[Index]
Design for the Natural Financial System

July 4, 2009 - October 20, 2009

Author: Bart klein Ikink
Introduction



Money is power more than anything else. Therefore issues regarding money should be handled with the greatest amount of understanding possible. 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 correctly, leads to a concentration of money power in the financial sector and governments that undermines democracy. People and markets can never be free if there is a concentration of power in the financial sector and governments. Therefore the financial sector and governments should be regulated in such a way that they have a positive impact on wealth and that money does not dominate the destiny of humanity.

The central question is: Should the fate of a nation or the world be determined the people or by the bankers? In other words: Should a nation or the world be governed by the people through their elected representatives or by an unelected financial elite?

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 on money and the money creation by financial institutions. Because of this the financial system becomes more complex than it would otherwise have been. Financial instability and complexity create opportunities to profit at the expense of others. This leads to a concentration of wealth that is not based on economic achievement which results in a lower wealth for the general public. The charging of interest on money and the money creation by governments and financial institutions are the most fundamental threats to economic freedom.

The interests of governments and the financial sector are intertwined because they together control the creation of money. Also politicians are easily corrupted by special interests. Therefore government intervention and regulation will never solve the problem of money power undermining a democracy. Government intervention and regulation will only aggravate this problem because the oppressive power of the government can be used to serve special interests.

The design for the Natural Financial System brings the following advantages:
- Natural Money will take away the power to create money from governments and the financial sector;
- The Natural Economy will have a higher growth rate than an economy based on usury. This will attract investors;
- Natural Money will bring financial stability. This will attract investors and deter speculators;
- The Natural Financial System 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 transparency of the Natural Financial System design will reduce the need for extensive regulation.

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.

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 banning 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. Therefore the number of funding options is decreasing. This has far reaching consequences for people and businesses.

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 the chance of being short of money is greatly reduced.

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 more easy.

The following issues are discussed:
- characteristics of Natural Money;
- the valuation of the Natural Money unit;
- social issues;
- personal finance;
- business finance;
- government finance;
- local currencies;
- methods of payment;
- exchanging currencies.



Characteristics of Natural Money

Natural Money has the following characteristics:
- A holding tax is levied by the government on the money in circulation. This money comes back into circulation by government expenditures.
- There is a complete ban on usury, which is the charging of interest on money. Money may only be lent without charging interest.
- The money supply is not growing or decreasing without deliberate action. There is no money creating activity by financial institutions or the government. Therefore there is no monetary inflation. Apart from fluctuations in available goods and services, there is basically no price inflation or deflation. Issues regarding the money supply can be resolved by a democratic vote. In this way governments or banks cannot create money whenever they choose.
- There is a complete ban on credit, which is creating money out of nothing. Banks can only lend out money that is available in savings accounts.



The valuation of the Natural Money unit

The value of money depends on convertibility and money supply:
- Convertibility means that money must be exchangeable for goods, services and other money units. If the money unit is not exchangeable for goods, services and other money units, the money unit has no value.
- The money supply relative to the size of the economy also determines the value of money. Money supply itself is not important but changes in money supply result in monetary inflation or deflation. Money supply changes and economic growth are the determinants of price inflation over the long term.

To demonstrate that money supply is not important, you can play Monopoly with an older version of the game. The banknotes have smaller denominations, but the game is exactly the same. This demonstrates that money supply is not important for the economy. Prices will always adapt to the available money supply.

The money supply should be based on a rule that does not change. However you can never trust the government. So when you lend your money for any period of time, guarantees should be made to pay back same value. The guarantee of value is essential in any money system. This means that when lending money, additional provisions must be made that guarantee the value of the loans. Loans can be valued in the following ways:
- As a part of the money supply (for example: 0,00000001% of money supply). Because money supply is known to the public, this could easily be calculated. This has consequences for savings and loans on the balance sheets of banks. If the money supply is increased with 10%, the notational values of savings and loans should also be increased with 10%. Balances in the current accounts are not affected.
- As a basket of goods and services. This will cover the loan in the case the money system changes. The basket of goods and services should be paid in cash when the loan matures. These baskets should include a wide range of goods and services, in order to prevent price fluctuations of individual goods and services or manipulations of prices of individual goods and services, from affecting the value of the loan. This is a very tricky matter.

