the plan for the future
5 October 2019 (latest revision: 28 January 2022)
Author: Bart klein Ikink
My first contact with interest-free money dates from 1994. At the time, I was a volunteer for Friends Of The Earth in Groningen. One day we held a sit-in at the entrance to Groningen Airport as a protest against the subsidy for the airport the municipality had granted. When we were sitting there, the police came and ordered us to leave. We weren't die-hard activists like Greenpeace, so we went away. At that point, I realised that these actions didn't address the underlying issues.
Economic interests always won out, not only because of the influence of money but also because most people, including myself, are attached to their standard of living. But it was clear that the economy must change, and that time was running out. Friends of the Earth in Groningen worked with Strohalm, a foundation that worked on economic solutions for environmental issues and poverty. One of their books is Poor Because Of Money.
Strohalm claimed that interest causes short-term thinking in the economy1 and that interest is a flow of income from poor to rich and forces the economy to grow.2 Interest, therefore, causes poverty and destruction of the planet. Interest also promotes work pressure and stress.3 Strohalm also claimed that interest causes a shortage of money4 so there is always pressure to make returns.
Debts continue to grow because of interest. At some point, debtors can't pay the interest on their debts anymore, and then the financial system crashes, and the economy collapses. Interest is a stealthy civilisation killer. Most people don't notice that because it may take generations, while financial pundits often attribute crises to secondary causes like too much credit. That is why we need to abolish interest.
Strohalm's ideas are debatable, and some people would label them as outlandish. But they do get to the heart of the matter. Only, society isn't malleable. If interest disappears, everything will not miraculously turn out fine. Human nature doesn't change. Money and the pursuit of profit can bring out the worst in people. Still, people in traditional societies in which money plays a minor role often have a more relaxed lifestyle, and they share more often.
Ideals may be inspiring, but they aren't always feasible. Going back to traditional societies is not an option. Still, there are a few accidents in history that show that a better world may be possible. One of them was the Miracle of Wörgl. In 1932 during the Great Depression, a local currency in the Austrian town of Wörgl caused an economic miracle. The key to its success was a holding fee of 1% per month.5 This worked like a negative interest rate.
A holding fee on money like in Wörgl can make interest-free loans possible because lenders do not have to pay the holding fee. A return of zero is better than -12%. But who wants to lend out money without interest when savings accounts yield 7%? That was the interest rate in 1994. I had studied business economics, so I realised that a large-scale application of interest-free money wasn't feasible.
That's also why economists never took this idea seriously. Only necessity doesn't suddenly vanish because something is or seems impossible. Years went by, and I made some money. Around the year 2000, I became an investor and an active member of the investor message board IEX. In 2000 the internet bubble popped, and shares crashed in the following years. That seemed a good time to present Strohalm's ideas to people who would probably oppose them.
The discussions on IEX dragged on for several years and took a lot of time and energy. The criticism was harsh but also educational. Gradually, I gained a better understanding of what investors think, how the financial system works, and what might be possible and what probably is not. A solution still seemed out of reach, but the discussions were helpful. I learned why interest-free money failed, and so when I figured out how it might work, I immediately realised that I was on to something.
The financial crisis of 2008 made me think of this again. Then I made a discovery. Interest-free money could provide better returns and be attractive to investors. To see why you need to look at the real interest rate, which is the actual return. The real interest rate is the nominal interest rate minus the inflation rate. If the interest rate on your bank account is 1%, that is the nominal interest rate. But if the inflation rate is 2%, the real interest rate on the bank account is -1%.
The money in Wörgl circulated quickly. The economy did better without creating new debts. If you can't charge interest, you will only lend money to reliable borrowers. That is because interest is a reward for taking risks. As a consequence, there would be fewer financial and economic crises due to debts and interest. So the economy might do better without adding money so that inflation might end.
Returns for investors might go up. With a maximum nominal interest rate of zero, the higher real interest rate could express itself in a rising value of money. That seemed plausible as there was no need for adding more money. Monetary economics suggests that under these conditions, prices may fall, and the currency may become worth more. Back then, I didn't know much about economics, but at least I knew that.
The economic growth rate could be 3%. The inflation rate could be -3%. If a bank account yields -2%, the real interest rate could be a positive 1%. In this way, the real return on interest-free money could be better.
Negative interest rates and deflation can be more attractive for investors than positive interest and inflation. It all depends on the real interest rate. If the economy does better, the real interest rate is probably higher. Interest-free money with a holding fee could be more efficient and will replace interest-bearing currencies. That was nothing short of shocking. It seemed that a new economic paradigm was on the horizon.
Negative interest rates may be the new paradigm in economics. Many people fear that the financial system will crash at some point as debts and interest payments continue to grow. But there is a way out. Lower interest rates may signal a willingness to save or an unwillingness to borrow. With negative interest rates, we do not need more debt to keep the economy afloat. That also happened in Wörgl.
