| Money of the Natural Economic Order |
October 7, 2008 - February 3, 2012
Author: Bart klein Ikink
| Problems in the current money system |
Do you ask yourself
What money exactly is? |
|
The real cause of the problems lies in the nature of our money system in which interest on money is charged. The following example demonstrates that interest on money is unsustainable and leads to crisis:
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 kilograms of gold weighing 6,000,000 times the complete mass of the Earth. |
If usury is practiced on a limited scale or over a short timeframe then those problems do not surface. Usury is an insidious process. Over time it is unescapable that it reduces large numbers of people to a state of servitude to the usurers. This is a long term development that transcends the lifespan of a human. Usury is the main reason why a number of civilisations have failed and why Western civilisation is about to fail. To get an understanding of the issue, you can view the documentary "Money as Debt" on our current money system.
The financial crisis at first seems the result of outright stupidity as many Americans and Europeans went into debt for items they did not need and did not save money even if they had sufficient income [+]. Those people were lured into debt by low interest rates and therefore it seems that higher interest rates will correct the problem. But this is not true for the following reasons:
- Interest is an allowance for risk and therefore interest introduces risk in the financial system. People, organisations and countries that have troublesome debt levels can borrow even more if they are willing to pay higher interest rates. They will do so if they see no other option. If there was no interest on money, debtors cannot borrow more than they are able to repay.
- Interest is the cause of economic cycles. If there was no interest on money, there would be constant economic growth without recessions. Consequently less people will borrow too much money when the mood is optimistic and then get into financial trouble when the economy turns sour.
The money as debt video can currently be seen using the following links (those links may be removed in the future):
- Money as Debt, part 1
- Money as Debt, part 2
- Money as Debt, part 3
- Money as Debt, part 4
- Money as Debt, part 5
How banks create money
The adverse effects of usury are aggrevated by credit. Because the money in deposit is rarely withdrawn, and new money is deposited to compensate for withdrawals, banks do not need to have all deposited money available for withdrawals. Most money in the bank can be used for making loans. The reserve ratio determines the amount that needs to be available for withdrawal relative to deposits. A reserve ratio of 1:10 or 10% means that for every 100 Euro in deposit, 10 Euro needs to be readily available for withdrawal.
Banks create money when someone takes out a loan. The money for a loan must be available as a deposit, which can be money in a savings account or a current account. Taking out a loan means accepting an obligation to repay and a transferral of the loan amount to the current account of the borrower, who then can spend the borrowed amount. In this way the loan money automatically becomes deposited money, which then can be used to make new loans. This is demonstrated in the example below, where a ficticious bank issues a loan of 100,000.
Bank balance before the loan has been made:
| debit | credit | |||
|---|---|---|---|---|
| loans | 500,000 | savings | 500,000 | |
| allocated reserve | 55,000 | current accounts | 300,000 | |
| available for loans | 445,000 | equity | 200,000 | |
Bank balance after taking out a loan of 100,000:
| debit | credit | |||
|---|---|---|---|---|
| loans | 600,000 | savings | 500,000 | |
| allocated reserve | 65,000 | current accounts | 400,000 | |
| available for loans | 435,000 | equity | 200,000 | |
After the loan has been made, both the amount of loans and the amount of deposits have risen. 90% of the newly created deposits can be used to fund new loans. Therefore loaning out 100,000 enables the bank to loan out another 90,000 as long as the money remains within the bank. When the 100,000 is transferred to another bank, then the other bank may loan out the extra 90,000. In this way banks create new money out of nothing. Banks demand interest on the money they lend. People who deposit money in a savings account receive interest from the bank. Problems arise when savers accumulate money in savings accounts as more and more debts are needed to accommodate those savings and the interest on those savings.
The extent to which banks can create money depends on the required reserve ratio. Assuming a reserve ratio of 10% on all types of money, the practice is as follows:
- To start with, a bank needs money that is created by the government in the form of bank notes or a balance at the central bank. When the bank owns € 10,000 of this money, the bank can create a new loan of € 9,000.
- The borrower can use the borrowed money for payment. The recipient of the payment may bring the € 9,000 to his own bank. The bank of the receiver, using the same reserve ratio, can use 90 percent of the money for a new loan. On the basis of the € 9,000 that is in the bank's account, a new bank loan of € 8,100 can be made.
- The loan of € 8,100 can be spent by the person who has borrowed it. The recipient of the € 8,100 may bring it to his own bank. His bank can create a new loan of € 7,290 on the basis of the € 8,100. This process can be repeated endlessly, until the original € 10,000 of the government has been used by the banks has been to create approximately € 100,000.
At the moment, reserve ratios of banks are even lower than 1:10, so that banks can create even more money out of € 10,000 of government issued money. The nature of the game is not known to most people, and terminology used obscures the situation. Secrecy and banking go hand in hand. Federal Reserve Board Vice Chairman Alan Blinder said in 1994 in the Nightly Business Report that:
The last duty of a central banker is to tell the public the truth. |
Currently the difference between a savings account and a current account is obscure because money can often be withdrawn from savings accounts instantly. By definition savings are not money as savings cannot be used to make payments. To make a payment, savings have to be transferred to a current account in order to become money. Because money in the current account is available for loans, banks do not need to have loans backed by savings. Banning credit means that all loans must be made out of savings. In such a situation banks need savings to make loans, and especially time deposits or savings with withdrawal constraints. This is demonstrated in the example below, where a ficticious bank issues a loan of 100,000.
Bank balance before the loan has been made:
| debit | credit | |||
|---|---|---|---|---|
| loans | 500,000 | savings | 500,000 | |
| allocated reserve | 325,000 | current accounts | 300,000 | |
| loan reserve | 175,000 | equity | 200,000 | |
Bank balance after taking out a loan of 100,000:
| debit | credit | |||
|---|---|---|---|---|
| loans | 600,000 | savings | 500,000 | |
| allocated reserve | 425,000 | current accounts | 400,000 | |
| loan reserve | 75,000 | equity | 200,000 | |
When credit is banned, the limits of lending are reached earlier and debt cannot grow as much as when credit is available. The system of credit is often referred to as fractional reserve banking [+]. A ban on credit does not solve the core problem of usury. Usury makes debtors dependent on creditors. If people accumulate money in savings accounts, money will be withdrawn from circulation. The shortage of money can only be alleviated with new loans. Saving money therefore forces other people into debt and usury will make those debts grow. This situation is unsustainable and leads to a crisis in the long run. The current financial crisis is the endgame of the fractional reserve banking system and therefore one can say:
The long run has now been run and there is nowhere to run any more. |
Saving money is not bad nor is going into debt for good reasons, but the mirror image of savings is debt. Accumulated interest can make savings and debts go out of control.
Why do economists not solve economic problems?
In 2006 Fed leaders, armed with the best economic data available, seemed to had no idea of what was looming less than two years off. They significantly underestimated how serious the economic situation was [+]. They were warned but chose to ignore those warnings [+], possibly because the real bubble produced profits for the Wall Street banks owning the FED. Economists from the Austrian School of Economics and the Interest Free Economy also warned for an epic collapse of the debt based financial system. They were ignored by policy makers at the central banks and the governments around the world.
Jay Hanson, the maker of the website Dieoff.org thinks that economics is political propaganda with agendas hidden in assumptions. Most economic thinking has the following fallacies:
- Economists assume that the economy is powered by money rather than by energy.
- Economics is mostly political in its assumptions and therefore economists often support political agendas.
- Economists assume that money is only a medium of exchange and a store of wealth. Money is also social power and this has significant consequences.
- Many economists make economic models that are correlations of transitory effects. Their reasoning is often like: this happened before that happened, and then assume, that this happening must have caused that happening.
Because economics often equals forwarding political propaganda, Hanson comes to the conclusion that Economics is largely a pseudo-science like fortune telling or astrology. This may explain why most economists did not foresee the financial crisis and why they often do not agree on solutions for economic problems. Curiously banning usury is never discussed by economists, while this is the solution for the financial crisis and many other economic problems. As the FED dominates the field of economics in the United States, criticism of the central bank has become a career liability for economists [+]. One cannot expect real solutions from a corrupted pseudo-science that is servile to the usury banking cartel.
How the current money system works
Almost all money in circulation is created by bank loans. Characteristics of the current money are:
- Banks create money by making a loan. At the moment someone takes out a loan, the money comes into existence.
- Banks demand interest on the money they lend.
- The money in circulation must return interest for the banks and the holders of deposits. If the holders of deposits do not liquidate their accounts, there will not be enough money in circulation to pay for the interest, so not everybody can fulfil his or her obligations, unless new debts are created.
- As a result, debts tend to grow exponentially and so do interest payments.
- If the economy is growing slowly, serious problems arise. As the Western economies are in the mature phase, economic growth is therefore relatively low, and the problem starts becoming acute.
Credit and interest on money make it possible for an economy to grow above potential during a boom phase. In the boom phase investors add leverage using credit which intensifies the boom, creating shortages of materials and labour resulting in rising prices. Interest on money stimulates banks to lend money to leveraged investors during the boom. Credit makes it possible to create money out of nothing, which enables the banks to fuel the boom. When the cycle turns into bust investors start to deleverage which intensifies the bust, creating surpluses of materials and labour resulting in falling prices [+].
