When a book is €7 in France, what does that mean? If it is $8 in the United States, is it more expensive there than in France? It depends on the exchange rates of the dollar and the euro. If the dollar is worth €0.80, then $8 equals €6.40, which is less than €7. The exchange rates of the euro and the dollar depend on supply and demand in the foreign exchange market. However, the price of money is not the same as the price of currencies.
When economists talk about the price of money, they mean the interest rate. The supply and demand for funds determine the interest rate, as well as the available funds for lending and the demanded funds for borrowing. When many want to borrow and few plan to lend, the interest rate rises. When only a few want to borrow, or when a lot of funds are available for lending, the interest rate drops.
Economists distinguish between money and capital markets. Money markets provide short-term funding, typically less than a year, whereas capital markets provide long-term financing. Several factors affect the supply and demand of funds in the money and capital markets. These are:
Ordinary people value the present over the future, and the degree to which we do affects the interest rate. They suffer from time preference.
Capitalists are very special people. They save and invest anyway, even at low interest rates. They are endowed with a capitalist spirit.
Returns on other investments affect the money and capital markets because they must be attractive relative to alternatives.
Time preference
Suppose you are a hatter and have just sold a hat for €50. You could rush to the nearest phone shop and buy that fancy phone cover you saw yesterday. Alternatively, you could save up to buy a new smartphone later, once you have sold more hats. You could even save for your retirement. The odds are that the money will be gone before the month is over, and that you have acquired a phone cover or some other gewgaw. If this applies to you, economists will diagnose you with a condition called time preference.
Economists assume that we have a time preference, meaning we prefer to satisfy our desires now rather than later. You want the latest smartphone model now rather than later, and you may even wish to borrow money to buy it now. Individual time preferences vary. Your time preference is the degree to which you value the present above the future, which you can express in an interest rate. If the market interest rate is above your time preference, you save, and if it is below, you borrow.
Time preferences differ for different people. Mary may save if interest rates are above 4%, and borrow once they are lower. John may save as long as interest rates are above 6% and borrow when they are below 6%. Alex might save if interest rates are above 5%, but may not borrow if interest rates are below 5%. The result is that as interest rates rise, the supply of funds for lending increases and the demand for funds for borrowing decreases. The market interest rate will be where supply and demand are equal.
Capitalist spirit
Time preference is an ailment plaguing ordinary people. Their designated role in the economy is to consume. Other people think differently. Economists have diagnosed them with a condition called a capitalist spirit, which is the opposite of time preference. They are the capitalists. Capitalists believe that money spent on a frivolous item is money wasted. That is because if you save and invest your money, you will end up with more money to reinvest.
Capitalists don’t suffer from time preference. Their designated role is to invest. And so, they end up with a lot of money when they die. What’s the point of that? Capitalists invest in businesses that make the frivolous items ordinary people consume. Ordinary people wouldn’t have invested their money. They would have spent it on frivolous items instead, so that these items wouldn’t have been there in the first place.
Capitalists have a lot of money. They don’t stop investing when interest rates are lower. They can’t help themselves. They have a capitalist spirit, just as ordinary people can’t help themselves because of their time preference. When they run out of things to invest in, they lend their money at lower interest rates. Again, it is the law of supply and demand at work. If capitalists have a lot of money while other people cannot borrow because they can’t afford to pay the interest, interest rates drop.
Investment returns
There is no point in investing if you don’t get more in return. These returns end up as corporate dividends or as rent from real estate. If these returns are high, you may prefer investing over lending. Investing is risky. If sales are sluggish, corporations may cut their dividends, but lenders still get their interest. When a business goes bankrupt, lenders receive their money first, while investors get what’s left over. And that could be nothing.
When someone wants to borrow money from you, the interest rate must be attractive compared to the investments you can make. Otherwise, you may prefer to invest and receive dividends and rents despite the risks. In this way, interest rates on other investments affect those on loans. Banks dominate the markets for borrowing and lending, so we choose between investing and keeping a deposit at a bank.
Risk
When you lend out your money, the borrower may not repay. So, if a stranger wants to borrow some money from you, she could offer you a high interest rate so that you might think, ‘I don’t know her, but she may pay back, and the interest rate is attractive, so I’ll do it.’ Money can lose value due to inflation, so inflation is another risk for the lender. If the money that buys a smartphone today only buys a phone cover a few years later, you spend that money on a smartphone right now. That is, unless someone wants to borrow your money from you and offers a high enough interest rate, so that you save for a newer model that you expect to need a few years down the line.
A bank’s business is to know its customers, so lending to a bank is usually less risky than lending to an individual or a company. When you have money in a bank account, you have lent it to your bank. Banks are supposed to be good at managing risk, so you accept a lower interest rate on your deposit than you would on a loan to an individual or a corporation. Banks know their customers well and lend to many different customers, so they can manage their risks and lend at lower interest rates than you could. Interest is the price paid for distrust. If investors trust the debtors and the value of the money, they expect inflation to be low, which means interest rates are lower.
The government and the central bank play a central role in limiting banking risk. Banks charge interest on loans, which leaves debtors short of money. That is, unless depositors spend their money or someone else borrows the principal plus the interest. Like other Ponzi schemes, the usury scheme collapsed from time to time, leading to defaults and economic hardship. To prevent that, the government borrows money, and the central bank prints it into existence, bringing it into circulation so debtors can repay their debts with interest. But with governments and central banks propping up the usury scheme, debts continue to grow, which may eventually lead to a usury-financial apocalypse.
Convenience
When you lend your money to someone else, you can’t use it yourself. There may be a new smartphone you want to buy, but alas, you have lent out your money. That is inconvenient. Then you remember with a smile that you will have the phone and a hip phone cover next year because you received interest. So, if you don’t receive interest on your money, you may not bother lending it out because you may need it.
When you deposit money at a bank, you lend it to the bank, but you can still use it at any time. If you use that money to pay for legal advice, it ends up in the lawyer’s account, and the bank borrows it from the lawyer until she uses it to pay the barber. Having cash on hand is convenient. Economists call this liquidity preference. We accept low interest rates on current accounts because they are as convenient as cash.
Properties of money
The properties of money can affect interest rates. Imagine that apples are money, and you save to buy a house. If someone wants to borrow 1,000 apples from you and promises to pay back 1,000 apples after 5 years, when you plan to buy the home, you probably accept this generous offer. You may even accept an offer of 900 apples, since that is better than letting your apples rot. In this case, you would settle for a negative interest rate.
You would only do so if you have no better alternatives. If you can make 10% per year in the stock market with Apple stock because their gadgets are in great demand and outrageously expensive, you would exchange your apples for Apple stock. It doesn’t matter if the apples rot. If someone wants to borrow money from you, you demand interest. Our money rots, even though not as much as apples. We call it inflation.
If the money had been gold, you wouldn’t accept the offer, even when the stock market is doing terribly. You can keep your gold in a safe deposit box, and you have 0% interest. Similarly, you wouldn’t accept negative interest rates on euros or dollars because you can take banknotes and store them in a safe deposit box. If many people do so, that interrupts the circular flows, and the economy may suffer.
Discounting
Discounting is about determining the present value of future money using the interest rate. When interest rates are above zero, one euro in the present is worth more than one in the future. That is because you can receive interest on that euro. If the interest rate is 5%, one euro turns into €1.05 in a year. In other words, €1,050 over a year is worth €1,000 today, so the present value of €1,050 over a year is €1,000.
How much is a cash flow of €1,000 in a year worth in the present? That is the reverse calculation. The formula for the present value of a single future cash flow is:
Present Value = Future Cashflow / (1 + (Interest Rate / 100)) ^ Number of Years
If there are multiple future cash flows, you add up their present values. An example can illustrate this. Assume that the interest rate on government bonds is 3%, and you own a 5% government bond that still has two years to go before the principal of €1,000 will be repaid. You will also receive €50 in interest after one year and another €50 in two years when the principal is due.
If you plan to sell the bond today, you want to know its present value. There are two cash flows. You will first receive €50 after one year. The present value of that cash flow is: €50 / (1 + (3 / 100)) ^ 1 = €48.54. After two years, you will receive an additional €1,050. The present value of that amount is: €1,050 / (1 + (3 / 100)) ^ 2 = €989.73. And so the present value of the bond is €48.54 + €989.73 = €1,038.27.
At higher interest rates, the value of the bond declines. If the interest rate is 5%, its present value is (€50 / (1 + (5 / 100)) ^ 1) + €1,050 / (1 + (5 / 100)) ^ 2 = €47.62 + €952.38 = €1000 exactly, which is to be expected. At lower interest rates, the bond will be worth more. At an interest rate of 2%, the present value is (€50 / (1 + (2 / 100)) ^ 1) + €1,050 / (1 + (2 / 100)) ^ 2 = €49.02 + €1,009.23 = €1,058.25.
