the plan for the future
7 October 2008 - 30 August 2016
Interest rates have gone down in recent decades. There has been an abundance of capital relative to investment opportunities. A number of developments contributed to this, such as more and more countries becoming developed, excess savings, central banking, efficient financial markets, reduced economic rationale for innovation and wealth inequality. Lower interest rates made it possible for people and organisations to go deeper into debt, but this has reduced future spending power. As a consequence lack of demand may push interest rates even lower. This may be the end of the zero lower bound on interest rates.
Throughout history the average returns on investments have mostly been higher than economic growth. The growth of interest income can become problematic when there is a lot of capital and the ownership of this capital is not evenly distributed. Most capital is now in the hands of a relatively small group of wealthy people that tend to reinvest their capital income instead of spending it. But if other people have not enough money to buy the goods and services this capital produces, profits and interest rates go down.
Natural Money can deal with these issues. Natural Money is interest-free money with a holding tax. Interest-free means that the maximum interest rate on loans is zero. The holding tax is a tax of 0.5% to 1.0% per month on currency, which is cash and central bank money. The holding tax does not apply on bank deposits and loans so that it can be attractive to lend out money at zero or even negative interest rates. The maximum interest rate of zero can curb risky lending to individuals, corporations and governments because there is no reward for taking excessive risk when lending out money.
The holding tax on cash eliminates the need to stimulate the economy as people will be encouraged to use their money for consumption, investment or lending at the prevailing interest rate. When the economy is booming, the maximum interest rate of zero can curb lending because other investments seem more attractive than debts. Consequently there are fewer funds available for loans so the economy will not overheat because of a debt fuelled boom. The economy may do well by itself so that governments do not have to manage aggregate demand and central banks do not have to manage interest rates.
Part of the proposal is a stricter seperation between regular banks and other financial service providers. Only regular banks can create money, guarantee deposits, and promise a fixed interest rate, which never exceeds zero. Governments may offer guarantees on deposits at regular banks. Regular banks can borrow at the central bank if needed. Apart from regular banks there are financial service providers that can promise higher yields. Financial service providers issue shares so that participants accept a price risk. They pay dividends and cannot promise fixed interest rates.
Natural Money could improve the economy and therefore provide better real returns on investments including debts. Because most money is debt, and debt creation is curbed by the maximum interest rate, economic growth may translate into lower prices, and an interest rate of zero could be a positive real return. It seems likely that the returns on Natural Money are better than those in the current financial system, or at least that the risk/reward ratios on Natural Money are better. This can cause a capital flight to the interest-free economy, and hence a world-wide adoption of Natural Money.
Before you start reading
The current predicament
Interest: the elephant in the room
The Natural Economic Order
The Austrian School of Economics
The financial System
Banking with Natural Money
Types of services
Properties of the financial system
Wholesale banking system
Governments and central banks
Interest and sustainability
Who benefits from lower interest rates?
Employment and labour income
Government regulation and intervention
Natural Money and history
Joseph in Egypt
Periodic debt forgiveness
Solon's economic reforms
The decline of Rome
Western Europe in the Middle Ages
Restrictions on charging interest
Fiat and scrip currencies
Recent examples of interest-free money
The miracle of Wörgl
The Schwanenkirchen Wara
The United States
Can it work?
Superior efficiency can enforce the change
Uncovering the prerequisites
Maximum interest rate
Common ideas about interest
The rationale of having interest on loans
Reasons for interest to exist
Returns on capital
Risks associated with lending out money
Time preference versus marginal utility
Effect of a holding tax
Effect of a maximum interest rate
The rationale for lower interest rates
Causes of economic cycles
Expectations and money hoarding
Usury and debt slavery
Fiscal and monetary policies
Positive interest rates create the rationale for fiscal and monetary policies
The natural interest rate
Shortcomings of the natural interest rate theory
Other economic schools from the Natural Money perspective
Community currencies and National Socialism
Socialism and Marxism
Steady state economics and de-growth
You need some basic knowledge of economics to understand this paper, such as the classical idea that markets can best be left alone as well as the interventionist idea that governments should manage the economy. You must have some basic understanding of the relationship between money supply, production, money velocity, and prices, and it is not a mystery to you how banks and central banks create money. That is all you need to understand this document. If you lack this knowledge, don't be discouraged, as everyhing is explained in Explaining Natural Money To Non-Economists.
The theory of Natural Money, which has been built on the ideas of interest-free money and community currencies, deals with the following questions:
- Is there a better way of improving the economy than making people go further into debt?
- Do we need central banks and governments to manage our economy or can we reduce their role?
- We are destroying our living conditions so how can we make the economy sustainable?
- Globalisation seems to make people and communities powerless so how can we give more room for people and communities?
- The rich seem to become richer at the expense of the rest so how can we alter this trend?
In this paper I will try to explain why interest-free money with a holding tax can help to solve those problems, and in this way improve the economy and contribute to a better quality of life. Natural Money can also increase yields on investments, so that introducing Natural Money can cause a capital flight toward the interest-free economy, and in this way enforce the introduction of Natural Money world-wide. Before I do that, I will describe the current predicament. Then I make a short dive into history and discuss the Natural Economic Order and the Austrian School of Economics, because both contributed to the initial idea.
Interest rates have gone down in recent decades for a number of reasons. These lower interest rates helped to spur investments but there were drawbacks, for example increased leverage and higher indebtedness. Now interest rates are stuck near zero, there are two important questions to be answered. The first one is how to let the economy recover, and the second one is how to curb the expansion of debt in the future. What now follows is a sort of situation description. It is not complete as it only highlights developments that matter most with regard to the general direction where interest rates are heading.
The accumulation of capital helped to bring down interest rates in the following ways:
Banking, central banking and the deregulation of the financial sector helped to bring down interest rates in the following ways:
There may be need for a way to reduce the amount of credit and curb risk taking in the financial sector for the following reasons:
Compound interest is infinite and this can become a serious problem. Aristotle realised that money is barren. He condemned lending of money at interest. When loans are made, they carry interest, but the money to pay the interest from doesn't exist, so that it often has to be loaned into existence. Lenders may spend the interest and borrowers may default so that it doesn't always happen, but on aggregate it does happen. This makes the financial system unstable and it is the cause of financial crises. A simple example can demonstrate this.
Assume that Jesus' mother put a small gold coin weighing 3 grammes in Jesus' retirement account at 4% interest in the year 1 AD. Jesus never retired but he promised to return. Suppose that the account was kept for this eventuality. How much gold would there be in the account in 2015? The answer is an amount of gold weighing 10 million times the mass of the Earth. The yearly interest would be an amount of gold weighing 400,000 times the mass of the Earth.
The basic idea of capitalism is to finance growth by credit and not by increasing the amount of real gold. To pay for the interest on existing debts, growth is needed, and to create growth, more debt is needed. If no one is willing to go further into debt, the capitalist system can run into trouble, debts will be defaulted upon, and an economic depression could ensue. For that reason, economists like Keynes advised governments to go further into debt when no one else is willing to.
Central banks try to manage this system of debt and interest. Interest on loans is an important reason why central banks are needed. Central bankers deliberate how much new money must be created and at what interest rate to keep the economy on track, so that the system will not implode because of deflation caused by debt defaults or explode because of inflation caused by too many new loans. The fear of implosion has made central banks lenient and this produced bubbles.
In this managed system private profits are backed by public guarantees. And because there is interest on loans, the financial system requires management. But interest is also a reward for risk, so managing the system and allowing interest, produces moral hazard. Financial institutions can engage in the quest for yield, and thereby destabilise the financial system, and count on central banks to solve any serious problems that come from their actions.
Monetary reformers often criticise the ability of banks to create money. They want banks to only make loans out of savings. But banning fractional reserve banking would cause it to be reinvented via arbitrage. A simple example can demonstrate this. Assume that banks only lend out money in savings accounts and that only savings yield interest. Imagine that Eve and Adam only do business with each other and that they both have 100 money units that they use for their daily business transactions. They could get rid of cash and give each other credit so that they both could put 100 money units in a savings account.
They accept each other's credit risk because they trust each other. Similar schemes can be devised so that savings can be fabricated out of credit. In fact, when banks create money, they do what Eve and Adam do on a larger scale. They can act as an intermediary between Eve and Adam so that they can give each other credit, even when they do not business with each other or do not trust each other. As a consequence the distinction between savings and credit tends to be ficticious and arbitrary. Banning fractional reserve banking would produce a number of schemes that replace it, rendering such a ban meaningless.
Creating money is just a specific example of the bank's main business. It only means that depositors can take out their deposits at any time regardless of the end dates of the loans backing them. Loans and deposits tend to mature on different dates. In order to end all risk of banks not being able to repay deposits because of this issue, deposits and loans should match each other exactly in time, which is impossible. When loans are made out of savings, banks can still go bankrupt when loans are not repaid or when people do not renew their deposits when they are due.
These ideas of monetary reform are made for different reasons, such as central banks distorting the markets for money and capital, fractional reserve banking being a fraud because of banks creating money from thin air, and banks making profits at the expense of the public at large. These viewpoints certainly have merits, but the ensuing reform proposals make financial and capital markets less efficient, either by increasing systemic risk or by eliminating the market mechanism, so they tend to push up interest rates. And because interest is the main cause of financial and economic instability, these proposals may do more harm than good.
When Silvio Gesell finished writing The Natural Economic Order in 1916, his proposal for a holding tax on money marked the beginning of new school of economic thought. Gesell labelled this money free money because he believed that it promoted the free play of economic forces. The most remarkable success of Gesell's ideas was the emergency currency of Wörgl. Famous economists like Irving Fisher and John Maynard Keynes thought that free money had potential. Still, the idea became close to forgotten after the emergency currency was banned and World War II ended the Great Depression.
