Tag: interest

The End of Usury

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The miracle of capitalism

A few centuries ago, over 99% of the world’s population lived in abject poverty. In 1651, Thomas Hobbes depicted human life as poor, nasty, brutish, and short. It had always been that way. Yet, a few centuries later, a miracle had occurred. Nowadays, more people suffer from obesity than from hunger. The life expectancy in the poorest countries exceeds that of the Netherlands in 1750, the wealthiest nation in the world at the dawn of the Industrial Revolution. This miracle is the result of science, innovations and a massive build-up of capital. How could that happen? That is because interest rates have come down from 30% in the Middle Ages to near zero today. Only, what caused interest rates to go that low?

In the economic sphere, it is the outcome of an epic battle between ‘Time Preference’ and ‘Capitalist Spirit’ that raged for centuries. The capitalist spirit won. Ordinary people suffer from a condition known as time preference, which causes them to spend their money on frivolous items. They think, ‘Live today, because you can be dead tomorrow.’ Economists say they lack trust in the future. There are also capitalists, who are special people who suffer from an illness called the capitalist spirit. Rather than spending their money on frivolous items, they think, ‘Don’t live today, but invest, so you will have more money when you die.’ Economists say that they have trust in the future.

And so, capitalists save and invest while ordinary people work for them and buy the products and services their ventures produce. When time preference prevails, there are few savings and high interest rates. People are poor because there is a lack of money for investments. When the capitalist spirit prevails, there are ample savings, low interest rates, and wealthy individuals with excess capital to invest. This miracle wouldn’t have happened without low interest rates, as investment returns must be higher than the interest rate, and interest rates can’t be low without efficient financial markets and trust in political and economic institutions. So, how did that come about?

In the Middle Ages, Europeans gradually developed a capitalist spirit. The ethic of the merchant gradually spread, so that money and profit, rather than Christian values, came to drive Europeans. They found new trade routes and exploited their colonies. Initially, Spain and Portugal led the way, but their kings were short of cash and heavily taxed their people. Many merchants moved to the Dutch Republic, which was more business-friendly because the propertied classes ran it. The Dutch didn’t have a strong state with an army, so taxes were also lower. The Dutch invented the stock market, featuring publicly traded shares, a crucial financial innovation that helps manage risk. Since then, investors could invest in a corporation at any time and sell their investment at any time.

Later, Great Britain became the dominant power. The British business elite, who paid most of the taxes, didn’t like paying for incompetence and corruption. After they had gained control over the British state in the Glorious Revolution of 1689, they forced the state to improve its competence. The British invented fractional reserve banking with a central bank, thereby creating efficient financial markets. Their colonial empire also expanded, so that they came to control the largest market, which favoured economies of scale. Once the competent government and financial innovations were in place, the Industrial Revolution took off. Low interest rates made long-term investments in machines profitable.

Once interest rates had decreased, economic growth accelerated, enabling investment returns to cover interest payments, which allowed financial markets to expand and drive further growth. The capitalist miracle is that financial markets helped boost trade and production by creating money that doesn’t exist to start businesses that don’t yet exist to make products that the people those businesses will hire will buy with this newly created money. Financial markets are at the basis of the capitalist economy. When growth slows, interest-bearing debt may collapse the global economy, but so far, financial innovators have invented new schemes to lend more, helped by low interest rates. Low interest rates make an economy possible, not high ones. But trust makes low interest rates possible.

Usury: the hidden cancer

As long as there was growth, there was more for most people, even though the division of the fruits of capitalism has its shortcomings. Personal qualities explain some inequality. Some people work harder, some are better entrepreneurs, some are more frugal, some are more useful, and some are better at exploiting others for their personal gain. These people usually end up wealthier. Still, the primary driving force in the capitalist system has little to do with individual qualities. It is profit or interest. Interest comprises all returns on capital. Interest is the reason why the rich get richer at the expense of the rest of us.

Interest fuels a global competition driven by innovation and economies of scale. As a result, a few oligarchs have become exceptionally wealthy, often by cornering markets, such as in the tech sector. Wealth inequality will be the most urgent immediate challenge once there is less to go around. It is unacceptable that people are starving because of a fuel shortage while the elites fly around in their private jets. Today, the increased use of artificial intelligence drives up energy prices, pushing humans out of the energy market.

Interest rates emerge in a market. Credit in the banking system and the actions of central banks have a profound influence, making financial markets more efficient. Still, supply and demand in financial markets remain key factors. Silvio Gesell had already envisioned, in 1916, that efficient global financial markets would eventually drive interest rates to zero. He based his prediction on the observation that interest rates were the lowest in London, which had the most developed financial markets at the time.

Wealth inequality, caused by decades of neoliberal supply-side economic policies, also plays a role. Gutting labour rights and social benefits to lower taxes for the rich caused their wealth to trickle down via lower interest rates. The wealthy, awash in capital, have run out of sensible investment options because working-class people lack the funds to spend. And so, interest rates decreased, allowing the working class to borrow more, propping up the economy with asset bubbles, in yet another usurious scheme in which the rich exploit the rest of us. Adding mortgage debt has long helped keep several economies afloat, including the Netherlands’.

Most people pay more interest than they receive. We pay interest via rents, taxes, and the price of everything we buy. Interest works like a tax on poverty that the poor pay for the benefit of the wealthy. Lower interest rates could benefit most people by lowering prices. You don’t see that happening. In a usury-based financial system, lower interest rates allow us to borrow more, putting more money into circulation and raising prices. As we borrow more, we may end up paying even more interest. To improve their yields in a low-interest environment, capitalists invent new schemes, such as leveraged buyouts and vampire capitalism. Lower interest rates also enabled more predatory lending because they made loan-sharking profitable at higher default rates.

Lower interest rates have worsened the excesses in the financial system. That is because we live under a usurious financial system. Had the maximum interest rate been zero, loan-sharking and leveraged buyouts wouldn’t be possible. But that would require us to look after people in financial trouble and limit their freedom, rather than giving them the liberty to borrow from payday lenders and credit card corporations. The underlying problem is the merchant’s ethics, which has become the foundation of our moral system, which is no ethics at all. A world without merchants is a world without many comforts we take for granted, but trade also makes us dependent on a system of governments and markets. Interest plays a crucial role. Investments must at least return the prevailing interest rate. Things aren’t straightforward, so ‘interest is evil’ is not a helpful approach to the matter. But what precisely is usury?

What is usury?

When you ask someone what usury is, the answer might be charging an excessively high interest rate. Traditionally, usury referred to paying for the use of money. In other words, usury is charging interest on loans. In this traditional definition, the currency has a constant value, so the borrower must repay the same value. If a ruler debases the currency and halves its gold content, a lender has a legitimate claim on the same amount of gold, hence twice the amount of currency. The reasons why usury is damaging are:

  • Usury turns money into a tool of power, enabling the rich to exploit the poor.
  • Usury disrupts the circular flow of money, causing economic hardship.
  • Fixed interest payments cause financial instability as incomes fluctuate.

Making a profit from a business venture is not usury. However, all capital income is interest, and interest contributes to wealth and income inequality, unless the interest rate is at or below the growth rate. Capitalism has raised living standards, so the prevailing view is that its benefits outweigh its drawbacks. Today, capitalist economies excel in generating money for capitalists by turning energy and resources into waste and pollution to market non-essential products and services in the bullshit economy. Therefore, the drawbacks now surpass the benefits, and by a wide margin.

The economist Piketty found that interest rates on capital were higher than the economic growth rate most of the time.1 That is unsustainable. It requires capital destruction that creates new room for growth or lower interest rates. In the past, World War I, the Great Depression, and World War II annihilated capital and created new room for growth. And so did the end of communism at the end of the 20th century. Eastern Europe, China and India became new centres of growth. The wave of capital seeking a return has finally reached Africa, the last frontier. From now on, growth must come from ‘wealth-creating’ non-essential activities in the bullshit economy, such as data centres that run artificial intelligence.

Value standard

The idea behind banning usury is that it is unfair for borrowers to return more than they borrowed. Traditionally, the poor borrowed from the rich, so charging interest would make them even poorer. If you borrow a loaf of bread, you return it. That is simple. Money, however, is an abstract measure of value, so what is usury and what is not requires a value standard. Islam forbids charging interest on money and debts, but also prohibits the debasement of currencies. According to Islamic law, money is gold or silver. Lenders should receive the same amount of gold or silver as repayment for the loan. There is, however, no reward for the risk of lending, which impedes capital formation. It is one of the reasons why the Industrial Revolution didn’t take off in the Islamic world.

A Natural Money currency serves as the value standard, so usury refers to charging an interest rate above zero on loans. To serve as a standard, the currency must have a stable value. The value of the Egyptian grain money came from its backing by grain stored in granaries. During the gold standard, gold was the value standard, as you could exchange national currencies for a fixed amount of gold. The backing of today’s fiat currencies is the economy. The Quantity Theory of Money states that Money Stock (M) * Velocity (V) = Price (P) * Quantity (Q), so Money Stock (M) depends on Velocity (V), Price (P) and Quantity (Q), and the value of a single unit such as the euro, is M / units in circulation.

A grain or gold backing can give the currency a stable value because there is a limited amount of grain and gold. Such a limit doesn’t exist for fiat currencies. Still, Natural Money currency can serve as a stable value standard because its issuance depends on lenders’ willingness to accept negative interest rates. Lenders thus only lend when they expect the currency’s future value to remain sufficiently stable. When they don’t lend, the amount of money in circulation shrinks due to negative interest rates and debt repayments, allowing the currency’s value to increase and prices to decrease. Trust in the currency thus stems from persistent deflationary pressures, as negative interest rates consume the money supply, and the maximum interest rate constrains credit creation.

Efficiency argument

Today’s global economy is overcapitalised due to massive over-investment in the bullshit economy, so near-term future growth rates will probably be negative, either as the result of an involuntary collapse or a managed decline, and the sustainable interest rate will also be negative. Once the world economy is on a sustainable footing again, there may be sustainable growth, allowing growth rates to become positive once more in the more distant future. A stable economy operating near the maximum growth rate, which can be negative, can achieve its full potential and full employment. That is what the ‘miracle of Wörgl’ suggests.

When average investment returns are near their sustainable maximum, real interest rates are also near their sustainable maximum. The usury-based economy is unstable due to credit expansions and contractions, so it often does not operate at its sustainable maximum, reducing its efficiency. Natural Money helps achieve a stable economy and minimise financial system risk, thereby realising the sustainable maximum. It follows that real interest rates with Natural Money are higher, even when economic growth rates are positive. The maximum nominal interest rate is zero, so higher real rates show up as currency appreciation, allowing an interest rate of zero to yield a positive absolute return.

A simple calculation illustrates this view. Economists assume there is a link between the amount of money and money substitutes (M) in circulation and prices in the equation Money Stock (M) * Velocity (V) = Price (P) * Quantity (Q). If ΔP, ΔM and ΔQ are sufficiently small, and velocity is constant, so that ΔV = 0, then it is possible to approximate this equation with %ΔP = %ΔM – %ΔQ, where %ΔP is the percentage change in price level, %ΔM is the percentage change in money stock, %ΔV is the percentage change in money velocity, and %ΔQ is the percentage change in the quantity of production.