At lower interest rates, bonds are worth more. That is also true for other assets that generate cash flows, such as stocks and real estate. The present value of the future dividends and rents increases when interest rates decline. When interest rates are lower, people can borrow more for a home, so that house prices may go up.
Engine of growth
Credit means trust. When you invest, you expect to receive a profit. You anticipate something that isn’t there yet. You imagine that it will be there in the future. In the past five hundred years, trust in the future mostly paid off. If you don’t trust the future, you put your money in a piggy bank or invest in something that keeps its value during an economic collapse, such as gold or land. Banks create money out of thin air, believing that the debtor’s future revenues will pay for the principal and the interest.
That is why the economy must grow. It is the growth imperative promoted by interest charges. When expectations fail to materialise, investors stop investing, and interest payments on existing debt damage the economy by sucking money out of the circular flows. When growth is lacking, governments and central banks keep the economy afloat by going into debt or printing currency and bringing these funds into circulation. When money circulates, businesses profit, employ people, and pay interest.
Interest keeps the economy going by making those with a surplus lend it to those with a deficit. That is why economists think that banning interest will cause an economic disaster. When economic growth is low and expectations aren’t met, investors stop investing, and the money stops flowing. Had the money been perishable like apples, they would still invest, even when returns were low, or lend their money at a negative rate. We see that happening. After accounting for inflation, interest rates are often negative.
Featured image: Ara Economicus. Beverly Lussier (2004). Wikimedia Commons. Public Domain.
Natural Money is an interest-free demurrage currency. It features a holding fee on currency and a maximum interest rate of zero on money and loans. The Natural Money currency is an accounting unit only, as the holding fee, which may range from 0.5% to 1% per month, makes the currency unattractive to hold. Therefore, the currency will not circulate, nor will someone invest in it. Cash, bank deposits, bonds, stocks, real estate, and other investments aren’t currency and therefore not subject to the holding fee. Not paying the holding fee and the curtailment of credit, and thereby inflation, caused by the maximum interest rate, can make lending at negative interest rates attractive.
Natural Money features a separation between regular banking, also known as commercial banking, which involves lending and borrowing, and investment banking, also referred to as participation banking, which involves participating in businesses. Regular banks guarantee returns to their depositors and use their capital to cover losses. Participating banks have shareholders who share in the profits and the losses. These two bank types should remain separated, even though one bank might offer both in distinct accounts. A commercial bank’s funds should be used only for lending. The maximum interest rate limits lending, allowing equity to replace debt in the financial system.
Evidence from history
There is little historical data on the subject of interest-free demurrage currency. Financial systems founded on interest-free money with a holding fee have never existed. There were holding fees and interest bans, but the combination of both has never existed. More importantly, a usury-free financial system requires a high-trust society founded on moral values where investments are safe, and is only feasible with the help of several relatively modern financial innovations. That all seems too good to be true, but we can have dreams. And so, the evidence from history is of limited value.
Several ancient societies have seen usury-induced economic crises. Extreme wealth inequality, often accelerated by usurious lending, regularly coincided with societal collapses. It is a recurring pattern that has existed since time immemorial. The Sumerians were already familiar with charging interest and its disastrous social consequences. Sumerian rulers began implementing debt jubilees as early as 2,400 BC, cancelling debts and freeing debt slaves. Other cultures, such as those in Israel, have banned charging interest. Israel also had debt jubilees every fifty years.
The Egyptian grain-backed currency existed for over 1,000 years, suggesting it provided monetary stability. Nevertheless, ancient Egypt has seen economic crises, often due to droughts causing crop failures, high taxation during warfare, or a weakening central government. The government mitigated famines with its grain reserves, but prolonged famines depleted these facilities, leading to civil unrest and, sometimes, a collapse of order. There is no evidence of social benefits of this money for Egyptian society. Charging interest was common, and Egypt had debt cancellations.
In the Middle Ages, the Church forbade charging interest. Christians, like Jews, were each other’s brothers and couldn’t charge each other interest. When economic life became more developed, the ban on interest became difficult to enforce. In the 14th century, partnerships emerged where creditors received a share of the profits from a business venture. As long as the share remained profit-dependent, it was not illegal, as it was a participation in a business rather than lending at interest.1 Islamic finance works with similar principles.2
In the 17th and 18th centuries, interest ceilings replaced bans. To circumvent the interest ceilings, a creditor and debtor could secretly agree on a fraud, whereby the creditor handed over less money than stated in the loan contract, so that the borrower actually paid more interest.3 More recent experiences with Regulation Q in the United States, which imposed maximum interest rates on bank accounts, suggest that a maximum interest rate is enforceable only if it does not significantly impact the bulk of borrowing and lending.4
An effective ban on usury requires a society grounded in moral values rather than profit. It requires us to live modestly and within the planet’s limits. It also requires societies to care for vulnerable individuals, so that they don’t fall prey to usurers. You shouldn’t charge interest, not merely because it is illegal, but because it contributes to something profoundly evil. That points to a broader problem. We should care about the world and consider the consequences of our actions. Even when what we do is legal, it doesn’t mean that it is good.
Implementation
To implement Natural Money, interest rates must already be low or negative. Attempting to lower interest rates when market conditions don’t justify that move would likely scare investors. Low interest rates require trust, which requires financial discipline, including fiscal discipline from governments. That doesn’t equal austerity, since governments earn interest on their debts when interest rates are negative. The transition preferably is a gradual process that the authorities communicate in advance. Whether that is possible at all remains to be seen, as the implementation may occur in exceptional times.
If there is still a functional currency, the first step is for the government to balance the budget. The second step is to decouple cash currency from the administrative or central bank currency. The move encompasses retiring central bank-issued banknotes and replacing them with treasury-issued banknotes. Not everyone will hurry to a local bank office to exchange banknotes, so the central bank-issued banknotes must be exchangeable at par for the new banknotes for a considerable period.
As long as interest rates are significantly above zero, a holding fee won’t bring them down. Setting a maximum interest rate can lower interest rates by curtailing credit, thereby cooling the economy. To avoid disrupting financial markets, the implementation must be gradual. The maximum interest rate should be high enough to avoid disrupting the economy. Initially, authorities could set the holding fee at a low percentage, or not at all. As interest rates fall, authorities can lower them.
The zero lower bound is a minimum interest rate. It operates like a price control by preventing interest rates from moving freely to the rate where supply and demand for money and capital balance. That is to the advantage of the wealthy, as they can take the economy hostage by demanding a minimum return on their investments. When returns are low, investors may prefer cash over investments, which can hinder an economic recovery. Economists call it liquidity preference.
Low interest rates can prompt lenders to seek higher yields and take on more risk. Low interest rates allow borrowers to take on more debt. Low interest rates can promote investments that become unprofitable when the economy slows down. A maximum interest rate can prevent these situations from happening. A maximum interest rate caps the risk lenders are willing to take and promotes a deleveraging of balance sheets, so that even low-yielding ventures don’t go bankrupt because of interest-bearing debts.
Issues with the maximum interest rate
A holding fee will cause few difficulties, but a maximum interest rate is more problematic. Insofar as the maximum interest rate affects questionable segments of credit, such as credit card debt and subprime lending, this is beneficial overall. More serious issues can emerge with financing small and medium-sized businesses. Partnership schemes can fill in the gap, but it is hard to predict how that will play out. The maximum yield on loans is zero, making partnerships more attractive, as they can offer higher returns.
There may be objections to the limits Natural Money imposes on consumer credit. Still, there is little doubt that a maximum interest rate can improve consumers’ purchasing power, as borrowers won’t have to pay interest. As a result, there are fewer borrowing options, which may lead to the emergence of black markets. To make illegal schemes unattractive for lenders, lenders who charge interest could lose the money they have lent.
Zero is the only non-arbitrary number, making it more difficult to change the maximum interest rate. That may happen for political or other reasons. The salespeople of usury can find plenty. If it is one, why not two? Zero is a clear line. A positive interest rate, no matter how small, contributes to financial instability. All positive growth rates compound to infinity, so once we start the fire of usury, it will eventually consume us.
A maximum interest rate seems feasible if it is above the rate at which most borrowing and lending occur, thereby limiting the effects on liquidity in the fixed-income market. A maximum interest rate creates room for alternatives, such as private equity and partnership schemes. These alternatives can supplement the fixed-income market and mitigate the effects of the maximum interest rate. A maximum interest rate is beneficial overall if it mainly affects questionable segments of credit, such as subprime lending.
