| Proposal For the Introduction Of Natural Money |
May 9, 2012 - January 25, 2013
Author: Bart klein Ikink
| Introduction |
The choice
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The currency of Wörgl, even though it attracted attention, is not the best example of a scrip currency. In the French village of Lignières-en-Berry a better scheme was devised that may still work well today. Copying this idea can create a more efficient financial system that may end the current financial system. Less efficient systems will be destroyed by the laws of competition and the interest based economy may not be able to compete with the interest free economy.
In the future there may be no more economic crises. There can be sufficient employment for everyone. The economy may become sustainable. Central governments and multinational corporations will see their influence reduced. Jobs that do not contribute to the real economy may vanish. The interest free community economy may be just around the corner, but only if we do the right thing. More detailed information about a monetary system based on Natural Money can be found in Money Of the Natural Economic Order.
Capitalism is suicide
Capitalism as we know it equals to collective suicide. Capitalists call our roadmap to destruction freedom of choice. Within the Capitalist economy we are free to choose which products to consume, but we are not free to choose for our own survival. Those who take measures to save the Earth will be outcompeted by others who do not take these measures. Money dictates our choices and this can be called a dictatorship of money.
Mother Nature is not kind to species that destroy their own living conditions. Their demise will be caused by their own unfitness for survival. The Club of Rome already warned in 1972 with its report The Limits to Growth that the current economic system will end in disaster.
Money has become the most important measurement of value but money in itself is worthless. This makes everything worthless including human existence. Western culture is suicidal because it attaches too much value to money, while the value of our future existence cannot be expressed in terms of money. Currently food supplies are practically non-existent, nature is being destroyed and social structures are unravelling, while politicians and corporate interests block effective solutions [+].
All interest is usury
Interest causes wealth to concentrate as the poor pay interest to the rich. Interest can be seen as a tax on poverty to the benefit of the rich. Interest disrupts the flow of money in the economy and causes economic crises. Therefore an interest based economy is inefficient. The following example demonstrates this and also that interest on money is unsustainable in the long run:
If someone brought a 1/10 oz gold coin to the bank in the year 1 AD, and the money remained there until the year 2000 AD, collecting a yearly interest of 4%, the amount of gold in the account would have been 3.6 * 10^31 kilogramme of gold weighing 6,000,000 times the complete mass of the Earth. |
If interest is charged on a limited scale or over a short timeframe then those problems do not surface. Over time it is inescapable that it reduces large numbers of people to a state of servitude to the money lenders. This is a long term development that transcends the life span of a human. Interest is the main reason why a number of civilisations have failed and why Western civilisation is about to fail. Therefore all interest is usury and the current financial system is a usury financial system [+].
In order to get rid of interest on money, a holding fee on money is needed, otherwise there is no reward for lending out money at 0% interest. Because money with a holding fee circulates in the economy no additional debts or money printing are needed to energise the economy. The economy will do well by itself so there is no need for government intervention. There will be no inflation so lending out money at 0% will be attractive.
| Natural Money: the way to end the interest based financial system |
Introduction
The superior efficiency of Natural Money can end the current world order that is based on usury banking. Natural Money is money with a holding fee (scrip money) combined with a ban on charging interest. The superior efficiency of Natural Money can end the interest based financial system. It can bring down the banks and Wall Street when it is used. Natural Money can end the current world order and can be the basis for the future economy based on local self sufficiency. It is possible because depreciating money drives out stable money in circulation.
Most people are afraid for change and they have good reasons for that. They want a better alternative and see it work before they accept it. This scheme has been tried before in Wörgl [+] and Lignières-en-Berry [+] with considerable success. The Wörgl experiment became explosive because many towns and villages wanted to copy it. For this reason the central bank of Austria banned it. The Lignières-en-Berry experiment was explosive because it could have replaced regular interest bearing money within a few years. For this reason the government of France banned it.
The secret formula
Currently there are thousands of similar currencies and LETS systems but they did not achieve the success of Wörgl and Lignières-en-Berry. The hidden secret of success could be the power that can bring down the interest based financial system. In order to achieve success, the following conditions must be met:
- The currency must be exchangeable in regular usury money but exchanging it must be less attractive than keeping it.
- At least initially the currency has to be backed with regular interest based money.
- Local businesses must accept the money.
- There must be an incentive to use the money in the form of a holding fee.
- The money must be attractive.
There are two methods to produce an successful experiment that can spread:
- A public currency issued by a government like in Wörgl that can be used as a payment for taxes [+].
- A private currency issued by a community, a group of people like in Lignières-en-Berry or a corporation [+].
Fatal attraction
The Wörgl currency was attractive because Schillings where hard to come by [+]. For this reason it may not work as well now as it did during the Great Depression unless the money becomes legal tender. In Lignières-en-Berry a clever scheme was devised to make the money attractive that may work well today [+]. The scheme was the following:
- People could buy the money at 95 cents to the dollar/euro.
