the plan for the future

Money of the Natural Economic Order

7 October 2008 - 18 June 2015


What is money?

Money first emerged because it was too cumbersome to trade goods and services directly. Without money, trade could become extremely complicated [1]. For example, if you were a rice farmer in need of a hammer, then without money, you had to find someone who could offer you a hammer, and needed rice at the same time. That was unlikely to happen. Maybe there was someone in need of rice, but he could not make a hammer, or there was someone who offered a hammer, but did not need rice at that time, but two months later.

Despite that, most humans did not need money for a long time because they lived in small bands and villages where everyone depended on each other and everyone helped each other [2]. People within the village exchanged their goods and services for favours and obligations. This meant, for example, that when a rice farmer needed a hammer, a tool maker would give him the hammer, in the expectation that if she needed rice, the rice farmer would provide it to her. Trade with the outside world was limited so that it could be done with barter [2].

As societies became more advanced, and many more products and services emerged, the informal system of favours and obligations did not suffice. The need emerged for a more formal system that could keep track of those favours and obligations. This formal system is called money. This money at least needed to have the following properties: (1) it could be exchanged for other goods and services, (2) its value had to be relatively constant or predictable over time, and (3) it must be possible to express the value of other items in terms of money. Money therefore is a medium of exchange, a store of value, and a unit of account.

The value of money comes from the fact that other people are willing to exchange their goods and services for it. Because other people are willing to do this, you are willing to do the same. The value of money is based on a belief, which is that you can exchange money for anything else [3]. Originally, the value of money could have come from the fact that it was also an item that people needed or desired. For this reason, grain, cigarettes and gold have been used as money. Money can also have value because a government requires that it must be used for payments.

Currently, money can be physical in the form of coins and bank notes, but most money nowadays exists as bookkeeping entries in financial institutions. Because stocks and bonds can be exchanged for money easily, those items have many of the features of money, even though they are not called money. For example, if you want to buy a car, you can sell some bonds for money, and then buy the car. It is interesting to note that the value of stocks and bonds depends on expected future revenues. For example, if a corporation is expecting losses, its stock and bonds are likely to drop in value.

Money is also a claim on future revenues. Like stocks and bonds, the value of bank deposits depends on the future revenues, in this case the future revenues of the bank. If the debtors of a bank cannot repay their loans, then the bank might not be able to repay its depositors, and those depositors may lose money. The value of money also depends on the fate of an economy. If fewer goods and services become available, and the amount of money remains the same, then the value of money could drop. In this way future revenues somehow limit the amount of claims, and therefore also money, that can exist.

Most money we currently use is bank debt, which are claims on future income of the debtors of banks as it is expected that the debtors repay their loans with their future income. Bank debt is often called bank credit. Those confusing terms come from bookkeeping entries. Your debt is on the left side of the bank's balance sheet that is named debit. It is also on the right side of your own balance sheet that is named credit. This is confusing because your debt is on the bank's debit side of the balance sheet while it is on the credit side of your balance sheet.

 your balance sheet:
 your house and other stuff
 cash and bank deposits
 mortgage and loans
 your net worth

 the bank's balance sheet:
 mortgages and loans
 cash and central bank deposits
 bank deposits
 the bank's net worth

Bank credit is money only because the law say so. Apart from bank credit, currency is also money. Currency consists of cash and central bank deposits. Because of legal requirements, banks need a certain amount of currency to make loans. There is also credit that is not money. For example, you could go to a shop and pay one month later. In that case, the shop gives you credit, but this is not money before the law. A small part of our money is not debt but cash. This money is often called currency, but currency not only consists of coins and banknotes, but also deposits that banks have at the central bank.

How the financial system came to be

Paul Grignon made an entertaining and informative documentary called Money as Debt which illustrates how the current monetary system works and how it came to be. Two ideas are crucial to understand. The first idea is that banks lend out money at interest. The second is that banks lend out more money than they have in their vaults. This may appear to be a fraudulent practise, but this idea is the cornerstone on which our modern economic system rests.

As the video shows, the current financial system evolved from the goldsmith's business. The goldsmith had a safe where he stored his own gold. Other people preferred store their gold at the goldsmith's safe because it was better guarded. So the goldsmith could make a business out of renting safe storage. People storing their gold did get a receipt that could be exchanged for the same amount of gold that they brought in. Soon people began to use the receipts of the goldsmith as money because paper money was more easy to use than gold coins.

Apart from this, the goldsmiths had another business, which was lending their own gold at interest. Because paper money was more easy to use than gold coin, borrowers also started to prefer paper money instead of gold. As a consequence, it rarely happened that someone exchanged paper money for gold coin, so that most of the gold remained in the vaults of the goldsmiths. Then the goldsmiths found out that they could not only lend their own gold, but also the gold of the depositors, so that they could earn more interest income.

When depositors started to realise that their gold was lent at interest, they started to demand interest on their deposits. At this point, modern banking started to take off, and paper money became known as bank notes. The goldsmiths then discovered that they could lend out even more gold than they had in their vaults. This practise is called fractional reserve banking because not all bank notes were backed by gold. When depositors started to realise that there were more bank notes circulating than there was gold in the vault of the goldsmith, the scheme ran into trouble.

Worried depositors went to the bank and exchanged their bank notes for gold. Soon the goldsmith ran out of gold and went bankrupt so that the bank notes became worthless. This is called a bank run. Because banking was important for economic developement, and because it was so profitable, the fraud of the goldsmiths was not banned. It became legalised and regulated instead, which meant that banks needed to have a minimum amount of gold available in order to pay depositors. Furthermore, central banks were invented to support banks in trouble.

