[Index]
Money of the Natural Economic Order

October 7, 2008 - May 12, 2010

Author: Bart klein Ikink
Problems in the current money system



Do you ask yourself

What money exactly is?
Why experts are so afraid of a major economic depression caused by the banks going bankrupt?
Why businesses, consumers and governments are so deeply in debt, in spite of all our prosperity?
Why despite all our prosperity, our social problems remain difficult to solve?
Why the economy destroys our living conditions?
Why the rich become richer and the poor become poorer in the developed economies?
Why in the emerging economies it is possible that the poor get richer?
Why saving money in the bank does not pay because the inflation is higher than the interest rate?
Why the government is increasingly intervening in markets, while this is not really a good idea?
Why capitalism seems to fail, even though it has brought us so much prosperity?
Why so many people earn their money in activities that serve no purpose, and some even become very rich?
Is there an alternative?

The economic problems we face now, again lead to a discussion of capitalism versus socialism. We have seen that both economic systems have their limitations. Supporters of capitalism will argue that the problems we have, are caused by government intervention in the markets. Proponents of socialism will argue that the problems we have, are caused by too little regulation of the markets. Both arguments seem reasonable but they conflict. My conclusion is therefore that this is a false debate, and that the real cause lies somewhere else.

In this text I will try to show that the real cause lies in the nature of our money system. Then I briefly try to explain that another money system is possible, and that it will work far more efficient than the current money system.

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. This is 1.9 * 10^27 cubic metres of gold weighing 317 times the complete mass of the Earth.

On the opposite side an ever increasing amount of debt is needed that pays for the interest on the money in the bank account. This example shows that interest on money is unsustainable and leads to crisis. Therefore problems arise when the economy stops growing. To get an understanding of the issue, you can view the documentary "Money as Debt" on our current money system, before continuing to read. 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

You'll be surprised how the system works, and also how utterly ridiculous it is. The documentary can be understood using only common sense. You do not need to know economic theory, which often is not common sense.

Banks create money out of thin air when someone takes out a loan. Banks demand interest on money that did not exist. This interest will, after deducting costs and dividends, be added to the equity of the bank, on which the bank can make new loans, which makes debt grow even further.



How the current money system works

Almost all the money in circulation is created by bank loans. Characteristics of the current money are:
- Banks create money out of thin air by making a loan. At the moment someone loans money, the money comes into existence.
- Banks demand interest on the money they lend.
- All the money in circulation should raise 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 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. Therefore it is also true that in strong emerging economies with a high level of savings, this problem has not yet come into play.

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 entices banks to lend money to leveraged investors during the boom phase. Credit makes it possible to create money out of thin air, which enables the banks to fuel the boom. When the cycle turns into bust investors start to deleverage which intensifies the bust, creating surplusses of materials and labour resulting in falling prices (see also: John Kenneth Galbraith - The Great Crash, 1929). What most economists including Galbraith do not see, is that credit and interest on money are the root causes of economic booms and busts.



How banks create money out of thin air

When you go to the bank to close a loan, the money is made on the spot by closing the loan deal. In economic theory this is the money-creating function of the banking system (see also: Wikipedia - Fractional reserve banking). The extent to which banks create money out of thin air depends on the reserve ratio. When we start from a reserve ratio of 1:10, the practice is as follows:
- To start with, a bank needs money that is created by the government in the form of banknotes or a balance at the central bank. When the bank owns € 10,000 of this money, and the reserve ratio is 1:10 the bank can create a € 9,000 loan, even though that money did not exist.
- A person who borrowed the money can use it for payment. The recipient of the payment may bring the € 9,000 to his own bank. Since this money has not been created by the government, the bank of the receiver, using a reserve ratio 1:10 may only 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 € 8,100 can be spent by the person who has borrowed it, and the recipient of that money may bring it to his own bank. This 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 out of thin air.

At the moment, reserve ratios of banks are even lower than 1:10, so that banks can create even more money out of thin air with € 10,000 of government issued money.



