| Design for the Natural Financial System |
July 4, 2009 - February 7, 2012
Author: Bart klein Ikink
| Introduction |
Democracy often fails
The financial system has failed. Soon financial chaos will spread to all corners of the planet. There is a lethal logic behind the development that led to this situation. Financial innovation always goes there where it is least regulated. Consequently, people and nations have no control over international finance. On the contrary, international finance dictates what people and nation can or cannot do. This could happen because politicians have been bribed into deregulating finance [+]. Even CEO's of failed companies that are bailed out with taxpayer money can receive multi million dollar bonuses [+]. Therefore democracy has also failed. Former US President John Adams once noted that democracies will always fail:
Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide. |
He also pointed at the reason why:
There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt. |
Another cause for the failure of democracy is money corrupting democratic institutions. Neoliberal economics has dominated economic thinking during the last decades. Economic freedom and democratic freedom are different aspects of freedom. More economic freedom may mean less democratic freedom, while more democratic freedom may mean less economic freedom. Wealth equality is a crucial element. If wealth is distributed evenly, then there is no incentive for enterpreneurship and working hard. If wealth is distributed unevenly, then oligarchs take over the country. Therefore Louis Dembitz Brandeis wrote:
We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both. |
Money can buy votes, officials, politicians, judges and everything else. The collapse of MF Global demonstrates what can happen when the regulatory system has become corrupted [+]. Therefore issues regarding democracy and finance should be handled with understanding the corruptive influence of money. Founding a democracy using the separation of powers also known as trias politica, which divides the estates in an executive, a legislative, and a judiciary branch, without addressing the issues of money wisely, leads to a concentration of power in the hands of a few people. The power to issue money is in the hands of the financial sector and the governments, while a large part of the financial sector and the governments are involved in parasitic activities that are a burden on the economy.
A solution
The interests of governments and the financial sector are intertwined because they together control the creation of money. Both governments and banks share a common interest. Therefore government intervention and regulation will not solve the problem of money power undermining democracy. To overcome this, the design of the financial system should be simple. In this way most people can understand finance and it will be less easy for insiders to take advantage of their superior knowledge. It will reduce the need for regulation and it will make it possible for the financial system to operate with minimal oversight. Only in this way politicians do not need to interfere and central banks can be abolished.
The financial sector should make a contribution to the real output of the economy by adding value and facilitating the real economy. Currently a large part of the financial sector is involved in handling the uncertainty coming from monetary and economic instability that is the result of the charging of interest and the money creation by financial institutions. Interest on money [+] and credit [+] are the root causes of financial instability.
Because of the financial instability, the financial system has become more complex than it would otherwise have been. Financial instability and complexity create opportunities to profit at the expense of others. This is inefficient and leads to a concentration of wealth that is not based on economic achievement. If those and other inefficiencies in the economy were eliminated, then people could work far less [+].
The design for the Natural Financial System takes into account those considerations. It brings the following advantages:
- The design will take away the power to create money away from governments and the financial sector [+].
- The design is simple and will reduce the need for regulation and management [+].
- The Natural Economy will have a higher growth rate than an economy based on usury. This will attract investors at the expense of the usury economy [+].
- Natural Money will bring financial stability [+].
- The design will provide a legal and organisational framework that guarantees the reliability of the agents operating in the financial sector to the greatest extent possible in such a way that they will not operate at the expense of investors.
The transparent financial sector design combined with the performance of the Natural Economy, the reliability of the agents operating in the financial sector and the accompanying financial stability will create a superior investment environment that will attract investment capital at the expense of financial sectors based on designs that allow usury, leverage or conglomerates with combined responsibilities. The introduction of the financial sector of the Natural Economy will therefore force other financial sectors to go out of business or to apply the same design.
Contents
The following subjects are treated in this text:
- consequences of the introduction of Natural Money;
- legal framework for banking;
- legal framework for the financial sector;
- organisational design of banking;
- transition to the Natural Financial System.
| Consequences of the introduction of Natural Money |
Introduction
Because of the absence of usury, which is the charging of interest on money, there is no compensation for the risk of loans not being repaid. It is therefore also not possible to insure default risk because the insurance fee is a form of interest. Only people and companies that are creditworthy may qualify for loans. Because credit is banned, it is not possible to create money out of nothing. Money lent must be available in the form of savings. There are less funding options available in the Natural Financial System. This has far reaching consequences for both people and businesses.
It is economically efficient to tax financial activities instead of productive activities. In the current economic system labour and productive business activity are taxed, while financial activity that does not contribute to the real economy is not taxed. In the Natural Financial System however money and financial activity are taxed and therefore taxes on labour and productive enterprise can be reduced or even abolished.
Because of the holding tax Natural Money is not scarce but abundant. In the Natural Economy bills are paid instantly or even in advance were possible. Also it is attractive for businesses to lend money without interest to reliable customers. In this way the holding tax on cash can be avoided. Because of this it is unlikely that a reliable person or business will ever be short of money.
The introduction of Natural Money means reorganising the financial sector and the laws regulating finance. If Natural Money is to be introduced worldwide, it will be an opportunity to standardise the financial system worldwide. This will reduce cost and will make managing financial affairs between countries more easy.
The following issues are discussed:
- social issues;
- personal finance;
- business finance;
- government finance;
- local currencies;
- methods of payment;
- exchanging currencies.
Social issues
Because Natural Money is not scarce but abundant, while it is more difficult to go deep into debt, far less people will get into financial trouble. The economy is always running at maximum potential so there is always employment. Money is easy to attain and for reliable people it is easy to lend at 0% because other people and businesses can avoid the holding tax in this way.
In the usury financial system people that are not creditworthy often qualify for loans at high interest rates, making them even less creditworthy. Lending money does not solve their problems but only aggravates them. The charging of interest on money is one of the main causes of poverty. Therefore not lending money to people that cannot repay their loan is a good step in reducing poverty.
If people do not have the money to pay for their basic needs, they should get help in organising their finances, and basic needs like food should be provided to them. It may be a good idea to give a community the possibility to take control of the finances of people in return for help.
Personal finance
Most people buying a house need a mortgage. Because no interest may be charged to compensate for the risk of default, mortgages will be less leveraged. People needing a mortgage must be trustworthy and make a down payment. People still need to make regular monthly payments but these will lower the principal. This is necessary because the value of the Natural Money currency has the tendency to rise, so the value of the house has the tendency to fall in currency terms. As the currency is rising in value, this does not mean that the real value of the house decreases.
Other types of loans will be more difficult to get because there is no collateral. In the Natural Financial System such loans are less needed. The absence of interest and the faster circulation of money in the financial system, make it far more easy to organise finances without debt. A car loan may be attainable if a large down payment is made. Flexible financing such as credit card loans will be difficult to get. Because no interest may be charged, banks have a preference for longer term loan agreements. Trustworthy individuals may get a loan without collateral. However they will often have to agree upon a fixed scheme of repayment. If they have excess money then they may not be able repay the loan faster.
Student loans may cause problems. This is not a problem when a student loan is denied because of the student's choice of study, attitudes or grades. If there is no employment in a certain field, it is better that no loan is granted. In this way the choices of students will be directed to the needs of a society. Local community banks have a strong bond with their community and may facilitate those loans. Most students will not let their community down.
Business finance
Companies can raise capital by issuing shares or by borrowing money without interest. Only companies that are trustworthy may qualify for loans because there is no reward for risk in the form of interest. Other companies will need to attract capital by issuing shares until they are able to borrow money without interest.
Businesses that need flexible financing need to allocate capital in advance by issuing shares or by borrowing money. This will introduce additional costs because the company has to pay taxes on money. These costs can be passed on to the customers because all companies in the same business should be in the same situation. Companies facing this situation may opt for liquidity pools or banks to alleviate this problem, but this will not guarantee the availability of the required capital when needed.
Banks cannot offer a surety or a guarantee because it is impossible to insure default risk within the Natural Economy. When a surety or a guarantee is needed, money must be deposited in a locked savings account. If the corporation does not have the money to do this, it may borrow the money or attract additional capital. Because companies in the Natural Economy are well financed, while most trade is local, guarantees will be less needed.