The financial system operates smoothly most of the time because the depositors of a bank rarely ever take all the money out at once. Central banks can provide temporary credit when too many people come to the bank to demand their money back. It is also possible to create additional money for interest payments because money is not backed by gold any more. Central banks can fix financial crises by printing more currency so that banks can always have enough money to pay out depositors. This made it possible to create far more debt than was possible under the gold standard.

How banks create money

Money is created when a bank makes a loan and money is destroyed when the loan is repaid. Consider a simple scenario, in which a bank has a capital of € 20,000, € 80,000 in deposits and € 60,000 in loans and € 40,000 in cash. Assume it is the only bank in a small self-sufficient village called Déjà Vu.

 the bank's balance sheet before the loan:
 loans 60,000
 cash 40,000
 bank deposits 80,000
 the bank's net worth 20,000

A villager then wants to start a business and takes out a loan of € 75,000. In exchange for the loan she receives a deposit of € 75,000, which she can use to set up the business. After this transaction, the balance sheet has changed.

 the bank's balance sheet after the loan:
 loans 135,000
 cash 40,000
 bank deposits 155,000
 the bank's net worth 20,000

As you can see, the amount of deposits miraculously increased from € 80,000 to € 155,000. The miracle is that the loan gave rise to a deposit. Because withdrawable bank deposits are money before the law, the bank has created money.

If the villager had issued a bond instead and sold it to people holding deposits at the bank, no money would have been created at all. Still, a bond is a debt for the issuer based on credit given by the bond holders, but this credit is not money before the law.

A bond could be traded for cash so the difference between cash and a bond might seem trivial. However, bonds can change in value while bank deposits are always paid at face value. This makes banking a tricky business because a bank might not be able to sell its loans at face value if needed.

The problematic nature of interest on money

The buildup of capital, which consists of knowledge, factories and buildings, made it possible to improve living standards for most people around the globe. Capital accumulates through interest. The accumulation of capital increases overall wealth. But can the accumulation of money increase overall wealth? The answer is clearly no. Money is not the same as capital and the flow of money is vital to the economy so that accumulating money could harm the economy.

Capital takes effort to build but money can be created at zero cost. Why must people work for money that governments and banks can create without cost? This made some people reconsider the gold standard, which means that the creation of money is restricted by the available amount of gold. Gold takes effort to mine, but the gold standard does not solve the problematic issue of interest on money. This poses a challenge in the longer term, as the following example demonstrates:

If someone brought a 1/10 oz gold coin to the bank in the year 1 AD, and the money remained there until the year 2000 AD, collecting a yearly interest of 4%, the amount of gold in the account would have been 3.6 * 10^31 kilogramme of gold weighing 6,000,000 times the complete mass of the Earth. The yearly interest would be an amount of gold weighing a mere 240,000 times the complete mass of the Earth.

Somewhere along the way the scheme would have run into trouble because the money in a bank account is backed loans the bank has made. A financial crisis occurs when borrowers are not able to repay their debts. The system of interest on money makes impossible to repay all debts in gold, so financial crises are inevitable if gold is used as money and there is interest on money.

Lenders can corner the market for money just by charging interest on money, and by doing so they can ruin the economy. At first the available credit could cause inflation, but then a severe depression could set in as there would not be enough money to pay for the interest. Lenders could then buy up all existing businesses and homes at firesale prices. Many people would then become their servants.

It is the age old problem of usury that has caused misery throughout history. Interest on money can also be seen as an important cause of anti-Semitism as moneylenders and bankers were often Jewish. Adolf Hitler blamed Jewish bankers for the economic crisis in Germany. US President Thomas Jefferson may have realised what could happen, even though he did not identify interest on money as a possible cause of the misery he foresaw, when he stated:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them, will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.

Banks create money when a new loan is made. The money is destroyed when interest is paid or the loan is paid back. As long as the loan is not repaid, the borrower pays interest to the banks, and indirectly to the holders of deposits. If the holders of deposits do not liquidate their accounts, there will never be enough money to repay the debts with interest, so not everybody can fulfil his or her obligations unless new debts are created. Periodically this can lead to an economic crises when debts have to be written off.


Interest contributes to financial crises via the mechanism of risk. First of all, interest rates reflect the risks involved in lending 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 might make those borrowers worse off. They might be better off if they could not borrow at all and had to curb 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 would be more effective if governments do not distort the market by giving guarantees and subsidies.

Monetary end game and zero-bound interest rates

During the financial crisis interest rates first went up because there was a risk of banks collapsing. This made people wary of depositing money at banks. Later, interest rates went to zero because central banks started to lend money to the banks. This reduced the possibility of a financial collapse. There are a number of other developments that contributed to zero-bound interest rates. Near zero interest rates could be the end-game of the current financial system.

First of all, there might be too many savings or too few investment opportunities world-wide. There could be limits to growth and there might be enough capital already so that new investments tend to yield less. Furthermore, debt levels have escalated in recent decades, which does not support spending. Finally, free and deregulated money and capital markets have made it possible to reallocate investments easily and at low cost, which also has pushed down interest rates.

As a consequence, near-zero interest rates do not seem to produce robust economic growth. Interest rates might go up, but it seems unlikely that they will reach pre-crisis levels, and they are likely to go down again in the next recession. Japan has had near-zero interest rates for decades. It seems therefore possible that interest rates will be near zero for a long period of time, and possibly forever. To free the market for savings and investments, interest rates may need to go negative.

Money of the Natural Economic Order

The Natural Economic Order

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 labeled 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 Wörgl experiment, which has been discussed in A Short Introduction to Natural Money. Famous economists such as Irving Fisher and John Maynard Keynes thought that free money had potential.