In a transitional situation the money unit may be backed with resources or a currency from the usury economy. However because the value of the Natural Money currency has the tendency to rise, the backing of the Natural Money currency can be temporary. If the Natural Money currency rises in value, the peg with the backing should not be maintained, because otherwise unnecessary amounts of resources or currencies have to be bought to maintain the peg. The rising of the value of the Natural Money currency does not harm the economy.



Social issues

Because Natural Money is not scarce but abundant, 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. A community must have the possibility to take control of the finances of people in return for help. Legislation should make this possible. If this does not suffice, it is better that people get their basic needs such as food for free if they cannot afford to pay for it.



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. Because 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. Such loans are also far less needed. The absence of interest and the fast 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 have to agree upon a fixed scheme of repayment. If they have excess money, they cannot repay the loan faster. The excess money must stay in the current account or be placed in a savings account.

Student loans may cause problems. It 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. However if banks perceive the risk of making student loans as too high, making a study impossible for good students, it may be needed for a government to step in by guaranteeing student loans.



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 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 all companies in the same business are in the same position, this does not affect competition. However because companies in the Natural Economy are well financed, guarantees are generally not needed. Only when a new business relationship is established or when an unusual large transaction takes place, surety may be needed.



Government finance

There is no need for governments to go into debt because tax income rises dramatically as a result of the faster circulation of money in the economy. Also there is constant growth in the economy without booms and busts, so government finances can be planned far more easily. To keep the government in check, it must 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 fulfil its financial obligations, this can be seen as a failure of the people in office. This should automatically result in new elections.

The taxing system of the government must have a positive influence on the wealth of a nation. The following types of taxes should therefore be considered:
- Holding tax: The holding tax is a tax on hoarding money. Money must be facilitator of trade and therefore money should circulate in the economy.
- Estate tax: The estate tax is a tax on inheritance. Inheritance often refrains people from becoming active in the economy. Inheritance also results in wealth that is not based on economic achievement. Estate tax should however be limited in such a way that it does not cause too much tax evasion.
- Trading tax: The trading tax is a tax on trading financial products. The trading tax refrains people from trading excessively.
- Energy tax: To make the economy more energy efficient and reduce pollution, an energy tax should be considered. For example: low energy prices have caused the cars in the US to be less energy efficient than the cars in others parts of the world.

Other taxes, such as income taxes, capital taxes and sales taxes do not have a positive impact on the economy and should be abolished as much as possible. The government should adjust its size and ambitions to the tax income available. The loss of government jobs will soon be eclipsed by the gain in private sector jobs caused by the Natural Financial System.

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 if it does not generate income.

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 and have their own elected officials and have their own tax income based on property taxes.

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. However government income is limited by the taxing system. Social security, medical insurance and pensions may need to be managed by special purpose independent governmental institutions that have their own elected officials and taxing system based on income taxes. Those institutions should not be part of the national 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 mismanagement because the institutions may be bailed out with taxpayers money if they fail. If people want to have insurance above the minimum level offered by governmental assistance, they should turn to the private sector.



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 production will replace centralised production 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. 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 currency probably will not generate enough income to support the provincial government because there is little provincial economic cohesion.

It is difficult to mismanage Natural Money currencies (see also: The fundamental soundness of Natural Money). 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 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 will not be available any more. The holding tax makes the use of cash cumbersome. Cash can be used to pay anonymously. People should still have the right to pay anonymously and therefore bank cards should have the option for the use of digital cash to pay anonymously. The right to pay anonymously using digital cash should be part of the Natural Money banking laws and may even be written down in the constitution of a country.

Security of digital cash is an important issue. Bank cards should be safe and people should not be able to create digital cash by hacking the system. Digital cash may therefore have serial numbers just like bank notes. The amount of digital cash on the bank card may be maximised because of security issues and the risk of losing the card.

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 rely on paper cheques and money transfer forms more 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 around 1,000,000. Also the number of independent banks may rise to a number of around 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 create solutions for exchanging currencies efficiently.
Legal framework for banking



Introduction

The primary function of banks should be bringing together supply and demand for money. However in many cases this primary function of banks is hampered by the profiting at the expense of others that takes place in the financial sector. The legal framework of the banks should guard against this, making the markets for money function properly.

The following issues are discussed:
- Natural Money banking rules;
- the scope of banking operations;
- ownership and controlling stakes;
- obligations.