In the case of bonds, the maximum interest rate of zero applies at the time of issuance. Due to economic circumstances or issues with the debtor, the interest rate may rise and enter positive territory. Likewise, governments may issue long-term bonds that may have positive yields if interest rates rise later on. That is not a serious issue, as long as the interest rate was zero or lower at the time of issuance.
A more serious issue is the risk of liquidity problems. When interest rates rise, less credit becomes available at interest rates of zero or lower. Interest rates might increase due to a strong economy with inflationary pressures. There are always economic agents that must borrow at all costs to meet their present obligations, so if they can’t borrow, they might go bankrupt. Businesses and individuals need to deleverage and arrange credit in advance, such as an overdraft facility, with their banks.
Another equally serious question is the profitability of banks with Natural Money. The lending business of banks will likely shrink significantly. The assumption is that risk-free lending will be profitable. But what if it isn’t? In that case, banks may need to lower the interest rates on deposit accounts to a level below the interest rate on short-term government debt. In that case, the cash interest rate may need to be lower than the interest rate on short-term government debt to make it work.
Inherent stability
Ending usury is impossible without investors having trust in the political economy or the political and economic institutions of the polity issuing the currency. The most trusted political economies have the lowest interest rates because their governments are fiscally responsible. Natural Money requires taking it to the next level. With Natural Money, to borrow, the government must find lenders willing to lend in the currency at negative interest rates. The government will be better off borrowing at negative interest rates, which provides an incentive for budgetary discipline. That is the foundation of stability.
Extracting a fixed income from a variable income stream contributes to financial instability. Fixed interest payments can bankrupt a corporation even when it is profitable overall. Interest contributes to moral hazard, as it serves as a reward for taking risks. Investors expect to earn higher yields on riskier debt, so lenders take on these risks. The more uncertain an income source, the higher the interest rate needs to be to compensate for the risk of lending, but the higher the fixed interest rate, the more likely failure becomes, which reveals the destructive consequence of interest being a reward for taking risks.
All parts of the financial system are intertwined. Individual banks can transfer these risks to the system. And so, the risk management of individual agents can increase the overall level of risk in the system. The payment and lending system is a key public interest, so governments and central banks back it. Banks take risks and reap rewards in the form of interest, while public guarantees back up the financial system. The arrangement leads to moral hazard, a mispricing of risk and private profits at the expense of the public. A maximum interest rate can end these problems.
A maximum interest rate causes a deleveraging and a reduction in problematic debts, which has a stabilising effect on the financial system and the economy. Individuals and businesses must already take action before their debts become problematic. Maximum interest rates can distort financial markets. Most notably, there will be fewer options for smaller firms to borrow. Partnership schemes should fill that void.
Interest payments also affect business cycles. The mainstream view is that central banks should raise interest rates during economic booms to curb investment and spending, thereby preventing the economy from overheating. A rosy view of the future prevails during a boom, so higher interest rates seem justified and borrowing continues for some time. When the bust sets in, the picture alters, and an overhang of debt at high interest rates worsens the woes. It would have been better if these debts hadn’t existed in the first place.
That makes a usury-based financial system inherently unstable. Natural Money changes this dynamic. When the economy improves, higher interest rates increase the attractiveness of equity investments relative to debt. That reduces the funds available for lending. The curtailment of credit will prevent the economy from overheating and avoid a debt overhang. When the economy slows, negative interest rates provide stimulus. In the absence of a debt overhang, the economy is likely to recover soon. A Natural Money financial system is inherently stable.
Featured image: 1919 Cover of The Natural Economic Order. Wikimedia Commons.
1. Simon Smith Kuznets, Stephanie Lo, Eric Glen Weyl (2009). The Doctrine of Usury in the Middle Ages. Simon Smith Kuznets, transcribed by Stephanie Lo. An appendix to Simon Kuznets: Cautious Empiricist of the Eastern European Jewish Diaspora. 2. Sekreter, Ahmet (2011). Sharing of Risks in Islamic Finance. IBSU Scientific Journal, 5(2): 13-20. 3. K. Samuelsson (1955). International Payments and Credit Movements by the Swedish Merchant Houses, 1730-1815. Scandinavian Economic History Review. 4. R. Alton Gilbert (1986). Requiem for Regulation Q: What It Did and Why It Passed Away. Federal Reserve Bank of St. Louis.
The last 200 years have been an era of exceptional economic growth, unlike anything the world has ever seen. Like any exponential phenomenon in a limited room, that growth will end. The best comparison is cancer. If it goes untreated, the host dies. The end of growth, whether it is by death of the host or treatment, has implications for capital, which is addicted to positive returns made possible by squandering planetary reserves. For most of history, there was a shortage of capital. But for the first time, there is a massive excess invested in the bullshit economy, transforming energy and resources into waste and pollution to make money for investors by producing and marketing non-essential products and services in a competition that is about to make humans redundant.
For most of history, economic growth has been negligible. However, it averaged 1.5% over the last two centuries and will soon return to zero, or possibly even lower, perhaps much lower. That has implications for returns on investments, the financial system and interest rates. Investors have become hooked on positive returns, so there must be growth. Otherwise, they lose confidence. It is grow or die, but growth will kill us. And so, we face the prospect of an economic collapse and a collapse of civilisation. We are near a technological-ecological apocalypse. There is a dark force operating behind the scenes that makes us commit suicide. It is usury, or the charging of interest on debts. It makes capital addicted to growth.
The survivors may debate the precise cause of the collapse. I have already received a newsletter email from a pundit claiming that a lack of very cheap oil is leading to debt problems. Future generations may blame the planet for being finite, rather than seeing that human beings were so foolish as to build their civilisation on usury, so that it can only survive through economic growth. Before modern times, humans managed to live without economic growth, as there was hardly any capital and no interest-bearing debt. Past civilisations facing usury-induced economic collapses either disappeared, banned interest, or instituted debt cancellations.
The past 200 years have indeed been exceptional, and that miracle was primarily due to low interest rates. Efficient financial markets promoted growth by depressing interest rates, allowing economic growth to finance the interest. That has blinded us from the financial apocalypse that is upon us. Low interest rates have already brought us unprecedented wealth, albeit at the expense of the planet and future generations. When economic growth returns to sustainable levels, the interest on outstanding debt can collapse the world economy and bring down human civilisation. Luckily, a usury-free financial system for a future without growth already exists: Natural Money.
The nature of usury
Suppose Jesus’ mother had opened a retirement account for Jesus just after his birth in 1 AD at the Bank of the Money Changers next to the Temple in Jerusalem. Suppose she had put a small gold coin weighing three grammes in Jesus’ retirement account at 4% interest. Jesus never retired, but he promised to return. Suppose now that the bank held the money for this eventuality. How much gold would there be in the account in the year 2020? It would be an amount of gold weighing twelve million times the mass of the Earth. There isn’t enough gold to pay out Jesus if he returns.
And so the usurers hope he doesn’t come back, also for other reasons, of course. And for every lending, there is borrowing. The bank is merely an intermediary. There must be people in debt for an amount of gold weighing twelve million times the mass of the Earth. That would never happen. The scheme would have collapsed long before that, and the debtors would have become the serfs of the money lenders. That is why religions like Christianity and Islam forbade charging interest on money or debts.
The usurers have found a way around the issue. Our money isn’t gold anymore. Banks create money from thin air, so the nature of usury has changed. When you go to a bank and take out a loan, such as a car loan, you get a deposit and a debt, which the bank creates on the spot through two bookkeeping entries. You keep the debt, but the deposit becomes someone else’s money once you purchase the car. When you repay the loan, the deposit and the debt vanish into thin air. You must repay the loan with interest. If the interest rate is 5% and you have borrowed €100 for a year, you must return €105.
Nearly all the money we use is created from loans that borrowers must repay with interest. If our borrowing creates money, and we repay our debts with interest, then we may do so by borrowing the interest. That is also what happens in reality, and that is why debt levels continue to rise. So, where does the extra €5 come from? Here are the options:
Borrowers borrow more.
Depositors spend some of their balance.
Borrowers fail to repay their loans.
The government borrows more.
The central bank prints the money.
Problems arise when borrowers don’t borrow more, and depositors don’t spend their money. In that case, borrowers as a group are short of funds, and some of them are unable to repay their loans. If too many borrowers can’t pay at once, a financial crisis occurs. To prevent that from happening, the government borrows more, and the central bank prints money. They bring that money into the economy, allowing debtors to pay off their debts with interest. Interest compounds to infinity, and there is no limit to human imagination, so frivolous accounting schemes can go a long way before they collapse.
