a trap from which there is no escape [+]. According to former US President John Adams:
Interest on money causes wealth to concentrate as the poor pay interest to the rich [+], so interest on money is an important cause of wealth inequality. Wealth inequality and democracy do not go well together. On this issue Louis Dembitz Brandeis wrote:
Money can buy officials, politicians and judges so issues regarding democracy and finance should be handled with an understanding of the corruptive influence of money. Founding a democracy using the separation of powers also known as trias politica, which divides the estates in an executive, a legislative, and a judiciary branch, without addressing the issues of money, leads to a concentration of power in the hands of a few people.
Governments and banks are the core of the interest based financial system because they together control the creation of money. Both governments and banks share a common interest so government intervention and regulation will not solve the problem of money power undermining democracy. The power to create money must be taken away from banks and governments. The financial System should be simple so most citizens can understand finance. In this way it will be more difficult for insiders to take advantage of their knowledge. This will reduce the need for regulation.
The financial sector should facilitate the real economy. Currently a large part of the financial sector is involved in handling the uncertainty coming from monetary and economic instability that is the result of the charging of interest and the money creation by financial institutions [+]. Interest on money [+] and credit [+] are important causes of financial instability.
Because of financial instability, the financial system has become more complex than it would otherwise have been. Financial instability and complexity create opportunities for insiders to profit at the expense of others. This is inefficient and leads to a concentration of wealth that is not based on economic achievement. If those and other inefficiencies in the economy are eliminated, people could work less and have the same level of prosperity [+].
The design for the Natural Financial System takes into account those considerations. It brings the following advantages:
- The design will take the power to create money away from governments and the financial sector and give it to the citizens [+].
- The Natural Financial System needs less regulation and management [+].
- The Natural Economy will provide better risk reward ratios compared to interest based economies. This will attract investors [+].
- Natural Money will bring economic stability [+].
- The design provides better guarantees for the reliability of the agents operating in the financial sector.
The transparent financial sector design combined with the performance of the Natural Economy, the reliability of the agents operating in the financial sector and the accompanying financial stability will create a better investment climate that will attract investment capital at the expense of financial sectors based on designs that allow interest on money, leverage or conglomerates with combined responsibilities. Crucial for success is asserting national sovereignty in order not to allow international finance and multinational corporations to syphon off national productivity.
This document discusses the organisation of the Natural Financial System. The following subjects are discussed:
- the consequences of the introduction of Natural Money;
- a legal framework for banking;
- a legal framework for the financial sector;
- an organisational design of banking;
- the transition to the Natural Financial System.
In the Natural Financial System it is not possible to insure default risk because the insurance fee is a form of interest. Insuring default risk creates a moral hazard [+]. Only people and companies that are credit worthy will qualify for loans. In the Natural Financial System banks cannot create money so money lent must be available in the form of savings. The Natural Financial System provides fewer funding options and this has significant consequences for both people and businesses.
In the Natural Financial System financial activities are taxed. The resulting tax income can be used to reduce taxes on activities in the real economy. In the current tax regime labour and productive business activity that contribute to the real economy are taxed, while financial activity that does not contribute to the real economy is not taxed. It is better to tax money and financial activities instead of labour and productive enterprise as this will improve the efficiency of the real economy and reduce the efficiency of the parasitic economy.
Natural Money is not scarce but abundant. Because of the holding tax, bills will often be paid instantly or even in advance. It is attractive for businesses to lend money without interest to reliable customers. It is unlikely that a reliable person or business will be short of money in the Natural Economy.
Commercial banks are needed because markets can allocate capital better than bureaucrats. This means that there must be a profit margin for the banks in the Natural Financial System. There is no interest on money so savers need to pay a fee to the bank to make it possible for banks to lend money at zero percent interest. This proposition is attractive to savers as there is no money creation, so economic growth will translate into lower prices. It is likely that there will be a real net return on deposits with zero percent interest or low negative rates.
The math is as follows: currently interest rates are around 3%, economic growth is 2% while money supply increases with 8%. The real return is a negative 3% (3+2-8). With Natural Money interest rates on deposits may be around -2%, economic growth could be 3%, while money supply increases with 0%. The real return is then a positive 1% (-2+3). Savers may have 4% higher returns in the Natural Economy. It is likely that the improved circulation of money will bring higher growth rates. If this is true then returns on savings with Natural Money are even more attractive.
The introduction of the Natural Financial System means reorganising the financial sector, including the laws regulating finance. If Natural Money is to be introduced worldwide, it will create an opportunity to standardise and to improve the financial system. This can reduce cost and can make managing international financial affairs more easy. The following issues are discussed:
- social issues;
- personal finance;
- business finance;
- government finance;
- local currencies;
- methods of payment;
- exchanging currencies.
In the interest based financial system people that are not credit worthy often qualify for loans at high interest rates, while interest aggravates their problems. If it is impossible to borrow money if you are not credit worthy, financial problems cannot grow out of control, and can be solved sooner and faster. It is therefore in the interest of borrowers as well as lenders that people cannot borrow more than they are able to repay.
Many people have been lured into debt by easy credit and the end of easy credit will force people to live within their means. In the Natural Economy this will not lead to an economic contraction because income is more easy to acquire. People that do not have the money to pay for their basic needs like food and shelter, should get help instead of an option to borrow money at interest.
Most people buying a house need a mortgage. In the Natural Financial System there is no interest to compensate for the risk of default, so mortgages in the Natural Financial System will be less leveraged. People needing a mortgage will have to make a down payment. Mortgages in the Natural Financial System will still have monthly payments, but these lower the principal.
Other types of loans without collateral are more difficult to attain but in the Natural Financial System those loans are less needed. The absence of interest and the faster circulation of money make it more easy to organise finances without debt. A car loan may still be attainable if a down payment is made. Flexible financing such as credit card loans will be difficult to come by. Banks will have a preference for longer term and fixed loan agreements.
Student loans will be more difficult to come by. Community banks have a strong bond with their community and could facilitate those loans. Most students will not let their community down. With the arrival of the Internet University, studying can become cheaper [+], and it will be possible to combine work and studies as less work will be needed to make a living [+].
The holding tax of Natural Money produces a push for instant payment. Bills will be paid instantly or even in advance. Companies can raise capital by issuing shares or by borrowing money without interest. Only companies that are credit worthy will qualify for loans as there is a limited reward for risk because there is no interest on money. Companies that are not credit worthy will need to attract capital by equity until they are able to borrow money without interest.
Businesses that need flexible financing must allocate capital in advance by issuing shares or borrowing money. This will introduce additional costs because the company has to pay a holding tax on excess money. These costs can be passed on to the customers because all companies in the same business will be in the same situation.
Corporations cannot issue bonds, not even bonds yielding zero percent, because the value of a bond reflects default risk. If the credit worthiness of a corporation decreases, the bond will lose value. Consequently the bond will have a positive yield if it is repaid in full. This is interest.
Banks cannot offer a surety or a guarantee because it is impossible to insure default risk in the Natural Economy. Instead companies must put money into a locked account. The money can be released once the goods have been delivered. If a company does not have money to put in a locked account then it must attract additional capital. Companies in the Natural Economy are well financed, while most trade is local, so guarantees and sureties will be less needed.
The rich have the opportunity to move their money to tax havens and the poor often have no money. Consequently the middle class is paying most of the taxes. Over the years tax regimes have become increasingly oppressive as governments did get access to more information. The United States government is even asserting its power overseas to deal with tax evasion. As Martin Armstrong noted [+]:
Martin Armstrong concluded that a government owns its people. Within the current political and economic system this trend is difficult to counter. The underlying causes of the problem are twofold. First, citizens have little control over governments. Secondly, governments have little control over transnational entities. Both issues contribute to oppressive tax laws.