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 needed 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. It is likely that depositors pay a fee to the bank for intermediary costs. Banks may offer different types of savings accounts. The most restrictive accounts do have the lowest fees and offer the highest degree of tax avoidance.
- Banks are prohibited from charging interest on money 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 free to the banks disposal. This is essential to prevent economic booms and busts from occurring.
- 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 to 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 local, state and national currencies and foreign national currencies;
- State level banks may do business in state, national and foreign national currencies;
- National banks may do business in national and foreign national currencies.

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 services should be executed by separate legal entities such as brokers and mutual funds.



Ownership and controlling stakes

To ensure that banks remain independent, the following rules regarding ownership and controlling stakes 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 completely disclosed. Otherwise they are 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 primary function of financial markets is hampered by the profiting at the expense of others that takes place in the financial sector. The legal framework of the financial markets should guard against this, making the capital markets function properly.

The following issues are discussed:
- separation of responsibilities;
- short selling;
- derivatives;
- trading tax.



Separation of responsibilities

Introduction

The financial sector is notorious for its schemes to profit at the expense of others. Applying a strict separation of responsibilities will do more to solve this problem than regulation that is 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 completely disclosed. Otherwise they are refrained from having a stake in a financial institution.

Banks should be the only financial institutions that lend money as a business. Other financial institutions may only offer current accounts that are subject to the holding tax. Money in those accounts may not be lent. Corporations that are not a financial institution may lend money to their customers only as the result of buying a product or a service.

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 be tempted to sell bad debt from the bank to the insurer and the insurer may place this 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 stock and commodity exchanges bring together supply and demand. To smoothen the functioning of those markets, market makers can be used. The function of the market maker is to inject liquidity and provide price continuity into the market. Market makers have the obligation to always offer a bid price and an ask price.

Market makers should not be allowed to short a stock. This implies that market makers will always be long. They can reduce their risk by minimising their exposure to the market. To refrain market makers from price fixing, more than one market maker should be assigned for a specific security on a specific exchange.

Also the off-market execution of orders should be prohibited. Sometimes orders are executed off-market in so called dark pools, often resulting in an execution of orders that is not optimal for the customer. All orders should be executed at an exchange to make order execution transparent.


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 cannot 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 may not be lent. 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. Now it is possible for investment 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 such as stops (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 (see also: The Tycoon Report - Who Really Owns Your Stocks? Hint: It’s Not You). 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.

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.

Custodian banks also 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 (see also: Rollingstone - Wall Street's Naked Swindle - DTCC).


Pension funds

Pension funds should never be controlled by the corporations that fund the pension fund. The pension money should be owned and controlled by the employees. Also the pension fund should never invest in the corporations that fund the pension fund. In this way people do not lose their income and their pension at the same time when the corporation they are working for is going bankrupt.

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.

When managing pension funds, 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 avoided by implementing a number of measures.

The pension payments should be based on the contributions paid by each individual pensioner 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. The Natural Money currency unit will rise in value at the same rate the economy grows, and therefore such a 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. 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 almost never disappoint.

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 making life expectancy estimates to determine the level of pension contributions and payments is pointless. Under abnormal conditions there may be black swan events that change life expectancy dramatically. In such cases life expectancy estimates are also useless.



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 also creates 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 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. 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 are interested in destroying a company when the problems with a company can be solved.

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 (see also: Rollingstone - Wall Street's Naked Swindle - Naked short selling) which can be used to create additional supply that can crush the price of the stock.

In the digital age the distinction between legitimate short selling and naked short selling becomes less clear. Securities do not have to be physically delivered for the trade which opens the system to loopholes (see also: Rollingstone - Wall Street's Naked Swindle - Loopholes). This can be solved by forcing the lender to deliver the securities to the borrower in exchange for a promise to return the securities. The promise to return the securities may not be transferable like the securities themselves because this will create an additional supply of the security in the same way naked short selling does.



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. 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 to hedge risk makes parties checking their counterparties better. For example: the sub prime problem would never have arisen when banks could not offload their risk in the financial markets.

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. Stock indexes will be very stable because economic conditions in the Natural Economy rarely ever change. 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 Natural Money. Because of this there will probably be little demand for stock index futures and options.

Currency futures and options are very 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. Therefore there will probably be little demand for currency futures and options. They should however be banned to stop possible abuse because currency futures and options may create a more liquid market for shorting currencies.