Necessity of interest
We take interest for granted, and economists believe that the economy needs it. Without lending and borrowing, a modern capitalist economy would have been impossible; without interest, loans would also be impossible. Money is to the economy what blood is to the body. If lending and borrowing halt, money stops flowing, and the economy comes to a standstill. That is like a cardiac arrest, which, if untreated, is fatal. And that is also why the financial press reads the lips of central bankers as if our lives depended on it. They manage the flow. Lenders have reasons to demand interest. These are:
When you lend out money, you can’t use it yourself. That is inconvenient. And so, you expect compensation for the use of your money.
The borrower may not repay the loan, so you desire compensation for that risk.
You can invest your money and earn a return. To lenders, the interest rate must be attractive relative to other investments.
That has been the case for a long time, and economists have gradually become quite good at explaining the past. Since then, we have seen financial innovations and are now facing the end of growth. Changes in the economy and the economic system may lead to the end of interest on money and debts. These are:
You can use the money in a bank account at any time. You can use the money you have lent as if it were cash. And a debit card is more convenient than cash.
Banks spread their risks, central banks help out banks when needed, and governments guarantee bank deposits, so bank deposits are as safe as cash.
There is a global savings glut. There are ample savings and limited investment options, which can make lending at negative interest rates attractive.
Negative interest rates are possible. In the late 2010s and early 2020s, the proof came when most of Europe entered negative interest-rate territory. The ECB was unable to set interest rates below -0.5%. Had it set interest rates even lower, account holders would have emptied their bank accounts and stuffed their mattresses with banknotes to avoid paying interest on their deposits, disrupting the circular flows.
As interest rates couldn’t go lower, the ECB took extraordinary measures, flooding the banking system with new money to boost the economy. Had there been a holding fee on cash, interest rates could have gone lower, and there would have been no need to print money. It has happened before. The Austrian town of Wörgl charged a holding fee on banknotes during the Great Depression, which led to an economic miracle by making existing banknotes circulate better rather than printing new money. Ancient Egypt had a similar payment system for over a thousand years during the time of the Pharaohs.
Miracle of Wörgl
In the midst of the Great Depression, the Austrian town of Wörgl was in dire straits and prepared to try anything. Of its population of 4,500, 1,500 people were jobless, and 200 families were penniless. Mayor Michael Unterguggenberger had a list of projects he wanted to accomplish, but there wasn’t enough money to fund them all. These projects included paving roads, installing street lights, extending water distribution throughout the town, and planting trees along the streets.1
Rather than spending the remaining 32,000 Austrian Schilling in the town’s coffers to start these projects, he deposited them in a local savings bank as a guarantee to back the issue of a currency known as stamp scrip. A crucial feature of this money was the holding fee. The Wörgl money required a monthly stamp on the circulating notes to keep them valid, amounting to 1% of the note’s value. The Argentine businessman Silvio Gesell first proposed this idea in his book The Natural Economic Order.2
Nobody wanted to pay for the monthly stamps, so everyone spent the notes they received. The 32,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings. Few did this because the scrip was worth one Austrian schilling after buying a new stamp. But the townspeople didn’t keep more scrip than they needed. Only 5,000 schillings circulated. The stamp fees paid for a soup kitchen that fed 220 families.1
The municipality carried out the works, including the construction of houses, a reservoir, a ski jump, and a bridge. The key to this success was the circulation of scrip money within the local economy. It circulated fourteen times as often as the schilling. It increased trade and employment. Unemployment in Wörgl decreased while it rose in the rest of Austria. Six neighbouring villages successfully copied the idea. The French Prime Minister, Édouard Daladier, visited the town to witness the ‘miracle of Wörgl’ himself.1
In January 1933, the neighbouring city of Kitzbühel copied the idea. In June 1933, Mayor Unterguggenberger addressed a meeting with representatives from 170 Austrian towns and villages. Two hundred Austrian townships were interested in introducing scrip money. At this point, the central bank decided to ban scrip money.1 The depression returned, and in 1938, the Austrians turned to Hitler, as they voted to join Germany.
Since then, several local scrip monies have circulated, but none has been as successful as the one in Wörgl. In Wörgl, the payment of taxes in arrears generated additional revenue for the town council, which it then spent on public projects. Once the townspeople had paid their taxes, they would have run out of spending options and might have exchanged their scrip for schillings to avoid paying for the stamps. That never happened because the central bank halted the project.
The economy of Wörgl did well because the holding fee kept the existing money circulating. A negative interest rate encourages people to spend their money, eliminating the need to borrow and keeping the money circulating in the economy. It demonstrated that the economy required a negative interest rate. A holding fee makes negative interest rates possible, as lenders do not have to pay it after lending the money. The one who holds the money pays the charge. That can make lending money at an interest rate of -2% to a reliable borrower more attractive than paying 12% for the stamps.
Joseph in Egypt
In the time of the Pharaohs, the Egyptian state operated granaries for over 1,500 years. Wheat and barley were the primary food sources in Egypt. Whenever farmers brought their harvest to one of the granaries, state officials issued them receipts stating the amount of grain they had brought in. Egyptians held accounts at the granaries. They transferred grain to others as payment or withdrew grain after paying the storage cost.
The Egyptians thus used grain stored in their granaries for making payments. Everyone needed to eat, so grain stored in the granaries had value.1 Due to storage costs, the money gradually lost its value. With this kind of money, you might have interest-free loans. If you save grain money, you pay for storage. And so, lending the money interest-free to a trustworthy borrower can be attractive. There is no evidence that this happened.
The origin of these granaries remains unclear. Probably, the state collected a portion of the harvests as taxes and stored them in its facilities. The government storage proved convenient for farmers, as it relieved them of the work of storing and selling their produce. And it made sense to have a public grain reserve in case of harvest failures.
The Bible features a tale that supposedly explains the origin of these granaries. As the story goes, a Pharaoh once had a few dreams that his advisers couldn’t explain. He dreamed about seven lean cows eating seven fat cows and seven thin, blasted ears of grain devouring seven full ears of grain. A Jewish fellow named Joseph explained those dreams to the Pharaoh. He told the Pharaoh that seven years of good harvests would follow, followed by seven years of crop failures. Joseph advised the Egyptians to store food for meagre times. They followed his advice and built storehouses for grain. In this way, Egypt managed to survive seven years of scarcity.
The money gradually lost value to cover the storage cost of the grain. It works like buying stamps to keep the money valid, like in Wörgl. Both are holding fees. The grain money circulated for over 1,500 years until the Romans conquered Egypt around 40 BC. It did not end in a debt crisis, which suggests that a holding fee on money or negative interest rates can create a stable financial system that lasts forever.
Storing food makes sense today, even when it costs money. Harvests may become more unpredictable due to global warming and intensive farming. We only have enough food in storage to feed humanity for a few months as it is unprofitable to store more. Food storage ties up capital, so there is also interest cost. But you can’t eat money, so storing food to deal with harvest failures is as sensible now as it was in the time of the Pharaohs. It reveals the stupidity of our current thinking. Our survival needs to be financially viable. Just imagine how that will play out once artificial intelligence and robots can replace us.
Natural Money
The miracle of Wörgl suggests that a currency with a holding fee could have ended the Great Depression. A myth circulating in the interest-free currency movement is that had the Austrian central bank not banned the experiment, the Great Depression would have ended, Hitler wouldn’t have come to power, and World War II wouldn’t have happened. That is a tad imaginative, to say the least, but a holding fee could have allowed for negative interest rates, and they could have prevented the Great Depression from starting in the first place. That is a lot of maybes.
And such money can last. The grain money in ancient Egypt provided a stable financial system for over 1,000 years. The grain backing provided financial discipline. The holding fee prevented money hoarding that could have impeded the flow of money. The money, however, didn’t promote interest-free lending, so the Egyptian state regulated lending at interest to prevent debt slavery. Egyptian wisdom literature condemned greed and exploitative lending, encouraging empathy for vulnerable individuals.
A holding fee of 10-12% per year punishes cash users. If the interest rate on bank accounts is -2%, an interest rate of -3% on cash is sufficient to prevent people from withdrawing their money from the bank. That becomes possible once cash is a separate currency backed by the government, on which the interest rate on short-term government debt applies. Banknotes and coins thus become separate from the administrative currency. So, if the interest rate on the cash currency is -3%, one cash euro will be worth 0.97 administrative euros after one year. And now, we have a definition of Natural Money:
Cash is a separate currency backed by short-term government debt and has the negative interest rate of short-term government debt.
