Tag: Natural Money

Fiscal and Monetary Policies

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Economic cycles

Mismatches between supply and demand cause economic cycles. A harvest may fail, and food prices may rise, leaving us with less money to spend on other items. Mismatches can concern the supply and demand of money, capital, labour, raw materials or consumer products. Interest charges also contribute to economic cycles. Interest rates reflect the market for funds. If all markets were perfect, economists argue, supply could adapt to demand instantly, and there would be no economic cycles. Not unlike many others, economists love fairy tales about a Paradise where everything is perfect. And so, they may advise us to make markets perfect, so that an economic Paradise will ensue.

Economic cycles occur because mismatches between supply and demand emerge periodically and eventually resolve. Economists use the term equilibrium in their models to explain the relationship between supply, demand, and price, but these models are simplifications of reality. There is rarely a stable equilibrium, and fluctuations in demand and supply cause changes in prices, inventories, and employment. There are several theories and explanations regarding those mismatches, economic cycles, and their effects. Most notably, money, credit and interest deserve attention.

According to Say’s law, supply creates its own demand because we make goods and services to use ourselves or to acquire other goods and services. It is most applicable to a simple barter economy. When money serves as a medium of exchange, we can postpone our purchases, leaving producers with excess inventory. Money hoarding can be a serious problem as it interrupts the circular flow of money. When money loses value, we are less likely to postpone purchases. It is why central banks aim for a bit of inflation. However, inflation shouldn’t be too high, as that can undermine trust in the currency.

Expectations are another factor. When consumers feel good about the future, they are more willing to spend on big-ticket items. Likewise, when investors expect brighter prospects, they anticipate higher profits, making them more willing to invest. Conversely, when consumers and investors are pessimistic, the opposite happens. And so, expectations can become a self-fulfilling prophecy. Likewise, when people expect a bank to collapse, it may collapse because that expectation triggers a bank run. Policy makers try to instil confidence in the system because a lack of confidence can break it. The reason is that credit means trust, and trust is what keeps the system going.

During good times, businesses and individuals tend to be confident. Credit is often available because businesses’ and individuals’ future income projections serve as the basis for banks to lend money. And so, companies and individuals can borrow more in good times. When the economy slows and their incomes decrease, they may struggle to make their interest payments. Consumers would have more disposable income without debt, since they wouldn’t have to pay interest. Similarly, businesses can go bankrupt even when they are profitable overall because of interest charges. And so, interest charges can exacerbate and prolong the bust.

Leverage contributes to the overall risk in financial markets. Liquid financial markets make it easier to enter and exit positions, leading investors to believe it is safe to operate with leverage. If markets were not fluid, leverage would appear more dangerous, as it would be more difficult to exit a position. For example, if you aren’t sure that you can renew your mortgage after five years, you aren’t going to buy a home. Liquidity enables risk-taking, allowing the overall level of risk in the financial system to increase. That can become apparent during a crisis. People who have to sell their home during a housing crisis may end up selling it at a low price, leaving them with a debt that takes years to repay. Therefore, maintaining a liquid market is crucial for its safety, and limiting leverage further enhances its security.

Bureaucratic interventions

In the wake of the Great Depression and World War II, government and central bank interventions have become standard tools for bureaucrats to manage the capitalist economy. Fiscal policies involve steering the economy through government expenditures. Ideally, it works as follows. When the economy is performing poorly due to sluggish demand, the government increases spending to boost demand. Conversely, when the economy is overheating due to excessive demand, the government reduces spending to curb demand. Likewise, central banks can lower interest rates to promote borrowing and boost demand, or raise interest rates to discourage lending and curb demand. These policies can have the following undesirable consequences:

  • The timing of the measures may be off, so when the measure has been decided upon and is taking effect, the economy may already be on the desired path.
  • Politicians may interfere and press for increased government spending or lower interest rates to boost the economy and get them re-elected.
  • Central bank interventions cause market participants to take more risk because they expect the central bank to intervene.
  • Due to usury, debt levels increase, so once these policies are commonplace, there are no corrections to cleanse the system from its excesses.

By failing to periodically cleanse the financial system of its excesses, either through a debt jubilee or an economic depression, the economy becomes addicted to credit expansion, and the final collapse will be even more severe. As the US dollar is the world’s reserve currency, a collapse in trust in this currency can trigger a global economic apocalypse. Usury is the primary reason for fiscal and monetary policies, because interest on money and debts generates a money shortage, driving a demand for credit. Debtors must repay more than they borrowed, but that extra money doesn’t exist. And so, governments and central banks fill the gap to prevent the usury scheme from collapsing.

Due to usury, it has become a permanent requirement. To prevent a shortage of money or a liquidity crunch from materialising, governments borrow, and central banks print money. The shortage arises when the private sector fails to borrow enough to cover the interest on existing debts. To counter the problem, the government can borrow and spend this money. Central banks can lower interest rates to make borrowing more attractive. They do so by buying up government debt, thereby decreasing the supply of government debt and increasing the supply of currency, which lowers interest rates because there are fewer debts and more currency to buy them with.

Economists assume that there is a natural interest rate at which the economy grows at its trend rate while inflation is stable. There is no direct way to measure or calculate the natural interest rate. Economists estimate it using their theories and models. The elusive natural interest rate is a crucial element in central bank decisions. The natural interest rate may differ from the actual interest rate due to credit in the financial system. Deviations from this rate trigger booms and busts. The interest rate below the natural rate can generate a boom. In that case, people borrow too much because interest rates are too low, leading to overspending and overinvesting. An interest rate above the natural rate can lead to a bust, resulting in underinvestment and underspending. By setting short-term interest rates and thereby influencing long-term rates, central banks steer credit creation.

The economy can do well by itself

With Natural Money, the economy can manage itself, making fiscal and monetary policies redundant. The holding fee removes the zero-lower bound, providing stimulus during economic slumps. The maximum interest rate curbs lending during economic booms, providing austerity. That mitigates business cycles. And so there will be fewer debt overhangs and financial crises. The market, combined with the price control of the zero upper bound, steers interest rates and the money supply, thereby reducing the role of central banks. The central bank’s currency will then become a unit of account or administrative currency. Natural Money has the following favourable consequences:

  • The holding fee on currency allows for negative interest rates to provide a stimulus, while the maximum interest rate provides austerity by curbing lending.
  • As interest is also a reward for taking risks, a maximum interest rate will take away the incentive to take risks and limit lending to the safest borrowers.
  • In the absence of usury, debt levels don’t increase, while only the safest borrowers can borrow, resulting in fewer bad debts.