What most economists including Galbraith do not see, is that credit and interest on money are the root causes of economic booms and busts. Others blame the fraud that accompanies the boom phase before the economic collapse [+]. It is the appetite for opportunities during the boom phase or hot money that reduces the critical judgment of greed driven investors. In a stable economic situation ponzi-schemes are less likely to occur. Ludwig from Mises at least realised that there is no means of avoiding the final collapse of a boom brought about by debt expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further debt expansion, or later as a final and total catastrophe of the currency system involved.
The competition element
Money often brings out the worst in people. Money causes unethical behavior and crime. There is a strong competition for money, which is caused by interest. If people accumulate money in savings accounts, money will be withdrawn from circulation. It is a game of musical chairs and the ensuing shortage of money causes competition for body. Everybody has to work harder, or has to be smarter, in order not te be left out in the money game. Being smarter often means deceiving others while working hard often equals destroying the planet.
The usury economic cycle
The usury economic system favours large scale operations. The mechanic behind the usury economic system favouring large scale operations is:
- If businesses make use of debt on which interest is paid, they need larger scale operations to achieve the same income level for the business owners because a part of the business income is going to the usurers. In good times businesses can borrow money to expand their operations. There is a reward for taking risk in the form of interest so there is a tendency to overinvest.
- When a recession sets in many businesses fail because demand falters and there is no credit available. If a larger scale operation fails then it is often not liquidated but taken over at a lower price, which makes it more cost effective for the new owners than smaller operations that are more conservatively financed.
- When the economy recovers a smaller number of larger scale businesses have survived. They start to increase their capacity again and become even larger than they were before.
This cycle is repeated again and again so with usury large scale operations have the advantage. The usury economic cycle caused the division of labour to go further than it otherwise would have done. The effect of the usury economic cycle favouring large scale operations is amplified by the free flow of capital and free trade as this created a competition of everybody against everybody on a world wide scale. As a consequence dependencies have escalated and people have become less self sufficient. In this way "the system" was created. Before the middle of the twentieth century most people lived in villages that were largely self dependent. Henceforth more and more people live in cities and societies have become more complex than they would have been without usury. The story of the Tower of Babel reflects on the dangers of this situation [+].
Correction mechanisms in the current money system
Within the current usury financial system, the following correction mechanisms exist:
- When the economy is slowing, the deficits of governments increase. Because consumers and businesses are reluctant to take on more debt, governments do it, because otherwise the economy would be slowing further.
- When the economy is slow, central banks lower interest rates for consumers and businesses to encourage them to add more debt. If the economy goes well, new debt is created in a faster pace, and central banks raise interest rates to curb debt growth, because otherwise money supply is growing fast, which results in higher inflation.
- Authorities are trying to regulate the banking system by imposing requirements for equity in relation to outstanding loans and savings. Over the years, these requirements were increasingly stretched, because more debt was needed to keep the usury financial system functioning.
- When despite these measures, the usury financial system fails, government money can be created by running the printing presses.
The printing presses use the following procedure, to obfuscate the real nature of the activity:
- Governments spend money or buy bad loans so government debt is increasing.
- This debt is purchased by banks. If the government buys up bad loans, banks exchange the bad loans for government debt.
- The central bank prints government money and acquires the government debt from the banks. The central bank now holds the government debt and collects interest on the government debt. If the central bank is an agency of the government, this is printing money outright, because government is indebted to itself, so the debt does not really exist. If the central bank is a private enterprise, as is the case in the United States, interest on government debt is a tax on the public to benefit of the banks owning the central bank.
- The banks now have more government money on their balance sheets, so using the same reserve ratio, they can lend more money.
Problems with free markets in the current money system
If the government did not interfere with the economy and interest rates, markets will correct, but in a rude way with businesses and banks going bankrupt, economic recessions and even economic depressions. In this process much useful capital is destroyed which could be productive if there was demand. The destruction of capital also results in a destruction of wealth. Since we live a democratic society, this will not be accepted and such issues will automatically lead to a strong call for government intervention and regulation. The core problem of government intervention and welfare is that it makes people dependent on the state.
Many people cannot oversee the consequences of their financial decisions so they are often preyed upon by financial advisors and usurers. The poor are often blamed for the situation they are in. However, because of usury, financial affairs have become complex, and there are many opportunities for fraudsters to take advantage of the unsuspecting public. At the center of Capitalism lies self-interest and individualism and the segregation of ethical principles from economic affairs. A consequence of this is that moral issues often play an insignficant role in business [+].
The expansion of government and the welfare state are consequences of failures in Capitalism caused by usury. With usury the poor will become the majority. They will elect people that try to stop economic laws from functioning because those laws are considered to be unjust. Many poor will then become dependent on the state. Fiscal austerity advocates hold irrational assumptions about human behaviour. They think that humans should behave according to their standards, which will require a dictatorship in practice. Many countries have found themselves in such a situation when the International Monetary Fund dictated austerity measures.
Problems with government intervention in the current money system
Government interventions reduce the severity of economic recessions and economic depressions in the short term, but create an ever bigger problem long term, namely increasing debt on which interest must be paid. When this issue was raised, the famous economist Keynes, who was a strong supporter of government intervention, responded: "In the long run we are all dead." In other words, it would not be the problem of his generation. Now we have entered a vicious circle of ever larger problems, which require more and more government intervention.
Proponents of government intervention often ignore basic economic principles, such as:
- You cannot spend your way out of a recession.
- You cannot regulate the economy too much.
- You cannot tax people and businesses too much.
- You cannot create money without reducing its value.
- The government cannot make up for rising unemployment by hiring out of work people or sending them unemployment checks.
- You cannot live beyond your means indefinitely.
- The economy must actually produce something others are willing to buy.
The money system promotes senseless economic activities
The share of the financial sector in the economy has increased significantly in recent decades. Although the financial sector produces nothing and the value added by the financial sector is negative because of the financial instability created by usury and credit, it is one of the major sectors of the economy. This is because the financial instability creates all sorts of complications. Many people are making a living from dealing with those complications.
Because of interest payments and all kinds of unproductive activities that are the result of interest charges, the living standard of many of people in the western world is decreasing. Many companies get into trouble due to financing structures and have to lay off people. These companies would be viable when conservatively financed. To deal with the effects of credit and interest there are government officials who deal with the unemployment of people in times of economic adversity, government officials trying to manage the economy, and programs for subsidising sustainable investment and curbing unsustainable activities that damage the environment or society.
Derivatives were called financial weapons of mass destruction by the world famous investor Warren Buffet. If he makes this kind of statement, the situation is serious. Derivatives are introduced because of the existence of credit and the charging of interest on money. The following types of derivatives exist:
- derivatives to hedge against or speculate upon default (such as credit default swaps). Companies may default because of management, but economic conditions can result in massive defaults, threatening the usury financial system. Economic conditions vary because of credit and the charging of interest on money.
- derivatives to hedge against or speculate upon fluctuations of prices (such as futures, options and interest rate swaps). Prices may fluctuate because of management or changing conditions in nature. However, changing economic conditions cause a substantial part of the fluctuation of prices. Economic conditions vary because of credit and the charging of interest on money.
In the current usury financial system some people can make lots of money by deceiving others. This makes the usury financial system inefficient. If there were less senseless activities and parasitical behaviour then capital and labour could be directed to useful production and services and to solving problems in society. This creates far more wealth than ever will be possible in the usury financial system.
Forced economic growth
Interest on money results in growing debt levels over time. Consequently the economy needs to grow to support the increasing debts. As most economic activities are senseless [+], economic growth often equals to increased resource consumption for senseless activities. This lead to a debate whether or not economic growth is desirable. More economic growth also does not mean happiness. In 1950 per capita GDP in the U.S. was a fraction of what it is today, yet surveys of happiness and life satisfaction and other indicators of well-being have declined steadily [+].
The current money system causes many problems
It is clear that the current money system causes many problems because of interest, and that within the current money system solutions are difficult to find. The cause for the economic problems lies in the nature of money. When new debt needed to pay for the interest on existing debts then the problem is out of control.
The book Poor Because of Money the Strohalm Foundation identifies a number of effects of interest on money [+]:
- interest is a catalyst for increased debt levels by creating a shortage of money;
- Interest is a tax on the poor to the benefit of the wealthy, making the poor poorer and the rich richer;
- interest causes an exponential growth of debts and credits, which will lead to a crisis;
- interest obstructs durable solutions because it creates a short time bias in investment decisions;
- interest leads to slavery because many people cannot repay their debts with interest and become the property of money lenders;
- interest leads to higher prices as interest is incorporated in the cost of a product.
To solve this problem we should create a new form of money, which automatically arranges the economy in a sustainable way, needing less control of the government. Moreover, much less energy must be put into economic activities related to money. These activities are of no use and are harmful to the economy and society.
| The money of the Natural Economic Order |
Stunning examples of interest-free money
Wörgl stamp scrip
In the past, money systems without interest on a small scale existed in various forms and some of them were extremely successful. One of the most stunning success stories is the Wörgl currency [+]. On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl introduced a complimentary 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 with which 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 complimentary currency known as stamp scrip. The Wörgl currency required a monthly stamp to be stuck on all the circulating notes for them to remain valid, amounting 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families.