The velocity of money (V) for Natural Money might be higher than for interest-bearing currency, and that could go together with a smaller money stock (M). Still, the velocity is likely to remain constant, as the economic picture is expected to remain stable. Now, it is possible to calculate the real interest rate (r) as the nominal interest rate (i) minus the inflation rate (%ΔP), so that r = i – (%ΔM + %ΔQ).

Suppose the long-term average economic growth rate for interest-bearing money is 2%. For Natural Money, it might be 3% because the economy is more often performing at its maximum potential. Assume that the long-term average money supply increase for interest-bearing money is 6% per year. For Natural Money, it is 0%. The long-term price inflation rate could then be 4% for interest-bearing money. With Natural Money, there could be a price deflation rate of 3% as the economy grows at a rate of 3% with a stable money supply. We can then produce the following calculation:

 situation interest on money  Natural Money 
 nominal interest rate (i)+3%-2%
 change in money supply (ΔM) +6%0%
 economic growth (ΔQ)+2%+3%
 real interest rate (r = i – ΔM + ΔQ)-1%+1%

Economic growth can be higher with Natural Money, allowing real interest rates to be higher. Furthermore, because Natural Money has several stabilisers that reduce financial system risk, the level of risk is likely lower. As a result, the risk-reward ratios associated with Natural Money are better than those in the current usury-based financial system. In other words, the same real interest rate in a usury-free financial system is a better deal because it entails fewer risks. Hence, a usury-free financial system based on Natural Money is more efficient, so there will be a capital flight from the usury-based economy to the usury-free economy after implementing Natural Money on a large enough scale. The efficiency argument demonstrates that usurious finance is parasitic.

The real interest rate may improve more than the economic growth rate due to lower financial-sector profits from phasing out exploitative parasitic activities, such as interest-bearing consumer credit. The rationale is that, without credit card payments, consumers have more disposable income. Furthermore, economic and financial stability can reduce investment risks, thereby requiring less financial sector intermediation. The financial instability and the need for government and central bank interventions in the usury-based financial system create opportunities for politically connected and other savvy and informed individuals, often referred to as ‘parasites’, to enrich themselves at the expense of the general public. The higher efficiency of Natural Money could end that.

The efficiency argument still applies when we switch to a values-driven, people-friendly economy that operates in harmony with nature. The inefficiency of such an economy stems from its inferior ability to generate money for investors by transforming energy and natural resources into waste and pollution in the bullshit economy. That depresses interest rates. That is not an inefficiency in the financial sector. With Natural Money, a values-driven, people-friendly economy can remain operational thanks to the financial system’s efficiency. Terminating the bullshit economy in a usury-based financial system will also depress interest rates. That can bring about an economic collapse, because usury makes capital addicted to growth.

Trust

Someone once asked me on an Internet message board, ‘Why would I lend money interest-free?’ The borrower may not repay. So, why take that risk? We lend interest-free to people we trust, and we may lend to family and friends, even when they are untrustworthy individuals living off our money. After all, they are family and friends. In a market, it won’t happen unless we trust the currency and the borrowers. Hence, ending usury is only possible in a high-trust environment. And investors must be in the market for other reasons than maximising their profits. Those who lend money to organic farms and invest in renewable energy have a different view of investing than vampire capitalists, who scam the government and rob grandparents of their retirement savings.

Credit means trust. Trust in the future is the foundation of the capitalist economy. Investors imagine that the future will be better so that their investments will be profitable or at least not loss-making. Credit, or financial capital, reflects this trust. Most of our money is credit, so its value depends on an imagined future. Some people argue that credit, banking, and central banking are a fraud because they are a fantasy. They may prefer something tangible, such as gold. Indeed, the capitalist economy, as well as civilisation in general, demonstrates the power of human imagination, and our faith in what we believe.

To have trust in the future, investors must believe that their investments are safe. The rule of law, political stability, the absence of graft, and sensible economic policies are fundamental factors for the economy to function effectively. As investments, such as factory investments, are long-term, the risk that a government will annul earlier commitments is a critical factor in investment decisions. Government actions, such as asset confiscation or taxation, can deter investors. Differences in tax regimes are equally damaging, as tax havens parasitise on productive economies that collect taxes to invest in their infrastructure and education.

Interest rates are the lowest in stable countries with low inflation, as trust translates into a risk premium on investments. The greater the perceived risk, the more the future becomes discounted, the higher the interest rates are, and the lower the standard of living usually is. Hence, Switzerland and Sweden have low interest rates, while Argentina and Mozambique have high interest rates. Interest rates in Europe are lower than in the United States. Apart from lower growth expectations, the Stability and Growth Pact, which limits government deficits, plays a role. And the government deficit as a percentage of tax income is a better indicator of the health of government finances than the deficit as a percentage of GDP. These are more sustainable in Europe. And so, trust also plays a role here.

Interest rates in Switzerland are currently at their lowest. In 2025, the key interest rate stands at zero. Interest rates in Switzerland are that low because investors trust the Swiss currency. From 1990 until 2024, the government’s budget deficit averaged at 0.45% of GDP. At the end of 2024, government debt was 20% of GDP. A general rule is that the lower the trust in the currency, the higher the interest rate. Venezuela has the highest interest rate at 60%, but with an inflation rate of 180%, investors are better off with a yield of zero in Swiss francs. In a market, low interest rates signal trust. Hence, trust is a crucial prerequisite for ending usury.

In 2025, interest rates in Turkey exceeded 40% to curb inflation after a failed monetary experiment. The assumption that interest charges cause inflation led Turkey’s leader to force the central bank to lower its interest rates. Inflation soared to 85% in 2022. The Turkish leader was defrauding creditors, thereby transgressing Islamic law. The relationship between interest and inflation exists, but it operates via credit. Credit expansion causes inflation, not interest itself. In a usury-based financial system with fiat currencies, raising interest rates curbs inflation by dampening demand for credit. That obscures the truth that interest is a cause of inflation, but a better way to limit credit expansion is to set a maximum interest rate on loans.

With Natural Money, the central bank doesn’t set the interest rate or manage the money supply. The interest rate and the money supply emerge in the market for lending and borrowing. The holding fee on the currency provides a stimulus by making lending at negative interest rates attractive, so no money remains on the sidelines. At the same time, the maximum interest rate of zero provides austerity, curtailing credit during a boom or when inflation is high. That will cool down the economy and dampen inflation. There could be deflation, and deflation could be permanent. The market for lending and borrowing is free in the sense that the central bank doesn’t manage interest rates and the money supply. However, the maximum interest rate of zero operates as a price control.

Interest rates emerge in the market for lending and borrowing. Negative interest rates require trust in the currency, the government and its policies, the financial system, and, ultimately, in the borrowers. It requires trust in the political economy and the future. In other words, all the world’s governments must be as reliable and capable as Denmark’s, and the global economy must be on a sustainable footing. At the same time, market participants shouldn’t engage in scams. So far, business and ethics haven’t agreed very well. The ethic of the merchant is no ethic at all. The change requires a moral imperative. We shouldn’t harm other people or nature. Instead, we should see the consequences of our actions and change our ways. Only a new religion can make that happen.

The price of usury

Interest promotes wealth and income equality. Most of us pay more in interest than we receive, either directly through loans and rents, or indirectly through the products we purchase. German research from the 1980s showed that the bottom 80% poorest people pay interest to the top 10% of the wealthiest people. You can view interest as a tax on the poor paid to the wealthy. The wealthiest individuals reinvest most of their interest income. That is what made them rich in the first place.

Interest promotes short-term thinking. The pursuit of profit drives the transformation of energy and resources into waste and pollution in the bullshit economy. With positive interest rates, money in the future is worth less than money now. It affects investment choices. Without interest charges, long-term investments would become more attractive. When interest rates are high, cutting down a forest today, selling the wood, and investing the proceeds may give higher financial returns than sustainable forest management.

Incomes fluctuate against fixed interest charges. It can bring borrowers into trouble. Financial instability can lead to economic instability. Usury causes financial crises, recessions and depressions. Governments and central banks manage the problem, but their actions create a false sense of security, allowing debts to continue growing, which will ultimately lead to a financial apocalypse. The underlying cause is usury. However, the road to the end of usury also goes through financial innovation and modern finance.

Fractional reserve banking

Innovations in financial markets have made them more efficient, enabling lower interest rates and increased lending, thereby spurring the Industrial Revolution. A crucial invention was fractional reserve banking. It turned bank deposits into money. There is always a demand for money. It is the most liquid asset. Economists call it the liquidity preference. Money commands power. You can use money to buy anything at any time. We may want to keep cash at hand for expected purchases, unexpected expenses, and investment opportunities.2 And so, we often aren’t willing to lend our money.

Fractional reserve banking enables banks to lend out money that depositors can withdraw. If you lend money to a fractional reserve bank, you can use it at any time, as if it were cash. Banks kept a fraction of deposits in cash reserves to meet withdrawals, knowing that only a small share of depositors would withdraw their money. That freed up funds for investments and helped to lower interest rates. A fractional-reserve bank creates money because a new loan automatically creates a new, equal-sized deposit. And that deposit is like any other deposit. You can use it to make a payment or withdraw cash. Fractional reserve banking eroded the commanding power of money, resulting in lower interest rates.

Fractional-reserve banks can fail when a large number of depositors withdraw their funds at once. The integrity of fractional-reserve money depended on the ability to exchange deposits for cash. That is where central banks come in. They can help banks in times of trouble by printing additional cash and lending it to them at interest. That safety net reduced the risk associated with bank deposits, allowing interest rates to drop even lower, which, in turn, promoted more lending and economic development.

If it sounds too good to be true, then it usually is. Lower interest rates fuelled the economic boom since the Industrial Revolution, which will eventually lead to a technological-ecological apocalypse. Critics of fractional reserve banking and central banking further argue that lower interest rates encourage poor investment decisions and that the safety net provided by central banks creates a moral hazard. If interest rates were to rise, these investments would become unprofitable, leading to bankruptcies and unemployment. And if central banks rescue banks in times of trouble, it will promote irresponsible lending.

There is overcrediting, and lower interest rates promote irresponsible lending by increasing profit margins for usurious lending. The way to end usurious lending is to set a maximum interest rate. More recently, critics have argued that central banks, through extraordinary measures such as quantitative easing, have suppressed interest rates. However, central banks believed that interest rates were too high. They couldn’t lower them due to a price control called the zero lower bound, which distorts the market. By printing money, central banks aimed to generate inflation, thereby allowing them to raise interest rates later.

Reserve requirements

Banks hold reserves, which are money issued by a central bank. Reserves include banknotes and coins, as well as balances that banks hold at the central bank. The primary reason for holding reserves was to meet cash withdrawals from depositors or to make payments to other banks in case depositors transfer money to another bank, and the other bank desires payment in kind rather than an IOU. A reserve requirement is a liquidity requirement. A bank must have enough cash on hand to meet its short-term obligations. Two developments have profoundly affected the need for reserves:

  • Contrary to the past, depositors hardly ever withdraw their funds in cash, so the money stays within the banking system.
  • Government debt has become an alternative source of liquidity. Government debt issued in the government’s currency is as safe as cash.