Natural Money will end the possibilities for carry trades in currencies that created speculative profits based on interest rate differentials. Carry trades were one of the main drivers of the imbalances in the usury financial system and economy in recent decades.

However commodity derivatives are still needed. This is 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 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 driven volatility. Therefore it is important to provide a sound regulatory framework for those markets.



Trading tax

To discourage excessive trading, which destabilises markets and does not have a real value for the economy, a trading tax should be considered. Most retail traders lose money so it is in their best interest when they are refrained from trading. The people that gain money in trading do so at the expense of others because trading is not investing. A trading tax will refrain people from trading excessively.

The trading tax will also curb program trading that often is sponsored by stock exchanges wanting to create volume. Currently program trading generates around 70% of the volume on stock exchanges. Program trading can only be profitable at the expense of investors. Program trading therefore reduces the value offered to investors by the stock exchange.

A trading tax could be charged on currency trades, stock trades and bond trades. The trading tax must be small, so people will not be discouraged from investing. 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.

To encourage investing there should be no tax on profits from investing such as dividends and capital gains. There should also be no 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.
Organisational design of banking



Introduction

The organisational design is a concept that should be validated and worked out in detail if it is to be used. In the Natural Money economy it must be possible to operate small local community banks cost 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

Banking should be open to private enterprise to ensure competition. This will result in a higher efficiency and a higher service level. The following types of banks are possible:
- Private enterprises: 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 services: 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 bank that is run as a community service within a community.
- Government services: 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 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 in the local community 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 is 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

The introduction of small banks raises the issue of the segregation of duties. The minimum number of bank officials should be established with their respective duties. In small banks this may result in part time jobs. The operations of a bank must be audited by an independent third party.

Smaller banks may use a facilitator that handles all issues concerning personnel such as legal issues concerning hiring and firing personnel and salary payments. The bank may be the employer or the facilitator may be the employer. The facilitator can make more optimal use of banking personnel by using the same employees for more than one bank.

Smaller banks may use a facilitator that hosts the banking information system. The facilitator can guarantee the segregation of duties insofar the information system can enforce this. The information system must make standard reports available, enabling the auditors to make an assessment of the health of the bank and its compliance with regulations.

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;
- using the computer system;
- operating the computer system if the bank is running the computer system itself.

The people working at the banks should meet specific requirements such as not having a criminal record and not having specific other positions in financial institutions.



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 that hosts 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 makes Internet banking unsafe and Internet banking may become even more unsafe in the future (see also: 247wallst.com - New software steals money from bank accounts).

If those problems cannot be solved effectively, people may start to rely more on local bank offices for their banking transactions instead of the Internet. The bank employees of local community banks in the Natural Financial System do know most of their customers personally.



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 nation. The operation of a facilitator must also be certified against the laws of the nation.