Government finance
Taxes
The rich often have the opportunity to move their money to tax havens. The poor often have no money. Consequently the middle class is paying most of the taxes. Over the years many tax regimes have become increasingly oppressive as governments did get access to more and more information. The United States government is even asserting its power overseas to deal with tax evasion. As Martin Armstrong noted [+]:
Today, if an American citizen lives in Kenya and gives birth to a child there who never returns to the United States, they still owe taxes. [...] Americans owe taxes on worldwide income even if they never participate in anything or receive a single benefit. They are economic slaves. This is waging war against the people and in fact the whole world. |
Martin Armstrong concluded that the government owns the people. This cannot end well. Within the current political and economic system this trend is difficult to counter. The underlying causes of the problem are twofold. First, the people have little control over the government and secondly, the government has little control over transnational entities. Both issues contribute to oppressive tax laws. The way out is to implement referendum laws and to ban transnational entities. In such a situation the people controls the government and the government controls the nation. Consequently taxes are paid where profits are made.
The people of a nation must be free to choose a tax regime that suits them best. If it punishes productive people then nation will decline. It is in the best interest of everybody to have a tax regime that rewards productive people. Rich people and productive people are often not the same. Many rich people did get rich because of unproductive activities [+] and corrupting the political system [+]. It does not harm a nation when those people move to another country.
A good tax system has a positive impact on a society. Many taxes, such as sales taxes, income taxes and taxes on profit do not benefit society because they discourage people from being active. The following types of taxes can contribute positively to society:
- Holding tax on money: People should be encouraged to accumulate their wealth in productive capital. The holding tax is a tax on hoarding money. Money must be facilitator of transactions and therefore money should circulate in the economy.
- Estate tax: The estate tax is a tax on inheritance. Inheritances often refrain people from becoming active in the economy. Inheritance also results in an accumulation of wealth that is not based on achievement. The accumulation of wealth by inheritance leads to the concentration of power into the hands of a few people that have contributed little to society.
- Trading tax: The trading tax is a tax on trading of currencies and financial products, such as bonds, stocks and commodity futurues. Trading should be discouraged while investment in productive enterprise should be encouraged.
- Energy tax: Energy taxes make the economy more energy efficient. For example: low energy prices have caused the cars in the United States to become less energy efficient than the cars in others parts of the world.
A government may still enforce taxes after a referendum but it will be a democratic choice. Currently politicians often follow their own ambitions or they are controlled by special interests. For example, if a public health care system is chosen in a referendum, the consequence will probably be that nobody can opt out.
Government debt
There is no need for governments to go into debt as government can print money. In the Natural Economy tax income rises as a result of the faster circulation of money. The economy grows at a constant pace without booms and busts, so government finances can be planned more easily. To keep the government in check, it should be illegal for a government to change the tax regime, to go into debt or to create money without consulting its citizens. If a government cannot fulfill its financial obligations, this can be seen as a failure of the people in office. Such a situation should automatically result in new elections.
Multinational corporations
Multinational corporations can make a profit in one country and pay taxes in another country. In this way there is a competition between countries to have the lowest taxes for large corporations. Consequently ordinary people pay taxes while large corporations and wealthy people evade them [+]. A number of multinational corporations, like Rupert Murdoch's News Corp, even succeeded in extorting tax money from the IRS and thus made a huge profit out of taxpayer's money [+].
Every country should be free in determining its own tax levels. This can only be realised when taxes are paid where profits are made. This means the end of tax havens and multinational corporations. Tax evasion by multinational corporations and oligarchs harms countries as the middle class of those countries often pays the bill. Developing nations lose more money because of tax evasion than they receive via development aid.
The United Kingdom, and especially the Canal Islands, Bahamas en Cayman Islands are popular tax havens. The Netherlands is a popular tax haven for corporations [+]. Switzerland has been a safe haven for tax evaders and dictators because of its bank secrecy and neutrality.
Large projects
A government can pay for large projects using its income. Large projects must be planned in such a way that government income is enough to pay for the expenses. The result may be that some projects take more time and that some projects may not be carried out at all. If a project is not possible because of lack of government income, this is a good thing. If a government had the ability to loan the money for such a project, future generations have to pay for the project. Because there is no interest on money in the Natural Financial System, governments have a limited potential for borrowing money because there is no allowance for risk.
Some countries may feel the need for large scale public works that do not generate income. Those public works may exceed the financial capabilities of the government. In such cases special purpose independent governmental institutions with their own elected officials can be introduced to manage those large scale public works. In The Netherlands the dikes, canals, ditches and rivers are maintained by the body of surveyors of the dikes. They operate independently from the government, have their own elected officials and have their own tax income based on property taxes.
Social benefits and pensions
National preferences with regard to social security and pensions differ widely but most nations like to assist the poorest by guaranteeing a minimum level of income for the disabled and unemployed, a minimal level of medical assistance for the poorest and a minimal level of pensions. Even though social benefits sometimes lead to economic inefficiencies, a minimum level of support is justified on moral grounds.
Social security, medical insurance and pensions can best be managed by special purpose independent institutions that have their own elected officials and taxing system. Those institutions should not be part of the government because politicians may be tempted to use the funds for other purposes. Those institutions should also not be privatised. A profit motive may lead to a short term focus and mismanagement because the institutions will be bailed out with taxpayers money if they fail. If people want to have insurance above the minimum level offered by the government, they should turn to the private sector.
Because there will be full employment in the Natural Economy, the need for unemployment benefits will disappear. Only people that are not able to work will still need benefits. The granting of benefits can better be done at the community level and the local community should bear a significant part of the cost. It may be a good idea to make local communities responsible social benefits for unemployment and illness because people are less inclined to live at the expense of their local community than to live at the expense of an anomymous system. It will also give local communities an incentive to employ as many people as possible.
Social benefits must be funded. Politicians in the United States made unrealistic promises such as low taxes compared to the level of benefits. Taxes may have to be raised and benefits may have to be reduced. Until now foreign countries funded the deficits of the United States because the US Dollar was the world reverve currency. In Europe the pension systems of many countries are not sufficiently funded and this will become problematic in the future.
 |
Source: JS Mineset |
Behind the issue of pensions looms a generational conflict. Currently the baby boom generation is starting to retire. The baby boom generation enjoyed a good life, depleted the Earth's energy and natural resources, while leaving a high level of benefits and government debt to be paid for by future generations. Pensions that were affordable when the number of pensioners was low compared to the number of working, are becoming a burden because the number of pensioners compared to the number of working is rising. Consequently pension systems are becoming untenable. The retirement age may need to rise or the level of benefits may need to be reduced.
Local currencies
States, provinces and municipalities can issue their own currencies that circulate along with the national currency. If they come into existence, those currencies should only be used for payments within the state, province or the municipality issuing the currency. The local currencies and state currencies should float against all other currencies. People will be inclined to spend the local currencies first because they can only be used locally. This will stimulate local trade. Long distance trade will be avoided where possible, making the economy more energy efficient.
Local currencies have the following advantages:
- They promote local trade and therefore generate employment in the local community.
- Local manual production will replace centralised machine production where possible, which makes the economy more energy efficient.
- Local currencies will generate tax income for local governments.
- Local currencies give local communities more possibilities to handle their own affairs making the central government less needed.
State, provincial and municipal governments will have to adapt their size and ambition to the tax income available. If an area has little economic cohesion then a government for that area does not have much value for its citizens and there probably will be too little income to support such a government. This may force state, provincial and municipal governments to cooperate or even to merge to become more efficient. Areas that have strong economic cohesion may create their own municipality or province. In some countries a layer of government may eventually disappear. For example: the provinces in the Netherlands have little value for their citizens. Introducing a provincial currencies in the Netherlands may not generate enough income to support provincial governments.
It is difficult to mismanage Natural Money currencies [+]. Introducing local currencies limits the effects of potential currency mismanagement. If the central government fails to manage its currency, local currencies are not affected. Also if a local currency is badly managed it has no consequence for the national currency. The use of local currencies may also increase competition between governments so the value of their services for the citizens may increase. If a certain government is inadequate or inefficient, its currency may be used less and as a consequence its value will reduce.
The introduction of local currencies will introduce additional exchange costs because there are far more currencies. However this should be considered as a trade off against higher growth rates, more financial stability and a higher level of wealth in the longer term.
