the plan for the future
5 October 2019 (latest update: 18 January 2020)
Author: Bart klein Ikink
My first contact with interest-free money dates from 1994. At the time I was a volunteer for Friends Of The Earth in Groningen. One day we held a sit-in at the entrance to Groningen Airport as a protest against the subsidy for the airport the municipality had granted. When we were sitting there, the police came and ordered us to leave. We weren't die-hard activists like Greenpeace, so we left. And I realised that these actions didn't address the underlying causes of the problems.
Economic interests always seemed to win, not only because of the power of capital, but also because most people, including myself, are attached to our prosperity. But it was clear to me that the economy must change and that time was running out. Friends of the Earth in Groningen worked with Strohalm, a foundation that worked on economic solutions for environmental issues and poverty. One of their most interesting books is Poor Because Of Money.
Strohalm claimed that interest causes short-term thinking in the economy, and that interest is a flow of income from poor to rich. Interest therefore causes poverty and destruction of the planet. Interest also promotes work pressure and stress. Strohalm also claimed that interest leads to a shortage of money, so there is always pressure to make a return.
Debts continue to grow because of interest. At some point the interest on these debts can't be paid any more and then the financial system crashes and the economy collapses. Interest can be a civilisation killer. Most people don't notice that because it may take generations for that to happen while crises are often atributed to secondary causes like too much credit. That is why it seemed to be of the utmost importance to abolish interest.
Strohalm's ideas are debatable and some people would label them as outlandish. But they do get to the heart of the matter. Only society isn't malleable. If interest is to disappear, everything will not miraculously turn out fine. Human nature remains the same. Money and the pursuit of profit can bring out the worst in people. People in traditional societies where money plays a minor role often have a more relaxed lifestyle and are more likely to share.
Ideals may be beautiful but they aren't always feasible. Going back to traditional societies is not an option. Still, there are a few accidents in history that show that a better world may be possible. One of them was the Miracle Of Wörgl. In 1932 during the Great Depression a local currency in the Austrian town of Wörgl caused an economic miracle. The key to its success was a holding fee of 1% per month. This worked like a negative interest rate.
Strohalm claimed that a holding fee on money like in Wörgl can make loans without interest possible. The fee can make it attractive to lend out money without interest because you can avoid the fee in this way. A return of zero is better than -12%. But who would want to lend money without interest a savings account yields 7%? That was the interest rate in 1994. I had studied business economics so I realised that a large-scale application of interest-free money wasn't feasible.
This is why economists never took this idea seriously so that it is uncharted territory now. Only I realised that necessity doesn't suddenly vanish because something is or seems impossible. Years went by and I made some money. Around the year 2000 I became an investor and an active member of investor message board IEX. In 2001 the internet bubble popped and shares crashed. That seemed a good time to present Strohalm's ideas to people who would probably oppose them.
The discussions on IEX dragged on for several years and they took a lot of time and energy. The criticism was sometimes harsh and educational. Gradually I gained a better understanding of how investors think, how the financial system works, and what might be possible and what is not. A solution still seemed out of reach but the discussions helped to create the preconditions for the discovery of Natural Money in 2008.
The financial crisis rekindled my interest in the subject. And then I found out that interest-free money with a holding fee might be possible or even inevitable. Interest-free money never seemed feasible because if you can get interest elsewhere, you would never want to lend out your money without interest. Interest-free money should provide an attractive return and must be competitive. Interest rates were still positive in 2008. So why did it already seem possible back then?
To see why, we can look at the real interest rate, which is the actual return. The real interest rate is the nominal interest rate minus the inflation rate. If the interest rate on your bank account is +1%, that is the nominal interest rate. But if the inflation rate is +2%, the real interest rate on the bank account is -1%.
The money in Wörgl circulated quickly. The economy did better. If interest is to be abolished, money would only be lent to people and companies that are reliable and are in good financial shape. That is because interest is also a reward for risk. As a consequence, there would no longer be any crises due to debts and interest. So the economy could do better and without crises, and without adding more money to the economy.
That would mean higher returns for investors so the real interest rate would go up. But if the maximum nominal interest rate remains zero, the higher real interest rate could express itself in a rising value of money. That seemed plausible as there was no need for adding more money. Monetary economy suggests that under these conditions prices may fall and the currency may become worth more. Back then I didn't know much about monetary economics but at least I knew that.
Perhaps economic growth could be +3% with Natural Money so the inflation rate could be -3%. If a bank account yields -2%, the real interest rate could be +1%. In this way the real return on interest-free money could be better. And it seemed plausible too.
Negative interest rates and deflation can be more attractive for investors than positive interest rates and inflation. It all depends on the real interest rate. If the economy turns better, the real interest rate is probably higher. And so it appears that negative interest rate currencies are more efficient and will replace positive interest rate currencies. This was nothing short of truly shocking. It seemed that a new economic paradigm was on the horizon.