The way out is to implement referendum laws, to assert national sovereignty and to ban transnational entities. In this way the citizens control the government and the government controls the nation, and taxes are paid where profits are made. If this is not done then changing tax laws can lead to tax evasion like happened in Great Britain where high incomes were subjected to a 50 percent income tax [+].
The citizens of a nation should be free to choose a tax regime that suits them best. If a tax regime punishes productive people then a nation will decline. It is in the best interest of everybody to have a tax regime that rewards productive activities. Rich people and productive people are not always the same. Many rich people have acquired their wealth by inheritance, criminal and unproductive activities [+] or using the corrupt political system [+].
A good tax code has a positive impact on society. The following taxes can contribute positively to society:
- Holding taxes on money prevent economic crises and encourage people to accumulate their wealth in productive capital.
- Fossil fuel taxes make the economy more energy efficient and they promote the use of renewable energy sources.
- Wealth taxes help to block the emergence of a parasitic elite that lives of the labour and enterprise of others.
- Trading taxes discourage trading. Trading does not contribute to economic output.
- Income taxes on high incomes discourage overachievement.
The citizens of a nation must be free to choose a tax regime. Income must be taxed were income is made otherwise there will be a competition between countries to make their laws the suitable for oligarchs and multinational corporations. Corporations should not have operations in different countries because it enables them to move profits between countries. It should not be possible for a corporation located in a foreign country to have a controlling stake in a national corporation directly or via intermediate entities. All structures that have the purpose of evading national laws and taxes should be eliminated.
A good tax code rewards productive people, most notably labourers and small business owners, but it should not reward overachievement. People that live of the work and enterprise of others are not productive. This is the rationale behind wealth taxes and the elimination of tax havens [+]. To reduce unemployment and fossil fuel consumption, taxes on labour should be low while taxes on fossil fuels should be high. This will make labour and renewable energy more competitive compared to fossil fuels. Achievement is good but overachievement is problematic as the resources of the planet are limited. Therefore high incomes should be taxed heavily.
Referendums will ensure that the tax code is a democratic choice. If the economy is doing well then the majority of people will be in the middle class, and the middle class will have a decisive influence on the destiny of a nation. Majority rule and referendums still imply a form of oppression because taxes and public services are mostly obligatory.
Governments can create money after a referendum, so there is no need for governments to go into debt. Taxation can establish fiat money as a currency, giving it value by creating demand for it in the form of tax obligations. An ongoing tax obligation, together with private confidence and acceptance of the currency, maintains its value [+].
In the Natural Economy tax income will rise as a result of the faster circulation of money. There will be no economic booms and busts so government finances can be planned more easily. Governments do not need to go into debt to stimulate the economy because the holding tax on Natural Money will produce a constant stimulus [+].
Multinational corporations can make a profit in one country and pay taxes in another country. In this way there is a competition between countries to have the lowest taxes for large corporations. Consequently small businesses and ordinary citizens pay taxes while large corporations and wealthy people evade them [+]. A number of multinational corporations like News Corp even succeeded in extracting tax money from the IRS, making a profit out of taxpayer's money [+].
Every country must be free to determine its own tax levels. This can only be realised when taxes are paid where profits are made. This means the end of tax havens and multinational corporations. Tax evasion by multinational corporations and oligarchs harms countries and their middle classes. Developing nations lose more money on tax evasion than they receive via development aid [+].
The United Kingdom, and especially the Canal Islands, Bahamas en Cayman Islands are popular tax havens. The Netherlands is a tax haven for corporations [+]. Switzerland has been a safe haven for tax evaders and dictators because of its bank secrecy and neutrality.
Governments can pay for large projects using current income. Large projects can be planned in such a way that government income is enough to pay for the expenses. The result may be that some projects take more time and that some projects may not be carried out at all. If a project is not possible because of lack of government income, this is good. If the government has the ability to borrow the money for such a project, future generations will have to pay for it.
Some countries feel the need for large public works that do not generate income. Those public works may exceed the financial capabilities of the government. In such cases special purpose independent governmental institutions with their own elected officials can be introduced to manage large public works. In The Netherlands the dikes, canals, ditches and rivers are maintained by the body of surveyors of the dikes. They operate independently from the national and local governments. They have their own elected officials and tax income.
Benefits and pensions
National preferences with regard to benefits and pensions differ but many nations assist the poorest by guaranteeing a minimum level of income for the disabled and unemployed, a minimal level of medical assistance for the poorest and a minimal level of pensions. Even though benefits can lead to economic inefficiencies, the support is justified on moral grounds. Politicians made unrealistic promises such as low taxes compared to the level of benefits, so taxes may have to be raised and benefits may have to be reduced.
Benefits, medical insurances and pensions can best be managed by special purpose independent institutions that have their own elected officials and taxing system. Institutions with long term obligations should not be part of the government, otherwise politicians will be tempted to use the funds for other purposes. Those institutions should also not be privatised. A profit motive may lead to a short term focus and the institutions will need to be bailed out with taxpayer money if they fail.
There will be sufficient employment in the Natural Economy, while there is an income guarantee in the form of a basic income, so the need for unemployment benefits will disappear. Only people that are not able to work need benefits. The granting of benefits can better be done at the community level and communities should bear a significant part of the cost. This will give communities an incentive to employ as many people as possible [+].
Behind the issue of pensions looms a generational conflict. Currently the baby boom generation is retiring. The baby boomers enjoyed a good life, depleted the Earth's energy and natural resources, and left a high level of benefits and government debt to be paid for by future generations. Pensions that were affordable when the number of pensioners was low compared to the number of working are becoming a burden because the number of pensioners is rising. The retirement age may need to rise or the level of benefits may need to be reduced.
The Natural Financial System allows states, provinces and municipalities to issue their own currencies. Those currencies will circulate alongside the national currency and can only be used for payments within the state, province or the municipality. Municipal currencies and state currencies will float against all other currencies. People will be inclined to spend the local currencies first because they can only be used locally. This will stimulate local trade at the expense of long distance trade, making the economy more energy efficient.
Local currencies have the following advantages:
- They promote local trade and strengthen communities by creating employment in the community.
- Local production by hand will sometimes replace centralised mechanised production, reducing energy consumption.
- Local currencies generate a tax income for local governments.
- Local currencies make communities more independent from the central government.
State, provincial and municipal governments have to adapt their size and ambition levels to the tax income available. Areas with little cohesion do not need to share a government. Such a government does not have value for its citizens and there may be too little income to support it. This may force state, provincial and municipal governments to cooperate or to merge. Areas that have strong economic cohesion may start their own municipality or province. In some countries a layer of government may disappear. There is a danger to this development as there is a possibility that rich communities and poor communities are created, so measures should be taken to avoid this development.
Natural Money currencies are less difficult to manage compared to interest based currencies as the money supply can remain constant [+]. Introducing local currencies limits the effects of potential currency mismanagement. If the central government fails to manage its currency, then local currencies are not affected. If a local currency is badly managed then this has no consequence for the national currency. The introduction of local currencies will introduce additional exchange costs because there are more currencies. This should be considered as a trade off against higher growth rates, more financial stability and a higher level of prosperity.
Methods of payment
The introduction of Natural Money may be a good moment to end cash in the form of bank notes and coins. The holding tax on Natural Money currencies makes the use of cash cumbersome. Cash is used to pay anonymously so bank cards must have the option to use digital cash for anonymous payments.