The paradigm in economics shifted a few times in the past. After the crisis of the 1930s, the new paradigm was that governments could borrow money to boost the economy via government spending and tax cuts. It was the beginning of fiscal policies. Governments began to manage the economy through spending. Only governments usually spent more than they received in taxes and made the central bank print the extra money.
In the 1970s, this scheme ran into trouble. The economy fared poorly, and inflation began to rise. Confidence in money eroded. It marked the beginning of the new paradigm of the monetarists and the start of monetary policies. Central banks were made independent from the government and focused on managing the creation of money by setting the interest rate. Central banks also became crisis managers.
Every time the financial system ran into serious trouble, central banks intervened to prevent an economic depression like the 1930s. In 1931 the FED didn't lower interest rates, and most economists now believe that this worsened the depression. As a result of the interventions, interest rates fell while the debts continued to grow. So every time the economy couldn't support the interest rate because of low growth and increasing debt levels, central banks lowered interest rates.
Now, this scheme runs into trouble. The economy can't support more interest-bearing debt anymore, and negative interest rates could be the way out. Investors might prefer negative interest rates if the risk/reward ratio is better. Negative interest rates and deflation could be a better deal than inflation with interest rates above zero. And negative interest rates may help and to end poverty and make the economy sustainable.
Mainstream economists have ignored interest-free money so far. Economics is about scarcity or the belief that we never have enough and must produce more. To do that, we need savings to finance investments. And to make us save, we need a reward in the form of interest. It appears that this is no longer the case. At interest rates near zero, savings still exceed investments. And so, interest rates may need to go even lower to reduce savings and to increase investments.
In 2008 it seemed that the financial system could collapse and that a second great depression would follow. People would then try out alternative ideas and copy the Wörgl experiment. And it could become a success. And I might have figured out why interest-free money with a holding fee will be the money of the future. That was a reason to work on Natural Money at first. Things didn't play out the way I anticipated.
Central banks halted the crisis. In doing so, they pushed interest rates to zero. Central banks took the risk of systemic failure out of financial markets by showing that they would do whatever it takes to keep the financial system afloat. And it appears that the absence of this risk is crucial for having interest rates below zero. If investors fear losses, they demand higher interest rates to compensate for that risk.
Central banks have cornered themselves by not allowing the financial system to crash. And so, negative interest rates seem inevitable. Probably it wouldn't be a local currency that will make it happen but the global financial system. Liquidity reduces the risk premium. Interest rates are the lowest where money and capital markets are most developed. Silvio Gesell noticed this too.
In his book The Natural Economic Order, he envisioned currencies with a holding fee. It was the competition in financial markets that would bring interest rates to zero, Gesell believed. Interest rates were the lowest in London, which was the financial centre of the world in 1900. Markets there were the most competitive.6 And competitive financial markets are impossible with local currencies.
Even so, central banks have enormous power. That may be beneficial for coping with financial crises because it enables them to act swiftly and decisively, but it might be better that there is no need for such power. The research revealed that interest charges on money and debts produce the need for central bank interventions. Without interest charges, the role of central banks could be more limited.
I do like people taking matters into their own hands like in Wörgl but letting the financial system fail and hoping for the best doesn't seem such a great idea. It is unlikely that it will work out well. The Great Depression caused tremendous hardship and led to World War II. And so I began to focus on the feasibility of a grand scale worldwide introduction of interest-free money with a holding tax because no one else was. Political reform would be a separate topic.
And so I went back to the drawing board. By 2013 I had worked through secondary school macroeconomics and validated the feasibility of Natural Money. Natural Money appeared feasible and it could be explained using existing economic theory. That was encouraging. So I thought, "Let the experts look at it." I emailed a few economists. Only Professor Bezemer from the University of Groningen responded. He asked a PhD student to look at Natural Money.
The PhD student noted that it would very difficult if not impossible to rein in the creation of money and credit, and if you try, shadow banks may fill in the void. The outcome could be worse. And so there was little you could do except imposing more regulations he said. Little did I know about shadow banks and derivatives back then. The PhD student advised me to follow some courses on the Internet. It was the second time I went back to the drawing board.
Meanwhile Strohalm had changed its name in Social Trade Organisation (STRO). Their main goal is to make money work for people by inventing and trying out new forms of local and regional money. They have done several projects with local and regional currencies. In this way STRO has built up a large body of knowledge and experience and best practices. When the financial system collapsed, for instance in Argentina, complementary currencies could fill in the void.
STRO believes that the type of money we use is a matter of choice. Their philosophy is to allow people to take matters in their own hand using complementary currencies. In this way they become less dependent on international finance. This can be helpful in areas where there is poverty. If money circulates more in the local economy like it did in Wörgl, for instance with a local or regional currency, there can be more employment and people can improve their lives.