Negative interest rates may be a new paradigm in economics. Many people fear that the financial system will crash at some point as debts and interest payments continue to grow. But there is a way out. Lower interest rates may signal an unwillingness to borrow more and that debt growth is stalling. There is little demand for loans and there are many savings. With negative interest rates, more debt may not be needed to keep the economy afloat, just like in Wörgl.
In the past, the paradigm in economics has shifted a few times. After the crisis of the 1930s the new paradigm was that governments could borrow money to boost the economy via government spending and tax cuts. This was the beginning of fiscal policies. Governments began to manage the economy through spending. Only governments began to spend more than they received in taxes and made the central bank print the extra money.
In the 1970s this scheme ran into trouble. The economy fared poorly and inflation began to be a problem. Confidence in money eroded. It marked the beginning of the new paradigm of the monetarists. This was the start of monetary policies. Central banks became independent from the government and focused on managing the creation of money by setting the interest rate in order to keep inflation low. Central banks also became crisis managers.
Every time the financial system was about to crash, central banks intervened because they feared that not intervening would trigger a crisis like in the 1930s. In 1931 the FED didn't lower interest rates and it is believed that this worsened the depression. As a result of the interventions, interest rates fell while the debts continued to grow. So when the economy couldn't support the interest rate because of low growth and increased debt levels, interest rates were lowered.
This scheme is running into trouble. The new paradigm may be that the economy can't support more interest-bearing debt and that the economy can only operate with negative interest rates. Investors might prefer negative interest rates if the risk/reward ratio is better. Negative interest rates and deflation might be a better deal than positive interest rates and inflation. Negative interest rates may help to make the economy sustainable and end poverty so a better future may be possible.
Interest-free money is overlooked by mainstream economists. The underlying assumption of modern economic thinking is scarcity or the belief that people never have enough so that we need investments and for that we need savings and to make people save we need positive interest rates. Only in times of crisis like in an economic depression when there is an excess of savings that may be different. Only, the excess of savings may be permanent.
In 2008 I feared that the financial system would collapse and that a second great depression would follow. At the time I believed that after the collapse new ideas would be tried and that the Wörgl experiment would be copied and that it could become a success. A better understanding could help. That was a reason to work on Natural Money at first. I even tried to write a computer programme that could administrate local negative interest rate currencies.
Things didn't play out as I anticipated. Central banks halted the crisis, but in doing so interest rates were pushed to zero. Central banks took the risk of systemic failure out of financial markets by showing that they would do whatever it takes to keep the financial system afloat. And it appeared that the absence of this risk is crucial for having interest rates below zero. If investors fear they may lose money they may demand higher interest rates to compensate for the risk.
Central banks may be indispensable for ending interest. And they have cornered themselves by not allowing the financial system to crash so that negative interest rates seem inevitable in the future. Perhaps it wouldn't be a local currency like the one in Wörgl that would make it happen. It might be the financial system itself. If it doesn't collapse then it may only be sustainable without interest. Silvio Gesell saw that coming already 100 years ago.
In his book The Natural Economic Order he envisioned currencies with a holding fee. It was the competition in financial markets that would bring interest rates to zero, Gesell believed. He based this belief on the observation that interest rates were the lowest in London, which was the financial centre of the world around 1900. Markets there were the most competitive. And competitive financial markets are impossible with a local currency.
Even so, central banks have enormous power and face little democratic supervision. That may be beneficial for coping with financial crises because it enables them to act swiftly and decisively, but it might be better that there is no need for such a power. The research revealed that the need for central bank interventions may arise because of interest on money and debts. Without interest on money and debts the role of central banks could be limited.
I do like people taking matters in their own hands like in Wörgl but letting the financial system fail and hoping for the best doesn't seem such a great idea. It is unlikely that it will work out well. The Great Depression caused tremendous hardship and led to World War II. And so I began to focus on the feasibility of a grand scale world wide introduction of interest-free money with a holding tax because no-one else was. Political reform would be a separate topic.
And I went back to the drawing board. By 2013 I had worked through secondary school macroeconomics and validated the feasibility of Natural Money. Natural Money appeared feasible and it could be explained using existing economic theory. That was encouraging. So I thought, "Let the experts look at it." I emailed a few economists. Only Professor Bezemer from the University of Groningen responded. He asked a PhD student to look at Natural Money.
The PhD student noted that it would very difficult if not impossible to rein in the creation of money and credit, and if you try, shadow banks may fill in the void. The outcome could be worse. And so there was little you could do except imposing more regulations he said. Little did I know about shadow banks and derivatives back then. The PhD student advised me to follow some courses on the Internet. It was the second time I went back to the drawing board.