Because nobody wanted to pay the holding tax, 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 business in town, only the railway station and the post office refused to accept the local money. 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 people also used scrip to replant forests, in anticipation of the future cash flow they would receive from the trees.
The key to its success was the fast circulation of scrip 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, Eduoard Dalladier, made a special visit to see the 'miracle of Wörgl'. In January 1933, the project was replicated in the neighbouring city of Kirchbuhl, and in June 1933, Unterguggenburger 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 complimentary currencies.
The Schwanenkirchen Wara
In Schwanenkirchen, 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.
Coals 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 [+].
The United States
In the United States Irving Fisher analysed the Wörgl case and published various articles about its success. More than 400 cities and thousands of communities all over the US started to issue a form of emergency currency, many of which were stamp scrip. There was a movement to issue a stamp scrip emergency currency nationwide. Senator Bankhead from Alabama presented a bill to the Senate on February 18, 1933 and Representative Petenhill from Indiana presented a bill to the House of Representatives on February 22, 1933.
The stamp scrips 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 emergency scrip. Acheson asked the opinion of one of his Harvard professors, who advised him that the system would work but that it would imply strongly decentralised decision making, which he should check out with the President. President Roosevelt prohibited any use of emergency currency [+].
Lignières-en-Berry
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 one month 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.
Many people took the money because there was three francs of profit to be made by buying vouchers for 95 French francs and returning them for 98 French francs a month 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 many additional customers, while it never costed them more than 2% because the vouchers could be returned for 98 French francs. The shopkeepers also preferred to use the vouchers for the payment.
Most 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 became alarmed. The vouchers became prohibited.
Guernsey
The British island of Guernsey has issued its own currency, and by doing so, Guernsey has demonstrated that inflation is caused by banks charging interest on money. In her book Web of Debt, Ellen Brown wrote the following:
In 1816 its sea walls were crumbling, its roads were muddy and only 4 1/2 feet wide. Guernsey's debt was 19,000 pounds. The island's annual income was 3,000 pounds of which 2,400 had to be used to pay interest on its debt. Not surprisingly, people were leaving Guernsey and there was little employment. Then the government created and loaned new, interest-free state notes worth 6,000 pounds. Some 4,000 pounds were used to start the repairs of the sea walls. In 1820, another 4,500 pounds was issued, again interest-free. |
Defining Natural Money
The use of money
It is not easy to define money by its properties, because there are many forms of money. It is more easy to define money by its use. Aristotle already saw the dual nature of money: money is a medium of exchange and a store of wealth. Those are conflicting uses. The store of wealth function hampers the medium of exchange use. If money does not function properly as a medium of exchange then the economy will suffer.
This is the age old money illusion. If money is considered to be wealth then money can be hoarded. This leads to the destruction of capital, which is real wealth.
Natural Money is the the most optimal form of money in terms of efficiency. The term Natural Money is chosen because it is derived from the Natural Economic Order. In general the term for money from the Natural Economic Order is free money, but this includes a wide variety of money types. Therefore it is confusing to use the term free money for the of the optimal solution.
Gold and silver as money
Because gold can be stored without losing value, it does not make sense to lend gold without charging interest. Hoarding money is sometimes safer than bringing it to the bank because banks can go bankrupt. Therefore people may be hoarding money for a rainy day. When more people do this simultaneously, money is removed from circulation, weakening the economy and the banks. When this happens, even more people will start hoarding money, because they expect times getting worse. This is the beginning of an economic crisis.
During the crisis many people will lose their income, and if they do not have money, they must borrow money against interest for unavoidable expenses such as food. As a result, the situation becomes even worse and many people will be reduced to a state of servitude to the money lenders. Returning to gold and silver as money is also not practical. If gold were chosen as money now, many people would exchange their servitude to the banks for servitude to the gold hoarders, which includes governments and central banks.
Hoarding money is not the same as saving money. Saving money and bringing money to the bank is good for the economy because the bank can lend out the money for productive investments. Gold and silver were chosen as money because they were a good store of wealth. People should have the option to buy gold and silver if they think that the financial system is unsound. By owning gold or silver it is possible to protect yourself against currency mismanagement. A simple solution is therefore: gold and silver can be used as a safe haven and money should be a medium of exchange only. Therefore gold and silver should not be money.
Characteristics of Natural Money
Natural Money has been derived from the free money invented by Silvio Gesell in the Natural Economic Order. The concept was improved during discussions with many individuals on Internet message boards. The first known example of free money is the Egyptian corn clearing system that was introduced by Joseph around 1,500 BC. This money was backed by corn and the value of receipts depreciated over time. The name Natural Money is used for the following reasons:
- Natural Money depreciates like most other items, such as buildings, machines and food.
- Natural Money is derived from the Natural Economic Order from Silvio Gesell.
- Natural Money will be the money people choose to use for transactions. The cause is related to Gresham's law as depreciating money drives out money of constant value. Consequently, Natural Money will become the prevailing type of money used in transactions in a free competition of different types of money.
- Natural Money takes into account human nature. Money is on the one hand a motivator for people to perform, but on the other hand it is a force that can lead to deception, destruction of nature, society and economy. The economy should work in a way that that it achieves a balanced and desirable result for individuals, society and nature.
Natural Money has the following characteristics:
- A holding tax is levied by the government on the money in circulation. This money comes back into circulation by government expenditures.
- There is a complete ban on usury, which is the charging of interest on money. Money may only be lent without charging interest.
- The money supply is not growing or decreasing without deliberate action. There is no money creating activity by financial institutions. Therefore there is no monetary inflation. Apart from fluctuations in available goods and services, there is basically no price inflation or deflation. Issues regarding the money supply can be resolved by a democratic vote. In this way governments cannot create money whenever they choose. There is however no strong incentive to increase money supply as will be shown further on in this text.
- There is a complete ban on credit, which is creating money out of nothing. Loans should be matched by savings.
- A government should not be able to change money tax levels, go into debt or create money unless this is decided by the citizens in a referendum. A government should only be able to tax money and spend money.
Natural Money needs little management and therefore all major issues regarding the management of money can be decided in a referendum. If people make unwise choices such as printing excessive amounts of money, they will face the consequences, such as investors evading their community. Citizens will be inclined to manage Natural Money in the way it best suits them.
The term natural money has also been used by the Austrian School for money that originated from a voluntary cooperation of acting persons [+]. This can be any type of money and Natural Money itself may fit this definition insofar it becomes accepted on a voluntary basis. Because Natural Money depreciates, Gresham's law predicts that Natural Money will be used, while other types of money will not be used. Because of its higher efficiency, people may be forced to accept Natural Money, as they would otherwise have no business when competitors accept Natural Money.
The valuation of the Natural Money unit
The value of money depends on convertibility and money supply. Convertibility means that money must be exchangeable for goods, services and other money units. This is a matter of trust. The money supply relative to the size of the economy also determines the value of money. Money supply itself is not important for the economy, but changes in money supply result in monetary inflation or deflation. Money supply changes and economic growth are the determinants of price inflation over the long term. The idea that money supply itself is not important, goes against conventional economic wisdom based on an economy of interest on money and credit:
To demonstrate that money supply is not important for the economy, you can play Monopoly with an older version of the game. The banknotes have smaller denominations, but the game is exactly the same. Prices will adapt to the available money supply. |
The money supply should be based on a rule that does not change. This will reduce uncertainty and increase trust in the monetary unit. When you lend your money for any period of time, the same value should be paid back at the end. The guarantee of value is essential in a monetary system without interest as there is no interest to compensate for inflation. That means that additional provisions must be made to guarantee the value of loans. Loans can be valued in the following ways:
- As a part of the money supply (for example: 0,00000001% of money supply). Because money supply is known to the public, this could easily be calculated.
- As a basket of goods and services. This will cover the loan in the case the money system changes. The basket of goods and services should be paid in cash when the loan matures. These baskets should include a wide range of goods and services, in order to prevent price fluctuations of individual goods and services or manipulations of prices of individual goods and services, from affecting the value of the loan.
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- Money supply is constant at all times.
- Money supply is growing or shrinking with population.
- Money supply is growing or shrinking with coverage (for example: stored food supplies).
Keeping money supply constant at all times is the most simple rule and therefore probably the best. This is possible because loans should be matched by savings so there will be no money creation. Never will there be any debate about what money supply should be, and how much it should grow. Debating this is a waste of time because without usury the economy will do well when the money supply is constant. Austrian School economists think that money supply does not have to grow for the economy to grow [+]. When there is interest on money, a fixed money supply will lead to a crisis because compound interest is infinite [+].