Another important theme for STRO is that there can be enough for everyone if people learn to appreciate that a good quality of life is not about being rich. What is the need for more if you have enough? This attitude may be helpful in making humanity live within the limits of the planet. And if there is a shortage of energy because we abort the use of fossil fuels to avert a climate disaster, strengthening local economies with the help of local currencies may relieve the impact.
STRO is one of the greatest financial innovators in the world but hardly anyone notices. Their award winning payment software package Cyclos has more than 5,000,000 users world wide and has options to design and administrate your own currency or start your own bank. It is used by barter groups and banks, most notably in developing nations. This software package enables communities to create their own local currency or to start a bank at little cost.
After evaluating some monetary theory, most notably the courses Economics of Money and Banking, Part One and Economics of Money and Banking, Part Two, I began to figure what a brilliant move abolishing interest could be for stabilising the financial system. Interest is a reward for risk and abolishing interest could curb risk and credit creation to the point that central banks may not need to manage the financial system any more.
Another question was why existing economic models didn't predict the crisis, let alone prevented it from happening. There are conspiracy theories suggesting that financial crises are planned by a secret cabal. The course Model Thinking may shed some light on that matter. The world of models is complex and full of unexpected outcomes. So even though Natural Money appears to be a promising idea, it is better to remain cautious as empirical evidence is lacking.
When economic models contradict, it might be better to consider them all at face value. They may explain different phenomena or may have different areas of application. I have tried to explain negative interest rates using these existing theories. Natural Money is not a complete all explaining model of economics either. It is meant to deal with financial and economic crises caused by interest on money and debts.
Some side-issues relate to Natural Money. One is religion. Ancient Egypt had Natural Money based on grain storage for 1,500 years. According the Bible, Joseph introduced the grain warehouses in Egypt around 1,500 BC. In the Bible, and even more so in the Quran, charging interest is forbidden. The story of Joseph might raise questions as to how the Bible came to be. An interesting course on this matter is The Bible's Prehistory, Purpose and Political Future.
The field of banking and interest is the theme of several conspiracy theories. It is claimed that banks are a secret cabal. And some allege that this cabal is led by Jews. For that reason it seemed a good idea to investigate history. An interesting course is A Brief History of Humankind. The relationship between Christians and Jews throughout the centuries is the subject of the course Practising Tolerance: The Church and the Jews in Italy.
By 2017 the theory had been revised and split up into two major parts, which are explaining why interest rates may go negative and remain negative in The End of Usury, and what the future financial system may look like and what kind of issues may arise in Feasibility Of Interest-free Demurrage Currency. Cash remained a problem. Cash would be very unattractive if there was a holding fee of 1% per month. By 2019 I had fix for that too.
Discussions on internet message boards remained a crucial part of the research effort. One person alone can't possibly read all the books that might be relevant, digest them, and then come to the right conclusions. It was more efficient to let other people do that and to let them correct my errors. And so Natural Money drifted away from the ideas of Strohalm. Implementing Natural Money globally may require being abstract, thinking big, and a lot of realism.
I tried to get attention for Natural Money but so far success has been elusive. I hoped that economists would pick up the lead but they didn't. In 2017 I attended the IV International Conference on Social and Complementary Currencies in Barcelona to give lectures about the research findings. A few people seemed interested but nothing came out of it. Efforts put in promotion go at the expense of doing research, and if they yield little, I am inclined to do more research.
Natural Money might be ignored until there are no other options left and economists, central banks and governments are desperately looking for a fix. Only in a situation of utter dispair they might be willing to try out new ideas. This was what happened in Wörgl in 1932. Natural Money might work and it might be the best available idea. If the financial system is on the breaking point, there might be little time and preparation might make a difference.
There are still areas of concern. For instance, will there be credit for small businesses? And if interest rates turn positive again, can Natural Money cope with that? Negative interest rates can arouse negative sentiments. Is it possible to make people see that they will be better off? What undesirable side-effects may there be and what kind of policies may be needed to deal with them? And are there still issues overlooked? More research seems advised.
1. Poor Because of Money: The consequences of interest, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#L4
2. Poor Because of Money: Usury is everywhere, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#L2
3. Poor Because of Money: The cost of being wealthy, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#M2
4. Poor Because of Money: Self sustaining money shortage, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#O2
5. Poor Because of Money: Wörgl, Henk van Arkel and Camilo Ramada, Strohalm, 2001: https://www.naturalmoney.org/ poorbecauseofmoney.html#G3
6. The Natural Economic Order, Silvio Gesell, Translated by Philip Pye, Peter Owen Ltd, 1958: https://www.naturalmoney.org/ NaturalEconomicOrder.pdf