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 clearly 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 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 [5]:

Proudhon asked: Why are we short of houses, machinery and ships ? And he also gave the correct answer: Because money limits the building of them. Or, to use his own words: "Because money is a sentinel posted at the entrance to the markets, with orders to let no one pass. Money, you imagine, is the key that opens the gates of the market (by which term is meant the exchange of products), that is not true-money is the bolt that bars them."

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, most notably gold, does not depreciate like goods so it can be stored without 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 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 posessors of other goods. He came up with the following observation [5]:

A and B, separated by space and time, wish to exchange their wares, flour and pig-iron, and for this purpose need the money in C's possession. C can at once effect the exchange with his money, or he can delay, hinder or forbid the exchange; for his money gives him the freedom of choosing the time at which it shall take place. Is it not obvious that C will demand payment for this power, and that A and B must grant it in the form of a tribute on their flour and pig-iron. If they refuse this tribute to money, money withdraws from the market. A and B must then retire without completing the sale and undertake the heavy cost of returning home with their unsold products. They will then suffer equally as producers and consumers; as producers because their wares deteriorate, and as consumers because they must do without the goods to obtain which they brought their products to market.

Gesell concluded that the owners of money could exploit their advantagous 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, higher interest rates 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. Now the banks are hoarding money because they do not see investment opportunities at the prevailing low interest rates. Economic theory suggests that the equilibrium interest rate is negative, and that equilibrium cannot 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 [5]:

Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money.

And the consequence Gesell envisioned was that [5]:

In whatever way the money is invested, it will immediately create demand. Directly, through purchasing, or indirectly through lending, the possessor of money will be obliged to create a demand for commodities exactly proportionate to the quantity of money in his possession.

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.

The Austrian School of Economics

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. The goldsmiths issued more claims than there was gold in their vaults and in this way they created money out of nothing. This scheme sometimes collapsed. Banks do essentially the same, 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. The Austrian School opposes the idea of banks creating money. Instead it proposes 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 the Austrians, only savings should be used for loans, so that there is always enough gold or money in the vault to pay depositors [6].

In the view of the Austrian School credit causes interest rates to be lower than their market equilibrium, so that bad investments 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 [6]. Because interest rates cannot go below a certain minimum level, credit will dry up once this level is reached.

Central banks meddle with this process. They can 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 [6]. 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:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

The type of money determines the outcome. If interest rates could go negative, there would always be credit, and the owners of money would be forced to choose between investing and consuming, so that the economy would not enter a depression. In that case the market could set the interest rate and central bank intervention would be superfluous. This could produce a higher return on capital and more employment so that capital as well as labour might be better off.

Money reformers tend to criticise fractional reserve banking or the ability of banks to create money. If the problem is excess credit, rebranding it and not naming it money does little to solve it. The distinction between savings and credit is not always clear. A simple example can demonstrate this. Assume that banks only lend out money in savings accounts and that only savings yield interest. Imagine that Mary and John only do business with each other and that they both have € 1,000 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 € 1,000 on 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 Mary and John do on a larger scale. They can act as an intermediary between Mary and John 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 could produce inefficiencies that may be resolved via arbitrage.

Most economists think that the views of the Austrian School are outdated and do more harm than good because they believe that policy actions based on Austrian School theories can make recessions and depressions last longer and become more severe than needed [7]. Still, the Austrian School has been important because it stresses the need for an effective mechanism to restrict credit in order to prevent booms and busts from occurring. The Austrian School also stresses that cental bank policies can have undesired side-effects because they can distort the markets for money and capital.


Natural Money

Natural Money is based on the ideas of Gesell and it also provides a mechanism to restrict credit. Governments and central banks do not manage the econonomy via aggregate spending an interest rates. Natural Money is currency with a holding tax, a maximum interest rate of zero and a fixed amount of currency units, as has been explained in A Short Introduction to Natural Money. The holding tax means that all currency in circulation is taxed and spent back into circulation by the issuing government.

It is not allowed to charge interest on Natural Money currencies. The holding tax does not apply on investments and loans so it can be attractive to lend out money at a maximum interest rate of zero. The fixed number of currency units and most notably the maximum interest rate limit the creation of credit. This does not have to harm the economy as the holding tax could provide a permanent stimulus.

Interest on money can be an important cause of financial instability, economic crises and exploitation, but it is the market that determines the interest rate. If the interest rate on the market is positive, then people are not willing to lend out money at an interest rate of zero or lower. For that reason it seems that an introduction of Natural Money probably would not have been succesful in the past.

The time for Natural Money may be coming as the market may favour interest-free money in the future. A number of developments have contributed to this situation, such as reduced population growth, more liquid financial markets, and a surplus of savings and capital. This is discussed in more detail in The Natural Economy. It is this possible that this will not change in the foreseeable future. If markets could operate properly, in the sense that savings must equal investments, then interest rates might be negative. Currently interest rates might be artifically pushed up because they cannot go below zero.

The holding tax could provide a constant stimulus in the economy so that central banks do not have to manage interest rates. They also do not have to print more currency to prevent financial and economic crises from occurring. It is likely that lenders will only take limited risks when lending out money, which will stabilise the financial system. Risky investments will then require more equity, which might be a good thing from the viewpoint of financial and economic stability.

Role of the banks

With Natural Money banks are much like they are nowadays. The maximum interest rate at which they can lend funds is zero. Because there is a holding tax on money, depositors are expected to accept negative interest rates on deposits, so that banks can have a profit margin. Banks can offer fixed rates to savers. There is a central bank that can support banks by lending money to them at an interest rate of zero if they cannot borrow elsewhere. Governments may also choose to guarantee deposits at banks.