Silvio Gesell is considered a socialist by some and a free-market proponent by others. He favoured free markets without state intervention, which made him a liberal, but he disliked the privileges of money and capital, which puts him in the camp of the socialists. Silvio Gesell was influenced by the Manchester School of Economics that contended that free trade and free capital markets would push interest rates to zero. The Manchester economists based this prediction on the discovery that in interest rates were the lowest England where money and capital markets were the most competitive and well-developed.
Gesell was also influenced by Proudhon, who thought that the accumulation of more and more capital would push interest rates to zero. Proudhon was a socialist who opposed the general Marxist doctrine that labourers could get the upper hand via class struggle. Instead he suggested that workers should do their jobs and work diligently to produce more and more capital. He thought that building more factories and churning out more products would push down prices while building more houses would push down rents. Proudhon saw that money somehow limited the production of capital. In the words of Gesell :
What Proudhon and Gesell discovered was that interest rates cannot go below a certain minimum level because investments would then stop. Money would go on strike as Gesell put it. The main reason is that low yields make investing and lending out money unattractive because of the risks involved. Money, and most notably gold, does not depreciate like goods so it can be stored without a loss, hence there is no incentive to put money at work if interest rates are low.
Keynes called this a liquidity trap, which means that when interest rates are low, people tend to prefer cash to investments. Nowadays bank deposits are considered lower risk than cash so the liquidity trap is at an interest rate near zero. Gesell thought that if money depreciated like other goods, the requirements of money would not block the production of more capital, and interest rates could go to zero. When Gesell lived, the gold standard was still in force. He noted that gold does not decay so that the possessors of gold have an advantage over the possessors of other goods. He came up with the following observation :
Gesell concluded that the owners of money could exploit their advantageous position by charging interest. His observation shows that there is a minimum interest rate that does not depend on the state of the economy. Money will be withdrawn from the economy once this level is reached so that interest rates cannot go lower. This is not because there are fewer savings but because savings are withdrawn from the economy. This causes an economic downturn so that the demand for goods and services drops, which demonstrates that money hoarding could result in an economic recession or even a depression.
On the other hand, Gesell observed that higher interest rates would make more credit available. This is problematic because higher interest rates and more credit do not create more gold or currency, so that interest and credit produce the seeds of economic destruction. At some point credit may need to be repaid with interest in gold or currency, which is more difficult if there is more credit created or interest rates have been higher.
The recent economic crisis is not so different. Banks were hoarding money because they did not see investment opportunities at the prevailing low interest rates. Economic theory suggests that the equilibrium interest rate was negative, and that equilibrium could not be reached because there is a minimum interest rate. In plain English this means that there are too many savings and too few investment opportunities and that interest rates must go even lower to discourage saving or to promote investing. Gesell proposed a tax on money to achieve this. He wrote :
And the consequence Gesell envisioned was that :
There are some issues with the proposal of Gesell. He foresaw the need of a Currency Office that manages the money supply based on inflation numbers. The Currency Office can become subject to political objectives. Gesell also did not think of a method to reign in credit. The economy may boom, interest rates could go positive, and credit could become abundant. At this point the Currency Office, which is more or less a central bank, might not be in a good position to curb inflation. Reducing the number of currency units could cripple the booming economy and produce an economic depression.
On the opposite side of Silvio Gesell were adherents of the gold standard and what came to be known as the Austrian School of Economics. The Austrian School of Economics contends that too much credit is an important cause of economic crises. Banks issued more credit than there was gold in their vaults and in this way they created money out of nothing. This scheme sometimes collapsed so that sometimes a bank run occurred when people lost their trust in the banker's scheme. Banks also borrow funds from each other so that one bank's trouble can spread to other banks.
When banks collapsed, credit dried up, and an economic crisis often followed suit. Some branches of the Austrian School oppose fractional reserve banking. Instead they propose a clear distinction between savings and credit. Savings consist of money entrusted to the bank for a specific time and money that cannot be withdrawn on short notice. According to these Austrians, only savings should be used for loans, so that there is always enough gold or money in the vault to pay depositors . Other Austrians think that fractional reserve banking can exist in a free market.
In the view of the Austrian School, bank credit causes interest rates to be lower than they otherwise would have been, so that malinvestments are made, creating excess capital. As long as the economy is booming, those investments appear to be profitable, but when the bust sets in this excess capital will be destroyed  . Because interest rates cannot go below a certain minimum level, credit will dry up once this level is reached, and this causes recessions. Austrians see recessions as a healthy cleansing process in which businesses have to readjust themselves to become more competitive.
Central banks meddle with this process. They reduce the risks related to bank failures so that interest rates can go lower. Central banks can also supply credit at a lower interest rate than the mininum interest rate in the market so that the reduction of excess capital during the bust does not have to take place, which makes things worse in the end according to Austrians  . Many Austrians fear a day of reckoning when all this excess credit cannot be repaid so that the economy enters the most serious economic depression there has ever been. This concern is reflected in the following famous words of Ludwig von Mises:
Lower interest rates allow for more debt to exist. If interest rates are lower, people and organisations can service more debt, and this can make the financial system unstable. For example, if you have € 500 per month in free disposable income available for interest payments, you can service a debt of € 600,000 at an interest rate of 1%, but only € 60,000 at an interest rate of 10%. If the interest rate rises 2%, your payment increases to € 1,500 when you have to service a debt of € 500,000 at an interest rate of 3%, but only to € 600 when you have to service a debt of € 60,000 at an interest rate of 12%. This is the danger of low interest rates.
A crucial observation of the Austrian Business Cycle Theory is that excess credit causes economic cycles. On the one hand, low interest rates allow for more debt to exist, which makes the financial system more vulnerable to interest rate changes. On the other hand, excess credit can also be the result of interest rates being too high instead of too low. When the economy is booming, interest rates rise, and credit becomes abundant. During a boom a lot of debt comes into existence that is bearing high interest rates based on rosy expectations of the future. When the bust sets in, it turns out that these high interest rates have been unjustified.
More importantly, low interest rates also allow for more capital to exist, so that there could be more products and services at lower prices. If interest rates are lower, more projects become profitable, and there could be more wealth. In fact, the Industrial Revolution started in England around 1700, just after England was the first country to institute a central bank in 1694. The existence of the central bank may have reduced the risk of banking so that banks could lend out more money at lower interest rates. This may have helped to muster the large capital investments that were needed for the Industrial Revolution.
Before I introduce the idea of Natural Money, let's sum things up. The following can be concluded from what has been discussed so far:
Natural Money is named after the Natural Economic Order of Silvio Gesell. Natural Money is interest-free money with a holding tax. Interest-free means that the maximum interest rate on loans is zero. The holding tax is a tax of 0.5% to 1.0% per month on currency, which consists of cash and central bank deposits. The government spends the holding tax so that the amount of currency remains constant. The holding tax does not apply on bank deposits and loans so that it can be attractive to lend out money at zero or even negative interest rates.
Introducing Natural Money can have the following effects:
- the holding tax can balance the markets for money and capital so that there is no need for stimulus;
- lower interest rates can make more investments profitable and this can help to improve the economy;
- the maximum interest rate of zero can prevent the economy from overheating as there will be less credit during economic booms as other investments are more attractive;
- the maximum interest rate of zero can reduce reckless lending because there is no reward for taking excessive risk.
The maximum interest rate makes equity investments attractive relative to debt because the yield of debt is capped at zero. The maximum interest rate can therefore help to reduce leverage and the vulnerability of the financial system to interest rate changes by increasing the amount of equity relative to debt, and by not allowing these interest rate changes to happen. If Natural Money can stabilise the economy, it becomes less likely that sudden changes in interest rates occur.
With Natural Money, banks can lend out money at a maximum rate of zero so deposit accounts can have negative yields that might amount to -2% to -3% annually. Lower yields seem unlikely as these would encourage people to spend their money so that interest rates will rise. There is a fixed amount of currency units and there is a reserve requirement so that there probably is no price inflation. If there is economic growth then the value of the currency can rise because economic growth means that more products and services become available while the amount of money remains the same.
Cash could be an obstacle to implementing the holding tax because it is now possible to store cash without cost. Eliminating cash alltogether may not be a good idea because some people prefer cash for various reasons. Cash can also serve as a back up when electronic payment systems fail. Silvio Gesell proposed a monthly stamp on bank notes . This is very cumbersome so that other solutions must be found.
Turning cash and electronic money into separate currencies, and making cash depreciate relative to electronic money at the pace of the holding tax, is feasible. Keeping cash for emergency situations will then cost 6-13% per year, but for small amounts this is no problem. If there is ample demand for cash, banks may issue bank notes that have better yields than central bank money. This is possible if banks are allowed to treat bank notes as anonymous deposits.
With Natural Money banks operate much like they do nowadays. Most regulations that apply now are likely to apply in the future. But there is a serious case for a stricter separation of regular banking on the one hand and investment banking and other risky financial activities on the other hand. If regular banks are supported by central banks and desposit guarantees of governments, they shouldn't be engaged in risky activities. Otherwise taxpayers may be paying for the failures of bankers.
Banks should only be able to lend out funds at a maximum interest rate of zero. This puts a cap on the risk they are willing to take. Depositors are expected to accept negative interest rates on their deposits in order for banks to have a profit margin. This is possible because of the holding tax. The central bank can support banks by lending money at an interest rate of zero when they cannot borrow elsewhere. Governments may choose to guarantee deposits at banks to a certain maximum.
With Natural Money there should be a distinction between regular banks and other financial service providers, which can be investment banks, mutual funds, or private equity funds. Only regular banks are allowed to guarantee deposits at par. Financial service providers cannot guarantee deposits at par. They issue shares in a closed-ended or open-ended structure. There is a price risk attached to those shares. Financial service providers can take more risk and offer higher returns.