There is no need for governments to engage in deficit spending, except to provide liquidity in financial markets, as government debt, rather than administrative currency, serves as a form of liquidity. The holding fee makes it unattractive to own administrative currency. Provided their finances are sound, governments can borrow at negative interest rates and earn interest on their debts. They could aim for the debt level giving the highest interest income. If market participants are willing to lend at -1% when government debt is 100% of GDP and at -2% when government debt is at 70% of GDP, the government could harvest 1% of GDP in the former case and 1.4% of GDP in the latter case.

It will be the end of fiscal and monetary policies. The economy will manage itself. Interest payments don’t create a need to add additional debts. Governments may step in during a crisis to restore trust in the financial system and the economy, but whether such intervention will be necessary is unclear, as there will likely be fewer crises. Natural Money also doesn’t require central banks to do more than handle the daily transactions between banks, as the holding fee terminates the demand for the central bank’s currency.

Latest revision: 12 November 2025

The Dark Side

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Trade and finance

In the past, ordinary people regarded merchants and bankers with suspicion. In popular culture, trade and banking were the domains of people of questionable ethics. Merchants are as slippery as eels, so it is hard to pin down the issue, but everywhere you see the death and destruction they cause. Hermes, the Greek god of trade, was also the god of thieves. Jesus Christ chased the money changers from the Jewish temple. In The Parable of the Talents, however, Jesus said that you must put your qualities to work. Talents were money, so it could mean putting your money to work. And Jesus said that it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.

Jesus lived 2,000 years ago. Economics as we know it now didn’t exist, so we can’t blame him for lacking a consistent view on economics. Someone claiming to be Paul added that the love of money is the root of all sorts of evil. The Jewish sage Jesus Sirach noted, ‘A merchant can hardly avoid doing wrong. Every salesman is guilty of sin.’ The Jews and Protestants excluded him from their canons, but his musings are in the Catholic Bible. Greed, or the pursuit of profit, drives trade. Traditional moral systems considered it wrong. We have gone a long way since then. Today, we hold a different view and see trade as mutually beneficial, so those who engage in trade do so voluntarily because they all benefit. Eels are very slippery indeed. And so are merchants.

Today, trade and finance are at the core of our economic and moral system. And so, Friedrich Hayek could write, ‘The disdain for profit is due to ignorance and to an attitude that we may, if we wish, admire in the ascetic who has chosen to be content with a small share of the riches of this world, but which, when actualised in the form of restrictions on others, is selfish to the extent that it imposes asceticism, and indeed deprivations of all sorts, on others.’ Our ethic is that we can do as we please, as if consequences don’t exist. And the ascetic is selfish when he says everyone should live like him. It is moral depravity at its finest. And so, what was good has become evil, and what was evil has become good.

The problem is not self-interest as such, but greed or the ethic of the merchant, and that the difference isn’t clear. Many merchants are people like you and me without evil intent. Shop owners make a living like everyone else and provide their customers with a service. They are often people who care, not the greedy, evil kind that run Wall Street or sell weapons to warring factions in Africa. But something is profoundly wrong with trade. Even a shop owner doesn’t produce something. They provide a service by trading in markets. And individual merchants may have ethical values, but markets never have them. Everything is for sale. Suppressing trade promotes illicit markets and crime. And so, we accept the drawbacks, thinking the alternatives are worse. That is a fatal mistake.

A pragmatic approach says that outcomes matter more than intent, so if the result of nefarious intent, like greed, is good, it is good. And if the outcome of good intent is terrible, it is wrong or perhaps even evil. If factory owners destroy artisans’ businesses and pay their employees low wages, but overall opulence increases as cloth becomes cheaper, then it is good. Likewise, if a country switches to socialism out of good intentions, but the population starves, it is evil. Before the Industrial Revolution, nearly everyone was as miserable as today’s poorest. Capitalism has lifted billions out of poverty. So why bother?

Trade and finance became the engine of growth, bringing industrialisation, modernisation, colonisation, the slave trade, mass migration, the loss of livelihoods for craftspeople, and the depopulation of the countryside. Various movements, such as socialists, anti-globalists, religious groups, small-is-beautiful, and environmentalists, attempted to provide alternatives to the current order with their visions of Paradise, but they all failed. The system is amoral, a brute force driven by our sentiments and urges. As consumers, we crave the best service at the lowest price, and as investors, we desire corporations to increase their profits. And we don’t think about the consequences.

Usury: the destroyer of civilisations

Money is to the economy what blood is to the body. It must flow. Otherwise, the economy will die. If we stop buying stuff, businesses go bankrupt, we become unemployed, the government receives no taxes, and everything comes to a standstill. That never happens because we spend money on necessities like fast food, smartphones, and sneakers. When we buy less, the economy slows, and we enter a recession, or if it gets worse, a depression. Businesses disappear, and people become unemployed and depressed. Usually, the economy recovers, but it may take time, sometimes decades. It is why we must keep buying stuff, and even more, to make the economy grow.

In the past, when borrowers couldn’t repay their debts, they became the moneylenders’ serfs. It is why several ancient civilisations had regular debt cancellations and why religions like Christianity and Islam forbade interest on money or debts. Usury is paying for the use of money, which is a profoundly evil practice. The evil of it lies in the money flows. We all need a medium of exchange. A simple explanation helps to clarify the issue. Imagine the Duckburg economy running on 100 gold coins. With these 100 gold coins, everyone has enough money, and the Duckburg economy operates smoothly. Scrooge McDuck owns ten, but he is a miser and doesn’t use them to buy items from others.

The economic flows of Duckburg now suffer a 10-coin shortfall. Products then remain unsold, and several ducks lose their jobs. To prevent that, Scrooge McDuck can lend these coins for one year at 10% interest to ducks who come short, so the money keeps flowing. At the end of the year, the economy is 11 short. Scrooge McDuck then lends 11 coins at 10%. In this way, he will own all the coins after 25 years. Scrooge McDuck can implode the Duckburg economy by keeping the money in his vault. When the citizens of Duckburg become desperate, Scrooge McDuck can buy their homes, let them pay rent, and become even richer. If you think that is smart, you have the ethics of a merchant. It demonstrates why, in traditional popular culture, merchants and bankers were evil.

Two things have changed since then. Starting with the Industrial Revolution, economic growth picked up, which helped to pay for the interest charges. The nature of money has also changed. It isn’t gold anymore. Nowadays, banks create money from thin air, so the nature of usury has also changed. When you go to a bank and take out a loan, such as a car loan, you get a deposit and a debt that the bank creates on the spot by creating two bookkeeping entries. The deposit becomes someone else’s money once you purchase the car. When you repay the loan, that bank deposit and the debt disappear. 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 deposits created from loans that borrowers must return with interest. Banks might pay interest on deposits. The depositors of a bank act like Scrooge McDuck. They have more money than they need and keep it in the account at interest. If they have borrowed € 1,000,000 at 5% interest, they must return € 1,050,000 after a year. Where does the extra € 50,000 come from? Here are the options:

  • borrowers borrow more;
  • depositors spend some of their balance;
  • borrowers don’t pay back their loans;
  • the government borrows more or
  • the central bank prints the money.