Banks have to comply to the following rules:
- Banks can not invest money that has been entrusted to them. They can only lend money without charging interest.
- It is possible to have administrative accounts. Those accounts are similar to cash and not subject to the risk of banking.
- Money in administrative accounts cannot be used for lending so the money in those accounts is subject to the holding tax.
- It is possible to have deposit accounts, such as savings accounts. The money in those accounts is not subject to the holding tax.
- Depositors pay a fee to the bank for mediation costs.
- Banks can only charge mediation costs to the saver and not to the borrower as fees on loans are interest.
- Banks can charge a maximum interest rate of zero on loans so they tend to select the least risky borrowers.
- Deposits at banks can have a government guarantee and banks can borrow from the central bank.

The role of the central bank is somewhat different. In the current situation central banks can influence the money supply by buying and selling bonds or other assets in exchange for currency. If central banks buy bonds in exchange for currency they are printing money. If they sell bonds, they do the opposite. Central banks can also influence interest rates. They set the short term interest rate.

With Natural Money, the interest rate is set by the market. 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 higher interest rates. Banks will therefore not borrow at the central bank if they do not have to, so that they only will do this in case of an emergency.

Apart from banks there might be financial service providers that are similar to banks and offer similar services. Those financial service providers cannot offer fixed rates and do not have central bank support. On the other hand, they can invest in assets that promise a higher yield than zero. Financial service providers can offer administrative accounts, but deposits are converted into shares that have a price risk attached to them. Those shares can be converted back into money in an administrative account and then be used for payment. In times of emergency financial service providers may limit withdrawals or opt to become closed-end funds.

Who benefits from lower interest rates?

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 [4]. While most people could benefit from lower interest rates, it is the top 1% that could lose the most from low interest rates.

Interest and sustainability

When interest on money is charged, 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 [8]. The following example comes from the book Poor Because Of Money of Strohalm [9]:

Suppose that a cheap house will last 33 years and costs € 200,000 to build. The yearly cost of the house will be € 6,060 (€ 200,000 divided by 33). A more expensive house costs € 400,000 but will last a hundred years. This house will cost only € 4,000 per year. For two thousand euro per year less, it is possible to build a house that is not only more pleasant to live in, but will also cost less in energy use.

After going to the bank for a mortgage application the math changes. If the interest rate is 10% then the expensive house will not only cost € 4,000 per year on write-offs, but during the first year there will be an additional interest charge of € 40,000 (10% of € 400,000).

The long lasting house now costs € 44,000 in the first year. The cheaper house now appears less expensive again. There is the yearly write off of € 6,060 but during the first year there is only € 20,000 in interest charges. Total costs for the first year are only € 26,060. During the following years, interest charges are lower, but they still make the less durable house cheaper.

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.

Risk in the financial system and the economy

Natural Money could reduce risk in the financial system for a number of reasons. First, the holding tax is likely to produce a permanent stimulus, reducing the risk of economic downturns. Second, a restriction on charging interest is likely to reduce the risk that lenders are willing to take. Third, debts cannot grow out of control because of interest charges. Because of this economic cycles, and therefore cycles of debt creation and liquidation, will be mitigated.

When money stops flowing and liquidity dries up, systemic risk increases. In the current financial system it is not expensive to be liquid, at least in the short term. With a holding tax on money this could change. Investors have to weigh the cost of going liquid against the potential losses they can make with investing. Those potential losses are subdued as the holding tax provides a constant stimulus that may prevent significant economic downturns from happening.

Interest is an allowance for risk so interest allows for risk in the financial system. People, organisations and countries that have troublesome debt levels can borrow more if they are willing to pay higher interest rates, which further erodes their capacity to repay. If there was no interest on money, creditors are less willing to lend money to risky debtors so debtors will be forced to reorganise their finances in an earlier stage.

Compound interest is infinite and most money is put into circulation by banks at interest in the form of a debt. As a consequence more and more debt is needed to keep the economy afloat. Without interest on money, debts cannot grow because of interest, while every down payment reduces the principal. As a consequence, debts are less likely to grow out of control.

To some extent economic cycles are caused by interest on money. During the boom phase, individuals and corporations can take on more debt, which further fuels the boom, while the bust phase debts are liquidated, which further intensifies the bust. With a maximum interest rate, it is not attractive to invest in debt during an economic boom as investments in equity promise better returns. Consequently there will be less debt liquidation during a bust.

As the risk in the financial system and the economy reduces because of Natural Money, this could put a downward pressure on interest rates, as interest is also a reward for risk. It tseems that Natural Money promotes its own success and that a maximum interest rate of zero might be sustainable for the foreseeable future.



Natural Money can help to reduce unemployment as the holding tax can provide a constant stimulus [10]. Not all unemployment can be eliminated because not everybody meets the requirements of potential employers. Often there is a surplus of low skilled labour. But as interest rates go lower, more people can be profitable employed, so that Natural Money could have a positive impact on employment.

Profits tend to reflect the risk of doing business so that reducing the risk of doing business could increase the overall level of wealth as well as wealth equality. Unless there is a monopoly, excess profits tend to lead to more competition and a higher demand for labour, which lowers the price of products or increases the price of labour. As profits tend to reflect the cost of doing business, the reward for labour could rise 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. Because the economy could be more stable with Natural Money, the risk of doing business could also be lower. 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. For this to happen, a country must be politically stable and property rights must be respected.

Balancing trade

The holding tax on money can help to correct trade imbalances. An exporting country will be inclined to spend the foreign currencies it received. This means that it is more likel that for each import, a matching export will be found. A country that lacks exports may need to replace imports with locally produced goods and services. A holding tax on money may therefore cause international trade to be based on comparative cost advantages. Countries can give each other credit but the maximum interest rate could help to limit this credit.

Complete industries have been wiped out in the United States because the US dollar was propped up by currency hoarding by exporting nations like China and Japan. This can be seen as a process of reverse economic development. On the other hand, this may have created excess capital in China and Japan. Those countries produced goods and services for US dollars that may prove to be worth less in the future.