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 have to 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, using the following procedure, to mask the real nature of the activity:
1. Governments spend money or buy bad loans so government debt is increasing.
2. This debt is purchased by banks. If the government buys up bad loans, banks exchange the bad loans for government debt.
3. 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.
4. The banks now have more government money on their balance sheets, so using the same reserve ratio, they can lend more money.

The foreign countries are disregarded in this explanation. This would make it more complicated. The matter is difficult to understand even when ignoring foreign countries.



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.



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, like the Austrian School’s 7 Commandments:
- You cannot spend your way out of a recession.
- You cannot regulate the economy into oblivion and expect it to function.
- You cannot tax people and businesses to the point of near slavery and expect them to keep producing.
- You cannot create an abundance of money out of thin air without making all that paper worthless.
- The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever.
- 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 financial sector is a significant portion of our economy. 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.

When less useless activities would take place in the economy, the labour force could be directed to useful production and services and solving problems in society, creating far more wealth than ever will be possible in the current financial system.



The current money system causes many problems

It is clear that the current money system causes many problems because of interest, and that solutions are difficult to find. The cause of economic problems lies in the nature of money. When more and more new debt needed to pay interest on debts, it is clear that the problem is growing out of control.

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



A stunning example

In the past, money systems without interest on a small scale existed in various forms and many were successful. They still exist today. The success of Natural Money will depend heavily on the rules of the system. The most stunning success story is the Wörgl currency (see also: The New Civilization Network - Wörgl's stamp scrip: The threat of a good example).

On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl made economic history by introducing 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 repaving the 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 what was effectively a hoarding fee, 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. This offer was rarely taken up though. 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 people unsuccessfully sued the bank and later lost in the Austrian Supreme Court. It then became a criminal offence to issue 'emergency currency'.

Unterguggenberger was opposed to both communism and fascism, championing instead what he referred to as 'economic freedom'. Therefore, it was deeply ironic that the Wörgl experiment was first branded 'craziness' by the monetary authorities, then a communist idea, and some years later as a fascist one. The town went back to 30% unemployment. In 1934, social unrest exploded across Austria. In 1938, when Hitler annexed Austria, he was welcomed by many people as their economic and political saviour.

The 1920's had already seen a scrip currency called the 'wara' in the German town of Schwanenkirchen. This saved the town's economy and kept a coal mine operating. It started circulating more widely, and became part of a movement called 'Freiwirtschaft' (Free Economy), based on the ideas of the economist Silvio Gesell. Central to Gesell's ideas was the use of a hoarding fee of the kind used in Wörgl (technically known as 'demurrage'). The soundness of such an idea was affirmed by John Maynard Keynes in his 1936 work 'General Theory of Employment, Interest and Money'.

The success of the Wörgl currency inspired the well known American economist Irving Fischer to write an article which was published nationwide. Many towns copied the idea. The Americans however used a far higher tax rate (2% a week instead of 1% a month) which undermined the confidence in the stamp scrip currencies. President Roosevelt abandoned the idea completely in the New Deal. It is therefore very important to implement stamp scrip the right way, otherwise it will become a failure.

Perhaps the most groundbreaking feature of demurrage is that it is intrinsically anti-inflationary. Whereas conventional currencies are devalued by increasing money supply to sustain the ever growing interest payments on debts, the demurrage currency is anti-inflationary because money supply does not increase. Economic growth then leads to lower prices.

The present short-term focus of investments, and the consequent lack of long-term vision are exacerbated by interest-driven currency devaluation that, from a profit perspective, reduces the appeal of longer-timescale projects. The use of a demurrage currency gives an edge to those working for sustainability, because a rate of return is achieved simply by lending out money. When money is repaid (remember these are non-interest currencies), it will have increased in value owing to the money saved by having avoided paying the monthly demurrage fees. This has the potential to enable investment in highly beneficial but economically marginal activities such as earth repair.