It is possible to have Natural Money bank notes and coins. Natural Money bank notes and coins could have an issue date and a validity period, which makes it possible to calculate the accrued holding tax. At the end of the validity period the bank notes and coins can be exchanged for new currency.
In the Natural Financial System debit cards will replace credit cards. People buying goods and services will pay promptly when possible to evade the holding tax. Credit card companies may take the money from the current account immediately because they cannot charge interest on money lent.
Bank customers who do not use computers must be able to write paper cheques and paper money transfer forms. Paper cheques and paper money transfer forms can be processed at the bank by bank employees or at a central facility that provides this service to a number of banks. Security issues on the Internet may cause people to use paper cheques and money transfer forms in the future.
In the Natural Financial System the number of currencies will rise dramatically. If local governments such as municipalities are allowed to issue currencies then the number of currencies may ultimately be more than 1,000,000 world wide. Also the number of independent banks may rise to a number of more than 1,000,000 world wide. As a consequence no currency or bank will be too big to fail.
Exchanging currencies will become an important issue. To discourage currency trading, an exchange tax is levied by the government of the currency that is sold in the exchange transaction. Exchanging currencies directly may not be impossible, especially when distant local currencies are involved in the exchange transaction. To facilitate the exchange of currencies, an International Currency Unit (ICU) will be needed.
International Currency Unit (ICU)
Supranational currencies like the euro have turned out to be a systemic failure because those currencies ignore the political and economic differences between the countries using the currency. The euro may have improved the fiscal discipline of European governments, but differences in competitiveness make the single currency problematic. In the euro area economic imbalances cannot be resolved via exchange rates.
Supranational currencies have the following deficiencies:
- A single currency limits the national sovereignty of the countries using the currency. The single currency will force governments to apply policies against the will of their peoples. For example, if the French want to retire at age 62, this may be impossible when they are using the euro.
- If one government mismanages its finances then other nations using the currency will be affected. For example, other countries pay for the financial mismanagement in Greece [+].
Countries with structural current account surpluses like the Netherlands or Germany are as big a problem as the countries with structural current account deficits like Spain and Italy.
International trade and the exchange of currencies can be facilitated with an International Currency Unit (ICU), which can be a weighed index of all Natural Money currencies or the most used Natural Money currencies. If the ICU is used in an exchange transaction in which it is bought and sold to facilitate the exchange of two other currencies, it is not needed to levy an exchange tax on the sell of the ICU.
Using the ICU all currencies can be exchanged with a maximum of two conversions. The holding tax on the ICU may be a weighed average of the holding taxes of the underlying currencies. The proceeds of the holding tax of the ICU may go to the governments issuing the underlying Natural Money currencies. A surcharge on the holding tax of the ICU may be added to fund supranational organisations like the United Nations.
The primary function of banks is bringing together the supply and demand for money and capital. The primary function of banking has become intermingled with other types of business like insurance, investment and trading securities. Banks have a public role because they facilitate financial transactions, so the business of banks should be transparent and separated from other types of business entities.
There is no interest on money in the Natural Financial System so banks need other income sources. The legal framework for Natural Money banking provides guidelines on how to operate a bank in the Natural Financial System. The following issues are discussed:
- abolishing central banks;
- Natural Money banking rules;
- the scope of banking operations;
- ownership and controlling stakes;
Abolishing central banks
Money supply is fixed in the Natural Financial System. There is no need to create money or to manage the money supply so central banks are not needed. Central banks are undemocratic institutions ruled by bankers that tend to favour banking interests. Even though most people have little understanding of banking, they do feel the consequences of interest on money and money creation. Most people understand that creating money can lead to higher prices.
Governments and banks should not be able to create money. Only the citizens should have the right to create money after a referendum. There is no gain in creating money in the Natural Financial System if debts are increased with the same percentage as the increase in the money supply. Raising the money tax has the same effect on the income of a government as increasing the money supply so there is no need to increase money supply [+].
Natural Money banking rules
Banks in the Natural Financial System must adhere to the following rules:
- Banks are prohibited from charging interest on money lent.
- Banks can only lend money entrusted to them. They cannot invest directly in businesses.
- Banks can charge intermediary costs to savers but not to borrowers.
- Money in current accounts is subject to the holding tax. Current accounts are used for money needed in the short term.
- Account holders can place money that is not needed in the short term in deposits and savings accounts.
- Banks can offer different types of savings accounts. The most restrictive savings accounts have the lowest fees.
- Money in current accounts is not available for lending. Only money in savings accounts can be used for lending.
- Municipal, state, provincial or national governments that have issued currencies levy a holding tax on the money. The banks collect the tax and transfer the proceeds to the governments issuing the currencies.
Scope of banking operations
Banks should only be able to do business in a limited set of currencies, depending on the juristriction in which the bank operates. Current accounts do not fall under this rule because money in the current account cannot be used by banks for making loans. This has the following consequences:
- Municipal banks can do business in the municipal currency, the state currency, the national currency and the International Currency Unit;
- State banks can do business in the state currency, the national currency and the International Currency Unit;
- National banks can do business in the national currency and the International Currency Unit.
The citizens of a municipality, state, province or nation must be able to determine the fate of their municipality, province, state or nation. Banks dealing with a currency must reside under a government issuing the currency, so banks can only have operations within the boundaries of the municipality, state or nation they are servicing. The emergence of transnational financial institutions should be avoided. A Natural Money bank resides under a national sovereignty and is subject to the laws of a nation. A Natural Money bank cannot have operations in foreign countries.
Banks can only provide banking services, which are: current accounts, loans, mortgages, savings accounts and deposits. Other financial services must be executed by separate entities, such as brokers, insurance companies and mutual funds. Banks must not be involved in other activities than banking because the financial system is a public infrastructure. Mingling other businesses with banking can harm the integrity of the financial system.
Ownership and controlling stakes
A central question is whether banking should be private or public. Silvo Gesell identified the financial system and money as public utilities. In the United States the Public Banking Institute is promoting banking as a public service. Natural Money does not dictate a public solution. Both options have advantages and disadvantages. Public banks are politically controlled and can become inefficient allocators of capital. Private banks are run for profit and may ignore the social consequences of their capital allocation.
On the issue the following considerations apply:
- If there are only public banks then there will be no competition and banks tend to become inefficient bureaucracies.
- The profit motive of private banks combined with public guarantees has been an important driver of the lax lending practises that resulted in the financial crisis.
- Public banks can be important for the economic infrastructure by funding projects that private banks will not fund [+].
- It may not be possible to make all banks in the Natural Financial System profitable, especially small local banks. In such situations a municipality, a state, a province or a nation may provide banking as a public service.
Public guarantees for private banks lead to moral hazard and abuse. Accepting public banking alongside with private banking favours public banks in competition because they enjoy state guarantees. It appears that accepting public banks alongside with private banks is less problematic than public guarantees for private banks. Public banks must be subjected to rules that limit their business and give them a designated function, such as providing loans for projects that would not have been feasible with private financing.
To ensure that banks do not become large conglomerates with conflicts of interests, the following rules regarding ownership and controlling stakes for private banks should be adhered:
- Banks should be prohibited from having stakes in other banks.
- Legal entities or natural persons can only own or control a limited stake in banks, for example 5%.
- Foreign entities having stakes in banks should be disclosed.
- The ownership rules must take into account intermediary legal entities.
Banks in the Natural Financial System have the following obligations:
- They must provide payment services via current accounts.
- They must collect the holding taxes for the governments issuing the currencies.
- Municipal banks must exchange the municipal currency for the regional (state) currency using a maximum spread. This obligation is limited in size because of the limited liquidity of the currencies involved.
