Tag: Natural Money

1919 Cover of The Natural Economic Order

Feasibility of Interest-Free Demurrage Currency

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Natural Money is an interest-free demurrage currency. It features a holding fee on currency and a maximum interest rate of zero on money and loans. The Natural Money currency is an accounting unit only, as the holding fee, which may range from 0.5% to 1% per month, makes the currency unattractive to hold. Therefore, the currency will not circulate, nor will someone invest in it. Cash, bank deposits, bonds, stocks, real estate, and other investments aren’t currency and therefore not subject to the holding fee. Not paying the holding fee and the curtailment of credit, and thereby inflation, caused by the maximum interest rate, can make lending at negative interest rates attractive.

Natural Money features a separation between regular banking, also known as commercial banking, which involves lending and borrowing, and investment banking, also referred to as participation banking, which involves participating in businesses. Regular banks guarantee returns to their depositors and use their capital to cover losses. Participating banks have shareholders who share in the profits and the losses. These two bank types should remain separated, even though one bank might offer both in distinct accounts. A commercial bank’s funds should be used only for lending. The maximum interest rate limits lending, allowing equity to replace debt in the financial system.

Evidence from history

There is little historical data on the subject of interest-free demurrage currency. Financial systems founded on interest-free money with a holding fee have never existed. There were holding fees and interest bans, but the combination of both has never existed. More importantly, a usury-free financial system requires a high-trust society founded on moral values where investments are safe, and is only feasible with the help of several relatively modern financial innovations. That all seems too good to be true, but we can have dreams. And so, the evidence from history is of limited value.

Several ancient societies have seen usury-induced economic crises. Extreme wealth inequality, often accelerated by usurious lending, regularly coincided with societal collapses. It is a recurring pattern that has existed since time immemorial. The Sumerians were already familiar with charging interest and its disastrous social consequences. Sumerian rulers began implementing debt jubilees as early as 2,400 BC, cancelling debts and freeing debt slaves. Other cultures, such as those in Israel, have banned charging interest. Israel also had debt jubilees every fifty years.

The Egyptian grain-backed currency existed for over 1,000 years, suggesting it provided monetary stability. Nevertheless, ancient Egypt has seen economic crises, often due to droughts causing crop failures, high taxation during warfare, or a weakening central government. The government mitigated famines with its grain reserves, but prolonged famines depleted these facilities, leading to civil unrest and, sometimes, a collapse of order. There is no evidence of social benefits of this money for Egyptian society. Charging interest was common, and Egypt had debt cancellations.

In the Middle Ages, the Church forbade charging interest. Christians, like Jews, were each other’s brothers and couldn’t charge each other interest. When economic life became more developed, the ban on interest became difficult to enforce. In the 14th century, partnerships emerged where creditors received a share of the profits from a business venture. As long as the share remained profit-dependent, it was not illegal, as it was a participation in a business rather than lending at interest.1 Islamic finance works with similar principles.2

In the 17th and 18th centuries, interest ceilings replaced bans. To circumvent the interest ceilings, a creditor and debtor could secretly agree on a fraud, whereby the creditor handed over less money than stated in the loan contract, so that the borrower actually paid more interest.3 More recent experiences with Regulation Q in the United States, which imposed maximum interest rates on bank accounts, suggest that a maximum interest rate is enforceable only if it does not significantly impact the bulk of borrowing and lending.4

An effective ban on usury requires a society grounded in moral values rather than profit. It requires us to live modestly and within the planet’s limits. It also requires societies to care for vulnerable individuals, so that they don’t fall prey to usurers. You shouldn’t charge interest, not merely because it is illegal, but because it contributes to something profoundly evil. That points to a broader problem. We should care about the world and consider the consequences of our actions. Even when what we do is legal, it doesn’t mean that it is good.

Implementation

To implement Natural Money, interest rates must already be low or negative. Attempting to lower interest rates when market conditions don’t justify that move would likely scare investors. Low interest rates require trust, which requires financial discipline, including fiscal discipline from governments. That doesn’t equal austerity, since governments earn interest on their debts when interest rates are negative. The transition preferably is a gradual process that the authorities communicate in advance. Whether that is possible at all remains to be seen, as the implementation may occur in exceptional times.

If there is still a functional currency, the first step is for the government to balance the budget. The second step is to decouple cash currency from the administrative or central bank currency. The move encompasses retiring central bank-issued banknotes and replacing them with treasury-issued banknotes. Not everyone will hurry to a local bank office to exchange banknotes, so the central bank-issued banknotes must be exchangeable at par for the new banknotes for a considerable period.

As long as interest rates are significantly above zero, a holding fee won’t bring them down. Setting a maximum interest rate can lower interest rates by curtailing credit, thereby cooling the economy. To avoid disrupting financial markets, the implementation must be gradual. The maximum interest rate should be high enough to avoid disrupting the economy. Initially, authorities could set the holding fee at a low percentage, or not at all. As interest rates fall, authorities can lower them.

The zero lower bound is a minimum interest rate. It operates like a price control by preventing interest rates from moving freely to the rate where supply and demand for money and capital balance. That is to the advantage of the wealthy, as they can take the economy hostage by demanding a minimum return on their investments. When returns are low, investors may prefer cash over investments, which can hinder an economic recovery. Economists call it liquidity preference.

Low interest rates can prompt lenders to seek higher yields and take on more risk. Low interest rates allow borrowers to take on more debt. Low interest rates can promote investments that become unprofitable when the economy slows down. A maximum interest rate can prevent these situations from happening. A maximum interest rate caps the risk lenders are willing to take and promotes a deleveraging of balance sheets, so that even low-yielding ventures don’t go bankrupt because of interest-bearing debts.

Issues with the maximum interest rate

A holding fee will cause few difficulties, but a maximum interest rate is more problematic. Insofar as the maximum interest rate affects questionable segments of credit, such as credit card debt and subprime lending, this is beneficial overall. More serious issues can emerge with financing small and medium-sized businesses. Partnership schemes can fill in the gap, but it is hard to predict how that will play out. The maximum yield on loans is zero, making partnerships more attractive, as they can offer higher returns.

There may be objections to the limits Natural Money imposes on consumer credit. Still, there is little doubt that a maximum interest rate can improve consumers’ purchasing power, as borrowers won’t have to pay interest. As a result, there are fewer borrowing options, which may lead to the emergence of black markets. To make illegal schemes unattractive for lenders, lenders who charge interest could lose the money they have lent.

Zero is the only non-arbitrary number, making it more difficult to change the maximum interest rate. That may happen for political or other reasons. The salespeople of usury can find plenty. If it is one, why not two? Zero is a clear line. A positive interest rate, no matter how small, contributes to financial instability. All positive growth rates compound to infinity, so once we start the fire of usury, it will eventually consume us.

A maximum interest rate seems feasible if it is above the rate at which most borrowing and lending occur, thereby limiting the effects on liquidity in the fixed-income market. A maximum interest rate creates room for alternatives, such as private equity and partnership schemes. These alternatives can supplement the fixed-income market and mitigate the effects of the maximum interest rate. A maximum interest rate is beneficial overall if it mainly affects questionable segments of credit, such as subprime lending.

In the case of bonds, the maximum interest rate of zero applies at the time of issuance. Due to economic circumstances or issues with the debtor, the interest rate may rise and enter positive territory. Likewise, governments may issue long-term bonds that may have positive yields if interest rates rise later on. That is not a serious issue, as long as the interest rate was zero or lower at the time of issuance.

A more serious issue is the risk of liquidity problems. When interest rates rise, less credit becomes available at interest rates of zero or lower. Interest rates might increase due to a strong economy with inflationary pressures. There are always economic agents that must borrow at all costs to meet their present obligations, so if they can’t borrow, they might go bankrupt. Businesses and individuals need to deleverage and arrange credit in advance, such as an overdraft facility, with their banks.