Because there is no need to create money in the Natural Financial System, governments and banks should not be able to create money. |
Economic growth introduces deflation in a Natural Economy [+]. Therefore it is better not to back the the money to gold or any other commodity. Doing this introduces the need for additional purchases of the used commodities, creating an excess reserve of gold or the used commodities. The value of the Natural Money currency should not be expressed in a usury currency, such as the Euro or the Dollar. The exchange rate should be determined by markets. During a transition period it may be possible to have a fixed exchange rate between the Natural Money currency and a usury currency. This requires the Natural Money currency to be backed by a reserve of usury money like it has been done in Wörgl, Austria [+].
Natural Money promotes sustainable investment choices
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 investments that are unsustainable and wasteful. If no interest was charged, sustainable investments would be more attractive [+]. The following example comes from Poor because of Money from Strohalm:
Suppose that a cheap house will last 33 years and that it will cost 200,000 Euro to build. The yearly cost will be 6,060 Euro (200,000 divided by 33). A more expensive house costs twice as much (400,000 Euro) but will last a hundred years. This house will cost only 4,000 Euro 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. |
This example shows that without interest charges there is a tendency to select long-term solutions while with interest charges short-term solutions will be preferred. Interest charges make long-term solutions uneconomical. This is also true on a larger scale. Natural resources such as rainforests are squandered because of a short term profit. Intelligent forest management could earn a profit for centuries to come but within the present money system it can be more profitable to cut down the rainforest now and put the money in the bank to earn interest. With a tax on money, long term solutions become even more preferred. Because of the tax on money the people in Wörgl started to plant trees in anticipation of future revenues.
Natural Money stabilises the economy
In a Natural Money system with holding tax and without interest, money is not created by financial institutions. The government levies a holding tax on the money and returns this money into circulation in the form of government spending. Any form of cash, both in accounts and in the form of bank notes, is subject to the tax. All loans that exist are created with existing money that is lent. Even though the money may not be lent at an interest rate, people will still be inclined to lend money, because there is a holding tax on money and the money keeps its value.
Consequently the following will happen:
- There is always money available to be borrowed by credit worthy companies and people. Because no interest may be charged, there is no reward for taking the risk that the loan will not be repaid. There will be no unwise lending and borrowing that may destabilize the economy.
- Should the economy weaken, which is unlikely because no money is withdrawn from circulation by interest payments, the economy may be fuelled by raising the holding tax. After all, people will be more likely to spend their money. With Natural Money, a higher holding tax is an incentive for the economy. This means that when a government is faced with rising deficits because of a weakening economy, increasing the holding tax reduces the deficit while energizing the economy. This shows that there is no strong incentive for the government to increase money supply.
- People who are unable to pay back a loan, will not get a loan. Ultimately this is in their own interest and in the interest of society. No one benefits from large groups of people that are so deeply in debt that they can never recover. However trustworthy individuals and companies can get a loan easily if needed because there is always full employment in the economy.
The optimal holding tax rate is around 0,5% to 1% a month. Lower holding tax rates may slow the economy and higher holding tax rates will undermine the confidence in the currency.
With Natural Money, it is not possible for countries or regions to sustain large current account surpluses or deficits. In the usury financial system large current account surpluses and deficits destabilise the world economy. Because of the holding tax on money, foreign countries will not be inclined to keep large currency reserves. Instead foreigners will use the money for investment or consumption. Consequently trade barriers and tariffs are not needed and currency markets will balance relative cost advantages of nations in such a way that the most optimal division of economic activities will be achieved.
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Natural Money leads to full employment
Natural Money should lead to full employment. Because money is circulating in the economy constantly, everybody who is able and willing to work, will get a job. If there is unemployment, it is not because of a recession or a depression. Therefore the price of labour would fall until full employment has been reached again. This is much easier to do because expectations about future business and employment are far more constant, so less employers and employees will have to change their expectations [+].
Natural Money will be abundant
Because of the holding tax Natural Money is not scarce but abundant. Bills are payed instantly or even in advance were possible. Also it is attractive for businesses to lend money without interest to reliable clients, because in this way the holding tax on cash can be avoided. Because of this the chance of being short of money is greatly reduced.
Because Natural Money is not scarce but abundant, far less people will get into financial trouble. The economy is always running at maximum potential so there is always employment. Money is easy to attain. For reliable people it is easy to lend at 0% because other people and businesses can avoid the holding tax in this way.
A Natural Economy needs less regulation and government
When the economy is stable, capital is not destroyed by lack of demand for products and services that are useful. Also, everybody is fully employed, eliminating the need for government assistance of people without income. The government does not need to employ people that would otherwise do nothing useful. Sustainable investment choices are rational economic decisions, so the government does not need to encourage them. The economy will allways be on maximum potential so the government does not need to interfere with the economy. Even though the economy will do well, people probably work far less than they do now as the same level of wealth can be achieved with less resources [+]. Leisure time may therefore increase significantly.
A Natural Financial System needs less regulation than the current usury financial system. This is because:
- Banning credit and interest on money makes the financial system more stable and will make many types of abuse in the Natural Financial System impossible.
- Shorting of stocks and derivatives will be banned completely. Derivatives are not needed in a Natural Money financial system, because derivatives were introduced to cope with the instability of the usury financial system. The shorting of stocks has no real value for markets and it creates an interest in bringing down companies [+].
According to Hoskins in his book War Cycles, Peace Cycles, one of the consequences of a usury is higher taxes. Hoskins contends that the only thing that has kept the usury system operating through the ages is taxation. Taxation is needed to keep the money circulating and to prevent severe inflations and deflations due to hoarding or over-printing [+]. The Wörgl experiment demonstrated this as the tax on money made the money circulate faster. Without usury the government does not need to prop up the economy by additional government spending. The extra tax income from the increased velocity of money can be used to lower taxes.
The role of the banks with Natural Money
With Natural Money, banks continue to exist. Banks will have to comply to the following rules:
- Banks may not invest for their own profit and risk money that has been entrusted to them. They may only lend money without charging interest.
- People can hold their money in the bank in the form of a current account, on which the holding tax is levied. They will hold the money needed in the short term in this type of account.
- People can hold money in the bank in the form of deposits or savings accounts. The bank lends this money without charging interest. Holding such deposits or savings accounts can be attractive because in this way the holding tax is avoided and the value of the money is not eroded by inflation. It is likely that depositors pay a fee to the bank for intermediation costs. Banks may offer different types of savings accounts. The most restrictive accounts do have the lowest fees and offer the highest degree of tax avoidance.
- Bank are prohibited to charge interest on money lent. This is essential to eliminate the risk from the financial system because banks may be tempted by interest to take on risky loans.
- The bank may only charge intermediation costs to the saver and not to the borrower, since the bank may be enticed by high fees to take on risky loans. Those fees are a kind of interest. This is a very essential feature of Natural Money.
- There must be no money creating activity in the banking system. Therefore, any money in the current accounts may not be used for lending. Only money in savings accounts may be used for lending. Therefore people must accept that bank cannot lend money or savings may be locked if there is not enough money in savings accounts. This is essential to prevent economic booms and busts from occurring.
- The (local, state or national) government issuing the currency levies a holding tax on the money. It is advised to keep the tax rate between 0.5% and 1.0% a month, because this appears to be the optimal tax rate for Natural Money. The banks holding the money must levy the holding tax and sent to proceeds to the government issuing the currency.
- People can participate in the stock market through mutual funds or they can buy stocks. This is an attractive alternative. Since there are no economic cycles and companies are conservatively financed, a diversified portfolio of shares is much less risky than in the current money system. People will invest in shares far more often.
Systems perspective
Try to imagine that the economy is a system, just like the human body. All parts of the system need each other to operate properly. Try to imagine that money flowing in the economy is like blood flowing in the body. In this case it would not make sense that a kidney is saying to the liver: This is my blood, you may borrow it with interest. It also does not make sense for parts of the body to hoard blood because there might be no blood flowing in the future. Strangely enough, economists think this makes sense.
Systems theory conflicts with economics. Charging interest makes sense to economists, but interest presses the weakest spots in the economy the hardest. This is because the weakest borrowers have to pay the highest interest rates. If engineers build planes like that, they would fall from the sky. Therefore according to systems theory, the economy could be far more efficient when the weakest spots are not pressed, capital would only be built and not be destroyed, recessions and depressions did not exist and full employment is a constant state of the economy.
The fundamental soundness of Natural Money
A government issuing Natural Money might be tempted to issue additional currency. But this is not a rational thing to do. First of all, tax income should increase because there is no inflation and money is circulating faster. Should the economy slow, and tax income diminish, which probably will not happen, the economy can be revitalised by raising the holding tax. This has the same effect as issuing additional currency. Furthermore, if savings and loans are guaranteed as a percentage of money supply, nobody can be harmed. Therefore, from a logical point of view, Natural Money is the most fundamentally sound money that can exist in the real world. Because printing additional currency is the same as increasing the money tax, both actions should be treated in the same way.
Money supply is inflexible (fixed) and there is no compensation for risk in the form of interest. Banks therefore always choose the best borrowers. This will prevent the economy from overheating when there is a sudden burst in demand for capital. This will also prevent the bust that will eventually follow. |
There is full employment in the Natural Economy so all people that are able to work will have money for their necessities. Because there is no compensation for risk, only people that are trustworthy will be able to borrow if they have the capacity to repay. Should the situation arise that people cannot afford to pay for their necessities while they also have no option to borrow, it is better to give them what they need than to lend them money at interest. It is no problem that people cannot borrow money for things they cannot afford because borrowing money will only make their situation worse.
