In the Bible is a story about a Pharaoh having bad dreams that his advisors could not explain. He dreamt about seven fat cows eaten. Then came seven lean cows who ate the fat cows. And then came seven full ears of grain. Seven thin and blasted ears devoured them. Joseph explained those dreams. He told the Pharaoh that seven years with good harvests would come, followed by seven lean years with crop failures. Joseph advised the Egyptians to store food. They followed his advice and built storehouses for grain. In this way, Egypt survived the seven years of scarcity.1
There is something that the Bible does not tell us. The Egyptians used this grain storage as a financial system. The historian Friedrich Preisigke discovered that the Egyptians used grain receipts for money.2 Farmers bringing in the grain received these vouchers. Bakers brought them back in and exchanged them for grain to make bread. In the meantime, these receipts circulated as money. The vouchers had value because you could exchange them for grain. According to the Bible, Joseph took all the money from the Egyptians.3 And so the Egyptians may have started to use the vouchers as money instead.
When you exchanged the receipts for the grain, you had to pay the storage cost. In this way, these vouchers gradually lost value over time. It worked like a negative interest rate. It may have helped to keep the money circulating and may have prevented financial crises caused by interest charges that prompted the Sumerians to cancel debts from time to time. During the reign of Ramesses the Great, Egypt became a leading power again. Some historians suggested that the Pharao’s wealth at the time came from grain money.
The money remained in circulation after the introduction of coins around 400 BC until the Romans conquered Egypt around 40 BC. The grain money survived for more than a thousand years. A holding fee on money and negative interest rates can create a stable financial system that lasts forever. It contrasts with the Sumerian interest-bearing debts that had to be cancelled from time to time to prevent permanent debt-slavery of the masses.
The Bible provides an explanation as to how the Egyptian grain storage financial system might have come to be even though the story probably is fiction. The Bible and the Quran also condemn charging interest. There appears to be a link between interest-free money with a holding fee and the Abrahamic religions.
Featured image: Joseph interpreting the Pharaoh’s dream. Illustrations for La Grande Bible de Tours. Gustave Doré (1866). Public Domain.
1. Genesis 41 [link] 2. A Strategy for a Convertible Currency. Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990 [link] 3. Genesis 47:15 [link]
Negative interest rates may be here to stay. Interest rates are the result of supply and demand for money and capital in financial markets. The factors that have caused interest rates to go down are still in place and may not go away. And so it may be better to allow interest rates to go down further and into negative territory. For that reason, we may need a holding fee on central bank money.
Most money is in bank accounts. It is loaned to banks by depositors. Central bank money is different. It is not a loan. The central bank money we all know is cash. But banks have accounts at the central bank. The balances in those accounts are central bank money too. So, if the central bank sets the interest rate, it is the interest rate on central bank accounts.
Cash comes with an interest rate of zero. Cash can be an attractive investment when interest rates on bank accounts are negative. Depositors may take their money from the bank and put their savings in cash. In Switzerland, where interest rates are the most negative, bank notes of 1,000 francs and safe deposit boxes are in short supply. Hence, interest rates can’t go further down as long as cash remains the way it is.
When people stop lending money and take their money from the bank, the economy runs into trouble. With a holding fee on central bank money of 10% per year, it can be attractive to lend out money at negative interest rates like -2% because you don’t pay the holding fee on money lent. That includes money in bank accounts. And so you may keep your money in the bank even when interest rates are negative.
Cash as a loan to the government
Only, a holding fee of 10% per year would make cash unattractive. And in Wörgl people had to buy stamps and glue them to the banknotes to keep them valid. This is cumersome. If the interest rate on cash would be a bit lower than interest rates on bank accounts, that might be enough to stop people from hoarding cash. And if we do not have to glue stamps on banknotes, cash would remain practical to use.
So if cash is a loan to the government rather than central bank money, the interest rate on short term loans to the government could be applied. That rate would be much better than the holding fee, for example -3%. There would be an exchange rate between cash and central bank money. The value of cash could gradually decrease at a rate of 3% per year so you don’t have to glue stamps on bank notes to keep them valid.
Negative interest rates reduce the balance in your account while inflation is stealthy. Wage changes are more visible than price changes as some prices go down while others go up. Even when negative interest rates and deflation are a better deal, people might not opt for it. Psychologists have found that for most people the pain of a loss outstrips the pleasure of a similar gain, which makes them risk-averse.