Certification

The banks as well as facilitators that host banking operations should meet certain requirements. The bank requirements cover organisational setup, personnel requirements, technical systems setup and auditing. The requirements check list may include the following:
1. Does the bank have a policy regarding use of its non-public areas?
1.1. Does the policy address use of its non-public areas by outside groups?
1.1.1. Do visitors need to sign in?
1.1.2. Do visitors need to show identification?
1.1.4. Is the criminal record of visitors checked?
1.2. Does the policy address use of its non-public areas by bank employees?
1.3. If a policy exists, is it enforced?
1.4. Is the policy execution checked regularly (at least every year)?
2. Does the bank have a policy regarding the hiring of employees and service providers?
2.1. Are the credentials of the employees checked?
2.2. Do the employees have the proper certificates to perform their job?
2.3. Are the credentials of service providers such as catering services checked?
3. Does the bank organisation model meet requirements of segregation of duties?
4. Does the bank implement a policy for data security?
4.1. Is the data centre protected from the outside world?
4.1.1. Are all ports to the servers of the data centre closed?
4.1.2. Is the data centre protected by a DMZ that is a specific server allowing specific port access?
4.2. Does the bank have a policy for the security of back ups?
4.2.1. Are back ups stored at another site?
4.2.2. Are the back ups protected (for example by encryption)?
4.2.3. Is the transport of back ups save (the line or the car transporting the tapes)?
4.3. Is the database data encrypted?
4.3.1. Is the database security key safely stored so that database administrators cannot use it?
4.3.2. Is the database security key safely stored so that hackers cannot use it?
4.3.3. Is the database security key safely backed up so that it can be restored if it is lost?
4.4. Can other banks not see the data of a bank if the data of more than one bank is stored on a system?
5. Does the bank implement a policy for data protection?
5.1. Does the bank have a back up procedure?
5.1.1. Are back ups made at regular intervals?
5.1.2. Is the restore of the back up tested regularly?
5.2. Is it possible to recover from a complete system crash by restoring the back ups?
5.3. Is the Oracle database optimally protected against user errors?
5.3.1. Are the control files of the Oracle database spread across at least two disk volumes?
5.3.2. Are the redo logs of the Oracle database spread across at least two disk volumes?
5.3.3. Are the data files and archive log files of the database on different disk volumes?
5.3. Is the system optimally protected against location failure? A system is located on a site if it is not distributed. The site may have one or more locations. Those locations must be in separate buildings in each others vicinity tied together in a high bandwidth local area network (LAN).
5.3.1. Is the data mirrored on separate locations?
5.3.2. Is the server mirrored on separate locations?
5.3.3. Do the locations have independent power supplies?
5.4. Is the system optimally protected against site failure? A system is located on a site if it is not distributed.
5.4.1. Has the bank outsourced operations to a certified facilitator that hosts banking operations?
5.4.2. If the bank has not outsourced operations, has the bank shadow sites running at partner banks?
5.4.3. If the bank has not outsourced operations, can the shadow sites be brought online in case of a complete site failure?
6. Are the requirements audited regularly?



Transitional payment facilitators

Transitional payment facilitators should be set up by the government to make payments possible between the Natural Money Financial System and the usury financial system because of the following reasons:
- During the transition period not all payment systems accept Natural Money account names even though they are operating within the Natural Financial System;
- The account numbers must be available in the old banking systems such as IBAN and SWIFT, so it is possible to directly transfer money between Natural Money current accounts and accounts in the usury financial system. Also payments between Natural Money current accounts and foreign countries can be facilitated in this way.

The transitional payments can be facilitated in the following ways:
- Current accounts in the Natural Financial System can be matched to account numbers in the usury financial system. The transitional payment facilitator should make this match;
- Current accounts in the usury financial system can be matched to account names in the Natural Financial System. The transitional payment facilitator should make this match;
- Account holders in the Natural Financial System can transfer money to account holders in the usury financial system by transferring the money to the transitional payment facilitator while mentioning the usury financial system account number and the account holder name in the description of the transaction;
- Account holders in the usury financial system can transfer money to account holders in the Natural Financial System by transferring the money to the transitional payment facilitator while mentioning the Natural Financial System account name and the account holder name in the description of the transaction.
Transition to the Natural Financial System



Introduction

The transition to the Natural Financial System is a change that has far reaching consequences. Therefore the decision making should be well based, the transition should well prepared and the public should be well informed about the changes and the progress that is made. Much effort should be put in limiting the scope of the initial transition. 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 when the transition to the Natural Financial System is considered. A considerable part of the requirements analysis has already taken place and is 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

Introduction

The requirements of the Natural Financial System should be analysed and agreed upon. 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:
1. determining the Natural Financial System basic concepts;
2. determining the Natural Financial System organisational requirements;
3. determining the Natural Financial System information system requirements;
4. determining the Natural Financial System laws.


Determining the Natural Financial System basic concepts

The process of determining the Natural Financial System basic concepts should lead to the definition of concepts and rules within the Natural Financial System. The research that already has been done may provide a good start for this process.

The process of determining the Natural Financial System basic concepts consists of the following steps:
1.1. gathering a team of experts on the field;
1.1.1. finding legal experts on the financial system;
1.1.2. finding experts in the working of financial markets;
1.1.3. finding experts on the separation of responsibilities between organisations;
1.1.4. finding experts on fraud in the financial system;
1.2. drafting the Natural Financial System basic concepts;
1.2.1. working out existing concepts;
1.2.2. making additional proposals and suggestions;
1.3. evaluating the Natural Financial System basic concepts;
1.3.1. discussing the pros and cons of existing proposals;
1.3.2. finding legal loopholes and possibilities for abuse;
1.3.3. finding possibilities for simplification;
1.4. laying down the Natural Financial System basic concepts.