In the past tariffs have been used to defend national industries. 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. A holding tax on money might do a better job in stimulating balanced trade.

Government regulation and intervention

Government regulations and interventions can produce onwanted side-effects. In many cases there are loopholes and opportunities for profit at the expense of the general public. If the economy could achieve the goals intended by government intevention automatically as a result of market forces, this might be more efficient because it could reduce fraud and misuse of funds.

Natural Money could provide a number of benefits that might reduce the need for government intervention and regulation. First of all, the economy is likely to do well by itself and there might be no need for governments to interfere with the economy. The holding tax on money provides a stimulus so that governments do not have to stimulate the economy. There could be more employment so that there is 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.

Low or negative interest rates may also benefit the poor and the middle class so that there might be less need for taxing the rich. The problem with taxing the rich is that the rich have many means at their disposal to evade taxes which the middle class and the poor do not have. Lower yields on their investments and higher labour income may be able to do what taxes and legislation failed to do.

Local currencies

One of the core elements of economic development is specialisation and division of labour, often based on the economies of scale. In some cases a certain reduction in the division of labour might enhance the efficiency of the economy as there could be diminishing returns on investments in social complexity [11]. Local currencies may have benefits for communities and can produce more local economic activities, but only when the economies of scale are limited.

Local and regional governments could issue Natural Money currencies to support local and regional development. Those currencies could circulate along with the national currency. People will be inclined to spend the local currencies first because they can only be used locally. This might stimulate local trade [12]. A multitude of local currencies could be confusing and reseach has shown that no more than 20% of the currency in circulation could be local.

Examples of interest-free money

The miracle of Wörgl

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 [13].

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 [13].

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 [13].

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' [13].

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 [13].

The Schwanenkirchen Wara

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 [14].

The United States

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 [14].


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 [15].

Interest in history

Joseph in Egypt

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 [20]. 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 [21]. Some historians suggested that the wealth of Egypt during the reign of Ramesses the Great was built upon the grain financial system [22]. 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 [3]. 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.

Periodic debt forgiveness

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 [18]. 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 [19].

The freedom advocated by the Covenant Code of Exodus, the septennial year of release in Deuteronomy and the Jubilee Year of Leviticus may have been concrete legal practises freeing rural populations from debt servitude and the land from appropriation by foreclosures [19]. It is reasonable to assume that those concepts can work well today. The creation of debt under a system of interest can be seen as fraud because new debts are needed to pay off the interest on existing debts, making debts grow further.

Solon's economic reforms

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 [24].

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 [24].

Solon's reforms were concentrated on the constitution and the economy and his reforms on debt and interest are just one of them [25]. 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 [25].

The decline of Rome

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 [26]. 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:

Unable to protect their subjects against the public enemy, unwilling to trust them with arms for their own defence; the intolerable weight of taxes, rendered still more oppressive by the intricate or arbitrary modes of collection; the obscurity of numerous and contradictory laws; the tedious and expensive forms of judicial proceedings; the partial administration of justice; and the universal corruption, which increased the influence of the rich, and aggravated the misfortunes of the poor. A sentiment of patriotic sympathy was at length revived in the breast of the fortunate exile; and he lamented, with a flood of tears, the guilt or weakness of those magistrates who had perverted the wisest and most salutary institutions.

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 [27]. 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.

Western Europe in the Middle Ages

Restrictions on charging interest

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 however were done as barter while taxes were mostly paid in kind. There were metal coins as well as promises [28]. 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 [29]. In 784 the Council of Aachen forbade charging interest altogether. In Western Europe this rule was more strictly enforced during the subsequent centuries [30]. 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 [29].

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 and 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 [31]. 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 [32].

Fiat and scrip currencies

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 [1].

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 shunned [20].

Will it work?

Superior efficiency can enforce the change

Natural Money can improve the performance of the economy. The holding tax can provide a constant stimulus. There will be less need for government and central bank interventions that can distort markets and cause moral hazard. Debts cannot grow out of control as there are no interest charges. There is a limited reward for risk on debts, so risky lending will be curbed. As a consequence the economy may perform better and there may be fewer economic crises.

The holding tax on Natural Money is an incentive to use the money for investment, consumption or lending without interest. As the economy performs better, while no additional currency is created, money supply can stabilise. When there is economic growth, more goods and services are offered against the same amount of money, and prices can fall. If prices fall, the value of the currency rises and zero interest loans can have positive real returns.

If economic growth improves, which seems likely given the performance enhancements embedded in the design of Natural Money, real returns on capital can also improve. This implies that real interest rates on Natural Money deposits can also be higher. The following example can illustrates this. Assume that the change in the value of a currency (inflation or deflation) equals the change in the amount of money minus economic growth. This is a simplistic and a debatable assumption. Assume further that economic growth in a mature economy can rise from 2% to 3% on average by implementing Natural Money.

It seems that with Natural Money, because the amount of currency does not change, the amount of outstanding bank credit will stabilise after some time. Assume that credit grows by 6% in the current financial system and does not grow with Natural Money. Assume also that a bank deposit with Natural Money has a nominal return of -2% while the and interest bearing deposit yields a nominal return of 3%. Then the real returns on both deposits can be calculated as follows:

 situation  interest on money   natural money 
 interest rate (i)+3% -2%
 change in amount of money (m) +6% 0%
 economic growth (g)+2% +3%
 real return (i - m + g)-1% +1%

The example shows that there is reason to believe that Natural Money deposits have better yields than interest bearing deposits. This has far reaching implications as there will be capital flight to Natural Money economies so interest based economies will be forced to switch over to Natural Money. The near zero real interest rates may stay in mature economies because returns on investments as well as risks do not justify higher interest rates. Japan with its aging population and decades of near zero interest rates could be a precursor of what is about to happen in the rest of the developed world.

