Natural Money is interest-free money. Interest-free means that the maximum interest rate on money and loans is zero. Negative interest rates are possible. Natural Money has a holding tax on cash ranging from 0.5% to 1.0% per month. The tax only applies to cash. It doesn’t apply to bank deposits, loans and other investments.
With Natural Money it can be attractive to put money in a bank account or to lend money at zero or even negative interest rates. For example, if the holding tax is 10% per year and bank deposits yield -2%, you can save 8% by depositing money at a bank.
In Wörgl the holding tax was levied using stamps on banknotes. Every month a stamp worth 1% of the value of the banknote had to be bought to keep it valid. But stamps on paper money are cumbersome. Alternatively, cash and digital money can be separate currencies, for example digital euro and paper euro. The tax can be implemented by gradually lowering the exchange rate of paper money.
The business of banks doesn’t change much with Natural Money. For a bank there is little difference between borrowing money at 2% to lend it at 4% and borrowing money at -2% to lend it at 0%. In both cases the bank can make a profit of 2%.
Most money is in bank accounts nowadays, and because the holding tax doesn’t apply on bank accounts, most people don’t pay a lot in holding tax. People who still rely on cash will be encouraged to make more use of digital money.
Allowing markets to operate
Money must remain in the economy. If you keep money for yourself, other people can’t use it for buying and selling stuff or making investments. It is better that you spend it, invest it or lend it to someone else who is going to use it to buy stuff or to invest. The holding tax encourages you to choose from these three options that benefit the economy and discourages you from holding on to cash, even when interest rates are negative.
There is a lot of capital and an abundance of savings so interest rates may remain low and may even go lower in the future. If the interest rate is not allowed to go below zero, prospective borrowers may not be willing to borrow and money is piled up in banks. This may harm the economy because this money is not used for buying and selling stuff or making investments.
A maximum interest rate of zero can be a problem too. In that case you may not be willing to lend your money if the risk is too high or when other investment options are more attractive. Natural Money is feasible only when the risks are low and more attractive options are absent so that interest rates remain below zero. But if prices go down, lending money at interest rates below zero can be attractive.
Partnerships can replace lending when interest rates above zero are forbidden. If lenders become partners, they share in the profits as well as the losses. In that case there are no fixed interest rates but sharing profits and losses. Islamic finance is an example of a partnership scheme. Depositors of an Islamic bank share in the profits as well as the losses of the ventures they finance.
Checking the expansion of debt
Most money is bank debt but bank debt is just a small part of all debt. If there is interest on this debt, more money has to be returned, and because the money doesn’t exist, it has to be loaned into existence. That may not be a problem as long as the new debt makes the economy grow but that may not remain so in the future. With Natural Money the economy can flourish without more debt. This might happen because:
- There is no need for more debt to pay for the interest on existing debts.
- If interest rates are negative and there are no profitable investment opportunities, owners of excess funds will be enticed to spend more otherwise they will lose money. This can improve the economy can improve without new debts.
- If owners of funds aren’t willing to spend, other people can borrow their money at negative rates. Borrowers don’t have to pay interest on their debts, and these debts are gradually decreasing.
Reducing risk in the financial system
Interest is a reward for risk. Risky loans fetch higher interest rates but governments and central banks guarantee the integrity of the financial system. Bankers can make profits and fetch big bonuses while the taxpayers are on the hook when things go wrong. If the maximum interest rate is zero, banks are less willing to take on risky loans because there is no reward for taking such risk so that there will be fewer risks in the financial system.
Promoting financial responsibility
Germany can borrow at negative interest rates while Greece can’t. Interest rates are negative in Switzerland and high in Venezuela. This is a matter of trust. The finances of Germany and Switzerland are in good shape while those of Greece and Venezuela are not. Lenders are willing to lend at negative interest rates to Switzerland and Germany because they trust the governments of these countries.
If there is a maximum interest rate of zero, you can’t borrow if lenders don’t trust you. It is better that you can’t borrow at all when your finances are in poor condition as the alternative is borrowing at usurious interest rates. In this way the maximum interest rate of zero can promote responsible behaviour by preventing irresponsible lending or borrowers getting into trouble because of interest payments.