Natural Money administrative currencies carry a holding fee of 10-12% per year, allowing for negative interest rates.
Loans, including bank loans, have negative interest rates. Zero is the maximum interest rate on debts.
Consequences
Natural Money doesn’t fundamentally alter the nature of bank lending. Banks borrow from depositors at a lower rate to lend it at a higher rate. With Natural Money, banks may offer deposit interest rates of -2% to lend it at 0% instead of borrowing it at 2% to lend it at 4%. A maximum interest rate of zero, however, has a profound impact on lending volume, as it severely constrains it, most notably speculative lending and usurious consumer credit, and it favours equity financing over borrowing in business. The strict lending requirements affect business loans, leading to deleveraging.
Businesses still need to attract capital. To address the issue, Natural Money features a distinction between regular banks and investment banks. Regular banks can guarantee promised returns and have government backing because the payment system is a public service. Investment banks invest in businesses and take risks. They are comparable to Islamic banks. Investment banks don’t guarantee returns. Depositors take on risk to get better returns, but they might incur losses or temporarily have no access to their deposits.
While the maximum interest rate restricts lending, the holding fee provides a stimulus, thereby stabilising the financial system. When the economy slows down, interest rates decrease, and more money becomes available for lending as risk appetite increases, making lending at zero interest more attractive. Conversely, if the economy booms, interest rates increase, and the maximum interest rate curtails lending. Consequently, central banks don’t need to set interest rates and manage the money supply, and governments don’t need to manage aggregate demand with their spending.
Reasons to do research
Stamp scrip and other kinds of emergency money have helped communities in times of economic crisis. The economic miracle of Wörgl during the Great Depression of the 1930s, however, was exceptional. The payment of local taxes inflated the impact of the money. Many townspeople had been late on their taxes, but once the economy recovered, they had the money to pay them. Some even paid their taxes in advance to avoid paying the holding fee. It generated additional revenues for the town, which it could spend on the projects. It provided a boost that would have petered out once the villagers had paid their taxes.3 It was not a miracle. It was too good to be true. Still, there is more to it.
Once interest rates reach zero, the markets for money and capital cease to function as interest rates can’t go lower. Money is to an economy what blood is to a body, so it must flow. When the money stops flowing, the effect is like a cardiac arrest, and the economy is in dead waters. To keep the money circulating, those with a surplus must lend it to those with a deficit, and the interest rate should be where the supply and demand for money are equal. When that interest rate reaches zero, lenders stop lending because the return is not worth the risk, so they wait for interest rates to rise. Money then ends up on the sidelines, leading to cardiac arrest, which can be the start of an economic depression.
It happened during the Great Depression. If interest rates had been lower, the markets for money and capital could have remained in operation. We have seen negative interest rates in Europe for nearly a decade. They could have gone lower had there been a holding fee on cash, or even better, a negative interest rate that is just low enough to prevent people from hoarding it. Once interest rates can go lower, a usury-free global financial system may be possible. That gives rise to several questions. Is it possible? Under which circumstances? What are the benefits and the drawbacks? What are the implications for individuals, businesses and governments? And how does it affect the financial system?
There is no alternative
Several other monetary reform proposals do not view the financial system as a system, which it is, and that isn’t hard to guess because the term ‘financial system’ already implies this. You can’t attach the wings of a Boeing to an Airbus and expect the thing to fly. The financial system is a complex system with numerous relationships, many of which existing reform proposals overlook. For instance, if you end the central bank, the economy will crash immediately, even if it is flying smoothly. And that isn’t even hard to find out.
The payment system is a key public interest, so governments and central banks stand behind it. Most banks are private corporations driven by profit. They take risks that might bring down the economy. And so, governments and central banks make regulations and oversee the banks. And banks create money, from which they profit, and we all pay for it via inflation. That is not good, but replacing the system with something worse is worse, like the word ‘worse’ implies.
There is no lack of ill-conceived proposals. And most fail to address the primary underlying cause of the dysfunction of the financial system, which is charging interest on money and debts, commonly known as usury. An inflation-free, stable financial system is possible. It may not even need central banks. But a sound reform proposal sees the financial system as a complex system with intricate relationships that interact with one another.
And so, Natural Money comes with a systems approach that aims to uncover the relevant relationships in the financial system and the consequences of changing them. It means that Natural Money is a comprehensive design. The gravest error you can make is to pick only the elements you like. That design will never fly. Nor would an Airbus take off with Boeing wings. So, you either buy Airbus or Boeing. In the case of Natural Money, that is not an option. There is no alternative.
Latest revision: 1 November 2025
Featured image: Wörgl bank notes with stamps
1. The Future Of Money. Bernard Lietaer (2002). Cornerstone / Cornerstone Ras. 2. The Natural Economic Order. Silvio Gesell (1918). 3. A Free Money Miracle? Jonathan Goodwin (2013). Mises.org.
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).
A few centuries ago, over 99% of the world’s population lived in abject poverty. In 1651, Thomas Hobbes depicted human life as poor, nasty, brutish, and short. It had always been that way. Yet, a few centuries later, a miracle had occurred. Nowadays, more people suffer from obesity than from hunger. Today, the life expectancy in the poorest countries exceeds that of the Netherlands in 1750, the wealthiest nation in the world at the dawn of the Industrial Revolution. This miracle is the result of science, innovations and a massive build-up of capital. How could that happen? That is because interest rates have come down from 30% in the Middle Ages to near zero today. Only, what caused interest rates to go that low?
In the economic sphere, it is the outcome of an epic battle between ‘Time Preference’ and ‘Capitalist Spirit’ that raged for centuries. The capitalist spirit won. Ordinary people suffer from a condition known as time preference, which causes them to spend their money on frivolous items. They think, ‘Live today, because you can be dead tomorrow.’ Economists say they lack trust in the future. There are also capitalists, who are special people who suffer from an illness called the capitalist spirit. Rather than spending their money on frivolous items, they think, ‘Don’t live today, but invest, so you will have more money when you die.’ Economists say that they have trust in the future.
And so, capitalists save and invest while ordinary people work for them and buy the products and services their ventures produce. When time preference prevails, there are few savings and high interest rates. People are poor because there is a lack of money for investments. When the capitalist spirit prevails, there are ample savings, low interest rates, and wealthy individuals with excess capital to invest. This miracle wouldn’t have happened without low interest rates, as investment returns must exceed the interest rate, and interest rates can’t be low without efficient financial markets and trust in political and economic institutions. So, how did that come about?
In the Middle Ages, Europeans gradually developed a capitalist spirit. The ethic of the merchant gradually spread, so that money and profit, rather than Christian values, came to drive Europeans. They found new trade routes and exploited their colonies. Initially, Spain and Portugal led the way, but their kings were short of cash and heavily taxed their people. Many merchants moved to the Dutch Republic, which was more business-friendly because the propertied classes ran it. The Dutch didn’t have a strong state with an army, so taxes were also lower. The Dutch invented the stock market, featuring publicly traded shares, a crucial financial innovation that helps manage risk. Since then, investors could invest in a corporation at any time and sell their investment at any time.
Later, Great Britain became the dominant power. The British business elite, who paid most of the taxes, didn’t like paying for incompetence and corruption. After they had gained control over the British state in the Glorious Revolution of 1689, they forced the state to improve its competence. The British invented fractional reserve banking with a central bank, thereby creating efficient financial markets. Their colonial empire also expanded, so that they came to control the largest market, which favoured economies of scale. Once the competent government and financial innovations were in place, the Industrial Revolution took off. Low interest rates made long-term investments in machines profitable.
Once interest rates had decreased, economic growth accelerated, enabling investment returns to cover interest payments, allowing financial markets to expand and drive further growth. The capitalist miracle is that financial markets helped boost trade and production by creating money that doesn’t exist to start businesses that don’t yet exist to make products that the people those businesses will hire will buy with this newly created money. Financial markets are at the basis of the capitalist economy. When growth slows, interest-bearing debt may collapse the global economy, but so far, financial innovators have invented new schemes to lend more, helped by low interest rates. Low interest rates make an economy possible, not high ones. But trust makes low interest rates possible.
Usury: the hidden cancer
As long as there was growth, there was more for most people, even though the division of the fruits of capitalism has its shortcomings. Personal qualities explain some inequality. Some people work harder, some are better entrepreneurs, some are more frugal, some are more useful, and some are better at exploiting others for their personal gain. These people usually end up wealthier. Still, the primary driving force in the capitalist system has little to do with individual qualities. It is profit or interest. Interest comprises all returns on capital. Interest is the reason why the rich get richer at the expense of the rest of us.