A government can guarantee repayments of debts issued in its own currency by printing more currency, with a so-called independent central bank as a cover, which has become a core foundation of confidence in the current usury-based financial system. The central bank will not let the usury-based financial system fail, so it will print money to buy government debt, which reduces the supply of debt and increases the supply of currency by which to buy government debt, thereby lowering interest rates and allowing the government to borrow more, making new money available to pay interest.

These profound changes have made traditional reserve requirements largely redundant. Banks hardly need any cash in their vaults. If they pay another bank in kind, government debt is as good as central bank currency. Or a bank could borrow at the central bank or another bank and pledge government debt as collateral. The experts concluded that reserve requirements have become superfluous. Government debt has become the actual reserve. And so, banking regulations today focus on solvency, or the ability to meet long-term obligations. Still, it would be a most serious oversight to ignore liquidity.

Globalisation, liberalisation, and derivatives

Advances in information technology and financial innovations have driven the globalisation of financial markets over the past few decades. In the 1980s and 1990s, governments liberalised financial markets and removed capital controls. Capital controls can lead to higher interest rates and higher costs of capital.3 Globalisation and liberalisation expanded the possibilities for borrowing and lending worldwide.4 The increased competition reduced the price of financial intermediation.

Globalisation and liberalisation made financial markets more liquid. It became cheaper and easier to exchange financial instruments, such as bonds and stocks, as well as goods and services, for cash. This development is more commonly known as financialisation. Like fractional reserve banking, financialisation eroded the position of money as the most liquid asset, thereby diminishing the commanding position of money owners to demand interest.

Globalisation and liberalisation also caused trouble. Money and capital could move more freely, making it easier for changing expectations to lead to financial instability. Central bank interventions neutralised a series of financial crises in the 1980s, 1990s and 2000s. Lower interest rates prompted investors to seek higher yields and take on more risk. However, trust and, therefore, liquidity can suddenly evaporate. Some countries used capital controls to counter financial instability while central banks provided liquidity.

Innovations in risk management and derivatives enabled the financial sector to further increase lending. These innovations spread risk, allowing the total amount of risk in the system to grow. Due to a lack of regulatory oversight, derivatives also enabled scammers to sell fraudulent mortgages, contributing to the 2008 financial crisis. Still, banks that professionally used derivatives to hedge their risks weathered the crisis better and had fewer loan write-offs.5

The notional value of outstanding derivatives can be mind-boggling. Their actual value is much lower. You can best compare them with insurance policies. The notional value of your fire insurance policy is typically based on the value of your home. The actual value is the premium you pay. That is, until your house burns down, and the actual value becomes the notional value. Insurers can handle that until many homes catch fire simultaneously.

The actual value of an interest rate derivative on a 3% ten-year bond with a notional value of €1,000,000 might change by €81,109 if the interest rate increases to 4%. As long as parties use derivatives to hedge risks, and counterparties, the ‘insurers’, can absorb the losses, the system will function. An equivalent to all houses catching fire simultaneously could be a sudden increase in interest rates. When the system is more stable, the need for these instruments decreases.

Wealth effect and bubbles

Lower interest rates increase the value of assets via discounting. In theory, the price of an asset is the net present value of its future revenues. Even though that is often not the case in reality, the theory explains why the prices of assets like bonds, real estate, and stocks rise when interest rates decrease. In this sense, lower interest rates can promote wealth inequality, but only when we consider the net present value of assets. If future revenue streams don’t change, wealth inequality is merely a temporary side effect.

There was, however, another dynamic operating underneath. Lower interest rates allow consumers to borrow more by taking out higher mortgages, thereby financing their unsustainable lifestyles. Critics called it a wealth effect promoted by an asset bubble. Lending propped up consumer spending when the incomes of many working-class people were lagging, and the wealth of the rich ‘trickled down’ via lower interest rates as they were running out of sensible investment options, giving them yet another avenue by which to squeeze the working class. In a system of usury, lower interest rates are of no help.

Financial sanity

Interest compounds to infinity. Three grammes of gold at 4% interest turn into an amount of gold weighing twelve million times as much as the Earth after 2020 years. Most of us aren’t long-term planners. We are busy fixing holes rather than solving underlying problems until things fall apart. Economists do this as well. John Maynard Keynes invented government borrowing as a fix for usury-induced debt problems. He once justified his short-term thinking with the world-famous quote, ‘In the long run, we are all dead.’ And this man was the founding father of modern economic policies.

More debt has now become the standard solution for debt problems. Today, most money comes into existence as a loan on which the borrower must pay interest. Every loan creates a deposit. The depositor automatically becomes the lender. If the interest rate is 5%, and €100 is circulating, then €105 must come back. So, where does the extra € 5 come from? Here are, once again, the options:

  • Depositors (on aggregate) spend some of their balance so borrowers (on aggregate) can pay the interest from existing money.
  • Some borrowers default and do not return (part of) the balance.
  • Borrowers (on aggregate) borrow the extra €5.
  • The government borrows the extra €5.
  • The central bank creates €5 out of thin air to cope with the shortfall.

Interest payments do not necessarily cause a shortage of money. Still, in reality, they do, mainly because depositors find it, like Scrooge McDuck, difficult, emotionally or otherwise, to part with their money. New debts fill most of the holes caused by the Scrooge McDuckism of depositors. That is why debt levels nearly always increase. Still, the money doesn’t always arrive at the right places, which causes financial crises. A few defaults are acceptable, but too many can cascade into a financial crisis, triggering an economic downturn or even a depression.

The cost of letting the financial system fail is so great that this is not an option. The 2008 financial crisis could have meant the end of civilisation as we know it, had central banks not saved us from a financial apocalypse caused by usury. When no one else is borrowing, the government and the central bank must step in, either by borrowing or printing money outright, to introduce new money into circulation to repay existing debts with interest. In this way, debts continue to grow, and we have become the hostages of the usurers.

The end of the road

The road to the end of usury ran through financial innovations. They lowered interest rates. Today, the world is awash in debt, and interest payments strangle the global economy, so that future interest rates may become negative. That could either be the end of usury or, if usury remains, the end of the economy. The world economy may collapse, or we can have a graceful decline, promoted by the efficiency of a usury-free financial system. The efficiency of Natural Money can help us build a high-trust world economy founded on moral values.

In a simplified world, we rely more on family and community, and less on markets and states, so the economy will also become simpler. Natural Money eliminates risk from the financial system, so that, after its implementation, several modern financial instruments may become obsolete, joining fossil fuels and marketing strategies. Still, economies of scale apply to several essential products and services, including finance. Negative interest rates require risk management that only scale can provide.

Latest revision: 3 December 2025

Featured image: Loan shark picture circulating on the internet, origin unknown.

1. Capital in the Twenty-First Century. Thomas Piketty (2013). Belknap Press.
2. Keynes, John Maynard (1936). General Theory of Employment, Money and Interest. Palgrave Macmillan.
3. Edwards, Sebastian (1999). How Effective are Capital Controls? Anderson Graduate School of Management, University of California.
4. Issing, Otmar (2000). The globalisation of financial markets. European Central Bank.
5. Norden, Lars, Silva Buston, Consuelo, Wolf Wagner (2014). Financial innovation and bank behaviour: Evidence from credit markets. Tilburg University.

A tenner on the street

A tenner on the street

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No such thing as a free lunch

Here comes another joke about economists. Suppose you just have found a tenner on the street. You are very excited about your windfall and tell the next person you meet about your find. You say, ‘I just found a tenner on the street.’ Now, this individual happens to be an economist. And he replies, ‘That is impossible. If there really was a tenner on the street, someone would have picked it up already.’

Economists also say, ‘There is no such thing as a free lunch.’ Some people get a free lunch, but someone else has to pay for it. If you find a tenner, someone else paid for it. If there is money for free, people will take it and let others pay for it. Economists call it arbitrage. It is also what trade is about. Traders try to make money by finding money for free, but in doing so, they work and take risks.

Economics assumes humans are rational in economic matters and do not leave tenners on the street. We make the best of our money by choosing the right products. And we make as much as we can with our abilities. If we get cash for free, many would not work or only do jobs they like to do. And even though we often are not rational, it explains much of our behaviour, most notably what happens in markets. If there is a tenner on the street, it will not be there for long.

If gold costs € 50 per gramme in France and € 40 in Germany, traders can make money by buying gold in Germany and selling it in France. The demand for gold in Germany will rise, as will the supply in France. The law of supply and demand says that the price goes up when demand increases and goes down when supply increases, so the price in Germany and France will be the same.

Economists call it arbitrage. Smuggling comes from the same principle. Cigarettes are more expensive in the United Kingdom than on the European continent. You can make money smuggling cigarettes into the United Kingdom and selling them there illegally. The price difference promotes smuggling. The difference between arbitrage and smuggling is that arbitrage is legal.

Markets without morals

Even though most individuals have moral values, markets do not have them. There are always people willing to market a harmful product. Their excuse often is that if they do not, someone else will. Laws can illicit smuggling and black markets. It helps if laws and enforcement are the same everywhere. Still, supply always equals demand at a specific price. So, if you outlaw harmful substances or practices, say alcohol, prostitution, cocaine, gambling, or cigarettes, you promote crime and violence because criminals make more money.

And so, the War on Drugs is a failure, like the prohibition in the United States in the 1920s. If selling cocaine is legal, the price difference between Colombia and the United States would be close to the production and transport costs. In that case, a gramme of cocaine might cost $ 5 in Colombia and $ 6 in the United States. But if it is illegal, and governments enforce the law, a gramme of cocaine might cost $ 10 n Colombia and $ 100 in the United States, and criminals make lots of money in the trade.

As crime-related violence engulfs more and more countries, gangs of criminals undermine governments and societies by giving poor people an income, bribing officials and hiring hitmen to eliminate those who stand in their way. Seeing it as an economic problem might help to find solutions, for instance, undermining the criminal business model by letting governments supply harmful substances and gambling and regulating prostitution. If governments keep repressing the drug trade, they make the criminal enterprise unprofitable by bringing their cost above the price for which governments sell.

It brings moral dilemmas, but unlike criminals, governments do not do marketing, for instance, by giving drugs to children to turn them into addicts. Governments have no profit motive, which allows governments to help drug addicts and give them treatments. But this does not stop the fentanyl crisis in the United States. This drug is too cheap and too deadly. Only unconventional measures like taking all the addicts off the streets and locking them up might end the suffering. To solve this issue, we might need to be as committed as the Taliban and accept the human cost. The human cost will be higher if we are lax. If an addict dies because of these measures, this person would have died anyway, and the gain is in the people we save.

Trust but verify

Similar issues arise when governments tax, punish criminals, give subsidies or provide social benefits. If that elicits the desired behaviour, that is good, but that does not always happen. Businesses shift their profits to tax havens. Wealthy individuals do the same with their assets. If there are social benefits, people who do not like to work or dislike their job try to get on the dole. Many people need those benefits, but fraud undermines their legitimacy.

Reasonable people are willing to pay taxes for people who need help but not for fraudsters. Tax and welfare fraud may get understated or overstated for political reasons. If you can commit fraud and gain financially, some will do it. And if they get away with it, more will do it. That undermines trust. Regulations need enforcement. For instance, not enforcing building regulations allows contractors to make money using inferior materials. And that happens with devastating consequences.