Financial service providers can make loans at a maximum interest rate of zero but they can also make other investments. For example, they could offer lease contracts on cars and houses similar to car loans and mortgages. This implies shared ownership of a property and shared risk taking. The lessee may not only pay rent but may also pay to gradually become the owner of the property.
There are two types of accounts with regard to risk. Money in a deposit account is part of the bank's capital available for lending. This money is subject to the risk of banking but depositors do not have to pay the holding tax. Money in an administrative account is similar to cash outside the banking system and it is not available for lending. This money is not subject to the risk of banking but a holding tax must be paid on this money. Because banks do not earn revenue from lending against administrative accounts, account holders might pay additional fees for the services associated with administrative accounts.
There are two types of accounts with regard to availability. Money in current accounts is readily available and can be used for payments. Money in savings accounts is not directly available for payment. Depending on the conditions of the savings account, this money can at some point in time be transferred to a current account and then used for payment. Current accounts could be administrative accounts as well as deposit accounts while savings accounts are always deposit accounts.
Inside the core financial system, which consists of the banks and the central bank, fixed or flexible rates on deposits and loans could be agreed as long as they do not exceed zero. Central bank support might be needed to support the core banking system as people may take out deposits so that the bank's reserve requirements are not met. Outside the core financial system there is no central bank support and yields exceeding zero on investments are possible. The absence of central bank support implies a higher risk for investments in financial service providers relative to bank deposits.
Based on these considerations, the following properties might need to be implemented in the Natural Financial System:
- only banks can offer deposit accounts and other financial service providers can only offer administrative accounts;
- banks should only provide payment, borrowing and lending services;
- banks cannot invest directly in securities, except bonds that yield less than the maximum nominal interest rate of zero;
- financial service providers can make other investments and make loans at a maximum nominal interest rate of zero;
- only banks can receive central bank credit and central banks could discount bonds for banks at an implied interest rate of zero;
- government guarantees only apply to bank deposits;
- only banks can receive central bank support.
Fischer Black realised in 1970 that a long term bond could be sold in three separate parts to three different investors. One could supply the money for the bond, one could bear the interest rate risk, and one could bear the risk of default. The last two would not have to put up any capital for the bonds, although they may have to post some sort of collateral . This idea became the basis for the development of wholesale banking and derivatives in recent decades. The wholesale banking system is more commonly known as the shadow banking system. It helped to spread risk and thus contributed to the drop in interest rates in recent decades.
Derivatives are often seen as a dangerous development. They are also not well understood. The total notational value of outstanding derivatives has grown explosively in recent decades. In the case of a severe shock, a sudden evaporation of liquidity can occur, so that derivatives can terminate the financial system. This nearly happened during the financial crisis of 2008. This had a number of probable causes:
1. a lack of liquidity caused by the zero bound liquidity trap. If interest rates could go low enough, liquidity probably would have returned.
2. immature regulation systems. The financial system was not prepared to meet an event like the financial crisis of 2008.
3. absence of markets. Many derivatives could not be traded in transparent liquid markets so that their value was difficult to establish.
A well-developed wholesale banking system might improve the efficiency of markets. For that to happen the liquidity issue has to be solved. Economic stability and a maximum interest rate of zero could help to reduce risk in the wholesale banking system. Default risk could be reduced with a maximum interest rate of zero. The holding tax on the currency will make it expensive to hold currency so liquidity is less likely to dry up. Combined with adequate regulation that includes solvability and liquidity requirements, as well as transparent liquid markets for derivatives, this could help to develop a mature and stable wholesale banking system.
On the one hand, Natural Money requires more discipline from governments with regard to their budgets. Government borrowing can crowd out private borrowing and can make it difficult or even impossible to keep nominal interest rates below zero. On the other hand, Natural Money offers more opportunities for governments to enforce budget discipline because there is no need for deficit spending. The holding tax eliminates the need for stimulus so that budget cuts or tax increases may have fewer adverse effects on the economy. Furthemore, if governments can borrow at negative interest rates, this can generate extra revenue for them.
The role of the central banks with Natural Money is somewhat different. In the current situation central banks can influence the money supply by buying bonds or other assets from banks or selling bonds or other assets to banks in exchange for currency. If central banks buy bonds or other assets in exchange for currency then they are printing currency. This currency can then be used for making new loans. If they sell bonds or other assets, they do the opposite. Central banks can also influence interest rates. They set the short term interest rate and this can influence longer term interest rates.
With Natural Money, the interest rate is set by the market and the upper bound, but not by the central bank. The lower bound is the holding tax rate and the upper bound is zero. The central bank only gives credit to banks at an interest rate of zero. This is unattractive for banks because they cannot lend out this money at a higher interest rate. Banks will therefore not borrow at the central bank unless they have to, for example in case of an emergency. Regular banks are stricly regulated and have limited investment options because they are backed by public guarantees.
Presumably Natural Money helps to prevent large scale financial crises. The central bank can still be a lender of last resort by lending out money at zero percent to banks when an emergency arises, so that banks can be recapitalised, disbanded, sold off or broken up in an orderly fashion. When banks are rescued, the economy is also rescued, and this tends to be profitable for a society. The moral hazard coming from government and central bank guarantees can be contained with a maximum interest rate on loans. Applying market forces in full during a crisis is likely to do more harm than good so more effort should be put in preventing crises.
There should be a reserve requirement with Natural Money, at least if the public is expected to exercise control over banks that are backed by public guarantees. Banks pay a holding tax on the currency in their vaults so higher reserve requirements translate into lower rates on deposits. It is possible to have fixed reserve requirements based on the type of deposits or based on a moving average of the daily transactions between accounts.
A fixed reserve requirement does not adapt to the velocity of money. A high velocity of money tends to be price inflationary while a low velocity of money tends to be price deflationary. If the reserve requirement changes with the velocity of money, it could counteract price inflation and deflation. In order not do disadvantage small banks, transactions between accounts within the same bank should be included in the reserve requirement calculation.
With Natural Money, banks can receive temporary central bank credit against collateral that can be used as reserves. This may be needed if there are sudden withdrawals from deposit accounts or when there is a sudden surge in the turnover of money. This central bank credit is added to bank reserves. It is provided at an interest rate of zero but is also subject to the holding tax like regular Natural Money currency.
The use of central bank credit with Natural Money is expensive for banks because banks cannot relend this money at a higher interest rate. The central bank thus operates as a lender of last resort in accordance with Bagehot's advice, which states that if there is a credit crunch, central banks should avert panic by lending early and without limit to solvent firms against good collateral at high rates .
With Natural Money, central banks therefore do not subsidise the banking system with cheap credit. Under normal conditions a bank can borrow at better rates from other banks and depositors. Because they cannot make money from central bank credit, banks probably have little appetite for central bank credit, and will curb lending when they are on it.
The holding tax can help to improve the economy by making holding money idle expensive so that the economy can recover quickly from a downturn. This undermines the rationale for governments and central banks to intervene to support the economy. A reduction in debt levels and price deflation probably doesn't do much harm. The economy can do well without new debts. If there is economic growth then prices can go down because there are more goods and services available for the same amount of money.
When savings exceed investments then interest rates could go further below zero to discourage saving and promoting investing. A maximum interest rate of zero could curb credit expansion when the economy is doing well because people are less inclined to lend money at the bank when other investment opportunities provide better returns. The adaptive reserve requirement could have a similar effect. If the economy is doing well, and the velocity of money increases, the reserve requirement increases so that fewer funds are available for lending.
The maximum interest rate is likely to result in a cap on the risk lenders are willing to take. Risky projects may need to be financed with equity instead of debt. People and businesses in financial trouble may have to adjust their finances in an earlier stage. Furthermore, their troubles cannot be compounded by interest charges. A more stable economy can also help to reduce the likelihood of people getting in financial trouble. Natural Money can help to discipline governments as low interest rates require sound government finances.
Interest contributes to financial crises via the mechanism of risk. First of all, interest rates reflect the risks involved in lending out money. If the borrower is less likely to repay the loan because of high debt levels or poor and unstable income, he or she has to pay higher interest rates on loans. Borrowing at high interest rates can make those borrowers worse off. They may be better off if they could not borrow at all and have to curb their spending.
It works both ways. As interest is a reward for risk, lenders are more willing to take risk if there is a reward in the form of higher interest rates. This risk then enters the financial system, making it more prone to crisis. What is even more troublesome, is the fact that when a borrower is in poor financial shape, paying higher interest rates tends to make his or her predicament even worse. Interest in this way tends to increase risk.
The trouble in the financial system that led to the crisis of 2008 can in this way be related to interest as lending to subprime borrowers could have been interest-induced. The risks were also underestimated because of government policies and guarantees that supported this borrowing. A maximum interest rate could curb the risk lenders are willing to take, but such a measure may be more effective if governments do not distort the market by giving guarantees and subsidies.
With positive interest rates, money in the future is worth less than money now. This has a major impact on investment choices. Interest promotes short term thinking. If no interest was charged, long-term investments would be more attractive . The following example comes from the book Poor Because Of Money of Strohalm :
The example shows that without interest charges there is a tendency to select long-term solutions, so interest makes long-term solutions less economical. If interest rates are negative, future income would be preferred even more. Interest promotes a short term bias in economic decisions. This must also be true on a larger scale. It may help to explain why natural resources, such as rainforests are squandered for short term profits.
When interest rates are lower then savings yield less, but interest rates on loans and mortgages will also be lower. If interest rates are lower, people have to save much more for retirement. On the other hand, everyone pays interest indirectly via the products they buy, so that lower interest rates tend to lower prices. German research has shown that 90% of the people pay more interest than they receive. Only the top 10% richest people receive interest on balance .