Problems arise when borrowers don’t borrow and depositors don’t spend their money. In that case, borrowers are € 50,000 short, and some can’t repay their loans. If many borrowers can’t, you have a financial crisis. Borrowers can reduce their spending to pay off their debts, leading to a slowdown of the economy. The economy is also unstable due to investor expectations. They expect more in the future. If debts remain unpaid or people stop spending, they incur losses and may lose trust and stop investing.

If they lose trust, they stop investing, less money flows into the economy, businesses go bankrupt, people become unemployed, and more borrowers get into trouble. As a result, even less money flows, causing banks to go bankrupt. Economists call it deflationary collapse. That happened in the 1930s, causing the severest economic depression in modern history. There was no money in the economy because lenders feared losing it. To prevent that from happening, governments run deficits and central banks print currency whenever there are shortages in the money flows. With interest on debts, these things are hard to avoid. But if the system never collapses, debts and interest payments only grow.

The 2008 financial crisis could have been much worse than the 1930s, potentially leading to the collapse of civilisation as we know it. That was due not only to the accumulation of far more debts but also because most people now live in cities, where they have become dependent on markets and governments. In the 1930s, most people still lived in the countryside. Central banks prevented a collapse by printing trillions of US dollars, euros, and other currencies. The shortfall was that enormous. We now buy our necessities in shops and rely on the government to keep the system running. We have not only become the usurers’ hostages, but also the hostages of markets and governments.

Barataria: an economic fairy tale

Money equals power, and the lure of riches corrupts us, so the alternatives to the system of trade and usury have failed. They can’t compete. A few people step out, but it is like a rehab from a consumption addiction. It is a sober life while everyone around you keeps on living the good life. After us, the deluge is the prevailing mood. The deluge is already taking off. Storms feed on the warming sea water and leave their burden on our shores. But what are our options anyway? In the early 1990s, the Strohalm Foundation published The Miracle Island Barataria, an economic parable by the Argentinian-German economist Silvio Gesell.1 I rewrote the narrative somewhat to better highlight its message. Gesell explores three options: (1) communism or socialism, (2) a market economy without traders and bankers, and (3) a fully capitalist economy.

In 1612, a few hundred Spanish families landed on Barataria, an island in the Atlantic, after their ships had sunk. The Spanish government believed they had drowned, so no one searched for them, and they became an isolated community. They worked together to build houses, shared their harvests, and had meetings in which they decided about the affairs that concerned everyone. It was democracy and communism. After ten years, the teacher, Diego Martinez, called everyone into a meeting. He noted that working together and sharing had helped them build their community, but the islanders had become lazy. They came late to work, took long breaks, and left early. They spent their time at meetings discussing what to do, but much work remained undone.

‘If someone has a good idea, he must propose it in a meeting to people who don’t understand it. We discuss it but usually we don’t agree or we don’t do what we agree upon. And so, nothing gets done and we remain poor. We could do better if we have the right to the fruits of our labour and take responsibility for our actions,’ Martinez said, ‘The strawberry beds suffered damage because no one had covered them against night frost.’ He mentioned several other examples. Martinez said, ‘If the strawberries are yours, you protect them. And if you have a promising plan you think is worthwhile and you can keep the earnings, you do it yourself and hire people to help you.’

He proposed splitting the land into parcels and renting them to the highest bidder to finance public expenses. Fertile lands would fetch a higher price than barren ones, giving everyone an equal opportunity to make a living. He also proposed introducing ownership so the islanders would feel responsible for their property. But with property, you need a medium of exchange or money. The islanders decided to use potatoes as money. Everyone needed potatoes. They had value, so they were good money.

Potatoes are bulky, thus difficult to carry, and they also rot. At the next meeting, Santiago Barabino proposed setting up a storehouse for potatoes and issuing paper money, which could be exchanged for potatoes when needed. So, you had banknotes of 1, 2, 5 and 10 pounds of potatoes. The Baratarians agreed. The notes had a date of issue and gradually lost their value to cover the storage cost and rot. If you returned the banknote to the potato storage after a year, you received 10% less. And because the issue date was on the banknote, buyers and sellers knew its value.

For several years, Barataria had banknotes representing stored potatoes. Their value declined over time to pay for the storage and the rot. Borrowers didn’t pay interest. If you had savings, you would lend them to trustworthy villagers if they agreed to return notes representing the same weight. The notes lost value, making everyone spend their money quickly and store items and food in their storehouses. The general level of opulence rose, but there were no poor or rich people. There were no merchants buying things at a low price to sell them at a high price. Businesses didn’t pay interest, and there were no merchants, so things were cheap in Barataria. The chronicle notes that the islanders acted as good Christians and helped each other.

Then Carlos Marquez had a new idea. He addressed Baratarians, ‘How many losses do housewives suffer from keeping food in their storehouses? We shouldn’t put our savings in perishable products, but money with stable value. We can back our money with something we don’t need and doesn’t deteriorate. The Pinus Moneta is a nut we can’t eat, and doesn’t rot,’ he said, ‘We don’t have to back money with a commodity of value like potatoes. The things we buy and sell give the money its value. If we do that, we can buy things when we need them and don’t have to store them ourselves.’

What a great convenience that would be. It seemed too good to be true. Diego Martinez argued against the proposal. He told his fellow islanders that a medium of exchange passes hands. It remains in circulation. But savings stay where they are unless those who are short of money borrow them and pay interest. You end up paying interest to use the currency you need to buy the things you need. His argument was to no avail. And that is the price of democracy. People often decide about questions they don’t understand.

Most islanders preferred to spend their time getting drunk in the pub instead of studying the issues of government. And if you are doing well, you can’t imagine that seemingly insignificant errors can ruin you. Marquez spoke passionately, while Martinez warned cautiously, saying things were fine as they were and he couldn’t foresee the consequences. That swayed opinions. The islanders switched to money backed by the Pinus Moneta. This money didn’t lose its value. That made it attractive to save money.

Suddenly, everyone tried to exchange their supplies for the Pinus Moneta, causing mayhem in the marketplace. Everyone brought everything they had to the market. But no one could sell their goods because everyone wanted money. That was until the company Barabino & Co came up with a plan. Barabino & Co. set up a bank with accounts that Baratarians could use for saving and making payments. Everyone could bring their money to the bank and receive an extra 10% after a year. The naive Baratarians agreed. They could have known there weren’t enough nuts of the Pinus Moneta to pay the interest. And they didn’t ask themselves how Barabino & Co. would generate the profits to pay that interest. With this borrowed money, Barabino & Co. bought goods from the islanders and deposited money into their accounts, but Barabino & Co. only purchased food and seeds.