- Municipal banks must exchange the municipal currency for the national currency using a maximum spread. This obligation is limited in size.
- State or provincial banks must exchange the state or provincial currency for the national currency using a maximum spread. This obligation is limited in size.
Banks in the Natural Financial System do not have income from trading activities and interest. This means that customers have to pay for banking services, such as operating accounts, bank cards and payments. The main source of income for Natural Money banks are the intermediary compensation on savings and currency exchange fees.
Banks in the Natural Financial System have the following sources of income:
- The intermediary compensation is a fee for money in savings accounts. The difference between the intermediary compensation of the savings account (for example: -2%) and the 0% loan rate is the margin for the bank.
- Account fees are fees for account related services such as keeping an account at the bank and the bank card.
- Transaction fees are fees for transactions such as money transfers, terminal payments and automatic collects.
- Currency exchange fees are paid for exchanging currencies in the Natural Financial System.
Banks in the Natural Financial System will be relatively small. The banking operations need to be standardised so it will be possible to have small banks that can share personnel. The smallest banks may need to share personnel as the requirements coming from the separation of responsibilities can conflict with organisation size.
Large banks have specialised departments for information technology, risk assessment, fraud prevention and card handling. Many Natural Money Banks will not have such departments because they are too small. Those banks must have the option to use a centralised facility for specialised functions.
The Basic Banking System can be run on a centralised facility using cloud computing technology. The centralised facilities can also offer others services. The organisation model of Natural Money banks probably will look like the Dutch Rabobank, where small independent banks share a number of centralised facilities.
The primary function of financial markets is bringing together supply and demand for money and capital. In many cases this function is hampered by the parasiting at the expense of others in the financial sector. Critics often argue that parasiting is the main business of the financial sector. The following types of schemes exist: exploiting insider information, collusion and market manipulation.
It is forbidden to charge interest in the Natural Financial System. To reduce the potential for the misuse of information asymmetry, it is important that it is not possible for any party in the financial sector to accept a default risk, or any other risk that infers interest, and transfer the risk to another party.
The legal framework of the Natural Financial System should guard against the misuse of information. To achieve this, the following measures can be considered:
- separation of responsibilities;
- trading restrictions.
Separation of responsibilities
Financial institutions must remain independent, otherwise they can take over each others default risk or misuse of information asymmetry. The following rules regarding ownership and controlling stakes should be adhered:
- Financial institutions are prohibited from having stakes in other financial institutions.
- Legal entities or natural persons may only own or control a limited stake in a financial institution, for example 5%.
- Foreign entities having stakes in financial institutions should be disclosed.
- The ownership rules must take into account intermediary legal entities.
Banks should be the only financial institutions that lend money as a business. Other financial institutions such as stock brokers or payment facilitators on the Internet like Paypal can only offer current accounts that are subject to the holding tax. Money in those accounts cannot be lent. Corporations that are not a financial institution may only lend money to their customers as the result of a regular business transaction such as selling a product or a service.
The MF Global debacle demonstrates that it is difficult to regulate complex financial conglomerates. There have been a large number of regulatory bodies involved in monitoring MF Global but they failed [+]. The regulators also did not stop the mortgage fraud as federal prosecutors have been reluctant to prosecute major lenders and senior executives even when there is evidence [+].
Regulators have not learned from their mistakes as the collapse of Enron would have provided ample opportunity to do so. Whether regulators have been corrupt or incompetent does not really matter. The Senate Banking Committee has proven to have little regard for conflicts of interest when it put a former J.P. Morgan lobbyist in charge of the hearings on J.P. Morgan’s risky proprietary trading [+]. The system of regulation has failed and it will fail again. The alternative for regulation is addressing the conflicts of interest. A good step towards a solution is breaking up the financial conglomerates.
Splitting up financial conglomerates will help to make the financial sector more transparent. The Glass–Steagall Act, which limited commercial bank securities activities and affiliations between commercial banks and securities firms, should be re-enacted and expanded as part of this reform [+]. The following types of financial institutions should become separate legal entities. They must adhere to the same rules concerning ownership and controlling stakes as banks:
- insurance companies;
- custodian banks;
- pension funds.
In recent years the division between banks and insurance companies has been dissolved. Numerous banking-insurance conglomerates came into existence, such as the bank-insurer ING in the Netherlands. With Natural Money it is not possible to insure loans, which are promises to pay, because the insurance fee is a form of interest. This means that banks and insurance companies should not be part of the same conglomerate.
Bringing banks and insurance companies together into one corporation is effectively an insurance against bank losses such as losses on loans, even if the insurance company does not actually insure the loans of the bank. The income from insurance operations can cover loan losses. Also the capital of the insurance operations can be used to cushion against loan losses. If the bank and the insurer had been separate entities, the insurer would have charged a fee for insuring the loans. This is a form of interest.
A bank-insurer could be tempted to sell bad debt from the bank to the insurer. The insurer could be tempted to place this bad debt into the accounts of its customers that have a pension or a life insurance based on the performance of their investments.
Exchanges such as bond exchanges, stock exchanges and commodity exchanges bring together supply and demand of financial titles. It may be possible to achieve a market price automatically, using a computer algorithm that is part of the public domain, without the need for market makers [+].
A sudden drop in liquidity can result in frozen markets or extreme price movements [+]. Specialists can provide liquidity and reduce price swings but they are traders so they have a questionable morality [+]. If the use of specialists cannot be avoided, then they should not be able to take short positions because short positions are forbidden in the Natural Financial System. Shorting is hedging against default risk, which infers interest. Specialists can minimise risk by minimising the position owned.
Off-market order executions in dark pools can result in order executions that are not optimal for the public. All orders should be executed at an exchange to make order execution transparent. To reduce the entering of orders that are not meant to be executed, for instance orders meant to influence the price, there must be a tax on placing orders.
A stockbroker trades securities on behalf of its customers. To make sure that a stockbroker is a neutral entity that does not act against the interests of its customers, the stockbroker should not be able to trade securities for its own account. For this reason a stockbroker cannot be a market maker. A stockbroker cannot be an investment advisor because the stockbroker should be neutral. Investment advisors may get fees from companies that want to sell securities.
Stockbrokers must not perform banking functions by supplying funding for leveraged positions. The money people deposit at the stock broker should not be available for lending. All the money deposited at stock brokers has the same status as the current account in the bank. This money is subject to the holding tax. Currently it is possible for banks make a profit by operating against the interests of their customers because they have insight in their financial position (as a bank), their investment position and their trading decisions (as a stockbroker).
A custodian bank is a financial institution responsible for safeguarding financial assets. A custodian bank holds assets such as equities and bonds in safekeeping, arranges settlement of purchases and sales of those securities, collects the income from those assets such as dividends and coupons, provides information on the underlying companies and their annual general meetings, manages cash transactions, performs foreign exchange transactions where required and provides reporting on their activities to their customers.
The Depository Trust & Clearing Corp. (DTCC) has legal ownership over stocks people buy [+]. Most people do not realise that they do not legally own their stock certificates and that they cannot assert their ownership. The collapse of MF Global demonstrated what could happen if people do not legally own stocks and bonds they have bought.
Legal ownership of a security should be with the buyer of the security. Owners of securities should have the option to obtain paper certificates of the securities they own. Currently all securities are owned by the Depository Trust & Clearing Corp. (DTCC) and buyers of securities do not legally own them. The DTCC having a near monopoly on all security custody activity is also not a good idea because it leads to a concentration of power.