The availability of credit at negative interest rates could create more room for capital buildup. This probably means that more products and services can be available at lower prices. This could increase overall prosperity. Furthermore, the returns on capital can be lower. This could promote a more even wealth distribution because most capital is in the hands of a relatively small group of wealthy people . Most people could therefore benefit from lower interest rates.
Natural Money can help to reduce unemployment as the holding tax allows for negative interest rates to balance consumption, savings and investments . Not all unemployment can be eliminated because not everybody meets the requirements of employers. Often there is a surplus of low skilled labour. But if the economy is operating at full potential, more people can be employed, so that Natural Money can have a positive impact on employment.
Profits and interest rates tend to reflect the risk of doing business so that reducing the risk of doing business could increase the overall level of wealth via lower interest rates. If it is sufficiently easy to enter the market, excess profits lead to increased competition or a higher demand for labour, which could lower the price of products or increase the price of labour. Hence, the reward for labour could increase when the risk of doing business is lower.
Natural money may help to reduce the risk of doing business, and hence reduce the cost of capital by making the economy could be more stable. Consequently the reward that capital requires to be employed can be lower so that the portion of national income paid out to labour could rise. An important condition for low business risk is political stability and a respect for property rights.
Some countries like China and Japan try to promote exports via currency manipulation. It may be better for those countries to increase aggregate demand. Negative interest rates can help to correct trade imbalances because exporters will lose money on foreign currency reserves. With negative interest, rates exporters will be more inclined to spend their currency balances. The maximum interest rate can help to curtail trade imbalances because it promotes a cap on risk taking.
Negative interest rates may do a better job than tariffs. There is no magic formula for determining what tariffs on what products are needed or justified, so decisions on tariffs tend to be arbitrary and political. The consequence may be that the advantages of trade between nations diminish, and that people will be paying more for foreign products than needed, and that employment may not improve because higher prices reduce demand for other goods and services.
Government regulations and interventions are aimed at specific goals that most people appreciate but they can produce undesired side-effects. In many cases there are loopholes and opportunities for profit at the expense of the general public. If the economy could realise these intended goals automatically as a result of market forces, this may be more efficient and it could reduce fraud and misuse of public funds.
Natural Money could provide a number of benefits that may reduce the need for government intervention and regulation. First of all, the economy is likely to do well by itself and there may be less need for governments to interfere with the economy. The holding tax on money eliminates the need for stimulus so that governments may not have to stimulate the economy. There could be more employment so that there may be less need for employment benefits and assistance.
Low interest rates can make sustainable investment choices rational economic decisions so that the government might have fewer reasons to encourage them. Fewer regulations in the financial system may suffice because a restriction on charging interest on money is likely to reduce risk taking in the financial system so that many of the abuses caused by financial engineering could become unprofitable and disappear.
One of the core elements of economic development is specialisation and division of labour, often based on the economies of scale. Sometimes a reduction in the division of labour can be more cost effective where there are diminishing returns on investments in social complexity . Local currencies can benefit communities by promoting local economic activities by introducing transaction costs. This works best when the economies of scale are limited or non-existent.
Local and regional governments can issue Natural Money currencies to support local and regional development. Those currencies can circulate alongside the national currency. People will be inclined to spend their local currency balances first because they can only be used locally. This can promote local trade . The potential of local currencies is limited. Reseach has shown that local currencies can not make up more than 20% of the currency in circulation.
A financial system similar to Natural Money existed in Egypt for more than a thousand years from around 1,500 BC up until the arrival of the Romans around 30 BC. It shows that negative interest rates are feasible and can exist for a long time. The theory of Natural Money could shed a new light on a number of historic issues such as the fall of Rome and the rise of Western Europe in the Middle Ages. There are a few recent experiments with a holding tax on money with remarkable results such as the emergency currency of Wörgl and the complementary currency of Lignières-en-Berry.
The Bible contains a story about the Pharaoh having dreams that he could not explain. The Pharaoh dreamt about seven fat cows being eaten by seven lean cows and seven full ears of grain being devoured by seven thin and blasted ears of grain. Joseph was able to explain those dreams to the pharaoh. He told the Pharaoh that seven good years would come and after that seven bad years would follow. Joseph advised the Egyptians to store food in large storehouses. They followed his advice and built storehouses for food. In this way Egypt survived the seven years of scarcity (Gen. 41:1-45).
What is less known, because it is not recorded in The Bible, is that the storing of food resulted in a financial system. The historian Friedrich Preisigke discovered that the Egyptians used grain receipts for money and had built a sophisticated banking system based on this money . Farmers bringing in the food received receipts for grain. Bakers who wanted to make bread, brought in the receipts which could be exchanged for grain. According to the Bible, Joseph took all the money from the Egyptians (Gen. 47:14-15). This may have prompted them to invent an alternative currency.
As a consequence the grain receipts may have been accepted as money. The degradation of the grain and storage cost caused the value of the receipts to decrease steadily over time. This stimulated people to spend the money. There was credit in this banking system, and most likely it was interest free. The grain receipt system lasted for many centuries. The actions of Joseph may have created this system as he allegedly proposed the grain storage and took all the money from the Egyptians. When Joseph came to Egypt, the country had already passed its zenith and the time of the building of the great pyramids was centuries earlier.
A few centuries later, during the reign of Ramesses the Great, Egypt became again a leading power . Some historians suggested that the wealth of Egypt during the reign of Ramesses the Great was built upon the grain financial system . The grain money remained in function in Egypt after the introduction of coined money around 400 BC until it was finally replaced by the Roman currency. The money and banking system were stable and survived for more than a thousand years. It seems therefore possible to have a sophisticated banking system with Natural Money, at least in a stationary economy.
Grain based money existed before. Sumerian barley money probably was the first money ever used around 3000 BC. Fixed amounts of barley grains were used as a universal measurement for evaluating and exchanging all other goods and services . The Sumerian money was not based on storehouses so it did not have a holding tax nor could the Sumerians build a sophisticated banking system based on this money like the Egyptians did. The Egyptian design proved that money with a holding tax and interest free banking could work on a large scale over a long timeframe.
In the Bible once in seven years a Sabbath Year was introduced in which debts were forgiven (Deut. 15:1-18). Once in the fifty years there was a Jubilee (Lev. 25:8-55). In the Jubilee every man could return to his possession while the land had to be redeemed. The Bible also banned interest . The periodic debt forgiveness in the Bible was not unique as Mesopotamian royal edicts cancelled debts, freed debt-servants and restored land to cultivators who had lost it under economic duress . These practises helped to free rural populations from debt servitude and the land from appropriation by foreclosures .
Around 500 BC agricultural output in Greece was not able to keep up with increasing population. Because of interest charges, mostly paid to city people, the debt load for farmers had gotten out of hand so that many of them could no longer pay their debts and were forced into slavery. Farms became the property of rich city people who did not understand farm work, while slavery did not contribute to the productivity of agriculture .
Harvests declined and the people in the cities were threatened by famine. Solon realised that a healthy countryside is a countryside without debts. Farmers who understand the business of farming must make their own decisions. The farmer's ambition to improve himself is indispensable for a vital countryside. Solon introduced drastic measures eliminating all existing debts. To avoid the expansion of new debts, a limit was also set to the rate of interest and the accumulation of land .
Solon's reforms were concentrated on the constitution and the economy and his reforms on debt and interest are just one of them . Solon also set a moral example. He identified greed as having negative consequences for society. The modesty and frugality of the rich and powerful men of Athens may have contributed to the city's subsequent golden age. Solon, by being an example and by reforming legislation, may have established a moral precedent .
A number of historians and economist investigated the decline of Rome and consequently a number of theories have been proposed to explain this historic event . In the fifth century the Roman historian Vegetius pleaded for a reform of the weakened army. The Roman Empire, and particularly the military, declined largely as a result of an influx of Germanic mercenaries into the ranks of the legions. This led not only to a deterioration of the standard of drill and overall military preparedness within the Empire, but also to a decline of loyalty to the Roman government in favour of loyalty to commanders.
There was a slump in agriculture and land was withdrawn from cultivation. High taxation on cultivated land was probably to blame. Another factor may have been the debasement of the currency that led to inflation. Apart from an expansion of the state, the debasement could also have been caused by interest on money as usurers may have amassed most of the gold and silver in the Roman Empire. Price control laws resulted in prices that were significantly below their free-market levels. The artificially low prices led to a scarcity of food. Together with increased taxation and oppressive laws, this led to more poverty.
In the Decline and Fall of the Roman Empire Edward Gibbon wrote:
Taxation was spurred by the expanding military budget, which was the result of the barbarian invasions and the use of mercenaries. A few centuries later the Eastern Roman Empire managed to survive the invasion of Arabs by introducing local militia that were not paid from the treasury but from local revenues . Over time the ranks of the militia were filled with local people that had an interest in defending their own land.
Roman money was based on gold and silver. Contrary to the Egyptian corn receipts, this money could be hoarded and moved abroad. This meant that when the Roman Empire started to decline, money may have disappeared from circulation. This may have reduced trade and impaired the economy. Because of this, as well as the expansion of government and the barbarian invasions, the government was permanently short of funds, causing a debasement of the currency and a rise of taxes that further burdened the Roman economy. In the end the invading barbarians may have been considered liberators.
After the Roman Empire collapsed, feudalism became the predominant political and economic system in Western Europe. The power in Western Europe became fragmented, so trade diminished and money became less important. Gold disappeared from circulation. Most transactions were done as barter while taxes were mostly paid in kind. There were metal coins as well as promises . From around 1100, money became increasingly important as both trade and cities grew at a steady pace and gold reappeared in Western Europe.