Methods of payment
After the introduction of Natural Money, cash in the form of coins and banknotes may not be available any more. The holding tax makes the use of cash cumbersome. It is still possible to have banknotes. The Natural Money banknotes should have a introduction date, which makes it possible to calculate the accrued holding tax by hand. At the end of the period of validity, the banknotes can be exchanged for the currency. Cash is often used to pay anonymously. People should have the right to pay anonymously so bank cards should have the option for the use of digital cash for anonymous payments.
In the Natural Financial System debit cards will probably replace credit cards. People buying goods and services want to pay promptly to evade the holding tax. Credit card companies want to take the money from the current account immediately because they cannot charge interest on money lent. Both developments effectively turn credit cards into a debit cards.
People that do not use computers must still be able to write paper cheques and paper money transfer forms. Paper cheques and paper money transfer forms can be processed locally by bank employees or at central facilities that provide this service to a number of banks. Security issues on the Internet may cause people to use paper cheques and money transfer forms in the future.
Exchanging currencies
In the Natural Financial System the number of currencies will rise dramatically. If local governments such as municipalities are allowed to issue currencies and Natural Money becomes the dominant financial system in the world, the number of currencies may ultimately be more than 1,000,000. Also the number of independent banks may rise to a number of more than 1,000,000.
When using Natural Money, exchanging currencies becomes an important issue. Exchanging currencies directly may sometimes be impossible, especially when local currencies are involved in the exchange transaction. Therefore it is important to have an International Currency Unit to exchange currencies efficiently.
International Currency Unit (ICU)
Supranational currencies like the Euro are a systemic failure because those currencies ignore the political and economical differences between the countries using the currency. Supranational currencies have the following deficiencies:
- A single currency limits the national sovereignty of the countries using the currency. The single currency will force the governments to apply policies against the will of their peoples. For example: if the French want to retire when they are 62, this may be impossible when they are using the Euro.
- If one specific government or people mismanages its finances then other peoples using the same currency will also be affected. For example: other countries may be ending up paying for the financial mismanagement in Greece [+].
International trade and an efficient exchange of currencies can be facilitated with an International Currency Unit (ICU), which can be a weighed index of all Natural Money currencies or the most used Natural Money currencies. In this way the ICU will not become a systemic failure.
Using the ICU all currencies can be exchanged efficiently with a maximum of two conversions. The holding tax on the ICU may be a weighed average of the holding taxes of the underlying currencies. The proceeds of the holding tax of the ICU may go to the governments issuing the underlying Natural Money currencies. A surcharge on the holding tax may be added to fund supranational organisations like the United Nations. As long as the United Nations are not a democratic institution, the weighing of the currencies funding the United Nations may also be the best way to distribute influence among the memberstates within the United Nations.
| Legal framework for Natural Money banking |
Introduction
The primary function of banks should be bringing together supply and demand for money and capital. In recent years the primary function of banking has become intermingled with other types of business. Banks have to facilitate finance so they have a public function. Therefore the business of banks should be as transparent as possible and should be separated from other types of business.
In the Natural Financial System the charging of interest is forbidden. Therefore banks should have other types of income. The legal framework for Natural Money banking should therefore provide transparency and guidelines on how to operate without charging interest.
The following issues are discussed:
- abolishing central banks;
- Natural Money banking rules;
- the scope of banking operations;
- ownership and controlling stakes;
- obligations.
Abolishing central banks
In the Natural Financial System money supply is fixed. There is no need to create money or to manage money supply in order to stimulate the economy. Therefore a central bank is not needed. Central banks are undemocratic institutions of bankers and therefore central banks tend to address the need of bankers and not of the people. Even though most people have little understanding of banking, they do feel the consequences of money creation. Most people understand that creating money does not solve economic problems and will lead to higher prices.
A government should also not be able to create money. Only the people should have the power to create money after a referendum. In the Natural Financial System there is no gain in creating money because all debts should be increased with the same percentage as the increase in the money supply. Furthermore raising the money tax has the same effect on the income of the government as increasing the money supply.
Natural Money banking rules
Banks in the Natural Money system must adhere to the following rules:
- Banks may not invest for their own profit and risk money that has been entrusted to them. They may only lend money without charging interest.
- People can hold their money in the bank in the form of a current account, on which the government tax is levied. They will hold the money they need in the short term in this type of account.
- People can hold money in the bank in the form of deposits or savings accounts. The bank lends this money without charging interest. Holding such deposits or savings accounts can be attractive because in this way the money tax is avoided and the value of the money is not eroded by inflation. Depositors pay a fee to the bank for intermediary costs. Banks may offer different types of savings accounts. The most restrictive savings accounts have the lowest fees.
- Banks are prohibited from charging interest on the money they have lent. This is essential to eliminate the risk from the financial system because banks may be tempted by interest to take on risky loans.
- The bank may only charge intermediary costs to the saver and not to the borrower, because the bank may be enticed by high fees to take on risky loans. Those fees are a kind of interest.
- There must be no money creating activity in the banking system. Therefore any money residing in the current accounts may not be used for lending. Only money in savings accounts is to be used for lending. People must accept that a bank sometimes cannot lend money or pay out savings if there is not enough money to the banks disposal.
- The local, state or national government issuing the currency levies a tax on the money. The banks holding the money must levy the tax and send the proceeds to the government issuing the currency.
The scope of banking operations
The size of banks should be limited. Therefore banks may only do business in currencies of their own jurisdiction. The only exception is the current account. A bank may offer all possible currencies in the current account. This has the following consequences:
- Local community banks may do business in the local community currencies, the state currency, the national currency and the International Currency Unit. Customers must reside in the community;
- State level banks may do business in the state currency, the national currency and the International Currency Unit. Customers must reside in the state;
- National banks may do business in the national currency and the International Currency Unit. Customers must reside in the nation.
The people of a community, state or nation must be able to determine the fate of their community, state or nation. Therefore banks may only have operations within the boundaries of the community, state or nation they are servicing. The emergence of multi national financial institutions should be avoided. A Natural Money bank must reside under a national sovereignty and be subject to the laws of a nation. Otherwise banks will set up operations in countries where they can evade the regulations of their home country. A Natural Money bank therefore should not have operations in foreign countries.
Banks should only provide banking services. These are: current accounts, loans, mortgages, savings accounts and deposits. Other financial services should be executed by separate legal entities such as brokers and mutual funds. Banks should not be involved in other activities because it may harm the integrity of the financial system. The financial system can be considered as a public service. Operating for profit at the expense of the public service should be prohibited.
Ownership and controlling stakes
A central question is whether banking should be private or public. Silvo Gesell identified the financial system and money as public utilities. In the United States the Public Banking Institute is promoting banking as a public service. However Natural Money itself does not dictate a public solution. The socialist solution is that the government takes over banking and issues state money instead of debt based money [+]. In this situation there is no real market for money, banks will lend on bureaucratic formulas and interest rates are set arbitrarily based on political considerations.
On the issue the following considerations apply:
- If only public banks are allowed, then there will be no competition, and banks may become inefficient bureaucracies.
- The profit motive of private banks, combined with public guarantees, has been an important driver of the lax lending practices that created the financial crisis.
- Public banks have been important in a number of vibrant economies, like those of North Dakota, Germany, India, China and Brazil [+].
- Sometimes it may not be possible to make a bank in the Natural Financial System profitable, especially when it is a small local bank. In such situations a community, a state or a nation may provide banking as a public service.
The fundamental options are to choose between private banking without guarantees or to accept banking as a public utility. Public guarantees for private banks will inevitably lead to moral hazard and abuse. Accepting public banking alongside with private banking will favour public banks in competition because they enjoy state guarantees. It appears that accepting public banks alongside with private banks is less problematic than public guarantees for private banks. The public banks may have a charters that limit their business or give them a designated function, such as providing loans for projects that would not have been feasible with private financing.
To ensure that private banks do not become large conglomerates with conflicts of interests, the following rules regarding ownership and controlling stakes for private banks should be adhered:
- Natural Money banks are prohibited from having stakes in other banks.
- Legal entities or natural persons may only own a limited stake in a Natural Money bank, for example 5%.
- Legal entities or natural persons may only control a limited stake in Natural Money banks, for example 5%. This rule must take into account intermediary legal entities.