Custodian banks have information about investment positions. Therefore custodian banks should be independent institutions. Currently the DTCC is privately owned by a consortium of brokers and banks. The DTCC facilitates scams and illegal practises like naked short selling that bring in profits for Wall Street firms [+].
For most people pension funds are a better solution than individual pensions because of the following:
- Nobody knows how long he or she may live. People that die early have no use for their pension money while people that live long may find their retirement to be insufficiently funded. Pension funds and insurance companies can fund the pensions of the long living with the money of the people that die early, making pensions cheaper and more adequately matching needs.
- Most people have no expert knowledge of investing and the returns on investment of most people does not beat index investing or model based investing. Many investors are subject to emotions such as greed and fear but professional investors use models. Model based investing without emotions does lead to better returns on investment on average.
Pension money is money that employees have worked for so pension funds should not be controlled by employers because employers may insufficiently fund pensions or abuse pension money [+]. Governments can go bankrupt so government pensions are also not safe. Pension funds can best be owned and controlled by the employees. This also means that, when funding is inadequate, the employees and the retirees are responsible for solving the issue.
Currently there is often a shared responsibility where employers tend to pay less when the returns of the pension funds are good, and tend to pay more when the returns are bad. High pension payments then coincide with poor business conditions, which puts an additional burden on the employers. It is better to make payments constant and to assume that there is no return on investment.
There can be a conflict of interest between the people that are retired and the people that are still working and pay pension contributions. This conflict arises when determining the level of pension payments to pensioners and estimating the life expectancy of pensioners and people still paying contributions. This conflict of interest can be reduced by basing the pension payments on the contributions paid and the investment return on those contributions. Guesses about future return on investment can create unsustainable pension systems. In the Natural Financial System estimates of future return on investment should maximally be rated at zero because there is no interest on money. Currently changes in interest rates can have a dramatic effect on pension funding calculations.
The Natural Money currencies rise in value at the same rate the economy grows. This will make pensions in Natural Financial System more sustainable than the current pension systems. If investment returns surpass expectations then pension levels may rise. If investment returns disappoint then pension levels may have to be reduced. Those adaptations should be made regularly and should include life expectancy changes. Because of the future returns on investments are maximally be rated at zero, and the Natural Economy is stable, investment returns will be more predictable.
People should be aware that a guaranteed pension level does not guarantee anything at all. If money becomes worthless, a pension based on a guaranteed amount of money also becomes worthless. Pension levels must be adapted regularly to current life expectancy rather than based on a guessed life expectancy in the future. In the past the uncertainty about investment returns has been far higher than the uncertainty about life expectancy.
In order to apply new regulation on the financial system, a nation has to assert national sovereignty and break free from the globalised financial and economic system. This includes blocking multinational corporations and money from tax havens to operate within the borders of the country. A country must primarily depend on its national capital.
New regulation should be imposed on:
- short selling;
- trading taxes;
- hedge funds.
Short selling of stocks should be banned because shorting is a hedge against default risk. In the Natural Economy it should not be possible to insure default risk. If people do not believe in the future of a company then their only option should be not to own the stock of the company. Shorting can create an interest in bringing down a company. In the Natural Economy short selling is unattractive in most cases because it brings money in the current account of the person or entity that is shorting. This money is subject to the holding tax. Short selling a currency is also unattractive because short selling results in holding another currency whereupon a holding tax must be paid.
Short selling is often justified on the premise that inefficient companies and scams are exposed earlier because short sellers do research that benefits the markets. However people holding the stock also have the interest in detecting inefficiencies and frauds. If something is wrong with a company, the first sellers get the best price. Inefficiencies and frauds will also be exposed if short selling is not allowed. Insiders can avoid losses by getting out early. Allowing short selling gives insiders an additional opportunity to profit from the unsuspecting public. Moreover, short sellers can become interested in destroying a company or even a nation. As Max Keiser noted, this market fundamentalism can lead to bizarre situations:
Another justification for short selling is that it can create demand for stock during a market panic as short sellers have to cover their shorts. In the Natural Financial System, economic crises and market panics are less likely to occur. Currently there is a difference between legitimate short selling and illegitimate short selling or naked short selling. Legitimate short selling means that stocks have to be borrowed from the owner, while naked short selling means that stocks are sold without being borrowed. During legal proceedings documents have surfaced that showed that naked short selling is a common practise within Goldman Sachs and Bank of America/Merrill Lynch [+].
Naked short selling equals printing additional counterfeit stock of a company [+], which can be used to create additional supply to trash the price of the stock. In the digital age the distinction between legitimate short selling and naked short selling has become less clear. Securities do not have to be physically delivered for the trade, which opens the system to loopholes [+]. Many investors do not know that they are contributing to legal short selling [+]. They can avoid this by not registering their stock certificates in street name.
In the Natural Economy the level of risk in financial markets is reduced because there is less risk premium available because interest is forbidden. In this way loans with a high risk of default are not granted. This will make the financial markets more stable. This further reduces default risk so there will be less need to hedge against risk. Currently derivatives have the following uses:
- to hedge against the risk of default or fluctuations of prices;
- to speculate upon default or fluctuations of prices.
Hedging and speculation often involve information asymmetry. If everyone knows the correct value of a derivative, and they all agree, how can anyone make money? People having inside information can hedge against or speculate upon a specific event at the expense of others that do not have this information. Not allowing parties to hedge their risks makes them check their counter parties better. For example, the sub prime mortgages problem would never have arisen if banks had not been able to offload their risk in the financial markets [+]. Important for the development of derivatives were mathematical constructions such as the Black-Scholes equation. According to Prof. Ian Stewart [+]:
The notational value of outstanding derivatives has reached 20 times the size of the world economy. Derivatives pose a risk to the financial system [+]. Derivatives are difficult to understand and as a consequence they are difficult to regulate. Regulating derivatives via clearing houses also poses risks [+]. Derivatives infer interest so they should be banned.
The following types of derivatives should be banned in the Natural Economy:
- interest rate derivatives because there is no interest on money;
- default risk derivatives because the risk of default cannot be hedged;
- stock futures and options because the shorting of stocks is banned;
- stock index futures because the shorting of stocks is banned.
Currency futures are not needed because the holding tax makes shorting currencies unattractive. Options can be used to create a short position so both calls and puts have to be banned. Exchange Traded Funds (ETF's) must be banned because they use derivatives [+]. Stock indexes will be less volatile because economic conditions in the Natural Economy are more stable. There will be no booms and busts in the Natural Economy. Variations in interest rates do not change the attractiveness of stocks because there is no interest on money. This will reduce the demand for trading instruments such as stock index futures and options.
Commodity derivatives may still be needed because suppliers and users of commodities need to make agreements to buy or sell commodities at a specific price at a specific time to ensure the continuation of their operations. Such an agreement will have a positive or a negative value as soon as the price of the commodity changes. In essence this is a future position. Commodity markets are notorious for their speculation. Therefore it is important to provide a sound regulatory framework for those markets if their existence cannot be avoided.
Currency futures and options are unattractive because of the holding tax on Natural Money currencies. This makes shorting a currency expensive because shorting results in holding another currency whereupon a holding tax must be paid. As a consequence, there probably will be little demand for currency futures and options.
Natural Money will end the possibilities for carry trades in currencies based on interest rate differentials. Carry trades were one of the main drivers of the escalating imbalances in the interest based financial system as positive and negative balances of payments were not always corrected by currency value adjustments.
Sustained financial imbalances are in nobody's interest. Creditor nations accumulate currencies that lose value over time. Countries like China and Japan can better use their resources for their own country instead of subsidising spending in the European Union and the United States.