Interest fuels a global competition driven by innovation and economies of scale. As a result, a few oligarchs have become exceptionally wealthy, often by cornering markets. The tech sector is an example. Wealth inequality will be the most urgent immediate challenge once there is less to go around. It is unacceptable that people are starving because of a fuel shortage while the elites fly around in their private jets. Today, the increased use of artificial intelligence drives up energy prices, pushing humans out of the energy market.
Interest rates emerge in a market. Credit in the banking system and the actions of central banks have a profound influence on financial markets, making them more efficient. Still, supply and demand in financial markets remain key factors. Silvio Gesell had already envisioned, in 1916, that efficient global financial markets would eventually drive interest rates to zero. He based his prediction on the observation that interest rates were the lowest in London, which had the most developed financial markets at the time.
Wealth inequality, caused by decades of neoliberal supply-side economic policies, also plays a role. Gutting labour rights and social benefits to lower taxes for the rich caused their wealth to trickle down via lower interest rates. The wealthy, awash in capital, have run out of sensible investment options because working-class people lack the funds to spend. And so, interest rates decreased, allowing the working class to borrow more and propping up the economy through asset bubbles, in yet another usurious scheme in which the rich exploit the rest of us. Adding mortgage debt has long helped keep several economies afloat, including the Netherlands’.
Most people pay more interest than they receive. We pay interest via rents, taxes, and the price of everything we buy. Interest works like a tax on poverty, with the poor paying for the benefit of the wealthy. Lower interest rates could benefit most people by lowering prices. You don’t see that happening. In a usury-based financial system, lower interest rates allow us to borrow more, putting more money into circulation and raising prices. As we borrow more, we may end up paying even more interest. To improve their yields in a low-interest environment, capitalists invent new schemes, such as leveraged buyouts and vampire capitalism. Lower interest rates also enabled more predatory lending by making loan-sharking profitable even at higher default rates.
Lower interest rates have worsened the excesses in the financial system. That is because we live under a usurious financial system. Had the maximum interest rate been zero, schemes such as loan sharking and leveraged buyouts wouldn’t be possible. That would require us to look after people in financial trouble and limit their freedom, rather than giving them the liberty to borrow. We allow it because the merchant’s ethics have become the foundation of our moral system. And that is no ethics at all. A world without merchants is a world without many comforts we take for granted, but trade also makes us dependent on governments and markets. Interest plays a crucial role. Things aren’t straightforward, so ‘interest is evil’ is not a helpful approach to the matter. But what precisely is usury?
What is usury?
When you ask someone what usury is, the answer might be charging an excessively high interest rate. Traditionally, usury referred to paying for the use of money. In other words, usury is charging interest on loans. In this traditional definition, the currency has a constant value, so the borrower must repay the same value. If a ruler debases the currency and halves its gold content, a lender has a legitimate claim on the same amount of gold, hence twice the amount of currency. The reasons why usury is damaging are:
Usury turns money into a tool of power, enabling the rich to exploit the poor.
Usury disrupts the circular flow of money, causing economic hardship.
Fixed interest payments cause financial instability as incomes fluctuate.
Making a profit from a business venture is not usury. However, all capital income is interest, and interest contributes to wealth and income inequality, unless the interest rate is at or below the growth rate. Capitalism has raised living standards, so the prevailing view is that its benefits outweigh its drawbacks. Today, capitalist economies excel in generating money for capitalists by turning energy and resources into waste and pollution to market non-essential products and services in the bullshit economy. Therefore, the drawbacks now surpass the benefits, and by a wide margin.
The economist Piketty found that interest rates on capital were higher than the economic growth rate most of the time.1 That is unsustainable. It requires capital destruction to create new room for growth or lower interest rates. In the past, World War I, the Great Depression, and World War II annihilated capital and created new room for growth. And so did the end of communism at the end of the 20th century. Eastern Europe, China and India became new centres of growth. The wave of capital seeking a return has finally reached Africa, the last frontier. From now on, growth must come from ‘wealth-creating’ non-essential activities in the bullshit economy, such as data centres that run artificial intelligence.
Value standard
The idea behind banning usury is that it is unfair for borrowers to return more than they borrowed. Traditionally, the poor borrowed from the rich, so charging interest would make them even poorer. If you borrow a loaf of bread, you return it. That is simple. Money, however, is an abstract measure of value, so what is usury and what is not requires a value standard. Islam forbids charging interest on money and debts, but also prohibits the debasement of currencies. According to Islamic law, money is gold or silver. Lenders should receive the same amount of gold or silver as repayment for the loan. There is, however, no reward for the risk of lending, which impedes capital formation. It is one of the reasons why the Industrial Revolution didn’t take off in the Islamic world.
A Natural Money currency serves as the value standard, so usury refers to charging an interest rate above zero on loans. To serve as a standard, the currency must have a stable value. The value of the Egyptian grain money came from its backing by grain stored in granaries. During the gold standard, gold was the value standard, as you could exchange national currencies for a fixed amount of gold. The backing of today’s fiat currencies is the economy. The Quantity Theory of Money states that Money Stock (M) * Velocity (V) = Price (P) * Quantity (Q), so Money Stock (M) depends on Velocity (V), Price (P) and Quantity (Q), and the value of a single unit, such as the euro, is M / units in circulation.
A grain or gold backing can give the currency a stable value because there is a limited amount of grain and gold. Such a limit doesn’t exist for fiat currencies. Still, Natural Money currency can serve as a stable value standard because its issuance depends on lenders’ willingness to accept negative interest rates. Lenders thus only lend when they expect the currency’s future value to remain sufficiently stable. When they don’t lend, the amount of money in circulation shrinks due to negative interest rates and debt repayments, allowing the currency’s value to increase and prices to decrease. Trust in the currency thus stems from persistent deflationary pressures, as negative interest rates consume the money supply, and the maximum interest rate constrains credit creation.
Efficiency argument
Today’s global economy is overcapitalised due to massive over-investment in the bullshit economy, so near-term future growth rates will probably be negative, either as the result of an involuntary collapse or a managed decline, and the sustainable interest rate will also be negative. Once the world economy is on a sustainable footing again, there may be sustainable growth, allowing growth rates to become positive once more in the more distant future. A stable economy operating near the maximum growth rate, which can be negative, can achieve its full potential and full employment. That is what the ‘miracle of Wörgl’ suggests.
When average investment returns are near their sustainable maximum, real interest rates are also near their sustainable maximum. The usury-based economy is unstable due to credit expansions and contractions, so it often does not operate at its sustainable maximum, reducing its efficiency. Natural Money helps achieve a stable economy and minimise financial system risk, thereby realising the sustainable maximum. It follows that real interest rates with Natural Money are higher, even when economic growth rates are positive. The maximum nominal interest rate is zero, so higher real rates translate into currency appreciation, allowing a zero interest rate to yield a positive absolute return.
A simple calculation illustrates this view. Economists assume there is a link between the amount of money and money substitutes (M) in circulation and prices in the equation Money Stock (M) * Velocity (V) = Price (P) * Quantity (Q). If ΔP, ΔM and ΔQ are sufficiently small, and velocity is constant, so that ΔV = 0, then it is possible to approximate this equation with %ΔP = %ΔM – %ΔQ, where %ΔP is the percentage change in price level, %ΔM is the percentage change in money stock, %ΔV is the percentage change in money velocity, and %ΔQ is the percentage change in the quantity of production.
The velocity of money (V) for Natural Money might be higher than for interest-bearing currency, and that could go together with a smaller money stock (M). Still, the velocity is likely to remain constant, as the economic picture is expected to remain stable. Now, it is possible to calculate the real interest rate (r) as the nominal interest rate (i) minus the inflation rate (%ΔP), so that r = i – (%ΔM + %ΔQ).
Suppose the long-term average economic growth rate for interest-bearing money is 2%. For Natural Money, it might be 3% because the economy is more often performing at its maximum potential. Assume that the long-term average money supply increase for interest-bearing money is 6% per year. For Natural Money, it is 0%. The long-term price inflation rate could then be 4% for interest-bearing money. With Natural Money, there could be a price deflation rate of 3% as the economy grows at a 3% rate with a stable money supply. We can then produce the following calculation:
situation
interest on money
Natural Money
nominal interest rate (i)
+3%
-2%
change in money supply (ΔM)
+6%
0%
economic growth (ΔQ)
+2%
+3%
real interest rate (r = i – ΔM + ΔQ)
-1%
+1%
Economic growth can be higher with Natural Money, allowing real interest rates to be higher. Furthermore, because Natural Money has several stabilisers that reduce financial system risk, the level of risk is likely lower. As a result, the risk-reward ratios associated with Natural Money are better than those in the current usury-based financial system. In other words, the same real interest rate in a usury-free financial system is a better deal because it entails fewer risks. Hence, a usury-free financial system based on Natural Money is more efficient, so there will be a capital flight from the usury-based economy to the usury-free economy after implementing Natural Money on a large enough scale. The efficiency argument demonstrates that usurious finance is parasitic.