The following spring, Barabino & Co. hiked food and seed prices. Most islanders paid more for food and seeds than they received in interest. They went into debt with Barabino & Co. With the profit, Barabino & Co. bought the next harvest and cranked up food prices even further. Soon, Barabino & Co. owned everything. Most were in debt and worked hard, but a few wealthy people lived off interest income. They didn’t work and lived a life of luxury on the interest on their accounts. The Baratarians needed money to pay for the items they bought from Barabino & Co. They had to borrow this money from Barabino & Co. and pay interest to use it. There weren’t enough nuts to pay back all loans with interest, so the islanders went further into debt year after year. They paid interest on money the bank created out of thin air, giving it to the wealthy. That is usury.

The Baratarians worked harder and grew more creative in earning money. The islanders invented, produced and sold more products, most notably wooden items made from the trees on the island. Not everyone could keep up, and more people lived in the fields. At least, the economy grew, and the Baratarians grew accustomed to luxuries they hadn’t had before. They had wooden chairs, boxes, ornaments, toys, outhouses, carts and tables. The islanders had managed without these items before, but now, they believed they needed them.

The change came with other unfavourable consequences. The Baratarians became agitated, deceitful, and immoral. Crime rose as everyone desired the luxuries that the rich enjoyed, and for which they didn’t have to work. Of their Christian faith, not much remained except an empty shell. They were busy making money. Then came the day the Baratarians had cut down all the trees on the island. They suddenly lacked the wood needed to make the tools for harvesting their crops, and they starved. That was the day the Pinus Moneta lost its value. After all, you can’t eat money.

Adam Smith and the Wealth of Nations

The tale tells how devious acts contributed to an outcome most of us now deem desirable. By selling our souls to the money god, most of us have a better life than people in the Middle Ages. That improvement came with wars, colonialism, the slave trade, pollution, and miserable working conditions, and ultimately, it could bring the end of human civilisation. With the help of saving and investing, capitalists build their capital. Capitalism is about making sacrifices in the present by saving to have a better future via investing. It also led to a mindless process called competition via innovation and economies of scale. Economists call it creative destruction.

In the original tale, the wood didn’t run out, but the British rediscovered the island to find a class society much like theirs. The story tells how devious acts contributed to an outcome most of us now deem desirable. By subjecting ourselves to this system of trade and usury, most of us live a more agreeable life than people in the Middle Ages. It came with wars, colonialism, the slave trade, pollution, miserable working conditions, the destruction of communities and societies, and, eventually, the end of human civilisation. With the help of saving and investing, capitalists build their capital. Capitalism involves making sacrifices in the present by saving to have more in the future via investing. You can always do better. It promoted competition via innovation and economies of scale. But there is no ultimate goal, a vision of Paradise, only creative destruction without end.

The Baratarians were in debt, worked hard and were creative. Those who couldn’t keep up became homeless. As there was never enough money to pay back the principal with interest, the Baratarians went deeper into debt, worked even harder and became more creative by inventing and selling new products, producing an economic boom that ended in starvation once the trees were gone. It looks like the problem we face. The Earth’s resources are finite, and interest accumulates to infinity. Our money becomes worthless once there is nothing left to buy or sell.

Adam Smith, the founder of modern capitalist thought, claimed that pursuing our private interests promotes the public good. A baker doesn’t bake bread to serve the community but to make a living. It is why we have something to eat. The baker doesn’t want to lose customers, so he bakes what they desire. Otherwise, they go to his competitor. Smith believed it would work out well as humans are moral creatures. We temper our behaviour as it affects others. Therefore, moral relativists could argue that we don’t need public interest. The private interest will do just fine. But it is not how markets operate. We may have ethical values, but markets never have them. The least scrupulous usually wins the competition, so the greater evil usually wins in the markets. We have found that out and now want governments to oversee the markets.

Factory owners didn’t consider the plight of the artisans they put out of business or the miserable working conditions of their workers. They would have gone out of business if they had done so. Moral considerations don’t drive business decisions, so psychopaths end up in high places in corporate management.2 These psychopaths in business provide us with harmful products like cigarettes, prostitution, gambling casinos, and semi-automatic rifles. They expand their market by advertising their wares. A merchant will say, ‘If I don’t supply the market, someone else will, so why not profit from death and destruction myself?’ The merchant then claims liberty is the highest value, and restricting markets equals oppression, thus the ultimate evil. Why not let everyone buy cocaine and semi-automatic rifles? It increases GDP. These are the morals of the merchant we now live by.

Without self-interest and trade, we would be poorer, and poverty was Smith’s primary concern. Increasing production was the way out. Self-interest and trade were the tools to achieve that. It succeeded marvellously. Since the Industrial Revolution, production increases have lifted billions of people out of poverty. Adam Smith argued:

  • The division of labour drives production increases. If you specialise in a trade, you can do a better job or produce more at a lower cost.
  • A market’s size limits the division of labour. Transport costs limit market sizes. Energy cost drives the volume and distance of trade.
  • Merchants preferred precious metals as money. It enabled them to store their gains, allowing them to wait for opportunities to make financial profits.

Producers produce items at different times, in different locations, and in different quantities than consumers need. That is why we trade. Traders bridge those gaps by storing, transporting, and dividing goods. Trade promotes large-scale production and labour efficiency, so fewer people provide for our necessities. That allows for more fanciful products and services and industries, thus a higher standard of living.

The evil empire of trade and usury

Economic and financial power translates into military power. The Europeans didn’t finance their conquests with taxes but with the profits from their colonial enterprises. No one likes to pay taxes, but everyone loves a profit. The scheme thus became an unprecedented success. Venture capitalists paid for the first ships, hoping to find new trade routes and riches. And they found them. The Europeans reinvested their profits, so their capital grew, and their financial and military strength increased.

After the bourgeoisie had taken control of the British government during the Glorious Revolution, the British state became a venture of the propertied class, like the Dutch Republic already was. The Dutch Republic, run by merchants, was the most successful and wealthiest nation at the time. The British imported knowledge of Dutch governance by appointing a Dutch governor as their king. In the following centuries, Great Britain became the world’s largest empire.

The British bourgeoisie benefited from a functioning state and was willing to pay for it. The storyline is that taxation became legitimate as it had the consent of the taxed. The British bourgeoisie didn’t like to pay for corruption or ineptitude, so the state’s performance improved.3 With its secured and enlarged tax base, the clamp down on corruption and ineptitude, the invention of modern banking, including a central bank, trust in British financial markets improved, and Great Britain could borrow more at lower interest rates.