Determining the Natural Financial System organisational requirements

The process of determining the Natural Financial System organisational concept should lead to the following results: - inter organisational design with separation of responsibilities between organisations in the financial system;
- organisational design with segregation of duties for different bank sizes;
- description of the organisational changes that need to be applied on other organisations in the financial sector;
- description of the organisational changes that need to be applied on other organisations in the real economy.

The process of determining the Natural Financial System organisational concept consists of the following steps:
2.1. gathering a team of experts on the field (some of them may be the same as in 1.1);
2.1.1. finding legal experts on organisation;
2.1.2. finding experts in the working of financial markets;
2.1.3. finding experts on the segregation of duties within an organisation;
2.1.4. finding experts on the separation of responsibilities between organisations;
2.1.5. finding experts on fraud in the financial system;
2.2. drafting the Natural Financial System organisational concept;
2.2.1. working out existing concepts in this document;
2.2.2. making additional proposals and suggestions;
2.3. evaluating the Natural Financial System organisational concept;
2.3.1. discussing the pros and cons of existing proposals;
2.3.2. finding organisational loopholes and possibilities for abuse;
2.3.3. finding possibilities for simplification;
2.4. laying down the Natural Financial System organisational concept.


Determining the Natural Financial System information systems requirements

The process of determining the Natural Financial System information systems requirements should lead to the following results:
- a description of the Basic Banking System;
- a description of the Natural Money Banking Network;
- an outline of other information systems that may exist in the Natural Financial System.

The process of determining the Natural Financial System information systems requirements consists of the following steps:
3.1. gathering a team of experts on the field;
3.1.1. finding information analysts with extensive banking knowledge;
3.1.2. finding functional designers with extensive banking and Oracle Designer knowledge;
3.1.3. finding organisational process designers with extensive banking and Oracle Designer knowledge;
3.1.4. finding network analysts with extensive banking network knowledge;
3.2. validating, modifying and detailing the existing Basic Banking System design;
3.2.1. validating the existing Basic Banking System design;
3.2.2. modifying the existing Basic Banking System design if there are errors or omissions;
3.2.3. detailing the existing Basic Banking System design;
3.3. making the Natural Money Banking Network design;
3.3.1. determining the basic Natural Money Banking Network design;
3.3.2. validating the basic Natural Money Banking Network design;
3.3.3. detailing the basic Natural Money Banking Network design.


Determining the Natural Financial System laws

The process of determining the Natural Financial System laws must lead to the following results:
- laws concerning the nature of Natural Money;
- laws regulating the banking system in the Natural Financial System;
- laws regulating separation of responsibilities between organisations in the Natural Financial System;
- laws regulating the transition to the Natural Financial System.

The basic concepts, the organisational design and systems design must make it possible to write down the rules guiding the Natural Financial System. Much effort should be put in writing down the law in short texts using clear unambiguous language.



Decision making

When the requirements analysis has been completed to such a degree that an informed decision can be made, the government may decide to introduce Natural Money. Such a decision can only be made if it is supported by the people living in the country. If there is doubt about the popular support for this decision a referendum may be needed. The Natural Financial System is a broad reform that should be accepted or rejected whole. There is no room for compromise or amendments.

If popular support for the financial sector reform is assured but there is doubt about political support for the reform, the need may arise to declare an emergency. Politicians are often bribed by special interests and may not always operate in the best interest of the people they represent. Especially financial sector interests have bought their way into politics and those interests may try to reestablish control over the government.

There will probably be turmoil and unexpected events that may raise the need for adaptations in the original plans. Politicians and lawyers interfering with the process may lead to adverse results. Therefore the Natural Money banking law should include the option of adjusting the Natural Financial System when design shortcomings are detected after the design has been approved without interference of politicians. Also provisions should be made for compensating damages that may come from those shortcomings. Litigation should be avoided as much as possible because mostly lawyers benefit from litigation.



Communication of the changes

Introduction

Introducing Natural Money will result in a radical change in the financial system and will change the daily life of most people in a fundamental way. When Natural Money is introduced, almost everybody will be better of after a number of years compared to sustaining the usury financial system. During the transition phase there probably will be turmoil. If people are not well informed, they may become fearful. There may be setbacks and unforeseen events. Special interest groups linked to the usury financial system may take advantage of the situation. The process of communication should start as soon as possible after it is agreed that Natural Money should be introduced.