The real interest rate may improve more than the economic growth rate due to lower financial-sector profits from phasing out exploitative parasitic activities, such as interest-bearing consumer credit. The rationale is that, without credit card payments, consumers have more disposable income. Furthermore, economic and financial stability can reduce investment risks, thereby reducing the need for financial sector intermediation. The financial instability and the need for government and central bank interventions in the usury-based financial system create opportunities for politically connected and other savvy and informed individuals, often referred to as ‘parasites’, to enrich themselves at the expense of the general public. The higher efficiency of Natural Money could end that.
The efficiency argument still applies when we switch to a values-driven, people-friendly economy that operates in harmony with nature. The inefficiency of such an economy stems from its inferior ability to generate money for investors by transforming energy and natural resources into waste and pollution in the bullshit economy. That depresses interest rates. That is not an inefficiency in the financial sector. With Natural Money, a values-driven, people-friendly economy can remain operational thanks to the financial system’s efficiency. Terminating the bullshit economy in a usury-based financial system will also depress interest rates. That can bring about an economic collapse, because usury makes capital addicted to growth.
Trust
Someone once asked me on an Internet message board, ‘Why would I lend money interest-free?’ The borrower may not repay. So, why take that risk? We lend interest-free to people we trust, and we may lend to family and friends, even when they are untrustworthy individuals living off our money. After all, they are family and friends. In a market, it won’t happen unless we trust the currency and the borrowers. Hence, ending usury is only possible in a high-trust environment. And investors must be in the market for other reasons than maximising their profits. Those who lend money to organic farms and invest in renewable energy have a different view of investing than vampire capitalists, who scam the government and rob grandparents of their retirement savings.
Credit means trust. Trust in the future is the foundation of the capitalist economy. Investors imagine that the future will be better so that their investments will be profitable or at least not loss-making. Credit, or financial capital, reflects this trust. Most of our money is credit, so its value depends on an imagined future. Some people argue that credit, banking, and central banking are fraudulent because they are fantasies. They may prefer something tangible, such as gold. Indeed, the capitalist economy, as well as civilisation in general, demonstrates the power of human imagination, and our faith in what we believe.
To have trust in the future, investors must believe that their investments are safe. The rule of law, political stability, the absence of graft, and sensible economic policies are fundamental to the economy’s effective functioning. As investments, such as factory investments, are long-term, the risk that a government will annul earlier commitments is a critical factor in investment decisions. Government actions, such as asset confiscation or taxation, can deter investors. Differences in tax regimes are equally damaging, as tax havens parasitise on productive economies that collect taxes to invest in their infrastructure and education.
Interest rates are the lowest in stable countries with low inflation, as trust translates into a risk premium on investments. The greater the perceived risk, the more the future becomes discounted, the higher the interest rates are, and the lower the standard of living usually is. Hence, Switzerland and Sweden have low interest rates, while Argentina and Mozambique have high interest rates. Interest rates in Europe are lower than in the United States. Apart from lower growth expectations, the Stability and Growth Pact, which limits government deficits, plays a role. And the government deficit as a percentage of tax income is a better indicator of the health of government finances than the deficit as a percentage of GDP. These are more sustainable in Europe. And so, trust also plays a role here.
Interest rates in Switzerland are currently at their lowest. In 2025, the key interest rate stands at zero. Swiss interest rates are so low because investors trust the Swiss currency. From 1990 until 2024, the government’s budget deficit averaged at 0.45% of GDP. At the end of 2024, government debt was 20% of GDP. A general rule is that the lower the trust in the currency, the higher the interest rate. Venezuela has the highest interest rate at 60%, but with an inflation rate of 180%, investors are better off with a zero yield in Swiss francs. In a market, low interest rates signal trust. Hence, trust is a crucial prerequisite for ending usury.
In 2025, interest rates in Turkey rose above 40% to curb inflation following a failed monetary experiment. The assumption that interest charges cause inflation led Turkey’s leader to force the central bank to lower its interest rates. Inflation soared to 85% in 2022. The Turkish leader was defrauding creditors, thereby transgressing Islamic law. The relationship between interest and inflation exists, but it operates via credit. Credit expansion causes inflation, not interest itself. In a usury-based financial system with fiat currencies, raising interest rates curbs inflation by dampening demand for credit. That obscures the truth that interest is a cause of inflation, but a better way to limit credit expansion is to set a maximum interest rate on loans.
With Natural Money, the central bank doesn’t set the interest rate or manage the money supply. The interest rate and the money supply emerge in the market for lending and borrowing. The holding fee on the currency provides a stimulus by making lending at negative interest rates attractive, so no money remains on the sidelines. At the same time, a maximum interest rate of zero imposes austerity, curtailing credit during booms or periods of high inflation. That will cool down the economy and dampen inflation. There could be deflation, and deflation could be permanent. The market for lending and borrowing is free in the sense that the central bank doesn’t manage interest rates and the money supply. However, the maximum interest rate of zero operates as a price control.
Interest rates emerge in the market for lending and borrowing. Negative interest rates require trust in the currency, the government and its policies, the financial system, and, ultimately, in the borrowers. It requires trust in the political economy and the future. In other words, all the world’s governments must be as reliable and capable as Denmark’s, and the global economy must be on a sustainable footing. At the same time, market participants shouldn’t engage in scams. So far, business and ethics haven’t agreed very well. The ethic of the merchant is no ethic at all. The change requires a moral imperative. We shouldn’t harm other people or nature. Instead, we should see the consequences of our actions and change our ways. Only a new religion can make that happen.
The price of usury
Interest promotes wealth and income equality. Most of us pay more in interest than we receive, either directly through loans and rents, or indirectly through the products we purchase. German research from the 1980s showed that the bottom 80% poorest people pay interest to the top 10% of the wealthiest people. You can view interest as a tax on the poor paid to the wealthy. The wealthiest individuals reinvest most of their interest income. That is what made them rich in the first place.
Interest promotes short-term thinking. The pursuit of profit drives the transformation of energy and resources into waste and pollution in the bullshit economy. With positive interest rates, money in the future is worth less than money now. It affects investment choices. Without interest charges, long-term investments would become more attractive. When interest rates are high, cutting down a forest today, selling the wood, and investing the proceeds may give higher financial returns than sustainable forest management.
Incomes fluctuate against fixed interest charges. It can bring borrowers into trouble. Financial instability can lead to economic instability. Usury causes financial crises, recessions and depressions. Governments and central banks manage the problem, but their actions create a false sense of security, allowing debts to continue growing and ultimately leading to a financial apocalypse. The underlying cause is usury. However, the road to the end of usury also goes through financial innovation and modern finance.
Fractional reserve banking
Innovations in financial markets have made them more efficient, enabling lower interest rates and increased lending, thereby spurring the Industrial Revolution. A crucial invention was fractional reserve banking. It turned bank deposits into money. There is always a demand for money. It is the most liquid asset. Economists call it the liquidity preference. Money commands power. You can use money to buy anything at any time. We may want to keep cash at hand for expected purchases, unexpected expenses, and investment opportunities.2 And so, we often aren’t willing to lend our money.
Fractional reserve banking enables banks to lend out money that depositors can withdraw. If you lend money to a fractional reserve bank, you can use it at any time, as if it were cash. Banks kept a fraction of deposits in cash reserves to meet withdrawals, knowing that only a small share of depositors would withdraw their money. That freed up funds for investments and helped to lower interest rates. A fractional-reserve bank creates money because a new loan automatically creates a new, equal-sized deposit. And that deposit is like any other deposit. You can use it to make a payment or withdraw cash. Fractional reserve banking eroded the commanding power of money, resulting in lower interest rates.
Fractional-reserve banks can fail when a large number of depositors withdraw their funds at once. The integrity of fractional-reserve money depended on the ability to exchange deposits for cash. That is where central banks come in. They can help banks in times of trouble by printing additional cash and lending it to them at interest. That safety net reduced the risk associated with bank deposits, allowing interest rates to drop even lower, which, in turn, promoted more lending and economic development.