If the money supply does not increase or provisions are made to guarantee the value of loans and savings, the growing wealth will lower the prices of goods and services and therefore the value of the loan will increase in real terms. This is an interest on capital, based on the growth of wealth of the society as a whole. It is therefore likely that you get a positive return out of lending money without interest. Because the Natural Economy will be stronger than the usury economy with interest on money, the return on money lent will probably be higher in a Natural Economy without interest on money than in a usury economy with interest on money. If traditional economies must compete with Natural Money economies for capital, they do not stand a chance as soon as the positive return on zero interest is discovered.
The holding fee on money will assure that imbalances are corrected in a short timeframe. An exporting country will spend the currency it received instead and hoard it. This means that for each import something has to be exported, and if a country has not enough exports, it will need to replace imports with locally produced goods and services. Consequently, when an economy is not competitive, it will become so soon. In the current financial system imbalances can persist, and those imbalances tend to escalate over time because countries in deficit have to pay interest on their debts.
Because of the price deflation in the Natural Economy, the price of productive assets such as property and land will fall over time. This forces the owners of those assets to use those assets in a productive way. Letting those assets stay idle will lead to a loss of money. This will bring all productive assets to maximum use. It will destroy opportunities to speculate, which is the keeping of assets to make money on price inflation.
Growth explosion
The introduction of Natural Money could lead to an explosion in economic growth, but it would be economic growth of a different type. Growth in the Natural Economy will be sustainable and increase overall wellbeing as social needs are addressed and people will have more leisure time. Economic growth in the Natural Economy is not destructive. According to the research of Strohalm, economic growth will follow a natural curve instead of an exponential curve. At the same time there will be a high level of prosperity and well-being [+].
There will at least be an end of the exponential growth in materials consumption. Production means such as machines will be used longer, thus creating those production means will bring more wealth with less effort. Products will be recycled more, creating more purchasing power. In fact more wealth is generated in an interest-free economy than in the usury economy. People may then choose to work less, but the extra leisure time has value and should be seen as wealth.
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 charging interest [+]. The periodic debt forgiveness in The Bible was not unique as Mesopotamian royal edicts canceled debts, freed debt-servants and restored land to cultivators who had lost it under economic duress [+].
It is often argued that periodic debt forgiveness, like a ban on interest charges will deprive people from needed credit. When there is a holding tax on money, this will not happen. The absence of a risk premium in the form of interest and periodical debt forgiveness will refrain potential creditors from letting debtors go too far into debt. It is also in the interest of the borrowers not to borrow more than they are able to repay. Therefore the absence of interest and the introduction of a recurrent debt forgiveness can be helpful in curtailing unwise lending.
The freedom advocated by the Covenant Code of Exodus, the septennial year of release in Deuteronomy and the Jubilee Year of Leviticus's Holiness Code were not just abstract literary ideas, but concrete legal practices freeing rural populations from debt servitude and the land from appropriation by absentee foreclosers. It is therefore reasonable to assume that those concepts will still work well today. The creation of debt under a system of interest can be considered as fraud because new debts are needed to pay off the interest on existing debts, making debts grow exponentially. The current financial crisis therefore can be considered as the endgame of a system of fraud by usury [+].
| The influence of money on history |
Introduction
Money and interest on money have had a profound impact on historic developments. It is safe to say the impact of money and interest on history has never been adequately analysed. With the theory of Natural Money it is possible to put some historical developments into a new perspective. A number of those developments are:
- How could the Egyptian civilisation last for more than 2,000 years?
- How could Athens in Greece become such a powerful city in antiquity?
- Why did Rome collapse?
- How did Western Europe become predominant during the Middle Ages?
- What caused the conflict between Capitalism and Socialism?
- What is the underlying cause of Wold War I?
- What is the underlying cause of Wold War II?
- Why is there a Clash of Civilizations?
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 (Gen. 41:1-45). Joseph was able to explain those dreams to the pharaoh. He told the pharao that seven good years would come and after that seven bad years would follow. Joseph advised the Egyptians to store food on a large scale. They followed his advice and built storehouses for food. In this way Egypt survived the seven years of scarcity.
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 [+]. Farmers bringing in the food, got receipts for grain. Bakers who wanted to make bread, brought in the receipts, which could be exchanged for grain. Because Joseph took all the money from the Egyptians (Gen. 47:14-15), they had to invent an alternative currency.
It did not take long before the grain receipts where generally accepted as money. Because of the degradation of the grain and mice eating it, the value of the receipts was steadily decreasing. This stimulated people to spend the money fast. The grain receipt system lasted for many centuries. It made sense to store food to provide for hard times. If we assume this worked the same way as in Wörgl, we can assume that also Egypt was building capital at maximum speed using full employment. When Joseph came to Egypt, the country had already passed its zenith. The time of the building of the great pyramids was centuries earlier.
After the introduction of the grain money, Egypt started to flourish again. Three centuries later, during the reign of Ramesses the Great, Egypt became again a leading power [+]. The wealth of Egypt during the reign of Ramesses the Great was built upon the grain money system. The grain money remained in function in Egypt until it was replaced by the Roman currency during the late Ptolemaic period. The grain receipt system was very stable and it helped Egypt to remain a stable civilisation for another 1,500 years. It is the only monetary system that survived for such a long time without collapsing. The Egyptian civilisation lasted for more than 2,000 years, far longer than any civilisation ever.
The fall of Rome
Many historians have investigated the fall of Rome and consequently many theories have been proposed to explain this important historic event [+]. From the Natural Money perspective, economic theories are the most relevant. In the fifth century the Roman historian Vegetius pleaded for a reform of the weakened army. The Roman Empire, and particularly the military, probably declined largely as a result of an influx of Germanic mercenaries into the ranks of the legions. This led not only to a decline in 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 decline in agriculture and land was withdrawn from cultivation. The chief cause probably was high taxation on cultivated land. Another factor may be that after the third century the debasement of the currency led to inflation. The debasement of the currency may have been caused by usury, as the usures may have amassed most of the gold and silver in the Roman Empire. Price control laws then 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 a decrease in the overall wealth of the Empire. 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 and was therefore indirectly the result of the barbarian invasions and the use of mercenaries. Two 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. Local militia can reduce military expenses and thus tax levels, while improving military preparedness.
From the Natural Money perspective it is noteworthy that the 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 disappeared from circulation. This reduced trade and impaired the economy. Because of this, and the barbarian invasions, the government was permanently short of funds. This caused the debasement of the currency and the rise of taxes, which further burdened the Roman economy. In the end the invading barbarians may have been seen as liberators.
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 the rich city people that did not understand farm work, while slavery did not contribute to the productivity of agriculture.
Because of this harvests were reduced and the people in the cities were threatened by famine. Solon realised that a healthy countryside is a countryside without debts, where farmers who understand the business of farming, make their own decisions. The farmer’s ambition to improve himself is indispensable for a vital countryside. Therefore 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 also did set a moral example. He identified greed as having negative consequences for the society as a whole. 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 reforming legislation, may have established a precedent [+].
The rise of Europe
End of money
After the Roman Empire collapsed, Europe fell back into a dark period, called the Middle Ages. Money ceased to exist because gold and silver disappeared out of circulation. Europe was very fragmented and in general there was no central power structure. Not much is known about money in the early Middle Ages. What is known however, is that the people of the Middle Ages were deeply aware of the temporality of human life, which was recorded in the motto memento mori. It means that you should remember the day that you will die. The charging of interest was strictly forbidden and people felt morally obliged not to do this. Therefore the people of the Middle Ages did not lend money at interest while they were inclined to spend their money.
If we assume this worked like it did in Wörgl, we may assume that Europe was building capital at maximum speed using full employment. Europe had to start at a very low level. Also, the local lords waged many wars that were destroying capital. But wealth steadily increased, faster than on any other part of the planet. When the Crusades started around the year 1100, there were so many resources to spend on this war, that the Western Europeans could battle the Muslims for centuries on their own ground, keeping extremely long supply lines of thousands of kilometres, while the conquered land was not profitable.
Fiat and scrip currencies
In the second half of the Middle Ages some lords started to issue fiat and scrip currencies. The fiat currencies had a value because they could be used to pay taxes. Apart from making money legal tender, it is taxes that give value to government issued currencies. The scrip currencies were valid for a limited period of time. After that period the people holding the currency had to return it to the ruler and a tax was levied. Those new currency units were also valid for a limited period of time. The actual value of the scrip currency decreased slowly during the period and was the lowest just before the tax was due.
An example of a fiat currency is the talley stick introduced by King Henry the First around 1100. King Henry the First 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 then spent the other half into the market place where it would continue to circulate as money. Because only tally sticks were accepted by Henry for payment of taxes, there was a built in demand for them, which gave people confidence to accept these as money. They remained in use until the early ninetheenth century. In 1834, after the talley sticks had been decomissioned, they were used as fuel for the heating stoves of the Houses of Parliament. They burned so well that the fire spread quickly and destroyed both Houses of Parliament.