Uncovering the prequisites

The complementary currency of Wörgl was a stunning succes, but other experiments with free money did not yield similar results. It was a fluke, but it highlighted a hidden potential. At least in theory, it seems possible to have stable economic growth without unemployment, or something close 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 seems to be the maximum interest rate of zero. How can the market for money and capital operate if there is ceiling on interest rates? This depends on the amount of loans that would require a higher interest rate. If this amount of loans is relatively small, there would be no problem. This may well be the case. If the holding tax is 1% per month, there is a margin of 13% per year to work with. This means that zero percent loans yield 13% per year more than cash.

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, as they often do not have a holding tax. As a consequence the Natural Money currency will be used for transactions. Investing in Natural Money deposits can also be more profitable. It seems that Natural Money can work under the same conditions as existing fiat currencies.

People are not familiar with the concept of Natural 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 the money may be worth more in the future, may not be very appealing unless they can see that they are better off. It is important to educate people about Natural Money before implementing it.

Money illusion can be a serious problem with Natural Money. People may find it difficult to accept lower wages or selling their house at a lower price, even when all other prices drop. Price inflation is more easy to cope with as price inflation makes it appear that people have more to spend even when this is not true. Natural Money may make it appear that people have less to spend even when real incomes rise.

Maximum interest rate

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 [40].

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 can 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 a 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 reach infinity, they can only be sustained by zero or negative interest rates. The alternatives to zero or negative interest rates are widespread defaults and destroying the currency. This leads to a destruction of money and creates new room for positive interest rates.

Frequently asked questions

Monopoly 1935

Questions about money supply and debt

Can the economy grow with a stable money supply?

Prices can adapt to the available amount of money. This can be demonstrated by the game of Monopoly. In the sandard version bank notes have denominations ranging from 1 to 500. There are also games with bank notes that have denominations ranging from 100 to 50,000 and all prices are multiplied by 100. Still, the game is exactly the same. Economists often assume that if there is economic growth, more money is needed to support it. However, the quantity of money is not the same as the denomination on the bank note. If prices drop, the amount of money buys more goods and services.

With Natural Money the economy may grow while the amount of currency is stable. As there is a maximum interest rate, direct investments may be preferred to loans, so the amount of credit can also stabilise. Economic growth implies that more goods and services become available, so prices can drop and the value of the money can rise. This can be explained with the equation M*V = P*T. If the amount of money M is constant, and the rate at which money circulates in the economy V remains stable over time, then economic growth will reduce the price level P because it increases the value of economic transactions T.

Money illusion can be a serious problem with Natural Money. People may find it difficult to accept lower wages or selling their house at a lower price, even when all other prices drop. Price inflation is more easy to cope with as price inflation makes it appear that people have more to spend even when this is not true. Natural Money may make it appear that people have less to spend even when real incomes rise.

Can the economy collapse if debt is not increasing?

The following example demonstrates that interest on money is unsustainable in the long run. If someone brought a 1/10 oz gold coin to the bank in the year 1 AD, and the money remained there until the year 2000 AD, collecting a yearly interest of 4%, the amount of gold in the account would have weighing 6,000,000 times the complete mass of the Earth. The yearly interest would have been 240,000 times the complete mass of the Earth.

As interest must be paid from debts, the scheme would have collapsed long before that. At some point people would not be able to repay their debts. There is not enough gold to sustain the scheme. Some ways to avoid or postpone a collapse are lowering interest rates, printing currency and thus inlflating debts away and encouraging people to go further into debt. This has happened in recent decades.

Is it not better to introduce a gold standard to curb the growth of debt?

The gold standard had been in force throughout the 19th century. Between 1815 and 1914 there was no major war in Europe while the Industrial Revolution increased overall living standards. Proponents of the gold standard think that it may still work well today. Gold and silver can be stored in a safe so it is not possible to levy a holding tax under the gold standard. As a consequence there will be no incentive to lend out money without interest.

The gold standard can enforce monetary discipline but it may be a harsh form of discipline. There may be depressions from time to time as bank runs can cause financial crises. The creation of central banks did alleviate that problem, but this also allowed for a centralisation of power in the hands of central banks. A renewed gold standard may eventually revert back into fiat currencies like we have now because interest on money is unsustainable in the long run. At some point there may not be enough gold to stabilise the financial system and the gold standard will be defaulted upon.

Why is it that the problems in the interest based financial system come to light right now?

If economies grow then leverage can make interest work positively for the economic development, because the extra growth above the interest adds to prosperity. That we see in emerging economies, but also in many European countries in middle of the last century. Once the economy turns into a mature phase, economic growth becomes a mere statistical fiction. The growing debt will become a drag on the economy.

In 1971 the link between gold and money, which over the years had become increasingly detached, was completely deserted. Financial innovations have since then created the possibilities for debt to grow further. This did not seem a problem for a long time. Now debts have become so large that many people get into financial trouble and the interest based financial system is at risk.

Questions about money without interest

May capital earn interest?

Capital should earn interest otherwise there will be no incentive to employ it. Only interest on money should be forbidden and money should not be capital. Gold and silver are capital because it takes effort to mine precious metals so gold and silver cannot be lent without interest. Fiat money is not capital as it requires little effort to produce. For this reason fiat money is not capital and does not need interest.

Is money without interest money for free?

In the current financial system banks and governments can create money with little effort. This is money for nothing. The value of loans reduces over time because of price inflation. Natural Money is not for free because the money supply is constant. The borrower has to pay back the same value. If the economy grows then the value of the loan increases. The interest based financial system penalises savers when interest rates are low and borrowers when interest rates are high.

How does a ban on interest reduce excessive risk taking?