The need for trading taxes
Currently labour and investing are taxed but there are no taxes on trading. Labour and investment are productive activities while trading is not. 99.9% of financial transactions are not needed for the real economy but take place in a speculative finance [+]. Most retail traders lose money in financial markets because they fall prey to irrational behaviour driven by fear and greed. One of the most influential books on collective irrational behaviour in financial markets is Extraordinary Popular Delusions and the Madness of Crowds written by the Scottish journalist Charles Mackay [+].
To discourage excessive trading, trading taxes can be implemented. A trading tax can refrain people from trading excessively and it will also curb programme trading. Currently programme trading generates around 70% of the trading volume on stock exchanges and it is sometimes used to manipulate prices [+]. Programme trading can only be profitable at the expense of investors and this reduces the value of security exchanges to investors [+].
Trading taxes are more commonly known as the Tobin Tax [+]. Tobin suggested a currency transaction tax in 1972, shortly after the Bretton Woods system of monetary management ended in 1971. Experiments with the Tobin tax in the past did not have the desired results. Research on the issue produced the following results:
- no statistically significant causal link was found between an increase in transaction costs and a reduction in volatility;
- trading volumes dropped and therefore the tax revenues were disappointing. Probably traders moved to other financial centres.
The underlying political assumption is that trade makes the economy more efficient. High trade volumes on financial markets are considered to be good because they create liquidity (in other words: trade is good because it creates the opportunity for more trade), and stable currency rates are considered to be desirable because they facilitate international trade. The assumption is political because it favours the ruling class that uses trade to exploit others.
The European Union is planning to implement a Tobin Tax [+]. This plan will fail if the tax is not implemented globally. British Prime Minster Cameron resisted the Tobin Tax plans of the European Union and he added that he would favour the tax if it was imposed globally. As the economy of Great Britain depends heavily on deregulated finance [+], Cameron probably did bet on this not happening. Only when nations disconnect themselves from international finance, they will be able to implement a Tobin Tax successfully.
International trade creates an economic rat race where everybody competes against everybody and this undermines wages. Traders tend to operate at the expense of others so the real economic value of many trading activities is negative [+]. Trading and speculation attract smart brains that could otherwise be used for productive purposes.
When currency rates are stable, trade imbalances can get out of hand. This was the main reason why the Bretton Woods System failed. To make trading taxes effective, the national sovereignty of the nations must be restored. This means that nations should disconnect themselves from the international financial markets and create national capital markets.
A trading tax can be charged on currency trades, stock trades, bond trades and orders placed. The trading tax on stock trades and bond trades must be low enough in order not to discourage investing but high enough to discourage trading. The trading tax can be charged when selling the position, and may be waived if the investor holds the position for a certain period of time.
There should be a tax on currency trades and the tax should be levied by the government of the currency that is sold in the trade. The holders of money should be encouraged to spend it in the real economy instead of exchanging it for other currencies. In Wörgl, the scrip currency could be sold for 0.98 Austrian Schilling while its economic value in Wörgl was equal to 1 Austrian Schilling [+].
Trade volumes on security exchanges will dry up and continuous trade for many securities will not be possible when there are trading taxes. Continuous trading can be replaced by periodic auctions of stocks. Periodic auctions are better than continuous trade as they reduce the opportunities for market makers to exploit the public.
In the Natural Financial System there is no need for a tax on profits from investing such as dividends and capital gains. There is also no need for a tax on investment capital such as stocks, bonds and real estate. Currency positions are subject to the holding tax of the government issuing the currency. Within the Natural Financial System, multinational corporations are not allowed to exist and corporations should list their securities on exchanges in their country of origin.
Most hedge fund investment strategies aim to achieve a positive return on investment whether markets are rising or falling. Investors are typically institutions or high net worth individuals. Because hedge funds are not sold to the public or retail investors, the funds and their managers have not been subject to the same restrictions that govern other funds and investment fund managers with regard to how the fund may be structured and how strategies and techniques are employed. Fund strategies fall into the following main categories: global macro, directional, event-driven, and relative value (arbitrage) [+].
Hedge funds can pose a systemic risk to the financial system because they operate with a leverage, which can be up to 1:100. Hedge funds are not transparent. As private lightly regulated entities, hedge funds are not obliged to disclose their activities. Hedge fund speculation allegedly deepened the troubles of struggling corporations and countries. Recently Greece has been the target of hedge funds [+]. The problems of Greece are caused by financial mismanagement in the first place. In the Natural Financial System it will be difficult to create leveraged positions because there is no allowance for risk. Combined with a ban on short selling, derivatives and trading taxes, this will end the business of hedge funds.
To operate small banks effectively, the organisational design of small banks should be straightforward and standardised. This means that there should be standard organisation models, standard procedures and standard information systems. In this way small banks can operate efficiently and exchange personnel. The following issues are discussed:
- ownership and legal structure;
- outsourced operations;
Ownership and legal structure
The following types of banks are possible:
- private enterprise: the bank is owned by shareholders and is working for profit.
- community service: the bank is a foundation that is run as a community service.
- government service: the bank is operated by a government.
Community and government banks may be the only option in small communities where there is no interest in running a bank as a private enterprise. When a bank is a community service or a cooperative then people having money in the bank can be the members of the bank. People having money in the bank appoint the board of the bank at the regular general meetings of the members. The voting power of a member can depend on the net worth this member holds in the bank. It is better that the voting power of individual members is limited to a certain maximum, which can be the same as the maximum stake a shareholder can have in a bank that is a private enterprise.
As banks occupy themselves with financial affairs, this raises the issue of the segregation of duties. Within a bank the following basic roles can be identified:
- account holders: people that have accounts in the bank;
- data entry: enters data on behalf of the account holders;
- account and account holder data review: reviews submitted account and account holder data;
- account and account holder data approval: approves submitted account and account holder data;
- transaction data review: reviews transaction requests;
- transaction data approval: approves transaction requests;
- application administration: administrates the application and represents the end users of the system and manages data, parameters and users;
- system administration: administrates the technical infrastructure, which includes databases, networks, hardware and software;
- auditing: verifies the procedures and the operations of the bank.
In small banks jobs may be part time jobs. A bank should have at least the following types of employees:
- clerk, having the roles data entry, account and account holder data review and transaction data review;
- approver, having the roles application administration, account and account holder data approval and transaction data approval.
Small banks may pool personnel. The clerk of one bank could be the approver in another bank. System administrators can work at a centralised site with experienced technical personnel. The auditor can work for an external auditing agency.
Bank employees should have knowledge of:
- the concept of the Natural Financial System;
- legal aspects of banking in the Natural Financial System;
- book keeping and accounting;
- the use of the computer systems.
The data of the bank and the network connections of the bank should be secure. Many small banks cannot afford the costs of the necessary security provisions. They can choose a facilitator to host their operations.
Malware and phishing threaten the security of Internet banking at the location of the account holder. Money can be transferred anywhere around the globe. This makes the recovery of stolen funds difficult.
The banking software should be part of the public domain. This will help to make the software less vulnerable as it can be evaluated by every expert around the globe. Criminals may try to exploit vulnerabilities but their efforts will be helpful in detecting them.
A Natural Money bank must reside under a nation and is subject to the laws of a nation. Facilitators that host banking operations must be located in the same nation of the banks they service. The operation of a facilitator must be subject to the laws of the nation. Banks as well as facilitators that host banking operations must meet certain requirements on organisational setup, personnel, technical infrastructure and auditing.
Transitional payment facilitators may be needed to make payments possible between the Natural Financial System and the interest based financial system as long as those systems coexist. During the transition period not all payment systems will be able to accept Natural Money account names and currencies. Accounts in the interest based financial system are available via IBAN and SWIFT.