It helped Great Britain to defeat France, a country with twice as much wealth and twice as large a population. In France, the wealthy didn’t pay taxes, and the government was always short of funding. France defaulted on its debts several times. The French government was inept and corrupt, which made lenders unwilling to lend to it. The British economic successes, thus having a large market, low interest rates, and high wages, helped to ignite the Industrial Revolution.

During the Napoleonic age, several European countries modernised their governments into modern bureaucracies, with career paths based on qualifications and merit. The British later also modernised their administration, aligning it more with the rational principles of government that other European countries had adopted after the French Revolution.4 The benefits of the division of labour imply it is better to let bureaucrats run bureaucracies and businesspeople run businesses. You don’t let government bureaucrats run a business, nor do you allow your businesspeople to run the government.

The United States followed a different path. When the Founding Fathers set up their new state based on the modern principles of their time, they were ahead of Europe. They introduced regular elections for the president and parliament and a separation of powers between the administration, parliament and the judiciary, thus creating checks and balances to prevent dictatorship or mob rule. The US also became the first democracy. All free men had received the right to vote by 1820.4 Several European countries later followed suit.

The US administration, however, didn’t become a modern professional bureaucracy at first, and the US government remained plagued by corruption, cronyism, and the presence of unqualified individuals. Politicians gave their supporters government offices when they won the election.4 In 1881, a disgruntled man who had campaigned for US President Garfield and sought a diplomatic job as compensation shot the president. Appointing people for political reasons had become unthinkable in most of Western Europe. Modernisation efforts in the US began in the 1880s, took decades, and never fully succeeded. Political appointments are now making a comeback.

The founding fathers had set up the United States as an oligarchic republic run by the propertied classes, similar to Great Britain and the Dutch Republic. Rather than leaning on a clean government like the British elites, the American elites learned to employ corruption, for instance, via campaign financing, bribing judges, and funding think tanks that advise the US government. After World War II, the United States emerged as a superpower, and the gold-backed US dollar became the currency used in international trade. To finance its military, the US began to run deficits in the 1960s and ended the exchangeability of the US dollar for gold in 1971. The US dollar then became the de facto reserve currency, most notably because oil-exporting countries continued to accept the US dollar.

The US dollar’s reserve status allowed the US elites to employ the productive capacity of the rest of the world for their empire. Foreign countries delivered goods and labour in exchange for US dollars, which the United States printed out of thin air. The US financial elites in institutions like the World Bank and the IMF pushed developing countries into US dollar debts, which made them depend on exports to serve the US empire. As a result, the domestic economy of the United States began to suffer from the Dutch disease. The Dutch natural gas exports created a demand for the guilder, which drove up the Dutch currency and made Dutch industries uncompetitive in the 1970s.

The Dutch remedied the issue in the 1980s by making a collective national agreement between the government, employers, and unions to keep wage increases below those of its competitors for several years. Demand for the US dollar, however, increased, not because of exports, but because of foreign nations being dependent on it, pushing up its value and eroding the competitiveness of American manufacturing. And the US didn’t need to correct that issue, because of the US dollar’s reserve status.
The US dollar has become an international store of value, and so has US government debt. There was even pressure to go into debt, to satisfy the global demand for US dollars. As a result, deficits have escalated further, and the American economy depends on controlling the world’s financial markets. The American empire is now the Evil Empire of Trade and Usury, the Babylon of our time. However, the end of an empire doesn’t always turn things for the better.

Latest revision: 7 August 2025

Featured image: cover of The Miracle Island Barataria

1. Het wondereiland Barataria. Silvio Gesell (1922).
2. 1 in 5 business leaders may have psychopathic tendencies—here’s why, according to a psychology professor. Tomas Chamorro-Premuzic (2019). CNBC.
3. The Origins of Political Order: From Prehuman Times to the French Revolution. Francis Fukuyama (2011).
4. Political Order And Political Decay. Francis Fukuyama (2015).

The Great Reset

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During the coronavirus pandemic, the World Economic Forum (WEF) launched a plan, The Great Reset. It aims to rebuild the world economy more intelligently, fairer and sustainably while adhering to the United Nations Sustainable Development Goals (SDG). These SDGs include ending poverty, improving health and well-being, better education, equality, clean water and sanitation, affordable and clean energy, jobs and economic growth. That sounds great, but is it a reset? It would be up to so-called responsible corporations and international non-governmental organisations (NGOs) to implement the agenda before 2030. Not everyone thinks that is a great idea.

The change is supposed to be powered by the Fourth Industrial Revolution, a fusion of technologies in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage and quantum computing. I get an uneasy feeling when I read that. It looks like an excuse for technology addicts to play with our future. Is it because I am against progress, or is it because of a rational fear that something is about to go seriously wrong even though I don’t know exactly what?

Under the umbrella of the Great Reset, so-called young global leaders of the WEF came up with new ideas. For instance, new technologies can make products like cars and houses cheaply available as a service, ending the need to own these items. A young global leader wrote an article titled, ‘Welcome to 2030. I own nothing, have no privacy, and life has never been better.’1 She hoped to start a discussion, and the article produced a slogan that also became an Internet meme, ‘You’ll own nothing, and you’ll be happy.’ There certainly is an economic rationale for sharing items like cars, most notably if they become more expensive to keep because of technological innovation.

Property, for instance, a home, can give you economic freedom. If you own a home, you don’t have to pay rent. And you own some capital when you retire. Some people think the WEF is a sinister elite club scheming to achieve a secret agenda where the elites own everything, and the rest of us ends up with nothing. And that might happen anyway if current trends continue because that is how capitalism works. Capital accumulates and ends up in the hands of a few because of interest. It is not a secret since Karl Marx figured that out. And it leads to a crisis when the impoverished masses can’t buy the things that capital produces. With negative interest rates, there is no need for that.

Property rights have become a semi-religious value in Western culture. That prevents us from taking the property of the elites and ending their stranglehold on our political economy. Marx advised that workers or the state would take over corporations. That might not be a good idea because workers and governments often do poorly at running corporations. Markets and private enterprises can efficiently provide goods and services, but it comes with wealth inequality and happens at the expense of future generations. Our societies must find the right balance. At some point, the disadvantages of the current political economy start to outweigh the advantages.

We use far more resources than the planet can provide, and wealth inequality is now so extreme that we might need a genuine Great Reset. Taking the wealth from the elites and discontinuing enterprises that don’t provide for our essentials is not communism, as long as there are markets and private property. People should prosper if their work benefits society and enterprises often do better at providing for our needs. But we don’t benefit from the corrupting influence of oligarchs. Their wealth comes from inheritance, criminal and shady activities, and, most notably, accumulated interest on their capital. That arrangement may have suited us in the past, but not now.