From the year 300 onwards, the church restricted charging interest. Rates above 1% per month where considered to be usurious and evil. There was no enforcement of the restrictions and charging interest remained common practise in trade . In 784 the Council of Aachen forbade charging interest altogether. In Western Europe this rule was more strictly enforced during the subsequent centuries . In the Byzantine Empire, restrictions on interest remained less strict, possibly because economic life was more developed, which made it more difficult to enforce a full ban on charging interest .
The restrictions on charging interest did not hamper economic development in Western Europe. When the ban on usury was first imposed, Western Europe was backwards compared to the Byzantine Empire and the Arab world, but during the centuries that the ban on charging interest was in force, Western Europe managed to become a dominant power. By the year 1100 when the Crusades started, Western Europe had enough resources to spend on a long war that lasted two centuries. The crusaders maintained long supply lines of thousands of kilometres, while the conquered land was not profitable.
When economic life in Western Europe became more developed, the ban on charging interest became more difficult to enforce. In the 14th century partnerships emerged where creditors received a share of the profits from a business venture. As long as the share in the profits was not fixed, this was not considered to be usury . Over time contracts were devised to evade the restrictions on charging interest. Rents on property were allowed so the definitions of rent and property were extended. During the 15th and 16th century, the restrictions on charging interest became untenable and were gradually lifted .
In the second half of the Middle Ages some lords started to issue fiat and scrip money. The fiat money had value because it could be used to pay taxes. Apart from making money legal tender, taxes can give value to money issued by governments. The scrip money was valid for a limited period of time. After that period the the money had to be returned to the ruler who exchanged it for new money that also was valid for a limited period of time. During the exchange a tax was levied. The actual value of the scrip currency decreased slowly during the period it was valid and was the lowest just before the tax was due.
An example of a fiat currency is the tally stick introduced by King Henry the First around 1100. Henry introduced sticks of polished wood, with notches cut along one edge to signify the denominations. The stick was then split full length so each piece still had a record of the notches. The King kept one half for proof against counterfeiting and spent the other half so it could circulate as money. Only tally sticks were accepted by Henry for payment of taxes so there was a demand for them. This gave people confidence to accept tally sticks as money. The tally sticks remained in use until the early nineteenth century .
An example of a scrip currency is the brakteaten. The brakteaten was used in Europe between 1150 and 1350. Brakteaten coins were silver plaques called back by the local authorities from time to time and then reissued with a new image. During reissuing a tax was levied that amounted to a holding tax. At first the currency was only reissued when a new ruler came to power. Later on the silver plaques were called back on a regular basis. Rulers started to abuse the currency and holding taxes reached 6% per month. This burden became so heavy that the brakteaten currencies were abandoned .
On 5 July 1932, in the middle of the Great Depression, the Austrian town of Wörgl introduced a complementary currency. Wörgl was in trouble and was prepared to try anything. Of its population of 4,500, a total of 1,500 people were without a job and 200 families were penniless. The mayor Michael Unterguggenberger had a long list of projects he wanted to accomplish, but there was hardly any money to carry them out. These projects included paving roads, streetlights, extending water distribution across the whole town, and planting trees along the streets .
Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he deposited them in a local savings bank as a guarantee to back the issue of a type of complementary currency known as stamp scrip. The Wörgl money required a monthly stamp to be stuck on all the circulating notes for them to remain valid, amounting to 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families .
Nobody wanted to pay the monthly stamps so everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings but this offer was rarely taken up. Of all the businesses in town, only the railway station and the post office refused to accept the complementary currency. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump and a bridge .
The key to its success was the fast circulation of the scrip money within the local economy, 14 times higher than the Schilling. This in turn increased trade, creating extra employment. At the time of the project, unemployment in Wörgl dropped while it rose in the rest of Austria. Six neighbouring villages copied the system successfully. The French Prime Minister, Édouard Daladier, made a special visit to see the 'miracle of Wörgl' .
In January 1933, the project was replicated in the neighbouring city of Kitzbühel, and in June 1933, Unterguggenberger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea. At this point the central bank panicked and decided to assert its monopoly rights by banning complementary currencies .
In the town of Schwanenkirchen in Bavaria the owner of a small bankrupt coal mine started to pay his workers in coal instead of Reichsmark. He issued a local script which he called the Wara that was redeemable in coal. The bill was only valid if a stamp for the current month was applied to the back of the note. This demurrage charge prevented hoarding and workers paid for their food and local services with the Wara.
Coal was a necessity and German Marks were in short supply so the currency became widely accepted. The use of this currency was so successful that by 1931 the so-called Freiwirtschaft (free economy) movement had spread through all of Germany. It involved more than 2,000 corporations and a variety of commodities backed the Wara. In November 1931 the German Central bank prohibited the use of the Wara .
In the United States Irving Fisher analysed the miracle of Wörgl. He published various articles about this success. More than 400 cities and thousands of communities all over the US started to issue emergency currencies, and many of them were stamp scrip. There was a movement to issue a stamp scrip currency nationwide. Senator Bankhead from Alabama presented a bill to the Senate on 18 February 1933 and Representative Petenhill from Indiana presented a bill to the House of Representatives on 22 February 1933.
The stamp scrip in the United States often had a high tax rate, sometimes 1 to 2% per week instead of 1% per month like in Wörgl. This undermined the confidence in the stamp scrip currencies. Irving Fisher approached the Undersecretary of the Treasury, Dean Acheson, to obtain support from the Executive branch for issuing stamp scrip. Acheson asked the opinion of one of his Harvard professors, who advised him that the system could work, but that it would imply strongly decentralised decision making. President Roosevelt later prohibited any use of stamp scrip .
In 1956 a few people in Lignières-en-Berry started a revolutionary experiment. They issued vouchers of 100 French francs for 95 French francs. After four months the vouchers could be returned for 98 French francs. A notary saw to it that for each voucher 98 French francs were deposited into a bank account. If the vouchers were not returned, a stamp of 1 franc had to be bought to keep the voucher valid.
The money was attractive because there was three francs of profit to be made by buying vouchers for 95 French francs and returning them for 98 French francs four months later. By spending the vouchers for 100 Francs it was even possible to make a profit of five francs. People tried to spend the vouchers in the shops and the shopkeepers liked the currency because it brought them additional customers, while it never did cost them more than 2% because the vouchers could be returned for 98 French francs. The shopkeepers also preferred to use the vouchers for their own payments.
Many people did not return the vouchers but bought the stamps to keep them valid. From the income of the stamps the cost of buying returned vouchers for 98 French francs could be covered. It did not take long before the currency of Lignières-en-Berry had replaced the French francs. The vouchers spread quickly and the French authorities were alarmed. The vouchers were prohibited .
A stable economy that is operating at or near the trend growth rate at full employment can achieve the maximum economic potential. Under those circumstances real interest rates should be near their sustainable maximum. Natural Money can help to realise a stable economy and reduce risk in the financial system. It therefore follows that real interest rates with Natural Money could be higher. This could then be reflected by a strong currency that is rising in value. An interest rate of zero might then be a positive real return.
A simple calculation can be made to support such a view. Economists assume that there is a link between the amount of money and money substitutes (M) in circulation and prices in the equation Money Stock (M) * Velocity (V) = Price (P) * Quantity (Q). If ΔP, ΔM and ΔQ are sufficiently small, and velocity is constant, so that ΔV = 0, then it is possible to approximate this equation with %ΔP = %ΔM - %ΔQ, where %ΔP is the percentage change in price level, %ΔM is the percentage change in money stock, %ΔV is the percentage change in money velocity and %ΔQ is the percentage change in the quantity of production.
The velocity of money (V) for Natural Money may be higher than for interest bearing currency, but it is likely to remain constant as the economic picture is more likely to remain constant. Now it is possible to make a calculation of the real interest rate (r), which is the the nominal interest rate (i) minus the inflation rate (%ΔP) so that r = i - %ΔM + %ΔQ.
Suppose that for interest-bearing money the long-term average economic growth is 2%, but for Natural Money it might be 3% because the economy is more often performing at its maximum potential. Assume that the long-term average money supply increase for interest-bearing money is 6% per year, but for Natural Money it is 0%. The long-term price inflation rate could then be 4% for interest-bearing money, but for Natural Money there could be a price deflation rate of 3% as the economy grows 3% on a stable money supply. Then the following calculation can be made:
Economic growth is likely to be higher with Natural Money, so real interest rates are likely to be higher. Furthermore, because Natural Money has a number of stabilisers that tend to reduce risk in the financial system, the level of risk is likely to be lower in the Natural Financial System. It seems therefore likely that the risk/reward ratios in the Natural Financial System are better than in the current financial system. This suggests that the design of Natural Money is more efficient so that there might be a capital flight from the interest economy to the interest-free economy as soon as Natural Money is implemented somewhere.
The real interest rate improvement may be higher than the improvement in the economic growth rate as there might a reduction in financial sector profits. Economic and financial stability might imply a reduction in the risks of investing so that investments could be made with less financial sector intermediation. The financial instability and the perceived need for government and central bank interventions in the interest-based financial system may have produced opportunities for politically connected and informed people to enrich themselves at the expense of the general public.
The complementary currency of Wörgl was a stunning succes, but other experiments with free money did not yield similar results. Was this a fluke, or did it highlight a hidden potential? If there is a hidden potential then it may be possible to have stable economic growth without unemployment, or we may come closer to that. The ideas of Silvio Gesell have fallen out of grace as they seem impractical to work with. To get it right seems to be a major challenge.
The first major obstacle could be the maximum interest rate of zero. How can the market for money and capital operate if there is ceiling on interest rates in the fixed income market? This depends on the amount of loans that would require a higher interest rate. If this amount of loans is relatively small, for example when interest rates are already negative, there would be no problem. This may well be the case when central banks are experimenting with negative interest rates.