- Foreign entities having stakes in Natural Money banks should be disclosed. Otherwise they must be refrained from having a stake in the bank.
Obligations
Banks have the obligation to provide certain services:
- All banks must provide payment services via current accounts.
- All banks must collect the holding tax for the government issuing the currency.
- Community banks must exchange the local currency for the regional (state) currency at the currency market, using a maximum spread. This obligation is limited in size because of the possibility of currency manipulation.
- Community banks must exchange the local currency for the national currency at the currency market, using a maximum spread. This obligation is limited in size because of the possibility of currency manipulation.
- Regional state or provincial banks must exchange the state or provincial currency for the national currency at the currency market, using a maximum spread. This obligation is limited in size because of the possibility of currency manipulation.
Banking income
In the Natural Financial System banks do not have income from trading activities, interest and money creation. Therefore bank costs should be charged to customers directly. Charging bank costs will make account holders aware of the cost of their activities and this will help to keep bank costs in check.
Natural money banks have the following sources of income:
- intermediary compensation is a fee the bank charges on money in savings accounts to compensate for intermediary costs. The compensation rate determines the intermediary compensation on saving accounts.
- Account fees are fees for account related services such as keeping an account at the bank and the bank card.
- Transaction fees are fees for transaction related services such as money transfers, terminal payments and automatic collects.
- Exchanging currencies will be a new source of income for banks because there are far more currencies in the Natural Financial System.
| Legal framework for the financial markets |
Introduction
The primary function of financial markets should be bringing together supply and demand for capital. However in many cases this function is hampered by the profiting at the expense of others that takes place in the financial sector. The following types of schemes exist:
- exploiting insider information;
- collusion;
- market manipulation.
The reduce the potential for misuse of information asymmetry, the following guideline should be followed in the design of financial markets:
It should not be possible for any party in the financial sector to accept a risk and then transfer the risk to another party. |
The legal framework of the financial markets should guard against this. The following measures are discussed:
- separation of responsibilities;
- measures against short selling;
- measures against derivatives;
- trading tax.
Separation of responsibilities
Introduction
The functioning of the financial sector is hampered by schemes to profit at the expense of others. Applying a strict separation of responsibilities will do more to solve this problem than regulation, which is often difficult to enforce. Simple rules are more easy to apply than complex ones. To enable financial institutions to remain independent, the following rules regarding ownership and controlling stakes should be adhered:
- Financial institutions are prohibited from having stakes in other financial institutions.
- Legal entities or natural persons may only own a limited stake in a financial institution, for example 5%.
- Legal entities or natural persons may only control a limited stake in financial institutions, for example 5%. This rule must take into account intermediary legal entities.
- All entities having stakes in financial institutions should be disclosed.
Banks should be the only financial institutions that lend money as a business. Other financial institutions, such as stock brokers or internet payment facilitators, may only offer current accounts that are subject to the holding tax. Money in those accounts cannot be lent. Corporations that are not a financial institution may only lend money to their customers as the result of a regular business transaction such as buying a product or a service.
The MF Global debacle demonstrates that it is difficult to regulate complex financial conglomerates. There have been a large number of regulatory bodies involved in monitoring MF Global but they failed [+]. The regulators also did not stop the mortgage fraud as federal prosecutors are reluctant to procecute major lenders and senior executives even when evidence was available [+].
There is no reason to assume that regulators will learn from their from their mistakes as the collapse of Enron would have provided ample opportunity to do so. Whether regulators are corrupt or incompetent does not really matter. The system of regulation has failed and it will fail again because the financial conglomerates and the financial system are complex. The best way to deal with the situation is breaking up financial conglomerates and to make the financial system less complex.
Splitting up financial conglomerates in combination will help to make the financial sector more transparent so less regulation will be needed. The following types of financial institutions should be separate legal entities that must adhere to the same rules concerning ownership and controlling stakes as banks:
- insurance companies;
- exchanges;
- stockbrokers;
- custodian banks;
- pension funds.
Insurance companies
In recent years the division between banks and insurance companies has been dissolved. In this way numerous banking-insurance conglomerates came into existence, such as the bank-insurer ING in the Netherlands. With Natural Money it is not possible to insure loans, which are promises to pay, because this introduces a moral hazard. The insurance fee is a form of interest. This means that banks and insurance companies must never be part of the same corporation.
Bringing banks and insurance companies together into one corporation is effectively an insurance against bank losses such as losses on loans, even if the insurance company does not actually insure the loans of the bank. The income from insurance operations can cover loan losses. Also the capital of the insurance operations can be used to cushion against loan losses.
The bank-insurer may also be be tempted to sell bad debt from the bank to the insurer and the insurer may place this bad debt in the accounts of its customers that have a pension or life insurance based on the performance of their investments.
Exchanges
Exchanges, such as bond exchanges, stock exchanges and commodity exchanges bring together supply and demand of financial titles. Probably it is possible to achieve the true market price automatically, using a computer algorithm that is part of the public domain without the need for market makers [+].
To establish liquidity in the financial markets, specialists may be needed. A sudden drop in liquidity may result in extreme price movements [+]. The use of specialists can provide liquidity and reduce price swings. The specialist must not be able to take a short position because this is forbidden in the Natural Financial System. The specialist can minimise exposure to risk by minimising the owned position.
Off-market execution of orders should be prohibited. Sometimes orders are executed off-market in so called dark pools, which may result in an execution of orders that is not optimal for the customers. All orders should be executed at an exchange to make order executions transparent. To prevent orders that are only meant to influence the price from entering the system, it may be a good idea that placing orders should be subject to a tax.
Stockbrokers
A stockbroker is trading securities on behalf of its customers. To make sure that a stockbroker is a neutral entity that does not act against the interests of its customers, the stockbroker should not be able to trade securities for its own account. A stock broker can therefore not be a market maker. A stockbroker must not also be an investment advisor because it should be a neutral entity. Investment advisors may get fees from companies wanting to sell securities.
Stockbrokers must not perform banking functions and supply funding for leveraged positions. The money people deposit at the stock broker should not be available for lending. Therefore all the money deposited at stock brokers has the same status as the current account in the bank. This money is subject to the holding tax. Currently it is possible for banks make a profit by operating against the interests of their customers because they have insight in their financial position (as a bank), their investment position and their trading decisions (as a stockbroker).
Custodian banks
A custodian bank is a financial institution responsible for safeguarding a firm's or individual's financial assets. The role of a custodian is: to hold in safekeeping assets such as equities and bonds, arrange settlement of any purchases and sales of such securities, collect information on and income from such assets (dividends in the case of equities and coupons in the case of bonds), provide information on the underlying companies and their annual general meetings, manage cash transactions, perform foreign exchange transactions where required and provide regular reporting on all their activities to their customers.
The Depository Trust & Clearing Corp. (DTCC) has legal ownership over nearly all stocks people buy [+]. Most people do not realise that they do not legally own a stock that they buy and that they cannot assert ownership in any way. The collapse of MF Global also demonstrated what could happen if people do not legally own stocks and bonds they have bought.
Legal ownership of a security should be with the buyer of the security. Owners of securities should have the option to obtain paper certificates of the securities they own. Currently all securities are owned by the Depository Trust & Clearing Corp. (DTCC) and buyers of securities do not legally own them. The DTCC having a near monopoly on all security custody activity is also not a good idea because it leads to a concentration of power in the financial sector.
The MF Global collapse and the handling of it by regulators has proven how this can work out for ordinary people. They have now good reason to distrust security accounts and brokerages [+]. The situation also erodes the trust in the financial system as guarantees to protect people from bankruptcies of financial institutions appear to have little value.
Custodian banks have information about investment positions people hold. Therefore custodian banks should never be part of a corporation that also holds a bank, an insurance company, an exchange, a market maker or a stock broker. Currently the DTCC is privately owned by a consortium of brokers and banks. The DTCC facilitates scams and illegal practices like naked short selling that produces high profits for Wall Street firms [+].
Pension funds
For most people pension funds are a better solution than individual pensions because of the following:
- Nobody knows how long he or she may live. People that die early have no use for their pension money while people that live long may find their retirement to be insufficiently funded. Pension funds and insurance companies can fund the pensions of the long living with the money of the people that die early, making pensions more adequately matching needs.