Economists believe property rights are essential for economic growth, and that business owners should be able to do as they please. For instance, Elon Musk has the right to ruin Twitter because he owns the company. Should employees and others suffer from the irrational behaviour of their owners? In the Netherlands, a series of interesting trials took place, where corporations tried to escape the influence of their majority shareholder Gerard Sanderink, who allegedly didn’t act rationally in the interest of these companies.2 Limited property rights and a collectivist attitude have not prevented China from becoming a large and advanced economy surpassing the United States and may have contributed to China’s success.

The degree of individualism currently existing in the West may do more harm than good. They promote political fights and litigation and prevent us from doing what we should do. And perhaps, less privacy can go a long way in reducing crime. Property rights and individualism were crucial to start capitalism and made the West dominate the world for centuries. And so, we have learned to see them as necessary, inevitable or even desirable. But once the European imperialist capitalist engine ran, these features became less important than economic stability. If you start a business, you must be able to estimate your returns, but you can lease everything and own nothing.

Individualism and property rights also play a positive role in society. The cultural heritage of the West is extensive compared to other cultures, for instance, if you express it in the number of books written or discoveries made. Self-interest and personal responsibility can inspire us to work harder and do a better job. The Soviet Union failed to produce enough food for its citizens while there was enough arable land. In the Soviet Union, farmers had to work on collective enterprises where they could not do as they saw fit and didn’t share in the profits. The tragedy of the commons is that we don’t care for public spaces as much as our possessions. Homeowners usually take better care of their houses than tenants. The same is true for car owners.

As they are now, property rights protect the elites. And the WEF plan is just a fart in the wind, not a Great Reset. We face unprecedented worldwide challenges while wealth inequality is at extreme levels, so individualism and property rights need limits. And we need a proper Great Reset, or a switch from economic to political control of the world’s resources if we intend to live in a humane world society that respects our planet. It is what a corporation named Patagonia did in 2022.3 We can do that on a global scale.

It begins with seizing the wealth of oligarchs and criminals and all hidden wealth in offshore tax havens, including their so-called charities, placing them in sovereign wealth funds, and setting a limit on what individuals can own or earn. And perhaps, we need to build our future on values rather than balance sheets. And everyone should contribute. Capital accumulates by interest, and people who live off interest don’t work for a living. That might be as bad as being on the dole while you can work. And peddling unnecessary products that harm life on Earth could be as bad as being a criminal.

Laws should prevent people and corporations from doing wrong, but they often fail to do that. Corporations pollute the environment or exploit employees to make a profit. But consumers desire excellence for rock-bottom prices. It is profitable to break the law if you can get away with it or when the gain is higher than the fine. And if there are loopholes, they become exploited. The anonymity provided by money, large corporations and markets turn us into uncaring calculating creatures. That is why big pharma, the military-industrial complex, the financial industry, and the Internet giants threaten us. If corporations do right out of their own, many laws and regulations become redundant. If moral values can replace the law, it could be better.

Less efficiency, poorer service and a smaller choice of products can be preferable if that doesn’t lead to deprivation and starvation. For instance, why must you get your meal from a takeaway restaurant instead of preparing it yourself? Or why do you need to dress up in the latest fashion if you have ample wearable clothing? And you must work to pay for these things, so if you don’t buy them, you have time to prepare your meal or mend your clothes. We don’t want to give up these things, so in a democracy, we can’t fix this problem. Perhaps we might accept the change if God sends a Messiah who tells us this is for the best.

That might be wishful thinking, but what else can make it happen if it is not religion? Do you believe we will come to our senses, become one humanity, and do right on our own? That is wishful thinking. God is our only hope. As we are heading for the Great Collapse in one way or another, the End Times could be now. We might live inside a simulation run by an advanced humanoid civilisation.4 Hence, God might own this world, and you might soon discover that you own nothing and be happy. God’s kingdom might be a utopian society as early Christians lived like communists (Acts 4:32-35).

So what can we achieve by taking political control of the world’s resources and means of production by seizing the elite’s wealth and placing it in sovereign wealth funds? You can think of the following:

  • We can direct our means to the goals of a humane society, be respectful of this planet, and plan long-term.
  • We can dismantle harmful corporations or give them a new purpose without starting an economic crisis with mass unemployment.
  • We can make corporations employ people in developing countries and give them an education and decent salaries.
  • We can fund essential government services in developing countries and eliminate corruption insofar as it is due to insufficient pay of government employees.
  • We can make corporations produce sustainably and pass on the cost to consumers.
  • We can determine the pay of executives.
  • We can halt developments like artificial intelligence, genetic engineering, and nuclear energy if we believe they are undesirable.
  • We can end the incentive to produce and consume more and stop the advertising industry from tracking us.
  • We can end stress in the workplace if we axe bullshit jobs and redirect workers to the needs of society. A twenty-hour working week might be enough.

Interest stands in the way of a better future. The economy ‘must’ grow to pay for the interest. We ‘must’ work harder in bullshit jobs to pay for the interest. Corporations ‘must’ sell harmful products to pay for the interest. Corporations ‘must’ pay low wages or move production to low-wage countries to pay for the interest. And because of interest, money disappears from where it is needed most and piles up where it is needed least. Interest is our tribute to the wealthy. If we hope to live in a humane world society that respects creation, ending interest might be imperative. That is where Natural Money comes in.

Latest revision: 28 April 2023

Featured image: You’ll own nothing and you’ll be happy. WEF.

1. Welcome To 2030: I Own Nothing, Have No Privacy And Life Has Never Been Better. Ida Auken. World Economic Forum (2016).
2. Zakenman Gerard Sanderink tierend in rechtszaal: ‘Deze rechtbank deugt voor geen meter!’ AD.nl (2023).
3. Patagonia’s Next Chapter: Earth is Now Our Only Shareholder. Patagonia (2022).
4. Are You Living In a Computer Simulation? Nick Bostrom. Philosophical Quarterly, 2003, Vol. 53, No. 211, pp. 243-255.

Joseph interpreting the Pharaoh's dream

Joseph in Egypt

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Money with a holding fee existed in ancient Egypt for over 1,500 years. Egypt had storehouses of grain run by the state. Grain was the primary food source for the Egyptians. When farmers came with their harvest, they would get a receipt telling how much they brought in and on what date. A baker could return the receipt and exchange it for grain after paying for the storage cost and loss due to degradation.

The origins of the grain storage remain unclear. The government collected taxes in kind, thus a portion of the harvest, and had to store it. The government storage probably proved convenient for farmers as they didn’t have to keep and sell their grain, which was a significant convenience. And it made sense to have a public grain reserve in case the harvests failed.

The Egyptians used these receipts as money, as grain was a commodity everyone needed. Because of the storage costs, the receipts gradually lost value. With this kind of money, you might have interest-free loans. Someone in possession of this money who likes to save it will lose by storing it and can keep his capital intact by lending it without interest. There is no evidence that this happened.