Defining money

It is not easy to define money by its properties, because there are so 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.

Natural Money is the search for monetary Holy Grail: 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 very confusing to use the term "free money" for the search of the optimal solution.



Problems with gold and silver being 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. 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.

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 an excellent store of wealth. People should have the option to buy gold and silver if they think that the financial system is unsound. A simple solution is therefore: gold and silver should be a store of wealth and money should only be a medium of exchange. Therefore gold and silver should not be money.



Characteristics of Natural Money

Silvio Gesell is the founder of the modern theory on Natural Money. However the first known example of this type of 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. This money is natural because it takes into account human nature. Greed 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 these matters are resolved, while achieving a desirable result for individuals, society and nature. The current theory in this document has been derived from the work of Gesell and improved during extensive discussions with many individuals on Internet message boards.

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 government 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. Natural Money is not a form of debt.



The valuation of the Natural Money unit

The valuation of the Natural Money unit is one of the most important topics. The money supply should be based on a rule that does not change. But you can never trust the government. So when you lend your money for any period of time, the same value should be paid back.

The guarantee of value is essential in a money system without interest. That means that when lending money, additional provisions must be made that guarantee the value of the loan. The loan 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.

Examples of possible money supply rules are:
- 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. 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 the economy will do well when the money supply is constant (see also: Mises.org - How Much Money Should There Be?).

Because there is no need to create money in the Natural Financial System, governments and banks should not be able to create money.

Because of economic growth there will be deflation in a Natural Economy (see also: Bernard Lietaer - A strategy for a convertible currency). Therefore it is probably also 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. However it may be wise to partially cover the the currency with food supplies and use the holding tax on this money to store the food and pay for the degradation of the food during storage.

The value of the money unit should not be expressed in a traditional money unit, such as the Euro or the Dollar. The exchange rate should be determined by markets alone.



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 (see also: Bernard Lietaer - A strategy for a convertible currency).

For example: you want to build a house and you have the choice between a house of € 100,000 with a yearly energy cost of € 5,000 or a house of € 200,000 with a yearly energy of € 2,000. Assume that the house is maintained well and that the debt will not be repaid. When the interest rate is 10 percent, the cost for a cheap house with high energy consumption is as follows: € 10,000 plus interest € 5,000 energy is € 15,000 per year. The expensive house with low energy costs: € 20,000 interest plus € 2,000 energy is € 22,000 per year. If you do not have to pay interest, the expensive house with low energy cost will be cheaper.



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. This means:
- There is always money available to be borrowed by creditworthy 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.



Natural Money leads to full employment

Natural Money should lead to full employment. Because money is circulating in the economy constantly, everybody who is ready, 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 (see also: Bernard Lietaer - A strategy for a convertible currency).



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 stable economy needs less intervention and regulation

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. Moreover, if sustainable investment choices are rational economic decisions, the government does not need to encourage them. Wealth is steadily increasing using the maximum potential. Therefore, government does not need to interfere with the economy.

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 which is the result of credit and interest on money. The shorting of stocks has no real value for markets. It creates an interest in bringing down companies.



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 theory 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. So there is no rational reason to destroy the system that is bringing wealth. It simply does not make sense. 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 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.

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 the loan, 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 highly probable 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.

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.
Natural Money in history



Introduction

Using the concept of Natural Money, I will try to explain some historic facts, which puzzled historians for a long time. Some intriguing historic questions are:
- How could Western Europe become so powerful during the Middle Ages? Europe was backwards at the beginning, annihilated by Black Death, and still came out on top.
- How could the Egyptian civilisation last for more than 2,000 years?
- Why did Rome collapse? They had the greatest civilisation and military organisation at the time.

Although the explanation is speculative, and not proven, there is some logic in it.



The rise of Europe

When 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. Some local lords issued scrip currencies. Those 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 units were also valid for a limited period of time. The actual value of the unit decreased slowly during the period and was the lowest just before the tax was due. An example of this is the brakteaten (see also: Bernard Lietaer - A strategy for a convertible currency).