One critique of Natural Money states that negative interest rates could lead to runaway inflation caused by excess credit. This critique appears to be based on the observation that lower interest rates will produce more credit. It is certainly true that lower interest rates allow for more credit, but once an economic boom sets in, interest rates tend to rise. The driver behind this credit is expectations with regard to the future. The maximum interest rate can channel these expectations into equity investments instead of debt so that these expectations do not translate in a credit boom.
Another critique is that Natural Money could lead to runaway deflation. This critique appears to be based on the observation that a lower velocity of money coincides with lower interest rates so that lowering interest rates even further would cause velocity to go down even further. This assumes that low interest rates cause the velocity of money to go down, while probably it is the economic conditions that produce a low velocity of money and low interest rates. In fact, this might be related to the zero bound or the liquidity trap, where people are unwilling to spend and prefer liquidity to investments because they cannot lose money on liquidity.
It seems important that the currency is legal tender and the only payment for taxes the goverment accepts. The existence of competing currencies, such as Bitcoin does not seem to be such a problem. These alternatives often do not have a holding tax so that the Natural Money currencies will be used for transactions. Investing in Natural Money deposits can also be more profitable if the economy is doing well and the Natural Money currency rises in value.
Most people are not familiar with the concept of interest-free money. It requires a new way of thinking. People are used to receiving interest on deposits and may object to paying for having deposits in the bank. The idea that this money may be worth more in the future, may not be appealing unless people can see that they will be better off. It might be important to educate people about Natural Money and it seems a good idea to decide about introducing it via a referendum.
Maximum interest rates have caused trouble in the past. If market interest rates exceed the maximum interest rate then investors will seek alternative investments and banks can become short of funds. In the United States there have been maximum interest rates on bank deposits for decades. The system came under stress because alternatives were offered, such as money market funds. As a consequence, maximum interest rates were phased out in the 1980s .
With Natural Money, banking is separated from other types of business, and only banks are able to guarantee the value of their deposits as there is a central bank to guarantee liquidity and a government to insure deposits. Other financial institutions must issue shares that have a price risk attached to them, but people may find the higher rates they offer more attractive and withdraw deposits from the banking system. This could cause a liquidity crisis in the banking sector.
The question is whether or not market interest rates will exceed the interest rates banks can offer on their deposits. The maximum interest rates in the United States did not cause any trouble when market interest rates were low. The maximum interest rate on Natural Money can be a positive real return. In mature economies with stable political systems and respected property rights, interest rates may remain low enough for Natural Money to succeed.
In Japan near zero interest rates have existed for decades. Japan could be a harbinger of what is to come for the rest of the world. Because of compound interest, debts tend to go to infinity. When debts near infinity, they can only be sustained by zero or negative interest rates. The alternatives to zero or negative interest rates are widespread defaults or high price inflation rates.
Some economists have entertained negative interest rates to kickstart the economy in times of crisis  , but the adverse consequences of compounding interest on money is not an issue in mainstream economics. There is little thought on the idea of interest as a promoter of risk taking and moral hazard within the financial sector. The consequences of interest on money on the stability of the financial system are not widely discussed.
Many theories about interest-free money do not consider arbitrage. If an interest-free currency can be used to buy assets with a yield, there will be free money for those who engage in this trade. An interest-free currency must provide a competitive return in order to be a viable alternative. This means that a number of preconditions must be met in order to have interest-free money. At least in theory, interest-free money could be more efficient, and thus provide better real returns.
Another issue with some ideas about interest-free money is the idea that charging interest is morally wrong. This requires an explanation. It is not wrong to be rewarded for lending out money as there is risk involved and opportunity forgone. Still, it might be a bad idea to desire more and more of something that is in limited supply, such as gold or currency, most notably if other people need that something to survive or to have a meaningful role in society.
A common misconception is that a restriction on charging interest on loans is a restriction on business profits. Capital needs a reward to be employed and restricting interest on loans does not change that. Others might worry that credit will not be available when charging interest on money is restricted, or they may fear the opposite, that abundant credit will destroy the currency. That does not have to happen.
It may seem strange that a restriction on charging interest on money can result in higher real interest rates. On closer inspection this makes sense. After all, if Natural Money is to improve economic efficiency, then this will somehow affect real interest rates. This is likely to be reflected in a rising value of the currency. This counterintuitive idea is the reason why Natural Money could be a success that might surprise most economists.
Interest is a natural phenomenon that arises under the conditions of the economy. There are a number of reasons for interest to exist. Those reasons are:
- returns on capital;
- risks associated with lending out money (default and inflation);
- time preference and marginal utility;
- money itself not depreciating in nominal terms, which puts a floor on interest rates.
Economists see interest as a payment for deferred consumption. By deferring consumption resources can be used for production. This can facilitate future consumption. As a general rule, it is assumed that a certain amount of savings makes a greater amount of future consumption possible. If an investment adds economic value, it returns more than the initial investment. The difference is interest.
When interest rates go lower, investments with lower economic value become feasible. If low interest rates are unsustainable, then these investments turn out to be malinvestments, as they produce a loss relative to the current interest rate. Apart from economic value, activities with a low or difficult to calculate economic returns can have value to humans, or these activities can be beneficial to society.
In a competitive free market, interest rates on money tend to reflect the productivity of capital. If they did not, and the risk/reward ratio of capital was better or worse, interest rates would adjust until they do reflect the productivity of capital. For example, if interest rates on money are low and the return on capital is high, then more people would be willing to invest in capital directly. Therefore interest rates on money tend to reflect the expected future return on capital.
Interest rates reflect the expected rate of price inflation and the risks associated with the borrower. Default and price inflation are both risks associated with lending out money. It is often assumed that there is a risk free interest rate, for example on government bonds, but even government bonds have some risk attached to them. Governments may not default outright but they can create money to pay off their debt, thereby lowering the value of the currency.
Convenience also determines interest rates. When you lend out your money, you cannot use it yourself. This is an inconvenience and people require a reward for this. Banking provides convenience by lending out money long term and making it available in a shorter timeframe. Fractional reserve banks make this money readily available. This is possible because if you make a bank payment to someone else, the bank will borrow the money from the person you are sending the money to instead. Because of the convenience they provide, banks help to lower interest rates.
There is time preference because on average people prefer to have a good or service sooner rather than later. In this way time preference contributes to positive interest rates. On the other hand, the law of marginal utility also counteracts time preference. If you have enough of everything you need, you prefer to have enough of everything you need in the future to having enough of everything now. If a large number of people have enough of everything, or when there are a few extremely rich people, then the law of marginal utility may overcome the time preference, and interest rates may be negative.
For example, when there is a choice between 10,000 loaves of bread now or one loaf of bread each day for the next 10,000 days, most people prefer one loaf of bread every day for the next 10,000 days. Most people will even prefer one loaf of bread each day for the next 1,000 days above 10,000 loaves of bread now, which implies a steep negative real interest rate. This is because bread spoils in a short time so no one can use 10,000 loaves of bread. It also applies on durable goods. Most people would prefer to have a new car now and a new car in ten years’ time instead of having two new cars now.
The money we currently use evolved from gold. It makes no sense to lend out gold at zero interest because gold does not decay. This also applies to money. Below a certain threshold there is no incentive to lend out gold because of the risks associated with lending. John Maynard Keynes thought that a liquidity trap can occur, which is a floor under which nominal interest rates cannot fall . Similarly it makes no sense to lend out euros at negative interest rates if you can put euro bank notes in a safe deposit box. This is why interest rates cannot meaningfully drop below zero.
If money depreciates over time like capital and other goods, for example by applying a holding tax, the picture may alter. People may prefer to have money at the time they need it in the same way they desire a loaf of bread when they need it. Under those conditions they may be willing to lend at zero or even negative interest rates. Whether or not that might happen also depends on other conditions such as the return on capital and the level of risk associated with lending out money, as well as the value development of the currency over time. Only strong currencies allow for negative interest rates.
A holding tax might affect real interest rates, but only if risk free interest rates are already near zero. An interest rate near zero might imply that there is no real equilibrium between the supply and demand of money. This equilibrium might be at an interest rate below zero. Central banks try to induce inflation by printing money and lowering interest rates, but until now they had little success. If the experience of Japan is to be a guide, they may not succeed. A holding tax on money could make it possible to achieve this equilibrium without much effort.
Restricting interest on loans poses constraints on the funds available for borrowing. If the risk/reward ratio of capital is more favourable, interest rates on loans may not be able to adjust upwards and direct investments will be preferred. There may be less borrowing for consumption so the economy will not overheat because of unsustainable accelerated consumption. The value of the currency may rise as economic output increases, and in this way the real interest rate on money can reflect the return on capital. Consequently it may be possible to sustain borrowing and lending at a maximum nominal interest rate of zero.
Questionable borrowers may not be able to borrow at a nominal interest rate of zero. They may be better off because they have to postpone consumption instead of paying high interest rates, so they will end up having more purchasing power. It is likely that financial innovators will try to chisel on any interest restriction. Loan sharks may try to fill in the gap and black markets may emerge. Making interest on money illegal and nullifying loans with interest may help to alleviate this issue as it makes the risk of doing business for loan sharks prohibitively high, so that black market interest rates are prohibitively high for most prospective borrowers.
For centuries usury laws have been enacted to protect the poor from unscrupulous lending practises by setting a maximum interest level. Economists contend that usury laws in the past failed because the interest ceiling was set below the equilibrium market interest rate. The effect of the interest rate ceiling may have been that only wealthy people could borrow money and that the poor had to manage themselves. Insofar the poor could not borrow at all they may have been better off in the end, but it is likely that at least some poor people became the victim of loan sharks.