An example of a scrip currency is the brakteaten [+]. The brakteaten was used in Europe between 1150 and 1350 and produced a lot of prosperity. 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. For the citizens this burden became to heavy so they started to prefer gold and silver as money.
Gold and credit
In the late Middle Ages, from the thirteenth century onward, the money supply was greatly increased by goldsmiths who created money by lending out money they did not have in deposit. They invented fractional reserve banking which greatly stimulated trade. This gave an additional boost to the European economy [+].
The European economy started to run in a higher gear. This became the main driving force for the exploration and exploitation of the rest of the world by Europe in the centuries that followed. The expansionist drive also satisfied the interest payments on the increasing debt load, and in this way the usury financial system gradually took hold of Europe.
Over the years the influence of banks gradually increased. Bankers have influenced wars, revolutions and political developments by financing parties in conflicts [+]. Central banks emerged, partly because the system of usury is inherently instable, and partly because of political activities of bankers. Central banks were introduced to regulate the banking business and to prevent bank runs, but they also generated a profit for the private interests behind the central banks.
Socialism and Communism
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Socialism and Communism are products of the Industrial Revolution. During the Industrial Revolution the world's average per capita income increased but in the nineteenth century most people did not feel that they profited from the developments. Many independent artisans lost their jobs and their source of income. There was resistance. The Luddites formed a social movement of British textile artisans in the nineteenth century who protested, often by destroying mechanized looms, against the changes produced by the Industrial Revolution, which they felt were leaving them without work and changing their way of life.
Factory owners became wealthy but the workers remained poor. The social conditions of the nineteenth century gave rise to Marxism. According to the Marxist theory workers are exploited because the value of their work was higher than the wages they received from the factory owners. Marxists thought that the surplus value of the labour of the workers turned up as profit for the factory owners. The Marxist analysis lead to the conclusion that capitalism oppresses the proletariat, the inevitable result being a proletarian revolution.
Marxists have not been able create a society that suited the needs of workers better. Over time the conditions of workers in the Capitalist societies improved while those in Communist countries lagged behind. But the Marxist analysis still points at the fact that the accummulation of capital results in an unequal distribution of wealth. The game of Monopoly demonstrates that this process is destructive in the end. At some point a few people possess all the means of production while the impoverished masses have no money to buy the products. As demand collapses, factories close and capital is destroyed. Marxists call this the crisis of Capitalism [+].
The conflict between Capitalism and Socialism or between free markets and government intervention has dominated the political debate for more than a century. The underlying cause of the exploitation, which is interest on money, has not been identified by most politicians and economists, even though it harms both business owners and workers [+]. Many people feel that the distribution of wealth in the current economic system is unjust or inefficient. Because interest on money and credit favour large scale operations, and therefore the extreme accumulation of capital into the hands of a few, they are the underlying causes of the inevitable collapse of Capitalism [+].
Nazi-Germany
After Adolf Hitler rose to power, Germany issued a debt-free and interest-free money based on human labour [+]. Within two years, unemployment had disappeared and the country was back on its feet. Germany had a stable currency, no debt, and no inflation, at a time when millions of people in the United States and other Western countries were still out of work and living on welfare.
Germany managed to restore foreign trade, although it was denied foreign credit and was faced with an economic boycott abroad. Despite international bankers being hostile to Germany, it rose from depression to the strongest economy in the world in five years time. Nazi-Germany demonstrated that it is possible to rebuild an economy on the national level while being partially cut off from the international economy. The economic success of Nazi-Germany is often attributed to the military buildup, but the military buildup was only possible because of Germany's economic strength.
The national restoration program of Nazi-Germany started with public works. Projects earmarked for funding included flood control, repair of public buildings and private residences, and construction of new buildings, roads, bridges, canals, and port facilities and the military. One billion bills of exchange, called Labor Treasury Certificates were issued to cover the cost. Millions of people were put to work on these projects, and the workers were paid with the Treasury Certificates. The workers then spent the certificates on other goods and services, creating more jobs for more people.
Interest and war
World War I
World War I has been caused by a number of factors, such as the rise of nationalism, the system of alliances, arms races and military planning, imperial and colonial rivalry for wealth and power and economic rivalry in industry and trade. Most historians agree that economic factors played a significant role in the rivalry between nations before World War I. In the years before 1914 the final conquests in Africa were made and further colonial expansion had become impossible. European colonial expansion started around 1450 and its main driver had been the fractional reserve usury money invented by the goldsmiths [+].
This may not be a coincidence that World War I started just after further colonial expansion became impossible. The tensions that were building before 1914 probably have been fueled by economic stress caused by the growth imposed by interest on money. It is therefore reasonable to assume that interest on money and fractional reserve banking have been important underlying causes for World War I, and possibly they have been most important underlying causes.
According to G. Edward Griffin and Rothbard bankers have played an important role in the entry of the United States in World War I. European governments started issuing war bonds. England and France selected the House of Morgan in the U.S. to act as their sales agent for the bonds while American big business started to work for the Allied cause. If the allies would lose then the allied bonds were going into default. The US Treasury could make direct grants to the Allies but only if the U.S. entered the war. After the United States entered the war, the Allies credits were extended so the loans to Morgan could be to paid off. In this way the Morgan was saved.
World War II
Interest on money and fractional reserve banking also have been important underlying causes for World War II. World War II had not been possible if Adolf Hitler had not risen to power. This happened for a number of reasons. They can be summarised as follows:
- the Peace Treaty of Versailles after World War I: The Peace Treaty of Versailles was humiliating for Germany and a direct consequence of World War I. Interest on money and fractional reserve banking have been important underlying causes for World War I.
- the economic hardship and the Great Depression: Economic cycles and economic depressions are caused by interest on money and credit in the fractional reserve banking system [+]. Therefore interest on money and fractional reserve banking have been the most important underlying causes for the economic hardship caused by the Great Depression.
- antisemitism in Germany: The charging of interest by Jews and fractional reserve banking based on interest bearing money, have been important causes of antisemitism [+].
Petrodollar wars
As the United States had a negative trade balance for decades, it became impossible to keep the US Dollar on the gold standard. In 1971 the United States unilaterally terminated convertibility of the dollar into gold. The US Dollar could remain its reserve status, partially because oil was traded in US Dollars. The American Empire depends on the US Dollar being accepted as a reserve currency. It is by the US Dollar reserve status that the oligarchs ruling the United States can exploit the resources and labour of other nations for their political goals and profits. Therefore it is often argued that the United States is waging wars in the Middle East to support the reserve status of the US Dollar [+]. The Iraq war started after Saddam Hussein had made the move to accept euros instead of dollars for oil.
The latest American sanctions are aimed at shutting down Iran’s central bank. It is likely that monetary considerations and the reserve status of the US Dollar has influenced decisions to start wars in the Middle East. The Central Bank of Libya was 100% state owned. Gaddafi was ousted at a time he was planning an all-African currency for conducting trade. He also planned to quit selling Libyan oil in U.S. dollars, demanding payment instead in gold-backed dinars. France was the first country to support the Libian rebels and its leader Nicholas Sarkozy called Libya a threat to the financial security of mankind [+]. One of the first acts of the Libyan rebels was to create a new central bank [+]. According to Ellen Brown, Libya challenged the supremacy of the dollar and the Western banks like Iraq under Saddam Hussein. Alex Newman made the following observations:
In a statement describing a March 19 meeting, the rebel council announced, among other things, the creation of a new oil company. And more importantly: “Designation of the Central Bank of Benghazi as a monetary authority competent in monetary policies in Libya and appointment of a Governor to the Central Bank of Libya, with a temporary headquarters in Benghazi.” |
The Clash of Civilizations (World War III)
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The Clash of Civilisations can be seen in a wider context. The economic expansion and usury money disrupted communities and destroyed cultural values all over the world. Tens of millions of people were killed in the process, such as the indigenous people of America. The wars caused by usury killed tens of millions more. The Clash of Civilisations is also cover for resource wars as the insatiable demand for natural resources like oil caused by the usury economy is a drive for wars like the one in Iraq [+].
In the end usury destroys all cultural values and civilisations. As long as the cultural values being destroyed and the people being killed were in third world countries, most people in the West did not care. Now the influx of immigrants starts to threaten Western societies and Western values. The economic expansion brought a large number of Muslim immigrants to Western Europe. In the 1960's and the early 1970's labour was in short supply. If there had been no interest on money, economic expansion would have been confined within the limits of the available resources, and the large influx of immigrants into Europe would never have occurred.