Not much is known about money in the Middle Ages. What is known however, is that the people of the Middle Ages were deeply aware of the temporality of human life. Memento mori was the motto of the people in the Middle Ages. This means: 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 were inclined to spend their money fast.

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, there was so much wealth to spend on a useless war, that Europeans could battle the Muslims for centuries on their own ground, keeping long supply lines, while the conquered land was not profitable. After that, Black Death annihilated about one third of the population, but only one century later, the exploration and exploitation of the rest of the world by Europe had begun.



Joseph in Egypt

In the Bible there is a story about a pharaoh having dreams about seven fat cows being eaten by seven lean cows and seven full ears of corn being devoured by seven thin and blasted ears of corn (Gen. 41:1-45). Joseph explained the 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 corn receipts for money (see also: Bernard Lietaer - A strategy for a convertible currency). Farmers bringing in the food, got receipts for corn. Bakers who wanted to make bread, brought in the receipts, which could be exchanged for corn. Because Joseph took all the money from the Egyptians (Gen. 47:14-15), they had to invent an alternative currency. Therefore it did not take long before the corn receipts where generally accepted as money. Because of the degradation of the corn and mice eating it, the value of the receipts was steadily decreasing. This enticed people to spend the money fast.

The corn 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. This currency remained in function in Egypt until it was forcibly replaced by the Roman currency during the late Ptolemaic period. The corn receipt system was very stable and it may have enabled Egypt to remain a stable civilisation for another 1,500 years. The Egyptian civilisation lasted for more than 2,000 years, far longer than any civilisation ever.



The fall of Rome

Rome lasted only 700 years. The money system was based on gold and silver. In the beginning Rome was able to expand, and therefore capital could grow faster than interest charges. But after 400 years the expansion was over, and slowly growing debt was becoming a drag on the economy. The government was permanently short of funds. The value of money was constantly devaluated. The military was also badly funded, and therefore other people could invade Roman lands. Debt was destroying Rome.
Will it work?



It will create a very powerful economy

Natural Money with holding tax and no interest is an uncertain experiment when introduced on a large scale. It may have implications that are difficult to foresee. These consequences can be both favourable as unfavourable. In any case, this is 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 with no compromise whatsoever. When this money system is introduced in a time of crisis, and there is no time for a proper preparation, mistakes will probably be made, and the chance of success will greatly decrease. The tax rate is very 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, 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

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 (see also: Bernard Lietaer - A strategy for a convertible currency).

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 therefore should not 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 central government may only set a framework of guidelines and minimal requirements.

It is difficult to mismanage Natural Money currencies (see also: The fundamental soundness of Natural Money). 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 realize 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 creditworthy, may qualify for loans. All other companies will need to attract capital by issuing shares until they are creditworthy 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: The value that is created in the economy, is within certain limits not dependent on the money supply. If the economy is doing well, and the money supply does not change, prices may decline. However, a strong increase or decrease the money supply can be harmful to the economy. Because the calculation of inflation rates is subject to manipulation, it is questionable whether there was any economic growth in the mature economies in recent years. Only money supply can be objectively measured.


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. This is 1.9 * 10^27 cubic metres of gold weighing 317 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 creditworthy people and businesses.
2. Moreover, because there is no interest, interest payments do not erode the creditworthiness 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, but actually 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 (see also: Naturalmoney.org - Scripture references to usury, interest). 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 war?

Answer: Interest charges can cause war. When an economy collapses, because debt and interest can no longer be paid, the following scenarios can unfold:
1. A war can be started to obtain access to new markets so the economy can grow to sustain more debt and interest payments.
2. 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.
3. It is possible that a war is started to obtain a higher inflation which eliminates debt and generates new economic activities.
4. A chain reaction of bankruptcies may emerge as the economy goes into a depression. Many people will then be dissatisfied. It is possible that 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.

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