It follows that any feasible maximum interest rate should be near or above the market interest rate. A maximum interest rate of zero might seem a serious obstacle, but it might not be. First of all, real interest rates in developed nations could remain zero bound for the foreseeable future. Second, the risks associated with lending are reduced when the financial system is more stable, so that lower interest rates could be justified. Third, and finally, with Natural Money a nominal interest rate of zero might imply a real interest rate close to the trend growth rate as the interest rate might reflect the rate of economic growth.
Low and negative real interest rates on loans may be coming and they may be here to stay. There a few reasons why interest rates went down, and could be heading down, and stay lower. These reasons are the following:
Interest on money can contribute to economic cycles but interest on money is not the only cause of economic cycles. In general economic cycles are caused by mismatches between supply and demand. Those mismatches can concern the supply and demand of money, capital, labour, raw materials or consumer products. Interest reflects the market for money and capital. If all markets were perfect, and supply could adapt to demand instantly, then there would be no economic cycles.
Economic cycles occur because mismatches between supply and demand emerge from time to time and are resolved after some time. Fluctuations in demand and supply cause fluctuations in prices, stocks and employment. There are a number of theories and explanations regarding those mismatches, economic cycles and their effects. Some of them identify banking and interest rates as their causes. The ideas that are relevant for Natural Money are discussed here.
Expectations are important in economics. If people feel secure and have a good feeling about their future, they could be more willing to spend. A positive or negative feeling about the economy can become a self-fulfilling prophecy. For example, if people expect a bank to collapse then this could happen because this feeling might cause a bank run. Therefore policy makers tend to give a rosy picture of the economy or the state of the banking system.
According to Say's law supply creates its own demand because goods and services are produced to acquire an equal value of other goods and services. This applies to a barter economy. If money is used as a medium of exchange, people can hold on to money and postpone their purchases. In this way producers can be left with overproduction, and a reduction in economic activity could be the result.
Money hoarding can be caused by bleak expectations about the future. Money hoarding can reinforce itself as a decline in economic activity can make people more cautious. They may start to save more and economic activity may decline even more. As a consequence, more people may expect that times get worse and start to save more. This cycle can reinforce itself and become destructive.
During good economic times, businesses and individuals tend to be confident. Credit is often available because future income projections of businesses and individuals are the basis for banks to lend money. Therefore businesses and individuals tend to increase their leverage during good times. When the economy slows down and their incomes reduce, they can get into trouble. People would have more disposable income when they were out of debt and did not have to pay interest. Similarly, businesses can go bankrupt even when they are profitable overall because of interest charges.
For example, a business may expect a return on investment of 8% and can borrow at 6%. It makes sense to use leverage and the business may have liabilities equalling two thirds of total assets. If the return on capital turns out to be 3%, the business operates at a loss because of interest payments. If there was no leverage then the business would still operate at a profit. Leverage can add to economic instability as it fuels the boom as well as the bust.
Often businesses are not liquidated but taken over at a lower price. Competitors that are more conservatively financed may suffer as overinvestment created a new competitor with a lower cost base. Some of those more conservatively financed competitors can go bankrupt as a consequence. Leverage can be an accelerator of economic change as it reduces the value of the capital of the leveraged business as well as the capital of the more conservatively financed businesses.
Leverage also contributes to the overall risk in financial markets. Liquid financial markets make it easier to enter and exit positions, making it appear that it is safe to operate with a leverage. If markets were not liquid then leverage appears more dangerous as it is more difficult to exit a position. Liquidity makes it possible to take on more risk so the overall level of risk in the financial system might increase as a consequence of liquidity. This may become apparent during a crisis because in times of crisis liquidity may suddenly disappear.
Banks create money by issuing bank credit that can be used for payments. From time to time a bank cannot meet the demand for money of its depositors and then the bank goes bankrupt. Such a situation can have different causes, such as unexpected withdrawals, economic cycles, seasonal factors or reckless lending. Because banks hold deposits at other banks, one bank's financial troubles can cascade through the banking system. As a consequence, people can lose their confidence in the banking system and bank runs may ensue.
Banks may stop lending money because they need to meet the demand from depositors for money. This can cause an economic recession or even a depression because a reduction in lending causes a reduction in spending and investments. During a depression business incomes drop in money terms so many businesses and people experience difficulty to repay their debts. This causes more businesses to go bankrupt and more people to become unemployed. More loans will then not be repaid and consequently more banks can get into trouble. In this way a credit cycle can reinforce itself.
Ancient societies observed the adverse consequences of interest. Interest contributed to the concentration of money in the hands of a few people, while on the other hand many people were in debt or had become serfs of the money lenders. For that reason debts were forgiven from time to time . This may have produced economic cycles. The Bible has provisions to forgive debts such as the Jubilee Year. Compound interest is infinite in the long run. This is a problem when the money lenders do not spend the interest on their money but accumulate it.
When money becomes concentrated into the hands of a few, less money remains in circulation and prices may drop. It becomes difficult to repay debts with interest because the debts and interest are fixed in money terms. Interest payments further reduce the available money in the hands of the public. Money lenders can then take possession of the belongings of the borrowers and demand their labour as repayment. In this way many people can become serfs of the money lenders. This phenomenon is called debt slavery.
From this one could conclude that any interest rate on debts above the change in the monetary base, which could be currency or gold, contributes to this problem and can henceforth be called usurious. For example, if there is two percent more currency in circulation every year, then an interest rate of two percent on debts does not contribute to the concentration of money into the hands of a few, but higher interest rates do. It also follows that if the monetary base remains stable, interest rates above zero could be called usurious.
Debts are made with the promise that they are repaid with interest. The total amount of currency relative to the total amount of debts is insignificant so that there is not enough currency to pay off all debts. Investors reinvest most of their interest income so that new debts are needed to pay off the old ones and the interest on those debts. When new debts are not made fast enough, the scheme runs into trouble, money may disappear from circulation, and a financial crisis can be the consequence. In this way the economy can enter a recession, or even worse, a depression.
Fiscal and monetary policies are meant to deal with this problem. When new debts are not made fast enough, governments can go further into debt. They can stimulate the economy by spending more or lowering taxes. Alternatively, central banks can lower interest rates, so that it becomes more attractive to borrow money. Both fiscal and monetary policies tend to increase the total amount of debts. This is the consequence of positive interest rates on debts. If interest rates on debts were zero or negative, then no new debts are needed to pay for the interest on existing debts.
If new debts are made at a faster pace than old debts are repaid with interest, the amount of money in circulation increases, which is monetary inflation. Under those conditions the economy tends to perform well and there could be price inflation. If new debts are made at a slower pace than old debts are repaid with interest, then the amount of money in circulation decreases, which is monetary deflation. Under those conditions the economy tends to perform poorly and there could be price deflation. This is why many economists think that there should be some monetary inflation but not too much.
Fiscal and monetary policies have been introduced to deal with economic cycles, and most notably with economic crises. Those policies aim to manage interest rates, money supply and aggregate demand. Those policies have turned out to be awkward because the best course of action is difficult to know in advance, but also because policy actions can distort markets and favour politically connected people and businesses. Most notably, those policies may foster moral hazard if market participants expect governments and central banks to help them out in times of trouble.
The rationale for monetary policies is based on a theory of natural interest rates. Economists often assume that there is a natural interest rate at which the economy is growing at its trend rate and where inflation is stable. The natural interest rate may differ from the actual interest rate in the market because the market is influenced by the creation of credit in the financial system.
Deviations from this natural rate of interest can trigger booms and busts. If the market rate of interest is pushed below the natural rate of interest, for example through monetary expansion caused by credit during times of optimism, then investors might receive a false signal to invest projects with a lower expected yield. During an economic bust, capital may be destroyed that may have to be rebuilt during the next economic boom.
The market interest rate may therefore differ from the natural interest rate so economists often assume that it must be set by monetary policies. One of the intentions of central bankers is to keep the market interest rate near the natural interest rate. By setting short term interest rates, and in this way indirectly targeting long term interest rates, central banks can influence the creation of bank credit.
During an economic boom the natural interest rate is above the market interest rate because economic growth is above the trend rate. During an economic bust the natural interest rate is below the market interest rate because economic growth is below the trend rate. If central banks perceive the natural interest rate to be above the market interest rate, they raise interest rates. If they perceive the natural interest rate to be below the market interest rate, they lower interest rates.
The natural interest rate theory has a few weak points. First, the natural interest rate cannot be measured or calculated. Economists and central bankers therefore have to rely on estimates. Second, fiscal and monetary policies can become subjected to political objectives. Policy makers prefer not to be responsible for economic downturns so monetary policies may be too easy during the boom phase as high interest rates could produce a bust.
More importantly, interest rates rise in times of optimism because of rosy projections of future revenues, so that interest rates may be too high in times of optimism instead of too low. When the boom is over, it turns out that there had been too much borrowing at interest rates that were too high, because the expectations of the future were too rosy. This observation contradicts the theory of natural interest rates because there appears to be no stable growth path.
According to classical economists, the economy tends to be in equilibrium at full employment because the desires of consumers exceed the capacity of the businesses to satisfy them. People produce in order to consume what they have produced or have acquired by exchanging what they have produced for what others have produced. Classical economics suggests that everything will work out fine when markets are competitive and flexible so that prices can adapt fairly quickly. A problem with this reasoning is that all prices are more or less flexible, but not interest rates, because they cannot go below zero.
Keynesian economics works around this problem. Keynes saw that interest rates cannot fall below a certain minimum. He called this a liquidity trap in which there are excess savings. In this situation investors prefer risk-free cash to investments in the hope of better returns on investments in the future . Keynes probably realised that the equilibrium interest rate during a crisis was negative, but he probably also thought that it would not be feasible to have negative interest rates. Keynesian economics therefore prescribes pushing up interest rates via aggregate demand and price inflation if there is a liquidity trap.