The grain storage relates to a story in the Bible. It is fiction but might tie money with a holding fee to the Abrahamic religions. As the story goes, the Pharaoh had dreams his advisers couldn’t explain. He dreamt about seven lean cows eating seven fat cows and seven thin and blasted ears of grain devouring seven full ears of grain.

Joseph explained those dreams to the Pharaoh. He told the Pharaoh that seven years with good harvests would come, followed by seven years with crop failures. He 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 (Genesis 41):

When two full years had passed, Pharaoh had a dream: He was standing by the Nile when out of the river, there came up seven cows, sleek and fat, and they grazed among the reeds. After them, seven other cows, ugly and gaunt, came up out of the Nile and stood beside those on the riverbank. And the cows that were ugly and gaunt ate up the seven sleek, fat cows. Then Pharaoh woke up.

He fell asleep again and had a second dream: Seven heads of grain, healthy and good, were growing on a single stalk. After them, seven other heads of grain sprouted–thin and scorched by the east wind. The thin heads of grain swallowed up the seven healthy, full heads. Then Pharaoh woke up; it had been a dream.

In the morning, his mind was troubled, so he sent for all the magicians and wise men of Egypt. Pharaoh told them his dreams, but no one could interpret them for him. Then, the chief cupbearer said to Pharaoh, ‘Today I am reminded of my shortcomings. Pharaoh was once angry with his servants, and he imprisoned me and the chief baker in the house of the captain of the guard.

Each of us had a dream the same night, and each dream had a meaning of its own. Now, a young Hebrew was there with us, a servant of the captain of the guard. We told him our dreams, and he interpreted them for us, giving each man the interpretation of his dream. And things turned out exactly as he interpreted them to us: I was restored to my position, and the other man was hanged.’

So Pharaoh sent for Joseph, and he was quickly brought from the dungeon. When he had shaved and changed his clothes, he came before Pharaoh. Pharaoh told Joseph, ‘I had a dream, and no one can interpret it. But I have heard it said of you that when you hear a dream you can interpret it.’ ‘I cannot do it,’ Joseph replied to Pharaoh, ‘but God will give Pharaoh the answer he desires.’

Then Pharaoh said to Joseph, ‘In my dream, I was standing on the bank of the Nile, when out of the river there came up seven cows, fat and sleek, and they grazed among the reeds. After them, seven other cows came up–scrawny and very ugly and lean. I had never seen such ugly cows in all the land of Egypt. The lean, ugly cows ate up the seven fat cows that came up first. But even after they ate them, no one could tell they had done so; they looked just as ugly as before. Then I woke up.

‘In my dreams I also saw seven heads of grain, full and good, growing on a single stalk. After them, seven other heads sprouted–withered and thin and scorched by the east wind. The thin heads of grain swallowed up the seven good heads. I told this to the magicians, but none could explain it to me.’

Then Joseph said to Pharaoh, ‘The dreams of Pharaoh are one and the same. God has revealed to Pharaoh what he is about to do. The seven good cows are seven years old, and the seven good heads of grain are seven years old; it is one and the same dream. The seven lean, ugly cows that came up afterwards are seven years old, and so are the seven worthless heads of grain scorched by the east wind: They are seven years of famine.

‘It is just as I said to Pharaoh: God has shown Pharaoh what he is about to do. Seven years of great abundance are coming throughout Egypt, but seven years of famine will follow them. Then, all the abundance in Egypt will be forgotten, and the famine will ravage the land. The abundance in the land will not be remembered, because the famine that follows it will be so severe.

The reason the dream was given to Pharaoh in two forms is that the matter has been firmly decided by God, and God will do it soon. ‘And now let Pharaoh look for a discerning and wise man and put him in charge of the land of Egypt.

Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.’

The plan seemed good to Pharaoh and to all his officials. So Pharaoh asked them, ‘Can we find anyone like this man, one in whom is the spirit of God?’ Then Pharaoh said to Joseph, ‘Since God has made all this known to you, there is no one so discerning and wise as you. You shall be in charge of my palace, and all my people are to submit to your orders. Only with respect to the throne will I be greater than you.’ So Pharaoh said to Joseph, ‘I hereby put you in charge of the whole land of Egypt.’

During the seven years of abundance, the land produced plentifully. Joseph collected all the food produced in those seven years of abundance in Egypt and stored it in the cities. In each city, he put the food grown in the fields surrounding it. Joseph stored up huge quantities of grain, like the sand of the sea; it was so much that he stopped keeping records because it was beyond measure.

The seven years of abundance in Egypt came to an end, and the seven years of famine began, just as Joseph had said. There was a famine in all the other lands, but in the whole land of Egypt, there was food. When all of Egypt began to feel the famine, the people cried to Pharaoh for food. Then Pharaoh told all the Egyptians, ‘Go to Joseph and do what he tells you.’

When the famine had spread over the whole country, Joseph opened these storehouses and sold grain to the Egyptians, for the famine was severe throughout Egypt. All the countries came to Egypt to buy grain from Joseph because the famine was severe in the whole world.

The story further tells how the Egyptians became the serfs of the Pharaoh (Genesis 47):

There was no food in the whole region because the famine was severe. Both Egypt and Canaan wasted away because of the famine. Joseph collected all the money found in Egypt and Canaan as payment for the grain they were buying and brought it to Pharaoh’s palace.

When the money of the people of Egypt and Canaan was gone, all of Egypt came to Joseph and said, ‘Give us food. Why should we die before your eyes? Our money is used up.’ ‘Then bring your livestock,’ said Joseph. ‘I will sell you food in exchange for your livestock since your money is gone.’

So they brought their livestock to Joseph, and he gave them food in exchange for their horses, their sheep and goats, their cattle and donkeys. And he helped them through that year with food in exchange for all their livestock.

When that year was over, they came to him the following year and said, ‘We cannot hide from our lord that since our money is gone and our livestock belongs to you, there is nothing left for our lord except our bodies and our land.

Why should we perish before your eyes–we and our land as well? Buy us and our land in exchange for food, and we, with our land, will be in bondage to Pharaoh. Give us seed so we may live and not die, and the land may not become desolate.’

So Joseph bought all the land in Egypt for Pharaoh. The Egyptians, one and all, sold their fields because the famine was too severe for them. The land became Pharaoh’s, and Joseph reduced the people to servitude from one end of Egypt to the other.

Joseph told the people, ‘Now that I have bought you and your land today for Pharaoh, here is seed for you so you can plant the ground. But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children.’

‘You have saved our lives,’ they said. ‘May we find favor in the eyes of our lord; we will be in bondage to Pharaoh.’ So Joseph established it as a law concerning land in Egypt -still in force today- that a fifth of the produce belongs to Pharaoh.

