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A Short Introduction to Natural Money


4 November 2008 - 18 October 2016



 
 

The problem of interest


Assume that Jesus' mother put a small gold coin weighing 3 grammes in Jesus' retirement account at 4% interest in the year 1 AD. Jesus never retired but he promised to return. Suppose that the account was kept for this eventuality. How much gold would there be in the account in 2015? The answer is an amount of gold weighing 10 million times the mass of the Earth. The yearly interest would be an amount of gold weighing 400,000 times the mass of the Earth.

It doesn't take a rocket scientist to figure out that this will cause trouble. More and more debt is needed to pay for the interest. The interest must be paid by the people that have a loan at the bank. And they can never pay it back as long as Jesus doesn't spend his money. The arithmetic is quite simple so the problem of interest was already known in ancient times. Charging interest was called usury and it was seen as evil because interest pushed many people into poverty.

Research has shown that 80% poorest people pay interest to the 10% richest people. Interest is everywhere. It is hidden in rents, taxes, and the price of everything you buy. Research has shown that products on average cost 25% more because of interest charges. And the poorest people often pay the highest interest rates when they have to borrow money. Interest is therefore sometimes called a tax on the poor for the benefit of the rich [1]. So why then do we have interest?

If you lend out money, you can't use it yourself. Most people want a compensation for this inconvenience. And if you lend out money, the borrower may not repay. Most people want a compensation for this risk too. Finally, if you can make a profit by investing, then why lend out money without interest? The interest rate is therefore determined in the market. Most investments have been made with borrowed money, so without interest it would have been impossible to build up the capitalist economy.


 
Year 0
Year 25
Year 75
 

The end of usury


In the meantime things have changed. You can lend out your money to a bank but you can still use it anytime. This is very convenient. Banks check the financial condition of borrowers and lend out money to many different people. This reduced risk. Central banks have been invented to help out banks if needed. There are even government guarantees on bank deposits. This reduced the risk of losing money to the point that bank deposits are considered to be safer than cash.

So what about the returns on investments? In the past, returns on investments on average have been higher than the rate of economic growth. Because most of those returns have been invested again, the amount of capital has grown faster than the economy, and a growing share of total income was not for wage earners but for investors. This cannot go on forever, because who is going to buy all the stuff the corporations make if wages keep on lagging?

To the left you see how total income and interest income develop with a rate of economic growth of 2% and an interest rate of 5% when interest income starts out as 10% of total income and all interest income is reinvested. After 25 years the economic pie has grown faster than interest income so that wages have risen. At some point interest income starts to rise faster than total income, and wages go down. After 80 years there's nothing left for wages. This is unsustainable.

This is the main reason why interest rates have gone down in recent years. In the short run, it was possible to prop up business profits by using the lower interest rates to let people go further in to debt to buy the stuff corporations make. In the long run, the growth rate of capital income cannot exceed the rate of economic growth. Furthermore, in the long run the amount of debts cannot grow faster than the economy. That is just simple arithmetic.

If interest rates go down even further then it may be possible to abolish interest on loans altogether. This may be the end of usury. In that case you do not need more and more debts to pay for the interest on existing debts. Then central banks do not need to print more money. Then you do not have financial crises because people cannot repay their debts with interest. As an additional side-benefit, products and services can be cheaper when interest rates are lower. So how may the future financial system without usury look like?



Natural Money


The idea of Natural Money consists of two basic elements, which are a tax on holding cash of 6 to 12% per year and a maximum interest rate of zero. It can be attractive to lend out money at an interest rate of zero or a bit lower because you don't have to pay the holding tax on money lent, for example by putting it in a bank account or buying a bond. This is, in short, the idea of Natural Money. Natural Money is named after the Natural Economic Order of Silvio Gesell in which he proposed a holding tax on money [2].

Introducing Natural Money is expected to have the following benefits:
- the holding tax can stimulate the economy because it can induce people to spend the money they have;
- lower interest rates can make more investments profitable and this can help to improve the economy;
- there probably will be fewer debts because the maximum interest rate of zero will make other investments more attractive relative to debt;
- most money is debt, and there probably will be fewer debts, so there will be less money, and prices may go down;
- the maximum interest rate of zero can curb reckless lending because there is no reward for taking excessive risks;
- debts cannot grow out of control because of interest charges;
- products and services can be cheaper because of lower interest costs.

Natural Money can help to make the economy stable without economic crises. If the economy is about to boom, returns on investments rise, and it becomes less attractive to lend out money at an interest rate of zero or lower. This means that the economy will not overheat because of people borrowing money to buy stuff or to invest. The holding tax provides a permanent stimulus so that the economy will probably be operating at full capacity with minimal unemployment.

The holding tax can stimulate the economy. The maximum interest rate can prevent excessive lending. Hence, the economy can do well without crises. But if the economy does better, returns on investments will be higher, and interest rates rise. But how can this be if the maximum interest rate is zero? There are two answers. First, higher interest rates reflect returns on investments in general. If there are fewer debts then other investments make up a larger part of the average.

The second answer is that prices are likely to drop so that the money will be worth more over time. And if money rises in value, this has the same effect as interest. For example, there is no difference in yield between a zero percent loan in a currency that rises 3% in value relative to the US dollar and a US dollar loan that yields 3% interest. Prices may go lower because of lower interest costs, but also because the amount of money in the economy doesn't increase.

If the economy is doing better with Natural Money then returns on Natural Money will be better than on regular money because the value of Natural Money is rising at a faster rate than the interest rate on regular money. This could cause a capital flight that will force the rest of the world to adopt Natural Money. It seems possible that Natural Money can cause a monetary revolution. But can this be true? There are only a few clues from history.