When private contractors perform public tasks, and the government pays for them, there is an opportunity for fraud. In the Netherlands, the government decentralised several forms of social work to the municipalities. Since then, criminals and fraudsters have set up businesses in those areas. The choice is either for governments to do these tasks themselves or to work with reliable suppliers by vetting them, perhaps even licencing them, and monitoring their performance.

Trade as finding tenners

Trade is like looking for tenners on the street and keeping them, even if you know the previous owner. You might call it pickpocketing. The difference is not always clear. Hermes, the Greek god who was the protector of the merchants, was also the refuge of the thieves. Popular culture views traders with suspicion. Value is subjective. If you bought an item for € 50 but could have bought it elsewhere for € 40, did the seller dupe you, was the item worth € 50, or were you stupid?

And we cannot do without trade. Few people have the time to go to all the producers for the things they need, nor have these producers the time to handle each individual that needs their product. If you had looked around, you might have found the same item for sale for € 40, but perhaps, you were too busy and happy to get the item instantly without looking around. Trade performs the following functions:

  • Goods are made in one place and used somewhere else. Trade bridges distance.
  • Goods are produced first and consumed later. Trade bridges time.
  • Goods usually are made in large batches and used in smaller ones. Trade matches volumes.

Crucial to trade is information. A trader must know what is on offer for what price and where, and for what price it might sell when and where. Gathering that information costs time and effort. If you trade potatoes, you buy them in large quantities from farmers during the harvest and sell them in smaller quantities to greengrocers throughout the year. You must offer an attractive price to the farmers and the greengrocers. Otherwise, they will go elsewhere. And your business must make a profit. Otherwise, you might as well have stayed in bed to watch television.

Financial markets

A tenner dwells more likely on streets where others do not look. Wall Street firms hire the brightest minds on the planet to find these places. For instance, Apple stock may be for sale for € 150 in Australia while it is doing € 151 in Germany. If you want to pick up that euro, you must be there and act quicker than everyone else. Wall Street firms thus invest in the fastest computers and networks.

So if a tenner falls out of your pocket on the stock market, Wall Street firms have already picked it up before it hits the street. They may soon apply artificial intelligence to look inside your pocket and fetch the tenner before it falls. So if you are willing to sell your stock for € 150 and someone else is willing to pay € 151, Wall Street banks may snatch the securities you offer for € 150 and sell it to the other for € 151.

If the interest rate in one country is lower than in another, you can profit by borrowing money in the first country and lending it out in the other. It can be attractive to borrow yen at 1% to buy dollars to lend them at 5% and pocket the difference. Economists call this a carry trade. You might expect that, like the price of gold, interest rates would converge because the yen interest rate would rise because of the borrowing in yen, while the dollar interest rate would fall because of the lending in dollars.

That did not happen. The central bank sets the interest rate and can create money. The Japanese central bank kept lending yen at 1% and buying dollars because the Japanese government did not like the yen to rise. That could hurt their exports. If the US central bank held the interest rate at 5%, and the Japanese central bank prevented the yen from rising, that meant lots of free money for banks. The Japanese paid for it. They could have bought more with their money if it had been worth more.

One of the most troubling issues with trade, markets and capitalism, is that value is subjective and often depends on irrational emotions. The market value of an empty Gucci bag is higher than that of a shopping bag filled with potatoes. And even though we cannot establish objective value, we need food more than designer bags. The appreciation of subjective value is what makes the current economic system suicidal. A happy shopper today can be a dead one tomorrow.

Lately, I found a tenner on the street. Economists can be wrong. Well, indeed.

Latest revision: 19 August 2023

Featured image: A tenner on the street. Free Shutterstock image from Blackday.

Arab farmer taking straw to his farm. Public domain.

Clutching at a Straw

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Fleeing is no longer possible

As mentioned earlier, I read The Limits of Growth in my late teens. Having hoped to live for another sixty years or so, I was informed by that book that a computer had calculated I would live to see the end. And who would argue with a computer, an entirely logical device? Time was ticking. Tic toc tic toc. As a child, I dreaded the future whenever the song Vluchten Kan Niet Meer (Fleeing Is No Longer Possible) was on the radio. It unnerved me profoundly, as it painted a dismal future in which nature would be gone. The ticking clock had made me run for cover as a toddler. That gloomy mood faded when I went to secondary school, and for a long time, the coming doom hardly crossed my mind.

That was until I read The Limits of Growth. It featured dreadful graphs showing decades in advance how resources would run out, and billions of people would die. Two decades had passed since then, and everyone had ignored it. It led me to join a local environmentalist group, Friends of the Earth, after finishing my studies. That was in 1993. My political affiliation had gradually trended to the centre-left. For a long time, I had believed that there was no alternative to capitalism, but gradually I realised that it also meant there was no alternative to doom. And so there had to be an alternative. It was impossible, but it was necessary. And that thought settled.

Friends of the Earth is an international organisation known in the Netherlands as Milieudefensie, with local activist groups, most notably in student towns like Groningen. We researched issues and tried to convince people. Friends of the Earth also lobbies with politicians and pressures corporations. We were a hodgepodge of students, people with jobs, unemployed, activists, and ordinary people, led by a woman in her thirties who acted like an Akela in the Boy Scouts. A 22-year-old student was her boyfriend.

We were not as militant as Greenpeace, but sometimes we protested. Once, we blocked the entrance of Groningen Airport to object to the government subsidies for the airport. The police came and told us to leave, which we did. It made me realise that activism wouldn’t solve the world’s problems. What could you do? If you went extreme and vandalised property, people would hate you for it, and it wouldn’t change the world. Starting a political party wouldn’t help. Think of what must be done and promise that you will do it. Few will vote for that. Even the most ‘extreme’ environmental party, the Green Party (GroenLinks), didn’t have what it takes, and they had only a few seats. That did not bode well.

And finally, if the Netherlands was going to do it, but no one else would, it wouldn’t help. And then there is the competition in the economy. Businesses will go bankrupt if they do more to save the environment than others. Their products would be more expensive, and we wouldn’t buy them, except for those who care enough for the environment to pay more. The group had about thirty active members and was divided into subgroups centred around specific issues such as vegetarianism, factory farms, air pollution, and economics. Economic issues caught my interest.

My mind was often grinding. It was like Hegelian dialectic, so trying ideas and looking for reasons why they would fail. You can ask hypothetical questions. Is it possible to make capitalism sustainable and just? Fat chance. Wasting is the essence of the system. If capitalism doesn’t solve these problems, then why not try socialism? Would that work? Probably not. People want more stuff. Democracy? Authoritarianism? Likely not. Can we make nature sacred? They will laugh at the idea. Money is sacred. All I got was an increasing pile of objections as to why ideas don’t work. I was too realistic to get carried away by any idea. History is full of examples of ideas going wrong. You can discard most ideas without even trying. That was the benefit of knowing history all too well.

No frivolous accounting

Friends of the Earth in Groningen was a small outfit, so compared to the art festival at the university campus, the yearly budget was negligible, about 6,000 guilders (€ 2,723). It covered the group’s activities. We were short of money. That changed once I became the treasurer. I took measures to make expenses match project income. Everything had to be accounted for. I eliminated the use of cash and required everyone to deliver receipts and state their purpose. I transferred the money via bank transfer, so it was clear where the money went. Yet, luck played a major role.

Each year, we received two grants of 2,500 guilders (€ 1,134), one from the province of Groningen and one from the municipality of Groningen. The provincial administration had just denied the allowance we had received in previous years. We could appeal to the decision at the Appeals Commission, which we did. Then I went to the Provincial House to discuss the issue with the official responsible for the grant. He explained that our request had been late and that the money jar was empty. I asked him whether there was any point to the appeal. He said no. It was a done deal.

So, after receiving an invitation to a hearing at the Appeals Commission, I decided not to waste my time going. After all, it was a done deal. One of the commissioners called me after the hearing to ask why we hadn’t shown up. And I told him. That probably touched a nerve, as it gave him the impression that no one took the Appeals Commission seriously. Our appeal was granted, and we received the subsidy. As I had made a budget that didn’t anticipate this money and had implemented budgetary discipline, we ended up with income exceeding expenses.

Once over a cliff, a cartoon character might clutch at a straw to save itself. Only in animated pictures does the straw hold. The Dutch saying ‘clutching at a straw’ means grasping at your last hope. On economic issues, the local group of Friends of the Earth worked together with Strohalm, or more precisely, Rinke. He lived in Groningen and was actively engaged in Strohalm and its ideology. He was on social benefits, and his career was working for Strohalm and Friends of the Earth. He was serious about his job and worked hard. The meaning of the Dutch word strohalm is straw.

The people of Strohalm claimed that the economy must grow to pay interest. Interest rates can’t go below zero, and if debts aren’t repaid with interest, the financial system collapses, so it is grow-or-die. And interest adds to the principal until infinity. To deal with that problem, I later figured that central banks print money to fill the gaps and aim for inflation, which is why it hadn’t collapsed. Sound accounting attracted me, so this made me think. And the idea of economic growth is frivolous accounting if you are the accountant of our planet’s resources. Many people worry about government deficits, but not about the overexploitation of the earth. And so, the cranks run the show in this world with insane planetary accounting schemes and delusions about growth. And the global economy and financial system create oceans of wealth and deserts of poverty, Srohalm argued.

Strohalm aimed to end interest by charging a holding fee on money. You don’t have to pay the fee if you lend your money. In this way, it could be attractive to lend money without interest. Natural Money as an idea thus already existed back then. Silvio Gesell introduced the holding fee in his 1916 book The Natural Economic Order. Strohalm also promoted local money. And Strohalm promoted local solutions to shield the local economy from international financial markets, such as local currencies.

When you buy groceries at your local supermarket, you have no clue where your money ends up and what it helps to accomplish. The supermarket chain may use it to build a new distribution centre. One of the contractors there might exploit immigrants. It is hard to do something about that, but it made me aware of the impact my money has on the planet and on other people. I moved most of my savings to an ethical bank, first ASN and later Triodos. Later, I also started buying Fair Trade products.

With local money, you could oversee what it accomplishes. And so, Strohalm began a LETS (Local Exchange Trading System) in Groningen. We exchanged goods and services using fictitious currency with a holding fee. It soon dawned upon me that LETS would accomplish very little. It was more of a tea party than a viable alternative for the regular economy. The exchange circle had a few hundred people, and many weren’t very active, so there were only a few products and services. And most weren’t things you needed. You might get a Reiki healer but not a handyman.

If your skills had market value, you wouldn’t exchange them in the LETS circle because you could get guilders you could spend everywhere. Thus, it was not only a matter of scale but also of commitment. The people in the exchange didn’t offer valuable skills or products, either because they didn’t have them or because they could fetch more in the market. You could say that people value money more than community, but you could also say that people tried to make money from their hobby, so they didn’t have to work for a living.