If it sounds too good to be true, then it usually is. Lower interest rates have fuelled the economic boom since the Industrial Revolution and will eventually lead to a technological-ecological apocalypse. Critics of fractional reserve banking and central banking further argue that lower interest rates encourage poor investment decisions and that the safety net provided by central banks creates a moral hazard. If interest rates were to rise, these investments would become unprofitable, leading to bankruptcies and unemployment. And if central banks rescue banks in times of trouble, it will promote irresponsible lending.
There is overcrediting, and lower interest rates promote irresponsible lending by increasing profit margins for usurious lending. The way to end usurious lending is to set a maximum interest rate. More recently, critics have argued that central banks, through extraordinary measures such as quantitative easing, have suppressed interest rates. However, central banks believed that interest rates were too high. They couldn’t lower them because of a price control known as the zero lower bound, which distorts the market. By printing money, central banks aimed to generate inflation, so they could raise interest rates later.
Reserve requirements
Banks hold reserves, which are money issued by a central bank. Reserves include banknotes and coins, as well as balances held by banks at the central bank. The primary reason for holding reserves was to meet cash withdrawals from depositors or to make payments to other banks when depositors transfer money to another bank and the other bank demands payment in kind rather than an IOU. A reserve requirement is a liquidity requirement. A bank must have enough cash on hand to meet its short-term obligations. Two developments have profoundly affected the need for reserves:
Contrary to the past, depositors rarely withdraw their funds in cash, so the money remains within the banking system.
Government debt has become an alternative source of liquidity. Government debt issued in the government’s currency is as safe as cash.
A government can guarantee repayments of debts issued in its own currency by printing more of that currency, with a so-called independent central bank as cover, which has become a core foundation of confidence in the current usury-based financial system. The central bank will not let the usury-based financial system fail, so it will print money to buy government debt, which reduces the supply of debt and increases the supply of currency by which to buy government debt, thereby lowering interest rates and allowing the government to borrow more, making new money available to pay interest.
These profound changes have made traditional reserve requirements largely redundant. Banks hardly need any cash in their vaults. If they pay another bank in kind, government debt is as good as central bank currency. Or a bank could borrow at the central bank or another bank and pledge government debt as collateral. The experts concluded that reserve requirements have become superfluous. Government debt has become the actual reserve. And so, banking regulations today focus on solvency, or the ability to meet long-term obligations. Still, it would be a most serious oversight to ignore liquidity.
Globalisation, liberalisation, and derivatives
Advances in information technology and financial innovations have driven the globalisation of financial markets over the past few decades. In the 1980s and 1990s, governments liberalised financial markets and removed capital controls. Capital controls can lead to higher interest rates and higher costs of capital.3 Globalisation and liberalisation expanded the possibilities for borrowing and lending worldwide.4 The increased competition reduced the price of financial intermediation.
Globalisation and liberalisation made financial markets more liquid. It became cheaper and easier to exchange financial instruments, such as bonds and stocks, as well as goods and services, for cash. This development is more commonly known as financialisation. Like fractional-reserve banking, financialisation eroded the position of money as the most liquid asset, thereby diminishing the commanding position of money holders in demanding interest.
Globalisation and liberalisation also caused trouble. Money and capital could move more freely, making it easier for changing expectations to lead to financial instability. Central bank interventions neutralised a series of financial crises in the 1980s, 1990s and 2000s. Lower interest rates prompted investors to seek higher yields and take on more risk. However, trust and, therefore, liquidity can suddenly evaporate. Some countries used capital controls to counter financial instability while central banks provided liquidity.
Innovations in risk management and derivatives enabled the financial sector to further increase lending. These innovations spread risk, allowing the total amount of risk in the system to grow. Due to a lack of regulatory oversight, derivatives also enabled scammers to sell fraudulent mortgages, contributing to the 2008 financial crisis. Still, banks that professionally used derivatives to hedge their risks weathered the crisis better and had fewer loan write-offs.5
The notional value of outstanding derivatives can be mind-boggling. Their actual value is much lower. You can best compare them with insurance policies. The notional value of your fire insurance policy is typically based on the value of your home. The actual value is the premium you pay. That is, until your house burns down, and the actual value becomes the notional value. Insurers can handle that until many homes catch fire simultaneously.
The actual value of an interest rate derivative on a 3% ten-year bond with a notional value of €1,000,000 might change by €81,109 if the interest rate increases to 4%. As long as parties use derivatives to hedge risks, and counterparties, the ‘insurers’, can absorb the losses, the system will function. An equivalent to all houses catching fire simultaneously could be a sudden increase in interest rates. When the system is more stable, the need for these instruments decreases.
Wealth effect and bubbles
Lower interest rates increase the value of assets via discounting. In theory, the price of an asset is the net present value of its future revenues. Even though that is often not the case in practice, the theory explains why the prices of assets such as bonds, real estate, and stocks rise when interest rates decrease. In this sense, lower interest rates can promote wealth inequality, but only when we consider the net present value of assets. If future revenue streams don’t change, wealth inequality is merely a temporary side effect.
There was, however, another dynamic operating beneath the surface. Lower interest rates allow consumers to borrow more by taking out higher mortgages, thereby financing their unsustainable lifestyles. Critics called it a wealth effect promoted by an asset bubble. Lending propped up consumer spending when the incomes of many working-class people were lagging, and the wealth of the rich ‘trickled down’ via lower interest rates as they were running out of sensible investment options, giving them yet another avenue by which to squeeze the working class. In a system of usury, lower interest rates are of no help.
Financial sanity
Interest compounds to infinity. Three grammes of gold at 4% interest turn into an amount of gold weighing twelve million times as much as the Earth after 2020 years. Most of us aren’t long-term planners. We are busy fixing holes rather than solving underlying problems until things fall apart. Economists do this as well. John Maynard Keynes invented government borrowing as a fix for usury-induced debt problems. He once justified his short-term thinking with the world-famous quote, ‘In the long run, we are all dead.’ And this man was the founding father of modern economic policies.
More debt has now become the standard solution for debt problems. Today, most money comes into existence as a loan on which the borrower must pay interest. Every loan creates a deposit. The depositor automatically becomes the lender. If the interest rate is 5%, and €100 is circulating, then €105 must come back. So, where does the extra € 5 come from? Here are, once again, the options:
Depositors (on aggregate) spend some of their balance so borrowers (on aggregate) can pay the interest from existing money.
Some borrowers default and do not return (part of) the balance.
Borrowers (on aggregate) borrow the extra €5.
The government borrows the extra €5.
The central bank creates €5 out of thin air to cope with the shortfall.
Interest payments do not necessarily cause a shortage of money. Still, in reality, they do, mainly because depositors find it, like Scrooge McDuck, difficult, emotionally or otherwise, to part with their money. New debts fill most of the holes caused by the Scrooge McDuckism of depositors. That is why debt levels nearly always increase. Still, money doesn’t always reach the right places, which causes financial crises. A few defaults are acceptable, but too many can cascade into a financial crisis, triggering an economic downturn or even a depression.
The cost of letting the financial system fail is so great that this is not an option. The 2008 financial crisis could have meant the end of civilisation as we know it, had central banks not saved us from a financial apocalypse caused by usury. When no one else is borrowing, the government and the central bank must step in, either by borrowing or printing money outright, to introduce new money into circulation to repay existing debts with interest. In this way, debts continue to grow, and we have become the hostages of the usurers.
The end of the road
The road to the end of usury ran through financial innovations. They lowered interest rates. Today, the world is awash in debt, and interest payments strangle the global economy, so that future interest rates may become negative. That could either be the end of usury or, if usury remains, the end of the economy. The world economy may collapse, or we can have a graceful decline, promoted by the efficiency of a usury-free financial system. The efficiency of Natural Money can help us build a high-trust world economy founded on moral values.
In a simplified world, we rely more on family and community, and less on markets and states, so the economy will also become simpler. Natural Money eliminates risk from the financial system, so that, after its implementation, several modern financial instruments may become obsolete, joining fossil fuels and marketing strategies. Still, economies of scale apply to several essential products and services, including finance. Negative interest rates require risk management that only scale can provide.
Latest revision: 2 May 2026
Featured image: Loan shark picture circulating on the internet, origin unknown.
1. Capital in the Twenty-First Century. Thomas Piketty (2013). Belknap Press. 2. Keynes, John Maynard (1936). General Theory of Employment, Money and Interest. Palgrave Macmillan. 3. Edwards, Sebastian (1999). How Effective are Capital Controls? Anderson Graduate School of Management, University of California. 4. Issing, Otmar (2000). The globalisation of financial markets. European Central Bank. 5. Norden, Lars, Silva Buston, Consuelo, Wolf Wagner (2014). Financial innovation and bank behaviour: Evidence from credit markets. Tilburg University.
The Plan For The Future 