Another equally serious question is the profitability of banks with Natural Money. The lending business of banks will likely shrink significantly. The assumption is that risk-free lending will be profitable. But what if it isn’t? In that case, banks may need to lower the interest rates on deposit accounts to a level below the interest rate on short-term government debt. In that case, the cash interest rate may need to be lower than the interest rate on short-term government debt to make it work.

Inherent stability

Ending usury is impossible without investors having trust in the political economy or the political and economic institutions of the polity issuing the currency. The most trusted political economies have the lowest interest rates because their governments are fiscally responsible. Natural Money requires taking it to the next level. With Natural Money, to borrow, the government must find lenders willing to lend in the currency at negative interest rates. The government will be better off borrowing at negative interest rates, which provides an incentive for budgetary discipline. That is the foundation of stability.

Extracting a fixed income from a variable income stream contributes to financial instability. Fixed interest payments can bankrupt a corporation even when it is profitable overall. Interest contributes to moral hazard, as it serves as a reward for taking risks. Investors expect to earn higher yields on riskier debt, so lenders take on these risks. The more uncertain an income source, the higher the interest rate needs to be to compensate for the risk of lending, but the higher the fixed interest rate, the more likely failure becomes, which reveals the destructive consequence of interest being a reward for taking risks.

All parts of the financial system are intertwined. Individual banks can transfer these risks to the system. And so, the risk management of individual agents can increase the overall level of risk in the system. The payment and lending system is a key public interest, so governments and central banks back it. Banks take risks and reap rewards in the form of interest, while public guarantees back up the financial system. The arrangement leads to moral hazard, a mispricing of risk and private profits at the expense of the public. A maximum interest rate can end these problems.

A maximum interest rate causes a deleveraging and a reduction in problematic debts, which has a stabilising effect on the financial system and the economy. Individuals and businesses must already take action before their debts become problematic. Maximum interest rates can distort financial markets. Most notably, there will be fewer options for smaller firms to borrow. Partnership schemes should fill that void.

Interest payments also affect business cycles. The mainstream view is that central banks should raise interest rates during economic booms to curb investment and spending, thereby preventing the economy from overheating. A rosy view of the future prevails during a boom, so higher interest rates seem justified and borrowing continues for some time. When the bust sets in, the picture alters, and an overhang of debt at high interest rates worsens the woes. It would have been better if these debts hadn’t existed in the first place.

That makes a usury-based financial system inherently unstable. Natural Money changes this dynamic. When the economy improves, higher interest rates increase the attractiveness of equity investments relative to debt. That reduces the funds available for lending. The curtailment of credit will prevent the economy from overheating and avoid a debt overhang. When the economy slows, negative interest rates provide stimulus. In the absence of a debt overhang, the economy is likely to recover soon. A Natural Money financial system is inherently stable.

Featured image: 1919 Cover of The Natural Economic Order. Wikimedia Commons.

1. Simon Smith Kuznets, Stephanie Lo, Eric Glen Weyl (2009). The Doctrine of Usury in the Middle Ages. Simon Smith Kuznets, transcribed by Stephanie Lo. An appendix to Simon Kuznets: Cautious Empiricist of the Eastern European Jewish Diaspora.
2. Sekreter, Ahmet (2011). Sharing of Risks in Islamic Finance. IBSU Scientific Journal, 5(2): 13-20.
3. K. Samuelsson (1955). International Payments and Credit Movements by the Swedish Merchant Houses, 1730-1815. Scandinavian Economic History Review.
4. R. Alton Gilbert (1986). Requiem for Regulation Q: What It Did and Why It Passed Away. Federal Reserve Bank of St. Louis.

1919 Cover of The Natural Economic Order

Discovery of Interest-Free Money

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In September 2008, the banking crisis was getting out of hand. Things were falling apart. It seemed as if the financial system could collapse at any moment and that civilisation, as we know it, would end. Today, the 2008 financial crisis is a distant memory, but at the time, not only did the financial press worry. Panic was setting in. It was like 1929. I had long feared an apocalyptic financial collapse and believed that usury, or charging interest on money and debts, would be the underlying cause. On the surface, the cause may appear irresponsible lending, but interest is a reward for the risk of default. Without interest charges on debts, there would be no irresponsible lending.

The events prompted me to watch the animated picture ‘Money as Debt’ on YouTube and reflect once again on Silvio Gesell’s ideas about charging a holding fee on money and using it to eliminate interest charges. I penned down my thoughts about interest-free money with a holding fee, and tried to make an ordered, coherent whole of them. The idea had never seemed workable. Why should you lend out money interest-free if you can receive interest elsewhere? It is why economists didn’t look into it more seriously and why interest-free money remained a fringe idea, mainly attracting eccentrics like me.

Then, in the first days of October, I made a startling discovery. Banning interest promotes financial stability by preventing usurious lending, irresponsible lending, and unproductive financial schemes. That would improve the economy. Think of it like so. When credit card debt and payday lending at high interest rates disappear, people will have more disposable income, and you will have no usurers living off the work of others. That would be more efficient. It also reduces the need for government and central bank interventions to manage the interest-bearing debt. Usury requires government deficits and the creation of money by central banks.

That is because most of our money is debt. If you go to a bank and take out a loan, the bank creates money out of thin air, but you must pay back the loan with interest. You repay the loan with money borrowed by someone else. And the money you need to pay the interest doesn’t exist. Someone else must borrow that as well. On a larger scale, due to interest charges, we need to add extra debt to pay off existing debts with interest. To prevent the usury scheme from collapsing, governments run deficits and central banks print money, which leads to inflation. The inflation rate is often higher than the interest rate you get on a bank account. The profits are for the bankers, who receive huge bonuses.

Now comes the explosive discovery. The economy would do better without usury. If the economy performs better, the yield on investments would be higher, so an investor would receive better returns with negative interest rates. The difference comes from inflation. Without interest charges, there is no need for government deficits and money printing. The economy can thrive without more debt, so there would be no inflation. During the Great Depression, the Austrian town of Wörgl issued a currency with a holding fee. Those holding the money had to pay a 1% monthly fee to keep the money valid, so they would spend it rather than save it. And so, the money kept circulating, and Wörgl’s economy boomed while Austria suffered from the depression.

And so I figured that if the money is interest-free, the currency’s value rises more than the interest you would receive on an interest-bearing currency. Think of it like so. You can have 2% interest with 5% inflation or -2% interest with 0% inflation. The latter would be a better deal. The question then becomes, why lend out money with interest when interest-free money offers better returns? If the idea is that good, and the ‘Miracle of Wörgl’ suggests so, investors would bring their money to the interest-free economy, and the usury economy would collapse. If this became more widely known, the idea would spread and terminate the usury financial system forever.

Until then, I had always believed that interest-free money was sound in theory, but impossible in reality, because rather than good intentions, efficiency drives changes in this world, which is also the reason why we are doomed. The only constant in history is the strong killing the weak. But this money could be the terminator of usury, and a better future for humankind suddenly seemed possible. An incredible power seemed to lurk behind it. And making this knowledge public, I speculated, could unleash an unspeakable force. The Austrian central bank banned the Wörgl money, so we don’t know how it would have ended if it had continued. Perhaps, we would have lived in an entirely different world. A similar type of money lasted for over a thousand years in ancient Egypt. Had I discovered the secret that explains these successes?

That gave me serious doubts. How could the experts have missed it? I was an amateur. And amateurs who think they know better than the experts have become a plague recently. ‘Think for yourself and do your own research,’ has become the motto of a growing squad of nutters that the Dutch would call Wappies. ‘If it snows, that proves climate change is a hoax.’ You know the type. Everyone can gather random posts and articles from the Internet and create their own version of the truth out of thin air. I was anxious about getting it wrong, which made me doubt the greatness of the discovery. It might be a good idea, but it can’t be that good. And that is correct, a decade of research later confirmed, but it is possible nonetheless. And the proof also came as we have seen negative interest rates in the next decade.

Then, on a website promoting Gesell’s ideas, I found the following quotes,

‘The creation of money that cannot be hoarded will lead to a different and more real kind of property.’

– Albert Einstein

‘Gesell’s name will be a leading name in history once it has been disentangled.’