When interest rates are negative, money disappears so inflation will probably be lower. There might even be deflation, which means that prices on average go down. That could be a better deal than printing money to produce inflation as this money usually ends up in the hands of the rich while everyone else pays for the inflation. But most people simply do not like see their account balance go down because of a negative interest rate.
They prefer the illusion of a small gain that amounts to a loss in reality to the illusion of a small loss that is a gain in reality. And there is a risk that the expected benefits from negative interest rates do not materialise. It is not rational but human psychology is the way it is. There may be a fix for that by hiding negative interest rates and make them look like inflation. To explain how, we have to look at the characteristics of Natural Money:
Central bank money carries a holding fee of approximately 10% per year. If you own central bank currency then € 1,00 turns into € 0,88 after a year. This can make lending at negative interest rates attractive.
Interest rates on bank accounts might be around -2% per year in terms of central bank money, so people don’t pay the holding fee but the interest rate banks offer.
Cash is a short-term loan to the government and carries the interest rate of short-term government loans, which might be -3%.
Central bank money and cash are separate currencies. They have an exchange rate. Cash gradually loses value relative to central bank money.
Making cash the money in people’s mind
If balances of bank accounts are expressed in cash rather than central bank money, negative interest becomes hidden from the public. The interest rate on short-term government loans is one of the lowest. Banks must be able to offer at least this interest rate so people won’t see their money disappear because of negative interest. And if prices in shops are expressed in cash, cash will become the currency in people’s minds.
If the interest rate on cash is -3%, the value of cash goes down by 3% per year in terms of central bank money. So if a bank offers an interest rate of -2%, and the account is settled in cash, it appears as if the interest on the bank account is +1%. And if the deflation rate is 1%, prices go down by 1%. Meanwhile cash goes down 3% in value so that it appears there is an inflation rate of 2% as cash prices go up by 2%.
It is a trick to prevent people from acting against their best interest. Nowadays the interest rate on bank accounts is 0% and inflation is 2% so you would lose 2% in purchasing power per year by holding money in a bank account. In the example above the loss is 1%, which is a better deal. Natural Money can be a better deal for account holders. The economy is expected to do better so real interest rates can be higher.
Critics might argue that we could be fooled by this scheme, just like we were fooled before by inflation. We won’t notice the negative interest rate, just like we didn’t notice inflation previously. But separating cash from central bank money and expressing prices and the value of bank accounts in cash can clear the psychological barrier that stands in the way of adopting negative interest by the public.
Central bank money should remain the accounting unit in the financial system. Bank accounts should be accounted in central bank money, just like debts and interest rates as well as prices of financial assets like stocks and bonds. A similar situation existed in Europe between 1999 and 2002 when the digital euro was already introduced while cash was still the national currency.
Until very recently nearly everyone lived in abject poverty. Most people had barely enough to survive. In 1651 Thomas Hobbes depicted the life of man as poor, nasty, brutish, and short. Yet a few centuries later a miracle had happened. Many people are still poor but more people suffer from obesity than from hunger while the life expectancy in the poorest countries exceeds that of the Netherlands in 1750, the richest country in the world in the wake of the Industrial Revolution.
In 1516 Thomas More wrote his famous novel about a fictional island named Utopia. Life in Utopia was nearly as good as in the Garden of Eden. The Utopians worked six hours per day and took whatever they needed. His book inspired writers and dreamers to think of a better world while leaving the hard work to entrepreneurs, labourers and engineers. Today many of us have more than they need but still we work hard and feel insecure about the future.
Why is that? The answer lies within the nature of capitalism. It is not enough that we just work to buy the things we need. We must work harder to buy more, otherwise businesses go bankrupt, investors lose money, and people will be unemployed and left without income. In other words, the economy must grow. That worked well in the last few centuries, and it brought us many good things, but it may be about to kill us now.
People in traditional cultures didn’t need much. They were easily satisfied. Many modern people in capitalist societies believe they never have enough. You can always go for a bigger house, a more expensive car, or more luxury items. Many of us do not need more but the advertisement industry makes us believe that we do. We believe in scarcity even when there is abundance. And so the economy must grow. That is what they tell us.