A settlement of storage costs took place when someone brought in the receipts. The receipts gradually lost value over time to cover the storage cost. It was similar to buying stamps to keep the money valid, like in Wörgl. The grain 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 over 1,500 years. It was not a financial crisis that ended it, but the Roman conquest. It suggests a holding fee on money or negative interest rates can be the basis of a stable financial system that lasts for eternity.

Finally, there is a wisdom that we can easily overlook. Storing food makes more sense than saving money, even when you make losses on the storage. Today, the weather grows increasingly unpredictable due to global warming, so massive harvest failures become increasingly likely. Storing food makes more sense than ever in a time when people cling to money more than ever, and there is only enough food in storage to feed humanity for a few months. It doesn’t require a rocket scientist to figure that Joseph’s advice to the Pharaoh to store food for meagre times makes more sense than ever.

Latest revision: 13 January 2024

Featured image: Joseph interpreting the Pharaoh’s dream. Illustrations for La Grande Bible de Tours. Gustave Doré (1866). Public Domain.

Wörgl bank note with stamps. Public Domain.

Cash for Negative Interest Rates

nivtric2 Comments

The problem with cash

Dealing with cash is cumbersome for both businesses and banks, so they are increasingly opting for digital payments. It helps to reduce their costs. Increasingly, people are opting for digital payments over cash. Geezers might still prefer to pay with banknotes and coins, but youngsters often don’t. These are the primary reasons why banknotes and coins could soon go extinct. The authorities have also sought to reduce the use of cash because it has long been the preferred method of payment for criminals.

Cash still plays a significant role. In the European Union, people mainly use them for small transactions. Cash can become an attractive investment when interest rates are negative. In Switzerland, where interest rates have been the most negative at -0.75%, 1,000 franc banknotes and safe deposit boxes were in short supply. And so, interest rates below -1% seem impossible as long as cash yields zero.

When depositors take their money from the bank, the bank can run into trouble. That may happen when interest rates fall below zero. A holding fee on central bank money, including cash, of 12% per year, can make it attractive to lend money at negative interest rates, like -2%, as you don’t pay the holding fee on loaned funds. Bank deposits are money lent to banks, thus loaned funds. You may keep your money in the bank when interest rates are negative because cash has a lower interest rate.

Cash as a loan to the government

In Wörgl, the townspeople bought stamps and glued them to the banknotes to keep them valid. It would be more practical if we didn’t have to glue stamps on banknotes. And a holding fee of 12% per year would make cash unattractive. The charge doesn’t need to be that low to prevent people from withdrawing their money from the bank and putting it in a safe deposit box. If the interest rate on cash were a bit lower than the interest rates on bank accounts, that would be enough to stop people from hoarding banknotes.

When cash is a loan to the government, the interest rate on cash could be the same as the interest rate on short-term loans to the government. That rate would be better than the holding fee and could be as low as -3%. There can be an exchange rate between cash and central bank money. The value of cash would gradually decrease at a rate of 3% per year, and you don’t have to glue stamps on banknotes to keep them valid. The situation resembles 3% inflation, but it is a negative interest rate.

That difference is crucial because negative interest rate currencies may not require government or central bank management. They provide financial stability themselves. There is no money shortage due to interest charges, so there is no permanent need to expand debts to sustain the usury scheme, which requires government and central bank management. With negative interest rates, the money supply can be stable or even shrink without adverse consequences for the financial system or the economy.

Human psychology

Negative interest rates visibly reduce the currency balance in your account, while inflation operates more stealthily, by robbing you while you believe you get more. Wage changes are more noticeable than price changes, as some prices decrease while others increase in value. Even when negative interest rates and deflation are a better deal, and even if we all know it, we might not opt for them. The phenomenon is known as the money illusion. We resist a reduction in monetary units, even if it would make us better off.

It also affects how we look at negative interest rates. When interest rates are negative, money disappears, so inflation is likely to be lower, and prices may even decrease. That could be a better deal for depositors if their real return were higher, but most people dislike seeing their account balance decrease due to a negative interest rate. They might get edgy about their money vanishing into thin air. Negative interest rates sparked outrage among some Belgian depositors, who demanded a ban on these rates.

We prefer the illusion of a small gain that amounts to a loss in reality to the illusion of a similar loss that is, in fact, a better deal. It is not rational, but human psychology is the way it is. We are emotional beings that can think rather than thinking creatures with emotions. There is a fix: hiding negative interest rates and making them appear as inflation. To explain how we can look at the characteristics of Natural Money:

  • The administrative currency carries a holding fee of approximately 12% per year. If you own this money, €1.00 turns into €0.88 after a year. It can make lending at negative interest rates attractive.
  • Interest rates on bank accounts might be around -2% per year. Depositors don’t pay the holding fee, but the interest rate the bank offers.
  • Cash is a short-term loan to the government and carries the interest rate of short-term government loans, which might be -3%.
  • The administrative currency and cash become separate currencies. Cash gradually loses value relative to the administrative currency.

Making cash the money in people’s minds

When bank account statements are in cash currency rather than administrative currency, the public doesn’t notice that the interest rate is below zero. 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 that people won’t see their balance shrink due to negative interest. And if shops express their prices in the cash currency, it will become the currency in people’s minds.

If the interest rate on cash is -3%, its value decreases by 3% per year in terms of the administrative currency. If a bank offers an interest rate of -2% and settles the account in cash, the interest on the bank account appears to be +1%. And if the deflation rate is 1%, prices go down by 1%. Meanwhile, the value of cash decreases by 3% in the administrative currency, so prices in the cash currency increase by 2%. And so, the public experiences 2% inflation.

You can see it as a deception to prevent people from deceiving themselves. People get aggravated by negative interest rates, but largely ignore inflation. They also fall for the illusion of getting more when interest rates are positive. When the interest rate on bank accounts is 1% and inflation is 3%, you would lose 2% in purchasing power per year by holding a balance in a bank account. A 1% loss is a better deal for depositors. Natural Money can improve the economy, allowing real interest rates to be higher.

Critics might argue that we could be fooled by this scheme, just like inflation fooled us before. We won’t notice the negative interest rate, just like we did inflation before. Separating cash from the administrative currency and expressing prices and the value of bank accounts in cash currency can clear the psychological barrier that stands in the way of the public adopting negative interest rates.

The administrative currency remains the accounting unit in the financial system for bank accounts, debt, and interest, as well as the prices of financial assets, such as stocks and bonds. A similar situation existed in Europe between 1999 and 2002. After introducing the digital euro, cash continued to be the national currency. With Natural Money, the maximum interest rate of zero applies to the administrative currency and not to the cash currency, so interest rates in the cash currency may be above zero.

Latest revision: 1 November 2025

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