There is still a demand for cheap immigrant labour. Money can travel freely around the world so there is a world wide competition of everybody against everybody. Many businesses in Western Europe and the United States need cheap labour to stay in business as the native people are often not willing to do hard work for low wages. Mass immigration cannot be stopped without ending the the world wide competition of everybody against everybody caused by international finance.
| Will it work? |
It will create a powerful economy
Is it possible to rebuild an economy destroyed by debt from the ground up? The question has been asked [+]. It is possible and it has been done before. Natural money will create an extremely powerful economy within a short timeframe. Natural Money with holding tax and no interest will have implications that are difficult to foresee. These consequences can be both favourable as unfavourable. In any case the introduction of Natural Money will be an economic revolution the world has never seen before. Therefore this should be done with a great understanding of the plan, with great care, and also without compromise. When this Natural Money is introduced in a time of crisis, and there is no time for a proper preparation, mistakes may be made, and the chance of success will decrease. The tax rate is important. As a general rule, the holding tax rate should be around 0.5% to 1% a month.
From an engineering viewpoint, using systems theory, a Natural Economy seems to be the most efficient market economy possible in the real world. If this is true, this has far reaching consequences. Societies implementing this system will not destroy capital but build capital constantly at maximum speed using full employment. Also those societies do not waste resources on financial activity or government intervention. Therefore those societies should be far more wealthy. As a result those societies become more powerful, and therefore Natural Money systems will replace all other money systems, maybe just because they are only natural. If this is true, banking interests will never succeed in preventing natural money from being introduced worldwide.
Natural Money can be chosen by a group of people deliberately. It can be selected in an unconscious process, like in ancient Egypt. It can be enforced by a rulers, like in Europe in the Middle Ages. Natural Money can be used on a small scale, a large scale, or even worldwide. Natural Money can be used in a democracy but it can also be used in a totalitarian state. Natural money assumes only economic freedom but it does not assume political freedom. Even though government intervention in the economy is not needed, it does not require a specific size of government. The extra wealth created by Natural Money can flow to the citizens, but it can also flow to the state like in Nazi-Germany, which may use it for its own purposes. Therefore, Natural Money is not good or bad in itself, but only a very powerful concept.
Stimulating local trade
Currently a producer such as a farmer only gets a small portion of the price for which a product is sold in a supermarket. Farmers and small producers have little bargaining power versus large supermarket chains. If products could be produced and sold locally, then both producers and consumers could get a better price. This will greatly improve the efficiency of the economy. Currently the number of local currencies is slowly growing [+], but most of them are not legal tender or do not have a holding tax. This will have to change in order for local currencies to fulfill their potential and replace existing usury currencies.
States and municipalities can issue their own currencies that circulate along with the national currency. If they come into existence, those currencies should only be used for payments within the state or the municipality issuing the currency. The local currencies and state currencies should float against all other currencies. People will be inclined to spend the local currencies first because they can only be used locally. This will stimulate local trade at the expense of long distance trade [+].
Local currencies have the following advantages:
- They promote local trade and therefore generate employment in the local community.
- Local production will replace centralised production which makes the economy more energy efficient.
- Local currencies will generate tax income for local governments.
- Local currencies give local communities more possibilities to handle their own affairs making the central government less needed.
Transactions done in local currencies may not need to have the full legal status of a business transaction. Those transactions can have the legal status of neighbours helping each other just like the transactions in a LETS system. Current legislation favours large scale centralised production because of the risk of litigation and the large investments that are needed to comply with legislation. The community issuing the currency should determine which regulation applies on transactions in the local currencies. The national government may only set a framework of guidelines and minimal requirements for transactions in local currencies.
It is more difficult to mismanage Natural Money currencies than usury currencies [+]. Introducing local currencies limits the effects of a potential currency mismanagement. If the central government fails to manage its currency, local currencies are not affected. Also if a local currency is badly managed, it has no consequence for the central currency.
Limitations
Natural Money without interest with holding tax has a number of restrictions. These restrictions are acceptable when we realise that the charging of interest is very harmful for the economy, society and nature.
Some limitations of a Natural Money system are:
- The power structures are trying to sustain the current system. Both governments and financial institutions benefit from the current money system. Therefore it may not be easy to reform the money system.
- The number of funding options is decreasing. There is no compensation for the risk of loans not being repaid. Companies can raise capital by issuing shares or by borrowing money without interest. Only companies that are credit worthy, may qualify for loans. All other companies will need to attract capital by issuing shares until they are credit worthy enough to be able to borrow money without interest.
- Businesses that need flexible financing, need to allocate capital in advance by issuing shares or borrowing money. This will introduce additional costs because the company has to pay taxes on money. This cost can be passed on to the customers because all companies in the same business should be in the same situation. Those companies may use liquidity pools or use banks to alleviate this problem, but this will not guarantee the availability of all the required capital when needed.
- A Natural Money system without interest does a great appeal to the rationality of human beings. The drive for people to get rich without working is eternal. A purely rational man would never participate in a lottery or a pyramid game. Yet there are many people doing just that.
The greatest danger that always remains, as long as Natural Money will function, is that interest in some way will be reintroduced, possibly in a disguised way. People will wonder: Why does the borrower not have to pay compensation? Why should the owner of the money pay a fee and not the borrower? Political and business interests will try to use this feeling for their own purposes.
With Natural Money, you can never insure loans, which are promises to pay, because this introduces a moral hazard. The insurance fee is a form of interest. You can however insure collateral if it is not money in any form.
Various structured products will be invented and financial interests will try to influence decision makers to allow such products. We must realize that any commission that a borrower pays, is interest. Interest can manifest itself in different forms. If there is no resolute legislation and enforcement, possibilities will be stretched and irresponsible risk taking will come back.
A call to action
If you understand the message and you understand the situation we are in, you see that our society is in great danger. Bankers and governments may ward off collapse, but this comes with a staggering price tag of ever increasing inflation and moral hazard. This will in the end eat away the fabric of our society. Therefore the time for action is now. First of all, the knowledge must be spread. What to do next, is up to you.
| Frequently asked questions |
Questions about money supply and debt
Question: If the money supply is constant, will it be possible for the economy to grow?
Answer: Prices will adapt to the money supply available. This can be demonstrated by the game of Monopoly. If you take a sixty years old game of Monopoly, there is far less money available than in a more recent game. Increasing the money supply a hundredfold does not change the game at all when the prices also rise a hundredfold. This is also what happens in the real economy. If the money supply rises then prices will also rise.
The value that is created in the economy is not dependent on the money supply itself. Most economists mistakenly believe that the money supply should be managed. A constant money supply is not a problem if the financial system is sound. A strong increase or decrease of the money supply can be harmful to the economy and those changes are often the result of managing the money supply. The Natural Financial System is based on sound monetary principles and therefore the money supply in the Natural Financial System can be constant.
A constant money supply is one of the elements that make the Natural Financial System efficient because there is no need for bureaucrats managing the money supply and there is less financial instability because of changes in the money supply.
Question: Why is it that the economy collapses, if debt is not increasing?
Answer: Interest payments do result in an instable economic system. The following example demonstrates this:
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 kilograms of gold weighing 6,000,000 times the complete mass of the Earth. |
If someone has money in the bank and it remains there untouched forever, an ever increasing amount of debt is needed to pay for the interest on the deposit. Interest on money therefore means a choice between ever expanding debt or monetary and economic collapse.
Question: Is it not wise to proceed on the gold standard, to curb the growth of debt?
Answer: With gold or silver being money, the existence of interest on money cannot be avoided, because coins can be hoarded and stored. Therefore it is not possible to raise a holding tax. At that moment there is no incentive to lend money without interest. If we return to the gold standard, and the system of banks charging interest still exists, the money system will evolve into a situation like we have now. People will not accept that banks go bankrupt and that there is a process of creative destruction with strong economic growth alternating with recessions and depressions. They will then ask for government intervention. The gold standard will therefore not lead to a natural order that is stable. Moreover, when the value of money is subject only the value gold, all sorts of manipulation are possible, like we see the gold market. Therefore it is wiser not to base the value of money on gold alone.
Question: Why is it that the problems in the usury financial system come to light right now?
Answer: If an economy is developing fast, the economy can grow faster than debt, and the leverage will make interest work positively for the development of wealth, 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, the economy is barely growing. Economic growth becomes a mere statistical fiction. The growing debt will eventually be 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 until debts have become so large, that many people get into financial troubles, and therefore the usury financial system is at risk.
Question: The banks have lost thousands of billions of Euros. Where has all the money gone?
Answer: A small part was paid in the form of profits and bonuses. The profits amounted to tens of billions, but hundreds perhaps thousands of billions of Euros have been lost. Because the balance sheets of banks are covered by collateral, a recession or depression can seriously damage bank balance sheets. In this way thousands of billions of Euros can be lost.
Questions about money without interest charges
Question: May capital earn interest?
Answer: It is only natural for capital to earn interest. Only on money interest should not be charged. Therefore, in the Natural Financial System, money should not be capital. Gold and silver are also capital and therefore gold and silver may earn interest. Gold and silver should therefore not be money.
Question: Is money without interest charges not just money for free?
Answer: The money we have now is money for free, since banks create money out of thin air. Moreover a loan you pay back later will have less value because of inflation. So if you are closing a mortgage with an interest rate of five percent, while the money supply grows at a rate of 15 percent, you actually get money for free when you borrow. Money without interest is not free money, especially if the money supply is constant. The current system penalizes savers if interest rates are low and penalizes borrowers if interest rates are high. Money without interest does not favour anybody.