But what are the consequences of this belief? If you eat too much this is great for business profits. And if you become obese as a consequence and need drugs for that reason, you again contribute to business profits so this is even better. Meanwhile we are using the resources of this planet in a much faster pace than nature can replenish. Humanity is standing before the abyss. Civilisation as it is will not continue for much longer. The end is near.
What has this to do with interest? If we want more products and services, we need more businesses, so we need investments. To do investments, we need savings. And to make people save, we need interest to make saving attractive. Consequently investments need to be profitable to pay for the interest. But there can be too much of a good thing. If we don’t need more stuff, we don’t need more savings, and interest rates go down.
A sustainable and humane economy?
Is it possible for humanity to live in harmony with itself and nature? We work harder than ever before and in doing so we destroy life on this planet. It seems hard to change this. If you organise production differently then your products might not be sold at a price that covers the cost to make them. In a market economy the value of a product is the price it fetches in the market. Marketing often comes down to inflating the market price of a product or a service to make more profit.
In the past there have been two fundamentally different approaches to the economy. For instance, before Germany became united in 1990, there were a capitalist and a socialist Germany. Socialist Germany ensured that everyone was employed. People in socialist Germany had enough but they had little choice as to what products they could buy. For instance, in socialist Germany there were two kinds of yoghurt while there were sixty in capitalist Germany.
And there was little freedom in socialist Germany. The secret police were everywhere. When Germany became united the socialist economy collapsed. Socialist corporations suddenly were bankrupt because no-one wanted to buy the products they produced. The ensuing reorganisation of the economy led to mass lay-offs and a staggering rise in unemployment. Ultimately 60% of the jobs in the former socialist firms disappeared.
Many lives and communities in former socialist Germany were destroyed. And people suddenly felt insecure about their future as businesses had to compete and make a profit in order to survive. In a market economy efficiency considerations determine what is produced. These efficiency considerations are the result of customer preferences as well as the requirement to make a profit. Loss-making businesses usually can’t attract capital in a market economy.
The quest for efficiency results in fewer and fewer people producing the things we need. To keep everyone employed in a capitalist economy unnecessary products and services must be produced, causing a rapid depletion of scarce resources as well as lots of waste. At least in theory we work can a few hours per day so we have more time for our mobile phone and each other. It may also be possible to free up resources to address poverty and other social problems.
And what has this to do with interest? The profit a corporation is expected to make should be higher than the interest rate in the markets for money and capital. Because what’s the point in making the effort and taking the risk of running a business if you can get the same return on a savings account? And so it appears that with negative interest rates corporations with zero profits can survive and that the economy doesn’t need to grow.
The road to inequality
Not so long ago an economist wrote a book that sent a shock-wave through the economic world because of stating a major cause of wealth inequality, which is that the return on capital usually is higher than the rate of economic growth. Capitalists reinvest most of their profits so capital usually grows faster than the economy most of the time. It can be proven beyond any doubt that capital can’t grow faster than the economy forever. Something will have to give at some point.
And what has this to do with interest? Interest is any return on capital. Interest income is the income of capitalists. That includes business profits and interest on bonds. The graph shows that labour income as part of the economy has diminished in recent decades in the United States. And that is because the capital share of national income has risen. In the past depressions and wars destroyed a lot of capital. Since 1945 there hasn’t been a serious depression or a world war.
The capitalist economy is like a game of monopoly. First everyone is doing great and capital is built in the form of housing and hotels. At some point some people can’t pay their bills anymore. To keep the game going, the winners can lend money to the losers. But at some point the losers can’t pay the interest any more. To keep the game going, interest rates must be lowered, so they can borrow more. But at some point some people can’t pay the interest again.
This happens in the real economy too. In a game of Monopoly we can start all over again. In the real economy that’s not an option. It would mean closing down factories in another great depression or destroying houses in another world war. So the game must continue. In Monopoly the rich can lend money at negative interest rates to the rest so that they can pay their bills. In the real economy this may be possible too.
Monopoly features a scheme that looks like a universal basic income. Every time you finish a round you get a fixed sum of money from the bank. At some point the bank may end up empty. The rich can then lend money to the bank at a negative interest rate to pay for it. It might seem a stupid thing to do because Monopoly is just a game. But the real economy is not. It may need an income guarantee for everyone financed by the rich.