– H.G. Wells

‘The application of Gesell’s principle of circulation of money will lead the nation out of the depression within two to three weeks. I am a humble student of this German-Argentine businessman.’

– Irving Fisher

‘The future will learn more from the spirit of Gesell than from that of Marx.’

– John Maynard Keynes

‘Gesell’s work will initiate a new epoch in the history of mankind.’

– Prof. Dr. B. Uhlemayr

‘Gesell’s discoveries and proposals are of the greatest importance for centuries to come.’

– Dr. Theophil Christen

These brilliant minds agreed that something epic lay beneath the surface and that it could change the future forever. John Maynard Keynes and Irving Fisher were among the greatest economists of their time. If Keynes believed Gesell would make us forget Marx, I might have found out why. And so, the Miracle of Wörgl and the grain money in ancient Egypt may not have been freak accidents but a sign of something more. Ending usury, the scourge that had haunted humankind for thousands of years, seemed within reach. While considering the implications, the following song played on the radio,

Summer has come and passed
The innocent can never last
Wake me up when September ends
Like my father’s come to pass
Twenty years have gone so fast
Wake me up when September ends

– Green Day, Wake me up when September ends

September had just ended. Silvio Gesell first proposed money with a holding fee in his book ‘Natural Economic Order,’ which he first published in German in 1916 as ‘Natürliche Wirtschaftsordnung.’ I figured that its abbreviation could be NWO, which stands for New World Order, not knowing that the German ‘Wirtschaftsordnung’ was, unlike in English and Dutch, one word. So, was my discovery meant to happen? Was it part of something bigger? These thoughts arose, ironically, because I didn’t see ‘Wirtschaftsordnung’ as a single word. It made me feel small and insignificant. Paranoia was creeping in.

What is less known, but definitely worth noting, is that the German Nazis also aimed to abolish interest and contemplated Gesell’s ideas. Gesell himself was not a Nazi, but a liberal and an internationalist. Adolf Hitler was more impressed by the ideas of Gottfried Feder, who had the same kind of moustache Hitler had. Feder had written ‘The Manifesto for the Abolition of Interest-Slavery’ around the same time Gesell wrote ‘The Natural Economic Order’ and proposed nationalising all banks and abolishing interest. Gesell argued for charging a holding fee on currency and not interfering with markets and banks.

I named the discovery Natural Money as a reference to the Natural Economic Order. Strange things began to happen. When I woke up at night, the clock always showed times like 2:22, 4:44 or 5:55, with no exception. That was creepy. Something seemed seriously off with reality. Then, my wife told me she was seeing those time prompts as well. Until then, I hadn’t told her that I was seeing them. Once you enter the Twilight Zone, it begins to affect you. Meaningful coincidences started to occur, making me open to suggestions. What happened around me and in the world seemed to interact with my thoughts. Even the covers and titles of the books in the bookshop at the train station in Leeuwarden radiated a sense of spookiness, with references to my situation. They call it synchronicity.

The animated picture Money as Debt started with a list of assassinated US Presidents who supposedly opposed the banking system, suggesting evil bankers were behind these assassinations, making me fear death under suspicious circumstances if Natural Money would get serious attention. Still, if a repetition of the miracle of Wörgl were to occur, the news would spread fast, and if it were that good, it would be impossible to stop. Killing me wouldn’t help. The Secret Service would be too late. Of course, I had worried far too much. I posted the idea on several message boards. Most people didn’t get it. I mailed the findings to 200 Dutch economic researchers. None of them was interested.

Natural Money had a more favourable reception on the message board of Opednews.com. It generated some discussion as some visitors saw the potential. Still, it didn’t lead to a further propagation of the idea. I also went to Strohalm’s office in Utrecht. They had been working on interest-free currencies for decades. The people of Strohalm received me politely, but they had other priorities. They had a promising project in Uruguay. Doubt crept in again. I didn’t know enough about monetary economics and the financial system to see whether it was an idea worth pursuing. And even if I was right, no one would listen, so I planned to give up and resume my life.

It was disappointing, but not as bad as being evicted from the dormitory by A* nineteen years earlier. To remind myself of that and make me feel better, I played the Sleepwalking album by Gerry Rafferty, the album I had come to associate with the events at the dormitory because of the lyrics of the first song, ‘Sleepwalking.’ And then I wondered whether A* had something to do with the discovery of Natural Money. Over the years, several incidents had occurred, suggesting that She was still interfering with my life. It didn’t take long before clues came up. There is a thin line between paranoia and psychosis. The lyrics of the fourth song of the album ‘On The Way’ were noteworthy,

Drifting along with the wind, telling yourself you can’t win
It’s over, and now we begin, oh yeah, we are on the way
…
Only one woman, one man, just doing the best that we can
There’s so much we don’t understand,
Oh yeah, but we’re on the way
Light shining down from the east,
bringing a love that won’t cease

– Gerry Raffery, On The Way

In my bed, I was imagining again. By giving up, I had just told myself I couldn’t win. Was this just the beginning? The beginning of what? What did I not understand? What was this love that won’t cease? Was my destiny connected with that of A*? I had loved Her in secret all that time, but never thought, or even hoped, that we could be together. The distinction between my make-believe world and reality, which had been there since I was a child, began to blur. The lyric wasn’t specific, so the suggestion came from me linking the album to the events in the dormitory. And I might still have ignored it if it weren’t for the fifth song,

People come and people go, friends, they disappear
There’s only one thing that I wanna know, tell me where do we go from here
Everybody’s on the make, everybody’s trying to get ahead
In a world like this, you just exist to feed the walking dead.
…
Lookin’ out on a world gone crazy, waitin’ for the fun to begin
The race is on, yeah, they’re gettin’ ready, Jesus, what a state we’re in
Meanwhile, down in my backyard, I’m sitting doing solitary
Now that I’ve milked the sacred cow, I just worry ’bout the military.
…
Get ready
Get ready

– Gerry Raffery, Sleepwalking

It is a strange lyric, and it made me think. Is the world about to go crazy, and is something about to start? We exist to feed the walking dead, which could be the defunct banking system, I reasoned. The phrase probably refers to what Karl Marx once wrote, ‘Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.’ I didn’t know that, so I made up my own interpretation. The sacred cow made me think of Joseph explaining the Pharaoh’s dreams, which is also not so obvious. Now, the story originates from a holy book, and one of the Pharaoh’s dreams involved cows, so that was the connection. Joseph introduced the granaries in Egypt, the story goes. Grain stored in these granaries became the basis of the Egyptian grain money, which, like Natural Money, had a holding fee to cover the storage costs.

These are some incredible leaps of thought that you wouldn’t make if you aren’t psychotic, so by then, I had crossed that line. Sleepwalking was the only album Gerry Rafferty had recorded outside the United Kingdom, and it was in the Netherlands, where I was living at the time. That was not a coincidence, I supposed, and I was right about that at least as it turned out. I had grown open to suggestions. Natural Money could change the world, some of the most brilliant minds had agreed on, and it was something epic, and it had to do with A*. And so, I was well on my way towards the shadow world where I was about to meet A* again after nineteen years. That evening, I felt A * trying to do a mind melt with me, like the Vulcans do in Star Trek, once again. This time, I didn’t resist. And there She was, on the other side. It seemed like a telepathic connection. By then, it was 11 November 2008.

Latest revision: 25 September 2025

Featured image: 1919 Cover of The Natural Economic Order. Wikimedia Commons.

Wörgl bank note with stamps. Public Domain.

Complementary Currencies

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The collapse of complex societies

In today’s globalised economy, imports and exports account for 40-60% of most nations’ GDP, so nearly every country has integrated into the world economy. That may change if the world economy collapses. A possible cause is a sudden loss of confidence in the US dollar, which is the world’s reserve and trade currency. A collapse of the world economy may trigger a reduction in complexity, commonly referred to as the collapse of world civilisation. Such a scenario is plausible, so it is prudent to plan for it. Perhaps, we can rebuild our civilisation with local initiatives. Usually, a collapse is involuntary. Things fall apart, not because we want to, but because we can’t afford our lifestyles anymore.