Meanwhile Strohalm had changed its name in Social Trade Organisation (STRO). Their main goal is to make money work for people by inventing and trying out new forms of local and regional money. They have done several projects with local and regional currencies. In this way STRO has built up a large body of knowledge and experience and best practices. When the financial system collapsed, for instance in Argentina, complementary currencies could fill in the void.
STRO believes that the type of money we use is a matter of choice. Their philosophy is to allow people to take matters in their own hand using complementary currencies. In this way they become less dependent on international finance. This can be helpful in areas where there is poverty. If money circulates more in the local economy like it did in Wörgl, for instance with a local or regional currency, there can be more employment and people can improve their lives.
Perhaps STRO is one of the greatest financial innovaters in the world but hardly anyone notices. Their award winning payment software package Cyclos has more than 5,000,000 users world wide and has options to design and administrate your own currency or start your own bank. It is used by barter groups and banks, most notably in developing nations. This software package enables communities to create their own local currency or to start a bank at little cost.
After evaluating some monetary theory, most notably the courses Economics of Money and Banking, Part One and Economics of Money and Banking, Part Two, I began to figure what a brilliant move abolishing interest could be for stabilising the financial system. Interest is a reward for risk and abolishing interest could curb risk and credit creation to the point that central banks may not need to manage the financial system any more.
Another question was why existing economic models didn't predict the crisis, let alone prevented it from happening. There are conspiracy theories suggesting that financial crises are planned by a secret cabal. The course Model Thinking may shed some light on that matter. The world of models is complex and full of unexpected outcomes. So even though Natural Money appears to be a promising idea, it is better to remain cautious as empirical evidence is lacking.
When economic models contradict, it might be better to consider them all at face value. They may explain different phenomena or may have different areas of application. I have tried to explain negative interest rates using these existing theories. Natural Money is not a complete all explaining model of economics either. It is meant to deal with financial and economic crises caused by interest on money and debts.
Some side-issues relate to Natural Money. One is religion. Ancient Egypt had Natural Money based on grain storage for 1,500 years. According the Bible, Joseph introduced the grain warehouses in Egypt around 1,500 BC. In the Bible, and even more so in the Quran, charging interest is forbidden. The story of Joseph might raise the qestion as to how the Bible came to be. An interesting course on this matter is The Bible's Prehistory, Purpose and Political Future.
The field of banking and interest is the theme of several conspiracy theories. It is claimed that banks are a secret cabal. And some allege that this cabal is led by Jews. For that reason it seemed a good idea to investigate history. An interesting course is A Brief History of Humankind. The relationship between Christians and Jews throughout the centuries is the subject of the course Practising Tolerance: The Church and the Jews in Italy.
By 2017 the theory had been revised and split up into two major parts, which are explaining why interest rates may go negative and remain negative in The End of Usury, and what the future financial system may look like and what kind of issues may arise in Feasibility Of Interest-free Demurrage Currency. Cash remained a problem. Cash would be very unattractive if there was a holding fee of 1% per month. By 2019 there was a possible fix for that too.
Discussions on internet message boards remained a crucial part of the research effort. One person alone can't possibly read all the books that might be relevant, digest them, and then come to the right conclusions. It was more efficient to let other people do that and to let them correct my errors. And so Natural Money drifted away from the ideas of Strohalm. Implementing Natural Money globally may require being abstract, thinking big, and a lot of realism.
I tried to get attention for Natural Money but so far success has been elusive. I hoped that economists would pick up the lead but they didn't. In 2017 I attended the IV International Conference on Social and Complementary Currencies in Barcelona to give lectures about the research findings. A few people seemed interested but nothing came out of it. Efforts put in promotion go at the expense of doing research, and if they yield little, I am inclined to do more research.
Natural Money might be ignored until there are no other options left and economists, central banks and governments are desperately looking for a fix. Only in a situation of utter dispair they might be willing to try out new ideas. This was what happened in Wörgl in 1932. Natural Money might work and it might be the best available idea. If the financial system is on the breaking point, there might be little time and preparation might make a difference.
There are still areas of concern. For instance, will there be credit for small businesses? And if interest rates turn positive again, can Natural Money cope with that? Negative interest rates can arouse negative sentiments. Is it possible to make people see that they will be better off? What undesirable side-effects may there be and what kind of policies may be needed to deal with them? And are there still issues overlooked? More research seems advised.
1. Poor Because of Money: The consequences of interest, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#L4
2. Poor Because of Money: Usury is everywhere, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#L2
3. Poor Because of Money: The cost of being wealthy, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#M2
4. Poor Because of Money: Self sustaining money shortage, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#O2
5. Poor Because of Money: Wörgl, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#G3