People 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?

Currently the general public is not well informed about the working of the usury financial system. Practically nobody knows that alternatives are available. Natural Money is the most efficient type of money and can be used to create the most efficient type of economy. An economy is efficient when productive work and enterprise is rewarded and when resources are directed to the real needs of people. People should therefore get a basic understanding of the working of the usury financial system, possible alternatives and the mechanics that make Natural Money the most efficient type of money.

Television networks, newspapers and the Internet will inform people and information will spread automatically. However a government deciding to change over to the Natural Financial System must be actively engaged in informing the general public. Educating the public about the current usury financial system, the possible alternatives and Natural Money may be done in the following ways:
- Money as Debt I may be broadcasted to educate people about the usury financial system.
- Money as Debt II may be broadcasted to educate people about the alternatives that are available.
- Experts like Ellen H. Brown and Paul Grignon can be interviewed by nationwide networks.
- There may be advertisements on television, the newspapers and the Internet informing people about specific issues.


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 go into a protracted decline that will take decades. The majority of people in the West will then 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 needs improvement and more police is 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, law, consultancy and financial services. 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, 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 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 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 financial and oligarchic business interests. Therefore the power of governments, financial institutions and oligarchic business interests should be reduced. Natural Money will strengthen local economies 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 to accept a tax on money. 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 far more efficient economy because money is flowing constantly. There is will never be an economic crisis again and 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 be a thing of the past. The tax on money should replace income taxes and taxes on profit. Those taxes should be lowered or abolished.

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. Special interest groups linked to the usury financial system may try to raise this subject and create the impression that borrowers are favoured at the expense of savers.

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 pay the highest interest rates. Abolishing interest on money will result in banks picking the best borrowers for the money they have at their disposal. This will create a 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 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?

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. If the government has taken control of the usury banks, the usury banks may be forced to comply. Using a transitional payment facilitator all payments that refer to the old bank account number will be routed to the new bank account name.

Everybody will get a new standardised bank card and 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 and may be compatible with existing payment terminals if possible. Cash is digital money that can be spent without contacting the bank over the banking network. The digital cash facility on bank cards must ensure anonymity for the people using digital cash for payment.

Businesses may need to adapt their information systems to facilitate bank account names. The Natural Money project should however not force businesses to make changes to their information systems in a short time. Also the Natural Money project should not be delayed by businesses that are not able to adapt their information systems in time. The use of transitional payment facilitators will uncouple the Natural Money banking project from the IT projects of businesses.

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 should be placed in the current account or a savings account. Businesses will face a similar problem. They have to allocate the capital they need in advance by issuing shares or take a fixed term loan.

The changeover to the Natural Financial System will be a big bang. At some point in time all payments in the real economy will have to be done using Natural Money. It may not be possible to adapt all information systems that use bank account numbers in time for the use of Natural Money. Also it may not be possible to replace all existing payment terminals in time. The use of transitional payment facilitators should smoothen the changeover.


What are the current developments and the next steps?

Introducing the Natural Financial System is a project of unprecedented proportions. Even though it is nearly certain that Natural Money will become a success if the proposal is not blocked or amended, there will probably be turmoil and unexpected events that may raise the need for adaptations in the original plans. If there is uncertainty about the progress of the project, people may become anxious. There will be a lot of uncertainty and even the best informed people do not know how everything will turn out to be in detail.

It is important to communicate openly about current developments, targets met, unexpected events, setbacks and the estimated time table for introduction. This may be done in a daily briefing with the press. As soon as developments may affect the time table for introduction, the public should be notified. The time table for introduction should not be fixed because the Natural Financial System and the Basic Banking System should be reliable and safe. There should be enough time for design, development, test and introduction of the Natural Financial System and the Basic Banking System. To prevent delays the scope of the project should be minimal and clear.

The use of vague and concealing language should be avoided at all cost. Vague and concealing language is used by politicians and bankers to hide the truth and will therefore not inspire confidence. There is no need to conceal anything because it is nearly certain that Natural Money will become a success if the proposal is not blocked or amended.



Preparation

Introduction

The project to introduce 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 is straightforward. There should be no room for adding extra functionality except for essential functions that were forgotten.

The usury financial system and the Natural Financial System should be completely separated. In this way instability in the usury financial system will not spill over to the Natural Financial System.