In ‘The Collapse of Complex Societies,’ Joseph Tainter argues that collapse is a sudden loss of complexity because the cost of complexity outstrips its benefits, leaving us better off with simpler lives. If you can’t afford food, life can be better without mortgages, taxes, medical bills, tuition costs, and most other things you buy if it means that you have something to eat. It is not that housing, government, education, and businesses have no use. After all, complexity solves problems. Still, we could do with less, accept life as it is, and lead agreeable lives without social media and new treatments for cancer. It may seem disagreeable, but the Amish are content with that lifestyle. And we may have to.

In such situations, communities and families take on a greater role at the expense of markets and states. Village life in the past wasn’t ideal. Abusive parents could do as they pleased and get away with it. The state didn’t interfere. And if you were gay, you had better not tell. Today, the idea of community has changed. You can set up a community with like-minded people. And there has been some progress in the degree of diversity people accept, so you may not have to. Collapse means that states and markets retreat, even though the degree to which they will is unknown at present. Ideally, self-sufficiency and widely agreed-on moral values will fill in the void, but we will not return to the dark ages.

Perhaps we can learn to live in harmony with one another and with nature. That is unlikely to happen, unless a new world religion emerges. Another requirement is breaking free from the stranglehold of usury and trade. Local money enabled Wörgl to achieve some economic independence by keeping money circulating within the local economy and encouraging townspeople to buy local products. When you use regular money, such as the euro, you can buy on international markets. The money will leave the local economy and may end up on the other side of the world. You don’t know what your money will do there. It might facilitate drug trades or child labour.

Breaking free from markets

Today, there are thousands of local and regional vouchers, but few were as successful as the Wörgl scrip. One notable exception was the Red Global de Clubes de Trueque (Global Network of Barter Clubs) during the Argentine Great Depression of 1998-2002. It was an even more spectacular success. The network emerged from local initiatives following the collapse of the Argentine banking system, enabling millions to exchange goods and services using local vouchers called créditos. Argentinians lacked a reliable medium of exchange, so barter clubs, which had initially been a lifeline for the unemployed, eventually helped a significant portion of the middle class, many businesses, and some factories.

You can see the role of usury and international trade and finance in these crises. In Wörgl, a holding fee on money brought the local economy back to life, indicating that the global economy required negative interest rates, which were impossible in a usury-based financial system. To maintain a stable currency for their payments, the Argentinians could have borrowed US dollars in global markets. Due to Argentina’s creditworthiness, it could only do so at a high interest rate, which would have further eroded the country’s finances. The Argentinians would have used these US dollars to purchase foreign goods on international markets, leaving the Argentinians soon without a means of payment again.

Had Argentina been a closed economy that had only bartered with the outside world, the crisis wouldn’t have happened. That is only hard to carry out. Traders would undermine the scheme by smuggling marketable goods in and out of the country. Only a few totalitarian regimes, like Nazi Germany, succeeded in doing this. Still, the thought experiment of a closed economy explains why barter clubs were successful. And it partly explains the economic miracle of Nazi Germany. The Argentinians participating in the barter clubs had nothing to offer to international markets. Or, they supported the clubs to help their communities and were willing to forego better deals available in global markets.

Limitations

Amid a worsening depression, the Wörgl economy improved, and unemployment dropped. Wörgl achieved this by breaking free from usury and the market. The Argentinian network of barter clubs also did. And there lies a significant issue. Modern economies utilise goods and services that require a scale that only larger markets or global initiatives can provide. One of them is finance. It is probably impossible to develop local financial markets for scrip, let alone make them usury-free. The options for spreading risks in small markets are limited. The day you can go to the bank to get a mortgage in local scrip may never come.

The initiatives were successful because of an emergency. There was a lack of a reliable medium of exchange. The Argentinian barter vouchers weren’t legal tender and had no backing of a national currency. Millions of people joined the network, but it declined after 2001. The network had no organised structure. There were thousands of barter clubs in the network, each with its own notes. The clubs accepted each other’s vouchers, so some clubs committed fraud by printing additional vouchers. The Argentinian economy recovered in 2002, so the need for the barter clubs also diminished.

Whether the local or regional money is a currency or a voucher depends on the setup. An exchangeable government currency inspires trust. Most initiatives issue vouchers, but some have a currency reserve backing them. Most are private, and the money is hardly ever legal tender. Typically, these initiatives have a specific goal, such as strengthening the local community or economy. The money issued by the Austrian town of Wörgl was as close to a currency as local money can get. A government issued it, accepted it for tax payments, and guaranteed the exchange rate with the regular currency.

The Wörgl scrip and the Argentinian barter clubs demonstrate that local currencies and vouchers can succeed in times of crisis when the circular money flows have collapsed, either due to deflation (leading people to hoard money) or inflation (making the country’s currency worthless). It is also possible to integrate these local economies into a larger economy through these monetary exchanges. However, when the economy is doing well and the circular flows are functioning, the role of these monies becomes marginal. And so, they complement the regular financial system and are complementary currencies.

If you can receive internationally accepted currency, such as euros, you prefer them to barter vouchers because they inspire more trust. In times of crisis, you may be willing to take less trustworthy money if that is the only one available. It will be impossible to have a global network of local vouchers. Money operates in a hierarchy of trust. Exchangeability in a regular currency makes them more trustworthy. Imagine that there are 1,000,000 barter clubs issuing vouchers worldwide. How can you know that a note is genuine, and, if so, that the club issuing it is not scamming the system? And so, a voucher or currency can best only circulate in the area where everyone knows it.

Credit means trust, and as a Dutch proverb says, trust comes on foot and leaves on horseback. It is hard to build, but easy to lose. There are always individuals trying to scam the system. The human desire to live off the work of others is eternal. It is the foundation of capitalism, as it is what investors seek to do. And people try to use the government for their gain by demanding benefits, favourable regulations, or lower taxes. It is also a reason why trade and usury exist, not the only one, of course, but it is good to keep this in mind. The Greek god of the merchants was also the god of the thieves. It is a cynical view, as most people are honest, but systems of trust are often as strong as their weakest link.

A local economy typically offers fewer choices and often poorer-quality products than international markets. You may accept these drawbacks to support your local community, since the best deal in the market may not be the best deal for your village or country. Walmart might be cheaper and offer a wider variety of choices, but buying at Walmart comes at the expense of local stores, factories, and suppliers, so that if you buy at Walmart, your sister or neighbour ends up unemployed and must move to the city to find a telesales job in the bullshit economy.

Making it work

Imagine that everyone does something helpful rather than wasting energy and resources in the bullshit economy, that no one is on the dole, and that people with limited abilities contribute what they can. Imagine that we respect nature and that the economy is sustainable. That might be possible when we end the dictatorship of usury and markets. In that case, we may work only twenty hours per week, have enough to live on, and can do as we please for the remainder of our time. Okay, we can’t visit Disney World or watch Formula 1 car racing, which are senseless, wasteful activities, so we must entertain ourselves with other things, like playing soccer or singing in a choir.

Since 1934, Switzerland has had a business-to-business barter cooperative, WIR, which issues credit, the WIR franc backed by assets the members have pledged in collateral. Businesses trade goods and services without using cash, allowing them to work with less financial capital, clear excess inventory, and build new business relationships. The United States has several barter organisations with varying credibility. Most are for-profit, so serving a community is not their primary objective.

Another scheme that can strengthen the local community is the Farmer-Citizens Initiative, also known as the Pergola Association. The market for agricultural produce is competitive, subjecting farmers to international finance and global markets. Farmer-citizens’ initiatives have varying setups. Usually, citizens pay a subscription fee to cover the farm’s expenses in exchange for a share of the produce. It enables farms to diversify and offer a broader range of food products. Rather than exploiting immigrants, farmers may hire locals to do chores. That is possible because these farmers don’t produce for global markets. The transactions can be in local scrip.