The people in such a scheme were mostly idealists who wanted to change things rather than people who would get things done. For a closed economy to work, the community needs scale to fulfil most of its needs. And it must produce tradeable goods and services to fulfil the remainder of its needs. Above all, building such a community requires commitment. Everyone must contribute, make themselves useful by acquiring new skills if needed, and accept a lower standard of living because they forgo the benefits of the division of labour in international markets. How can you achieve that?

Friends of the Earth Groningen once held a camp to work on our persuasion skills. Rinke was one of the organisers. He specifically praised me and called me an example for the others. That couldn’t be because of my communication skills. What set me apart was that I knew very well what other people were thinking and how they would react. My parents and some of my friends disapproved of my joining the environmentalists. And I didn’t try to convince others of my views, but merely tried to figure out how much they were willing to go along with them. Everyone knows that dumping garbage in nature is not okay. You can use that.

My parents found environmentalists a nuisance at best. When, in 2012, the socialists, led by Diederik Samsom, had a chance to win the elections, they were alarmed because Samson had been with Greenpeace as a student. A former environmentalist running the country was their worst nightmare. Perhaps you can see the irony of that. They considered voting for the conservative liberals (VVD) rather than the Christian Democrats (CDA), for which they had voted all their lives, to prevent that from happening. And so, there is no point in arguing. Did I ever convince anyone of my political views as a teenager? Probably not. That lesson I had learned already as a young man.

Few people are willing to change their lifestyles for the welfare of animals or future generations. Blocking roads would make people angry. People want to drive cars and don’t care about climate change. Strohalm proposed a tax on air travel because air travel is highly polluting and a luxury. Environmental taxes would raise prices and infuriate people. Taxes have caused revolutions. People aren’t willing to give up their right to murder their children. I didn’t give up on environmentalism just because we were heading for the apocalypse, but annoying people wasn’t the way to solve the problem. Only that wasn’t particularly satisfactory. If you accept doom, you might as well commit suicide right away. And so, there must be a way, even if there isn’t.

And there were issues with interest-free money. Why would you lend out money without interest if you could receive interest elsewhere? If you can borrow money at an interest rate of zero, you could borrow as much as you can and put it in a bank account at interest. That is not going to work. That was my grinding mind, looking for failures. It is an occupational hazard if you work in IT. A programme always has errors, and it is better to find the bugs before running it. Cleaning up the mess afterwards is far more work. Still, if interest is the root cause of social and environmental problems and can destroy human civilisation, we must make interest-free money work, even if it never will.

And perhaps it could work. During the Great Depression, a small Austrian town, Wörgl, had money featuring a holding fee. It was a stunning success. A similar money had existed in ancient Egypt for over a thousand years. The Egyptians used receipts for grain stored in the granaries as money. These receipts had a holding fee to cover storage and putrefaction. A Strohalm book related it to the biblical story of Joseph, who supposedly had introduced these granaries to weather seven lean years. If it can work for a thousand years, it can work forever. If only we could uncover the key to these successes. That was a reason not to let go of the idea. Maybe the impossible is possible.

In 1997, I moved to Sneek to live with my wife, Ingrid. Sneek had no local Friends of the Earth group, so I stopped being an active member, but I kept using public transport. Not owning a vehicle while working in IT consultancy for 10 years was a considerable sacrifice. Living in Groningen had made that possible. It was a remote corner of the country. My jobs were either in Groningen itself or so far away that I had to stay in a hotel. In Sneek, I could use Ingrid’s mother’s car if needed. Still, life without a car is quite uncomfortable. And my sacrifice was pointless. More and more people drove SUVs. They didn’t care. They figuratively gave me the middle finger, and their message was, ‘If you don’t ruin this planet, we double down our efforts.’ That was not what these people were thinking, but terrorists at least believed they were doing it for a good cause, and these SUV drivers must have known that they were doing something wrong, at least if they had a conscience.

If you can do an IT consultancy job for ten years without owning a car, few people really need one. But who will tell them to ditch their cars and move closer to their jobs, or cram into crowded buses and trains for a journey that lasts up to twice as long? We can replace vehicles with public transport, but few people would do that voluntarily. The Dutch nickname for the car is ‘Holy Cow’ for a reason. In 2003, Ingrid’s mother’s vehicle broke down, and she didn’t buy a new one. Having never aspired to higher moral standards than others, at least if they are pointless, I bought a car. It must help. Otherwise, you are just having a hard time, with nothing good coming of it. We used the car to go to my parents’ home in Nijverdal or the forest in Rijs, as there was no forest near Sneek.

Becoming your avatar

Between 1998 and 2002, I was a freelance IT specialist. Lots of money came in, so there was some capital to invest. My first investments were small and unprofitable because I believed that profits mattered. At the time, loss-making internet startups did well in the stock market, while profitable corporations did poorly. Understanding financial markets seemed challenging, which made me think I had to stay informed and join the IEX investment message board. At the time, I still occasionally said, ‘With SuperB***,’ when picking up the phone. That once led to a hilarious moment when I expected a call from Ingrid, but it turned out to be from Martien. And so, that name became my avatar. I also took the Financial Markets course at the Dutch Open University.

Later, I changed my avatar name after someone noted that SuperB*** sounded arrogant. From then on, I never answered the phone, saying, ‘With SuperB***.’ That was no longer needed to feel better. A strange thing about avatars is that you somehow become this person, SuperB***, on the message board. People don’t know you, only the avatar. Readers began to expect serious commentary and strong writing from SuperB***. And so, I introduced a few other avatars with fanciful names like IEKS! (a Dutch exclamation of shock that sounds like IEX) or Schaduwschaap (shadow sheep) to be someone else and have fun. And I wasn’t the only one. Others also came up with fanciful names like mooiepipo (beautiful clown), danger money, !@#$!@! (some curse) or Schraalhans (a Dutch joke). Some also used multiple avatars, so the message board became a playground for practical jokes.

Usually, the name had some witty meaning. It could be something like this, ‘Buy And Hold (BAH) is for sheep and sheep say bah and like to live a calm life in the shadows, hence shadow sheep.’ Walhalla Raaskalla, which means something like mad ravings in the heavens of the Viking gods, just sounded funny. And it rhymed. MMWOPS stood for ‘Making Money While Other People Sleep.’ It was the name of an American scam company defrauding the Dutch shipbuilder RSV, which went bankrupt in 1984 despite receiving two billion guilders in government support. Most of my avatars didn’t last long, except Dikkevettebeer (big fat bear), who believed the stock market would crash to zero and the gold price would rise to infinity. Bears believe that stocks go down, and the stock market went down at the time, so the bears grew fatter.

Some people were promoting certain stocks and hoped others would buy them, so they could profit. Some people were there to defraud others. And you couldn’t see each other face-to-face, which promoted paranoia. You see that on social media today. Can you trust other posters? Do they have a hidden agenda? There is a lot of misinformation. Some governments and corporations pay people to spread their propaganda. Some believe other posters who disagree with them get payment.

A colourful investment fund manager, Michael Kraland, ran the message board. He wrote entertaining commentaries. At the time, he rode the hype of the internet and telecom bubbles. His strategy was risky and not sound advice to inexperienced investors. It was even more irresponsible because his boasting made uninformed people invest in these crappy stocks. And because he was a boaster, he received nasty negative comments on the message board, including unproven accusations of wrongdoing. And perhaps also because he was a Jew, which seemed not accidental, as he worked in finance, and there are many Jews in finance. And even though, as far as I know, he never did anything illegal, I considered him a dubious character.

You could witness what Keynes called ‘animal spirits’ on the message board, experience the fear and greed of small investors, and become part of it. You hope your investments do well and fear they will not. I traded in stock options and made a few huge gains, but overall, I lost. Human emotions often drive the decisions people make about their investments. I was not much different. Those who had success imagined they were geniuses. And then they lost it all when the bubble collapsed. I wasn’t good at picking stocks or trading, but I didn’t take many risks.

Introduction to conspiracy thinking

After some time, a day trader named Cees joined the IEX message board. A day trader is someone who tries to make a living out of trading rather than investing. About 90% of the people aren’t successful in trading and lose money, including me, for I have tried trading stock options for a while. Cees began sharing conspiracy theories from US message boards and websites. One was about the Plunge Protection Team. If the markets were about to collapse, a secretive group called the Plunge Protection Team would come to the rescue. A stock market crash could undermine confidence in the financial system run by Wall Street. They couldn’t allow that to happen.

Many ridiculed Cees at first, but after the internet bubble had popped and even more so after 9/11, markets often miraculously recovered due to massive buying in the futures markets just before they crashed, so his credibility gradually rose. It probably wasn’t entirely true, as the stock markets declined dramatically between 2001 and 2003 during one of the most epic bear markets in recent history. Still, something fishy was definitely going on there. And the gold price regularly plummeted due to sudden selling at irregular hours when most markets were closed.

Cees believed central banks were orchestrating this to bolster confidence in their currencies. He wrote that if the gold price were to rise, the public would lose trust in central bank money. In times of thin trade, you can sell a bit of gold to make the price drop. The trick was to break a trend. Trend followers, called technical traders, would join the bandwagon and sell more gold, lowering the price further, in a manipulative cycle. The purpose of the trade was to bring the price down, which made sense because if a rational investor planned to sell gold, he would seek the best price. And these sales at quiet hours caused the price to crash. These kinds of intriguing posts kept the reader’s attention.

The gold market was rigged like most markets, but not in this spectacular manner, other pundits explained. They would look at traders’ positions in the Commitment of Traders (COT) report to predict price movements. So, if the category of small speculators had loaded up on precious metals, prices would probably go down. Gold mining corporations sell gold in advance on futures markets to make their budgets predictable and plan their operations. The bullion banks were the intermediaries. These banks sold that gold in futures markets to hedge their risk and played the market to enhance their profits. Successful traders exploit our emotions with deception. They spread false information about central banks selling gold to scare suckers on gold bug sites into selling. Once the bullion banks had sold all their inventory on the futures market, they might crash the price to repurchase it at a lower price. And so a veritable conspiracy theorist should have asked, ‘Who profits from these conspiracy theories?’ You can ask the same question about many other conspiracy theories. Who profits from undermining trust in society and its institutions?

Meanwhile, I found alarmist websites about Peak Oil, claiming that oil production was about to decline. There were also websites denying global warming. Most people wouldn’t take them seriously and believe what the scientists say, but I looked into them to see what they had to say. Having studied the philosophy of science, it was not hard for me to uncover the brazen lies, falsifications and misinterpretations of the facts in the climate change denial scene. And they claimed climate scientists committed fraud. People want to believe it. Like my sister once said, ‘I will believe in Santa Claus as long as he brings me presents.’ The benefit of denying climate change is having the comfortable feeling of not needing to change your excessive consumerist lifestyle. The Internet proved to be an ideal platform for cranks to spread their nonsense, making me think there would soon be, like Peak Oil, a time of Peak Bullshit, where the truth would have gone lost entirely. Only, I never thought of what would come after that. The name suggests that after reaching a peak, bullshit would decline.