There are two approaches to the transition to the Natural Financial System: big bang and gradual. In a big bang scenario the transition takes place in a short timeframe and every contingency must be planned in advance. In this way the euro was introduced between 1999 and 2002. This approach takes a lot of preparation.
In a gradual scenario the transition is slower so there is more time to alter the plans when things do not work out well. A gradual approach takes less preparation. Because it is difficult to assess the consequences of a transition to the Natural Financial System, the gradual approach is the best way to handle the issue.
Also in a gradual approach the transition to the Natural Financial System should be prepared and the public should be informed about the changes. Limiting the scope of the initial phase is essential as it reduces risks and brings in valuable information. Most likely a few municipalities will start issuing Natural Money currencies based on the guidelines from the Proposal For the Introduction Of Natural Money and use the Basic Banking System for administering them.
The transition to the Natural Financial System should have the following phases:
- requirements analysis;
- communication of the changes;
- decision making;
The requirements of the Natural Financial System must at least produce:
- laws that regulate the Natural Financial System;
- descriptions of roles and organisational designs for the organisations operating in the Natural Financial System;
- system designs for the Basic Banking System and other systems supports banking operations in the Natural Financial System.
The requirements analysis consists of the following steps:
- determining the basic concepts of the Natural Financial System;
- determining the organisational requirements in Natural Financial System;
- determining the information system requirements in Natural Financial System;
- determining the laws guiding the Natural Financial System.
Communication of the changes
An introduction of the Natural Financial System will result in a profound change that affects the daily life of most people. During the transition phase there may be turmoil. If citizens are not well informed then they can become fearful. Political agitators may try to use this fear to forward their own agendas. There may be setbacks and unforeseen events. The public should be provided with relevant information about the consequences of the introduction of the Natural Financial System.
Becoming accustomed to new way of thinking is difficult and some issues need explanation. The public should be informed about the following:
- the consequences of charging interest on money;
- the need for the Natural Financial System;
- the holding tax on money;
- why borrowers pay no interest and savers pay a fee;
- what citizens and businesses need to do;
- current developments and next steps.
The consequences of charging interest on money
Most people do not know the consequences of charging interest on money. Most people do not know that interest on money causes many problems [+] and is the main systemic contributor to wealth disparity [+]. Only a few people know that there are alternatives. Natural Money is the most efficient type of money [+]. In the Natural Financial System productive work and enterprise are rewarded, while resources can be directed to the needs of people [+]. The public should have a basic understanding of those issues.
The need for the Natural Financial System
Many economies in developed nations are burdened with debt. Without a real change in the financial system, those economies will go into a protracted decline that may take decades. Natural Money can mitigate this trend and will reduce unemployment and bring prosperity without economic crises [+]. Real living standards depend on the availability of energy and natural resources. Natural Money can help to make the best out of limited resources.
The ageing population of the West needs care and attention. The quality of education may need improvement. More police is needed in neighbourhoods that are controlled by gangs and criminals. Currently a large part of the workforce is unemployed or locked up in unproductive jobs in bureaucracy, management, law, consultancy, finance and trading, and technology [+]. Natural Money will help to direct the workforce to the needs of society, such as caring for the elderly, education and policing.
Interest on money is an important cause of poverty [+]. As long there is interest on money, poverty cannot be effectively eliminated. This does not mean that poverty will disappear as soon as Natural Money is introduced, but the introduction Natural Money will enable more people to take their destiny in their own hands [+].
The interest based economy has a short term view and this results in the destruction of living conditions. Interest on money causes an amount of money in the future to be valued less than an amount of money in the present. The Natural Economy will be focussed on a longer time horizon. Resources will be saved and recycled. Nature will be respected more because future living conditions will be valued higher compared to present living conditions [+].
The short term view of the economy caused by interest on money hollows out corporations. Investors focus on quarterly numbers. This results in financial engineering and higher debt levels. If the economy is booming then leverage will improve profits and lead to higher management bonuses. When the economy slows, leverage will make the company prone to bankruptcy. Workers will then be laid of and creditors may lose money [+]. In the Natural Economy it is more difficult to use leverage to finance an operation.
The holding tax on money
People are not accustomed to paying a tax on money. It is difficult to accept that you do not own money you have worked for. Money is an accounting unit and just a number on a display. Interest groups linked to the interest based financial system may try to raise this issue and create the impression that a tax on money is not fair.
Fairness is a subjective measure but systemic efficiency is not. If the economy does better without interest on money, and most people profit from the improved economic conditions, then the holding tax will be accepted. To create acceptance it may be a good idea to experiment with Natural Money currencies on a limited scale to make people see that holding taxes on money have a positive impact on the economy.
Why borrowers pay no interest and savers pay a fee
In the interest based financial system interest is paid on savings and debts. In the Natural Financial System borrowers pay no interest so the cost of banking is paid for by savers. Borrowers should not pay interest or fees otherwise banks will be tempted to take on risky loans for high interest rates or high fees. This will make the financial system instable because the weakest borrowers will pay the highest interest rates and fees [+]. Abolishing interest on money results in banks picking the best borrowers for the money they have at their disposal [+]. This will make the financial system more stable.
Savers are better of with Natural Money because the value of money rises when the economy grows. The math is as follows: currently interest rates are around 3%, economic growth is 2% while money supply increases with 8%. The real return is a negative 3% (3+2-8). With Natural Money interest rates on deposits may be around -2%, economic growth could be 3%, while money supply increases with 0%. The real return is then a positive 1% (-2+3). It is possible that the improved circulation of money will bring higher growth rates. If this is true then returns on savings with Natural Money are even more attractive.
What citizens and businesses need to do
During the transition to the Natural Financial System everybody needs to open an account at a Natural Money bank. The process of opening accounts at Natural Money banks and transferring money from regular banks to Natural Money banks can be an automatic process if there is sufficient certainty about the identity of the account holder and his or her whereabouts.
All account holders need to get a new bank card and new banking equipment. Bank cards and banking equipment such as identification devices and payment terminals should be standardised so small banks and small businesses can operate in a cost effective way. Bank cards in the Natural Financial System should have an option to hold digital cash. Digital cash is money that can be spent anonymously.
Businesses and governments need to adapt their information systems to facilitate banking in the Natural Financial System. Many people will need to reorganise their financial affairs as flexible financing will be more difficult to acquire. If a person or a business needs funding occasionally then often a fixed term loan agreement must be made. Any excess money can be placed in the current account or a savings account.
Current developments and next steps
Some of the consequences of introducing the Natural Financial System cannot be known on beforehand. There may be turmoil and unexpected events that introduce the need for adaptations in the original plans. It is important to communicate openly about relevant developments. It must be clear from the start that unexpected issues may arise and that those issues will be addressed. Direct and open communication about problems and actions taken will help to inspire confidence.
There may be an official decision point in which a nation decides to implement the Natural Financial System. In such a situation a proposal may be subjected to a referendum [+]. It is likely that economic factors will force countries to implement Natural Money. Those countries may not have a real choice because the Natural Financial System is more efficient than financial systems that allow charging interest on money [+].
The initial phase of the introduction of the Natural Financial System will have a limited scope. Limiting the scope of the initial phase reduces risks and can provide valuable information to improve the process. Most likely a few municipalities will start issuing Natural Money currencies based on the guidelines from the Proposal For the Introduction Of Natural Money and use the Basic Banking System for administering them. The interest based financial system and the Natural Financial System will have to remain separated as much as possible. In this way financial instability in the interest based financial system will not spill over to the Natural Financial System.