Government support can help. The Wörgl municipality accepted its currency for tax payments. Complementary currencies are not a recent invention. Accepting a currency as payment for taxes, or even requiring payment in that currency, has been a way for governments to generate demand for it, allowing them to issue currency without backing it in precious metals. In England, tally-stick money circulated within the country, as it had value only there, allowing local state money to coexist alongside the merchant’s money, gold coin, insulating the nation’s economy from the whims of international trade.

In a Natural Money financial system, local governments, such as municipalities, can issue local and regional currencies backed by national currencies or the global reserve currency (GRC), which are debts of national governments or the world government in the International Currency Unit (ICU). In a more decentralised world with a uniform law system, nation-states aren’t the highest authority. They, however, issue debts in the ICU, so there can be national currencies based on these debts. Municipalities can issue debts in the ICU. Using them as backing for local currencies makes maintaining parity with the national currency a challenge. And so, a full backing is of the essence.

To end usury and have lending, you not only need trust, but also efficient financial markets. Interest rates below zero can only exist when lenders expect repayment and the currency to have a stable value. In a small community, there are few lenders and borrowers, resulting in limited options. Raising capital for a new business or a mortgage in a local currency is probably impossible. And if a single business fails, a small bank can get into trouble. In larger financial markets, banks can diversify their investments.

Local monies are complementary, supplementing the regular financial system rather than replacing it. Preferably, their value stays on par with the regular currency. Only a full backing like in Wörgl can guarantee that. Small-scale lending and borrowing in these currencies based on personal trust is possible. It is not feasible to develop financial markets in them. Still, in a future where communities become increasingly self-sufficient, complementary currencies will play a more significant role than they do today.

To make it work, we should have motives beyond securing the best deal or maximising profit. So far, these other motives haven’t moved mountains. That is because only faith can. Money gives us a false sense of security. It promises us that we can buy anything we want, at any time we want. But money is not a basement full of foodstuffs or safety to walk the streets. Once we have ruined this planet and society falls apart, we will find out. Still, we put our faith in money. If it is not the euro, we put our faith in gold and silver rather than our communities. That is because trade and usury have destroyed them.

Latest revision: 12 November 2025

Featured image: Wörgl bank note with stamps. Public Domain.

Wörgl bank note with stamps. Public Domain.

Short Introduction

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End of growth

The last 200 years have been an era of exceptional economic growth, unlike anything the world has ever seen. Like any exponential phenomenon in a limited room, that growth will end. The best comparison is cancer. If it goes untreated, the host dies. The end of growth, whether it is by death of the host or treatment, has implications for capital, which is addicted to positive returns made possible by squandering planetary reserves. For most of history, there was a shortage of capital. But for the first time, there is a massive excess invested in the bullshit economy, transforming energy and resources into waste and pollution to make money for investors by producing and marketing non-essential products and services in a competition that is about to make humans redundant.

For most of history, economic growth has been negligible. However, it averaged 1.5% over the last two centuries and will soon return to zero, or possibly even lower, perhaps much lower. That has implications for returns on investments, the financial system and interest rates. Investors have become hooked on positive returns, so there must be growth. Otherwise, they lose confidence. It is grow or die, but growth will kill us. And so, we face the prospect of an economic collapse and a collapse of civilisation. We are near a technological-ecological apocalypse. There is a dark force operating behind the scenes that makes us commit suicide. It is usury, or the charging of interest on debts. It makes capital addicted to growth.

The survivors may debate the precise cause of the collapse. I have already received a newsletter email from a pundit claiming that a lack of very cheap oil is leading to debt problems. Future generations may blame the planet for being finite, rather than seeing that human beings were so foolish as to build their civilisation on usury, so that it can only survive through economic growth. Before modern times, humans managed to live without economic growth, as there was hardly any capital and no interest-bearing debt. Past civilisations facing usury-induced economic collapses either disappeared, banned interest, or instituted debt cancellations.

The past 200 years have indeed been exceptional, and that miracle was primarily due to low interest rates. Efficient financial markets promoted growth by depressing interest rates, allowing economic growth to finance the interest. That has blinded us from the financial apocalypse that is upon us. Low interest rates have already brought us unprecedented wealth, albeit at the expense of the planet and future generations. When economic growth returns to sustainable levels, the interest on outstanding debt can collapse the world economy and bring down human civilisation. Luckily, a usury-free financial system for a future without growth already exists: Natural Money.

The nature of usury

Suppose Jesus’ mother had opened a retirement account for Jesus just after his birth in 1 AD at the Bank of the Money Changers next to the Temple in Jerusalem. Suppose she had put a small gold coin weighing three grammes in Jesus’ retirement account at 4% interest. Jesus never retired, but he promised to return. Suppose now that the bank held the money for this eventuality. How much gold would there be in the account in the year 2020? It would be an amount of gold weighing twelve million times the mass of the Earth. There isn’t enough gold to pay out Jesus if he returns.

And so the usurers hope he doesn’t come back, also for other reasons, of course. And for every lending, there is borrowing. The bank is merely an intermediary. There must be people in debt for an amount of gold weighing twelve million times the mass of the Earth. That would never happen. The scheme would have collapsed long before that, and the debtors would have become the serfs of the money lenders. That is why religions like Christianity and Islam forbade charging interest on money or debts.

The usurers have found a way around the issue. Our money isn’t gold anymore. Banks create money from thin air, so the nature of usury has changed. When you go to a bank and take out a loan, such as a car loan, you get a deposit and a debt, which the bank creates on the spot through two bookkeeping entries. You keep the debt, but the deposit becomes someone else’s money once you purchase the car. When you repay the loan, the deposit and the debt vanish into thin air. You must repay the loan with interest. If the interest rate is 5% and you have borrowed €100 for a year, you must return €105.

Nearly all the money we use is created from loans that borrowers must repay with interest. If our borrowing creates money, and we repay our debts with interest, then we may do so by borrowing the interest. That is also what happens in reality, and that is why debt levels continue to rise. So, where does the extra €5 come from? Here are the options:

  • Borrowers borrow more.
  • Depositors spend some of their balance.
  • Borrowers fail to repay their loans.
  • The government borrows more.
  • The central bank prints the money.

Problems arise when borrowers don’t borrow more, and depositors don’t spend their money. In that case, borrowers as a group are short of funds, and some of them are unable to repay their loans. If too many borrowers can’t pay at once, a financial crisis occurs. To prevent that from happening, the government borrows more, and the central bank prints money. They bring that money into the economy, allowing debtors to pay off their debts with interest. Interest compounds to infinity, and there is no limit to human imagination, so frivolous accounting schemes can go a long way before they collapse.

Necessity of interest

We take interest for granted, and economists believe that the economy needs it. Without lending and borrowing, a modern capitalist economy would have been impossible; without interest, loans would also be impossible. Money is to the economy what blood is to the body. If lending and borrowing halt, money stops flowing, and the economy comes to a standstill. That is like a cardiac arrest, which, if untreated, is fatal. And that is also why the financial press reads the lips of central bankers as if our lives depended on it. They manage the flow. Lenders have reasons to demand interest. These are:

  • When you lend out money, you can’t use it yourself. That is inconvenient. And so, you expect compensation for the use of your money.
  • The borrower may not repay the loan, so you desire compensation for that risk.
  • You can invest your money and earn a return. To lenders, the interest rate must be attractive relative to other investments.

That has been the case for a long time, and economists have gradually become quite good at explaining the past. Since then, we have seen financial innovations and are now facing the end of growth. Changes in the economy and the economic system may lead to the end of interest on money and debts. These are:

  • You can use the money in a bank account at any time. You can use the money you have lent as if it were cash. And a debit card is more convenient than cash.
  • Banks spread their risks, central banks help out banks when needed, and governments guarantee bank deposits, so bank deposits are as safe as cash.
  • There is a global savings glut. There are ample savings and limited investment options, which can make lending at negative interest rates attractive.