There was reason to be suspicious. The United States was the centre of a global empire financed by the US dollar’s reserve status, so the Powers That Be (TPTB) would, in all likelihood, protect the financial system at all costs. A collapse could mean the end of their trade and usury empire and their insane profits. I had already bought gold for other reasons and didn’t trust financial markets or those who operate them. And so these stories intrigued me, and I began to visit the sites Cees mentioned. American gold and bear websites complained corporations pumped up profits with frivolous accounting, thereby abandoning the tedious Generally Accepted Accounting Principles or GAAP, which made me smile because GAAP is Dutch for yawn. For the record, a bear is an individual who believes markets will go down and invest accordingly, while a bull thinks markets will rise and invest accordingly.

Those running the financial markets might be pulling out every lever to keep the Ponzi scheme of interest-bearing debt going. Debts continued to grow, as did interest payments, so there could soon be a day of reckoning. I had read ‘The Limits of Growth,’ so I knew that collapse was inevitable. The bear websites reminded me of that. If the sky has come down on you once, as it did to me as a student, you worry it might happen again. It made me on edge concerning my investments, which wasn’t helpful for profits. Gold was a long-term investment, as owning gold could help weather a financial collapse, so I didn’t care much about gold price swings. I sometimes hoped that the corrupt system would collapse, but that was because I hadn’t fully considered the consequences. If you come to think of it, it is unlikely that something good would come out of it.

Back then, conspiracy websites appeared reasonable because they investigated issues that the mainstream financial press did not. But it is a slippery slope. There are all kinds of secret goings on, but the imagination of the conspiracy theorists has no limits. You can go nuts if you don’t perform a regular reality check. Your beliefs will get farther from reality. When I revisited these sites in the early 2020s, they had gone delusional, disseminating misinformation about vaccinations, global warming and the 2020 US elections. The Dutch would call them Wappies. They never ask themselves, who profits from our nuttery? But also, if you rationally look at reality, you might go insane as well. The world is insane.

In 1999, I had already bought my first gold. The gold price had reached historic lows. Gold mines were loss-making and closing, making me smell total apathy toward precious metals, suggesting a generational low point. It made me think that it could be the beginning of a long-term trend of rising gold and silver prices that might last a decade or more. And feeling that an apocalypse could come, it was an insurance. And so, I went to my bank to open a gold account. They sent an investment advisor to talk me out of it. He said, ‘No one does that anymore. I know a man who has had a silver account with us for two decades. Silver has gone nowhere all that time. Gold mines are making losses because the price of gold is only going down. You should invest in the stock market instead. Stock prices only go up.’ It reinforced my belief that it was the perfect time to buy gold, so I pressed on and opened a gold account. Perhaps the investment advisors at the bank office had a good laugh that day.

Nijverdal, where I lived as a child, was the scene of a gold rush in 1901. It was the only place in the Netherlands that ever had a gold mining operation. The rush was short-lived because the ore concentration was lower than previously thought. In Sneek, I bought a goldsmith’s home. That is an interesting set of coincidences. There are no precious metals accounts anymore. Today, precious metals ETFs are essentially the same. I had gold coins in a safe-deposit box at a bank to weather a possible financial collapse. Later, I also acquired silver bars and coins, about 75 kilogrammes in total, and stored most of them in a safe deposit box at another bank. I did this, fearing financial collapse due to reckless debt creation and humanity’s depletion of resources.

A thought that didn’t die

In 2001, after the Internet bubble had popped, I pitched interest-free money on the IEX message board. My lack of financial knowledge didn’t deter me. Everyone can participate in a debate on a message board, so you can exchange thoughts with people you wouldn’t meet otherwise. Others rebuked me time after time and pointed out my errors, so I gradually learned. Lengthy exchanges over several years resulted in unwieldy discussion threads. As these arguments proceeded, my knowledge of finance improved. If you are trying something new, you learn more from open discussions on the Internet than academic debates, often occurring in closed circles under rigorous standards that don’t allow you to speculate. Seeing the issue from different perspectives is more helpful than having in-depth knowledge of a narrow field. My persistence came from an unwavering belief in the insanity of ever-expanding debts and interest payments.

Interest payments destabilise the financial system because borrowers must return more than they borrowed. That money isn’t there, so someone must borrow the difference. If no one else borrows, the government or the central bank must borrow or print new money. Otherwise, a financial crisis and possibly an economic depression will ensue. That is why debts accumulate and why inflation happens. Interest-free money can be sound money because banning interest promotes responsible lending, stabilises the financial system and ends inflation. You don’t lend to someone you don’t trust if you receive no compensation for the risk of not returning the loan. You don’t need to incur more debt to pay off existing debts. That is the theory, but practical issues stood in the way. The market sets the interest rate. If you have money to invest and can receive interest, you won’t lend without interest. That is why economists never took interest-free money seriously. It was a domain of eccentrics like me.

The gold websites familiarised me with the Austrian School of Economics and their adherents, another eccentric bunch. Many were libertarians who saw government, rather than the love of money, as the root of evil. Usually, the private sector can produce a product or service more efficiently than the government, so they believe the government shouldn’t impose regulations or provide public services. They also had ideas about sound money and preventing irresponsible lending. They question banks’ money creation and dispute the need for central banks. Banks create money, which causes inflation. Central banks help banks in trouble, which promotes irresponsible lending. They hoped to limit money creation or return to a gold standard to enforce financial discipline.

They didn’t want governments or central banks to interfere with economic cycles, thereby accepting financial crises and economic hardship to cleanse the excesses. They argued that these corrections are necessary and beneficial as they would terminate poorly run businesses. And things would only worsen if you didn’t allow these natural cycles to run their course. They would argue that the central bank, the FED, had exacerbated the Great Depression and that its policies had contributed to the 2008 financial crisis, as its support for commercial banks had promoted reckless lending. They have little regard for mainstream economics, which underpins government and central bank actions to manage the economy, or what economists call fiscal and monetary policies, thus running government deficits, setting interest rates and printing money.

These issues troubled me as well, as did reckless lending. And so, we had a common ground. Paying interest on existing debts with new ones is fundamentally unsound. To me, funny accounting is an abomination and the basis of corruption. Banks profit from creating money. Inflation is the price we pay for their profits. Banks steal from us, most notably people with low incomes and those who don’t own stocks or real estate. If real estate values rise, so do rents, benefiting homeowners at the expense of renters. The underlying cause is usury, thus charging interest on money and debts, but few people notice. By their lending, banks create money and demand more in return, so we need more money to prevent the scheme from collapsing. And if the scheme collapses, like it nearly did in 2008, that could be the end of civilisation as we know it. For adherents of the Austrian School, charging a fee on currency and banning interest are out of the question, as they run counter to their view of ‘free’ markets. Those who accept a wage below subsistence level are free in their view, even when slaves have a better life.

They were a cult, with their own particular universe of facts. They believed the fairy tale that once the government had disappeared and markets were ‘free’, we would live in Paradise. Even though they were on opposite sides of the political spectrum, a comparison to communists is apt indeed. Both ideologies are like religions. Like communists have their prophets, such as Marx, Lenin, and Engels, libertarians have their own, such as Von Mises, Hayek, and Rand. Both have holy books. Communists have Marx’s Das Kapital or the Communist Manifesto, and libertarians have Rand’s Atlas Shrugged or Ludwig von Mises’s The Theory of Money and Credit. I didn’t read these books, but I have read several of their articles and had discussions with them, so over time, I learned about their beliefs. And perhaps that works better. You can better understand Islam by listening to the opinions of Muslims than by reading the Quran. That is my conclusion after reading the Quran and having had exchanges with Muslims on message boards. I also never read Karl Marx’s books.

If their ideology fails, communists blame the capitalists, while libertarians blame the government. The problem is that humans are unfit for communism, but also for free markets. Regardless of the system, people take advantage of each other’s weaknesses and the system itself. If you held alternative views like me, they accused you of being Keynesian, which seemed worse than being Satan himself. They would argue for ending minimum wages and sell it as a way to help the poor. So, if you can’t earn a subsistence-level income in the so-called ‘free’ market, letting you starve would help you.

If their ideology fails, communists blame the capitalists, while libertarians blame the government. The problem is that humans are unfit for both communism and free markets. Regardless of the system, people take advantage of each other’s weaknesses and the system itself. If you held alternative views like me, they accused you of being Keynesian, which seemed worse than being Satan himself. They would argue for ending minimum wages and sell it as a way to help the poor. So, if you can’t earn a subsistence-level income in the so-called ‘free’ market, letting you starve would help you. To illustrate the mood among these people, on 23 February 2026, someone posted on the Austrian Economics subreddit, ‘It’s time for welfare reform: Maybe food is so expensive because 42 million people get it for free.’ Letting people die of starvation will lower food demand, which might lower food prices. Letting poor people starve for lower food prices for the rich is their line of thinking.

These Austrians may come up with all kinds of charitable motives as to why poor people should starve to pay for the boob jobs of rich women. It is how free markets work. If they were to run the world with their 19th-century views on economics, we would end up in an Oliver Twist novel. They were preoccupied with money like me, but in a way as if only money mattered. From that narrow perspective, their views make sense. Like them, I looked for a sound monetary system, so their views had my interest. Yet, they are a gathering of Scrooges McDucks fearing rot in their money vaults. A funny coincidence is that their hero, after whom they named their website, is Ludwig von Mises. So Mises for misers. Wall Street may be much more evil than they are, but they represent money worship in its purest form. Something isn’t quite right about these people. Central bankers may be the high priests of the money religion, but the Austrians consider them heretics. They are the true faith of Mammon, that is. And the great thing about them was that they had an unparalleled religious zeal to prove me wrong in monetary matters.

They raised new arguments and brought to my attention every error in my thinking they could find. And so, my mind kept grinding. Whatever these people say, the root of frivolous accounting is charging interest on money and debts. It may not be possible to end it because if you do, lending might stop, and the economy might collapse. However, if you investigate a problem, you must at least correctly identify the root cause. Otherwise, the solution will remain out of sight. Charging interest leads to crises. Only you can’t tell Scrooge McDuck. He thinks there is no life after usury. And so, I learned as much from the Austrians as from Strohalm. And perhaps it is no coincidence that the miracle of Wörgl happened in Austria. The answer to the issue that kept the Austrians awake at night, sound money, had been quietly gathering dust in their backyard all along.

In this way, two opposing fringe ideas, which were interest-free money with a holding charge and the Austrian School view, challenged each other in my mind. It was Hegelian Dialectic at its finest. I wasn’t constantly brooding over this issue, but I couldn’t let it go either. In 2008, this resulted in the synthesis of Natural Money. In a gold standard, you need positive interest rates to get the economy going. As a result, you end up with debts you can never repay in gold. At some point, you must face collapse or leave the gold standard. The latter is the easy short-term solution, so you can leave the problem for future generations to solve. Like Keynes said, ‘In the long run, we’re all dead.’

When you do that, the sky is the limit, and debts escalate to infinity, which we have seen happening, most notably after the end of the last remnant of the gold standard. The long run is now over, and Keynes is dead. It is up to our generation to address the problem. Limiting the interest rate to zero can curb money creation and stop irresponsible lending. If the money supply is stable and the economy grows, prices, including the gold price, would drop. And so, a well-managed currency with a holding fee could be stronger than gold. The economy can perform better without interest, allowing interest-free money to yield better returns. That was the beginning of Natural Money. Over the following decade, I developed a more comprehensive theory using modern monetary economics.

Latest revision: 21 April 2026

Featured image: Arab farmer taking straw to his farm. Public domain.