An outline of the future economy
Can we have an economy that is humane and in harmony with nature? A few centuries ago no-one would have believed that we could live the way we do today and most people would have believed that it is more likely that unicorns do exist. If excess resource consuming consumption is to be curtailed, fewer options for consumers remain, for instance there may only be organic products, and supermarkets in the future might look a bit like those in former socialist Germany.
That may not be so bad. People in socialist Cuba live as long as people in the United States despite the United States spending more on healthcare than any other country in the world. Cubans eat no fast food so they live a healthier life style. And Cubans suffer less from a negative self image than people who are exposed to the advertisement industry. Advertisements aim to make us unhappy with ourselves and what we have in order to make us buy more products and services.
Like in former socialist Germany there isn’t much freedom in Cuba. If the government is to regulate the fat content in fast food or the sugar content in sodas then we lose our freedom to become obese. Alternatively, the government could even end our freedom to destroy life on this planet and kill our children. That may be oppression. But the alternative may be a collective suicide of humanity. Even though socialism failed we may have to pick the best parts out of it and integrate them into a market economy.
If the most resource consuming non-essential activities are to be axed, entire industries will be wiped out like in socialist Germany. One can think of making air travel sustainable and what that will with ticket prices. It is bad for economic growth. Many people would not like this. Still, life in a future sustainable market economy can be much more agreeable than life in Cuba or former socialist Germany.
So what has this to do with interest? A dramatic change to make the economy sustainable can cause a massive economic shock like the Great Depression. The economy can soon recover if interest rates can go negative. Before you say that it is more likely that unicorns exist, this has been tested during the Great Depression. The outcome is dubbed the Miracle of Wörgl. And evidence for the existence of unicorns has not yet been so forthcoming.
If interest rates are low then the creators of ideas and makers of things are rewarded more. They are the entrepreneurs and labourers rather than the owners of capital. It is in the spirit of Silvio Gesell who believed that labour and creativity should be rewarded and not the passive ownership of capital. Only when there is a shortage of capital or more demand for goods and services than there is supply, people need to be encouraged to save.
The economy is already constrained by a lack of demand rather than supply. That will be even more so when excessive consumption is to be curtailed and the rich have fewer options to spend their money on. And so it may become possible to fund an income guarantee with income taxes as well as negative interest on government debt. This can improve the bargaining position of labourers.
It is better to have an income guarantee rather than a universal basic income because that would be cheaper. There is little to gain from handing out money to people that already have enough. And the scheme should provide an incentive to work. A simple example can explain how that might work out. Assume there is an income guarantee of € 800 per month and a 50% income tax. The following table shows the consequences for different income groups.
Perhaps it doesn’t feel right that people are being paid for doing nothing. But nowadays people are paid for producing and selling things we do not really need and by doing so they endanger our future. Someone who does nothing at all can be worth much more for society than a travelling salesperson, a trader on Wall Street or a constructor who builds mansions for the rich. Of course it is better that people do something useful and useful people should be rewarded for their efforts, but doing nothing is always better than doing something stupid, and having zero value is always better than having negative value.
Another question is how this can be paid for? The Miracle of Wörgl shows us that the economy can flourish without growth when interest rates are negative so that most people will be employed. Money can still be a motivator to run a business or to go to work but less so than in the present. It doesn’t have to stop people from starting a business. Many entrepreneurs didn’t intend to become rich. They just wanted to be an entrepreneur or believed in the product they were making or selling. Still, there is no doubt whatsoever that a humane economy in harmony with nature will be very different from the economy of today.
Featured image: Slums built on swamp land near a garbage dump in East Cipinang, Jakarta Indonesia. Jonathan McIntosh (2004).
Other images: Share of Labour Compensation in GDP at Current National Prices for United States. FED. Public Domain
In the past when borrowers couldn’t pay their debts with interest they became the serfs of money lenders. That’s why interest was often forbidden and called usury. Most people have forgotten about that. But nowadays most money is debt on which interest must be paid. And that is the reason why there are so many problems in the financial system like instability, increasing debt levels, inflation, and central banks having so much power.