Negative interest rates are possible. In the late 2010s and early 2020s, the proof came when most of Europe entered negative interest-rate territory. The ECB was unable to set interest rates below -0.5%. Had it set interest rates even lower, account holders would have emptied their bank accounts and stuffed their mattresses with banknotes to avoid paying interest on their deposits, disrupting the circular flows.

As interest rates couldn’t go lower, the ECB took extraordinary measures, flooding the banking system with new money to boost the economy. Had there been a holding fee on cash, interest rates could have gone lower, and there would have been no need to print money. It has happened before. The Austrian town of Wörgl charged a holding fee on banknotes during the Great Depression, which led to an economic miracle by making existing banknotes circulate better rather than printing new money. Ancient Egypt had a similar payment system for over a thousand years during the time of the Pharaohs.

Miracle of Wörgl

In the midst of the Great Depression, the Austrian town of Wörgl was in dire straits and prepared to try anything. Of its population of 4,500, 1,500 people were jobless, and 200 families were penniless. Mayor Michael Unterguggenberger had a list of projects he wanted to accomplish, but there wasn’t enough money to fund them all. These projects included paving roads, installing street lights, extending water distribution throughout the town, and planting trees along the streets.1

Rather than spending the remaining 32,000 Austrian Schilling in the town’s coffers to start these projects, he deposited them in a local savings bank as a guarantee to back the issue of a currency known as stamp scrip. A crucial feature of this money was the holding fee. The Wörgl money required a monthly stamp on the circulating notes to keep them valid, amounting to 1% of the note’s value. The Argentine businessman Silvio Gesell first proposed this idea in his book The Natural Economic Order.2

Nobody wanted to pay for the monthly stamps, so everyone spent the notes they received. The 32,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings. Few did this because the scrip was worth one Austrian schilling after buying a new stamp. But the townspeople didn’t keep more scrip than they needed. Only 5,000 schillings circulated. The stamp fees paid for a soup kitchen that fed 220 families.1

The municipality carried out the works, including the construction of houses, a reservoir, a ski jump, and a bridge. The key to this success was the circulation of scrip money within the local economy. It circulated fourteen times as often as the schilling. It increased trade and employment. Unemployment in Wörgl decreased while it rose in the rest of Austria. Six neighbouring villages successfully copied the idea. The French Prime Minister, Édouard Daladier, visited the town to witness the ‘miracle of Wörgl’ himself.1

In January 1933, the neighbouring city of Kitzbühel copied the idea. In June 1933, Mayor Unterguggenberger addressed a meeting with representatives from 170 Austrian towns and villages. Two hundred Austrian townships were interested in introducing scrip money. At this point, the central bank decided to ban scrip money.1 The depression returned, and in 1938, the Austrians turned to Hitler, as they voted to join Germany.

Since then, several local scrip monies have circulated, but none has been as successful as the one in Wörgl. In Wörgl, the payment of taxes in arrears generated additional revenue for the town council, which it then spent on public projects. Once the townspeople had paid their taxes, they would have run out of spending options and might have exchanged their scrip for schillings to avoid paying for the stamps. That never happened because the central bank halted the project.

The economy of Wörgl did well because the holding fee kept the existing money circulating. A negative interest rate encourages people to spend their money, eliminating the need to borrow and keeping the money circulating in the economy. It demonstrated that the economy required a negative interest rate. A holding fee makes negative interest rates possible, as lenders do not have to pay it after lending the money. The one who holds the money pays the charge. That can make lending money at an interest rate of -2% to a reliable borrower more attractive than paying 12% for the stamps.

Joseph in Egypt

In the time of the Pharaohs, the Egyptian state operated granaries for over 1,500 years. Wheat and barley were the primary food sources in Egypt. Whenever farmers brought their harvest to one of the granaries, state officials issued them receipts stating the amount of grain they had brought in. Egyptians held accounts at the granaries. They transferred grain to others as payment or withdrew grain after paying the storage cost.

The Egyptians thus used grain stored in their granaries for making payments. Everyone needed to eat, so grain stored in the granaries had value.1 Due to storage costs, the money gradually lost its value. With this kind of money, you might have interest-free loans. If you save grain money, you pay for storage. And so, lending the money interest-free to a trustworthy borrower can be attractive. There is no evidence that this happened.

The origin of these granaries remains unclear. Probably, the state collected a portion of the harvests as taxes and stored them in its facilities. The government storage proved convenient for farmers, as it relieved them of the work of storing and selling their produce. And it made sense to have a public grain reserve in case of harvest failures.

The Bible features a tale that supposedly explains the origin of these granaries. As the story goes, a Pharaoh once had a few dreams that his advisers couldn’t explain. He dreamed about seven lean cows eating seven fat cows and seven thin, blasted ears of grain devouring seven full ears of grain. A Jewish fellow named Joseph explained those dreams to the Pharaoh. He told the Pharaoh that seven years of good harvests would follow, followed by seven years of crop failures. Joseph advised the Egyptians to store food for meagre times. They followed his advice and built storehouses for grain. In this way, Egypt managed to survive seven years of scarcity.

The money gradually lost value to cover the storage cost of the grain. It works like buying stamps to keep the money valid, like in Wörgl. Both are holding fees. The grain money circulated for over 1,500 years until the Romans conquered Egypt around 40 BC. It did not end in a debt crisis, which suggests that a holding fee on money or negative interest rates can create a stable financial system that lasts forever.

Storing food makes sense today, even when it costs money. Harvests may become more unpredictable due to global warming and intensive farming. We only have enough food in storage to feed humanity for a few months as it is unprofitable to store more. Food storage ties up capital, so there is also interest cost. But you can’t eat money, so storing food to deal with harvest failures is as sensible now as it was in the time of the Pharaohs. It reveals the stupidity of our current thinking. Our survival needs to be financially viable. Just imagine how that will play out once artificial intelligence and robots can replace us.

Natural Money

The miracle of Wörgl suggests that a currency with a holding fee could have ended the Great Depression. A myth circulating in the interest-free currency movement is that had the Austrian central bank not banned the experiment, the Great Depression would have ended, Hitler wouldn’t have come to power, and World War II wouldn’t have happened. That is a tad imaginative, to say the least, but a holding fee could have allowed for negative interest rates, and they could have prevented the Great Depression from starting in the first place. That is a lot of maybes.

And such money can last. The grain money in ancient Egypt provided a stable financial system for over 1,000 years. The grain backing provided financial discipline. The holding fee prevented money hoarding that could have impeded the flow of money. The money, however, didn’t promote interest-free lending, so the Egyptian state regulated lending at interest to prevent debt slavery. Egyptian wisdom literature condemned greed and exploitative lending, encouraging empathy for vulnerable individuals.

A holding fee of 10-12% per year punishes cash users. If the interest rate on bank accounts is -2%, an interest rate of -3% on cash is sufficient to prevent people from withdrawing their money from the bank. That becomes possible once cash is a separate currency backed by the government, on which the interest rate on short-term government debt applies. Banknotes and coins thus become separate from the administrative currency. So, if the interest rate on the cash currency is -3%, one cash euro will be worth 0.97 administrative euros after one year. And now, we have a definition of Natural Money:

  • Cash is a separate currency backed by short-term government debt and has the negative interest rate of short-term government debt.
  • Natural Money administrative currencies carry a holding fee of 10-12% per year, allowing for negative interest rates.
  • Loans, including bank loans, have negative interest rates. Zero is the maximum interest rate on debts.

Consequences

Natural Money doesn’t fundamentally alter the nature of bank lending. Banks borrow from depositors at a lower rate to lend it at a higher rate. With Natural Money, banks may offer deposit interest rates of -2% to lend it at 0% instead of borrowing it at 2% to lend it at 4%. A maximum interest rate of zero, however, has a profound impact on lending volume, as it severely constrains it, most notably speculative lending and usurious consumer credit, and it favours equity financing over borrowing in business. The strict lending requirements affect business loans, leading to deleveraging.