The future of interest rates

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There is a relationship between the amount of capital in a market economy, wealth inequality, savings, the level of debt, and interest rates. If an economic depression or a world war can be avoided, this relationship may decide the future of interest rates, and interest rates may go negative. If this makes you yawn, you have read the message already, and you can proceed with more exiting ventures like checking out what your friends are doing on Facebook or Instagram.

If instead you are thrilled by the idea of knowing more about this relationship, you may continue reading. Interest rates are the result of supply and demand for money and capital. Money and capital differ from consumer goods like coffee and services like haircuts. Money is a medium of exchange. You use money to buy and sell consumer goods and services. And capital isn’t consumer goods or services either. Capital is used to make these consumer goods and services. Hence supply and demand for money and capital need a separate explanation.

The price of money

A kilogram of coffee might cost € 7 in France and $ 8 in the United States. But what does that mean? Is coffee more expensive in the United States than in France? That entirely depends on the price of the dollar and the euro. If one dollar is worth € 0.80 then $ 8 is € 6.40, which is less than € 7. The price of the euro and the dollar change every day because of changes in supply and demand in the market for euros and dollars. But the price of euros and dollars is not the price of money, at least according to economists.

When economists talk about the price of money, they do not mean the price of dollars and euros. They talk about the interest rate. The supply and demand for money and capital determine the interest rate, hence the interest rate is the price of money. This price has a relation with the returns on capital because investments in capital are an alternative to lending. Money isn’t produced and consumed like coffee. If you borrow money, you may have to return it with interest. Borrowers may pay for the use of money, not for the money itself.

There are people and corporations that have savings as well as people and corporations that need money for consumption or investment. So there is supply and demand for money. But what determines the supply and demand for money and therefore the interest rate? It begins with the choice people have when spending their income. They can choose between consumption and saving. Savings can be used for investments in corporations to make products and services in the future.

Consumption versus investment

Economists sometimes use a simple model consisting of only households and businesses to explain things like consuming and saving. Households consume the stuff businesses make. In order to make that stuff, businesses need investment capital provided by households from their savings. It is important to notice that some households borrow and some businesses save, but on balance households save while businesses borrow to invest.

Households can do two things with their income. They can either use it for buying stuff, which is consumption, or save so that businesses can invest. For example, if you are a plumber and need to buy a new van for your business, which is an investment, you may have to forego a new car for your family, which is consumption, to save money for the van. You could also borrow the money for the van so that you can buy the family car too, but in that case someone else has to save so that you can borrow.

If people spend a lot of money on consumption, businesses sell a lot of stuff and make great profits. Businesses may be willing to invest so that they can sell even more and make even more profits. But if there are only a few savings because people spend a lot of money on consumption, so businesses might fear they can’t borrow and may be willing to pay higher interest rates, so that interest rates go up.

When interest rates go up, some businesses may abort their investment plans as they don’t expect to make enough money to pay for the interest. At the same time, more households may be willing to save. So when interest rates go up, the demand for money goes down and the supply of money goes up.

On the other hand, if households save a lot of money and do not consume, there are a lot of savings, but businesses are not willing to invest because they have trouble selling stuff and making profits. In that case households fearing that they don’t receive interest on their savings are willing to lend at lower interest rates, and interest rates go down. But how do households choose between consuming and saving?

Time preference

Economists believe that your choice between saving and borrowing depends on your time preference as well as the interest rate. Time preference is your willingness to forego your needs or desires in the present in order to fulfil your needs or desires in the future. An example can illustrate this. Assume that you want to buy a new car. You want that new car now but you don’t have the money. You can either wait and save to buy the car later or you can borrow to buy the car now.

Assume the car costs € 10,000. If the interest rate is 10%, you may realise that borrowing money to buy the car will cost you dearly. If you pay back € 1,000 each year, you repay the loan in 10 years. Over that period you pay € 5,500 in interest so the car will cost you € 15,500 instead of € 10,000. The alternative is to wait and save money to buy the car.

If you can manage saving € 1,500 per year and the interest rate on savings is also 10%, you could buy the car after less than six years. But then the car only costs you € 8,250 because you receive € 1,750 in interest. At an interest rate of 10% borrowing money to buy this car costs nearly twice as much as saving.

That may convince you to save and drive your old car for six more years. If the interest rate is lower, you may find borrowing more attractive than saving because you would rather have the new car now. Your time preference tells how strong your desire is to have the car now rather than later. It determines the interest rate you are willing to pay. Not surprisingly, different people have different time preferences.

Time preferences affect interest rates. Suppose that you want to borrow money for a new car. Suppose that you can only borrow the money from John. John has € 10,000 but he wants to buy a car too. Time preferences are going to decide whether or not John is going to lend you this money. If your time preference is 7% and John’s time preference is 5%, he will keep his old car for a while and lend the money to you. He may do this because he expects to buy a bigger car once you have repaid your loan with interest.

The interest rate could be anywhere between 5% and 7% depending on your and John’s negotiating skills. You won’t borrow at interest rates above 7% and John won’t lend at interest rates below 5% but any interest rate between 5% and 7% is acceptable to both you and John. In this way time preferences affect interest rates.

When interest rates go down, more people may borrow and fewer people may save because of their time preferences. If the interest rate is 4%, John may buy that bigger car now and borrow the money to buy it. If the interest rate is 8%, you would save to buy the car. When interest rates rise, more people may opt for saving instead of borrowing. The interest rate may move to where supply equals demand, which depends on the time preferences of lenders and borrowers but also on the demand for investment capital.

Capitalist spirit

Time preference only works for ordinary people. There are other people too. They are called capitalists. You probably have heard about them. Capitalists think differently. They suffer from a condition called capitalist spirit, which is having little or no time preference. Capitalists think that money spent on a frivolous item is money wasted, because when you invest your money, you end up with more money that you can invest again.

Capitalists save regardless of the interest rate. They rather invest in the distant future when they are dead than spoil their money on frivolous items during their lifetimes. Consequently capitalists end up with a lot of money when they die. What’s the point of that? Capitalists invest in businesses that make the frivolous items ordinary people enjoy. Ordinary people wouldn’t have invested their money, but spent it on frivolous items instead so that these items wouldn’t have been produced in the first place.

Perhaps you think that all capitalists are wealthy. But that isn’t true. Anyone who saves as much as he or she can regardless of the interest rate can be called a capitalist. What is important here, is that the capitalists as a group own most capital, and because capitalists own so much money and capital, and keep on saving and investing, there is a surplus of savings. And if there is a surplus of savings at an interest rate of zero, the interest rate should be negative according to the law of supply and demand.

Convenience

When you lend money to someone else you can’t use it yourself. There may be a new mobile phone you want to buy, but alas, you have lent out your money. This is not convenient. But then you remember with a smile on your face that you will be able to buy the phone but also an additional hip phone cover next year because you receive interest on that loan. So, if you don’t receive interest on your money, you may not bother lending it out because you may suddenly need it. Interest rates on long-term loans are higher than interest rates on short-term loans because the longer you can’t use your money, the less convenient it is.

When you deposit money at a bank, you lend it to the bank but you can still use it any time. That is possible because when you make payment, for example for legal advice, this money ends up the account of the lawyer. The bank will then be borrowing this money from the lawyer instead until she uses it to pay someone else. This is convenient so you are willing to lend money to a bank. For that reason interest rates on current accounts and checking accounts are low. Having money in a bank account is more convenient than cash so the bank may even charge you for having an account.

Risk

Lending out money can be risky. There are two types of risk. First the borrower may not pay back the loan. That could make you reluctant to lend. So if someone of questionable integrity wants to borrow money from you, and you fear that she may not pay back, she could offer you a very high interest rate so that you might think, ‘Well, she may not pay back, but the interest rate is very attractive, so I’ll take my chances and do it anyway.’

Second, money may become worth less in the future. This is called inflation. If there’s a lot of inflation then the money that buys a mobile phone today may only buy a phone cover next year. In that case you may spend your money right away on a mobile phone before it is too late. That is unless someone wants to borrow the money from you and offers a very high interest rate, so that your can buy a better model next year.

The business of a bank is to know its customers. For that reason lending money to a bank is less risky than lending out money to an individual or a corporation. And because banks are supposed to be good at managing risk, they can borrow at lower interest rates, meaning that interest rates on bank accounts are lower than those on loans.

And because banks know their customers and lend to many different people, they can manage risk better than you can and lend at lower interest rates than you are willing to because if you lend money to a someone you don’t know, you may desire a higher interest rate because you don’t know whether he or she is going to repay the loan.

Returns on investments

If you have money, you could invest it in corporations or real estate. Corporations pay dividends and real estate pays rent. If the rents and dividends are higher than the interest rate you get by lending out your money, you may prefer investing to lending. But investing is more risky than lending. If sales are sluggish, profits may go down and dividends may be cut, but lenders still get their interest. Nevertheless investments are an alternative to lending, so if investments offer better yields, you may opt for investing.

If someone wants to borrow money from you, the interest rate must be high enough otherwise you may invest this money instead. Other people who have money are in a similar position. Borrowers need to offer attractive interest rates in order to be able to borrow. Similarly, if dividends and rents are low, people with money may prefer lending to investing, so that borrowers can negotiate lower interest rates. In this way the returns on investments affect interest rates on loans.

The type of money used

The properties of money can affect interest rates. Just imagine that apples are money and you are saving to buy a house. If someone wants to borrow 1,000 apples from you, and promises to repay those 1,000 apples after 10 years when you plan to buy your house, you would gladly accept this generous offer. You may even accept an offer of 900 apples because that is better than letting your apples rot. In this case you would settle for a negative interest rate. But you would only do so if there are no alternatives.

If you could make 10% per year in the stock market, you could exchange your apples for Apple stock because their gadgets are in great demand and outrageously expensive. In that case, it doesn’t matter that apples rot and you could demand interest on a loan. But if returns on the stock market are low or when stock prices are fluctuating so wildly that you can’t sleep at night, you may prefer the offer of 900 apples.

If the money had been gold, you would never accept such an offer, even when the stock market is doing terrible. You can always keep your gold in a safe deposit box. Similarly, you wouldn’t accept negative interest rates on euros or dollars because you can take your money from the bank and store the bank notes in a safe deposit box. The problem with this is that if you put money in a safe deposit box, other people can’t use it for buying and selling stuff. And this can cause an economic depression.

Central banks

It is often said that central banks set the interest rate. But how do they do that? Central banks can print money. If central banks believe that the interest rate is too high, they print more money so that there is additional supply and interest rates go down. On the other hand, if central banks believe that the interest rate is too low, they print less money so that interest rates go up. If the central bank says that it sets the interest rate to 3%, this means that it will print precisely enough money to keep the interest rate at 3%.

Why do central banks print money? Money isn’t produced and consumed like coffee. If you borrow money, it has to be returned with interest. Most money is debt so where does the interest come from? Capitalists let their money grow on their bank accounts so the money to pay the interest from must come out of thin air. Individual borrowers may be able to repay their debts with interest but on aggregate borrowers can’t.

More money needs to be borrowed to pay for the interest. That’s why the total amount of debt increases each year. And if people aren’t borrowing enough, the central bank may print more money to prevent a financial crisis.