- Most people have no expert knowledge of investing. Therefore the returns on investment for most people does not beat index investing or model based investing because humans are subject to emotions such as greed and fear. Professional investors only use models. Model based investing without emotions does lead to better returns on investment over the long term in most cases.
Pension money is money that employees have worked for. Therefore pension funds should not be controlled by corporations because corporations may undefund the pensions or abuse the pension money [+]. Pension funds should therefore be owned and controlled by the employees. This also means that, when funding is inadequate, the employees and the retirees are responsible for solving the issue. Currently there is often a shared responsibility. In such a situation employers tend to pay less when the returns of the pension funds are good and they tend to pay more when the returns are bad. Consequently high pension payments often coincide with bad business conditions, which puts an additional burden on the employers. It is better to make payments constant and assume that there is no return on investment. This guarantees a minimum pension level. When the employee retires, his or her real pension can be calculated.
There is always a conflict of interest between the people that are retired and the people that are still working and pay pension contributions. This conflict arises when determining the level of pension payments to pensioners and estimating the life expectancy of pensioners and people still paying contributions. This conflict of interest can be reduced by basing the pension payments on the contributions paid and the investment return on those contributions. Guesses about future return on investment may create unsustainable pension systems. In the Natural Financial System estimates of future return on investment should maximally be rated at zero because there is no interest on money. Currently changes in interest rates can have a dramatic effect on pension funding.
The Natural Money currency unit will rise in value at the same rate the economy grows, and therefore the Natural Money pension system will become more sustainable than the current pension systems. If investment returns surpass expectations, pension levels may rise. If investment returns disappoint pension levels may fall. Those adaptations should be made regularly and should include life expectancy changes. Because of the future returns on investments are maximally be rated at zero, and the Natural Economy is constantly growing at maximum potential, investment returns will rarely be disappointng.
Pensioners should be aware of the fact that a guaranteed pension level in the current usury financial system does not guarantee anything at all. If money becomes worthless, a pension based on a guaranteed amount of money also becomes worthless. |
Pension levels should be adapted regularly to current life expectancy rather than based on a guessed life expectancy in the future. Under normal conditions uncertainty about investment returns is far higher than uncertainty about life expectancy. Therefore putting too much effort into life expectancy estimates to determine the level of pension contributions and payments is pointless.
Short selling
Short selling of stocks should be banned because shorting can be used as a hedge against default risk. In the Natural Economy it should not be possible to insure default risk. If people do not believe in the future of a company, their only option should be not to own the stock of the company. Shorting can create an interest in bringing down a company. In the Natural Economy short selling is unattractive in most cases because it brings money in the current account of the person or entity that is short selling the stock. This money is subject to the holding tax. Short selling a currency will also be unattractive because short selling results in holding another currency whereupon a holding tax must be paid.
Short selling is often justified on the premise that inefficient companies and scams are exposed earlier because short sellers do research that benefits the markets. However people holding the stock also have the interest in detecting inefficiencies and frauds. If something is wrong with a company, the first sellers get the best price. Inefficiencies and frauds will therefore also be exposed if short selling is not allowed. As insiders can avoid losses by getting out early, allowing short selling gives insiders an additional opportunity to profit from the unsuspecting public. Moreover short sellers can become interested in destroying a company or even a nation. As Max Keiser noted, this market fundamentalism can lead to bizarre situations:
When discussing America’s demise we’ve talked many times about a key issue, ‘market fundamentalism.’ The idea that insiders are willing to make a quick buck even if it means death to themselves, their family and their country. We saw this on 9/11 – when at least one broker was buying airline puts – to make a quick buck- even though he was sitting in the Twin Towers (and could have escaped) at the time and perished. Today, Eric Cantor is making a similar trade. He is the new ‘Broker Zero.’ He is working feverishly to destroy the country’s economy while simultaneously betting on its destruction for a quick buck. This type of market jihadism should be stopped in the U.S. It would be a very good first step toward recovery if financial terrorists like Cantor were kicked out of Washington. |
Another justification for short selling is that it can create demand for stock during a market panic as short sellers have to cover their shorts. In the Natural Financial System, economic crises and market panics are less likely to occur. Currently there is a difference between legitimate short selling and illegitimate short selling or naked short selling. Legitimate short selling means that stocks have to be borrowed from the owner, while naked short selling means that stocks are sold without being borrowed.
Naked short selling can be used to print additional counterfeit stock of the company [+], which can be used to create additional supply to trash the price of the stock. In the digital age the distinction between legitimate short selling and naked short selling has become less clear. Securities do not have to be physically delivered for the trade, which opens the system to loopholes [+]. Many investors do not know that they are contributing to short selling [+].
Derivatives
In the Natural Economy risk in financial markets is reduced because there is no risk premium available in the form of interest. In this way loans with a high risk of default are not granted. Therefore the financial markets become more stable. which further reduces default risk so there will be less need to hedge against risk. Currently derivatives have the following uses:
- to hedge against the risk of default or fluctuations of prices;
- to speculate upon default or fluctuations of prices.
Hedging and speculation often involve information asymmetry. People having inside information can hedge against or speculate upon a specific event at the expense of others that do not have this information. Not allowing them to hedge risk makes parties checking their counterparties better. For example: the sub prime mortgages problem would never have arisen if banks had not been able to offload their risk in the financial markets. Because there is no objective measure for risk, parties think that they can make risky bets and hedge them [+].
The notational value of outstanding derivatives has reached 20 times the size of the world economy, which is poses a risk to the world economy [+]. Derivates are difficult to understand and as a consequence they are difficult to regulate, while regulating derivatives via clearing houses may also pose serious risks [+]. Derivatives should therefore be banned.
The following types of derivatives should be banned in a Natural Economy:
- Interest rate derivatives must be banned because there is no interest on money;
- Default risk derivatives must be banned because the risk of default cannot be hedged;
- Stock futures and options must be banned because the shorting of stocks is banned;
- Stock index futures and options must be banned because the shorting of stocks is banned;
- Currency futures and options must be banned because the shorting of currencies is useless because of the holding tax.
Because call options can also be used to create a short position, calls and puts should both be banned. The same applies for Exchange Traded Funds (ETF's) [+]. Stock indexes will be less volatile because economic conditions in the Natural Economy are more stable. There will be no booms and busts in the Natural Economy. Variations in interest rates do not change the attractiveness of stocks because there is no interest on money. This will reduce the demand for trading instruments such as stock index futures and options.
Currency futures and options are unattractive because of the holding tax on Natural Money currencies. This makes shorting a currency expensive because shorting results in holding another currency whereupon a holding tax must be paid. There probably will be little demand for currency futures and options.
Natural Money will end the possibilities for carry trades in currencies based on interest rate differentials. Carry trades were one of the main drivers of the escalating imbalances in the usury financial system as positive and negative balances of payments were not corrected by currency value adjustments. |
Sustained financial imbalances are in nobody's interest. Creditor nations accumulate currencies that lose value over time. Countries like China and Japan can better use their resources to improve their own wealth instead of subsidising the spending of the EU and the US. The current situation will end in tragedy for all parties, as the production of the EU and the US will be outsourced, while creditor nations will end up holding worthless currencies.
Commodity derivatives may still be needed because suppliers and users of commodities need to make agreements to buy or sell commodities at a specific price at a specific time to ensure the continuation of their operations. Such an agreement will have a positive or a negative value as soon as the price of the commodity changes. In essence this is a future position. Commodity markets are notorious for their speculation. Therefore it is important to provide a sound regulatory framework for those markets.
Trading taxes
The need for trading taxes
Currently labour and investing are often taxed, but there are no taxes on trading. This not efficient because labour and investing are productive activities, while trading is not. 99.9% of financial transactions are not needed for the real economy but take place in a speculative finance [+]. Most retail traders lose money in financial markets because traders often fall prey to irrational behaviour driven by fear and greed. One of the most influential books on collective irrational behaviour in financial markets is Extraordinary Popular Delusions and the Madness of Crowds written by the Scottish journalist Charles Mackay [+].
To discourage excessive trading, which does not have a real value for the economy, trading taxes should be considered. A trading tax may refrain people from trading excessively, and it may also curb program trading that often is sponsored by stock exchanges to create trading volume. Currently program trading generates around 70% of the trading volume on stock exchanges and is sometimes used to manipulate the markets [+]. Program trading can only be profitable at the expense of investors. This reduces the value of security exchanges to investors.