Businesses still need to attract capital. To address the issue, Natural Money features a distinction between regular banks and investment banks. Regular banks can guarantee promised returns and have government backing because the payment system is a public service. Investment banks invest in businesses and take risks. They are comparable to Islamic banks. Investment banks don’t guarantee returns. Depositors take on risk to get better returns, but they might incur losses or temporarily have no access to their deposits.

While the maximum interest rate restricts lending, the holding fee provides a stimulus, thereby stabilising the financial system. When the economy slows down, interest rates decrease, and more money becomes available for lending as risk appetite increases, making lending at zero interest more attractive. Conversely, if the economy booms, interest rates increase, and the maximum interest rate curtails lending. Consequently, central banks don’t need to set interest rates and manage the money supply, and governments don’t need to manage aggregate demand with their spending.

Reasons to do research

Stamp scrip and other kinds of emergency money have helped communities in times of economic crisis. The economic miracle of Wörgl during the Great Depression of the 1930s, however, was exceptional. The payment of local taxes inflated the impact of the money. Many townspeople had been late on their taxes, but once the economy recovered, they had the money to pay them. Some even paid their taxes in advance to avoid paying the holding fee. It generated additional revenues for the town, which it could spend on the projects. It provided a boost that would have petered out once the villagers had paid their taxes.3 It was not a miracle. It was too good to be true. Still, there is more to it.

Once interest rates reach zero, the markets for money and capital cease to function as interest rates can’t go lower. Money is to an economy what blood is to a body, so it must flow. When the money stops flowing, the effect is like a cardiac arrest, and the economy is in dead waters. To keep the money circulating, those with a surplus must lend it to those with a deficit, and the interest rate should be where the supply and demand for money are equal. When that interest rate reaches zero, lenders stop lending because the return is not worth the risk, so they wait for interest rates to rise. Money then ends up on the sidelines, leading to cardiac arrest, which can be the start of an economic depression.

It happened during the Great Depression. If interest rates had been lower, the markets for money and capital could have remained in operation. We have seen negative interest rates in Europe for nearly a decade. They could have gone lower had there been a holding fee on cash, or even better, a negative interest rate that is just low enough to prevent people from hoarding it. Once interest rates can go lower, a usury-free global financial system may be possible. That gives rise to several questions. Is it possible? Under which circumstances? What are the benefits and the drawbacks? What are the implications for individuals, businesses and governments? And how does it affect the financial system?

There is no alternative

Several other monetary reform proposals do not view the financial system as a system, which it is, and that isn’t hard to guess because the term ‘financial system’ already implies this. You can’t attach the wings of a Boeing to an Airbus and expect the thing to fly. The financial system is a complex system with numerous relationships, many of which existing reform proposals overlook. For instance, if you end the central bank, the economy will crash immediately, even if it is flying smoothly. And that isn’t even hard to find out.

The payment system is a key public interest, so governments and central banks stand behind it. Most banks are private corporations driven by profit. They take risks that might bring down the economy. And so, governments and central banks make regulations and oversee the banks. And banks create money, from which they profit, and we all pay for it via inflation. That is not good, but replacing the system with something worse is worse, like the word ‘worse’ implies.

There is no lack of ill-conceived proposals. And most fail to address the primary underlying cause of the dysfunction of the financial system, which is charging interest on money and debts, commonly known as usury. An inflation-free, stable financial system is possible. It may not even need central banks. But a sound reform proposal sees the financial system as a complex system with intricate relationships that interact with one another.

And so, Natural Money comes with a systems approach that aims to uncover the relevant relationships in the financial system and the consequences of changing them. It means that Natural Money is a comprehensive design. The gravest error you can make is to pick only the elements you like. That design will never fly. Nor would an Airbus take off with Boeing wings. So, you either buy Airbus or Boeing. In the case of Natural Money, that is not an option. There is no alternative.

Latest revision: 1 November 2025

Featured image: Wörgl bank notes with stamps

1. The Future Of Money. Bernard Lietaer (2002). Cornerstone / Cornerstone Ras.
2. The Natural Economic Order. Silvio Gesell (1918).
3. A Free Money Miracle? Jonathan Goodwin (2013). Mises.org.

Banking Operations

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Commercial versus savings banks

Historically, the banking sector comprised several types of banks. The distinction between commercial banks, which create money, and savings banks, which don’t, has lost its value due to the existence of efficient financial markets, where banks match terms through borrowing and lending. The distinction between created money and savings is arbitrary, as the following example demonstrates. Suppose that I work at a farm, and the farmer rewards me with a plot of land and leftover wood and materials from a defunct shed, which I use to build my home. After finishing my house, I go to the bank and take out a mortgage. The bank creates money out of thin air.

Until I went to the bank, no money had changed hands. Still, I was able to save for a home of my own. In other words, savings aren’t the same as money in a savings account. In this case, my savings are my home, and if the mortgage is a debt, the money I take out is my savings. To further illustrate the point, suppose that I have no money and also own no home. When I go to the bank for a car loan, the bank creates this money on the spot. If you think there are no savings, you are wrong again. The person who sold you the car had saved the car. I can even borrow money and put it in a savings account. And so, I created savings from thin air by borrowing money and lending it to the bank.

Full-reserve banking

A well-known monetary reform proposal is full reserve banking, as outlined in the Chicago Plan, which means there are only savings banks and no commercial banks that create money. It often resurfaces when banks go bankrupt. With full reserve banking, banks can’t lend out funds deposited in demand accounts or current accounts. Money in these accounts isn’t debt but backed by central bank currency or cash. And depositors can’t withdraw the money from their savings accounts on short notice. In this way, banks can’t go bankrupt because of depositors demanding payment in cash. With full reserve banking, loans must come from savings, which are funds that depositors can’t withdraw on demand, as they have entrusted them to the bank for an extended period.

Lack of cash is usually not the primary reason banks fail, but rather, loan write-offs. That was also the case during the 2008 financial crisis. Full reserve banking addresses a liquidity problem, whereas the crisis was a solvency issue that subsequently led to a liquidity issue. Banks ran into trouble, not because they lacked cash, but because they incurred losses on their loans. As a result, banks began to distrust one another and stopped lending to each other. The financial system can be safe with zero reserve banking, provided that banks are solvent, thus have sufficient capital, and own adequate liquid assets, such as government bonds, that they can sell to meet withdrawals. And so, a reserve requirement can better include liquid safe assets, such as government bonds, rather than currency alone.

Some proponents of full reserve banking are socialists who oppose privately controlled money creation, as they view it as a public subsidy to the private banking sector. Others desire a banking sector free from government interference, so a ‘free’ banking market without central bank interventions and deposit guarantees. At least that is something socialists and their opponents might agree on. Bank credit can contribute to economic cycles and financial crises. With full reserve banking, there would be less bank credit, and interest rates would be higher. To make lending possible, depositors must part with their money for a designated period of time to make it available for lending. As a result, fewer funds are available for lending, and interest rates would be higher.

Shadow banks

Full-reserve banking makes financial markets less efficient, allowing alternative schemes, such as shadow banks, to fill the gap. An example can illustrate that. Suppose that God has ordered banks only to use money in savings accounts for lending so that there is full reserve banking in Paradise. Eve and Adam only do business with each other. Both have €100 in their current account, which they use for their daily business transactions. This money is suitable for payment because it is in the current account. For that reason, they don’t receive interest. Assume now that the bank also offers savings accounts with an interest rate of 4% but money in savings accounts isn’t suitable for payment.

Then a financial advisor comes along, disguised as a snake, advising Eve and Adam for a reasonable fee on how to manage their payments between themselves and to deposit their money into a savings account. So, what you now read in Genesis is made up by bankers to hide their fraud, a conspiracy theorist might infer. But it is just a story. In this way, Eve and Adam both earn interest on their €100. They give each other credit, so that Eve can borrow €100 from Adam, and Adam can borrow €100 from Eve. They don’t need to keep money in their current accounts, so they deposit their funds into a savings account and earn interest. Everybody wins, Eve, Adam, and of course, that snakelike creature.