- They could spend it as 1 dollar/euro because businesses accepted the money at that value.
- After four months they could exchange the money at 98 cents to the dollar/euro.
- They could instead buy a stamp of 1 cent to make the money valid for another month and spend it as 1 dollar/euro again.
The Lignières-en-Berry currency soon became a great succes because:
- People bought the money because they could spend it at a 5% profit or exchange it at a 3% profit after four months.
- Businesses accepted the money because it generated extra business and it could cost them no more than 2%.
- If businesses did spend the money then there was no loss at all.
- The money circulated because spending was more attractive than keeping the money.
- Many people chose to buy the stamp even though they could get back 98 cents because by buying the stamp they could spend the currency unit as 1 dollar/euro.
- The income from the stamps covered the loss of exchanging the money at 98 cents.
The experiment in Lignières-en-Berry was a success. Many communities moved to copy the system. This alarmed the Bank of France so much that in July 1957 it sent a team of police specialists to investigate what it saw as a virus about to contaminate the whole country [+]. It may have taken only a few years until the money had replaced interest based money in France. For this reason the government of France banned it.
Capital and profit
To set up a Lignières-en-Berry currency you do not need much capital. If you intend to issue 100,000 dollar/euro of currency units you only need 3,000 dollar/euro. People will buy the currency at 95 cents so they bring in 95,000 dollar/euro while you need 98,000 dollar/euro to pay them back.
It is possible that the operation will run at a profit because people have to buy the stamps to keep the money valid. The profit can be used to the following ends:
- To issue additional currency. In this way the scrip money will spread. If the market becomes saturated more people will return the money for 98 cents so the profit will disappear and the situation will stabilise.
- To build capital for a bank to support making loans in the local currency at 0%.
- For the benefit of the community, for example poverty relief.
- It can be added to the value of the currency so the value of the currency will rise. This will make the money attractive for investors to invest in, for example by loaning out money at 0% interest.
- A dividend for shareholders. Many people will not prefer this solution but in a free market this type of money can exist alongside public and community currencies.
For the community there are a number of benefits, but more employment is the most important one. In Wörgl unemployment dropped during the time the currency was used, while unemployment rose in the rest of Austria.
If a consortium of local business owners issues the currency then the operation can run at a loss but still be profitable to the local business owners overall because it generates more business for them. In Lignières-en-Berry salaries were exchanged into the local currency and this generated more business locally. Even though the Lignières-en-Berry scheme did not produce a loss, it may have been profitable for the local business owners to sustain the scheme, even if there was a loss.
Considerations
Essential for the success of the Lignières-en-Berry scheme was that local businesses could pay salaries partially in the local currency. Employees who worked at participating businesses could buy the money at 95 cents. Businesses that depend heavily on local revenue should be able to ask their employees to exchange a part of their salary in local currency. This can be attractive for both the business owner and the employee. If the community council accepts the money for taxes, this will increase the acceptance of the money.
There are some issues that should be addressed:
- The government has a monopoly on issuing money so the currency may need to be named gift certificates or vouchers.
- The organisation behind the gift certificates must be trustworthy and transparent. This may require independent oversight and auditing.
- Before the experiment starts a significant number of businesses must be willing to accept the gift certificates.
- If too many gift certificates are issued the chance increases that gift certificates are returned, creating a loss for the issuing organisation.
- People that sell gift certificates must not be able to buy new gift certificates at a lower price at the same time.
It may be a good idea to make some adaptations in the scheme like the following:
- Interest rates are lower now than they were in France in 1956, so a lower return profit of 2 cents in four months (6% annually) can still be attractive.
- The buyback price can be made one cent lower (97 cents instead of 98 cents). In this way it will be more attractive to buy the stamp.
- Employees of participating businesses could exchange a part of their salaries into the local currency at an exchange rate of 98 cents to 99 cents depending on the validity of the stamp, so the business owners can reduce their local currency surplus at a smaller loss. This can also be attractive to employees because their employment may partially depend on the money.
Future developments
After the initial set up phase, the interest free currency should float against the national interest based currency in a free market. As long as the interest free currency needs to be backed with the national interest based currency, some of the proceeds of the stamps can be used to add to the value of the local interest free currency. This will make 0% loans an attractive investment relative to bank loans in the interest based financial system. If capital can be invested in the local currency, this will make the local interest free currency more attractive, and it will become possible to pay rents and mortgages in the interest free currency. This will create a powerful alternative to interest bearing money.