Tobin tax
Trading taxes are more commonly known as Tobin Tax [+]. Tobin suggested his currency transaction tax in 1972, shortly after the Bretton Woods system of monetary management ended in 1971. Experiments with the Tobin tax in the past often did not have the desired results. The research produced the following results:
- no statistically significant causal link was found between an increase in transaction costs and a reduction in volatility;
- trading volumes dropped and therefore the tax revenues were disappointing. Probably traders moved to other financial centres.
The underlying political assumption is that trade makes the economy more efficient. High trade volumes on financial markets are considered to be good because they create liquidity (in other words: trade is good because it creates the opportunity for more trade), and stable currency rates are considered to be desirable because they facilitate international trade. The assumption is political because it favours the ruling class that uses trade to exploit others.
The European Union is planning to implement a Tobin Tax by 2012 [+]. This plan will probably fail if the tax is not implemented globally. British Prime Minster Cameron correctly assessed this risk and he resisted the Tobin Tax plans of the European Union but his statement indicates he would favour such imposition if it was imposed globally. As the economy of Great Britain depends on deregulated finance [+], Cameron probably bets on this not happening. Only if nations disconnect themselves from international finance, they may be able to implement the Tobin Tax regardless of what other countries do.
Efficiency considerations
International trade creates an economic rat race where everybody competes against everybody. This undermines real wages. Traders often operate at the expense of others, so the real economic value of trade may well be negative [+]. Furthermore, trading and speculation attract smart brains that could otherwise be used for productive purposes. When currency rates are stable, imbalances in trade can get out of hand. This issue undermined the Bretton Woods System and is now undermining the single European currency.
To make trading taxes effective, national sovereignty of the nations need to be restored. This means that nations should disconnect themselves from the international financial markets as much as possible. A succesful example of this idea is Germany in the 1930's. After Adolf Hitler rose to power, unemployment disappeared within two years, despite an international economic boycott. Germany was largely disconnected from the international economy, but it had a stable currency, no debt, and no inflation, at a time when millions of people in the United States and other Western countries were still out of work and living on welfare [+].
Applications
A trading tax could be charged on currency trades, stock trades and bond trades, and on orders placed. The trading tax on stock trades and bond trades must be low, so people will not be discouraged from investing, but high enough to discourage trading. The trading tax may only be charged when selling the position and may be waived if the investor holds the position for a certain period of time.
There should be a tax on currency trades and the tax should be levied by the government of the currency that is sold in the trade, like it has been done in Wörgl. People should be encouraged to spend the Natural Money currencies in the real economy instead of exchanging it for other currencies. In Wörgl people could exchange the Wörgl Currency Unit for 0.98 Austrian Schilling while its economic value was 1 Austrian Schilling.
Probably trade volumes on security exchanges will dry up. The consequence may be that continuous trade of securities will not be possible in the future and that there will be periodic auctions for most securities at an equilibrium price. If volumes are low then periodic auctions are a better option than continuous trade as there will be less opportunities for market makers to exploit the public.
There is no need for a tax on profits from investing such as dividends and capital gains. There is also no need for a tax on investment capital such as stocks, bonds and real estate. Currency positions however are subject to the holding tax of the government issuing the currency. Within the Natural Financial System, multinational corporations are not allowed to exist and corporations therefore should list their securities on exchanges in the country of their origin. This makes it feasible to implement trading taxes without corporations and investors leaving the securities exchanges.
Hedge funds
Most hedge fund investment strategies aim to achieve a positive return on investment whether markets are rising or falling. Investors are typically institutions, such as pension funds, university endowments and foundations, or high net worth individuals. Because hedge funds are not sold to the public or retail investors, the funds and their managers have historically not been subject to the same restrictions that govern other funds and investment fund managers with regard to how the fund may be structured and how strategies and techniques are employed. Fund strategies fall into the following main categories: global macro, directional, event-driven, and relative value (arbitrage) [+].
Hedge funds can pose systemic risks to the financial sector. Hedge funds often speculate with a leverage, which can be up to 1:100. Hedge funds are also not transparent. As private, lightly regulated entities, hedge funds are not obliged to disclose their activities. It is often alleged that hedge funds speculation can deepen the troubles of struggling corporations and countries. Recently, Greece has been the target of hedge funds [+]. Those problems are mostly caused by financial mismanagement in the first place. In the Natural Financial System it will be difficult to create leveraged positions because there is no allowance for risk. This, combined with a ban on short selling, derivatives and trading taxes will end the business of hedge funds.
| Bank Organisation |
Introduction
In the Natural Money economy it must be possible to operate small local community banks effectively. Therefore the basic organisational design of those banks should be simple. The following issues are discussed:
- ownership and legal structure;
- personnel;
- security;
- outsourced operations;
- certification.
Ownership and legal structure
The following types of banks are possible:
- Private enterprise. The bank is owned by shareholders and is pursuing profit. There are limits to ownership and controlling stakes in banks. Owners of a bank should be fully disclosed.
- Community service. The bank is a foundation that is run as a community service. The bank is not pursuing profit but services the community. This may be a good option in small communities where there is no interest in running a bank as a private enterprise. It is possible to have more than one community bank within a community.
- Government service. The bank is operated by the government issuing the Natural Money currency. This may be a good option in very small communities where there is no interest in running a bank as a private enterprise or a community service.
When a bank is a community service or a cooperative, then people having money in the bank are in effect the members of the bank. This is somewhat like the concept of the Rabobank in The Netherlands. The people having money in the bank appoint the board of the bank at the regular general meetings of the members. People having money in the bank have voting power at the general meetings of the members. The voting power depends on the net worth a member holds in the bank. However the voting power of individual members should be limited to a certain maximum, which can be the same as the maximum stake a shareholder may have in a bank that is a private enterprise.
Personnel
As banks occupy themselves with financial affairs, this raises the issue of the seggregation of duties. Within a bank the following basic roles can be identified:
- account holders: people that have accounts in the bank;
- data entry: enters data on behalf of the account holders;
- account and account holder data review: reviews submitted account and account holder data;
- account and account holder data approval: approves submitted account and account holder data;
- transaction data review: reviews transaction requests;
- transaction data approval: approves transaction requests;
- application administration: administrates the application and represents the end users of the system and manages data, parameters and users;
- system administration: administrates the technical infrastructure, which includes database, network, hardware and software;
- auditing: verifies the procedures and the operations of the bank.
In small banks bank jobs may be parttime jobs. In the most basic configuration, the bank should have at least the following people in office:
- clerk, having the roles data entry, account and account holder data review and transaction data review;
- approver, having the roles application administration, account and account holder data approval and transaction data approval.
It is possible that small banks pool personnel. The clerk of one bank could be the approver of another bank. The role of system administration can be executed at a centralised site with experienced technical personnel. The auditor can be employed by an external auditing agency.
The people working at the banks should have knowledge of the following subjects:
- the concept of the Natural Financial System;
- legal aspects of banking in the Natural Financial System;
- book keeping and accounting;
- the use of the computer system.
The people working at the banks should meet other requirements, such as not having a criminal record.
Security
The data of the bank and the network connections of the bank should be secure. If a bank is small and cannot afford the costs of the necessary security provisions, the bank should choose a facilitator to host the banking operations.
Bank security is threatened by the advent of Internet banking. Money can be transferred anywhere around the globe and payment facilitators like Paypal make transaction tracking more difficult. Malware also threatens Internet banking [+].
Because of this more people may start to rely on local bank offices for their banking transactions instead of the Internet. Making the banking software part of the public domain may help to make it less vulnerable for hackers as the software can be evaluated by every expert around the globe. Criminals may try to exploit vulnerabilities in the banking software, but their efforts will also be helpful in detecting them.
Outsourced operations
A Natural Money bank must reside under a national sovereignty and is subject to the laws of a nation. The facilitators that host banking operations, such as personnel or information systems, must therefore also reside under the same national sovereignty and be located within the borders of the same nation the banks are in. The operation of a facilitator must be certified against the laws of the nation.
Certification
The banks as well as facilitators that host banking operations should meet certain requirements. The requirements cover organisational setup, personnel, technical systems setup and auditing.