The preparation for the transition to the Natural Financial System consists of the following steps:
- taking over the central bank and the banks;
- preparing local and regional governments for the transition;
- preparing people and businesses for the transition;
- starting the Natural Financial System and Natural Money banks;
- dealing with emergency conditions.
Taking over the central bank and the banks
Central banks should be brought under government control. Government debt owned by central banks can be annulled. Governments may need to take control over banks and operate them so payments can proceed. Deposits in the interest based financial system should be guaranteed to a certain maximum so depositors will not take their money out of the banks. Bonds and derivatives do not have to be guaranteed. Governments may need to operate the banks during the transition period until the Natural Financial System has become operational.
During the financial crisis governments have taken over obligations and bad assets from banks. It is not a good idea to let the public pay for the failure of private enterprises. These measures have been taken because there was no alternative for the interest based financial system. There is now an alternative in the form of the Natural Financial System so governments have the following options:
- declaring all government bail outs and guarantees illegal and returning the troubled assets to the banks and returning the funds to the treasury;
- declaring all central bank bail outs and guarantees illegal and returning the troubled assets to the banks and returning the funds to the central bank.
Letting bad banks fail probably will end the economic crisis. Iceland fares relatively well after refusing to bail out the banks and implementing a form of debt forgiveness [+]. Many economists think that Iceland took the right steps [+]. Most likely depositors of a failed bank will recover at least 90% of their funds that are not guaranteed by a government.
Preparing local and regional governments for the transition
Municipal, state or provincial governments can issue their own Natural Money currencies. When Natural Money currencies are introduced, the tax regime must be changed. The municipal, state or provincial governments will acquire tax income at the expense of the national government. This means that tasks have to be performed by the municipal, state or provincial governments that were previously executed by the national government. Most notably, the distribution of benefits will have to be delegated to municipal, state or provincial governments [+].
Preparing people and businesses for the transition
People will have to adapt their financial affairs to the Natural Financial System. This means the following:
- Account holders have to open bank accounts at Natural Money banks. There may be an automated procedure to open a bank account in a Natural Money bank based on information already available at existing banks.
- In the Natural Financial System it is not possible to have negative account balances in the current account and there are fewer flexible financing options.
- Account holders must get used to multiple currencies in their accounts.
- The Basic Banking System has different account names and other options.
Businesses have to adapt their operations to the Natural Financial System. This means the following:
- Businesses must adapt their business processes and information systems to the Natural Financial System. The use of Basic Banking System account names will affect information systems.
- New payment terminals may be needed. New payment terminals may not be needed if existing payment terminals can be used in the Natural Financial System.
Starting the Natural Financial System and Natural Money banks
As soon as the decision is taken to change over to the Natural Financial System, preparations have to be made to start up Natural Money banks. The organisation of Natural Money banking operations must be standardised and relatively simple, so starting a Natural Money bank must a standard operation. The process of starting and operating a bank in the Natural Financial System should be written down in manuals.
The following issues have to be addressed:
- the Natural Money banks have to be founded;
- the boards of the Natural Money banks have to be appointed;
- the personnel of the Natural Money banks has to be hired;
- the Natural Money banks have to be funded;
- the boards and the personnel of the Natural Money banks have to be educated.
Dealing with emergency conditions
A transition to the Natural Financial System will be a rough ride. The transition is gradual so it is possible to deal with problems caused by a transition to Natural Money when they occur. Still it is possible that something goes wrong and that people lose their income. Provisions must be made in order to ensure that everyone will have basic necessities and nobody ends up homeless during the transition phase.
The transition to the Natural Financial System can start after Natural Money banks have been instituted. The approach should be gradual and at first only a few municipalities should make the transition. The first transitions should be used to improve the laws, the procedures and the information systems of the Natural Financial System. They can also be used to detect other problems caused by the transition and to deal with them.
After the first transitions have completed, and the laws, the procedures and the information systems have been improved, and the problems have been addressed, then more municipalities can start a transition. At that point a state or provincial government and the national government can start introducing Natural Money currencies.
A conversion of the interest based financial system into the Natural Financial System may have the following phases:
- issuing Natural Money currencies;
- currency conversion;
- conversion of financial markets;
Issuing Natural Money currencies
Municipal, state, provincial and national governments can issue a Natural Money currencies that will become legal tender within the municipality, state, province or nation. The interest bearing currencies may continue to exist for a time, but they must not remain legal tender. Owners of interest bearing currencies must be free to convert their money into Natural Money currencies.
First only payments for goods, services, taxes and salaries will be done in the Natural Money currencies. The Natural Money currencies will be used in the real economy. The financial system will not be converted at first because corporations have to adapt their financial structure to the Natural Financial System.
Currency conversion can take place by backing Natural Money currencies with interest bearing currencies in the way it is proposed in Proposal For the Introduction Of Natural Money. Due to the higher velocity of Natural Money, less money will be required to make the economy function. The higher velocity of Natural Money can reduce the debt burden as money changes hands faster. At some point there will be enough Natural Money currency stock and no more currency conversions will be needed to support the economy. Converting all currency stock into Natural Money currencies brings in excess money. This has an inflationary effect on prices as well as wages.
On the other hand there will be no credit in the Natural Financial System. All loans made by banks must be covered with savings. This will reduce the availability of money supply. The liquid money supply component M1 will shrink [+] as banks will be in need for deposits to cover their loans. This will have a deflationary effect because there will be less money directly available. The smaller size of Natural Money banks will have an additional deflationary effect as they need higher reserve requirements than larger banks.
The higher velocity of Natural Money and the reduced availability of credit both affect the debt burden and the value of savings. It is likely that converting all currency stock into Natural Money currencies will be net wage and price inflationary. Possibly wages and prices will double. Most people have more debts than savings so they will profit from the conversion such a development. Converting all currency stock to Natural Money currencies can become a kind of debt forgiveness. It is possible that there will be a flight into hard assets until the currency conversion issues have been settled, but gold and silver have already risen in US Dollar terms in anticipation of a currency devaluation of approximately 75%. After settlement, Natural Money currencies will likely rise in value over time.
The value reduction of money in circulation cannot be avoided because it is the inevitable outcome of the buildup of debts in the interest based financial system [+]. Continuing the interest based financial system will destroy human living conditions and will also make money worthless in the end [+]. Dealing with the issue now means that it will be out of the way soon and that the future will be better. Natural Money needs fewer currency in circulation so the options are making existing currencies worthless or converting them into Natural Money currencies. Conversion is the best option otherwise people that converted their money early will see their money keep full value while people that were late see their money end up worthless.
Conversion of financial markets
A company that wants to be listed on a stock exchange in the Natural Financial System must issue stock until the debt on its balance sheet meets specific requirements. Bond holders must convert their holdings into common stock. Issuing bonds is not possible as bond values reflect default risk. The conversion can be done at market prices for the bonds and the stocks denominated in the interest based currencies. Short interest in the stock should be eliminated before conversion, because bond holders may short the stock to get a favourable conversion rate.
The conversion to the Natural Financial System consists of the following steps:
- elimination of all short interest on the stock before conversion;
- conversion of debt into equity;
- listing of the stock at stock exchanges within the nation and the Natural Financial System;
- removal of the listing of the stock from all stock exchanges that are not within the nation and the Natural Financial System.
International payments and debts are often in Euro or US Dollar. The European Union member states and the United States are not engaged in many of the underlying agreements. Therefore the European Union member states and the United States are not in a position to abolish the Euro or the US Dollar unilaterally. The European Union and the United States should discuss the management of the Euro and the US Dollar with their international trading partners and major creditor nations if they intend to implement Natural Money currencies.