There may come a clash between banks and governments versus money reformers. Banks and governments cannot stop the spread of knowledge and the functioning of markets so their resistance will be futile. The existing power structures depend heavily on the monetary system and the end of the existing monetary system will create an opportunity to reform the political system. The most important reform is the introduction of referendum laws like those in Switzerland that will give citizens more control over their government. In the United States the two party system should be replaced by proportional representation, which makes the US political system less prone to bribery and corruption. This can end the rule of the elite so politicians will not collude with oligarchs again in the future.
| Economic efficiency |
Introduction
The reason why some experiments were successful, may be the superior economic efficiency of interest free money. This idea has not been properly tested as the experiments were stopped within a year. Lending at 0% has not been tried. The free money currencies have not floated so their value could not rise. The superior economic efficiency of Natural Money should manifest itself in the following ways:
- A constant flow of money that makes the economy perform better from a systems perspective.
- Bad money drives out good money or not?
- Without the usury economic cycle the functioning of markets improves.
- Trade imbalances are resolved.
- Sustainable investments become more attractive.
- Systemic risk is eliminated from the financial system.
- More can be done with fewer resources.
- A higher economic growth rate produces higher returns on capital.
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Systems perspective
Try to imagine that the economy is a system 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 at 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 that 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 and this will make the weakest borrowers even weaker. According to systems theory the economy would be far more efficient when the weakest spots are not pressed and when useful capital would not be destroyed in recessions and depressions.
All parts of the economy need money for the supply of energy like all parts of the body need blood for the same reason. If the blood circulation is hampered then the body will not perform well. Likewise if the flow of money in the economy is hampered then the economy will not perform well. A holding fee on money will improve the circulation of money and therefore the efficiency of the economic system.
Natural Money drives out interest based money
Depreciating money drives out stable money in circulation. People will circulate the money that loses value and keep the money that has a more stable value. That is also one of the reasons why gold and silver do not circulate as money. Therefore depreciating money is a superior form of money from the circulation perspective. In the long run money of constant or rising value will become more widely accepted because it is more trusted. This is also one of the reason why gold is still accepted as money and paper currencies from the past are not.
If there is sufficient supply of depreciating money or Natural Money then regular money such as the euro and the Dollar will disappear from circulation. Because the money supply of the natural money is constant, while the supply of euro and US dollar is increasing steadily, the natural money may become more widely accepted in the long run because the money unit itself has a stable or a rising value. Probably the value of the Natural Money will rise compared to gold. The Natural Money may therefore become superior in circulation as well as trust.
The usury economic cycle
The usury economic system favours large scale operations [+]. During the usury economic cycle useful capital is replaced by useless capital. This works as follows:
- If businesses leverage their balance sheet and make use of debt on which interest is paid, they need larger scale operations to achieve the same income level for the business owners because a part of the business income is going to the money lenders. In good times businesses can borrow money to expand their operations. There is a reward for taking risk in the form of interest so there is a tendency to over invest.
- When a recession sets in many businesses fail because demand falters and there is no credit available. If a larger scale operation fails it is often not liquidated but taken over at a lower price which makes it more cost effective for the new owners than smaller operations that are more conservatively financed.
- When the economy recovers a smaller number of larger scale businesses have survived. They start to increase their capacity again and become even larger than they were before.
This cycle is repeated again and again so with interest large scale operations have the advantage. The usury economic cycle caused the division of labour to go further than it otherwise would have done. The effect of the usury economic cycle favouring large scale operations is amplified by the free flow of capital and free trade as this created a competition of everybody against everybody on a world wide scale. As a consequence dependencies have escalated and people have become less self sufficient. In this way "the system" has been created. Before the middle of the twentieth century most people lived in villages that were largely self dependent. Henceforth more and more people live in cities and societies have become more complex than they would have been without interest on money.
The usury economic cycle makes the economy less efficient because the functioning of markets is perverted by cycles of leverage and liquidation. During the boom phase useless capital is created. During the bust phase useful capital is destroyed. In this way useful capital is replaced by useless capital. As less and less people can have an income from real economic output because money lenders take an ever increasing share of the profits, productive jobs have been replaced by service sector jobs that do not produce a good or service someone needs.
Balancing trade
Trade imbalances are economically inefficient so Natural Money will can the economy more efficient. A holding fee on money will make international trade work based on comparative cost advantages like David Ricardo explained in his book On the Principles of Political Economy and Taxation. A relative cost advantage between countries will result in balanced trade as the currencies will not be hoarded because of the holding fee. A country that has a trade deficit will see its currency drop until exports match imports. Currently some countries run large current account deficits for a long period of time because of carry trades based on interest rate differentials and exporting nations hoarding currencies of importing nations.
Current account deficits destroy productive capital of importing nations. This is a process of reverse economic development resulting in a third world economy. Complete industries have been wiped out in the United States because the US Dollar was propped up by high interest rates and currency hoarding by exporting nations like China and Japan. This created useless capital in China and Japan. Those countries produce goods and services for US Dollars that will prove to be worth less in the future as the United States has too little productive capital to support the value of its currency. To balance the trade useless capital in China and Japan may need to be destroyed and replaced by useful capital in the United States.