Transitional payment facilitators
Transitional payment facilitators may be needed to make payments possible between the Natural Money Financial System and the usury financial system as long as those systems coexist. During the transition period not all payment systems may be able to accept Natural Money account names even though they are operating within the Natural Financial System. Accounts in the usury financial system are available via IBAN and SWIFT, so it is possible to transfer money between Natural Money current accounts and accounts in the usury financial system via a payment facilitator.
| Transition to the Natural Financial System |
Introduction
The transition to the Natural Financial System has far reaching consequences. The transition should well prepared and the general public should be informed about the changes and the progress made. Limiting the scope of the initial transition is essential. The transition to the Natural Financial System should have the following phases:
- requirements analysis;
- decision making;
- communication of the changes;
- preparation;
- transition.
The requirements analysis may start as soon as the transition to the Natural Financial System is considered. A considerable part of the requirements analysis has already taken place and has been written down in the following documents on Naturalmoney.org: Money of the Natural Economic Order, Design for the Natural Financial System and Systems Design for the Basic Banking System.
Requirements analysis
The requirements of the Natural Financial System should be analysed. If the requirements analysis is complete, there must be at least:
- a set of laws that regulate the Natural Financial System;
- an organisational design for the organisations in the Natural Financial System;
- a systems design for the Basic Banking System that supports the banking operations.
The requirements analysis for the Natural Financial System consists of the following steps:
- determining the Natural Financial System basic concepts;
- determining the Natural Financial System organisational requirements;
- determining the Natural Financial System information system requirements;
- determining the Natural Financial System laws.
Decision making
Because Natural Money is the most efficient type of money, there is no real decision making involved. The concept will spread on its own as soon as it is implemented somewhere. Discussing whether or not to implement the Natural Financial System useless.
Communication of the changes
Introduction
Introducing Natural Money will result in a change in the financial system that will affect the daily life of most people. When Natural Money is introduced, most people will be better off in the long run, compared to sustaining the usury financial system. During the transition phase there most likely will be turmoil. If people are not well informed, they may become more fearful than needed. Political agitators may try to use the fear to forward their own agendas. There may be setbacks and unforeseen events. The process of communication should start as soon as possible.
The public should be informed about the following:
- How does the current financial system work and how does Natural Money work?
- Why is there a need to change to the Natural Financial System?
- Why should a holding tax be paid for money in the current account?
- Why should borrowers pay no interest and why should savers pay a fee?
- What is going to change and what do people and businesses need to do?
- What are the current developments and the next steps?
How does the current financial system work and how does Natural Money work?
The general public is not well informed about the working of the usury financial system and does not know that usury is the main cause of financial and economic crises. Practically nobody knows that alternatives are available. Natural Money is the most efficient type of money because in the Natural Financial System productive work and enterprise are rewarded, while resources are directed to the real needs of people. The general public should therefore have a basic understanding of the reasons why usury is the cause of crisis and the existence of alternatives for usury money.
Why is there a need to change to the Natural Financial System?
The economies in the West (US, EU, Australia) are deeply in debt. If there is no real change in the financial system, the economies of the US and the EU will collapse or go into a protracted decline that may take decades. The majority of the people in the West will see a drastic decline in living standards. Natural Money will reverse this trend and will result in constant economic growth at full potential without crisis and unemployment [+].
The aging population of the West needs care and attention, the quality of education may need improvement and more police may be needed in neighbourhoods that are ruled by gangs and criminals (the no go areas). Currently a large part of the workforce is unemployed or locked up in unproductive jobs in government, management, law, consultancy, finance and trading and technology [+]. Natural Money will restructure the economy in such a way that the workforce can be directed to the needs of society, such as caring for the elderly, education and policing.
Usury is one of the main causes of poverty and probably the most important one. As long a usury exists, poverty cannot be effectively eliminated. This does not mean that poverty will disappear as soon as Natural Money is introduced, but the introduction Natural Money will enable more people to take their destiny in their own hands.
The economy based on usury has a short term view which results in the destruction of nature. Because of interest payments an amount of money in the future is valued less than an amount of money in the present. The Natural Economy will be focussed on a longer time horizon. In this way resources will be saved and recycled. Nature will be respected because our future living conditions will be valued higher and depend on the preservation of nature [+].
The short term view of the economy caused by usury hollows out corporations. Investors focus on quarterly numbers, which results in financial engineering and higher debt levels. If the economy is booming, the leverage will improve profits and lead to higher management bonuses. When the economy slows, leverage will make the company prone to bankruptcy, so workers have to be laid of and creditors may lose money [+]. In the Natural Economy it is far more difficult to use leverage to finance an operation.
Financial institutions have captured the governments of the West because their failure is assumed to have dire consequences. This effectively ended democracy in the West and governments in the West are now ruled by an oligarchy of business interests. Natural Money will strengthen local economies at the expense of the oligarchy and will bring decision making back to the local level.
Why should a holding tax be paid for money in the current account?
Nobody is accustomed to paying a tax on money. It will require a fundamental change in the way people see things. Special interest groups linked to the usury financial system may try to raise this subject and create the impression that a tax on money is not fair. Fairness however is a subjective measure.
System efficiency is an objective measure. A tax on money will create a more efficient economy, because money is flowing constantly. There will never be an economic crisis based on credit contraction again. The economy will grow constantly at maximum potential. Unemployment will be a thing of the past. Central banks are not needed anymore and inflation will end. The tax on money can replace income taxes and taxes on profit.
It is possible to avoid paying the holding tax by lending out money. Avoiding the holding tax will make saving money attractive even though savers do not get interest on their money and have to pay an intermediary fee to the bank.
Why should borrowers pay no interest and why should savers pay a fee?
Everybody is accustomed to the usury financial system and therefore to interest payments on savings and debts. It will require a fundamental change in the way people see things to accept that borrowers should pay no interest and savers should pay a fee. The main reason for not allowing borrowers to pay any interest or fee is that banks may take on risky loans for high fees or high interest payments. This will create an instable financial system because the weakest borrowers alos pay the highest fees and interest rates. Abolishing interest on money will result in banks picking the best borrowers for the money they have at their disposal. This will result in a more stable financial system.
Savers are better of with Natural Money. This is because the value of money rises when the economy grows. If the Natural Money economy grows constantly at a rate of 4%, the value of the money rises 4% per year. If someone places money at the bank in a 10-year deposit with a yearly compensation rate of 0.5%, the deposit will have a real return of 3.5% per year. If the usury economy grows at 3% a year, while the money supply rises at 7% a year, a 10 year deposit at 4% interest has a return of 0%. Over the last 10 years the usury economy grew less than 3% a year on average, money supply rose more than 7% a year on average and deposits returned less than 4% a year on average. Therefore savers are better of in the Natural Money Financial System.
What is going to change and what do people and businesses need to do?
If there is a transition then everybody needs to open an account at a Natural Money financial institution. The process of opening an account at a Natural Money bank and transferring money from a usury bank to the Natural Money bank may be a standardised automatic process provided that there is sufficient certainty about the identity of the account holder and his or her whereabouts. In the case that a government has taken control of the usury banks, the usury banks can be forced to comply.
Everybody needs to get a new bank card and new banking equipment. Bank cards and banking equipment, such as identification devices and payment terminals, should be standardised so small banks and small businesses can operate in a cost effective way. Bank cards in the Natural Financial System have the option to hold cash. Cash is digital money that can be spent without contacting the bank over the banking network.
Businesses may need to adapt their information systems to facilitate bank account names. Many people will need to reorganise their financial affairs. Flexible loans will be difficult to get. If someone needs to loan money occasionally, a fixed term loan agreement should be made and the excess money must be placed in the current account or a savings account. Businesses will face a similar problem. They will have to allocate the capital they need in advance by issuing shares or take a fixed term loan.
What are the current developments and the next steps?
Introducing the Natural Financial System is a project of which not all consequences will be known on beforehand. Even though it is nearly certain that Natural Money will become a success , there will probably be turmoil and unexpected events that may raise the need for adaptations in the original plans. If there is uncertainty, people may become anxious and there will be a lot of uncertainty.