The functionality of the BBS is based on this assumption. The BBS therefore does not facilitate usury and financial transactions in the usury financial system. Transferring money between the usury financial system and the Natural Money Financial System should be done using Transitional Payment Facilitators.

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.

Many projects suffer from defined deadlines. Deadlines are nearly always missed and result in the introduction of immature systems because there was too little time for setting up the organisation, defining the procedures and for designing, building and testing the information systems. 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 be unable to live up to them.

It is therefore important not to compromise on quality standards and to minimise the scope of the project and the expectations about the outcome of the project.

During the preparation phase, the following steps should 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;
- building the Basic Banking System and the banking network.


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 good condition can 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. Only 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. The government should control the banks during the transition period, until the new financial system has become operational.

If the uncertainty about the fate of the banks results in serious questions regarding the safety of the money deposited at the banks, the government should act. This is also the case when banks show irresponsible behaviour because of the possibility of a financial system change.

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 should be abolished. 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.

To establish whether the holding tax income is sufficient to support a local or regional government it may be necessary to define minimal requirements for government services to get an insight in the cost of government. Such requirements may include the number of school teachers, fire fighters and police based on the demographic situation of the municipality or state or province.


Preparing people and businesses for the transition

People have to adapt the handling of their financial affairs to 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 automatically based on information already available at the usury banks and transfer the money from the usury bank to the Natural Money bank.
- 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 excess money should be placed in the current account or a flexible savings account. Also people should get used to the use of multiple currencies in their accounts.

Businesses have to adapt their operations to the Natural Financial System. This may mean the following:
- Businesses 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.
- Businesses may need to use new payment terminals. New payment terminals may not be needed if existing payment terminals can still 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 must be completely written down in Natural Money 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.


Realising the Basic Banking System and the Natural Money Banking Network

Before the decision is taken to change over to the Natural Financial System the phases designing the Basic Banking System and designing the Natural Money Banking Network can already start. If the design phase of the Basic Banking System nears completion, parts of the Basic Banking System that are straightforward can already be built. After the decision has been made, other activities may proceed.

Critical path analysis probably will show that designing and developing the Basic Banking System are time consuming phases in the early stages of the critical path of the project. If the functionality of the BBS is not known, it is not possible to write educational material for the people that have to use the BBS. If the BBS has not been built, it is not possible to educate the people that have to use the BBS. Therefore all effort put in designing and developing the Basic Banking System on beforehand probably will reduce the time needed to introduce Natural Money.

Realising the Basic Banking System and the Natural Money Banking Network consists of the following phases:
- designing the Basic Banking System;
- developing the Basic Banking System;
- testing the Basic Banking System;
- designing the Natural Money Banking Network;
- realising the Natural Money Banking Network;
- testing the Natural Money Banking Network;
- installing the Basic Banking System at the Natural Money banks;
- testing the Basic Banking System over the Natural Money Banking Network.



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 crisis. In such a situation the stakes are high and probably there is little time. 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 has the following phases:
- issuing the new currency;
- currency conversion;
- conversion of the financial markets;
- settlement.


Issuing the new currency

A government can issue a new 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.

People are still obliged to pay off their debts in the old currencies. 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. Only Natural Money currencies are allowed within the Natural Financial System. Only usury currencies are allowed in the usury financial system. If a payment between the two currency systems must be executed, the currency must be converted at a currency market and then sent to the receiving party.

It may be an option to cancel interest payments on old debts. This will greatly improve the capacity of the lenders to repay their debts. Many people may be able to keep up with their mortgage payments. However because of contractual obligations involved, this should be done with care. 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. Governments should not interfere with this and let markets do their work.


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 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 to the Natural Money Financial System. Stock exchanges may decide to change over to the Natural Financial System and remove the listing of all stocks of companies that do not want to change over to the Natural 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 most 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 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.

It is not in the interest of trading partners and creditor nations that they accumulate currencies that lose value over time. Countries like China and Japan should 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 both parties as the production of the EU and the US will be outsourced while creditor nations will end up holding worthless currencies. In the Natural Financial System, all countries will use their productive capacity to create their own wealth. With Natural Money it is very costly to hold foreign currencies for a longer period of time, because all currencies have a holding tax. This will prevent imbalances of payment from getting out of hand.

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.
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