Sustainable investment choices
When interest on money is charged, money in the future is valued 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. The following example demonstrates this [+]:
Suppose that a cheap house will last 33 years and that it will cost 200,000 Euro to build. The yearly cost will be 6,060 Euro (200,000 divided by 33). A more expensive house costs twice as much (400,000 Euro) but will last a hundred years. This house will cost only 4,000 Euro per year. For two thousand Euros per year less, it is possible to build a house that is not only more pleasant to live in, but will also cost less in energy use. |
This example shows that without interest charges there is a tendency to select long-term solutions while with interest charges short-term solutions will be preferred. Interest charges make long-term solutions uneconomical. This is also true on a larger scale. Natural resources such as rainforests are squandered because of a short term profit. Intelligent forest management could earn a profit for centuries to come but within the present money system it can be more profitable to cut down the rainforest now and put the money in the bank to earn interest. With a tax on money, long term solutions become even more preferred. For example, the people in Wörgl started to plant trees in anticipation of future revenues.
Systemic risk
Interest is an allowance for risk and therefore interest introduces risk in the financial system [+]. This risk appears on the balance sheets of financial institutions and can become a systemic risk. People, organisations and countries that have troublesome debt levels can borrow more if they are willing to pay higher interest rates, which further erodes their capacity to repay. If there was no interest on money, debtors cannot borrow more than they are able to repay. Consequently debtors must reorganise their finances in an earlier stage. Because of the usury economic cycle, booms and busts alternate. During the boom phase, individuals and corporations take on more debt. During economic downturns the perception of risk changes and debts are liquidated, which further intensifies the economic downturn.
With Natural Money there will be less systemic risk in the financial system for the following reasons:
- A ban on charging interest will reduce the risk that lenders are willing to take.
- Debts cannot grow out of control because of interest charges.
- The balance sheets of corporations and individuals will become less leveraged.
- Risky projects will be financed with equity instead of loans.
- The constant flow of money within the economy caused by the holding fee will reduce the risk of economic downturns.
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Doing more with fewer resources
Currently many people are working in jobs that do not produce a good or service someone needs. Those jobs can be found in bureaucracy, management, consultancy, trade and technology [+]. For those jobs energy and natural resources are needed as roads and offices have been built, cars are driven and the office buildings are heated. Many of those jobs consume resources but produce nothing useful. The apparent need for those jobs has arisen because of the usury economic cycle favouring large scale operations. The economy would be more efficient if useless occupations were eliminated.
Replacing a tax on labour with a tax on fossil fuels will help to replace fossil fuel consumption with labour and renewable energy resources. The use of energy is an important cause of poverty as it causes trade balances of reverse developed nations like the United States and the United Kingdom to go negative, while it creates the perceived need for costly resource wars to protect the exchange of natural resources and energy for currencies that would otherwise be worth less as those nations have too few exports to support the value of their currencies. If the money spent on resource wars is spent on energy conservation and renewable energy then the trade balance of the reverse developed nations would improve and consequently the wealth of the people living in those countries would increase [+].
Superior efficiency will enforce change
The secret behind Natural Money is the superior efficiency of Natural Money. Markets will enforce the change because there will be a capital flight from the interest based economy to the Natural Economy. This can be explained as follows [+]:
1. Interest on money should be banned. Return on capital is a good thing and should not be abolished.
2. Raise a tax on holding money. This is not a tax on wealth, so shares, real estate and money lent, should not be subject to this tax.
3. Do not create more money so there will be no monetary inflation.
4. Because there is a holding fee on money people will use the money to invest, to consume or to lend without interest.
5. Because interest is an allowance for risk, and no interest may be charged, the following will happen:
- Money will only be lent to reliable people and companies.
- Less money will lent and more money will be directly invested in equities and real estate.
6. There will never be an economic crisis because money is spent directly and there are practically no bad loans.
7. Because all money is directly used for investment or consumption, the economy grows steadily and there is sufficient employment.
8. As the economy grows constantly and because no more money is created, prices will fall. Loans with zero percent interest will have a positive return that is higher than real interest rates in the interest based financial system.
9. If one community, region or country applies this system, it will cause a capital flight to the interest free economy since the return on loans with zero percent interest is higher than the yield on interest products in the interest based economy. This will force the rest of the world to abandon interest on money.
10. After that everyone can achieve economic freedom. There will always be work for employees and there will always be customers for viable businesses. Nobody is deeply in debt.
The improvement in returns may not always be higher return rates per se, but it can also consist of better risk reward ratios. To make it work this way, no more currency should be issued after the initial phase. The Natural Money currencies should float against the interest based currencies in a free market so they can rise in value.