It is important to communicate openly about all relevant developments. The use of vague and concealing language should be avoided. Vague and concealing language is often used to hide the truth and using such language will therefore not inspire confidence. There is no need to conceal anything because Natural Money is the best available option.
Preparation
Introduction
The initial introduction of the Natural Financial System should have a minimal scope that is clearly defined. The basic functions of a bank and therefore the functionality of the Basic Banking system should be straightforward. The usury financial system and the Natural Financial System may be separated at first. In this way instability in the usury financial system will not spill over to the Natural Financial System.
Effort should be focussed on reducing the length of the critical path of the project. The critical path is a sequence of activities that depend on each other which determine the duration of the project. Determining the activities on the critical path and focussing efforts on reducing the duration of the activities in the critical path will reduce the duration of the project as a whole.
It is important not to compromise on quality standards. Therefore the project should not have a defined deadline and expectations of the project duration and outcome should be managed. It is better to exceed expectations than being unable to live up to them.
The transition to the Natural Financial System is expected to happen during a financial crisis. To handle the crisis, the following steps may need to be taken:
- taking over the central bank and the banks;
- preparing local and regional governments for the transition;
- preparing people and businesses for the transition;
- instituting the Natural Financial System and Natural Money banks.
Taking over the central bank and the banks
The central bank should be brought under government control. Any government debt under management of the central bank can revert to the government, effectively diminishing government debt. If all affairs are settled, the banks should be returned to market conditions. Most old banks probably will get liquidated but banks that are in a good financial condition may be converted to the new Natural Money system.
Before issuing the new currency, the government should take control over all banks and operate them, so payments can proceed. The deposits in the old banks should be guaranteed to a certain maximum, so people will not panic and take their money from the banks. Bonds and derivatives of the banks should not be guaranteed. The government may need to control the banks during the transition period, until the new financial system has become operational.
Taking money from the public and give it to private interests can be considered as theft. Therefore all money spend on bail outs should be returned and all guarantees should be ended. After taking control of the central bank and the banks, the government has the following options:
- declaring all government bail outs and guarantees illegal and returning the troubled assets to the banks and returning the funds to the treasury;
- declaring all central bank bail outs and guarantees illegal and returning the troubled assets to the banks and returning the funds to the central bank.
Preparing local and regional governments for the transition
Local (municipal) and regional (state or provincial) governments should be allowed to issue their own Natural Money currencies. When they introduce Natural Money currencies, the tax regime should be changed. Ideally the income of local (municipal) and regional (state or provincial) governments should only consist of the holding tax. Other taxes, like property taxes and income taxes, should be abolished if this is possible. It is difficult to know in advance whether the income from the holding tax will be sufficient to pay for the government expenses. However the example of Wörgl shows that tax income will rise dramatically after the introduction of Natural Money so it is certain that income and property taxes can be reduced significantly.
Preparing people and businesses for the transition
People have to adapt the handling of their financial affairs to the conditions of the Natural Financial System. This may mean the following:
- They may have to open bank accounts at Natural Money banks. There may be an automated procedure to open a bank account based on information already available at the usury banks. The transfer of the money from the usury bank to the Natural Money bank may also be automated.
- They should be informed about the differences between Natural Money banking and usury banking. In the Natural Money Financial System it is not possible to have negative account balances in the current account. If someone wants to loan money, a loan agreement should be made and the excess money should be placed in the current account or a flexible savings account. Also people should get used to using of multiple currencies in their accounts.
Businesses have to adapt their operations to the Natural Financial System. This may mean the following:
- They may need to adapt their information systems for the use of Natural Money. Especially the use of Natural Money bank account names may pose challenges to information systems. The use of transitional payment facilitators will give businesses more time to prepare for the transition. In this way the progress of the transition will not be blocked by the time businesses need to prepare for the transition.
- They may need to use new payment terminals. New payment terminals may not be needed if existing payment terminals can be used in the Natural Financial System.
Instituting the Natural Financial System and Natural Money banks
As soon as the decision is taken to change over to the Natural Financial System, preparations have to be made to run the Natural Money banks. Because the organisation of the Natural Money banking operations is standardised and relatively simple, instituting a bank is a standardised operation that can be executed with basic banking knowledge. The process of instituting and running a bank in the Natural Financial System should be written down in banking manuals.
When instituting Natural Money banks, the following issues have to be addressed:
- The Natural Money banks have to be founded.
- The boards of the Natural Money banks have to be appointed.
- The personnel of the Natural Money banks has to be hired.
- The Natural Money banks have to be funded.
- The boards and the personnel of the Natural Money banks have to be educated.
- The boards and the personnel of the Natural Money banks have to pass exams that certify their ability to operate the bank.
Transition
Introduction
It is imperative that the scope of the initial introduction of the Natural Financial System is minimised. If Natural Money is to be introduced, this will probably happen at a time of intense crisis. Failure is not an option. Therefore everything has to be done to ensure success. The conversion of the usury financial system into the Natural Financial System may have the following phases:
- issuing the new currency;
- currency conversion;
- conversion of the financial markets;
- settlement.
Issuing the new currency
A government can issue a Natural Money currency that will become legal tender within the country. The old currencies should continue to exist, but must not remain legal tender. People will be free to convert their old usury currency into the new Natural Money currency. In this way a country can shield itself from the financial system that is in a process of disintegration while not breaking existing agreements that are made in the old currencies such as the Euro or the US Dollar.
First only payments for goods, services, taxes and salaries will be done in the new Natural Money currency. The new Natural Money currency will be used in the real economy. The financial system will still operate using the old currencies. In this way those two systems are separated in such a way that the instability of the financial system will affect the real economy to a far lesser degree. When the financial system is separated from the real economy, the real economy may grow even while the financial system is in collapse.
Currency conversion
Financial markets will at first still operate using old currencies like the Euro or the US Dollar. Existing debts will also remain in Euro or US Dollar. Governments should stop bailing out bankrupt companies and financial institutions and let the markets do their work. The old currencies still do have value as many debts still have value.
If people are still obliged to pay off their debts in the old currencies then they can use their Natural Money to buy up their debts in the old currencies. Because the Natural Money currency is legal tender in the real economy, there will be demand for the Natural Money currency, and therefore it will always be possible to convert the Natural Money currency into the old currency.
It may be an option to cancel old debts or cancel interest payments on old debts. This will greatly improve the capacity of the lenders to repay their debts. When people are repaying their debts, this creates an upward pressure on the value of the old currency. When people are liquidating accounts in the old currency and buy the Natural Money currency, this creates a downward pressure on the value of the old currency.
Conversion of the financial markets
A company that wants to be listed on a stock exchange in the Natural Financial System must issue stock until the debt on its balance sheet meets specific requirements. Bond holders must convert their holdings into common stock. The conversion can be done at market prices for the bonds and the stocks using the old currency. All short interest in the stock should be eliminated before conversion, because bond holders may short the stock to get a favourable conversion rate. A specific conversion law should make this possible.
The conversion law should include the following:
- preliminary listing of the stock at a stock exchange that is within the Natural Financial System;
- elimination of all short interest on the specific stock before conversion;
- remove listing of the stock from all stock exchanges that are not within the Natural Financial System;
- conversion of debt into equity;
- full listing of the stock at a stock exchange that is within the Natural Financial System.
After the introduction of the Natural Financial System, financial markets can be converted in this to the Natural Money Financial System.
Settlement
Many international payments and debts are in Euro or US Dollar. The EU member states and the US are not engaged in many of those contracts. Therefore the EU members and the US are not in a position to abolish the Euro or the US Dollar. The EU and the US should therefore discuss the management of the Euro and the US Dollar with their international trading partners and the major creditor nations such as China and Japan. The debtor nations should negotiate with the creditor nations what kind of goods, services and assets will be returned for the debts and the time frame in which this will be realised.
The settlement may include a debt forgiveness as many debts are not repayable. Currently millions of Americans are about to lose their homes, and millions more have incurred large credit card debts, so it may be a good idea to make a debt forgiveness part of the settlement [+].
At some point in the future it becomes clear what the value of all debts is. When there is income or assets backing them up, debts should have some value. When this condition is realised, the financial system is stabilised and the remaining balances in the old currencies can be converted into Natural Money currencies. The value of derivatives should be determined by the market using the old currencies. The government has no role in this. Derivatives can never be converted into the Natural Money currencies.