To promote confidence in their currencies, governments need to have their finances in order. They will reap the benefits in the form of negative interest rates on their debts. For instance, if the government has a debt that equals 70% of the nation’s income, and this government can borrow at -3%, then it can spend 2.1% of the income of the nation for free, meaning that governments can do more or that taxes can be lower.
A stable economy
Humans buy stuff and go into debt to buy stuff when others are going into debt to buy stuff too. Suddenly they may realise that they have bought too much or have gone too deeply into debt, and all at the same time. One day they may be borrowing money, queueing up before the shops and bidding up prices. The next day, they may decide to pay off their debts, leaving the shop owners with unsold inventories they have to get rid of at fire sale prices. These ups and downs in the economy are called economic cycles.
What if you can’t borrow money when the economy is overheating and everybody wants to borrow money? And what if you get some money for free when the economy is slow and nobody wants to borrow? Natural Money can make that happen. The maximum interest rate is zero. If the economy is doing well there are other attractive investments and lenders are less willing to lend money at such a rate. If the economy is doing poorly, lenders may be willing to lend money at a negative rate, and give you money for free.
People will start to spend more when the economy is doing poorly and spend less when the economy is booming so that the economy will become more stable and economic cycles will disappear. As a consequence governments and central banks don’t have to manage the economy with spending and printing money. Governments can have balanced budgets and central banks don’t have to print money. And this may be needed to promote confidence in the currencies governments and central banks issue.
When interest rates go lower, more businesses become economical. And more business can make us more prosperous. Businesses employ people and generate work for other businesses. An example can illustrate this. Assume you think of starting a business. The investment is € 100,000. You think to make € 5,000 per year. If the interest rate is 2% it makes sense to start the business, but if the interest rate is 7% it makes no sense and it would be better to put your money in a bank account.
If you can’t borrow at positive interest rates then you end up with more money to spend because you don’t have to pay interest. Hence, consumers have more money to spend without interest. Most notably poor people may not be able to borrow. If the alternative is borrowing at usurious interest rates, they may be better off when they can’t borrow at all, provided that they get proper assistance when they are in need or start a business.
Many people believe that the economy may not grow any more or should not grow because economic growth means a greater use of the limited resources of the planet. In that case, the average interest rate on capital can’t exceed zero in the long run, and interest rates often need to be negative.
With lower interest rates longer term investments become more attractive. This may contribute to making the economy sustainable. The following example demonstrates how that may work. Assume that you own a patch of rainforest and that you consider two options. These are:
- cutting down the rainforest and selling the timber, which will give you a one time return of € 100,000 or
- harvesting the rainforest in a sustainable way, which will give you a return of € 3,000 each year indefinitely.
So what is the most attractive option? That depends on the interest rate. If the interest rate is 5% then cutting down the rainforest and putting the proceeds in a bank account is more attractive because you can make € 5,000 a year in this way. If the interest rate is 1% it makes more sense to harvest the rainforest in a sustainable way.
A better performing economy
If interest rates remain low and negative, the markets for money and capital may work better with Natural Money. The economy doesn’t need more debt in order to flourish. Risk will be eliminated from the financial system so that financial crises can become a thing of the past. Financial responsibility will be promoted. The economy can become more stable so that governments and central banks don’t have to intervene. It is likely that the economy will improve so that the core assumption can be true, which is:
Natural Money can help to improve the economy so returns on investments, hence interest rates must be higher. The maximum interest rate is zero so Natural Money currencies must rise in value. If they rise faster than interest accumulates on regular deposits, Natural Money is an attractive investment. A capital flight towards economies using Natural Money can cause Natural Money to be adopted world-wide. The superior efficiency of Natural Money is to enforce the change.
Why don’t economists see this? Perhaps it is because economists think that we can never have enough. Scarcity is the most basic tenet of economics. But does it still hold? Nowadays more people are dangerously overweight than underfed. And the wealthy top 1% who own most capital can’t spend all their money on stuff and are running out of things to invest in. The economic world is turning upside down, and so are interest rates.