Initially, Eve and Adam had no savings, only money in their current accounts. The advisor’s scheme allows them to fabricate savings out of credit. It seems like creating money, but Eve and Adam gave each other credit. They agreed to pay later, which exposed both to credit risk. One of them might not repay because you can do so many different things with €100 than put it in a savings account. You can use credit, which is an agreement to pay later, and use it like money. And so, Paradise was lost. Similar schemes exist on a larger scale. These are shadow banks. Shadow banks don’t create money but credit. The difference between fractional reserve money and this type of credit may not be significant in practice, except that it is unregulated, resulting in little oversight.

When banks create money, they do the same. The banks act as intermediaries between Eve and Adam, allowing them to lend money to each other even when they do not conduct business with each other or do not trust each other. The bank also assumes the risk that a debtor will fail to repay and receives a reward in the form of interest. It is also credit, but we refer to it as money because the law regards bank credit as legal tender, thus money. The government backs this scheme, as a stable financial system is a key public interest. Banks must have sufficient capital and reserves to meet emergencies. For that reason, banks are subject to regulations, while shadow banks are not subject to these rules, allowing the latter to offer more competitive interest rates.

As a result, the role of traditional banking has declined. Large corporations could lend and borrow in money markets at rates better than those offered by banks. At the same time, retail investors could invest directly in money markets and get better yields than banks offer. This development started with corporate borrowing. It later expanded into mortgages. The primary reason for regulating banks is that they operate the payment system, which is of public interest, and can borrow from the Federal Reserve. It prompted banks to strip their balance sheets and expose themselves to off-balance sheet risks to generate higher returns on their capital. For instance, offering an emergency credit line to a shadow bank generated profits while not appearing on the balance sheet.

The 2008 financial crisis originated in shadow banks that invested in risky assets, rather than conventional banks that create money through lending. Shadow banks aren’t subject to the same regulations as traditional banks, so they made speculative investments in mortgages. These investments appeared safe because rating agencies failed to do their jobs. Regular banks encountered trouble because they had backed shadow banks, hoping to reap a quick profit from credit insurance. The word they use is off-balance sheet financing. The regular bank didn’t lend money, but guaranteed credit to shadow banks in case of emergency, which is as dangerous as keeping the mortgages on its own balance sheet. But that was legal. It allowed banks to make more money from the same capital. Money creation, therefore, wasn’t the problem, and replacing regular banks with shadow banks could further destabilise the financial system.

If a financial crisis were to occur with loan write-offs, full reserve banking would only ensure that money in current accounts is safe. However, the same problems would emerge in savings accounts. Savings banks can expose themselves to off-balance sheet risks, unless that is forbidden. And they can also go belly up. And they did. If the debtors of a bank fail to meet their obligations, the bank may face financial difficulties, and the savings it holds may be at risk. Also, with full reserve banking, governments and central banks may end up supporting savings banks and even shadow banks to ensure financial stability, thereby rendering the benefits of full reserve banking void. After all, the initial cause was never a liquidity problem, but a solvency issue.

Commercial versus investment banks

The Glass-Steagall Act in the United States severed linkages between regular banking and investment activities that contributed to the 1929 stock market crash and the ensuing depression. Separating banking from investing can prevent banks from providing loans to corporations in which they have invested. The measure aimed to make bankers more prudent. The separation of commercial and investment banking prevented securities firms and investment banks from taking deposits. The reason for the separation was the conflict of interest that arose from banks investing in securities with their own assets, which were their account holders’ deposits. Banks were obliged to protect the account holder’s deposits and should not engage in speculative activities.

The Glass-Steagall Act included the Federal Deposit Insurance Corporation (FDIC), which guaranteed bank deposits up to a specified limit. It also comprised Regulation Q, which prohibited banks from paying interest on demand deposits and capped interest rates on other deposit products. Maximising interest rates can limit the risks banks are willing to take on loans, as these risks can destabilise the financial system.

Until the 1980s, the legislation mainly remained unchanged. With the rise of neoliberalism, government regulations became increasingly disapproved of. Hence, the Glass-Steagall Act became increasingly disregarded, and diligent deregulators repealed it in 1999 as part of their effort to relieve businesses of government regulations that stood in the way of corporations making profits at the expense of the public good. Regulation Q ceilings for all account types, except demand deposits, were phased out during the 1980s. After the 2008 financial crisis, a renewed interest in the Glass-Steagall Act emerged.

In the United States, money market funds circumvented the limits imposed on banks by Regulation Q, luring depositors with higher interest rates, thereby undermining the prudent banking paradigm. The money market funds, which are shadow banks, invested in collateralised debt obligations (CDOs), such as mortgage-backed securities (MBS). The 2008 financial crisis started in money market funds, not traditional banks.

Natural Money works with the same principles. It distinguishes between regular banks, which provide loans, and investment banks, which are partnerships that invest in equity. Islamic banks also operate similarly. The maximum interest rate of zero works like Regulation Q, aiming to limit the risks banks are willing to take on deposits, as interest is a reward for taking on risk. Banking in a Natural Money financial system works as follows:

  • Regular banks make low-risk loans. The money in these banks is secure. The maximum interest rate is zero. And so, deposits have negative yields.
  • Investment banks don’t lend but participate in businesses by providing equity. They can rent houses and lease cars. Investment banks offer higher returns.
  • Both regular banks and investment banks can invest in government securities to manage their risk and meet withdrawals.
  • Regular banks can promise a fixed interest rate. The government may offer support and deposit guarantees.
  • Investment banks don’t guarantee returns. They pay dividends based on their profits. Its depositors are investors who can face losses.

Natural Money enhances financial stability by favouring equity investments over debt investments. The maximum interest rate makes debt investments less attractive. And there is no reward in the form of interest for engaging in high-risk lending, which enhances the financial system’s stability. It stands to reason that the integrity of the system depends on strict adherence to its principles and the termination of evasive, get-rich-quick schemes of financial parasites, which requires a belief in the vision behind the idea of a usury-free economy. Let’s not dismiss that as a fantasy immediately.

Sanitation of banking

The primary cause of the financial system’s failure is usury. Imagine what a maximum interest rate of zero on debts can do. Only the most creditworthy borrowers can get a loan. You may have to save and bring in equity before applying for a mortgage, and that may be the only credit you can obtain. Even an overdraft may be impossible. That may seem harsh, but it is even worse when indebted consumers reach the point of interest payments and can’t make ends meet. If you want to buy something, you have to save for it. Likewise, corporations need to attract capital rather than debt to meet their liquidity requirements. The financial sector will shrink, and much of modern finance may become redundant.

That said, individuals and businesses may obtain better deals in the money market, allowing them to opt for this option rather than a bank. The distinction between traditional banks and shadow banks may blur. Tradional banks may need fewer regulations while shadow banks may need more. That is because without interest, risk may disappear. The central bank may stand behind the payment system, but it may not have to stand behind the lending system. The implicit guarantee of central banks buying debt and issuing currency with a holding fee means that the warranty will remain unused.

Two other themes emerged during the 2008 financial crisis: ‘too big to fail’ and ‘too complex to understand.’ Complexity and size are the outcome of competition. The failure of a large bank can bring down the financial system, and the products traders in financial markets use to hedge their risks or improve their profitability can be complex. Our future civilisation could be simpler, so the sanitation of the financial system should encompass cooperation, simplification and diversification. It may look as follows:

  • There should be an exhaustive list of all legal financial products and their requirements. We shouldn’t allow other financial products to exist.
  • No bank should hold more than a certain percentage of the global market, and no bank should expose itself to more than a certain percentage of another bank.
  • Banks should share services where scale is crucial, such as technological infrastructure and advanced knowledge.

Smaller banks can achieve efficiency improvements by using the same technological infrastructure. As long as they are independent financial institutions, they may share an IT department and operate their businesses on the same software. It may even be a public infrastructure that all banks share, allowing for significant cost savings, while also sharing knowledge and implementing measures related to issues such as fraud prevention.

Latest revision: 13 November 2025

Featured image: Ara Economicus. Beverly Lussier (2004). Wikimedia Commons. Public Domain.