Since there is no allowance for risk money will only be lent money to credit worthy people and businesses. Without interest payments the credit worthiness of borrowers will not be eroded. Because of the holding tax on money, there are no booms and busts. It is less likely that borrowers get into trouble because changing economic conditions.

Is a saver worse off without interest?

The interest rate the bank pays to savers is often lower than the price inflation rate, and nearly always lower than the growth of money supply. When the value of money is not eroded by printing of money, savers will be better off with zero percent interest in most cases. In the Natural Economy economic growth increases the value of money so there is often a real return on money without interest.

Is a borrower worse off without interest?

If the interest rate on the loan is lower than the inflation rate, a borrower will be worse off without interest. This is usually not the case as most loan rates are higher. In recent years interest rates for high quality mortgages have been low. Often they have been lower than the increase in money supply.

Interest rates in Japan are near zero percent. Does Japan have Natural Money?

The interest rates in Japan are low but this is not Natural Money. About 20 years ago, the banking system in Japan had been inflated by credit. Since then interest rates have been around zero percent to prevent a collapse of the monetary system. For the same reason interest rates in the United States and Europe have been low in recent years.

Do Islamic countries have Natural Money?

Charging interest is forbidden for Muslims, like it was for Christians. Islamic banks take a share of the profit of the companies they invest in and depositors get a share in the profit of the bank. Islamic banks do not lend money at interest but invest in the operations of their customers. Islamic banks do not provide loans at zero interest.

Questions about banking with Natural Money

Should banks be nationalised?

Banks have a special role in society because they are keepers of the financial system. With Natural Money banks must not be able to use money entrusted to them for investing. They must use all funds to make loans without interest. Banks can do this for their own risk. Banks should get an compensation for the risk of loans not being repaid. Depositors will pay for this compensation. Banking for profit is possible with Natural Money so banks can be private companies.

Are savings safe with Natural Money?

The Natural Economy will be stable. Bankruptcies and bad debt are rare. When certain loans cannot be repaid, depositors may loose some of their money. As there are less economic crises with Natural Money, it is less likely that a bank will become insolvent. Liquidity issues may occur more often when banks are smaller. This may mean that deposited money can be locked in a savings account until loans are repaid.

Economic questions

Should a government protect national businesses and employment from international competition?

Competition from abroad is not the cause of the financial crisis nor is it the true cause of unemployment. The free flow of money in international financial markets is causing crisis and unemployment as countries can manipulate currency rates in order to sustain unbalanced trade. With Natural Money international trade will be balanced as the holding tax on money will make it unattractive to hold currency reserves.

When trade is balanced then the stimulus of the holding tax will remain within the borders of the country. It is also possible to have a basic income as countries do not have to fear international competition. Consequently there will be sufficient employment and income security for the citizens.

Will Natural Money make international trade more difficult?

It is more difficult to have deficits or surpluses on the current account for a longer period of time. When a country pays another country in Natural Money for goods or services, the other country is encouraged to lend out the money or use the money for investment or consumption in the issuing country.

It is possible to have an international currency unit, which can be based on all Natural Money currencies in circulation. The holding tax rate of the international currency unit can be a weighed average of the holding tax rates of the underlying Natural Money currency units. The proceeds of the holding tax will go to the governments issuing the Natural Money currencies. There may be a surcharge on the international currency unit for international organisations like the United Nations.

Questions about the transition to Natural Money

Is a transition to Natural Money possible?

It is possible to start up local Natural Money currencies. If they are a success then more local Natural Money currencies will be set up and countries will become interested in introducing Natural Money on a national scale. Change will come when the problems are serious and when successful examples have demonstrated that Natural Money is the way out of the current crisis. The stakes are high so the power that be will try to block the reform.

How can a transition to Natural Money take place?

There are two approaches to the transition to Natural Money: gradual and big bang. During a big bang approach all balances are converted to Natural Money currencies after a political decision. A big bang will require a large effort in a short period of time. People have to be informed and businesses have to adapt their administrative systems in this short period. A big bang is risky as it is difficult to address issues that emerge during the transition.

In a gradual approach Natural Money currencies spread and replace interest bearing currencies for payment. During the initial phase Natural Money currencies are backed by interest bearing currencies and there is a fixed exchange rate between them. During the gradual approach issues can be addressed when they emerge and this provides the flexibility to make the process of transition as little disruptive as possible.

The introduction of Natural Money may undermine confidence in the interest based financial system and consequently banks may fail. The government may be forced to take over the administrative systems of the banks in order to let payments continue without disruption. The government may also be forced give a guarantee on deposits. A debt forgiveness may also be executed but this issue may also be addressed after the transition.

How can deposits and debts be converted into Natural Money?

All debt denominated in fiat currency is not worth more than the currency itself. As money is converted to Natural Money, deposits and debts will also be converted to Natural Money. After the conversion debts will be interest free while depositors will pay a compensation to the bank. Deposits are not subject to the holding tax and the compensation paid to the bank will be a fraction of the holding tax so deposits will still be attractive. If the transition is gradual then debts and deposits must be transferred to Natural Money in the same pace.

Political questions

Why do governments encourage debts of consumers and businesses?

To keep the economy growing, debts have to grow. Deposits grow because rich people can save money and receive interest on this money. If deposits grow while now new debts are made then the money supply decreases and this weakens the economy. Debts have to grow otherwise the economy collapses and the interest on the debts cannot be repaid.

Is a holding tax on money a tax on the rich?

The holding tax on money is not a tax on capital. Stocks, real estate and money lent are not subject to this tax. The holding tax on money is aimed at keeping the money in circulation, so the economy will not falter. The purpose of the holding tax is not to redistribute money.

Is inflation not a holding tax on money?