Sometimes people don’t borrow enough to keep the economy going and sometimes they borrow too much so that the economy is overheating. Central banks adapt their money printing to prevent these things from happening. Central banks raise interest rates and print less money (or stop printing money or even destroy money) when they want people and businesses to borrow less and they lower interest rates and print more money when they want people and businesses to borrow more.

The future of interest rates

Interest rates went down because capitalists acquired more and more capital over the years and kept on saving and investing regardless of the interest rate. In the past returns on capital have mostly been higher than the economic growth rate while most returns were reinvested so that a growing part of total income was for capitalists. As capitalists reinvested most of their capital income, this is not sustainable in the long run.

interestvers
Capital income (red) versus total income with capital income growing faster than total income

The graph above shows how total income and capital returns (in red) develop if the economic growth rate is 2%, the return on capital is 5%, capital income starts out as 10% of total income, and all capital income is reinvested. After 25 years the economic pie has grown faster than interest income and more is available for wages. At some point interest income starts to rise faster than total income, and less becomes available for wages. And after 80 years there’s nothing left for wages.1

This graph explains a lot about what is going on in reality. When wages started lagging, people couldn’t afford to buy all the stuff corporations made. As a consequence business profits, which is capital income, went down. In the short run it was possible to prop up business profits by allowing people go into debt to buy more stuff. But at some point people couldn’t borrow more unless interest rates went down. As capital income went down, capitalists became willing to lend money at lower interest rates, allowing people to borrow more to buy stuff. As interest rates went lower, more and more people went into debt because interest rates moved below their time preferences.

Nowadays most people are borrowing from the capitalists, for instance via mortgages, car loans, and credit cards, but also via governments as governments borrow from the capitalists too. Many people and governments can’t afford to borrow more. Interest rates are already near zero and may need to go negative if the law of supply and demand is going to do its job. In that case capitalists may start handing out money to the rest of us so that we can keep on buying the stuff their corporations make.

Capitalists may only lend at negative interest rates if money is like apples and not like gold.2 When interest rates are negative, people may buy land or real estate so that the prices of these properties may rise. Property taxes are often based on the value so properties may become less attractive at higher prices. Alternatives are gold or bitcoin, but at some point gold or bitcoin may become so expensive that the risk of losing money on these investments could deter people from buying more. Nevertheless, these alternatives put a constraint on how low interest rates can go. Interest rates must remain attractive for investors.

1. The End Of Usury. Bart klein Ikink (2018). Naturalmoney.org. [link]
2. Feasibility Of Interest-free Demurrage Currency. Bart klein Ikink (2018). Naturalmoney.org. [link]

Of Usury, from Brant's Stultifera Navis (the Ship of Fools)

The Problem Of Interest

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Compounding

Imagine that Jesus’ mother had put a small gold coin weighing 3 grammes in Jesus’ retirement account at 4% interest just after he was born in the year 1 AD. Jesus never retired but he promised to return. Suppose now that the account was kept for this eventuality. Imagine now that the end is near, and that Jesus is about to return. How much gold would there be in the account in 2018?

It is an amount of gold weighing 11 million times the mass of the Earth. The yearly interest would be a gold nugget weighing 440,000 times the mass of the Earth. There is a small problem, a fly in the ointment so to say. It would be impossible to pay out Jesus because there simply isn’t enough gold.

It might seem that the bank had to close long ago because of a lack of gold, but that isn’t true. As long as Jesus doesn’t show up it can remain open, at least if the borrowers are allowed to borrow more to pay for the interest. If the economy grows 4% it may not be such a big deal. The interest can be created out of thin air by making new loans that allow borrowers to pay for the interest. And if Jesus doesn’t claim his gold when he returns and accepts bank credit, everything will be fine.

There is a limited amount of gold while compound interest is infinite. As long as bankers can create money out of thin air to pay for the interest and people accept bank deposits for payment, everything is fine. Problems only arise when people demand real gold. A bank can go bankrupt when depositors want to take out their deposits in gold.

Central banks

Perhaps Jesus’ retirement account isn’t such a big problem after all. Our money isn’t gold but currencies central banks can print. Assume now that Jesus’ mother had put one euro in the account instead. One euro at 4% interest makes 22,000,000,000,000,000,000,000,000,000,000,000 euro after 2017 years. That may seem an intimidating figure, but the European Central Bank can take 22 pieces of paper and print 1,000,000,000,000,000,000,000,000,000,000,000 euro on each of them. And there you are. Something like this happened during the financial crisis of 2008. This is called quantitative easing. You may have heard that word before.

Central banks can print new dollars and euros to cope with a shortfall. In fact, this is what central banks often do. There is always a shortfall because of interest because most money is debt and interest on this debt needs to be paid. To make up for the shortfall, there are two options. First, people can borrow more. Second, central banks can print new currency. Both things can happen at the same time. Central bank decisions about interest rates are also about dealing with the shortfall caused by interest charges.

When central banks lower interest rates, people can borrow more because interest rates are lower. Central banks lower interest rates when people are borrowing less than is needed to cope with the shortfall. If central banks raise interest rates, people can borrow less because interest rates are higher. Central banks raise interest rates when people are borrowing more than is needed to cope with the shortfall and the extra money makes people want to buy more stuff than can be made. And if people don’t borrow at all, this is a crisis, and central banks may print more currency to cope with the shortfall.

Interest on capital versus economic growth

There is a problem central banks can’t fix by printing more currency. Interest is more than just interest on money. Interest is any return on investment. Throughout history returns on investments were mostly higher than the rate of economic growth. Most of these returns have been reinvested so a growing share of total income was for investors. This can’t go on forever because who is going to buy the stuff corporations make in order to keep these investments profitable? A simple example can illuminate that.

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

The graph above shows how total income and interest income (in red) develop with an economic growth rate 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 and 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 graph explains a lot about what is going on in reality.

In the short run it was possible to prop up business profits and interest rates by letting people go further into debt to buy more stuff. In the long run, the growth rate of capital income cannot exceed the rate of economic growth. Interest rates depend on the returns on capital so this can explain why interest rates went down in recent years. In the past interest rates below zero weren’t possible but from time to time there were economic crises and wars that destroyed a lot of capital. This created new room for growth.

Wealth inequality and income inequality

When interest rates go down, the value of investments tend to rise. If savings yield little this benefits the wealthy as most people have their money in savings while the wealthy own most investments. But it is important to know the cause otherwise you might think that interest rates should rise. The graph above shows that wealth inequality causes interest rates to go lower, hence redistributing income, for example via higher wages or taxes on the wealthy, can bring higher interest rates.

There is a difference between wealth inequality and income inequality. Your labour income and the returns on your investments are your income. If you are rich but make no money on your investments, your wealth doesn’t contribute to your income. In reality wealthy people make better returns on their investments than others because they have better information and can take more risk. Still, the graph shows that income and wealth inequality can’t increase indefinitely, and that returns on investments can’t exceed the reate of economic growth in the long run, hence interest rates need to go lower.

Most people pay more interest than they receive. The interest paid on mortgages and loans is the proverbial tip of the iceberg. Interest is hidden in rents, in taxes because governments pay interest on their debts, and the price of every product and service because investments have to be made to make these products and services. German research has shown that 80% of the people pay more in interest than they receive, while only the top 10% of richest people receive more in interest than they pay. Lower interest rates benefit most people despite some side-effects that work in the opposite direction.

Economic cycles

Humans are herd animals. They buy stuff and even 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. So prices may go up when people are in a buying frenzy and may go down when sales dry up.

When there is a buying frenzy business owners are optimistic and do a lot of investments, and often they go into debt to make those investments. But if suddenly customers disappear, they may be stuck with unsold inventory and debts they cannot repay. Businesses may then have to fire people. Those people are then left without income, and cannot repay their debts too, so sales will go down further. If their debts are not repaid, banks could get into trouble. In most cases the economy will recover. In the worst case banks go bankrupt, money disappears, the economy collapses, and an economic depression takes off.

Interest can make things worse. Assume that you have a business and expect to make a return of 8%. You have € 100,000 yourself and you borrow € 200,000 at 6%. You expect to make 8% so borrowing money at 6% seems a good idea. If you only invest your own € 100,000 you can make € 8,000, but if you borrow an additional € 200,000 you can make € 12,000 (8% of € 300,000 minus 6% of € 200,000, which is € 24,000 minus € 12,000). The balance sheet of your business might look like this:

debit
credit
inventory
€ 250,000
loan 6%
€ 200,000
cash, bank deposits
€ 50,000
owner’s equity
€ 100,000
total
€ 300,000
total
€ 300,000

If sales disappoint and you only make a return of 2% on your invested capital of € 300,000, which is € 6,000, you make a loss because you pay € 12,000 in interest charges. You may have to fire workers. Businesses can go bankrupt because they have borrowed too much and have to pay interest, even when they are profitable overall. Sales often disappoint when the economy fares poorly. This means that more businesses face the same difficulties and make losses because of interest payments. They may have to fire workers and these workers lose their income. This can worsen the slump.

Interest, economic depressions and war

Silvio Gesell discovered that interest rates can’t go below a certain minimum because lending would then stop. Money would go on strike as he put it. Why is that? Low yields make investing and lending money unattractive because of the risks involved. Debtors may not repay and banks may go bankrupt. Depositors then prefer to take their money out of the bank and keep it with themselves.

This can cause economic crises and depressions. Silvio Gesell lived around 1900. Interest rates below zero weren’t possible because of the gold standard. Depositors could go to the bank and withdraw their deposits in gold so that they didn’t have to accept negative interest rates. From time to time there were bank runs, economic crises and wars that destroyed a lot of capital. And this created new room for growth.

There may be a relationship between interest, economic depressions and war. In 1910 the amount of capital income (the red circle in the graph) relative to total income (the two circles together) was close to what it was in 2010. This could have led to an economic depression but then came World War I. The war destroyed a lot of capital so that there was new room for capital growth and interest rates could remain positive.

A few decades later the Great Depression arrived. If interest rates could have gone below zero in the 1930s, the Great Depression might not have happened, Adolf Hitler would not have risen to power and World War II would not have occurred. The currency of Wörgl demonstrates that negative interest rates could have ended the depression. After World War II interest rates never came near zero again. Governments and central banks printed more money. This caused inflation, which eroded trust in money.

People feared that inflation would make their money worth less so interest rates rose. In the 1970s the link between money and gold was abandoned because there was a lot more money than there was gold to back it. In the 1980s governments and central banks started policies to bring down inflation and to promote trust in money. As of 1983 interest rates went down gradually as a consequence of a renewed trust in money and central banks. Debt levels rose and interest rates went near zero.

Promoting inflation might not be a good idea. The end result is unpredictable. The best one can hope for is a poor performing economy and a lot of inflation like in the 1970s. But if interest rates rise because lenders lose their trust in money and debts, people may not be able to repay their debts, and the financial system might get into serious trouble. This can cause another great depression or another great war. But if the alternative is negative interest rates, stability and prosperity, then why not opt for that?
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Featured image: Of Usury, from Brant’s Stultifera Navis (the Ship of Fools). Albrecht Dürer (1494). Public domain.