Monetarists assume that a change in the money stock will, in the long run and all other things being equal, lead to a proportional increase in price level. Keynesians see a tradeoff between employment and inflation. Monetarists think that this effect only exists in the short run because prices adapt to changes in money supply . The Monetarists proposed a stable rule for monetary policy so that monetary policy would predictable. Monetarism suggests that monetary inflation is needed. Monetary inflation offsets the effects of compound interest on debts. Natural Money is expected to require no monetary policy at all, which is also predictable .
The rational expectations theory is based on the efficient market hypothesis, which states that markets reflect all available information . A possible effect of rational expectations is that it can make government policies ineffective. According to the rational expectations theory, Keynesian theories do not account fully for the changes in people's expectations about the consequences of fiscal and monetary policies because people learn from experience . Natural Money doesn't require fiscal and monetary policies so that these issues do not apply.
The community currencies movement seeks to reassert local control over economic life and money using local interest free currencies. National Socialism tries to do the same on the national level and also sees interest and international finance as the main culprits of economic suffering. There could be a rationale for economic inefficiencies such as increased transaction costs and ignoring the economies of scale when economic efficiency results in large scale unemployment, low wages or wealth inequality. It is possible to have Natural Money currencies at the local or regional level to deal with these concerns.
Socialism and Marxism emerged during the nineteenth century when there was widespread poverty caused by lack of capital and over supply of labour. Wages were low and working conditions were poor. On the other hand a few factory owners were extremely wealthy. This was a fertile ground for ideas about class struggle. Natural Money aims to create the opposite situation with facilitating more capital by allowing lower interest rates. More supply of capital would allow prices to go down via the mechanism of lower interest rates. In this way less wage income is needed to survive so that the supply of labour can be reduced.
Steady state economics and de-growth assume that economic growth cannot go on as it did given its consequences such as climate disruption, widespread habitat loss and species extinction, consumption of natural resources, pollution, urban congestion and an intensifying competition for remaining resources, so that lower economic growth might be needed  . Some ecologists contend that the current economic system has a growth imperative because it doesn't allow for negative interest rates so that it collapses when growth is too low. Natural Money allows for negative interest rates and can deal with low growth or no growth.
1. Financial services - Wikipedia (as on 28 October 2013): http://www.naturalmoney.org/financialservices.html
2. The Natural Economic Order, Silvio Gesell, Translated by Philip Pye, Peter Owen Ltd, 1958: http://www.silvio-gesell.de/neo_index1.htm
3. Austrian Business Cycle Theory - Mises Wiki (as on 4 March 2015): http://www.naturalmoney.org/abct.html; current version: http://wiki.mises.org/...
4. Austrian School - Wikipedia (as on 14 September 2013): http://www.naturalmoney.org/austrianschool.html; current version: http://en.wikipedia.org/wiki/Austrian_School
5. Economics of Money and Banking Part Two, Redacted Lecture Notes, Perry G. Mehrling, 2013, chapter 20 paragraph 1, http://www.naturalmoney.org/moneyandbanking-01.html#2001
6. Lombard Street: A Description of the Money Market, Walter Bagehot, 1873
7. A Strategy for a Convertible Currency: Impact on the Ecology, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990: http://www.itk.ntnu.no/ansatte/...; backup copy: http://www.naturalmoney.org/ convertiblecurrency.html
8. Poor Because of Money: The consequences of interest, Henk van Arkel and Camilo Ramada, Strohalm, 2001: http://www.naturalmoney.org/ poorbecauseofmoney.html
9. Poor Because of Money: Our theory on interest, Henk van Arkel and Camilo Ramada, Strohalm, 2001: http://www.naturalmoney.org/ poorbecauseofmoney.html
10. Capital in the Twenty-First Century, Thomas Piketty, Harvard University Press, 2014
11. A Strategy for a Convertible Currency: Impact on Employment, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990: http://www.itk.ntnu.no/...; backup copy: http://www.naturalmoney.org/ convertiblecurrency.html
12. Joseph Tainter - Wikipedia (as on 28 March 2014): http://www.naturalmoney.org/josephtainter.html; current version: http://en.wikipedia.org/wiki/Joseph_Tainter
13. A Strategy for a Convertible Currency: Decentralised Issuing of Stamp Scrip, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990: http://www.itk.ntnu.no/...; backup copy: http://www.naturalmoney.org/ convertiblecurrency.html
14. A Strategy for a Convertible Currency: Some Historical Precedents, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990: http://www.itk.ntnu.no/ansatte/Andresen_Trond/ finans/others/interest-free-money.txt; backup copy: http://www.naturalmoney.org/ convertiblecurrency.html
15. Ramesses II - Wikipedia (as on 3 September 2013): http://www.naturalmoney.org/ramesses2.html; current version: http://en.wikipedia.org/wiki/Ramesses_II
16. This was mentioned on Discovery Channel or National Geographic but I was unable to recover the source
17. Scripture references to usury, interest, The Bible, The Quran: http://www.naturalmoney.org/scriptureusury.html
18. The lost tradition of Biblical debt cancellations, Michael Hudson, 1993: http://www.scribd.com/ doc/53645620/7/Debt-Crises-in-Classical-Antiquity; backup copy: http://www.naturalmoney.org/debtcancellations.html
19. Poor Because of Money: Solon, the Greek economist, Henk van Arkel and Camilo Ramada, Strohalm, 2001: http://www.naturalmoney.org/ poorbecauseofmoney.html
20. Solon - Wikipedia (as on 21 March 2014): http://www.naturalmoney.org/solon.html; current version: http://en.wikipedia.org/wiki/Solon
21. Decline of the Roman Empire - Wikipedia (as on 21 March 2014): http://www.naturalmoney.org/declineofrome.html; current version: http://en.wikipedia.org/ Decline_of_the_Roman_Empire
22. Rome and Romania, 27 BC - 1453 AD: III. Third Empire, Middle Romania - Early Byzantium, Friesian.com: http://www.friesian.com/romania.htm#middle; backup copy: http://www.naturalmoney.org/romania.html
23. Money in the Middle Ages, Simon Newman, The Finer Times: http://www.thefinertimes.com/Middle-Ages/money-in-the-middle-ages.html; backup copy: http://www.naturalmoney.org/ moneymiddleages.html
24. The Doctrine of Usury in the Middle Ages: II. The opinion on usury of the Church-fathers in the Roman Empire, Simon Smith Kuznets, University of Chicago: http://home.uchicago.edu/weyl/Usury_appendi.doc; backup copy: http://www.naturalmoney.org/doctrineusury.html#02
25. The Doctrine of Usury in the Middle Ages: III. The doctrine of usury during the dark period, Simon Smith Kuznets, University of Chicago: http://home.uchicago.edu/weyl/Usury_appendi.doc; backup copy: http://www.naturalmoney.org/doctrineusury.html#03
26. The Doctrine of Usury in the Middle Ages: IV. The scholastic doctrine of usury. T. Aquinas, Simon Smith Kuznets, University of Chicago: http://home.uchicago.edu/weyl/Usury_appendi.doc; backup copy: http://www.naturalmoney.org/doctrineusury.html#04
27. The Doctrine of Usury in the Middle Ages: V. The fall of the Doctrine. Second half of the 15th, 16th centuries, Simon Smith Kuznets, University of Chicago: http://home.uchicago.edu/weyl/Usury_appendi.doc; backup copy: http://www.naturalmoney.org/doctrineusury.html#05
28. Laboratory readings: Wörgl's Stamp Scrip – The Threat of a Good Example?, Martin Oliver, Newciv.org, 2002: http://www.newciv.org/nl/newslog.php/_v105/ __show_article/_a000105-000002.htm; backup copy: http://www.naturalmoney.org/example.html
29. History of Money, 1930 – 1933, Mindcontagion.org: http://www.mindcontagion.org/money/hm1930.html; backup copy: http://www.naturalmoney.org/mc-historyofmoney-1930.html
30. Scrip / France, Barataria.org: http://www.naturalmoney.org/stampscrip.html
31. Regulation Q - Wikipedia (as on 29 March 2014): http://www.naturalmoney.org/regulationq.html; current version: http://en.wikipedia.org/wiki/Regulation_Q
32. Negative Nominal Interest Rates: Three ways to overcome the zero lower bound. Willem H. Buiter. NBER Working Paper No. 15118. Issued in June 2009: http://www.nber.org/papers/w15118.pdf; backup copy: http://www.naturalmoney.org/w15118.pdf
33. Buiter, W. H. and Panigirtzoglou, N. (2003), Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution. The Economic Journal, 113: 723–746. doi: 10.1111/1468-0297.t01-1-00162: http://eprints.lse.ac.uk/848/1/liqnew.pdf; backup copy: http://www.naturalmoney.org/liqnew.pdf
34. Liquidity trap - Wikipedia: http://en.wikipedia.org/wiki/Liquidity_trap
35. Economics Second Edition, David R. Kamerschen, Richard B. McKenzie, Clark Nardinelli, 1989, p. 366-371
36. Monetarism - Wikipedia: http://en.wikipedia.org/wiki/Monetarism
37. Economics Second Edition, David R. Kamerschen, Richard B. McKenzie, Clark Nardinelli, 1989, p. 421
38. Economics Second Edition, David R. Kamerschen, Richard B. McKenzie, Clark Nardinelli, 1989, p. 425
39. Degrowth - Wikipedia: http://en.wikipedia.org/wiki/Degrowth
40. Steady state economy - Wikipedia: http://en.wikipedia.org/wiki/Steady_state_economy