Inflation is not the same as a holding tax on money. Apart from fluctuation in supply and demand for goods and services, inflation is caused by increasing the money supply, even though this link is not always directly visible. Inflation is a stealth tax on money and many people are not aware of this.

With Natural Money the money supply does not grow but money is taxed directly, which makes the taxing visible. The holding tax will also stimulate people to circulate the money. Inflation does not have the same effect unless the inflation rate is high. High inflation can undermine the confidence in the money.

Why do religions condemn interest on money?

The Bible and the Quran state that interest on money is forbidden [18]. The Jews wrote this rule down in the Old Testament. In Islam interest is forbidden. Christianity also condemned charging interest on money. Based on the evidence it is likely that God sees charging interest as one of the most gravest sins.

What is the relation between interest and mass migration?

Economic refugees are coming to rich countries in increasing numbers. The driver behind mass migration is the difference in wealth between rich nations and poor nations. Interest on debts made it difficult for poor countries to reduce their debt burden. Poor countries have lured into debts to create profits for the oligarchs [+].

In his book War Cycles Peace Cycles Richard Hoskins argues that interest on money causes migration. According to Hoskins the consequence of having a debt/usury-based monetary system is a declining birth rate. When interest compounds debt over time, due to the lack of enough money to pay the existing debts, the debt-plagued native population stops reproducing due to the high cost of living.

This in its turn leads to the influx of foreign peoples. Hoskins states that mass immigration is an absolute necessity for any interest based system since new money must always be borrowed into existence. Immigrants represent new debt-free borrowers and bank customers [+].

What is the relation between interest and war?

When an economy collapses because the interest on debt can no longer be paid, the following scenarios can unfold:
- A war can be started to obtain access to new markets so the economy can grow to sustain more debt and interest payments.
- It is possible that a war will be started to ensure that the financial collapse will be attributed to the war and not to the banking system and interest payments.
- It is possible that a war is started to increase inflation by printing money. This eliminates debt and generates new economic activities.
- A chain reaction of bankruptcies may emerge as the economy goes into a depression. Many people will become dissatisfied. The leaders of a country may then look for an enemy to draw away the attention of the public from the economy.


1. History of Money - Wikipedia (as on 12 October 2013):; current version:
2. A Brief History of Humankind - Part III: The Unification of Humankind, § 8.2, Dr. Yuval Noah Harari,, 2013:
3. A Brief History of Humankind - Part III: The Unification of Humankind, § 8.3, Dr. Yuval Noah Harari,, 2013:
4. Poor Because of Money: Our theory on interest, Henk van Arkel and Camilo Ramada, Strohalm, 2001:
5. The Natural Economic Order, Silvio Gesell, Translated by Philip Pye, Peter Owen Ltd, 1958:
6. Austrian Business Cycle Theory - Mises Wiki (as on 4 March 2015):; current version:
7. Austrian School - Wikipedia (as on 14 September 2013):; current version:
8. A Strategy for a Convertible Currency: Impact on the Ecology, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990:; backup copy:
9. Poor Because of Money: The consequences of interest, Henk van Arkel and Camilo Ramada, Strohalm, 2001:
10. A Strategy for a Convertible Currency: Impact on Employment, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990:; backup copy:
11. Joseph Tainter - Wikipedia (as on 28 March 2014):; current version:
12. A Strategy for a Convertible Currency: Decentralised Issuing of Stamp Scrip, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990:; backup copy:
13. Laboratory readings: Wörgl's Stamp Scrip – The Threat of a Good Example?, Martin Oliver,, 2002:; backup copy:
14. History of Money, 1930 – 1933,; backup copy:
15. Scrip / France,
17. Poor Because of Money: The reason for the search, Henk van Arkel and Camilo Ramada, Strohalm, 2001:
18. Scripture references to usury, interest, The Bible, The Quran:
19. The lost tradition of Biblical debt cancellations, Michael Hudson, 1993:; backup copy:
20. A Strategy for a Convertible Currency: Some Historical Precedents, Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990:; backup copy:
21. Ramesses II - Wikipedia (as on 3 September 2013):; current version:
22. This was mentioned on Discovery Channel or National Geographic but I was unable to recover the source

24. Poor Because of Money: Solon, the Greek economist, Henk van Arkel and Camilo Ramada, Strohalm, 2001:
25. Solon - Wikipedia (as on 21 March 2014):; current version:
26. Decline of the Roman Empire - Wikipedia (as on 21 March 2014):; current version:
27. Rome and Romania, 27 BC - 1453 AD: III. Third Empire, Middle Romania - Early Byzantium,; backup copy:
28. Money in the Middle Ages, Simon Newman, The Finer Times:; backup copy:
29. 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:; backup copy:
30. The Doctrine of Usury in the Middle Ages: III. The doctrine of usury during the dark period, Simon Smith Kuznets, University of Chicago:; backup copy:
31. The Doctrine of Usury in the Middle Ages: IV. The scholastic doctrine of usury. T. Aquinas, Simon Smith Kuznets, University of Chicago:; backup copy:
32. 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:; backup copy:
34. Poor Because of Money: Money creation or exploitation, Henk van Arkel and Camilo Ramada, Strohalm, 2001:
35. Economy of Nazi Germany - Wikipedia (as on 22 March 2014):; current version:
36. Hjalmar Schacht, Mefo Bills and the Restoration of the German Economy 1933-1939, Philip Pilkington, Fixing the Economists, 2013:; backup copy:
37. Thinking outside the box: How a bankrupt Germany solved its infrastructure problems, Ellen Brown, Web of Debt, 2007:; backup copy:
38. Petrodollar warfare - Wikipedia (as on 22 March 2014):; current version:
39. Libya: another neocon war, David Swanson, The Guardian, 2011:; backup copy: