A short introduction

The problem of interest

Suppose that Jesus’ mother had 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 2017? The answer is an amount of gold weighing 11 million times the mass of the Earth. The yearly interest would be an amount of gold weighing 440,000 times the mass of the Earth.

A mere 4% yields an insane amount of gold after 2016 years. Someone has to pay for the interest, in this case the people who borrowed money from the bank. If Jesus doesn’t come back to spend his money, that’s impossible. At some point the debtors can’t pay the interest, let alone repay their debts. They can only borrow more or default. And if they default, there will be a financial crisis. A financial crisis happens when borrowers can’t repay their debts.

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Our money isn’t gold and central banks can print more of it. If the economy grows at a rate of 4% per year, debtors may be able to pay the interest. If Jesus comes back the claim his money, the central bank could print the cash and buy up the loans. Even in times of crisis, when debtors can’t pay back the loans, central  banks can print cash and bail out the banks. In this way the financial crisis of 2008 was contained.

Bailing out banks has drawbacks. Interest is an incentive for banks to create new debts. And the higher the risk, the higher the interest rate. Higher interest rates mean greater profits for the banks but also more risks to taxpayers.

Interest causes financial and economic crises. This was already known 3,000 years ago. Interest pushes people into poverty as they are crushed by growing debt burdens and interest payments. Interest was considered evil. It was forbidden by some major religions like Christianity and Islam. So why do we have interest? The answer is that lending and borrowing wouldn’t be possible without it.

If you lend out money, you can’t use it yourself. Most people want a compensation for this inconvenience. Furthermore, the borrower may not repay, or the money may be worth less in the future because of inflation. Most people want a compensation for these risks too. Finally, if you can make a profit by investing, then why lend out money without interest? The interest rate on borrowed money must be attractive compared to other investments. As most investments have been made with borrowed money, it would have been impossible to build the capitalist economy without interest.

Research has shown that the 80% poorest people pay interest to the 10% richest people. Interest is everywhere. It is hidden in rents, taxes, and the price of everything we buy. Products on average cost 25% more because of interest charges. And the poorest people often pay the highest interest rates when they borrow money. Interest is therefore sometimes called a tax on the poor for the benefit of the rich. But if the poor don’t have enough money because they pay interest to the rich, they can’t buy the stuff to make the investments of the rich profitable.

The end of usury

A few things have changed over the years. 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 can help out banks if there is no money to pay the interest. 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?

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Interest income (red) versus total income with interest income growing faster than total income

The graph shows 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 the most important reason why interest rates have gone down in recent years. In the short run it was possible to prop up business profits by using 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 can’t exceed the rate of economic growth. Furthermore, the amount of debts cannot grow faster than the economy until eternity. You may see this graph a few times more if you browse around this website.

If interest rates go down further then it may be possible to abolish interest on money and loans altogether. This will be the end of usury. In that case we do not need more debt to pay for the interest on existing debts and there will be no incentive to take excessive risk because there is no reward for taking this risk. That may be the end of financial and economic crises. Central banks do not need to print more money. In this way inflation will end. Products and services can become cheaper because interest costs will go down. But how can it be done? And is it really possible?

The miracle of Wörgl

In 1932, in the middle of the Great Depression, the Austrian town of Wörgl was in trouble and 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. The mayor came up with a cunning plan.

Rather than spending the 40,000 Austrian Schilling 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 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. A businessman named Silvio Gesell came up with this idea called ‘free money’ in his book The Natural Economic Order.

Nobody wanted to pay for the monthly stamps which came down to a holding tax on money, so everyone receiving the notes would spend them. 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. That was because the scrip could be spent as one schilling after buying a new stamp. The money raised with the stamps was used to run a soup kitchen that fed 220 families.

Of all the businesses in town, only the railway station and the post office refused to accept the money. 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 increased trade and created 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 copied in the neighbouring city of Kitzbühel. In June 1933 major Unterguggenberger addressed a meeting with representatives from 170 different Austrian towns and villages. Two hundred Austrian townships were interested in adopting the idea. At this point the central bank decided to assert its monopoly rights by banning scrip money. One can only imagine what had happened if communities all over the world had been free to copy the idea. The Great Depression may have ended in 1933 and World War II may never have taken place.

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Joseph explaining the dream to the Pharaoh

Joseph in Egypt

The Bible features 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. 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. 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 look for an alternative.

In this way the grain receipts may have become money. The money unit was an amount of grain stored at a storehouse. The degradation of the grain and the storage cost caused the value of the receipts to decrease steadily over time. This was like a holding tax on money similar to the stamps in Wörgl. This stimulated the Egyptians to spend their money. It is unclear whether there were loans made with this money. The actions of Joseph may have helped to create this money as he allegedly proposed the grain storage and took all the money from the Egyptians.

A few centuries later, during the reign of Ramesses the Great, Egypt was again a leading power. Some historians claimed that the wealth of Egypt during the reign of Ramesses the Great was built upon the grain financial system. The grain money remained after the introduction of coins 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, probably because there weren’t any financial crises caused by interest payments.

Natural Money

Natural Money has a holding tax like the grain storage money of ancient Egypt and the free money of Silvio Gesell used in Wörgl. Charging interest on money and loans is not allowed. To summarise:

  • Natural Money is interest-free, which means that the maximum interest rate on money and loans is zero. Negative interest rates are possible and;
  • Natural Money has a holding tax on cash ranging from 0.5% to 1.0% per month. The holding tax doesn’t apply to bank deposits, loans and other investments.

You can avoid paying the tax by lending out money or by putting it in a bank account. 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.

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%.

Putting stamps on bank notes every month is cumbersome. It may therefore be a better idea to have a separate paper currency so that you may have a paper euro and a digital euro. The paper euro can then lose value relative to the digital euro at the rate of the holding tax. Another option is to introduce digital cash with a holding tax. That could be a crypto currency.

Superior efficiency

If Natural Money is so great then why doesn’t everyone use it already? It has something to do with the interest rate. After the Great Depression interest rates never came near zero again so other local currencies weren’t as successful as the one in Wörgl. Maybe it is too good to be true after all, but there are reasons to think otherwise. Natural Money can become a success if the following conditions are met:

  • Interest rates must be low or negative to begin with and remain low or negative. Interest rates are set in the markets for money and capital but governments can help to lower interest rates by improving confidence in their currencies.
  • Natural Money must help to improve the economy. In this way the returns on investments increase by using Natural Money so that investors prefer Natural Money to regular money with interest.

Interest rates went down in recent years. Will they remain low or even go lower in the future? With Natural Money there may be no financial and economic crises so that the economy can improve. Will that really happen? If these conditions are met then Natural Money can become the money of the future. The case for Natural Money rests on these assumptions. In other words:

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.

More reading

If you have some knowledge of economics and you are interested in the economic theory of Natural Money then it might be a good idea to check out Naturalmoney.org. This website features two papers that have been presented at the IV International Conference on Social and Complementary Currencies in Barcelona in 2017.

The first paper named The End Of Usury  explains why interest rates are likely to go lower and become negative and remain low and negative for the foreseeable future. The second paper named Feasibility Of Interest-Free Demurrage Currency how Natural Money might be implemented world-wide and what the possible consequences will be.