Question: How does a money system without interest charges eliminate excessive risk taking?
Answer: This is done in the following ways:
1. Since there is no allowance for risk, money will only be lent money to credit worthy people and businesses.
2. Moreover, because there is no interest, interest payments do not erode the credit worthiness of companies and people.
Because the market solves many problems in this way, the government has a smaller task in managing the economy. Less people and companies do go bankrupt.
Question: Is a saver worse off without interest?
Answer: The interest rate the bank pays is usually lower than inflation, and almost always lower than the growth of the money supply. When the value of money is constant, and you will get the same amount of loan money back, you will be better off.
In the Natural Economy the value of money is usually rising so there is a real return on money even though there is no interest.
Question: Is a borrower worse off without interest?
Answer: If the interest rate on the loan is lower than inflation a borrower will be worse off without interest. This is usually only the case with mortgages but not with other types of loans.
Question: In Japan, interest rates have been near zero percent for years. Is Japan an example of a Natural Money system?
Answer: Although the interest rate in Japan is very low, this is not a Natural Money system without interest using holding tax. The money system in Japan is similar to the money system in the western world. About 20 years ago, the banking system in Japan had been inflated by increased credit growth. Since then interest rates dropped to around zero percent to prevent a collapse of the system by debt payments and interest charges.
Question: Do Islamic countries have a Natural Money system?
Answer: While charging interest is forbidden in Islam, like it was the case in Christianity, this does not mean that the Islamic world has a Natural Money system. Islamic banking does give despositors a share in the profit of the banking operation and the Islamic bank takes a share of the profit of the companies they invest in. Even though Islamic banking creates a more stable financial system, it is not the optimal system in terms of efficiency.
Questions about banking in a Natural Money system
Question: Should the banks be nationalized?
Answer: Banks have a special function in society because they manage the money system. In any case, the banks must not be permitted to use money entrusted to them for investing or taking risk. They must use these funds to make loans without interest. They can operate for their own risk, for which banks could get an allowance, or they can mediate loans for which they could get a fee. A bank should therefore still be a private company.
Question: Are my savings still safe at the bank?
Answer: The economy will be more stable. Bankruptcies and bad debt are a rare phenomenon. When banks operate on behalf of depositors, this means that when certain loans cannot be fully repaid, the depositors loose a part of their money. When banks operate for their own account, the equity of the bank can absorb the losses.
Economic questions
Question: Should the government protect business and employment protection against competition from abroad?
Answer: Competition from abroad is not the cause of the financial crisis. Therefore, to counter competition from abroad is not the solution. Especially when all countries have Natural Money systems, imbalances of payments between countries are less prevalent. Countries will no longer lend to each other more than can be repaid.
Question: Does Natural Money make international trade more difficult?
Answer: 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. If this is not attractive, the other country may buy gold in the issuing country at market prices. This diminishes the gold reserve of the first country so the price of gold will rise in the first country. Therefore products of the first country become more attractive to other countries. This is the natural gold standard. If this is too cumbersome, which it probably is, countries can dispose of their surplus natural currencies using the foreign exchange markets.
It is possible to create an international currency unit, which is an index based on all the Natural Money currency units 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 currency units based on the weighing of the currency unit in the index.
Question: Is it not possible to abolish the money creating by banks, but allow the charging of interest?
Answer: In this case there is a closed-circuit of money, but there are two major disadvantages:
1. In times of economic crisis, people will take their money away from banks and start hoarding money. This will disrupt the economy even further. The citizens will then ask for government intervention, and the money system will gradually develop into the system as we have now.
2. Interest reinforces the contrast between rich and poor. The rich usually have money, while the poor need it. In that case, the poor must borrow at an interest rate. The poorest pay the highest interest rates. Because the supply of money is constant, they become even poorer money wise. If the economy is booming, and many new goods and services are supplied, and prices are falling faster than interest rates, the poor might get richer in terms of goods and services, but this is generally not the case. The result is that interest in overall, make the rich richer and the poor poorer. Social unrest is lurking.
Questions about the transition to a Natural Money system
Question: When will the transition to the new money system be possible?
Answer: Probably change will come when the problems are seriously enough, and enough people know what the actual cause of the situation is. The stakes are high. Banks will try to create a new system with interest charges.
Question: How should the transition to a new money system take place?
Answer: When a country or region as a whole would like to convert to a Natural Money system, it could be done as follows:
1. A money supply number must be determined. It is not necessary to change the money supply because the real problem is the fact that debts are larger than savings.
2. All balances of savings and debts should be matched. All savings must exactly match all debts. The current savings will be smaller than the debts, so after scoring all positive and negative balances, a negative balance may remain. Many debts in the old system can never be repaid without creating massive inflation.
The process of converting to the new money system is a complex one. It should be determined which debts will be forgiven and which debts should remain. The transition period for a country could take a few years, given the complexity of the current usury financial system.
Question: How do debts in the old system convert into the new?
Answer: In principle, all debt denominated in fiat currency is not worth more than the currency itself. There is no coverage. You are therefore at the mercy of the authorities issuing the currency, which are the national authorities. In principle, this transition should be regulated by the markets.
Political questions
Question: Why do economists advise governments to spend money when the economy is not doing well?
Answer: The current system of fractional reserve banking money with interest charges needs increasingly more debt to to operate. When consumers and businesses do not go into debt because they are reluctant to do so, government should do this, because otherwise the fractional reserve money system would collapse.
Question: Why did the government encourage strong growing debts of consumers and businesses?
Answer: Growing government deficits were seen as economic weakness which could undermine confidence in the currency. Therefore governments encouraged that more and more debts were incurred by consumers and businesses. As a result, the government managed to show relatively low deficits. This situation exists in many countries having a housing bubble, including the Netherlands. The United States was the main benefactor of the current usury financial system because the dollar was the reserve currency, and it was the United States which had the greatest motivation for continuing this system as long as possible.
Question: Why did economists not see this coming?
Answer: There have been economists, who have seen it coming, but most economists did not expect this to happen. Economics does not take into account that a human is a social being which is very essential for understanding humans. Economics is therefore a complex pseudo-science, with all kinds of irrational assumptions, the most important of which is: the existence of the homo economicus (economical thinking human). On the existence of the homo economicus much of economic theory is based. The homoc economicus does not exist, and a lot of economic theory is dubious at best, and in many cases it is politically motivated. As economists are mostly paid for by special interests, they rarely manage to have an independent view.
Question: Is a holding tax on money not a tax on the rich?
Answer: The holding tax on money is no tax on capital. Stocks, real estate and money lent are not subject to this tax. This holding tax is aimed at keeping the money in circulation, so the economy will not falter. Its purpose is not to redistribute income.
Question: Is inflation not a holding tax?
Answer: Inflation is not the same as a holding tax on money in the Natural Money system. Inflation is generally caused by the increase of money supply. The increase in money supply in the current system is needed to keep the economy going, because the debt also continues to grow and interest thereon should be paid. In a Natural Money system, the money supply does not grow, and there is no inflation.
Question: Why do religions condemn usury, which is the charging of interest on money?
Answer: The Bible states that interest charges on money are forbidden [+]. The Jews wrote this rule down in the Old Testament. This is also the basis for Christianity and Islam condemning the charging of interest on money. There are people who think this was a message from God(*), but there is another explanation possible. The Jews were living with the Egyptians for centuries and were familiar with the corn receipt money. If the money worked very well to the advantage of the Egyptians, the Jews may well have thought this to be the best money system possible.
(*) this turned out to be true.
Question: What is the relationship between interest charges and mass migration?
In the book Poor Because of Money the Strohalm Foundation argues that 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. Because of interest on debt, it is difficult for many poor countries to reduce their debt burden. Many poor countries have lured into debt to create profits for the oligarchs [+].
In his book War Cycles Peace Cycles Richard Hoskins argues that interest on money is an important driver for mass 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 of a given country stops reproducing due to the heavy cost of living. This in turn leads to the influx of immigration of foreign peoples. Hoskins states that mass immigration is an absolute necessity for any usury-based system since new money must always be borrowed into existence and the money system was continue to operate at all costs. Immigrants represent new, debt-free borrowers and bank customers [+].
Question: What is the relationship between interest charges and war?
Answer: Interest charges can cause war. When an economy collapses becaus 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 collapse of the money system 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 then be dissatisfied. The leaders of a country may look for an enemy to start a war to draw away the attention of the public from the economic problems.
In his book War Cycles Peace Cycles Richard Hoskins argues that a consequence of having a usury system is war. According to Hoskins wars are typically fought near the trough of the War/Peace Cycle and are waged only as a desperation measure to stimulate an economy suffering from the effects of deflation, which is a consequence of usury. Wars tend to have the effect of providing a short-term stimulus to the economy since new money has to be borrowed into existence in order to fight the expensive battles and industry is provided an excuse to begin operating at full capacity again. This is followed by a "peace" phase of non-aggression, completing an idealised cycle of approximately 50 years from trough to trough. Hoskins identifies his War/Peace Cycle with the 50-year "Jubilee Cycle" mentioned in the biblical book of Leviticus. Without interest bearing debt there could be no such cycle [+].