Incomes fluctuate but interest payments are fixed. And interest is a reward for risk. So the less a debtor can afford to pay interest, the higher the interest rate will be. The lender is rewarded with a higher interest rate to take that risk. It is therefore not surprising that the financial system is unstable.
Even more importantly, money is loaned into existence and must be repaid with interest. So if the interest rate is 5% and there is € 100 in existence then € 105 must be returned after a year. But where does the extra € 5 come from? There are a few options:
Lenders spend some of their balance so borrowers can pay the interest.
Some borrowers default so a part of the balance is not returned.
Borrowers borrow more.
The government borrows more.
The central bank creates the shortfall out of thin air.
All these things happen and often at the same time. Lenders on aggregate let their capital grow at interest. A few defaulting borrowers are acceptable but too many defaults can easily cascade into a financial crisis and create an economic crisis. The cost of letting the financial system fail is so big that this option is not acceptable. So if no-one else is willing to borrow then the government or the central bank steps in.
That’s why debts continue to grow. That’s why there is inflation. That’s why we have economic crises. That’s why governments are running deficits. That’s why there are financial crises. That’s why we need central banks to save us. That’s why all fixed positive interest rates on money and debts are usurious, even when they are low. The following example can demonstrate that.
Suppose that Jesus’ mother had put a small gold coin of 3 grammes in Jesus’ retirement account at 4% interest in the year 1 AD. Jesus never retired but he promised to return. Suppose now that the account was kept for this eventuality. How much gold would there be in the account in 2020? The answer is an amount of gold weighing 12 million times the mass of the Earth.
A mere 4% yields an incredible amount of gold after 2020 years. Someone has to pay the interest, in this case the people who borrowed money from the bank. If Jesus doesn’t come back to spend his money, that’s impossible. At some point the debtors can’t pay the interest, let alone repay their debts. They can only borrow more or default. Lowering the interest rate doens’t solve the problem. It only postpones the reckoning.
Ending usury by banning interest was never possible. Lending and borrowing would stop or go underground. The capitalist economy requires lending and borrowing so without interest it would never have been possible to build a modern capitalist economy. But interest rates are poised to go negative so it may soon become possible.
Natural Money is interest free money with a holding fee. The holding fee on money makes it attractive to lend out money at negative interest rates. For example, if the holding fee is 10%, lending out money at an interest rate of -2% will save you 8%. Once most interest rates are negative, positive interest rates can be forbidden. That can end reckless lending without producing a financial or economic crisis.
What does ending usury mean? Interest is everywhere. Interest is hidden in taxes, rents, the price of all the products and services you buy. Most pay more interest than they receive. Ending interest will benefit most people as 90% pays interest on balance while only the to 10% richest people receive interest on balance. But there is more to it. A few consequences:
You can’t borrow if your finances are in dire straits. Lending money to people in financial distress shouldn’t be left to the markets.
People and businesses will become less leveraged as there is no incentive to that. Risky ventures will be financed with equity.
The business for banks does’t change much. Borrowing money at -2% to lend it at 0% is as profitable as borrowing money at 2% to lend it at 4%.
Financial engineering will be reduced as financial engineering schemes like LBO’s often involve great leverage.
The economy can find support in the negative interest rate so governments don’t need to go into debt to stimulate the economy.
The maximum interest rate can curb debt creation for as soon as the economy recovers equity investments become more attractive relative to debt.
It can be a blow to political corruption because borrowers need to be trustworthy, and that includes governments, so taxes must cover government expenses.
This is not austerity as governments don’t pay interest on their debts but instead receive interest on their borrowings.
Ending interest reduces leverage and this can stabilise the financial system and the economy. The holding fee help to make the economy flourish. Money with a holding fee has brought the economy of the Austrian town of Wörgl back to life in the midst of the Great Depression. Ancient Egypt had a financial system with this money for more than 1,000 years. Usury can end very soon and it may never come back.
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The miracle of Wörgl
During the Great Depression people were desperate. In the small Austrian town of Wörgl a new form of money was introduced. This produced an economic miracle.
When I was eighteen years or so I once read The Limits of Growth. That’s depressing stuff, most notably if you’re young and expect to live for another sixty years or so. Doom seemed imminent and I would probably live to see it happen. That was the moment when my views about the future turned grim. Before that I hardly had views about the future at all. A few years later I became an environmentalist and a member of Friends of the Earth in Groningen. Friends of the Earth does research and tries to convince people that they should change their lifestyles. Friends of the Earth also lobbies with politicians and pressures corporations. And sometimes we protested.