The miracle of Wörgl


On 5 July 1932, in the middle of the Great Depression, the Austrian town of Wörgl introduced a complementary currency. Wörgl was in trouble and was prepared to try anything. Of its population of 4,500, a total of 1,500 people were without a job and 200 families were penniless. The mayor, Michael Unterguggenberger, had a long list of projects he wanted to accomplish, but there was hardly any money to carry them out. These projects included paving roads, streetlights, extending water distribution across the whole town, and planting trees along the streets.

Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he deposited them in a local savings bank as a guarantee to back the issue of a type of complementary currency known as stamp scrip. The Wörgl money required a monthly stamp to be stuck on all the circulating notes for them to remain valid, amounting to 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families.

Nobody wanted to pay the monthly stamps so everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings but this offer was rarely taken up. Of all the businesses in town, only the railway station and the post office refused to accept the complementary currency. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump and a bridge.

The key to its success was the fast circulation of the scrip money within the local economy, 14 times higher than the Schilling. This in turn increased trade, creating extra employment. At the time of the project, unemployment in Wörgl dropped while it rose in the rest of Austria. Six neighbouring villages copied the system successfully. The French Prime Minister, Édouard Daladier, made a special visit to see the 'miracle of Wörgl'.

In January 1933, the project was replicated in the neighbouring city of Kitzbühel, and in June 1933, Unterguggenberger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea. At this point the central bank panicked and decided to assert its monopoly rights by banning complementary currencies [3].



Joseph in Egypt


The Bible contains a story about the Pharaoh having dreams that he could not explain. The Pharaoh dreamt about seven fat cows being eaten by seven lean cows and seven full ears of grain being devoured by seven thin and blasted ears of grain. Joseph was able to explain those dreams to the pharaoh. He told the Pharaoh that seven good years would come and after that seven bad years would follow. Joseph advised the Egyptians to store food on a large scale. They followed his advice and built storehouses for food. In this way Egypt survived the seven years of scarcity.

What is less known, because it is not recorded in The Bible, is that the storing of food resulted in a financial system. The historian Friedrich Preisigke discovered that the Egyptians used grain receipts for money and had built a sophisticated banking system based on this money [4]. Farmers bringing in the food received receipts for grain. Bakers who wanted to make bread, brought in the receipts which could be exchanged for grain. According to the Bible, Joseph took all the money from the Egyptians. This may have prompted them to invent an alternative currency.

As a consequence the grain receipts may have become accepted as money. The degradation of the grain and storage cost caused the value of the receipts to decrease steadily over time. This stimulated people to spend the money. It is unclear whether there was credit in this banking system. The grain receipt system lasted for many centuries. The actions of Joseph may have created this system as he allegedly proposed the grain storage and took all the money from the Egyptians. When Joseph came to Egypt, the country had already passed its zenith as the time of the building of the great pyramids was centuries earlier.

A few centuries later, during the reign of Ramesses the Great, Egypt became again a leading power [5]. Some historians suggested that the wealth of Egypt during the reign of Ramesses the Great was built upon the grain financial system [6]. The grain money remained in function in Egypt after the introduction of coined money around 400 BC until it was finally replaced by Roman money. The money and banking system were stable and survived for more than a thousand years without collapsing, possibly because there was no interest on this money.



Research


Similar experiments like the emergency currency of Wörgl did not produce similar results. The success of the Wörgl currency may have been inflated by the payment of taxes in arrears that could be spent by the town council [7]. Maybe it is too good to be true after all, but there are reasons to believe otherwise. Natural Money could become a success as it promises to provide higher real returns or at least better risk/reward ratios. The major challenge is making it work in practise.

The field of interest-free money and community currencies is dominated by people who aim to improve the living conditions of the poor. Their focus is not on economic theory. As a consequence many assumptions behind complementary currencies and interest-free money conflict with widely accepted economic theories on interest and money. On the other hand, most economists think that interest-free money will never work, so they never seriously investigated the idea.

In the past there was sufficient economic growth and new debts were made in a sufficient pace to pay off the old debts with interest, but now economic growth is low and many economies are burdened with debt. The time for interest-free money with a holding tax may be approaching. During a crisis people may be willing to try out new ideas as happened in the Austrian town of Wörgl. Out of the experiments, the most efficient system may emerge. This probably will be Natural Money.

This website is frequently updated and reflects the current state of my research. If you only have limited knowledge of the economy and the financial system, you could read Explaining Natural Money to Non-Economists. This document explains what money is, what the role of banks is, why the financial system is the way it is, and what the problem of interest is. The economic theory of Natural Money is laid out in Money of the Natural Economic Order.



References


1. Poor Because of Money: Our theory on interest, Henk van Arkel and Camilo Ramada, Strohalm, 2001: http://www.naturalmoney.org/ poorbecauseofmoney.html
2. The Natural Economic Order, Silvio Gesell, Translated by Philip Pye, Peter Owen Ltd, 1958: http://www.silvio-gesell.de/neo_index1.htm
3. Laboratory readings: Wörgl's Stamp Scrip – The Threat of a Good Example?, Martin Oliver, Newciv.org, 2002: http://www.newciv.org/...; backup copy: http://www.naturalmoney.org/example.html
4. A Strategy for a Convertible Currency, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990: http://www.itk.ntnu.no/...; backup copy: http://www.naturalmoney.org/convertiblecurrency.html
5. Ramesses II - Wikipedia (as on September 3, 2013): http://www.naturalmoney.org/ramesses2.html; current version: http://en.wikipedia.org/wiki/Ramesses_II
6. This was mentioned on Discovery Channel or National Geographic but I was unable to recover the source
7. A Free Money Miracle?, Jonathan Goodwin, Mises.org, 2013: http://www.mises.org/daily/6336/A-Free-Money-Miracle; backup copy: http://www.naturalmoney.org/freemoneymiracle.html