One day we blocked the entrance of Groningen Airport to protest against the government subsidies for the airport. The city council felt that Groningen needed an airport but Groningen wasn’t big enough to make it profitable. When we were sitting there, the police came to remove us, and it suddenly became clear to me that activism didn’t help. Politicians will be voted out of office when they are serious about solutions. Businesses will go bankrupt if they take appropriate action unless all other businesses do the same. The required measures are extremely costly and will affect our lifestyles so profoundly that it would never happen in the current political and economic system.
Once being over a cliff, a cartoon character can only clutch at a straw. And only in cartoons the straw might hold. Friends of the Earth in Groningen worked together with the Strohalm Foundation. The meaning of the Dutch word strohalm is straw. According to Strohalm, the economy must grow because of interest, and that’s destroying the planet. It is ‘grow-or-die’ because interest rates need to be positive. Any solution begins with ending interest, they believed, and interest causes a lot of other problems too, like poverty and financial instability. Strohalm’s idea was banning interest and charging a fee on money as Silvio Gesell had proposed, so that it would be attractive to lend out money without interest.
Economists didn’t take interest-free money seriously. If you can receive interest elsewhere then why would you lend out money without interest? And if you can borrow money at an interest rate of zero, you would borrow as much as you can and put it in a bank account at interest. Therefore, interest-free money with a holding tax would never work, at least so it seemed, and it didn’t take long before I realised that too. Only, that wasn’t satisfactory. Accepting doom is like committing suicide. If interest is the root of many social and environmental problems, and may destroy human civilisation, you can’t ignore that. And perhaps it could work. During the Great Depression it had been tried in a small Austrian village and it was a stunning success.
For years I used public transport as much as possible, but at some point I began to realise that it was all pointless. More and more people started driving SUV’s. They didn’t care. It didn’t matter what I do. A car can make your life more comfortable and I had no higher morals than other people.
A few years later, in 1998, I became a freelance IT specialist. I made a lot of money so I had money to invest. My first investments were small and not very successful. That was because I believed that the profits of corporations matter. But investments in loss-making internet startups did very well while profitable corporations did poorly. And so I came to believe that I had to stay informed about the developments in the financial markets. In 2000 I joined the investment message board Iex.nl.
On the message board was a day trader who shared all kinds of conspiracy theories with us. For instance, if the markets were about to collapse, a secret group called Plunge Protection Team would come to the rescue. He was ridiculed, but after the internet bubble popped, markets often miraculously recovered when they were about to crash.
And gold often crashed because of sudden selling. The day trader believed central banks wanted to keep confidence in their currencies. If the gold price were to rise, he claimed, people would lose trust in central bank currencies. This was new to me, and probably it wasn’t true, but I already had bought some gold because I didn’t trust financial markets and the people operating them. I was not good picking stocks, and I was too risk averse to be very successful in the stock market, but the gold turned out to be a good investment as I held on to it for decades.
In 2001 after the Internet bubble had popped I pitched the idea of interest-free money on the message board. My lack of knowledge was eclipsed by my zeal and lengthy discussions followed. On the Internet people from different backgrounds and different knowledge can be in one virtual room and participate in a discussion. I was rebutted time after time, but as these discussions went on, my knowledge of the financial system increased and I became aware of the issues that had to be resolved in order to make interest-free money work.
As a gold investor I became familiar with the Austrian School of Economics. This group questions money creation by banks and the need for central banks. They pointed at the inflation caused by money creation and central banks. At some point all the debt banks create would eventually collapse the financial system and money would be worthless, they believed.
And so two opposing fringe ideas, interest-free money with a holding tax and Austrian School, were challenging each other in my mind, which may be how Hegelian dialectic is supposed to work. In 2008 this resulted in a resolution and the idea of Natural Money was born. The economy can do better without interest so returns for investors can be higher. As positive interest rates are not allowed, the money may rise in value, so that interest-free money can give better returns. Hence, interest-free money was possible, perhaps even inevitable. In the following decade I integrated modern main stream economics into the theory of Natural Money. This research can be found on the website Naturalmoney.org.